<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1999
REGISTRATION NO. 333-84045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
PREDICTIVE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 13-3808483
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
--------------------------
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
RONALD G. PETTENGILL, JR. ROBERT L. BELAU
CHIEF EXECUTIVE OFFICER PRESIDENT
PREDICTIVE SYSTEMS, INC.
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. PETER B. TARR, ESQ.
BABAK YAGHMAIE, ESQ. JOSEPH E. MULLANEY III, ESQ.
BROBECK, PHLEGER & HARRISON LLP HALE AND DORR LLP
1633 BROADWAY, 47(TH) FLOOR 60 STATE STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02109
(212) 581-1600 (617) 526-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE (3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share........... 4,600,000 shares $14.00 $64,400,000 $17,904
</TABLE>
(1) Includes 600,000 shares which the underwriters have the option to purchase
to cover overallotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(3) $14,456 previously paid.
--------------------------
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 SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1999.
[LOGO]
4,000,000 SHARES
COMMON STOCK
Predictive Systems, Inc. is offering 4,000,000 shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "PRDS." We anticipate
that the initial public offering price will be between $12.00 and $14.00 per
share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- -------------
<S> <C> <C>
Public Offering Price.............................................................. $ $
Underwriting Discounts and Commissions............................................. $ $
Proceeds to Predictive............................................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION CAPITAL MARKETS CORP.
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
[PREDICTIVE LOGO WITH PICTURE OF NETWORK CONSULTANTS
AND THE TEXT "BUSINESS-SAVVY NETWORK CONSULTANTS".]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE 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 , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 8
Forward-Looking Statements; Market Data.................................................................... 16
Use of Proceeds............................................................................................ 17
Dividend Policy............................................................................................ 17
Capitalization............................................................................................. 18
Dilution................................................................................................... 19
Selected Consolidated Financial Data....................................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 32
Management................................................................................................. 45
Certain Transactions....................................................................................... 56
Principal Stockholders..................................................................................... 59
Description of Capital Stock............................................................................... 61
Shares Eligible for Future Sale............................................................................ 64
Underwriting............................................................................................... 66
Legal Matters.............................................................................................. 68
Experts.................................................................................................... 68
Where You Can Find More Information........................................................................ 68
Index to Consolidated and Supplemental Financial Statements................................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS.
PREDICTIVE SYSTEMS, INC.
OUR BUSINESS
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. Using our
BusinessFirst methodology, we demonstrate the business value of technology
solutions in specific and measurable terms, thereby enabling our clients to
incorporate objective and quantifiable analysis into their technology investment
decisions. As a result, our clients can gain a clear understanding of the
benefits that they will derive from their network technology investments and a
measure of certainty regarding how their technology investments will be
translated into quantifiable improvements to their business processes.
OUR SERVICES
As an independent service provider, we provide our clients with unbiased
expertise that enables the design, implementation and management of optimal
technology solutions. We provide our services on either a project outsource or
collaborative consulting basis. Our project outsource services are primarily
based and measured against mutually agreed upon service offerings and provide
our clients with certainty of costs, delivery time and project scope. Our
collaborative consulting services enable our clients to utilize our extensive
expertise in order to extend their internal capabilities and to access our
methodologies.
In addition to these services, we have developed an innovative service model
through which we deliver our clients productized services, which are
pre-packaged service products. Our service products are characterized by
pre-defined service offerings that have a pre-defined set of service
deliverables, a pre-defined pricing model and are implemented using a
pre-defined methodology. In contrast to our project outsource and collaborative
consulting services which provide our clients with services that are customized
for, and therefore unique to, each engagement, our service products are
typically provided with little or no modification. We believe that this unique
approach to network services further differentiates us from our competitors.
Our consultants are organized into the following practice areas, which cover
the four cornerstones of network computing: network and systems management;
internetwork design and engineering; performance management; and information
security. This structure enables our consultants to gain in-depth expertise and
become intimately familiar with the best practices and methodologies identified
within each of those disciplines.
OUR MARKET
We believe we are well-positioned to capitalize on global trends impacting
communications technology, primarily the acceptance and growth of the Internet
and private intranets. As a result of these trends, the demand for network
consulting services has grown dramatically. International Data Corporation, a
market research organization, estimates that the worldwide market for these
services will grow from $12.1 billion in 1998 to $25.5 billion by 2003. Although
there are many third-party service providers attempting to address this growing
market, including network equipment vendors, systems integrators, value-added
resellers and network consulting companies, we believe that few have the
requisite focus and expertise to address the multi-faceted issues surrounding
today's complex networking environments.
4
<PAGE>
OUR STRATEGY
Our goal is to become the leading provider of services for the design,
performance, management and security of complex networks. To achieve this goal,
we intend to pursue the following strategies:
- continue to evolve our BusinessFirst methodology;
- expand and enhance our service product offerings;
- continue to attract and retain highly qualified consultants;
- further increase our industry expertise; and
- expand in existing and new geographic markets.
OUR CLIENTS
We provide our services to a broad range of clients in many industries,
including communications services, financial services, network technology and
professional services. Our clients include Allied Signal; Bear Stearns;
Bloomberg; British Telecom; Cisco Systems; UUNET, an MCI WorldCom company;
Pfizer and Qwest. These clients, in the aggregate, accounted for approximately
60.2% of our revenues for the six months ended June 30, 1999 and 55.0% of our
revenues for the year ended December 31, 1998.
RECENT DEVELOPMENTS
In September 1999, we completed the private placement of 1,242,000 shares of
our common stock to Cisco Systems, Inc. for $12.00 per share. In connection with
the investment, we have agreed to nominate a person designated by Cisco for
election to our Board of Directors so long as Cisco owns more than 750,000
shares of our common stock.
In September 1999, we also completed the private placement of 94,867 and
18,133 shares of our common stock to General Atlantic Partners 57, L.P. and GAP
Coinvestment Partners II, L.P., respectively, for $12.00 per share.
OUR HISTORY
We were organized as Predictive Holdings, Inc. in Delaware in February 1995.
In March 1999, in order to simplify our corporate organizational structure,
Predictive Holdings was merged into its wholly-owned subsidiary, Predictive
Systems, the surviving corporation.
Since our inception, we have expanded our service offerings, evolved our
technology expertise and developed the scope of our business to address the most
critical network technology needs of the broad client base we serve. We have
continued to grow our client base by expanding geographically, and we have
supported this client base by attracting and retaining talented professionals at
all levels. As of August 31, 1999, our employee base had grown to 349 full-time
employees.
Our principal executive offices are located at 145 Hudson Street, New York,
New York 10013. Our telephone number is (212) 219-4400. In addition, we maintain
offices in nine other locations: Atlanta, Georgia; Boston, Massachusetts;
Dallas, Texas; Florham Park, New Jersey; Herndon, Virginia; Pleasanton,
California; Santa Cruz, California; London, England; and Amsterdam, The
Netherlands.
------------------------
Except as otherwise noted, all information in this prospectus:
- reflects the automatic conversion of all of our outstanding shares of
series A convertible preferred stock into an aggregate of 6,512,316 shares
of our common stock on the closing of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
"PREDICTIVE SYSTEMS," "BUSINESSFIRST" and the Predictive logo are trademarks
of Predictive. All other trademarks and service marks used in this prospectus
are the property of their respective owners.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Predictive........... 4,000,000 shares
Common stock to be outstanding after this 22,542,280 shares
offering...................................
Use of proceeds.............................. For general corporate purposes, including
working capital. We may also use a portion of
the proceeds for acquisitions of
complementary businesses or technologies.
Please see "Use of Proceeds."
Proposed Nasdaq National Market symbol....... PRDS
</TABLE>
The number of shares outstanding after this offering is based on our shares
of common stock outstanding as of August 31, 1999 and gives effect to:
- the automatic conversion of all outstanding shares of series A convertible
preferred stock into 6,512,316 shares of our common stock on the closing
of this offering;
- the sale of 1,242,000 shares of our common stock to Cisco at $12.00 per
share subsequent to August 31, 1999; and
- the sale of 94,867 and 18,133 shares of our common stock to General
Atlantic Partners 57 and GAP Coinvestment Partners II, respectively, at
$12.00 per share subsequent to August 31, 1999.
This information excludes:
- 10,293,013 shares subject to options outstanding as of August 31, 1999 at
a weighted average exercise price of $1.87 per share;
- 2,706,987 additional shares reserved for issuance under our stock option
plan; and
- 750,000 additional shares available for issuance under our employee stock
purchase plan.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize the financial data for our business. You
should read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 8,106 $ 18,087 $ 25,923 $ 9,465 $ 22,566
Cost of revenues......................................... 4,352 10,407 14,560 5,617 11,278
Gross profit............................................. 3,754 7,680 11,363 3,848 11,288
Noncash compensation expense............................. -- -- -- -- 10
Operating profit (loss).................................. 1,543 1,887 (822) (1,223) 180
Net income (loss)........................................ $ 863 $ 1,011 $ (627) $ (737) $ (183)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE:
Basic.................................................... $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
Diluted.................................................. $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic.................................................... 4,269 4,382 6,015 4,634 8,971
Diluted.................................................. 11,586 12,765 6,015 4,634 8,971
</TABLE>
The following table is a summary of our balance sheet at June 30, 1999. The
unaudited pro forma data give effect to the sale of 1,242,000, 94,867 and 18,133
shares of our common stock to Cisco, General Atlantic Partners 57 and GAP
Coinvestment Partners II, respectively, at $12.00 per share subsequent to June
30, 1999 and the application of the net proceeds therefrom. The pro forma as
adjusted data give effect to:
- the automatic conversion of 6,512,316 shares of our series A convertible
preferred stock into 6,512,316 shares of common stock on the closing of
the offering and the reissuance of treasury stock in connection with this
conversion; and
- the sale of 4,000,000 shares of common stock at an assumed initial public
offering price of $13.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
<S> <C> <C> <C>
PRO FORMA PRO FORMA
ACTUAL ----------- AS ADJUSTED
--------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 360 $ 15,870 $ 62,730
Working capital.............................................................. 11,802 27,312 74,172
Total assets................................................................. 17,633 33,143 80,003
Total stockholders' equity................................................... 12,761 28,271 75,131
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS OR
FINANCIAL CONDITION WOULD LIKELY SUFFER. IN THIS CASE, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR LIMITED OPERATING HISTORY, PARTICULARLY IN LIGHT OF OUR RECENT GROWTH, MAKES
IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND TO PREDICT OUR FUTURE SUCCESS
We commenced operations in February 1995 and therefore have only a limited
operating history for you to evaluate our business. Because of our limited
operating history, recent growth and the fact that many of our competitors have
longer operating histories, we believe that the prediction of our future success
is difficult. You should evaluate our chances of financial and operational
success in light of the risks, uncertainties, expenses, delays and difficulties
associated with operating a new business, many of which are beyond our control.
You should not rely on our historical results of operations as indications of
future performance. The uncertainty of our future performance and the
uncertainties of our operating in a new and expanding market increase the risk
that the value of your investment will decline.
BECAUSE MOST OF OUR REVENUES ARE GENERATED FROM A SMALL NUMBER OF CLIENTS, OUR
REVENUES ARE DIFFICULT TO PREDICT AND THE LOSS OF ONE COULD SIGNIFICANTLY REDUCE
OUR REVENUES
During the six months ended June 30, 1999, each of Bear Stearns and Qwest
Communications accounted for 23.1% and 17.1%, respectively, of our revenues. Our
five largest clients accounted for 57.0% of our revenues for the six months
ended June 30, 1999. For the year ended December 31, 1998, our five largest
clients accounted for 54.9% of our revenues. If one of our major clients
discontinues or significantly reduces the use of our services, we may not
generate sufficient revenues to offset this loss of revenues and our net income
will decrease. In addition, the non-payment or late payment of amounts due from
a major client could adversely affect us.
OUR CLIENTS MAY TERMINATE THEIR CONTRACTS WITH US ON SHORT NOTICE
Our services are often delivered pursuant to short-term arrangements and
most clients can reduce or cancel their contracts for our services without
penalty and with little or short notice. If a major client or a number of small
clients terminate our contracts or significantly reduce or modify their business
relationships with us, we may not be able to replace the shortfall in revenues.
Consequently, you should not predict or anticipate our future revenues based
upon the number of clients we have currently or the number and size of our
existing projects.
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER IN FUTURE PERIODS, AND AS
A RESULT, WE MAY FAIL TO MEET THE EXPECTATIONS OF OUR INVESTORS AND ANALYSTS,
WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE
Our operating results have varied from quarter to quarter. Our operating
results may continue to vary as a result of a variety of factors. These factors
include:
- the loss of key employees;
- the development and introduction of new service offerings;
- reductions in our billing rates;
- the miscalculation of resources required to complete new or ongoing
projects;
8
<PAGE>
- the utilization of our workforce; and
- the timing and extent of training.
Many of these factors are beyond our control. Accordingly, you should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. In addition, our operating results may be
below the expectations of public market analysts or investors in some future
quarter. If this occurs, the price of our common stock is likely to decline.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM FIXED-PRICE PROJECTS, UNDER
WHICH WE ASSUME GREATER FINANCIAL RISK IF WE FAIL TO ACCURATELY ESTIMATE THE
COSTS OF THE PROJECTS
We derive a substantial portion of our revenues from fixed-price projects.
For the year ending December 31, 1998 and the six months ended June 30, 1999,
fixed-price projects accounted for 26.0% and 36.9% of our revenue, respectively.
We assume greater financial risks on a fixed-price project than on a
time-and-expense based project. If we miscalculate the resources or time we need
for these fixed-price projects, the costs of completing these projects may
exceed the price, which could result in a loss on the project and a decrease in
net income. Further, the average size of our contracts has increased in recent
quarters, resulting in a corresponding increase in our exposure to the financial
risks of fixed-price engagements. We recognize revenues from fixed-price
projects based on our estimate of the percentage of each project completed in a
reporting period. To the extent our estimates are inaccurate, the revenues and
operating profits, if any, that we report for periods during which we are
working on a fixed-price project may not accurately reflect the final results of
the project and we would be required to record an expense for these periods
equal to the amount by which our revenues were previously overstated.
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS WHICH COULD RESULT
IN GREATER THAN EXPECTED LOSSES
Our results of operations may experience seasonal fluctuations as businesses
typically spend less on network management services during the summer and
year-end vacation and holiday periods. Additionally, as a large number of our
employees take vacation during these periods, our utilization rates during these
periods tend to be lower, which reduces our margins and operating income.
Accordingly, we may report greater than expected losses for these periods.
OUR LONG SALES CYCLE MAKES OUR REVENUES DIFFICULT TO PREDICT AND COULD CAUSE OUR
QUARTERLY OPERATING RESULTS TO BE BELOW THE EXPECTATIONS OF PUBLIC MARKET
ANALYSTS AND INVESTORS
The timing of our revenues is difficult to predict because of the length and
variance of the time required to complete a sale. Before hiring us for a
project, our clients often undertake an extensive review process and may require
approval at various levels within their organization. Any delay due to a long
sales cycle could reduce our revenues for a quarter and cause our quarterly
operating results to be below the expectations of public market analysts or
investors. If this occurs, the price of our common is likely to decline.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO GROW OUR BUSINESS, WHICH WE MAY NOT
BE ABLE TO DO
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the success of our existing
and new service offerings and competing technological and market developments.
As a result, we may not be able to generate sufficient cash from our operations
to meet additional working capital requirements, support additional capital
expenditures or take advantage of acquisition opportunities. Accordingly, we may
need to raise additional capital in the future. Our ability to obtain additional
financing will be subject to a number of factors, including market conditions,
our operating performance and investor sentiment. These factors
9
<PAGE>
may make the timing, amount, terms and conditions of additional financing
unattractive for us. If we are unable to raise additional funds when needed, our
ability to operate and grow our business could be impeded.
RISKS RELATED TO OUR STRATEGY AND MARKET
WE MAY HAVE DIFFICULTY MANAGING OUR EXPANDING OPERATIONS, WHICH MAY HARM OUR
BUSINESS
A key part of our strategy is to grow our business, however, our rapid
growth has placed a significant strain on our managerial and operational
resources. From January 1, 1997 to August 31, 1999, our staff increased from
approximately 123 to approximately 349 employees. To manage our growth, we must
continue to improve our financial and management controls, reporting systems and
procedures, and expand and train our work force. We may not be able to do so
successfully.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED NETWORK SYSTEMS CONSULTANTS
WHICH COULD AFFECT OUR ABILITY TO COMPETE EFFECTIVELY
Our continued success depends on our ability to identify, hire, train and
retain highly qualified network management consultants. These individuals are in
high demand and we may not be able to attract and retain the number of highly
qualified consultants that we need. If we cannot retain, attract and hire the
necessary consultants, our ability to grow, complete existing projects and bid
for new projects will be adversely affected.
COMPETITION IN THE NETWORK CONSULTING INDUSTRY IS INTENSE, AND THEREFORE WE MAY
LOSE PROJECTS TO OUR COMPETITORS
Our market is intensely competitive, highly fragmented and subject to rapid
technological change. We expect competition to intensify and increase over time.
We may lose projects to our competitors, which could adversely affect our
business, results of operations and financial condition. In addition,
competition could result in lower billing rates and gross margins and could
require us to increase our spending on sales and marketing.
We face competition from systems integrators, value added resellers, local
and regional network services firms, telecommunications providers, and network
equipment and computer systems vendors. These competitors may be able to respond
more quickly to new or emerging technologies and changes in client requirements
or devote greater resources to the expansion of their market share.
Additionally, our competitors have in the past and may in the future form
alliances with various network equipment vendors that may give them an advantage
in implementing networks using that vendor's equipment.
We also compete with internal information technology departments of current
and potential clients. To the extent that current or potential clients decide to
satisfy their needs internally, our business will suffer.
IF WE ARE UNABLE TO INTEGRATE OUR RECENT ACQUISITION OF NETWORK RESOURCE
CONSULTANTS AND COMPANY, B.V. AND ANY OTHER FUTURE ACQUISITIONS, OUR BUSINESS
MAY BE DISRUPTED
We recently acquired Network Resource Consultants and Company, B.V., a
network consulting company based in The Netherlands. The integration of this and
other future acquisitions presents us with significant financial, managerial and
operational challenges. We may not be able to meet these challenges effectively.
To the extent our management is required to devote significant time and
attention to integrating the technology, operations and personnel of acquired
businesses, we may not be able to properly serve our current clients or attract
new clients. Any difficulties in integrating
10
<PAGE>
acquisitions could disrupt our ongoing business, distract our management and
employees, increase our expenses and otherwise adversely affect our business.
IF WE ARE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES, OUR GROWTH COULD BE
IMPEDED
A component of our growth strategy is the acquisition of, or investment in,
complementary businesses, technologies, services or products. Our ability to
identify and invest in suitable acquisition and investment candidates on
acceptable terms is crucial to this strategy. We may not be able to identify,
acquire or make investments in promising acquisition candidates on acceptable
terms. Moreover, in pursuing acquisition and investment opportunities, we may be
in competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could also
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment.
OUR ACQUISITION STRATEGY COULD HAVE AN ADVERSE EFFECT ON CLIENT SATISFACTION AND
OUR OPERATING RESULTS
Acquisitions involve a number of risks, including:
- adverse effects on our reported operating results due to accounting
charges associated with acquisitions;
- increased expenses, including compensation expense resulting from newly
hired employees; and
- potential disputes with the sellers of acquired businesses, technologies,
services or products.
Client dissatisfaction or performance problems with an acquired business,
technology, service or product could also have a material adverse impact on our
reputation as a whole. In addition, any acquired business, technology, service
or product could significantly underperform relative to our expectations.
COMPETITION FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO RETAIN KEY
PERSONNEL COULD INTERRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR GROWTH
Our future success depends, in significant part, upon the continued service
and performance of our senior management and other key personnel, in particular
Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer, and Robert
L. Belau, our President. Losing the services of any of these individuals would
impair our ability to effectively deliver our services and manage our company,
and to carry out our business plan. In addition, competition for qualified
personnel in the network consulting industry is intense and we may not be
successful in attracting and retaining these personnel. There may be only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult to hire these persons. Our business
will suffer if we encounter delays in hiring additional personnel.
OUR INTERNATIONAL EXPANSION EFFORTS, WHICH ARE A KEY PART OF OUR GROWTH
STRATEGY, MAY NOT BE SUCCESSFUL
We expect to expand our international operations and international sales and
marketing efforts. Recently, we commenced operations in England. In addition, in
August 1999, we acquired Network Resource Consultants and Company, B.V., a
network consulting company based in The Netherlands. We have had limited
experience in marketing, selling and distributing our services internationally.
We may not be able to maintain and expand our international operations or
successfully market our services internationally. Failure to do so may
negatively affect our business, as well as our ability to grow.
11
<PAGE>
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES
ASSOCIATED WITH OPERATING INTERNATIONALLY
Operating internationally may require us to modify the way we conduct our
business and deliver our services in these markets.
We anticipate that we will face the following challenges internationally:
- the burden and expense of complying with a wide variety of foreign laws
and regulatory requirements;
- potentially adverse tax consequences;
- longer payment cycles and problems in collecting accounts receivable;
- technology export and import restrictions or prohibitions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- cultural and language differences;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity during the summer months in
Europe.
If we do not appropriately anticipate changes and adapt our practices to
meet these challenges, our growth could be impeded and our results of operations
could suffer.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME LESS
COMPETITIVE AND OUR BUSINESS WILL SUFFER
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. As a result
of the complexities inherent in today's computing environments, we face
significant challenges in remaining abreast of such changes and product
introductions. If we cannot keep pace with these changes, we will not be able to
meet our clients' increasingly sophisticated network management needs and our
services will become less competitive.
Our future success will depend on our ability to:
- keep pace with continuing changes in industry standards, information
technology and client preferences;
- respond effectively to these changes; and
- develop new services or enhance our existing services.
We may be unable to develop and introduce new services or enhancements to
existing services in a timely manner or in response to changing market
conditions or client requirements.
IF THE USE OF LARGE-SCALE, COMPLEX NETWORKS DOES NOT CONTINUE TO GROW, WE MAY
NOT BE ABLE TO SUCCESSFULLY INCREASE OR MAINTAIN OUR CLIENT BASE AND REVENUES
To date, a majority of our revenues have been from network management
services related to large-scale, complex networks. We believe that we will
continue to derive a majority of our revenues from providing network design,
performance, management and security services. As a result, our future success
is highly dependent on the continued growth and acceptance of large-scale,
complex computer networks and the continued trend among our clients to use
third-party service providers. If the growth
12
<PAGE>
of the use of enterprise networks does not continue or declines, our business
may not grow and our revenues may decline.
IF THE INTERNET DOES NOT GROW AND CONTINUE TO DEVELOP AS A VIABLE BUSINESS TOOL,
DEMAND FOR OUR SERVICES AND OUR REVENUES MAY DECLINE
The growing demand for network management services has been driven in part
by the growth of the Internet. The Internet may not prove to be a viable
commercial marketplace because of:
- inadequate development of the necessary infrastructure;
- lack of development of complementary products (such as high speed modems
and high speed communication lines);
- implementation of competing technology;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; or
- governmental regulation.
Moreover, critical issues concerning the use of the Internet remain
unresolved and may affect the growth of the use of such technologies to solve
business problems. If the Internet fails to grow or grows more slowly as a
viable business tool than anticipated, there will be a significant decline in
the need for our services and our revenues will decline.
YEAR 2000 PROBLEMS PRESENT TECHNOLOGICAL RISKS WHICH MAY BE COSTLY TO CORRECT
AND WHICH MAY DISRUPT OUR BUSINESS
Year 2000 problems could cause us, or our clients, to experience operational
difficulties and incur expenses. Although we have received compliance
information from our material third-party vendors, we have not received
compliance information from all of our third-party vendors. In addition, it is
possible that our third-party vendors were mistaken in certifying that their
systems are Year 2000 compliant. Furthermore, we will not conduct an end-to-end
system test until October 1999. If we fail to fix our internal systems or to fix
or replace material third-party software, hardware or services on a timely
basis, we may suffer lost revenues, increased operating costs and other business
interruptions, any of which would materially and adversely affect us. Moreover,
if we fail to adequately address Year 2000 compliance issues, we may be subject
to claims of mismanagement and related litigation, which would be costly and
time-consuming to defend.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. If those entities fail to be
Year 2000 compliant, there may be a systemic failure beyond our control, such as
a prolonged Internet, telecommunications or electrical failure, which could
materially disrupt our ability to deliver our services.
RISKS RELATED TO INTELLECTUAL PROPERTY MATTERS AND POTENTIAL LEGAL LIABILITY
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. However, we do not have any patents or patent
applications pending and existing trade secret, trademark and copyright laws
afford us only limited protection. Despite our
13
<PAGE>
precautions, it may be possible for third parties to obtain and use our
intellectual property without our authorization. The laws of some foreign
countries are also uncertain or do not protect intellectual property rights to
the same extent as do the laws of the United States.
WE MAY NOT BE ABLE TO OBTAIN TRADEMARK PROTECTION FOR SOME OF OUR IMPORTANT
TRADEMARKS, WHICH WOULD SIGNIFICANTLY IMPAIR OUR ABILITY TO PREVENT OTHERS FROM
USING THOSE TRADEMARKS AND MAY REQUIRE US TO REPLACE THEM WITH NEW TRADEMARKS
The trademark offices in the United States and England have raised
objections to the registration of our "PREDICTIVE SYSTEMS," "BUSINESSFIRST" and
Predictive logo trademarks, including likelihood of confusion with pre-existing
trademarks and descriptiveness. We have responded to these objections and are
awaiting the trademark offices' decisions on our responses. We have not,
however, received any objections from third parties asserting likelihood of
confusion claims with respect to our trademarks. Nonetheless, we may not be able
to obtain trademark registrations in the United States or England, or both, for
one or more of these trademarks, in which case we will be unable to fully
enforce our statutory trademark rights against third parties for these
trademarks, and/or we must decide to replace such trademarks with new
trademarks.
WE MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH
COULD BE EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR BUSINESS
We cannot be certain that our services, the finished products that we
deliver or materials provided to us by our clients for use in our finished
products do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. As a result, we may be
subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business. We may
incur substantial expenses in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against us may
result in substantial monetary liability or may materially disrupt the conduct
of our business.
BECAUSE OUR SERVICES ARE OFTEN CRITICAL TO OUR CLIENTS' OPERATIONS, WE MAY BE
SUBJECT TO SIGNIFICANT CLAIMS IF OUR SERVICES DO NOT MEET OUR CLIENTS
EXPECTATIONS
Many of our projects are critical to the operations of our clients'
businesses. If we cannot complete these projects to our clients' expectations,
we could materially harm our clients' operations. This could damage our
reputation, subject us to increased risk of litigation or result in our having
to provide additional services to a client at no charge. Although we carry
general liability insurance coverage, our insurance may not cover all potential
claims to which we are exposed or may not be adequate to indemnify us for all
liability that may be imposed.
RISKS RELATED TO THIS OFFERING
WE DO NOT HAVE A PLAN FOR THE USE OF THE NET PROCEEDS OF THIS OFFERING AND WILL
THEREFORE HAVE DISCRETION AS TO THE USE OF THESE PROCEEDS, WHICH WE MAY NOT USE
EFFECTIVELY
We have no plan with respect to the use of the net proceeds of this offering
and have not committed these proceeds to any particular purpose. Therefore, our
management will have significant flexibility in applying the net proceeds of
this offering and may use the proceeds in ways with which stockholders disagree.
We may not be able to invest these funds effectively.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
Following this offering, the market price of our common stock is likely to
be highly volatile and may fluctuate substantially. As a result, investors in
our common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects. In addition, the
14
<PAGE>
stock market has, from time to time, experienced significant price and volume
fluctuations that have affected the market prices for the securities of
technology companies. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
was often brought against that company. Many technology-related companies have
been subject to this type of litigation. We may also become involved in this
type of litigation. Litigation is often expensive and diverts management's
attention and resources.
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS
Our directors, executive officers and affiliates currently beneficially own
approximately 79.5% of the outstanding shares of our common stock, and after the
offering will beneficially own approximately 67.0% of the outstanding shares of
our common stock. Accordingly, these stockholders will have significant
influence in determining the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including mergers,
acquisitions, consolidations and the sale of all or substantially all of our
assets, and also the power to prevent or cause a change in control. The
interests of these stockholders may differ from the interests of the other
stockholders.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. In addition, we have a
significant number of shares that are subject to outstanding options. The
exercise of these options and the subsequent sale of the underlying common stock
could cause a further decline in our stock price. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could decline.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
pro forma net tangible book value per share as of June 30, 1999 of $1.62.
Accordingly, investors purchasing shares in this offering will suffer immediate
and substantial dilution of their investment. In addition, we had 10,293,013
shares subject to options outstanding as of August 31, 1999 at a weighted
average exercise price of $1.87 per share. The exercise of these options will
result in further dilution of the value of the shares purchased in this
offering.
15
<PAGE>
FORWARD-LOOKING STATEMENTS; MARKET DATA
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because these
forward looking-statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
This prospectus contains market data related to our business and the network
consulting and integration services industry. This market data includes
projections that are based on a number of assumptions. If these assumptions turn
out to be incorrect, actual results may differ from the projections based on
these assumptions. As a result, our markets may not grow at the rates projected
by these data, or at all. The failure of these markets to grow at these
projected rates may have a material adverse effect on our business, results of
operations and financial condition, and the market price of our common stock.
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common stock
offered by us are estimated to be $46.9 million, assuming an initial public
offering price of $13.00 per share, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be $54.1 million.
The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock, and facilitate future
access to public markets. As of the date of this prospectus, we have not made
any specific expenditure plans with respect to the proceeds of this offering.
Accordingly, our management will have significant flexibility in applying the
net proceeds of this offering. We expect to use the net proceeds of this
offering for general corporate purposes, including working capital. A portion of
the net proceeds may also be used for the acquisition of complementary
businesses or technologies. We are not currently a party to any contracts,
letters of intent, commitments or agreements and are not currently engaged in
active negotiations, with respect to any acquisitions.
Pending such uses, we will invest the net proceeds of this offering in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not intend to pay cash dividends in the
foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to (1) the receipt of the net
proceeds from the sale of 1,242,000, 94,867, and 18,133 shares of our
common stock to Cisco, General Atlantic Partners 57 and GAP Coinvestment
Partners II, respectively, at $12.00 per share subsequent to June 30, 1999
and the application of the net proceeds therefrom, (2) the automatic
conversion of our series A convertible preferred stock into common stock,
and (3) the reissuance of treasury stock in connection with this
conversion; and
- on a pro forma as adjusted basis to reflect our sale of shares of common
stock at an assumed initial public offering price of $13.00 per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us. Please see "Use of Proceeds."
You should read this information together with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -------------
<CAPTION>
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Long term debt.............................................................. $ -- $ -- $ --
Stockholders' equity:
Convertible preferred stock, $.001 par value, 20,000,000 shares
authorized, 6,512,316 issued and outstanding, actual; 10,000,000
authorized, none issued and outstanding, pro forma and pro forma as
adjusted................................................................ 7 -- --
Common stock, $.001 par value, 50,000,000 shares authorized, 12,465,750
issued and 9,610,650 outstanding, actual; (200,000,000 authorized,
17,477,966 issued and outstanding, pro forma; 21,477,966 issued and
outstanding, pro forma as adjusted)..................................... 12 17 21
Additional paid-in capital.................................................. 20,308 27,421 74,277
Treasury stock.............................................................. (8,399) -- --
Deferred compensation....................................................... (295) (295) (295)
Retained earnings........................................................... 1,144 1,144 1,144
Accumulated other comprehensive loss........................................ (16) (16) (16)
--------- ----------- -------------
Total stockholders' equity................................................ 12,761 28,271 75,131
--------- ----------- -------------
Total capitalization.................................................... $ 12,761 $ 28,271 $ 75,131
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999. It does not
include:
- 10,293,013 shares subject to options outstanding as of August 31, 1999 at
a weighted average exercise price of $1.87 per share;
- 2,706,987 additional shares reserved for issuance under our stock option
plan; and
- 750,000 additional shares available for issuance under our employee stock
purchase plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$28.3 million, or $1.62 per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of stock
outstanding at that date, assuming the receipt of the net proceeds from the sale
of 1,242,000, 94,867 and 18,133 shares of our common stock to Cisco, General
Atlantic Partners 57 and GAP Coinvestment Partners II, respectively, at $12.00
per share, the conversion of all outstanding shares of our series A convertible
preferred stock into common stock and the reissuance of our treasury stock in
connection with this conversion. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the net tangible book value per
share of common stock immediately after the completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us, our pro forma net tangible book
value as of June 30, 1999 would have been $75.1 million, or $3.50 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.88 per share to existing stockholders and an immediate dilution of $9.50 per
share to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 13.00
Pro forma net tangible book value per share at June 30, 1999............... $ 1.62
Pro forma increase attributable to new investors........................... 1.88
---------
Pro forma net tangible book value per share after this offering.............. 3.50
---------
Pro forma dilution per share to new investors................................ $ 9.50
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share paid
by existing stockholders and new investors purchasing shares of common stock in
this offering. The calculation below is based on an assumed initial public
offering price of $13.00 per share, before deducting the estimated underwriting
discounts and commissions and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 17,477,966 81.4% $ 27,133,111 34.3% $ 1.55
New investors.................. 4,000,000 18.6 52,000,000 65.7 13.00
------------ ----- ------------- -----
Total...................... 21,477,966 100.0% $ 79,133,111 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding as of June 30, 1999. As of August 31, 1999, there were options
outstanding to purchase a total of 10,293,013 shares of common stock with a
weighted average exercise price of $1.87 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
Please see "Capitalization."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1997 and
1998 and the selected consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of June 30, 1999 and the
consolidated statements of operations for the six months ended June 30, 1998 and
1999 have been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated balance sheet data as of
December 31, 1996 has been derived from our consolidated audited financial
statements not included in this prospectus. The selected consolidated balance
sheet as of December 31, 1995 and the selected consolidated statement of
operations data for the period from February 10, 1995 (inception) to December
31, 1995 are derived from our unaudited consolidated financial statements not
included in this prospectus.
The unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for the fair presentation of our consolidated
financial position and the consolidated results of operations for those periods.
Results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year or for any
future period.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes to those statements included elsewhere in this prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1998 1999
--------------- ---------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
(UNAUDITED) DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Professional services............. $ 2,090 $ 6,819 $ 16,897 $ 23,858 $ 8,935 $ 21,278
Hardware and software sales....... 161 1,287 1,190 2,065 530 1,288
--------------- ---------- --------- --------- --------- ---------
Total revenues.................. 2,251 8,106 18,087 25,923 9,465 22,566
Cost of revenues:
Professional services............. 981 3,382 9,590 12,861 5,179 10,246
Hardware and software purchases... 161 970 817 1,699 438 1,032
--------------- ---------- --------- --------- --------- ---------
Total cost of revenues.......... 1,142 4,352 10,407 14,560 5,617 11,278
--------------- ---------- --------- --------- --------- ---------
Gross profit........................ 1,109 3,754 7,680 11,363 3,848 11,288
Expenses:
Sales and marketing............... 220 386 1,082 3,433 1,255 3,409
General and administrative........ 535 1,683 4,390 8,184 3,587 7,377
Depreciation and amortization..... 63 142 321 568 229 312
Noncash compensation expense...... -- -- -- -- -- 10
--------------- ---------- --------- --------- --------- ---------
Operating profit (loss)............. 291 1,543 1,887 (822) (1,223) 180
Other Income (Expense):
Interest income................... 5 31 27 58 13 70
Other income...................... -- 8 4 1 -- 37
Interest expense.................. -- -- (36) (324) (67) (109)
--------------- ---------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes........ 296 1,582 1,882 (1,087) (1,277) (178)
Income tax provision (benefit)...... 146 719 871 (460) (540) 361
--------------- ---------- --------- --------- --------- ---------
Net income (loss)................... $ 150 $ 863 $ 1,011 $ (627) $ (737) $ (183)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Net income (loss) per share:
Basic............................. $ 0.04 $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Diluted........................... $ 0.01 $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Weighted average common shares
outstanding:
Basic............................. 4,245 4,269 4,382 6,015 4,634 8,971
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Diluted........................... 10,396 11,586 12,765 6,015 4,634 8,971
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
</TABLE>
Please see Note 3 to our consolidated financial statements for an
explanation of the number of shares used in per share computations. Upon the
closing of this offering, each share of our series A preferred stock will
convert into one share of our common stock. On a pro forma basis, basic and
diluted loss per share, had each share of our series A preferred stock been
immediately converted into common stock at the time of issuance, would have been
$(0.01) for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 JUNE 30, 1999
------------- --------- --------- --------- -------------
<CAPTION>
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 270 $ 638 $ 420 $ -- $ 360
Working capital............................................ 661 1,178 1,679 2,365 11,802
Total assets............................................... 1,180 3,629 6,870 13,677 17,633
Total stockholders' equity................................. 192 1,061 2,072 2,026 12,761
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Substantially all of our revenues are derived from professional services. We
provide network consulting services to our clients on either a project outsource
or collaborative consulting basis. We derive revenues from these services on
both a fixed-price, fixed-time basis and on a time-and-expense basis. We use our
BusinessFirst methodology to estimate and propose prices for our fixed-price
projects. The estimation process accounts for standard billing rates particular
to each project, the client's technology environment, the scope of the project,
and the project's timetable and overall technical complexity. A member of our
senior management team must approve all of our fixed-price proposals. For these
contracts, we recognize revenue using a percentage-of-completion method
primarily based on costs incurred. We make provisions for estimated losses on
uncompleted contracts on a contract-by-contract basis and recognize such
provisions in the period in which the losses are determined. Professional
services revenues for time-and-expense based projects are recognized as services
are performed. Any payments received in advance of services performed are
recorded as deferred revenue. Our clients are generally able to reduce or cancel
their use of our professional services without penalty and with little or no
notice. We also derive limited revenues from the sale of hardware and software.
We sell hardware and software only when specifically requested by a client. We
expect revenues from the sale of hardware and software to continue to decline on
a percentage basis.
Since we recognize professional services revenues only when our consultants
are engaged on client projects, the utilization of our consultants is important
in determining our operating results. In addition, a substantial majority of our
operating expenses, particularly personnel and related costs, depreciation and
rent, are relatively fixed in advance of any particular quarter. As a result,
any underutilization of our consultants may cause significant variations in our
operating results in any particular quarter and could result in losses for such
quarter. Factors which could cause underutilization include:
- the reduction in size, delay in commencement, interruption or termination
of one or more significant projects;
- the completion during a quarter of one or more significant projects;
- the miscalculation of resources required to complete new or ongoing
projects; and
- the timing and extent of training, weather related shut-downs, vacations
and holidays.
Our cost of revenues consist of costs associated with our professional
services and hardware and software purchases. Costs of revenues associated with
professional services include compensation and benefits for our consultants and
project-related travel expenses. Costs of hardware and software purchases
consist of acquisition costs of third-party hardware and software resold.
On August 12, 1999, we acquired Network Resource Consultants and Company,
B.V. for an aggregate purchase price of approximately $4.8 million. The purchase
price was paid in the form of 1,062,814 shares of our common stock in exchange
for all of the outstanding capital stock of Network Resource Consultants and
Company. The acquisition was accounted for as a pooling of interests.
Supplemental financial statements reflecting our combined results with those of
Network Resource Consultants and Company as of December 31, 1997 and 1998 and
June 30, 1999 (unaudited) and the years ended December 31, 1996, 1997 and 1998
and the six months ended June 30, 1998 and 1999 (unaudited) are included
elsewhere in this prospectus. The acquisition of Network Resource Consultants
and Company resulted in an increase in revenue and gross profit of less than 10%
for the
22
<PAGE>
restated years ended December 31, 1996, 1997 and 1998 and for the restated six
months ended June 30, 1999. The operating profit (loss) (decreased) increased by
($235,000), ($62,000), ($262,000), ($133,000) (unaudited) and $147,000
(unaudited) for the years ended December 31, 1996, 1997 and 1998, and the six
months ended June 30, 1998 and 1999, respectively. Net income (loss) decreased
by ($163,000), ($58,000), ($166,000), ($81,000) (unaudited) and ($93,000)
(unaudited) for the years ended December 31, 1996, 1997 and 1998, and the six
months ended June 30, 1998 and 1999, respectively. You should read the
discussion herein in conjunction with the supplemental financial statements
reflecting our combined results with those of Network Resource Consultants and
Company, B.V. included elsewhere in this prospectus.
On September 16, 1999, we completed the sale of 1,242,000 shares of our
common stock to Cisco at $12.00 per share for net proceeds of approximately
$14.2 million.
On September 22, 1999, we completed the sale of 94,867 and 18,133 shares of
our common stock to General Atlantic 57, and GAP Coinvestment Partners II,
respectively, at $12.00 per share for net proceeds of approximately $1.4
million.
We plan to continue to expand our operations by hiring additional
consultants and other employees, and adding new offices, systems and other
infrastructure. The resulting increase in operating expenses will have a
material adverse effect on our operating results if our revenues do not increase
to support such expenses. Based on all of the foregoing, we believe that our
quarterly revenue and operating results are likely to vary significantly in the
future and that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied on as indications of future
performance.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
Revenues:
Professional services........................................... 84.1% 93.4% 92.0% 94.4% 94.3%
Hardware and software sales..................................... 15.9 6.6 8.0 5.6 5.7
--------- --------- --------- ----------- -----------
Total revenues................................................ 100.0 100.0 100.0 100.0 100.0
Costs of revenues:
Professional services........................................... 41.7 53.0 49.6 54.7 45.4
Hardware and software sales..................................... 12.0 4.5 6.6 4.6 4.6
--------- --------- --------- ----------- -----------
Total cost of revenues........................................ 53.7 57.5 56.2 59.3 50.0
Gross Profit...................................................... 46.3 42.5 43.8 40.7 50.0
Expenses:
Sales and marketing............................................. 4.8 6.0 13.2 13.3 15.1
General and administrative...................................... 20.8 24.3 31.6 37.9 32.7
Depreciation and amortization................................... 1.7 1.8 2.2 2.4 1.4
Noncash compensation expense.................................... -- -- -- -- --
Operating profit (loss)........................................... 19.0 10.4 (3.2) (12.9) 0.8
Other income (expense)............................................ 0.5 -- (1.0) (0.6) --
--------- --------- --------- ----------- -----------
Net income (loss) before income tax provision (benefit)........... 19.5 10.4 (4.2) (13.5) 0.8
Income tax provision (benefit).................................... 8.9 4.8 (1.8) (5.7) 1.6
--------- --------- --------- ----------- -----------
Net income (loss)................................................. 10.6% 5.6% (2.4)% (7.8)% (0.8)%
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
23
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUES. Substantially all of our revenues are derived from fees for
professional services. Revenues increased 138.4% from $9.5 million in the six
months ended June 30, 1998 to $22.6 million in the six months ended June 30,
1999. Revenues from professional services increased 138.1% from $8.9 million in
the six months ended June 30, 1998 to $21.3 million in the six months ended June
30, 1999. This increase was primarily due to an increase in the number of
professional services projects and an increase in the size of the projects.
Revenues from hardware and software sales increased 142.8% from $530,000 in the
six months ended June 30, 1998 to $1.3 million in the six months ended June 30,
1999. During the six months ended June 30, 1999, each of Bear, Stearns & Co.
Inc. and Qwest Communications, Inc. accounted for 23.1% and 17.1%, respectively,
of our revenues. The number of our billable consultants increased from
approximately 120 at June 30, 1998 to approximately 190 at June 30, 1999.
Subsequent to June 30, 1999, we added an additional 14 billable consultants as a
result of our acquisition of Network Resource Consultants and Company, B.V.
GROSS PROFIT. Gross profit increased 193.3% from $3.8 million in the six
months ended June 30, 1998 to $11.3 million in the six months ended June 30,
1999. As a percentage of revenues, gross profit increased from 40.7% in the six
months ended June 30, 1998 to 50.0% in the six months ended June 30, 1999. This
increase in gross profit was due to efficiencies in completing fixed-price,
fixed-time projects, higher utilization rates and an increase in average billing
rates. Cost of revenues increased from $5.6 million in the six months ended June
30, 1998 to $11.3 million in the six months ended June 30, 1999. This increase
in cost of revenues was due primarily to an increase in compensation and
benefits paid to consultants.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of compensation and benefits, travel expenses and promotional
expenses. Sales and marketing expenses increased 171.5% from $1.3 million in the
six months ended June 30, 1998 to $3.4 million in the six months ended June 30,
1999. As a percentage of revenues, sales and marketing expenses increased from
13.3% in the six months ended June 30, 1998 to 15.1% in the six months ended
June 30, 1999. This increase was primarily due to an increase of $1.6 million in
compensation and benefits paid due to the hiring of additional personnel and an
increase of $451,000 in commissions paid.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 105.7% from $3.6 million in the six months ended June 30, 1998 to $7.4
million in the six months ended June 30, 1999. As a percentage of revenues,
general and administrative expense decreased from 37.9% in the six months ended
June 30, 1998 to 32.7% in the six months ended June 30, 1999. The increase in
absolute dollars was primarily due to an increase of $1.9 million in recruiting
and professional development and other administrative costs, an increase of $1.1
million in compensation and benefits costs, and an increase of $790,000 in
facilities and equipment costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
36.1% from $229,000 in the six months ended June 30, 1998 to $312,000 in the six
months ended June 30, 1999. This increase was due to purchases of additional
equipment to support our growth.
NONCASH COMPENSATION EXPENSE. During the six months ended June 30, 1999, we
granted options to purchase shares of common stock at exercises prices that were
less than the fair market value of the underlying shares of common stock. This
will result in noncash compensation expense over the period that these specific
options vest. We estimate the expense will be approximately $48,000 for the year
ended December 31, 1999. During the six months ended June 30, 1999, we recorded
$9,875 of noncash compensation expense related to these options. The remaining
noncash compensation expense beyond 1999 is currently estimated to be $257,000.
OTHER INCOME (EXPENSE). Other expense decreased from $54,000 in the six
months ended June 30, 1998 to $2,000 in the six months ended June 30, 1999. This
decrease was primarily due to an increase
24
<PAGE>
in interest expense related to short term borrowings, offset by increased
interest income and other non-operating income.
INCOME TAXES. The income tax benefit was ($541,000) on pre-tax losses of
$1.3 million for the six months ended June 30, 1998. For the six months ended
June 30, 1999, the income tax expense was $361,000 on pre-tax income of
$178,000. The effective tax rate was 42.3% and 203.1% during the six months
ended June 30, 1998 and 1999, respectively. The increase in the effective tax
rates relates to the provision for a valuation allowance against net operating
losses of our English subsidiary.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Revenues increased 43.3% from $18.1 million in 1997 to $25.9
million in 1998. Revenues from professional services increased 41.2% from $16.9
million in 1997 to $23.9 million in 1998. This increase was primarily due to an
increase in the number of professional services projects and an increase in the
size of these projects. Revenues from hardware and software sales increased
73.6% from $1.2 million in 1997 to $2.1 million in 1998. During 1998, Bear,
Stearns & Co. Inc. accounted for 21.0% of revenues. The number of our billable
consultants increased from approximately 98 at December 31, 1997 to
approximately 149 at December 31, 1998.
GROSS PROFIT. Gross profit increased 48.0% from $7.7 million in 1997 to
$11.4 million in 1998. As a percentage of revenues, gross profit increased from
42.5% in 1997 to 43.8% in 1998. This increase in gross profit was due to
efficiencies in completing fixed-price, fixed-time projects, partially offset by
lower utilization rates and a decrease in average billing rates. Cost of
revenues increased from $10.4 million in 1997 to $14.6 million in 1998. This
increase in cost of revenues was due primarily to an increase in compensation
and benefits paid to consultants.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 217.4%
from $1.1 million in 1997 to $3.4 million in 1998. As a percentage of revenues,
sales and marketing expenses increased from 6.0% in 1997 to 13.2% in 1998. This
increase was primarily due to an increase of $1.6 million in compensation and
benefits paid due to the hiring of additional personnel, an increase of $591,000
due to increased sales and marketing efforts, and an increase of $142,000 in
commissions paid because of the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 86.4% from $4.4 million in 1997 to $8.2 million in 1998. As a
percentage of revenues, general and administrative expense increased from 24.3%
in 1997 to 31.6% in 1998. This increase was due to an increase of $1.4 million
in recruiting and professional development and other administrative costs, an
increase of $1.3 million in compensation and benefits costs, and an increase of
$1.1 million in facilities and equipment costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
76.9% from $321,000 in 1997 to $568,000 in 1998. This increase was due to
purchases of additional equipment to support our growth.
OTHER INCOME (EXPENSE). Other expense increased from ($5,000) in 1997 to
($265,000) in 1998. This increase was primarily due to an increase in interest
expense related to an increase in short term borrowings.
INCOME TAXES. The income tax provision was $871,000 on pre-tax income of
$1.9 million in 1997. In 1998 the income tax benefit was ($460,000) on pre-tax
losses of $1.1 million. The effective tax rate was 46.3% and 42.3% for 1997 and
1998, respectively. The differences in the effective tax rate resulted from a
greater amount of non-tax deductible expenses during 1997.
25
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUES. Revenues increased 123.1% from $8.1 million in 1996 to $18.1
million in 1997. Revenues from professional services increased 147.8% from $6.8
million in 1996 to $16.9 million in 1997. Revenues from hardware and software
sales decreased 7.6% from $1.3 million in 1996 to $1.2 million in 1997. The
increase in professional services was primarily due to an increase in the number
of professional services projects and an increase in the size of these projects.
During 1997, each of Bear, Stearns & Co. Inc. and Unisys Corporation accounted
for 20.6% and 19.7% of revenues, respectively. The number of our billable
consultants increased from approximately 42 at December 31, 1996 to
approximately 98 at December 31, 1997.
GROSS PROFIT. Gross profit increased 104.6% from $3.8 million in 1996 to
$7.7 million in 1997. As a percentage of revenues, gross profit decreased from
46.3% in 1996 to 42.5% in 1997. The increase in gross profit in absolute dollars
was due to efficiencies in completing fixed-price, fixed-time projects, higher
utilization rates and an increase in average billing rates. Cost of revenues
increased from $4.4 million in 1996 to $10.4 million 1997. This increase in cost
of revenues was due primarily to an increase in compensation and benefits paid
to consultants.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 180.3%
from $386,000 in 1996 to $1.1 million in 1997. As a percentage of revenues,
sales and marketing expenses increased from 4.8% in 1996 to 6.0% in the 1997.
This increase was due primarily to an increase of $441,000 in compensation and
benefits paid due to the hiring of additional personnel, and an increase of
$126,000 in commissions paid because of the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 160.8% from $1.7 million in 1996 to $4.4 million in 1997. As a
percentage of revenues, general and administrative expense increased from 20.8%
1996 to 24.3% in 1997. This increase was primarily due to an increase of $1.1
million in facilities and equipment costs, an increase of $883,000 in recruiting
and professional development and other administrative costs, and an increase of
$756,000 in compensation and benefits costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
125.8% from $142,000 in 1996 to $321,000 in 1997. This increase was due to
purchases of additional equipment to support our growth.
OTHER INCOME (EXPENSE). Other income (expense) decreased from $39,000 in
1996 to ($5,000) in 1997, due to an increase in interest expense as a result of
short term borrowings during 1997.
INCOME TAXES. The income tax provision was $719,000 on pre-tax income of
$1.6 million in 1996. In 1997, the income tax provision was $871,000 on pre-tax
income of $1.9 million. The effective tax rate was 45.4% and 46.3% in 1997 and
1998, respectively. The increase in the effective tax rate above the federal and
state statutory rates reflects certain non-tax deductible expenses.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the seven quarters in the period ended June 30, 1999 and the
percentage of our revenues represented by each item in the respective quarters.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with our
financial statements and notes. The unaudited results of operations for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
-------- --------- -------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services............ $3,918 $3,798 $5,137 $6,702 $8,221 $9,887 $11,391
Hardware and software sales...... 406 78 452 233 1,302 478 810
-------- --------- -------- --------- -------- --------- ---------
Total revenues................. 4,324 3,876 5,589 6,935 9,523 10,365 12,201
Cost of Revenues:
Professional services............ 2,269 2,387 2,792 3,308 4,374 4,849 5,397
Hardware and software
purchases...................... 245 65 373 229 1,032 426 606
-------- --------- -------- --------- -------- --------- ---------
Total cost of revenues......... 2,514 2,452 3,165 3,537 5,406 5,275 6,003
-------- --------- -------- --------- -------- --------- ---------
Gross profit....................... 1,810 1,424 2,424 3,398 4,117 5,090 6,198
Expenses:
Selling and marketing............ 372 484 771 1,032 1,146 1,589 1,820
General and administrative....... 1,303 1,722 1,865 2,231 2,366 3,469 3,908
Depreciation and amortization.... 104 108 121 123 216 144 168
Noncash compensation expense..... -- -- -- -- -- 5 5
-------- --------- -------- --------- -------- --------- ---------
Operating profit (loss)............ 31 (890) (333) 12 389 (117) 297
Other income (expense)............. (14) (22) (32) (85) (126) (28) 26
-------- --------- -------- --------- -------- --------- ---------
Net income (loss) before income tax
provision (benefit).............. 17 (912) (365) (73) 263 (145) 323
Income tax provision (benefit)..... 8 (390) (150) 46 34 (49) 410
-------- --------- -------- --------- -------- --------- ---------
Net income (loss).................. $ 9 $ (522) $ (215) $ (119) $ 229 $ (96) $ (87)
-------- --------- -------- --------- -------- --------- ---------
-------- --------- -------- --------- -------- --------- ---------
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services............ 90.6% 98.0% 91.9% 96.6% 86.3% 95.4% 93.4%
Hardware and software sales...... 9.4 2.0 8.1 3.4 13.7 4.6 6.6
-------- --------- -------- --------- -------- --------- ---------
Total revenues................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of Revenues:
Professional services............ 52.5 61.5 50.0 47.7 45.9 46.8 44.2
Hardware and software
purchases...................... 5.6 1.7 6.6 3.3 10.9 4.1 5.0
-------- --------- -------- --------- -------- --------- ---------
Total cost of revenues......... 58.1 63.2 56.6 51.0 56.8 50.9 49.2
-------- --------- -------- --------- -------- --------- ---------
Gross profit....................... 41.9 36.8 43.4 49.0 43.2 49.1 50.8
Expenses:
Selling and marketing............ 8.6 12.5 13.8 14.9 12.0 15.3 14.9
General and administrative....... 30.2 44.5 33.4 32.1 24.8 33.5 32.0
Depreciation and amortization.... 2.4 2.8 2.2 1.8 2.3 1.4 1.4
Noncash compensation expense..... -- -- -- -- -- -- --
-------- --------- -------- --------- -------- --------- ---------
Operating profit (loss)............ 0.7 (23.0) (6.0) 0.2 4.1 (1.1) 2.5
Other income (expense)............. (0.3) (0.5) (0.5) (1.3) (1.3) (0.3) 0.2
-------- --------- -------- --------- -------- --------- ---------
Net income (loss) before income tax
provision (benefit).............. 0.4 (23.5) (6.5) (1.1) 2.8 (1.4) 2.7
Income tax provision (benefit)..... 0.2 (10.1) (2.7) 0.6 0.4 (0.5) 3.4
-------- --------- -------- --------- -------- --------- ---------
Net income (loss).................. 0.2% (13.4)% (3.8)% (1.7)% 2.4% (0.9)% (0.7)%
-------- --------- -------- --------- -------- --------- ---------
-------- --------- -------- --------- -------- --------- ---------
</TABLE>
27
<PAGE>
We have historically experienced significant quarterly fluctuations in our
revenues and results of operations and expect these fluctuations to continue.
Factors causing these variations include the number, timing, scope and
contractual terms of client projects, delays incurred in the performance of such
projects, accuracy of estimates of resources and time required to complete
ongoing projects, and general economic conditions. In addition, our future
revenues and operating results may fluctuate as a result of changes in pricing
in response to customer demand and competitive pressures, the ratio of
fixed-price contracts versus time-and-expense contracts and the timing of
collection of accounts receivable. A high percentage of our operating expenses,
particularly personnel and rent, are relatively fixed in advance of any
particular quarter. As a result, unanticipated variations in the number and
timing of our projects or in employee utilization rates may cause significant
variations in operating results in any particular quarter, and could result in
losses. Any significant shortfall of revenues in relation to our expectations,
any material reduction in utilization rates for our consultants, an
unanticipated termination of a major project, a client's decision not to pursue
a new project or proceed to succeeding stages of a current project, or the
completion during a quarter of several major customer projects could require us
to pay underutilized employees and have a material adverse effect on our
business, results of operations and financial condition.
Our quarterly operating results are also subject to certain seasonal
fluctuations. We have in the past recruited new consultants in the first and
second quarters who have not conducted billable services until later in the
year. Demand for our services may be lower in the fourth quarter due to reduced
activity during the holiday season and fewer working days for those customers
that curtail operations during this period. These and other seasonal factors may
contribute to fluctuations in our operating results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of equity
securities and cash flow from operations. As of June 30, 1999, we had
approximately $360,000 in cash and cash equivalents.
Cash used in operating activities increased from $960,000 for the six months
ended June 30, 1998 to $4.4 million for the six months ended June 30, 1999.
Significant uses of cash resulted from an increase in accounts receivable,
unbilled work in progress and a decrease in deferred income, partially offset by
a reduction in the net loss.
Cash (used in) provided by operating activities was ($3.7) million in 1998,
($1.2) million in 1997 and $678,000 in 1996. The increase in the use of cash
resulted from the net loss in 1998, an increase in accounts receivable and
unbilled work in progress during 1998 partially offset by an increase in
accounts payable and accrued expenses at December 31, 1998.
Cash provided by financing activities was $12.5 million for the six months
ended June 30, 1999, $5.4 million for 1998, $1.4 million for 1997 and $5,000 for
1996. Cash provided by financing activities for the six months ended June 30,
1999 resulted from the proceeds of $18.6 million related to the sale of
preferred stock offset partially by the repayment of short-term borrowings. Cash
provided by financing activities for 1998 and 1997 resulted from short-term
borrowings.
Our capital expenditures were $745,000 for the six months ended June 30,
1999, $687,000 for 1998, $357,000 for 1997 and $315,000 for 1996. Capital
expenditures were made to purchase computer equipment and office furniture and
for leasehold improvements.
We have a demand loan facility, secured by a lien on all of our assets,
under which we may borrow up to the lesser of $5.0 million or 80.0% of our
accounts receivable. Amounts outstanding under the facility bear interest at a
rate of 11.25% per annum. At June 30, 1999, there were no amounts outstanding
under the facility.
On September 16, 1999, we completed sale of 1,242,000 shares of our common
stock to Cisco at $12.00 per share for net proceeds of approximately $14.2
million.
28
<PAGE>
On September 22, 1999, we completed the sale of 94,867 and 18,133 shares of
our common stock to General Atlantic Partners 57 and GAP Coinvestment Partners
II, respectively, at $12.00 per share for net proceeds of approximately $1.4
million.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our working
capital needs for at least the next 12 months.
IMPACT OF THE YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, it is necessary to update the computer systems and/or software used by
many companies and governmental agencies to comply with Year 2000 requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant.
STATE OF READINESS. We are in the process of determining the Year 2000
readiness of our information technology systems, which include our hardware and
software, and our non-information technology systems, which include the
telephone systems and other office equipment we use internally. Our assessment
plan consists of the following steps:
- evaluating our date dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally-developed proprietary
software;
- contacting third-party vendors and licensors of material hardware,
software and services that we use;
- contacting vendors of material non-information technology systems that we
use;
- formulating repair or replacement requirements and implementing corrective
measures; and
- evaluating the need for, and preparing and implementing, if required, a
contingency plan.
To date, we have determined the following through our assessment:
- We have checked our internally developed software and systems for date
dependent code, and all material files and systems are Year 2000
compliant. We believe that the recently installed code is also Year 2000
compliant;
- We have contacted the vendors of material hardware and software components
of our information technology systems, and they have informed us that the
products we use are currently Year 2000 compliant;
- Commercial software, including financial reporting software, upon which we
depend is either Year 2000 compliant or will be upgraded to be compliant
in the normal course of business through upgrades or installation of
software patches;
- Substantially all hardware we use in our network operations and all of the
hardware we use in our office operations have been certified as Year 2000
compliant by its vendors;
- Our telephone system and mail systems are certified as Year 2000
compliant; and
- Our landlords and third-party advertising sales representative and
servicing organizations have not yet provided us with Year 2000 compliance
information.
While we have assessed the Year 2000 readiness of each of our material
internal systems, we will not conduct an end-to-end system test until August
1999. Accordingly, we cannot yet assess whether our internal system, as a whole,
is Year 2000 compliant. In addition, we will continue to attempt to obtain
verification from all remaining distributors, suppliers and vendors that their
systems are Year 2000 compliant. We intend to complete our assessment, and the
replacement or remediation of any non-Year 2000 compliant technologies, by the
end of the third quarter of 1999.
29
<PAGE>
COSTS. We estimate that the total cost for our Year 2000 compliance efforts
will be approximately $250,000. Most of these expenses relate to the operating
costs associated with time spent by our employees in Year 2000 compliance
matters. If we encounter unexpected difficulties, or we are unable to obtain
compliance information from material third parties, we may need to spend
additional amounts to ensure that our systems are Year 2000 compliant.
RISKS. Although we have received compliance information from our material
third-party vendors, we have not received compliance information from all of our
third-party vendors. In addition, it is possible that our third-party vendors
were mistaken in certifying that their systems are Year 2000 compliant. In
addition, we will not conduct an end-to-end system test until October 1999. If
we fail to fix our internal systems or to fix or replace material third-party
software, hardware or services on a timely basis, we may suffer lost revenues,
increased operating costs and other business interruptions, any of which could
have a material adverse effect on our business, results of operations and
financial condition. Moreover, if we fail to adequately address Year 2000
compliance issues, we may be subject to claims of mismanagement and related
litigation, which would be costly and time-consuming to defend.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. If those entities fail to be
Year 2000 compliant, there may be a systemic failure beyond our control, such as
a prolonged Internet, telecommunications or electrical failure, which could have
a material adverse effect on our business, results of operations and financial
condition.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year
2000 assessment and have developed no contingency plans to address the
worst-case scenario that might occur if technologies we depend upon actually are
not Year 2000 compliant. We will take into account our Year 2000 simulation
testing results and the responses we receive from all third-party vendors and
service providers in determining the need for and nature and extent of any
contingency plans. We intend to develop any required contingency plan by the end
of October 1999.
FORWARD-LOOKING STATEMENTS
The Year 2000 discussion above is provided as a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and
contains forward-looking statements. These statements are based on management's
best current estimates, which were derived from a number of assumptions about
future events, including the continued availability of resources,
representations received form third parties and other factors. However, we
cannot assure you that these estimates will be achieved, and our actual results
could differ materially from those anticipated. Specific factors that might
cause material differences include:
- the ability to identify and remediate all relevant systems;
- results of Year 2000 testing;
- adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are our outsourcing service
providers, suppliers, and vendors;
- unanticipated system costs; and
- our ability to implement adequate contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to
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shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997 and need not be applied to interim periods in
the initial year of application. Comparative information for earlier years
presented is to be restated. We do not operate in more than one segment. Our
chief operating decision maker allocates resources and assesses the performance
associated with its business on a single-segment basis.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities." This statement establishes accounting and reporting
standards of derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for all quarters of fiscal years beginning after June 15, 1999. We do
not expect the adoption of this standard to have a material effect on our
results of operations, financial position or cash flows.
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BUSINESS
OVERVIEW
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. Using our
BusinessFirst methodology, we demonstrate the business value of technology
solutions in specific and measurable terms, thereby enabling our clients to
incorporate objective and quantifiable analysis into their technology investment
decisions.
As an independent service provider, we provide our clients with unbiased
expertise that enable the design, implementation and management of optimal
technology solutions. We provide our services on either a project outsource or
collaborative consulting basis. Our project outsource services are based on and
measured against mutually agreed upon service offerings and provide our clients
with certainty of costs, delivery time and project scope. Our collaborative
consulting services enable our clients to utilize our extensive expertise in
order to extend their internal capabilities and to access our methodologies. In
addition to these services, we have developed an innovative service model
through which we deliver our clients packaged service products, otherwise
referred to as productized services. Our service products are characterized by
pre-defined service offerings that have pre-defined deliverables, a pre-defined
pricing model and are implemented using a pre-defined methodology. In contrast
to our project outsource and collaborative consulting services which provide our
clients with services that are customized for, and therefore unique to, each
engagement, our service products are typically provided with little or no
modification.
Our consultants are organized into the following practice areas, which cover
the four cornerstones of network computing: network and systems management;
internetwork design and engineering; performance management; and information
security. This structure enables our consultants to gain in-depth expertise and
become intimately familiar with the best practices and methodologies identified
within each of those disciplines.
INDUSTRY BACKGROUND
The effective communication and management of information has become
critical to success in today's competitive and rapidly changing global business
environment. Network infrastructures that once were viewed as sources of
competitive advantage are now being recognized as competitive necessities for
businesses in a broad range of industries. This shift is driven primarily by the
following factors:
- the migration from mainframe and client/server technologies to
Internet-based computing environments among most industries;
- the demand for real-time exchange of critical, time-sensitive information
within organizations and among their external constituents; and
- the widespread adoption of the Internet among consumers.
As a result of these factors, current and emerging network hardware and
software companies are rapidly developing sophisticated technologies for
business users to accommodate critical applications, such as electronic
commerce, supply chain management, web hosting, customer relationship management
and global marketing. In addition to business use of networks, consumers are
increasingly accessing networks, via the Internet, to communicate, store and
publish information, conduct retail transactions and access online sources of
entertainment. Business and consumer trends will continue to positively impact
the number of users who access, and the data traffic carried over, the Internet.
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The growth in network-dependent activities requires complex network
solutions that integrate a variety of systems and technologies from multiple
vendors. The rapid pace of change in networking technology has further increased
the complexity of designing and implementing these network solutions. As
competing hardware and software companies develop applications to more
effectively and efficiently manage increasing volumes of information, rapid
adoption of new technologies is required for businesses to remain competitive.
Accordingly, the demand for experienced professionals that can assist businesses
in designing, implementing, managing and monitoring complex network solutions
has increased dramatically.
As a result of demand for professionals with networking expertise, it has
become increasingly difficult for businesses to attract and retain dedicated
internal information technology resources. In response, many businesses are
focusing on their core competencies and outsourcing their network management
needs to third-party service providers. Consequently, the demand for network
consulting and integration services has grown dramatically. International Data
Corporation, a market research organization, estimates that the worldwide market
for these services will grow from $12.1 billion in 1998 to $25.5 billion by
2003. There are many third-party service providers, including network equipment
vendors, systems integrators, value-added resellers and network consulting
companies, seeking to capitalize on this growth.
However, we believe that few have the requisite focus and expertise to
address the complex, multi-faceted issues surrounding today's networks, and many
are limited by the fact that they:
- are primarily motivated by distributing their own products and often lack
the skills to implement multi-vendor solutions;
- are focused on traditional mainframe computing environments and derive a
large percentage of their revenue from reselling hardware and software
products; or
- only augment businesses' in-house capabilities with hourly rate-based
teams of technical personnel.
As a result, a significant opportunity exists for a service provider that
can offer businesses high-end consulting and technical expertise in the design,
implementation, management and security of complex networks.
THE PREDICTIVE SOLUTION
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. We believe that
our success to date has been largely attributable to the following key
characteristics of our service offerings:
QUANTIFIABLE BUSINESS ANALYSIS. Using our BusinessFirst methodology, we can
demonstrate the business value of technology solutions in specific and
measurable terms, thereby enabling our clients to incorporate objective and
quantifiable analysis into their technology investment decisions. We utilize
widely accepted principles of risk analysis and mitigation used by the insurance
and financial services industries to assess our client's technology environment.
We provide our clients with a detailed analysis of the financial benefit of a
project by quantifying factors such as business risks, total cost of ownership
and operational efficiency. As a result, our clients can gain a clear
understanding of the benefits that they will derive from their network
technology investments and a measure of certainty about how their technology
investments will be translated into quantifiable improvements to their business
processes.
FLEXIBLE AND INNOVATIVE SERVICE DELIVERY METHODOLOGIES. We provide our
clients with a flexible service delivery model that is designed to enhance their
ability to cost-effectively leverage our expertise.
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We are engaged by our clients in one of three ways: on a project outsource
basis, on a collaborative consulting basis or through the purchase of
pre-defined service offerings, otherwise known as service products. When engaged
on a project outsource basis, we work with our clients to mutually define a
fixed scope of work at the beginning of the project that is tailored to the
clients' specific needs and therefore, modified from engagement to engagement.
We then deliver the services for a fixed fee, in a fixed period of time with a
fixed set of deliverables. When engaged on a collaborative consulting basis, we
extend our clients' internal technical capabilities with our consultants. This
enables our clients to utilize our extensive expertise and to access our
methodologies while they retain overall responsibility for the project.
Collaborative consulting services are typically billed on a time and expense
basis, and typically do not entail fixed-cost, fixed-time or fixed-service
commitments. Our service products are pre-defined service offerings that we
believe address the needs that are common to many of our clients. These service
products are characterized by pre-defined deliverables, pre-defined pricing and
are provided with little or no modification.
IN-DEPTH NETWORK COMPUTING EXPERTISE. Our consultants are organized into
practice areas which cover the four cornerstones of network computing: network
and systems management; internetwork design and engineering; performance
management; and information security. This enables our consultants to gain
in-depth expertise and become intimately familiar with the best practices within
each of those disciplines. More importantly, it enables us to leverage the
knowledge base within each practice group to provide our clients with
cross-functional teams of consultants that are better equipped to address their
varying networking needs in a coordinated and efficient manner.
STRATEGY
Our goal is to become the leading provider of services for the design,
performance, management and security of complex networks. To achieve this goal,
we intend to pursue the following strategies:
CONTINUE TO EVOLVE OUR BUSINESSFIRST METHODOLOGY. The evolution and
enhancement of our BusinessFirst methodology is critical to our ability to
leverage and share knowledge across engagements and to further improve our
ability to deliver predictable, high-quality services to our clients on time and
on budget. We have a dedicated team of consultants that is focused on
continuously enhancing and refining our BusinessFirst methodology by
incorporating the best practices identified over numerous engagements. We
believe that this enables us to consistently deliver high-quality network
technology solutions.
EXPAND AND ENHANCE OUR SERVICE PRODUCT OFFERINGS. We intend to continue to
enhance and expand our innovative service product offerings. These service
offerings provide our clients with a pre-defined set of deliverables that
require minimal customization and are characterized by an objective and
quantifiable value proposition and return on investment justification. Moreover,
our service products enable us to increase our margin opportunities by improving
the efficiency of our sales and service delivery model. These products also
enable us to market and sell our services through indirect channels. For
example, we recently entered into an agreement with Cabletron under which
Cabletron has agreed to market and sell our service product offerings, which
will initially include our Information Security Requirements Analysis product
and will expand to other service product offerings. We intend to enter into
other strategic relationships which will enable us to further expand our market
penetration by leveraging our strategic partners' distribution channels to
market and sell these services.
CONTINUE TO ATTRACT AND RETAIN HIGHLY QUALIFIED CONSULTANTS. We intend to
continue to attract and retain highly qualified consultants by providing them
with a rich environment and culture to work in, and by offering them attractive
professional development and compensation opportunities. We generally recruit
consultants who have significant technical expertise and offer them the ability
to accelerate their career development by working with sophisticated
technologies in complex, multi-vendor environments. We have established a formal
training program, Predictive University, which is designed to improve the
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skills and productivity of our consultants. We intend to continue to build our
nationwide recruiting organization, promote our corporate culture with stated
values, and to invest heavily in the training and development of our
consultants.
FURTHER INCREASE OUR INDUSTRY EXPERTISE. We intend to continue to expand
the scope of our industry expertise in order to further penetrate the markets
which we serve. We believe our expertise in specific industries considerably
enhances our ability to help companies within those industries gain competitive
advantage by improving the performance and utility of their networks. We have
significant experience within the financial services, communication services,
and Internet and electronic commerce industries. In each of these markets, we
employ industry experts, pursue targeted sales and marketing opportunities and
develop industry-specific service offerings. We intend to expand into other
industries which we believe will be well suited to our services.
EXPAND IN EXISTING AND NEW GEOGRAPHIC MARKETS. We intend to expand our
presence in the geographic markets we currently serve and to enter new markets.
We believe that building a critical mass of highly-qualified consultants and
establishing a multi-national presence through both internal growth and
acquisitions will provide us with a substantial competitive advantage. We
recently acquired Network Resource Consultants and Company, B.V. in The
Netherlands in order to further expand our European presence. We currently offer
our services through a network of nine offices located throughout the United
States and in London, England and Amsterdam, The Netherlands. We intend to
continue to pursue strategic acquisitions to gain access to new geographic
markets, additional talented professionals, and network management tools and
methodologies.
BUSINESSFIRST METHODOLOGY
BusinessFirst is a proprietary methodology that governs our organization and
client engagements. Our BusinessFirst methodology enables us to better
understand the business objectives that drive the need for technology solutions
and provide our clients with pre-defined services on a fixed-time, fixed-price
basis. We begin each engagement by helping our clients clarify their business
requirements in specific terms. We then undertake a thorough assessment of our
client's existing business processes and technology infrastructure. Based on
this assessment, we formulate an analysis of the requirements to translate their
technology investments into measurable business objectives. Once we formulate a
requirements analysis, we draw upon our broad expertise to design a solution
that leverages our clients' existing technology infrastructure to maximize their
return on investment. We believe that our BusinessFirst methodology bridges the
gap in the marketplace between management consulting firms and technical staff
augmentation services and enables us to translate business objectives into
leading-edge technology solutions.
SERVICES
Our consultants are organized into four practice areas. Although many of our
consultants are cross-skilled in a variety of technologies and many technologies
span multiple practice areas, each practice area represents an aspect of network
technology important enough to warrant specialization.
These practice areas are:
- network and systems management;
- internetwork design and engineering;
- performance management; and
- information security.
Our consultants have extensive experience with a wide variety of
technologies and vendors. For some clients, our consultants are involved in both
technology and vendor selection. Other clients have
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already selected the technology, vendor or both. Regardless, we offer our
clients a completely objective, vendor-neutral approach. Our knowledge of
advanced technologies and leading vendors is a significant part of our value
proposition to our clients.
NETWORK AND SYSTEMS MANAGEMENT. Our network and systems management practice
focuses on designing and implementing reliable and continuously available
management systems for large-scale, highly-complex networks. The fundamental
tenet of this practice area is that proactive management is an essential element
of any network design and engineering effort. Our network management consultants
develop systems and processes that are able to identify, isolate and resolve
network failures, sometimes before they occur.
The following table lists some of the services provided by our network and
systems management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Service Definition and Service Level Highlights a client's service level commitments and assists in the
Agreement Workshop development of a rational, long-term plan for meeting and exceeding
those commitments.
Rapid Restart Assessment Determines the readiness of a client's network operations center and
provides short-term and long-term recommendations for addressing its
deficiencies.
Network Operation Center Architecture and Assists clients in evaluating and selecting network and systems
Implementation management technologies appropriate for their network operations
centers. Configures and implements the selected technology and
trains clients' operations staff.
Process and Procedure Development Designs, implements and documents the processes and procedures
required to operate a network operations center.
Automation, Correlation and Root Cause Automates repetitive management tasks associated with operating a
Analysis Technology Development network.
</TABLE>
INTERNETWORK DESIGN AND ENGINEERING. Our internetwork design and
engineering practice focuses on designing and implementing network solutions in
support of our clients' strategic business initiatives. We have created a team
of seasoned professionals who use their specialized technical skills, real-world
industry experience and methodologies to solve the problems associated with
building and maintaining network foundations. With core competencies in the
areas of backbone technology, local area network switching, Internet Protocol,
or IP, management and design, asynchronous transfer mode, or ATM, and remote
access, our versatile team contributes both technical depth and breadth to
client engagements.
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The following table lists some of the services provided by our internetwork
design and engineering practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Advanced Technology Planning and Migration Assists clients in planning and integrating advanced technologies
into their business-critical networks. The services include
technology briefings, vendor/product selection, solution design and
integration planning and comprehensive testing.
Network Deployment Services Implements network technology into clients' existing networks.
Services include project management, vendor coordination, technology
installations and training.
Remote Access and Virtual Private Network Designs and deploys secure, high-performance remote access and
virtual private network solutions to allow clients, their employees,
supply-chain partners and other business partners to access
information remotely.
Network Audit Services Audits clients' network infrastructure to evaluate its design and
performance, document the configuration, analyze its compliance to
prescribed standards and develop an action plan to meet strategic
objectives.
Internet Protocol Management Solutions Designs and implements Internet Protocol address schemes required
for a client to connect to the Internet. The service also implements
management technologies to administer the Internet Protocol
addresses used within an organization.
</TABLE>
PERFORMANCE MANAGEMENT. Our performance management practice leverages
proven methodologies and our extensive experience to help our clients optimize
their networks. We use sophisticated tools and techniques to gather, organize
and warehouse network performance data. This data may subsequently be used for a
number of related performance analysis applications, including capacity
planning, response time management and network simulation modeling. Consultants
in our performance management practice area are experts in applicable
technologies, including core competencies in remote monitoring, or RMON, data
warehousing and discrete event simulation modeling.
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The following table lists some of the services provided by our performance
management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Network Baselining Collects data in order to establish a baseline of network resource
utilization. The baseline is then used as a comparison against
future trends.
Application Impact Analysis Analyzes how an application uses network resource to predict
response times that users will experience when the application is
deployed. Recommends improvements that enable the application to
maximize network resources.
Network Usage-Based Billing Services Assists clients' transition from a flat-rate billing model to a
usage-based billing model for buying network services.
Capacity Planning Assists clients in understanding the capacity and network resource
constraints that exist within their network with sufficient advance
warning to enable them to add capacity before user performance is
affected.
Response Time Management Monitors and analyzes end-user application response times to ensure
that they remain within the service level commitments.
Network Simulation Modeling Models a network environment so that new configuration and new
application deployment scenarios can be simulated before going into
production.
</TABLE>
INFORMATION SECURITY. Our information security practice is focused on
ensuring that the confidentiality, integrity and availability of our clients'
networks are protected. Our information security consultants have practical
experience with a wide array of advanced security technologies, as well as the
social and procedural aspects of security. By translating the complexities of
information security into understandable terms such as risks, costs and
benefits, we enable our clients to make clear and informed decisions about
protecting their information assets.
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The following table lists some of the services provided by our information
security practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Information Security Requirements Analysis Assesses clients' physical security environment, the technical
controls for accessing information assets and employee security
awareness. Highlights deficiencies and makes recommendations to
migrate clients to industry-specific best practices.
Asset and Risk Analysis Identifies critical assets, determines susceptibility to risks and
quantifies the impact of such risks. Recommends a risk mitigation
plan to prioritize corrective actions.
Information Security Policy Development Assists customers to create a comprehensive information security
policy that clearly states requirements for employee behavior,
technical security systems and the physical controls needed to
protect the client's information assets.
Security System Design and Implementation Designs and implements security systems using custom configured
products to enforce the specific information security policy of each
client.
Incident Response and Digital Forensics Provides critical response team services in the event of a security
Services breach. Restores the operational integrity of the systems, maintains
evidence, provides forensic and investigative services and
facilitates changes to prevent a recurrence of the breach.
Information Security Assessments Verifies the implementation and effectiveness of clients' security
policies by reviewing and testing their policies, employee
awareness, perimeter security and response team readiness.
</TABLE>
SERVICE PRODUCTS
Through our collective experience, we gain insights into the common needs of
our clients. When we determine that a need is both urgent and pervasive, we
standardize our services into a solution referred to as a service product. Our
service products are pre-defined service offerings that are replicable from one
project to another and have a pre-defined set of service deliverables, a
pre-defined pricing model and are implemented using a pre-defined methodology.
In contrast to our project outsource and collaborative consulting services which
provide our clients with services that are customized for, and therefore unique
to, each engagement, our service products are typically provided with little or
no modification.
Our service products offer a number of advantages as compared to custom
consulting engagements. These include:
- efficient delivery of our services over and over again using a replicable
methodology;
- ability to gain broad market penetration because our productized services
are well-defined and can be more easily sold by our sales force and
through third-party sales channels;
- ability to more effectively articulate the business benefit of our
services based on observing the impact that our service products have for
other clients; and
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- a more flexible pricing strategy that is based on the business benefit to
our clients and not the cost to deliver our services.
Our current service products include:
INFORMATION SECURITY REQUIREMENTS ANALYSIS. This service product is
designed to discover information security weaknesses in our clients' networks
and systems. It provides our clients with the ability to understand where they
are vulnerable to a security threat and both the likelihood and potential cost
of each threat. Our certified security experts assess a client's physical,
administrative and technical security. They then present a report to management
explaining how the security weaknesses that they have found could impact the
client's business and propose strategies for addressing these weaknesses.
NETWORK ASSESSMENT. This service product provides a cost-effective expert
analysis of a client's existing network environment. It provides a report that
helps the client to understand the performance and reliability characteristics
of its network and provides specific recommendations for improvements to the
network along with an analysis of the business benefits that can be achieved
through the recommended improvements.
APPLICATION IMPACT STUDY. This service product provides clients with the
information they need to understand how the deployment of a new application will
impact an existing network. Our consultants use a combination of sophisticated
analysis tools and methodologies to thoroughly understand how an application
uses network resources. They then issue a report on the application's
performance and its impact on the client's network. Clients can then determine
if they need to enhance their network in order to ensure that their critical
applications perform to their requirements.
NETWORK BILLING. This service product provides clients with a detailed
breakdown of who, how, why, when and where their network was used by their
employees so they can charge employees based on their actual network usage. Our
consultants implement the technology to collect the network usage statistics,
and advise our clients on the most appropriate pricing strategy to charge for
network usage. We then produce the bills that are passed on to the network
users.
ENTERPRISE MANAGEMENT ASSESSMENT. This service product provides an
evaluation of a client's current enterprise network management systems. Our
consultants analyze both a client's enterprise network management technology and
its service level agreements. They then provide the client with a tactical and
strategic roadmap that enables the client to implement network management
solutions that support the client's business objectives.
NETWORK MODELING. This service product allows clients to ask "what if"
questions about planned changes in their network before the changes are
implemented. Using a combination of sophisticated software tools and our own
methodology, we build a model of the network environment. We can then simulate
changes in the environment such as adding applications or changing equipment,
and observe the impact. Clients can then use this analysis to optimally plan
changes in their network.
YEAR 2000 COMPLIANCE ASSESSMENT. This service product identifies network
infrastructure that is at risk because of Year 2000 problems and the impact
these risks can have on a client's business. Our network systems engineers
analyze a client's network infrastructure devices and enterprise management
applications to determine the potential risk based on vendor specifications.
They then develop a plan for remediation to minimize the Year 2000 risk to a
client's business.
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CLIENTS
We provide professional network services to a variety of clients across a
broad range of vertical industries including:
<TABLE>
<S> <C> <C> <C>
COMMUNICATIONS FINANCIAL SERVICES NETWORK TECHNOLOGY OTHER
SERVICES Bear Stearns Analog Devices Allied Signal
Bell Atlantic Bloomberg Cabletron Houghton Mifflin
Bell South Cigna Cisco Mary Kay Cosmetics
British Telecom DLJdirect Data General Norfolk Southern
Cable & Wireless Deutsche Bank IBM Pepsi
Cignal Global Comm. First Union Lucent Technologies Pfizer
Enron Communications Fleet Bank Nortel Networks Siemens Energy
iBEAM Broadcasting ING Baring Furman Selz PROFESSIONAL SERVICES
ICG Netcom J.P. Morgan Law Plus
Intelsat Morgan Stanley Lockheed Martin
MCI WorldCom Pershing Unisys
Primus Telecom. State Street Bank
PSINet State Farm
Qwest S.W.I.F.T.
Teligent Union Bank of
UUNet California
</TABLE>
CLIENT CASE STUDIES
UUNET. UUNET, the Internet services division of MCI WorldCom, is a global
leader in Internet communications solutions to businesses worldwide. UUNET has
built its reputation on providing high-quality services such as Internet access,
web hosting, remote access and other value-added networking services. To ensure
its ability to provide clients with the highest levels of service, UUNET
constructed one of the most rigorously-engineered and widely deployed
Internet-protocol networks in the world. UUNET currently offers service to more
that 70,000 businesses in 114 countries throughout North America, Europe and
Asia Pacific. UUNET selected us to develop its next-generation Internet-based
service offering, Virtual Private Networking.
Virtual Private Networks, or VPN's, provide secure, encrypted connections
over the public Internet that allow businesses to communicate privately without
having to build separate private networks. While UUNET's own network systems
engineers are among the most experienced in the world, they wanted an
independent assessment of their VPN system design. We worked with UUNET to
develop a comprehensive VPN solution, including network management, service
provisioning and fulfillment, and network security. We also worked successfully
with UUNET to ensure that the VPN was scalable across UUNET's global network,
both in terms of functionality, ease of deployment and ease of operation.
Finally, we helped develop and document the processes and procedures necessary
to efficiently operate the service.
The success of UUNET's VPN service has led to other collaborations with us,
including the development of UUNET's Internet-based fax service and branded
dial-up Internet access service.
BT SYNCORDIA SOLUTIONS. BT Syncordia Solutions, a division of British
Telecom, is Europe's second largest provider of managed and outsourced network
solutions. BT Syncordia manages the infrastructure of more than 27,000 clients
in 46 countries. BT Syncordia-managed networks carry a significant portion of
the commercial banking transactions in the United Kingdom. In order to meet the
business-critical availability requirements of its customers, BT Syncordia
turned to us to help it design and build a world-class network operations
center.
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We used our Business First methodology and extensive technical experience to
design and build a state-of-the-art network operations center for BT Syncordia.
We integrated best-of-breed network management tools that could manage BT
Syncordia's multi-vendor network and easily incorporate changes due to increases
in network traffic, introduction of new services and increases in customer base.
We also instituted processes and procedures that enabled BT Syncordia's
operations staff to act rapidly to identify and resolve network performance
issues. Moreover, our BusinessFirst methodology allowed us to demonstrate the
revenue enhancement opportunities and cost savings resulting from BT Syncordia's
network operations center investment.
UNION BANK OF CALIFORNIA. Union Bank of California has been a leader in the
development of on-line banking products and services. Its early entree into the
on-line banking arena has allowed it to effectively utilize the Internet to
conduct a significant amount of banking transactions each day. Critical to the
continued success and growth of Union Bank of California's on-line presence is
the security of its networks. Union Bank has turned to us to address its network
security requirements.
Even though Union Bank of California had designed and implemented
sophisticated security technology solutions, they enlisted our help to validate
its security program and to assist it in highlighting deficiencies or
vulnerabilities in its existing security program. We performed a thorough
assessment of their perimeter defenses, encryption strategy, authentication
techniques, and operational processes and procedures. Our efforts helped Union
Bank of California make necessary changes to their infrastructure, security
systems and operational policies that significantly improved the security of
their Internet banking and other on-line initiatives. We also created an ongoing
review process to ensure continued, optimal security.
SALES AND MARKETING
We have developed direct and indirect sales channels for the sale of our
services. To facilitate our direct sales effort we have developed the
infrastructure necessary to capture and track the major sales indicators through
the sales cycle. Additionally, a significant amount of time and effort has been
and will continue to be invested in the development of tools, training materials
and training for sales and technical personnel. Our service products have
provided us with an opportunity to develop strategic third-party relationships
with hardware, software service and telecommunications providers in order to
expand our sales channel. As a result, we are developing an indirect sales
channel through relationships with third-party strategic partners. We have
entered into an agreement with Cabletron under which Cabletron has agreed to
market and sell our service products. Cabletron will initially sell and market
our Information Security Requirements Analysis product, with an additional 3
products to be added over the term of the agreement. The products will be sold
by Cabletron. We will provide the services for each product for which we will be
paid a predetermined amount by Cabletron. The term of the agreement is through
July 30, 2001 and will renew automatically for successive one year terms unless
terminated by either of us. We intend to pursue similar agreements with other
strategic partners in order to broaden our indirect sales channel.
HUMAN RESOURCES
We seek to attract, train, retain and deliver the highest level of technical
talent. We believe that our proactive approach gives us a strong competitive
edge in the marketplace and a scalable, consistently high standard of service
delivery. As of August 31, 1999, we had 349 full-time employees.
RECRUITING. Our success is dependent in part on attracting and retaining
talented and motivated personnel at all levels. Accordingly, we invest
significant resources in our recruiting efforts. We have a proactive recruiting
philosophy and believe in a broad-based model for attracting candidates.
Generally, we hire technical consultants according to profiles that fit into one
of our four practice areas.
CORPORATE CULTURE. Our corporate culture is shaped by our view of employees
as investors because they choose to invest their talents, skills, time and
energy into our organization. This mindset is critical
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to our ability to attract and retain professional staff at a time when
information technology professionals are in high demand. We have instituted a
very competitive benefits package for all employees and have developed policies
that ensure that we continue to address our employees' professional development
and satisfaction. We strive to maintain our relaxed and supportive workplace
despite our rapid growth and expansion.
PROFESSIONAL DEVELOPMENT. We believe that our investment in our employees
must mirror our employees' investment in and commitment to us. Integral to this
goal is the establishment of a career development plan for each of our
employees, which is created and agreed upon by management and the employee. We
provide our consultants with the opportunity to obtain extensive subject matter
expertise in their practice area and to work in collaborative multi-discipline
projects. We have also established Predictive University, a training program
that leverages both our in-house captured knowledge programs, as well as
selected outside certification programs.
COMPENSATION. We believe that linking employee compensation to our success
through performance-based incentive programs encourages a high level of
involvement from each team member and increases our employee retention. We
provide a highly competitive compensation package that consists of a combination
of base salary, performance-based incentives and company stock options.
COMPETITION
The network management consulting industry is comprised of many
participants, is highly competitive and is subject to rapid technological
change. We face intense competition from systems integrators, value added
resellers, local and regional network services firms, telecommunications
providers, network equipment and computer systems vendors. Many of our
competitors have greater name recognition, longer operating histories, more
relationships with large and established clients and greater financial,
technical and managerial resources. Furthermore, we expect that our competitors
may in the future form alliances with other technology vendors, which may give
them an advantage in managing networks that use that vendor's equipment.
Most of our current clients and prospective clients have internal
information technology departments and could choose to satisfy their network
management needs through internal resources rather than by outsourcing them to
third-party service providers such as ourselves. The decision by clients or
prospective clients to rely on their own information technology departments
could have a material adverse affect on our business, results of operations and
financial condition. Moreover, as the domestic and global markets for
information technology services continue to grow, we expect to face stiff
competition from new entrants into the network management consulting industry.
We believe that the principal competitive factors in the network management
market are the ability to attract and retain qualified personnel, quality and
breadth of services offered, price and reliability of services provided and the
strength of client relationships. We believe we compete favorably with respect
to all of these factors. We believe we distinguish ourselves from our
competitors through our expertise in managing complex, multi-vendor networks and
our ability to provide clients with cost certainty and guaranteed deliverables.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. Despite our precautions, it may be possible
for third parties to obtain and use our intellectual property without our
authorization. Furthermore, the validity, enforceability and scope of protection
of intellectual property in Internet-related industries is uncertain and still
evolving.
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The laws of some foreign countries do not protect intellectual property to the
same extent as do the laws of the United States.
We pursue the registration of our trademarks in the United States and
England. We may not be able to secure adequate protection of our trademarks in
the United States and other countries. We currently have applied for trademark
registrations in the United States and England for the PREDICTIVE SYSTEMS and
BUSINESSFIRST marks, and further, a trademark application in the United States
for the Predictive logo. The trademark offices in the United States and England
have raised preliminary objections to the registration of the trademarks
described above on a number of grounds, including likelihood of confusion with
pre-existing trademarks and descriptiveness. We have responded to these
objections and are awaiting the trademark offices' decisions on our responses.
We have not, however, received any objections from third parties asserting
likelihood of confusion claims with respect to our trademarks. Nonetheless, we
may not be able to obtain trademark registrations in the United States or
England, or both, for one or more of these trademarks, in which case we would be
unable to fully enforce our statutory trademark rights against third parties for
these trademarks, and/or we may decide to replace these trademarks with new
trademarks. This could have a material adverse effect on our business, financial
condition and results of operations. Effective trademark protection may not be
available in all the countries in which we conduct business. Policing
unauthorized use of our marks is also difficult and expensive. In addition, it
is possible that our competitors have adopted or will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion.
We cannot be certain that our services and the finished products that we
deliver do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. We may be subject to
legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. We may incur
substantial expenses in defending against these third-party infringement claims,
regardless of their merit. Successful infringement claims against us may result
in substantial monetary liability or may materially disrupt the conduct of our
business.
FACILITIES
Our principal executive offices are currently located in approximately
15,000 square feet of office space in New York, New York. Additionally, in June
1999 we entered into an agreement to lease approximately 32,000 square feet of
office space in another facility in New York, New York, with an option for an
additional 32,000 square feet available by March 2001. We expect to move our
principal executive offices to the new facilities in December 1999. We also
lease office space in:
- Atlanta, Georgia;
- Boston, Massachusetts;
- Dallas, Texas;
- Florham Park, New Jersey;
- Herndon, Virginia;
- Pleasanton, California;
- Santa Cruz, California;
- London, England; and
- Amsterdam, The Netherlands.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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MANAGEMENT
The following table sets forth our executive officers, directors and key
employees, their ages and the positions they hold:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ronald G. Pettengill, Jr............................. 40 Chairman of the Board and Chief Executive Officer
Robert L. Belau...................................... 36 President and Director
Gerard E. Dorsey..................................... 52 Chief Financial Officer
Thomas R. Joseph..................................... 32 Vice President, General Manager North America
Carl D. Humes........................................ 33 Vice President, Global Operations
Gregory D. Nicastro.................................. 39 Vice President, Strategic Services
Neeraj Sethi......................................... 36 Vice President, Finance
R. Kevin Holt........................................ 45 Vice President, Human Resources
John Wright.......................................... 36 Managing Director, Europe
Peter L. Bloom (1)................................... 41 Director
Donald J. Duffy (1).................................. 32 Director
Braden R. Kelly (2).................................. 28 Director
Eric Meyer (2)....................................... 38 Director
Inder Sidhu.......................................... 39 Director
William W. Wyman (2)................................. 61 Director
</TABLE>
- ------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
RONALD G. PETTENGILL, JR. co-founded Predictive in February 1995 and has
been Chairman of the Board and Chief Executive Officer since that time. Prior to
founding Predictive, Mr. Pettengill was Senior Vice President of Network
Operations at Allerion, Inc., a systems integration and network control center
design, operation and service delivery firm, from 1992 to 1995. From 1990 to
1992, Mr. Pettengill was the Director of Technical Services at Network
Management, Inc., which provided consulting services to assist Fortune 500
companies migrate from mainframe to network-based client/ server environments.
Prior to working at Network Management, Mr. Pettengill was the Network Manager
at Bear, Stearns & Co. Inc.
ROBERT L. BELAU co-founded Predictive in February 1995 and has been
President and a Director since that time. Prior to founding Predictive, Mr.
Belau was Director of Sales at Allerion, and also managed the definition,
productization and pricing of its network management outsourcing services, from
1993 to 1995. From 1987 to 1993, Mr. Belau was the Director of Sales at Network
Management. Mr. Belau is the step-brother of Eric Meyer, one of our directors.
GERARD E. DORSEY has been Chief Financial Officer since September 1999.
Prior to joining us, Mr. Dorsey was Senior Vice President-Finance, Chief
Financial Officer and Secretary of Intelligroup, Inc., a professional
information technology consulting services company, from 1995 to 1999. From 1991
to 1995, Mr. Dorsey was Senior Vice President-Finance and Chief Financial
Officer of Ariel Corporation, a data communications company. Prior to joining
Ariel Corporation, from 1991 until 1995, Mr. Dorsey was Chief Financial Officer
of Information Management Technologies Corporation, a printing and office
services outsourcing company. From 1987 until 1990, Mr. Dorsey was Treasurer of
Loral Corporation.
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THOMAS R. JOSEPH has been Vice President, General Manager North America
since April 1999. Prior to that Mr. Joseph held various positions with us, most
recently as National Vice President of Business Development, from 1996 to 1999.
From 1994 to 1996, Mr. Joseph was a Global Accounts Manager at Metropolitan
Fiber Systems, a competitive access provider.
CARL D. HUMES has been Vice President, Global Operations since April 1999.
Prior to that
Mr. Humes served as Regional Vice President of Technical Services for our
Mid-Atlantic region since 1996. From 1995 to 1996, Mr. Humes was a consultant at
Booz-Allen & Hamilton, a strategic consulting firm. Prior to that, Mr. Humes was
an officer in the United States Navy, and served on a nuclear submarine and at
the White House Office of Emergency Operations.
GREGORY D. NICASTRO has been Vice President, Strategic Services since April
1999. Prior to that, Mr. Nicastro served as Vice President of Marketing since
1997. Prior to joining us, Mr. Nicastro founded ActingExec, a marketing
consulting firm, in 1995. From July 1995 to October 1995, Mr. Nicastro was
Director of Systems Marketing at 3Com Corporation. From 1988 to 1995, Mr.
Nicastro served as National Account Sales Manager at Sun Microsystems.
NEERAJ SETHI has been Vice President of Finance since 1995. Prior to joining
us, Mr. Sethi was Assistant Vice President for Global Expense Management at
Bankers Trust from 1992 to 1995. From 1989 to 1992, Mr. Sethi was Controller and
Financial Analyst at Network Management.
R. KEVIN HOLT has been Vice President of Human Resources since March 1999.
Prior to joining us, Mr. Holt was a Managing Partner at USWeb/CKS (formerly
USWeb). Prior to the merger of USWeb/CKS and Gray Peak Technologies, Mr. Holt
served as Vice President and Director of Recruiting at Gray Peak, a high-end
network solutions provider. From October 1995 until September 1997, Mr. Holt
served as the Eastern Division Recruiting Manager at Sprint-Paranet, a global
network solutions provider. Previously, Mr. Holt was the Founder and President
of Metropolitan Search, a contingency and retained search and consulting
company. Mr. Holt filed a petition for bankruptcy protection in 1994.
JOHN WRIGHT has been Managing Director, Europe since January 1999. Prior to
joining us, Mr. Wright founded Visia Management Consultants, a strategic
consulting company, in 1997. From 1996 to 1997, Mr. Wright served as Director,
Business Development at Global Village, a communications software firm. From
1987 to 1996, Mr. Wright served in various roles at Gandalf Digital
Communications, including, most recently, Director of Indirect Channels.
PETER L. BLOOM has been a director of Predictive since March 1999. Mr. Bloom
is a managing member of General Atlantic Partners, LLC, a private equity firm
that invests globally in software, services, Internet and related information
technology companies, and has been at General Atlantic since 1995. From 1982 to
1995, Mr. Bloom served in various roles at Salomon Brothers, including as
Managing Director of Salomon's U.S. Technology Division. Mr. Bloom is a Director
of Bindview Development Corporation and a Special Advisor to the Board of
Directors of E*TRADE Group, Inc.
DONALD J. DUFFY has been a director of Predictive since its inception in
February 1995. Mr. Duffy is a co-founder of Meyer, Duffy & Associates, Inc., and
MD Ventures, firms that invest in early stage networking and Internet technology
companies. Mr. Duffy is a director of Bikers Dream Inc., a publicly traded
company. Mr. Duffy has been at Meyer, Duffy & Associates since 1994. From 1992
to 1994, Mr. Duffy was a Vice President at Oak Hall Capital Advisors, a money
management firm.
BRADEN R. KELLY has been a director of Predictive since June 1999. Mr. Kelly
is an associate at General Atlantic Partners, LLC, and has been with General
Atlantic since 1995. Mr. Kelly is a director of HEALTHvision, Inc., a provider
of comprehensive Internet solutions to the healthcare industry. From 1993 to
1994, Mr. Kelly served as a Financial Analyst at Morgan Stanley & Company.
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ERIC MEYER has been as a director of Predictive since its inception in
February 1995. Mr. Meyer is a co-founder of Meyer, Duffy & Associates and MD
Ventures, firms that invest in early stage networking and Internet technology
companies. Mr. Meyer has been at Meyer, Duffy & Associates since 1994. From 1992
to 1994 Mr. Meyer served as a Vice President at Oak Hall Capital Advisors. Mr.
Meyer is the step-brother of Robert L. Belau, our President and one of our
directors.
INDER SIDHU has been a director of Predictive since September 1999. Mr.
Sidhu has been the Vice President of Worldwide Professional Services at Cisco
since December 1998. From 1995 to 1998, Mr. Sidhu served in various executive
management positions in the Sales and Business Development organizations at
Cisco. From 1991 to 1995 Mr. Sidhu was a consultant at McKinsey & Company. Prior
to that, Mr. Sidhu led a network management group at 3Com Corporation.
WILLIAM W. WYMAN has been a director of Predictive since September 1999.
Since 1995, Mr. Wyman has been a business advisor and counselor on a broad range
of issues to a number of corporate chief executives of financial services,
information services, forest products and software companies. From 1984 to 1995,
Mr. Wyman was a partner at Oliver, Wyman & Company, a firm which specializes in
management consulting to large financial institutions and which he co-founded.
Mr. Wyman is a director of SS&C Technologies and U.S. Timberlands. He also
serves as a trustee of the Dartmouth Hitchcock Medical Center and on the Boards
of Advisors of The Sprout Group, a venture capital fund associated with
Donaldson, Lufkin & Jenrette, and Legend Capital, a leveraged buyout firm
associated with Castle Harlan Investments.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three year terms. Upon expiration of the term of a class of directors,
the directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which their term expires. Our board of
directors has resolved that Messrs. Pettengill, Belau and Duffy will be Class I
directors whose terms expire at the 2000 annual meeting of stockholders. Messrs.
Bloom, Meyer and Wyman will be Class II directors whose terms expire at the 2001
annual meeting of stockholders. Messrs. Kelly and Sidhu will be Class III
directors whose terms expire at the 2002 annual meeting of stockholders. These
provisions, when coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees.
BOARD COMMITTEES
The audit committee reports to the board of directors regarding the
appointment of our independent public accountants, the scope and results of our
annual audits, compliance with our accounting and financial policies and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. Meyer, Kelly
and Wyman who were appointed in May 1999, June 1999 and September 1999,
respectively. Prior to that time, the responsibilities of the audit committee
were handled by the entire board of directors.
The compensation committee reviews and makes recommendations to the board of
directors regarding our compensation policies and all forms of compensation to
be provided to our executive officers and directors. In addition, the
compensation committee reviews bonus and stock compensation arrangements for all
of our other employees. The members of the compensation committee are Messrs.
Duffy and Bloom, who were appointed in May 1999. Prior to that time, the
responsibilities of the audit committee were handled by the entire board of
directors.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past
with the exception of the following:
- Messrs. Pettengill, Belau, Duffy and Meyer serve on the board of directors
of Tribeca Software, a network management software company, and Messrs.
Pettengill and Belau are executive officers of Tribeca. Please see
"Certain Transactions--Tribeca Software" for information about our
relationship with Tribeca.
- Messrs. Pettengill and Meyer serve on the board of directors of Riversoft
Ltd., a network management software company. We act as a reseller for
Riversoft's software. To date, our revenues from sales of Riversoft's
software have not been material.
- Our directors have engaged in various other transactions with us. For
information about these transactions please see "Certain
Transactions--Relationship with Cisco,--Sale of Common Stock,--Sales of
Series A Convertible Preferred Stock and Warrants,--Share Redemption,--
Meyer Duffy & Associates,--Loans to Officers and--Option Grants."
DIRECTOR COMPENSATION
We do not currently compensate our directors for attending meetings of the
board of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings. Each of Messrs. Bloom, Duffy, Kelly and Meyer
were granted options to purchase 25,000 shares of our common stock at a price of
$4.00 per share in May 1999. Messrs. Sidhu and Wyman were granted options to
purchase 25,000 shares of our common stock at a price of $11.05 per share in
September 1999. These options vest over a period of four years.
Under the automatic option grant program of the 1999 Stock Incentive Plan,
which is described below under "--1999 Stock Incentive Plan," each individual
who first joins the board of directors after the closing of this offering as a
non-employee member of the board of directors will also receive an option grant
for 25,000 shares of our common stock at the time of his or her commencement of
service on the board of directors. In addition, at each annual meeting of
stockholders, beginning with the 2001 annual meeting, each individual who is to
continue to serve as a non-employee member of the board of directors will
receive an option to purchase 2,500 shares of our common stock.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued during
the fiscal year ended December 31, 1998 to our Chief Executive Officer and to
each of our most highly compensated executive officers, other than the Chief
Executive Officer, whose salary and bonus for such fiscal year exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
---------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY $ BONUS $ OPTIONS COMPENSATION
- ------------------------------------------------------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Ronald G. Pettengill, Jr............................... $ 175,000 $ 50,000 60,000 $ 8,447(1)
Chief Executive Officer
Robert L. Belau........................................ 175,000 50,000 60,000 8,899(1)
President
Thomas R. Joseph....................................... 112,500 190,000 270,000 3,000(2)
Vice President of North America
Carl D. Humes.......................................... 112,500 190,000 270,000 3,000(2)
Vice President, Technical Services
Gregory D. Nicastro.................................... 140,000 14,000 -- --
Vice President, Strategic Services
Neeraj Sethi........................................... 135,167 55,000 -- --
Vice President, Finance
</TABLE>
- ------------------------
(1) We paid a monthly car allowance and automobile insurance premiums for each
of Messrs. Pettengill and Belau during the year ended December 31, 1998.
(2) We paid a monthly car allowance effective July 1998 for each of Messrs.
Joseph and Humes during the year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to our Chief Executive Officer and to each of our most highly
compensated executive officers, other than the Chief Executive Officer, whose
salary and bonus for such fiscal year exceeded $100,000. We have never granted
any stock appreciation rights. The potential realizable value is calculated
based on the term of the option at its time of grant. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth. The percentage of total options granted to employees
in the last fiscal year is based on options to purchase an aggregate of
2,427,000 shares of common stock granted under our option plans. There was no
public market for our
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<PAGE>
common stock as of December 31, 1998. Accordingly, the fair market value on
December 31, 1998 is assumed to be the initial public offering price of $13.00
per share.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION --------------------------
NAME GRANTED IN 1998 SHARE ($) DATE 5% 10%
- --------------------------------------- ----------- ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr............... 60,000 2.5% $ 1.25 1/1/08 $ 1,135,036 $ 1,764,199
Robert L. Belau........................ 60,000 2.5 1.25 1/1/08 1,135,036 1,764,199
Thomas R. Joseph....................... 150,000 6.2 1.25 1/1/08 2,837,590 4,410,498
120,000 4.9 1.50 8/1/08 2,124,830 3,163,999
Carl D. Humes.......................... 150,000 6.2 1.25 1/1/08 2,837,590 4,410,498
120,000 4.9 1.50 8/1/08 2,124,830 3,163,999
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the value realized
upon exercise of options during 1998 and the number and value of unexercised
options held by each of our named executive officers at December 31, 1998. There
was no public market for our common stock as of December 31, 1998. Accordingly,
the values set forth below have been calculated on the basis of the fair market
value on December 31, 1998 assuming this was equal to the assumed initial public
offering price of $13.00 per share, less the applicable exercise price per
share, multiplied by the number of shares underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
<S> <C> <C> <C> <C> <C> <C>
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ------------ ----------- ------------- ------------ -------------
Ronald G. Pettengill, Jr.............. 585,000 $ 7,507,305 780,000 -- $ 9,485,220 --
Robert L. Belau....................... 585,000 7,507,305 780,000 -- 9,485,220 --
Thomas R. Joseph...................... -- -- 210,000 150,000 2,497,530 $ 1,740,000
Carl D. Humes......................... -- -- 210,000 150,000 2,460,000 1,740,000
Gregory D. Nicastro................... -- -- -- 336,000 -- 3,948,000
Neeraj Sethi.......................... 135,000 1,732,455 90,000 90,000 1,070,010 1,057,500
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into executive employment agreements with Ronald G.
Pettengill, Jr., our Chairman and Chief Executive Officer, and Robert L. Belau,
our President. Each employment agreement provides for an initial annual base
salary of $200,000. Each employment agreement also provides for initial
performance based bonuses of $25,000 upon the closing of this offering and up to
an additional $50,000 upon the achievement of certain gross revenue thresholds
in the 1999 fiscal year. Under the agreements, each executive also received
options to purchase 100,000 shares of our common stock at a price of $4.00 per
share, which vest over 3 years. Additionally, each executive received options to
purchase an additional 100,000 shares of our common stock at a price of $4.00
per share which vest after 4 years. These additional options will vest
immediately upon the achievement of certain gross revenues thresholds.
Each employment agreement expires on May 11, 2002, subject to earlier
termination or extension. Each employment agreement provides that if Messrs.
Pettengill and Belau are terminated by us without cause or if they terminate
their employment agreements for good reason, they will be entitled to their base
salary and health coverage until the later of the expiration date of their
employment agreements
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or one year from the date of termination. Additionally, all stock options
granted to them will immediately vest.
Under the agreements, good reason includes:
- a material breach of the agreements by us;
- a material change in the executives duties and responsibilities;
- a change in the executive's reporting relationship;
- a relocation of our executive offices further than 75 miles from its
current location; or
- a change of control.
Each employment agreement prohibits Messrs. Pettengill and Belau from
competing with us, or soliciting our customers or employees, for a period of one
year from the date of their termination of employment.
We have also entered into an employment agreement with R. Kevin Holt, our
Vice President of Human Resources, John Wright, Managing Director Europe, and
Gerard Dorsey, our Chief Financial Officer. Mr. Holt's agreement provides for an
initial annual base salary of $130,000 and for an initial performance based
bonus of up to $120,000 upon the achievement of certain hiring goals, hiring
processes and marketing goals in the fiscal year ending December 31, 1999. Under
the agreement, Mr. Holt received options to purchase 130,000 shares of our
common stock at a price of $2.50 per share, which vest over four years.
Our employment agreement with Mr. Holt expires on January 23, 2001, subject
to earlier termination. Mr. Holt's agreement provides that if he is terminated
by us without cause or if he terminates his employment with us for good reason,
he will be entitled to receive his base salary until the earlier of six months
after the date of his termination or the date he accepts new employment. Under
the agreement, good reason includes:
- a reduction in Mr. Holt's base salary;
- a relocation of Mr. Holt's office further than 50 miles from his current
office; or
- a material reduction in job duties.
Our agreement prohibits Mr. Holt from competing with us, soliciting our
employees or permitting his name to be used in connection with a competing
business for a period of six months from the date of the termination of his
employment.
Our agreement with Mr. Wright provides for an initial base salary of
L71,200, approximately $114,000 at an exchange rate of 1.6, plus a bonus based
on our performance. Under the agreement, Mr. Wright received options to purchase
80,000 shares of our common stock at a price of $2.50 per share, which vest over
four years. We agreed to contribute an amount equal to 5% of Mr. Wright's base
salary to a pension plan. The employment agreement prohibits Mr. Wright from
competing with us and soliciting our employees for a period of 6 and 12 months,
respectively, from the termination of his employment. The agreement is in effect
until terminated by either party by giving at least 3 months notice to the other
party.
Our agreement with Mr. Dorsey provides for an initial base salary of
$210,000 and an annual bonus of up to a maximum of $75,000. Under the agreement,
Mr. Dorsey received options to purchase 175,000 shares of our common stock at a
price of $11.05 per share, which vest over 4 years. Our agreement further
provides that Mr. Dorsey will receive an automobile allowance of $650 per month.
The agreement prohibits Mr. Dorsey from competing with us and soliciting our
employees for a period
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<PAGE>
of one year from the termination of his employment. The agreement has an initial
term of three years, and renews automatically for successive one year periods
unless written notice is given by either party.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1998 Stock Option/Stock Issuance Plan and our 1998
California Stock Option/Stock Issuance Plan. The 1999 Plan became effective upon
its adoption by the board of directors on September 14, 1999. It will be
approved by the stockholders prior to the date of this offering.
6,665,600 shares of common stock have been authorized for issuance under the
1999 Plan. This share reserve consists of the shares which were available for
issuance under the predecessor plans on the effective date of the 1999 Plan plus
an additional increase of 2,345,597 shares. The share reserve will automatically
be increased on the first trading day of January each calendar year, beginning
in January 2001, by a number of shares equal to 1% of the total number of shares
of common stock outstanding on the last trading day of the immediately preceding
calendar year, but no such annual increase will exceed 500,000 shares. However,
in no event may any one participant in the 1999 Plan receive option grants or
direct stock issuances for more than 500,000 shares in the aggregate per
calendar year.
Outstanding options under the predecessor plans will be incorporated into
the 1999 Plan upon the date of this offering, and no further option grants will
be made under those plans. The incorporated options will continue to be governed
by their existing terms, unless our compensation committee extends one or more
features of the 1999 Plan to those options. However, except as otherwise noted
below, the outstanding options under the predecessor plans contain substantially
the same terms and conditions summarized below for the discretionary option
grant program under the 1999 Plan.
The 1999 Plan has five separate programs:
- the discretionary option grant program under which eligible individuals in
our employ or service (including officers, non-employee board members and
consultants) may be granted options to purchase shares of our common
stock;
- the stock issuance program under which these individuals may be issued
shares of our common stock directly, with the purchase of such shares or
as a bonus tied to the performance of services;
- the salary investment option grant program under which executive officers
and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special below-market stock option
grants;
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members; and
- the director fee option grant program under which non-employee board
members may elect to apply a portion of their retainer fee to the
acquisition of special below-market stock option grants.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the exercise or purchase price
for each such grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may
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<PAGE>
participate in the salary investment option grant program in the event that
program is activated for one or more calendar years. Neither the compensation
committee nor the board will exercise any administrative discretion with respect
to option grants made under the salary investment option grant program or under
the automatic option grant or director fee option grant program for the non-
employee board members.
The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the compensation committee may allow a participant to pay
the option exercise price or direct issue price (and any associated withholding
taxes incurred in connection with the acquisition of shares) with a
full-recourse, interest-bearing promissory note.
In the event that we are acquired, whether by merger or asset sale or
board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent our repurchase rights with respect to those shares are to
be assigned to the successor corporation or otherwise continued in effect. The
compensation committee may grant options under the discretionary option grant
program which will accelerate in the acquisition even if the options are assumed
or which will accelerate if the optionee's service is subsequently terminated.
The compensation committee may grant options and issue shares which accelerate
in connection with a hostile change in control effected through a successful
tender offer for more than 50% of our outstanding voting stock or by proxy
contest for the election of board members) or the options and shares may
accelerate upon a subsequent termination of the individual's service.
Options currently outstanding under the plan may be assumed by the successor
corporation in an acquisition; such options are not by their terms subject to
acceleration at the time of an acquisition or a change in control or upon the
termination of the optionee's service following any such transaction.
Stock appreciation rights may be issued under the discretionary option grant
program which will provide the holders with the election to surrender their
outstanding options for an appreciation distribution from us equal to the fair
market value of the vested shares subject to the surrendered option less the
aggregate exercise price payable for such shares. This appreciation distribution
may be made in cash or in shares of our common stock. There are currently no
outstanding stock appreciation rights under the predecessor plans.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program (including options incorporated
from predecessor plans) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.
In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $5,000 nor more than $50,000. In
return, the individual will automatically be granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the option
shares on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the salary reduction amount. The option will become exercisable in a
series of 12 equal monthly installments over the
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<PAGE>
calendar year for which the salary reduction is to be in effect and will be
subject to full and immediate vesting in the event of an acquisition or change
in control.
Under the automatic option grant program, each individual who first joins
our board after the effective date of this offering as a non-employee board
member will automatically be granted an option for 25,000 shares of our common
stock at the time of his or her commencement of board service. In addition, on
the date of each annual stockholders meeting, beginning with the 2001 meeting,
each individual who has served as a non-employee board member since the last
annual stockholders meeting will receive an option grant to purchase 2,500
shares of our common stock. Each automatic grant will have an exercise price
equal to the fair market value per share of our common stock on the grant date
and will have a maximum term of 10 years, subject to earlier termination
following the optionee's cessation of board service. Each option will be
immediately exercisable, subject to our right to repurchase any unvested shares,
at the original exercise price, at the time of the board member's cessation of
service. The options will vest, and our repurchase right will lapse, with
respect to, the initial 25,000-share option grant in a series of four (4) equal
successive annual installments upon the optionee's completion of each year of
service over the four (4)-year period measured from the grant date. However,
each such outstanding option will immediately vest upon an acquisition or change
in control or the death or disability of the optionee while serving as a board
member. Each 2,500-share option grant will be fully vested on grant.
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically be made on the first trading day in
January in the year for which the non-employee board member would otherwise be
paid the cash retainer fee in the absence of his or her election. The option
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of our
common stock on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the portion of the retainer fee applied to that option. The option
will become exercisable in a series of twelve equal monthly installments over
the calendar year for which the election is in effect. However, the option will
become immediately exercisable for all the option shares upon the death or
disability of the optionee while serving as a board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, director fee option grant and
salary investment option grant programs and may be granted to one or more
officers as part of their option grants under the discretionary option grant
program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than 50%
of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the highest price per share of our common
stock paid in connection with the tender offer less the exercise price payable
for such share.
The board may amend or modify the 1999 Plan at any time, subject to any
required stockholder approval. The 1999 Plan will terminate no later than
September 14, 2009.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan was adopted by the board on September 14,
1999 and will be approved by the stockholders prior to the date of this
offering. The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow our
eligible employees and those of our participating subsidiaries to purchase
shares of our
54
<PAGE>
common stock, at semi-annual intervals, through periodic payroll deductions. A
total of 750,000 shares of our common stock will be issued under the plan.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. The initial offering period will begin on the day
the underwriting agreement is executed in connection with this offering and will
end on the last business day in October 2001. The next offering period will
begin on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 10% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase date
(the last business day in January and July each year). The purchase price per
share will be 85% of the lower of the fair market value of our common stock on
the participant's entry date into the offering period or the fair market value
on the semi-annual purchase date. The first purchase date will occur on the last
business day in April 2000. In no event, however, may any participant purchase
more than 500 shares, nor may all participants in the aggregate purchase more
than 187,500 shares on any one semi-annual purchase date. Should the fair market
value of our common stock on any semi-annual purchase date be less than the fair
market value on the first day of the offering period, then the current offering
period will automatically end and a new offering period will begin, based on the
lower fair market value.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in October 2009.
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<PAGE>
CERTAIN TRANSACTIONS
RELATIONSHIP WITH CISCO
In September 1999, we sold 1,242,000 shares of our common stock to Cisco for
$12.00 per share. In connection with the investment, we have agreed to nominate
a person designated by Cisco to our Board of Directors so long as Cisco owns
more than 750,000 shares of our common stock. Additionally, we provide network
consulting services to Cisco pursuant to an existing agreement negotiated by the
parties in an arms-length transaction. This agreement expires in May 2003 and
governs the terms and conditions that apply to all consulting services performed
by us for Cisco and for customers of Cisco. In fiscal 1998 and the six months
ended June 30, 1999, revenues from Cisco were $35,190 and $883,388,
respectively. Inder Sidhu, one of our directors, is the Vice President of
Worldwide Professional Services at Cisco.
SALE OF COMMON STOCK
In September 1999, we sold 94,867 and 18,133 shares of our common stock to
General Atlantic Partners 57 and GAP Coinvestment Partners II, respectively, for
$12.00 per share. Peter L. Bloom and Braden R. Kelly, our directors, are
respectively a managing member and an associate of General Atlantic Partners,
LLC. General Atlantic Partners, LLC is the general partner of General Atlantic
Partners 57 and the managing members of General Atlantic Partners, LLC are also
the general partners of GAP Coinvestment Partners II.
TRIBECA SOFTWARE
In March 1998, we made a pro rata distribution of all of the outstanding
shares of our former subsidiary, Tribeca Software, Inc., to our stockholders. Of
the 1,501,700 then outstanding shares of Tribeca, we distributed the following
amounts to our officers, directors and 5% stockholders and their affiliates:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF STOCKHOLDER OF TRIBECA
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
Ronald G. Pettengill, Jr........................................................................ 234,000
Robert L. Belau................................................................................. 250,000
Belau Irrevocable Family Trust.................................................................. 10,000
Neeraj Sethi.................................................................................... 13,000
Donald J. Duffy................................................................................. 25,000
Eric Meyer...................................................................................... 42,500
MD Strategic, L.P............................................................................... 85,000
PVII, L.P....................................................................................... 32,000
Boyce Meyer Trust(1)............................................................................ 200,000
</TABLE>
- ------------------------
(1) Boyce Meyer was the father of Eric Meyer and the stepfather of Robert
Belau.
Subsequent to this transaction, Tribeca purchased from us, and we assigned
to Tribeca, network management software and other assets, including computer and
office equipment. As payment for these assets, Tribeca gave us a demand note in
the amount of $130,000, which accrued interest at 8% per annum. Additionally, we
gave Tribeca a $1,000,000 line of credit at an interest rate of 8% per annum. In
March 1999, Tribeca paid us the full amounts due under the demand note and line
of credit and the line of credit was terminated. The largest amount outstanding
under the line of credit was $988,800.
From March 1998 through June 1999, we performed payroll, accounting and
other administrative services for Tribeca for a fee of $7,000 per month.
Additionally, Tribeca leases office space and
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<PAGE>
equipment from us for approximately $12,000 per month. We also have an oral
agreement with Tribeca to purchase at a discount and resell its software. In
1998, sales of Tribeca's software accounted for approximately $100,000 of our
revenues. We believe that these transactions were on terms that are no less
favorable than those that could be obtained from unaffiliated third parties.
Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer, Robert
L. Belau, our President, and Donald J. Duffy and Eric Meyer, our directors, are
directors of Tribeca and own shares of common stock of Tribeca. Additionally,
Messrs. Pettengill and Belau serve as executive officers of Tribeca.
SALE OF SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS
In March 1999, we sold 6,512,316 shares of series A convertible preferred
stock and warrants to purchase the number of shares of our common stock that
equals 15% of the number of shares registered in this offering, at the initial
public offering price, to six accredited investors for an aggregate purchase
price of approximately $18.6 million. General Atlantic Partners 54, L.P.
purchased 5,350,441 shares and GAP Coinvestment Partners II purchased 1,112,765
shares. Peter L. Bloom and Braden R. Kelly, our directors, are respectively a
managing member and an associate of General Atlantic Partners, LLC. General
Atlantic Partners, LLC is the general partner of General Atlantic Partners 54
and the managing members of General Atlantic Partners, LLC are also the general
partners of GAP Coinvestment Partners II. The purchase price for the series A
convertible preferred stock was $2.85 per share. On the closing of this
offering, the series A convertible preferred stock will automatically convert
into 6,512,316 shares of common stock. Under the terms of the warrants, a notice
of exercise was required to be sent within twenty business days of the initial
filing of this registration statement. As no notice of exercise was received
within this exercise period, the warrants have terminated and are no longer
exercisable.
SHARE REDEMPTION
As a condition of the March 1999 sale of series A convertible preferred
stock and warrants, we were required to repurchase approximately $8.4 million of
our common stock. Accordingly, we made an offer to each of our stockholders to
repurchase their shares at a price of $2.94 per share. Subsequently, in March
1999, we repurchased a total of 2,855,100 shares of common stock from 31 of our
stockholders who elected to sell shares for an aggregate purchase price of
approximately $8.4 million. Of these, we purchased the following amounts from
our officers, directors and 5% stockholders and their affiliates:
<TABLE>
<CAPTION>
NUMBER OF SHARES AGGREGATE
NAME OF STOCKHOLDER REDEEMED CONSIDERATION
- -------------------------------------------------------------------------------- ----------------- -------------
<S> <C> <C>
Ronald G. Pettengill, Jr........................................................ 534,000 $ 1,570,850
Robert L. Belau................................................................. 480,000 1,412,000
Neeraj Sethi.................................................................... 48,000 141,200
Donald J. Duffy................................................................. 210,000 617,750
Eric Meyer...................................................................... 282,000 829,550
MD Strategic, L.P............................................................... 119,040 350,176
Predictive Ventures, L.P........................................................ 300,000 882,500
PVII, L.P....................................................................... 33,060 97,251
</TABLE>
Eric Meyer and Donald J. Duffy, our directors, are general partners of MD
Strategic, Predictive Ventures and PVII.
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<PAGE>
MEYER, DUFFY & ASSOCIATES
We had an agreement with Meyer, Duffy & Associates, Inc. pursuant to which
Meyer Duffy & Associates provided us with consulting and advisory services
regarding capital raising and strategic partnerships. Eric Meyer and Donald J.
Duffy, our directors, serve as co-managing Directors of Meyer, Duffy &
Associates. We paid Meyer, Duffy & Associates a retainer fee of $5,000 per month
in connection with these services through March 31, 1999, the date that the
agreement terminated. Additionally, in August 1998, we loaned Meyer, Duffy &
Associates, L.P., in connection with the exercise of options, $300,000 at an
interest rate of 7% per annum. Meyer, Duffy & Associates, L.P. repaid this loan
in March 1999. Messrs. Meyer and Duffy are the general partners of Meyer, Duffy
& Associates, L.P.
LOANS TO OFFICERS
In August 1998, in connection with the exercise of options, we loaned each
of Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer and
Robert L. Belau, our President, $97,500 at an interest rate of 7% per annum.
Messrs. Pettengill and Belau repaid those loans in March 1999. In addition to
these loans, from time to time, we have advanced loans to Messrs. Pettengill and
Belau. As of December 31, 1998 the amounts outstanding under these advances for
Messrs. Pettengill and Belau was $15,000 and $13,402, respectively which
represents the largest amounts outstanding under these advances during fiscal
1998. There are currently no advances outstanding. We may in the future make
loans to our officers.
OPTION GRANTS
We granted each of Messrs. Bloom, Duffy, Kelly and Meyer, our non-employee
directors, options to purchase 25,000 shares of our common stock at a price of
$4.00 per share. We granted each of Messrs. Sidhu and Wyman, our non-employee
directors, options to purchase 25,000 shares of our common stock at a price of
$11.05 per share. Additionally, in 1999, we granted to Messrs. Pettengill,
Belau, Dorsey, Joseph, Humes, Holt, Sethi and Wright options to purchase
200,000; 200,000; 175,000; 100,000; 60,000; 130,000; 70,000 and 80,000
respectively. Please see "Management--Employment Agreements." For additional
information regarding the grant of stock options to executive officers and
directors, please see "Management--Director Compensation," "--Executive
Compensation," "--1999 Stock Incentive Plan" and "Principal Stockholders."
AGREEMENTS WITH UNDERWRITERS
We provide network consulting services to Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette and First Union Capital Markets Corp. pursuant to
agreements they have entered into with us. The terms of these agreements were
negotiated by the parties in arms-length transactions and were entered into
prior to our selection of the underwriters of this offering. In 1998, revenues
derived from Bear Stearns, Donaldson, Lufkin & Jenrette and its affiliates, and
First Union equalled $5.4 million, $162,689 and $50,000, respectively. For the
six months ended June 30, 1999, revenues derived from Bear Stearns and
Donaldson, Lufkin & Jenrette and its affiliates equalled $5.2 million and
$855,000, respectively. We may provide network consulting services to other
underwriters in this offering after the date of this prospectus.
We recently adopted a policy that all transactions with officers, directors,
5% stockholders and their affiliates be entered into only if they are approved
by a majority of the disinterested independent directors, are on terms no less
favorable to us than could be obtained from unaffiliated parties and are
reasonably expected to benefit us.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of September 30, 1999 and as adjusted to
reflect the sale of common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o Predictive Systems, Inc., 145 Hudson Street, New York, New
York 10013. Except as indicated by footnote, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options held by such persons that are exercisable within 60 days of September
30, 1999, but excludes shares of common stock underlying options held by any
other person. Percentage of beneficial ownership is based on 18,790,080 shares
of common stock outstanding as of September 30, 1999, assuming the conversion of
the series A preferred stock, and 22,790,080 shares of common stock outstanding
after completion of this offering. It assumes that the underwriters'
over-allotment option to purchase up to an additional 600,000 shares is not
exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED
--------------------------
<S> <C> <C> <C>
SHARES BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ----------------------------------------------------------------- ------------------------ ----------- -------------
Ronald G. Pettengill, Jr. (1).................................... 2,229,000 11.4% 9.5%
Robert L. Belau (2).............................................. 2,655,000 13.6 11.4
Thomas R. Joseph (3)............................................. 240,000 1.3 1.0
Carl D. Humes (3)................................................ 240,000 1.3 1.0
Gregory D. Nicastro (4).......................................... 84,000 * *
Neeraj Sethi (5)................................................. 150,000 * *
Peter L. Bloom (6)............................................... 6,880,006 36.6 30.2
Donald J. Duffy (7).............................................. 2,631,900 13.9 11.5
Braden R. Kelly (8).............................................. -- -- --
Eric Meyer (9)................................................... 3,114,900 16.4 13.6
Inder Sidhu (10)................................................. 1,242,000 6.6 5.4
William W. Wyman (11)............................................ -- -- --
Cisco Systems, Inc. (12)......................................... 1,242,000 6.6 5.4
General Atlantic Partners, LLC (13).............................. 6,880,006 36.6 30.2
Meyer Duffy and Associates, L.P (14)............................. 1,800,000 9.6 7.9
All directors and executive officers as a group
(15 persons) (15).............................................. 17,014,906 79.5 67.0
</TABLE>
- ------------------------
* Indicates less than one percent of the common stock.
(1) Includes (a) 780,000 shares issuable upon the exercise of currently
exercisable options and (b) 150,000 shares of common stock held by The Conor
G. Pettengill Trust and 150,000 shares held by The Julia G. Pettengill
Trust.
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<PAGE>
(2) Includes (a) 780,000 shares issuable upon the exercise of currently
exercisable options and (b) 126,000 shares of common stock held by The Belau
Family Trust.
(3) Includes 240,000 shares issuable upon the exercise of currently exercisable
options.
(4) Includes 84,000 shares issuable upon the exercise of currently exercisable
options.
(5) Includes 120,000 shares issuable upon the exercise of currently exercisable
options.
(6) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54, (b)
349,918 shares owned by General Atlantic Partners 57, and (c) 1,179,647
shares owned by GAP Coinvestment Partners II. The general partner of General
Atlantic Partners 54 and General Atlantic Partners 57 is General Atlantic
Partners, LLC and the managing members of General Atlantic Partners, LLC are
also the general partners of GAP Coinvestment Partners II. Peter L. Bloom is
a managing member of General Atlantic Partners, LLC. Mr. Bloom disclaims
beneficial ownership of these securities except to the extent of his
economic interest in General Atlantic Partners, LLC, and GAP Coinvestment
Partners II. The address of Mr. Bloom is c/o General Atlantic Partners, LLC,
3 Pickwick Plaza, Greenwich, Connecticut 06830.
(7) Includes (a) 180,000 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares of common stock held by MD
Strategic, L.P., (c) 1,800,000 shares of common stock held by Meyer, Duffy
and Associates, L.P., and (d) 140,940 shares of common stock held by PVII,
L.P. Mr. Duffy is a general partner of each of MD Strategic, L.P., Meyer,
Duffy & Associates, L.P. and PVII, L.P. Mr. Duffy disclaims beneficial
ownership of these securities except to the extent of his economic interest
in MD Strategic L.P., Meyer Duffy & Associates, L.P. and PVII, L.P. The
address of Mr. Duffy is c/o of Meyer, Duffy & Associates, Inc., 237 Park
Avenue, New York, New York 10017.
(8) The address of Mr. Kelly is c/o General Atlantic Partners, LLC, 3 Pickwick
Plaza, Greenwich, Connecticut 06830.
(9) Includes (a) 180,000 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares of common stock held by MD
Strategic, L.P., (c) 1,800,000 shares of common stock held by Meyer, Duffy
and Associates, L.P., and (d) 140,940 shares of common stock held by PVII,
L.P. Mr. Meyer is a general partner of each of MD Strategies L.P., Meyer,
Duffy and Associates, L.P. and PVII, L.P. Mr. Meyer disclaims beneficial
ownership of these securities except to the extent of his economic interest
in MD Strategic L.P., Meyer Duffy & Associates, L.P. and PVII, L.P. The
address of Mr. Meyer is c/o Meyer, Duffy and Associates, Inc., 237 Park
Avenue, New York, NY 10017.
(10) Includes 1,242,000 shares of common stock owned by Cisco. Mr. Sidhu is the
Vice President of Worldwide Professional Services at Cisco. The address of
Mr. Sidhu is c/o Cisco Systems, Inc., 170 West Tasman Drive, San Jose,
California 95134-1706.
(11) The address of Mr. Wyman is 4 North Balch Street, Hanover, New Hampshire
03755.
(12) The address of Cisco is 170 West Tasman Drive, San Jose, California
95134-1706.
(13) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54, (b)
349,918 shares owned by General Atlantic Partners 57, and (c) 1,179,647
shares owned by GAP Coinvestment Partners II. General Atlantic Partners, LLC
is the general partner of General Atlantic Partners 54 and General Atlantic
Partners 57 and the managing members of General Atlantic Partners, LLC are
also the general partners of GAP Coinvestment Partners II, therefore,
General Atlantic Partners, LLC may vote and dispose of the shares owned by
these entities. The address of General Atlantic Partners, LLC is 3 Pickwick
Plaza, Greenwich, Connecticut 06830.
(14) The address of Meyer, Duffy and Associates, L.P. is c/o Meyer, Duffy &
Associates, Inc., 237 Park Avenue, New York, New York 10017.
(15) Includes 2,604,000 shares of common stock issuable upon the exercise of
currently exercisable options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our amended and restated certificate of incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
200,000,000 shares of common stock, par value $.001 per share, and 10,000,000
shares of preferred stock, par value $.001 per share, the rights and preferences
of which may be established from time to time by our board of directors. As of
September 30, 1999, 12,277,764 shares of common stock were outstanding and
6,512,316 shares of series A convertible preferred stock convertible into the
same amount of shares of common stock were outstanding. As of September 30,
1999, we had 76 stockholders.
COMMON STOCK
Under our amended and restated certificate of incorporation, holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors. They do not have cumulative voting rights. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of our
common stock are entitled to receive ratably dividends, if any, as may be
declared by the board of directors out of legally available funds. In case of a
liquidation, dissolution or winding up of Predictive, the holders of common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after payment of all of our liabilities and any
preferred stock then outstanding. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. The rights, preferences
and privileges of holders of common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. After the closing of this offering, there will be no shares
of preferred stock outstanding.
PREFERRED STOCK
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences, powers,
rights and restrictions of different series of preferred stock may differ. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock. Such
issuance may also have the effect of delaying, deferring or preventing a change
in control of Predictive. We have no current plans to issue any shares of
preferred stock.
REGISTRATION RIGHTS
In March 1999, we entered into registration rights agreement with some of
our stockholders, including: General Atlantic Partners 54; GAP Coinvestment
Partners II; Ronald G. Pettengill, Jr., our Chief Executive Officer; Robert L.
Belau, our President; Eric Meyer and Donald Duffy, our directors; and Meyer,
Duffy and Associates. This agreement was amended in September 1999 to include
General Atlantic Partners 57. Under the terms of this agreement, as amended at
any time after the first anniversary of the effective date of this offering,
each of General Atlantic Partners 54, General Atlantic Partners 57 and GAP
Coinvestment Partners II may, on two occasions only, require us to register for
sale all or any portion of the shares of common stock issuable upon conversion
of the preferred shares held by them. We are also obligated to register some
shares of common stock held by parties to the registration rights agreement if
they request to be included in the registration. In September 1999, we entered
into a separate registration rights agreement with Cisco Systems.
61
<PAGE>
Under each of these agreements, if we become eligible to file registration
statements on Form S-3, some parties to the registration rights agreements may
require us to file a registration statement on Form S-3 under the Securities Act
with respect to some shares of common stock held by them. We are also obligated
to register some shares of common stock held by parties to the registration
rights agreements if they request to be included in the registration. In
addition, holders of common stock who are parties to the registration rights
agreements will be entitled to require us to register some of their common stock
when we register stock of other stockholders. This type of registration right is
known as a "piggyback" registration right.
The foregoing registration rights are subject to certain conditions and
limitations, including:
- The right of the underwriters in any underwritten offering to limit the
number of shares of common stock held by stockholders with registration
rights to be included in any demand, S-3 or piggyback registration; and
- Our right to delay for up to 90 days the filing or effectiveness of a
registration statement pursuant to a demand for registration if the board
of directors of determines that the registration would not be in our best
interest at that time.
We are generally required to bear all of the expenses of all registrations,
except underwriting discounts and commissions. Registration of any of the shares
of common stock held by stockholders with registration rights would result in
those shares becoming freely tradable without restriction under the Securities
Act immediately after effectiveness of the registration. We have agreed to
indemnify the holders of registration rights in connection with demand, S-3 and
piggyback registration under the terms of our registration rights agreements.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BYLAWS
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, which are summarized in the following paragraphs,
may have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, when coupled with the
provision of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships or increase the size of the
board of directors, may delay a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
CUMULATIVE VOTING
Our amended and restated certificate of incorporation expressly denies
stockholders the right to cumulate votes in the election of directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation eliminates the ability
of stockholders to act by written consent. It further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors.
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<PAGE>
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be 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. In the event that the annual meeting is called for a date that is
not within thirty (30) days before or after the anniversary date, in order to be
timely, notice from the stockholder must be received no later than the tenth day
following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. In the case of a
special meeting of stockholders called for the purpose of electing directors,
notice by the stockholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our amended and restated by-laws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual or
special meeting of stockholders or from making nominations for directors at
these meetings.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally 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 bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with the
amendment of provisions of our amended and restated certificate of incorporation
and amended and restated bylaws, including those provisions relating to the
classified board of directors and the ability of stockholders to call special
meetings.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred 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 and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
The Delaware General Corporation Law provides generally 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 bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with various
business combination transactions and the amendment of various provisions of our
amended and restated certificate of incorporation and amended and restated
bylaws, including those provisions relating to the classified board of
directors, action by written consent and special meetings by stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be American Stock
Transfer & Trust Company, New York, New York.
LISTING
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "PRDS."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have on
the market price of the common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of the common stock and could impair our future ability to raise capital through
the sale of its equity securities.
Upon completion of this offering, we will have an aggregate of 22,790,080
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of the
outstanding shares, the 4,000,000 shares sold in this offering will be freely
tradable, except that any shares held by our "affiliates," as defined in Rule
144 promulgated under the Securities Act of 1933, may only be sold in compliance
with the limitations described below. The remaining 18,790,080 shares of common
stock will be deemed "restricted securities" as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. Subject
to the lock-up agreements described below and the provisions of Rules 144,
144(k) and 701, these 18,790,080 shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- ------------------------------------------------------------------------
<C> <S>
778,000 After the date of this prospectus
100,050 After 90 days from the date of this prospectus
17,912,030 After 180 days from the date of this prospectus, subject, in some cases,
to volume limitations
</TABLE>
In general, under Rule 144, as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of (1) 1% of the
then outstanding shares of common stock (approximately 228,000 shares
immediately after this offering) or (2) the average weekly trading volume in the
common stock during the four calendar weeks preceding the date on which notice
of such sale is filed, subject to certain restrictions. In addition, a person
who is not deemed to have been an affiliate of Predictive at any time during the
90 days preceding a sale and who has beneficially owned the shares proposed to
be sold for at least two years would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above. To the extent that
shares were acquired from an affiliate of ours, that person's holding period for
the purpose of selling under Rule 144 commences on the date of transfer from the
affiliate. Notwithstanding the foregoing, to the extent the shares were acquired
through the cashless exercise of a stock option or a warrant, that person's
holding period for effecting a sale under Rule 144 commences on the date of the
option or warrant grant. In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or advisors who purchased
our shares in connection with a compensatory stock or option plan or other
written agreement is eligible to resell such shares after the effective date of
this offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period in Rule 144.
As of the date of this prospectus, options to purchase a total of 10,111,463
shares of common stock are outstanding, of which 4,899,800 are currently
exercisable (without regard to the 180-day lock up period). Promptly after the
closing of this offering, we intend to file a registration statement to register
for resale all shares of common stock issued or issuable under its 1999 employee
stock purchase plan and not otherwise freely transferable. Accordingly, shares
covered by that registration
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<PAGE>
statement will be eligible for sale in the public markets, unless those options
are subject to vesting restrictions.
Our directors and officers and certain of our stockholders who hold
17,871,030 shares in the aggregate have agreed that they will not sell, directly
or indirectly, any shares of common stock (other than shares of common stock
purchased as part of the directed share program in connection with this
offering) without the prior written consent of BancBoston Robertson Stephens
Inc. for a period of 180 days from the date of this prospectus.
We have agreed not to sell or otherwise dispose of any shares of our common
stock during the 180 day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
option plan.
Following this offering, under certain circumstances and subject to certain
conditions, holders of 8,122,006 shares of our outstanding common stock will
have certain demand registration rights with respect to their shares of common
stock (subject to the 180-day lock-up arrangement described above) to require us
to register their shares of common stock under the Securities Act, and they will
have certain rights to participate in any future registration of securities by
us. Additionally, holders of 8,791,952 shares of our outstanding common stock
will have some rights to participate in any future registrations of securities
by us. See "Description of Capital Stock-Registration Rights."
65
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc.; Bear, Stearns & Co. Inc.; Donaldson, Lufkin
& Jenrette Securities Corporation and First Union Capital Markets Corp., have
severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
set forth opposite their names below. The underwriters are committed to purchase
and pay for all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
Bear, Stearns & Co. Inc..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
First Union Capital Markets Corp.................................................
----------
Total........................................................................ 4,000,000
----------
----------
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,000,000 shares offered by this prospectus. If purchased, the additional
shares will be sold by the underwriters on the same terms as those on which the
4,000,000 shares are being sold. We will be obligated, under this option, to
sell shares to the extent the option is exercised. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of the
4,000,000 shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid by us to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Assumed public offering price................................... $ $ $
Underwriting discounts and commissions..........................
Proceeds, before expenses, to us................................
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on , 1999.
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<PAGE>
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of representation
and warranties contained in the underwriting agreement.
FUTURE SALES. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period of 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of common stock, any options or warrants to purchase
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. There are no agreements
between the representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period. In addition, we have generally agreed that, during the 180-day
lock-up period, we will not, without the prior written consent of BancBoston
Robertson Stephens Inc., (a) consent to the disposition of any shares held by
stockholders prior to the expiration of the 180-day lock-up period or (b) issue,
sell, contract to sell or otherwise dispose of, any shares of common stock, any
options or warrants to purchase any shares of common stock, or any securities
convertible into, exercisable for or exchangeable for shares of common stock,
other than our sale of shares in the offering, our issuance of common stock upon
the exercise of currently outstanding options and warrants, and our issuance of
incentive awards under our stock incentive plan. Please see "Shares Eligible for
Future Sale."
INTERNET DISTRIBUTION. A limited number of shares will be made available to
the customers of E*TRADE Securities. E*TRADE will make a copy of the prospectus
in electronic format available on its Web site. E*TRADE will accept conditional
offers to purchase shares from all of its customers that complete and pass an
online eligibility profile. In the event that the demand for shares from the
customers of E*TRADE exceeds the amount of shares allocated to it, E*TRADE will
use a random allocation methodology to distribute shares in even lots of 100
shares per customer. These are no plans to direct shares to particular Internet
purchasers.
DIRECTED SHARES. We have requested that the underwriters reserve up to five
percent of the shares of common stock for sale at the initial public offering
price to directors, officers, employees and other individuals designated by us.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus will be determined through
negotiations between us and the representatives. Among the factors to be
considered in these negotiations are prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
STABILIZATION. The representatives have advised us that, under Regulation M
under the Securities Exchange Act, some participants in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or purchase of the common stock on behalf of the
67
<PAGE>
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by the underwriter or syndicate member is purchased by the
representatives in a syndicate covering transaction and has therefore not been
effectively placed by the underwriter or syndicate member. The representatives
have advised us that these transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
OTHER AGREEMENTS. BancBoston Robertson Stephens acted as placement agent in
connection with the sale of 1,242,000 shares of common stock to Cisco in
September 1999 and was paid customary fees.
We provide network consulting services to some of the underwriters. Please
see "Certain Transactions--Agreements with Underwriters."
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, New York, New York. The Brobeck investment fund
and attorneys at Brobeck hold in the aggregate 49,110 shares of series A
preferred stock, which will automatically convert into 49,110 shares of common
stock upon the closing of this offering. Various legal matters in connection
with this offering will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Predictive Systems, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information with respect to Predictive and the common stock, reference
is made to the registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in Predictive files in the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Predictive's
Commission filings, including the registration statement, will also be available
to you on the Commission's Internet site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
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<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED AND SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HISTORICAL PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited)................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1998 and 1999 (Unaudited).......................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1999 (Unaudited)........................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1998 and 1999 (Unaudited).......................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Supplemental Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited).... SF-1
Supplemental Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999 (Unaudited).................................................. SF-2
Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997
and 1998 and the Six Months Ended June 30, 1999 (Unaudited).............................................. SF-3
Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999 (Unaudited).................................................. SF-4
Notes to Supplemental Consolidated Financial Statements.................................................... SF-5
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements included herein have been adjusted to give effect
to the increase in the authorized number of common shares to 200,000,000 and to
decrease the authorized number of preferred shares to 10,000,000. We expect to
be in a position to render the following report upon the effectiveness of such
events assuming that from May 12, 1999 to the effective date of such events, no
other events will have occurred that would effect the financial statements or
the notes thereto.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
To Predictive Systems, Inc.:
We have audited the accompanying balance sheets of Predictive Systems, Inc.
(a Delaware corporation) (the "Company") as of December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Predictive Systems, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
We have also made a similar audit of the accompanying supplemental balance
sheets of Predictive Systems, Inc. at December 31, 1997 and 1998, and the
related supplemental statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. The
supplemental statements give retroactive effect to the merger with Network
Resource Consultants and Company B.V. on August 12, 1999, which has been
accounted for as a pooling of interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
F-2
<PAGE>
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the financial position of Predictive
Systems, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, after giving retroactive effect to the merger with Network
Resource Consultants and Company B.V. as described in Note 1, all in conformity
with generally accepted accounting principles.
F-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 420,456 $ -- $ 359,911
Accounts receivable--net of allowance for doubtful accounts of $79,613,
$141,489 and $426,817, respectively......................................... 4,197,870 8,806,184 13,220,569
Unbilled work in process...................................................... 179,404 1,062,824 1,477,863
Notes receivable--employees................................................... 53,371 55,100 50,461
Notes receivable--stockholders................................................ -- 515,000 --
Due from related party........................................................ -- 916,948 --
Prepaid income taxes.......................................................... 344,049 342,829 --
Other current assets.......................................................... 276,609 386,453 597,354
---------- ----------- -----------
Total current assets........................................................ 5,471,759 12,085,338 15,706,158
PROPERTY AND EQUIPMENT--net of accumulated depreciation and amortization of
$485,510, $947,735 and $1,259,870, respectively............................... 893,988 1,356,634 1,741,644
DEFERRED TAX ASSET.............................................................. 237,322 -- --
OTHER ASSETS.................................................................... 267,314 235,047 185,074
---------- ----------- -----------
Total assets................................................................ $6,870,383 $13,677,019 $17,632,876
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................ $ 545,351 $ 475,610 $ --
Short-term borrowings......................................................... 780,000 5,598,000 --
Accounts payable and accrued expenses......................................... 654,378 2,803,686 3,297,868
Deferred income tax liability................................................. 1,676,937 185,000 229,268
Deferred income............................................................... 32,955 445,414 25,073
Dividends payable............................................................. 26,250 61,250 --
Income taxes payable.......................................................... -- -- 201,511
Current portion of capital lease obligations.................................. 76,982 151,027 150,511
---------- ----------- -----------
Total current liabilities................................................... 3,792,853 9,719,987 3,904,231
---------- ----------- -----------
NONCURRENT LIABILITIES:
Deferred rent................................................................. 23,306 70,957 52,177
Capital lease obligations..................................................... 282,013 446,018 398,927
Deferred income tax liability................................................. -- 714,146 516,528
---------- ----------- -----------
Total liabilities........................................................... 4,098,172 10,951,108 4,871,863
---------- ----------- -----------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par value, 5%
cumulative, 4,200,000, 4,200,000 and 0 shares issued and outstanding)......... 700,000 700,000 -- --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 10,000,000 shares authorized, 0,
0 and 6,512,316 shares issued and outstanding, none issued and outstanding
on a pro forma basis)....................................................... -- -- 6,512 --
Common stock ($.001 par value, 200,000,000 shares authorized, 4,408,200,
7,900,200 and 12,465,750 shares issued and 4,408,200, 7,900,200 and
9,610,650 shares outstanding, 16,122,966 shares issued and outstanding on a
pro forma basis)............................................................ 4,408 7,900 12,466 16,123
Additional paid-in capital.................................................... 69,762 682,270 20,307,511 11,911,613
Treasury stock, 2,855,100 shares.............................................. -- -- (8,398,753 ) --
Deferred compensation......................................................... -- -- (294,750 ) (294,750)
Retained earnings............................................................. 1,998,041 1,335,741 1,143,726 1,143,726
Accumulated other comprehensive loss.......................................... -- -- (15,699 ) (15,699)
---------- ----------- ----------- ----------
Total stockholders' equity.................................................. 2,072,211 2,025,911 12,761,013 12,761,013
---------- ----------- ----------- ----------
Total liabilities and stockholders' equity.................................. $6,870,383 $13,677,019 $17,632,876 $17,632,876
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services..................... $ 6,818,678 $ 16,897,456 $ 23,857,780 $ 8,935,220 $ 21,278,287
Hardware and software sales............... 1,287,649 1,189,617 2,065,348 530,258 1,287,701
----------- ------------ ------------ ------------ ------------
Total revenues.......................... 8,106,327 18,087,073 25,923,128 9,465,478 22,565,988
COST OF REVENUES:
Professional services..................... 3,381,505 9,590,306 12,861,272 5,179,277 10,245,945
Hardware and software purchases........... 970,479 816,935 1,698,356 437,820 1,031,889
----------- ------------ ------------ ------------ ------------
Total cost of revenues.................. 4,351,984 10,407,241 14,559,628 5,617,097 11,277,834
----------- ------------ ------------ ------------ ------------
Gross profit............................ 3,754,343 7,679,832 11,363,500 3,848,381 11,288,154
SALES AND MARKETING......................... 386,000 1,081,889 3,433,751 1,255,707 3,409,297
GENERAL AND ADMINISTRATIVE.................. 1,683,574 4,390,476 8,184,486 3,586,811 7,376,425
DEPRECIATION AND AMORTIZATION............... 142,134 320,908 567,761 229,348 312,135
NONCASH COMPENSATION EXPENSE................ -- -- -- -- 9,875
----------- ------------ ------------ ------------ ------------
Operating profit (loss)................. 1,542,635 1,886,559 (822,498) (1,223,485) 180,422
OTHER INCOME (EXPENSE):
Interest income........................... 31,540 26,575 57,976 12,662 69,574
Other income.............................. 7,613 3,849 1,555 35 36,882
Interest expense.......................... -- (35,545) (324,591) (66,629) (109,078)
----------- ------------ ------------ ------------ ------------
Income (loss) before income tax
provision (benefit)................... 1,581,788 1,881,438 (1,087,558) (1,277,417) 177,800
INCOME TAX PROVISION (BENEFIT).............. 718,678 870,504 (460,258) (540,880) 361,065
----------- ------------ ------------ ------------ ------------
Net income (loss)....................... $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (183,265)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE
BASIC..................................... $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
DILUTED................................... $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC..................................... 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
DILUTED................................... 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
PRO FORMA NET LOSS PER SHARE--BASIC AND
DILUTED (unaudited)(Note 2)............... $(0.01)
------------
------------
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND DILUTED
(unaudited)(Note 2)....................... 13,131,340
------------
------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN TREASURY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL STOCK
--------- ----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..................... -- $ -- 4,269,000 $ 4,269 $ 37,901 $ --
Net income..................................... -- -- -- -- -- --
Exercise of options............................ -- -- 30,000 30 4,970 --
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31, 1996..................... -- -- 4,299,000 4,299 42,871 --
Net income..................................... -- -- -- -- -- --
Exercise of options............................ -- -- 109,200 109 26,891 --
Preferred stock dividends...................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31, 1997..................... -- -- 4,408,200 4,408 69,762 --
Net loss....................................... -- -- -- -- -- --
Exercise of options............................ -- -- 3,492,000 3,492 612,508 --
Preferred stock dividends...................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31, 1998..................... -- -- 7,900,200 7,900 682,270 --
Net loss....................................... -- -- -- -- -- --
Foreign currency translation adjustment........ -- -- -- -- -- --
Total comprehensive loss.......................
Preferred stock dividends...................... -- -- -- -- -- --
Conversion of preferred to common.............. -- -- 4,200,000 4,200 695,800 --
Issuance of preferred stock.................... 6,512,316 6,512 -- -- 18,559,713 --
Exercise of options............................ -- -- 365,550 366 65,103 --
Common stock repurchase to treasury, 2,855,100
shares....................................... -- -- -- -- -- (8,398,753)
Recognition of deferred compensation........... -- -- -- -- 304,625 --
Noncash compensation expense................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ----------
Balance at June 30, 1999 (unaudited)............. 6,512,316 $ 6,512 12,465,750 $ 12,466 $20,307,511 $(8,398,753)
--------- ----------- --------- ----------- ---------- ----------
--------- ----------- --------- ----------- ---------- ----------
<CAPTION>
ACCUMULATED
OTHER TOTAL
DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION EARNINGS LOSS EQUITY
------------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995..................... -- $ 150,247 $ -- $ 192,417
Net income..................................... -- 863,110 -- 863,110
Exercise of options............................ -- -- -- 5,000
------------- --------- -------------- ------------
Balance at December 31, 1996..................... -- 1,013,357 -- 1,060,527
Net income..................................... -- 1,010,934 -- 1,010,934
Exercise of options............................ -- -- -- 27,000
Preferred stock dividends...................... -- (26,250) -- (26,250)
------------- --------- -------------- ------------
Balance at December 31, 1997..................... -- 1,998,041 -- 2,072,211
Net loss....................................... -- (627,300) -- (627,300)
Exercise of options............................ -- -- -- 616,000
Preferred stock dividends...................... -- (35,000) -- (35,000)
------------- --------- -------------- ------------
Balance at December 31, 1998..................... -- 1,335,741 -- 2,025,911
Net loss....................................... -- (183,265) (183,265)
Foreign currency translation adjustment........ -- -- (15,699) (15,699)
------------
Total comprehensive loss....................... (198,964)
------------
------------
Preferred stock dividends...................... -- (8,750) -- (8,750)
Conversion of preferred to common.............. -- -- -- 700,000
Issuance of preferred stock.................... -- -- -- 18,566,225
Exercise of options............................ -- -- -- 65,469
Common stock repurchase to treasury, 2,855,100
shares....................................... -- -- -- (8,398,753)
Recognition of deferred compensation........... (304,625) -- -- --
Noncash compensation expense................... 9,875 -- -- 9,875
------------- --------- -------------- ------------
Balance at June 30, 1999 (unaudited)............. $(294,750) $1,143,726 $ (15,699) $12,761,013
------------- --------- -------------- ------------
------------- --------- -------------- ------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 863,110 $1,010,934 $ (627,300) $ (736,537) $ (183,265)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Noncash compensation expense......................... -- -- -- -- 9,875
Deferred income taxes................................ 463,229 838,572 (540,469) (540,880) (153,350)
Depreciation and amortization........................ 142,134 320,908 567,761 229,348 312,135
Provision for doubtful accounts...................... 20,840 99,308 102,196 76,680 285,328
(Increase) decrease in--
Accounts receivable................................ (1,197,039) (2,718,335) (4,710,510) (428,825) (4,699,713)
Unbilled work in process........................... (300,190) 204,978 (883,420) (27,773) (415,039)
Prepaid income taxes............................... (133,133) (210,916) 1,220 (781) 342,829
Other current assets............................... (190,084) (44,401) (215,378) 37,855 (210,901)
Other assets....................................... (77,851) (127,283) 32,267 (19,313) 49,973
Increase (decrease) in--
Accounts payable and accrued expenses.............. 575,628 (61,916) 2,149,308 458,886 494,182
Deferred income.................................... 494,948 (464,493) 412,459 (3,842) (420,341)
Deferred rent...................................... 16,462 (7,269) 47,651 (4,798) (18,780)
Income taxes payable............................... -- -- -- -- 201,511
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 678,054 (1,159,913) (3,664,215) (959,980) (4,405,556)
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to employees.................................. -- (57,151) (26,950) (10,206) (30,938)
Repayments from employees.............................. -- 3,780 25,221 -- 35,577
Payments to stockholders............................... -- -- (515,000) -- --
Repayments from stockholders........................... -- -- -- -- 515,000
Payments to related party.............................. -- -- (916,948) (424,633) (478,078)
Repayments from related party.......................... -- -- -- -- 1,395,026
Purchase of property and equipment..................... (315,189) (356,782) (686,823) (381,543) (744,752)
---------- ---------- ----------- ---------- ----------
Net cash used in investing activities............ (315,189) (410,153) (2,120,500) (816,382) 691,835
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares repurchased to treasury.................. -- -- -- -- (8,398,753)
Cash overdraft......................................... -- 545,351 (69,741) (221,054) (475,610)
Proceeds from short-term borrowings.................... -- 2,452,000 19,643,000 9,064,000 4,351,000
Repayments of short-term borrowings.................... -- (1,672,000) (14,825,000) (7,444,000) (9,949,000)
Payment of preferred dividends......................... -- -- -- -- (70,000)
Proceeds from sale of preferred stock.................. -- -- -- -- 18,566,225
Proceeds from exercise of stock options................ 5,000 27,000 616,000 101,000 65,469
---------- ---------- ----------- ---------- ----------
Net cash provided by financing activities........ 5,000 1,352,351 5,364,259 1,499,946 4,089,331
---------- ---------- ----------- ---------- ----------
Effects of exchange rates.............................. -- -- -- -- (15,699)
Net increase (decrease) in cash.................. 367,865 (217,715) (420,456) (276,416) 359,911
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,171 420,456 420,456 --
---------- ---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,171 $ 420,456 $ -- $ 144,040 $ 359,911
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The financial statements and footnotes reflect the combined
operations and financial position of the Company and the Parent for all periods
presented.
The Company provides network consulting services for the design,
performance, management and securities of complex computing networks. Services
are currently provided through the Company's offices located throughout the
United States and its wholly-owned subsidiary in England which was formed in the
first quarter of 1999.
The Company is proposing an initial public offering of up to 4,600,000
shares of common stock including overallotment. See "Risk Factors" in the
accompanying prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS--
The accompanying consolidated balance sheet as of June 30, 1999 and
consolidated statements of operations, stockholders' equity and cash flows for
the six months ended June 30, 1998 and 1999 included herein have been prepared
by the Company and are unaudited. The information furnished in the unaudited
financial statements referred to above includes all adjustments which are, in
the opinion of management, necessary for a fair presentation of such financial
statements. The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION--
Revenue for time-and-material contracts are recognized as the services are
rendered. Revenues for fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting based on the ratio
of costs incurred to total estimated costs. Unbilled work in process represent
costs incurred and estimated earnings, production, and other client-reimbursable
costs. Included in unbilled work in process as of December 31, 1997 and 1998 and
June 30, 1999 is $39,580, $1,032,390 and $1,448,809 (unaudited), respectively,
related to fixed-price contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. The
Company acts as a reseller of certain hardware and software and sales revenue is
recognized when these products are shipped to the customer.
Deferred income represents prepayments from customers that are recorded as
liabilities for future services to be performed. Income is recognized upon
performance of these related services.
F-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS--
The Company considers all short-term marketable equity securities with a
maturity of three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT--
Computer equipment and office furniture are carried at their cost basis and
depreciated using the straight-line method over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the life of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred and major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives.
BUSINESS CONCENTRATIONS AND CREDIT RISK--
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, approximately 79% of sales were from
six customers. For the year ended December 31, 1997, approximately 60% of sales
were from four customers. For the year ended December 31, 1998, approximately
20% of sales were from one customer. The amounts due from these customers at
December 31, 1997 and 1998 were approximately $2,357,000 and $2,931,000,
respectively.
INCOME TAXES--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company converted from a cash basis to an accrual basis taxpayer on January 1,
1998.
UNAUDITED PRO FORMA INFORMATION--
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of its
convertible preferred stock into common stock concurrent with the closing of the
Company's anticipated initial public offering. (See Note 7 for conversion terms)
The unaudited pro forma consolidated balance sheet as of June 30, 1999,
reflects the conversion of 6,512,316 shares of the convertible preferred stock
into 6,512,316 shares of common stock.
Pro forma loss per share is computed using the weighted average number of
common shares outstanding during the period assuming conversion of the
convertible preferred stock into common stock as of the date of issuance.
F-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME (LOSS) PER SHARE--
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding. Diluted net income (loss) per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
outstanding.
ACCOUNTING FOR LONG-LIVED ASSETS--
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. The Company does not believe that any
such changes have taken place.
STOCK-BASED COMPENSATION--
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), and elected to continue the accounting
set forth in Accounting Principles Board No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and to provide the necessary pro forma disclosures as if
the fair value method had been applied (Note 7).
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amounts of cash and cash equivalents, accounts and other
receivables, and accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of outstanding borrowings
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS--
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15, 1997
and need not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
Company does not believe it operates in more than one segment. The chief
operating decision maker allocates resources and assesses the performance
associated with its business on a single-segment basis.
F-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss)...................... $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (183,265)
Preferred stock dividends.............. -- (26,250) (35,000) (17,500) (8,750)
------------- ------------- ------------ ------------ ------------
Numerator for basic earnings per
share--net income (loss) available
to common stockholders............. 863,110 984,684 (662,300) (754,037) (192,015)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Effect of dilutive securities-- preferred
stock dividend......................... -- 26,250 -- -- --
------------- ------------- ------------ ------------ ------------
Numerator for diluted earnings per
share--net income (loss) available to
common stockholders after assumed
conversions............................ $ 863,110 $ 1,010,934 $ (662,300) $ (754,037) $ (192,015)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Denominator--
Denominator for basic earnings per
share--weighted average shares....... 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred stock....... 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options............... 3,117,130 4,182,193 -- -- --
------------- ------------- ------------ ------------ ------------
Dilutive potential common shares....... 7,317,130 8,382,193 -- -- --
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Denominator for diluted earnings per
share--adjusted weighted average shares
and assumed conversions................ 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Basic earnings per share from net income
(loss)................................. $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Diluted earnings per share from net
income (loss).......................... $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>
The following table summarizes the weighted average of securities
outstanding which are excluded from the loss per share calculation for the year
ended December 31, 1998 and the six months ended
F-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
June 30, 1998 and 1999, respectively. Preferred stock is reflected on an "if
converted" basis. See Note 7.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Mandatory redeemable convertible preferred............ 4,200,000 4,200,000 1,516,667
Convertible preferred................................. -- -- 4,160,646
Stock options......................................... 2,396,092 4,557,823 3,856,450
------------ ---------- ----------
6,596,092 8,757,823 9,533,763
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(4) PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment.................................. $ 646,026 $ 1,243,475 $ 1,812,587
Office furniture.................................... 341,901 630,722 644,925
Leasehold improvements.............................. 391,571 430,172 544,002
------------ ------------ ------------
1,379,498 2,304,369 3,001,514
Less--Accumulated depreciation and amortization..... (485,510) (947,735) (1,259,870)
------------ ------------ ------------
$ 893,988 $ 1,356,634 $ 1,741,644
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Depreciation and amortization expense aggregated $142,134, $320,908,
$567,761, $229,348 (unaudited) and $312,135 (unaudited), respectively, for the
years ending December 31, 1996, 1997 and 1998 and for the six months ended June
30, 1998 and 1999.
(5) SHORT-TERM BORROWINGS:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts receivable,
as defined. At December 31, 1998, the balance outstanding on this demand loan
was $5,598,000 as the lender has informally extended the Company's ability to
borrow under this demand loan. The interest rate on the demand loan was 11.25%
at December 31, 1998. During the first quarter of 1999, the balance outstanding
on the demand loan was paid in full.
F-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) CAPITAL LEASE OBLIGATIONS:
The Company has entered into various leases for computer equipment, office
furniture, and leasehold improvements. These leases have been capitalized using
interest rates ranging from 7.88% to 18.83% and expire on various dates through
2003. Depreciation on the capitalized assets has been included in depreciation
expense in the accompanying statements of operations.
The future minimum lease payments required under the above mentioned capital
leases for the twelve months ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1999............................................................................. $ 211,951
2000............................................................................. 209,297
2001............................................................................. 155,655
2002............................................................................. 87,812
2003............................................................................. 55,697
Less--Amount representing interest............................................... (123,367)
-----------
Present value of net minimum lease payments...................................... 597,045
Less--Current portion............................................................ (151,027)
-----------
$ 446,018
-----------
-----------
</TABLE>
(7) STOCKHOLDERS' EQUITY:
PREFERRED STOCK--
Since inception, the Company has issued two types of preferred stock. The
following is a discussion of each of these issuances--
In 1995, the Company issued 4,200,000 shares of mandatory redeemable
convertible preferred stock (the "1995 Preferred Shares") at a price of
$0.17 per share. The shares accrue dividends at 5% per year, commencing
March 1, 1997. Each share is convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. The shares
automatically convert upon successful completion of an initial public
offering yielding gross proceeds of at least $10.0 million and at an initial
public offering price of not less than $0.83 per share. Commencing March 1,
1998, the Company was able to redeem the 1995 Preferred Shares. Commencing
March 1, 2001, if not previously redeemed, the Company was required to
redeem the 1995 Preferred Shares in three equal annual installments.
During the quarter ended March 31, 1999, the holders of the 1995
Preferred Shares exercised their conversion rights and converted all
outstanding shares into 4,200,000 shares of common stock. In connection with
the conversion, the Company paid $70,000 of accumulated dividends on the
1995 Preferred Shares.
Subsequent to the conversion of the 1995 Preferred Shares, the Company
redeemed 2,855,100 shares of common stock at a purchase price of
approximately $2.94 per share.
On March 5, 1999, the Company sold 6,512,316 shares of convertible
preferred stock (the "1999 Preferred Shares") to General Atlantic Partners
54, L.P. (5,350,441 shares), GAP Coinvestment Partners II, LP (1,112,765
shares), and other investors (49,110 shares) resulting in net proceeds of
approximately $18,600,000. The 1999 Preferred Shares are convertible to
common shares on a 1 to 1 ratio at any time at the option of the holder,
subject to certain adjustments. The shares will automatically convert (i)
prior to the closing of the proposed initial public offering
F-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
yielding net proceeds of at least $25 million and resulting in a market
capitalization of at least $100 million or (ii) upon the conversion of at
least 67% of all 1999 Preferred Shares.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, L.P., warrants
were issued to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering at a price equal to the
initial price to the public. In order to exercise the warrants, a notice of
exercise must be delivered within 20 business days following the first
filing of the Company's registration statement on Form S-1. (See Note 12)
STOCK OPTIONS--
In 1998, the Company adopted its Stock Option/Stock Issuance Plans (the
"Option Plans"). Prior to this time, options issued were not issued in
connection with a plan. The Option Plans are each divided into two separate
equity programs, the Option Grant Program and the Stock Issuance Program. Under
the Option Grant Program, the Company may issue either incentive stock options
or nonqualified stock options. Under the Stock Issuance Program the Company may
issue shares of common stock either through the purchase of such shares or as a
bonus for services rendered. To date, no shares have been issued under the Stock
Issuance Programs. Awards under either program may be granted to such directors,
employees and consultants of the Company as the Board of Directors selects in
its discretion. As of December 31, 1998 a combined total of 2,084,908 shares of
common stock has been reserved for issuance under the two Option Plans.
A summary of the activity under the Option Grant Programs is as follows--
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------------------------------------- JUNE 30, 1999
1996 1997 1998 (UNAUDITED)
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Outstanding at beginning of
period............................ 4,386,000 $ 0.17 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02
Granted............................. 1,560,000 0.78 3,856,800 1.04 2,427,000 1.41 1,925,085 3.31
Exercised........................... (30,000) 0.17 (109,200) 0.25 (3,492,000) 0.18 (365,550) 0.18
Forfeited........................... -- -- (192,000) 0.83 (9,000) 0.83 (160,650) 1.05
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02 9,796,485 $ 1.50
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Options exercisable at end of
period............................ 3,588,000 $ 0.27 5,700,300 $ 0.42 4,586,250 $ 0.80 4,859,100 $ 0.89
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted during period..... $ 0.17 $ 0.23 $ 0.26 $ 0.62
</TABLE>
F-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- ------------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$0.17............................................ 789,000 6.20 years 789,000
0.50............................................ 240,000 7.00 years 240,000
0.83............................................ 3,040,800 7.83 years 2,557,800
1.25............................................ 2,788,800 8.61 years 912,450
1.50............................................ 1,539,000 9.59 years 87,000
-------------- -------------
8,397,600 4,586,250
-------------- -------------
-------------- -------------
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1996 1997 1998 1999
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported.......................... $ 863,110 $ 1,010,934 $ (627,300) $ (183,265)
Pro forma............................ 830,967 774,427 (1,006,406) (465,089)
Basic net income (loss) per share:
As reported.......................... $ 0.20 $ 0.22 $ (0.11) $ (0.02)
Pro forma............................ $ 0.19 $ 0.18 $ (0.17) $ (0.05)
Diluted net income (loss) per share:
As reported.......................... $ 0.07 $ 0.08 $ (0.11) $ (0.02)
Pro forma............................ $ 0.07 $ 0.06 $ (0.17) $ (0.05)
</TABLE>
F-15
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
DEFERRED COMPENSATION--
During 1999, the Company granted stock options with exercise prices which
were less than the fair market value of the underlying shares of common stock at
the date of grant. As a result, the Company has recorded deferred compensation
of $304,625. This amount will be recognized as noncash compensation expense over
the vesting period of the options (4 years).
(8) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 are as follows--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision--
Federal......................................... $ 185,521 $ 26,882 $ -- $ -- $ 399,865
State........................................... 69,928 5,050 80,211 -- 114,550
---------- ---------- ----------- ----------- -----------
255,449 31,932 80,211 -- 514,415
---------- ---------- ----------- ----------- -----------
Deferred income tax provision (benefit)--
Federal......................................... 331,790 578,823 (407,182) (381,133) (131,082)
State........................................... 131,439 259,749 (133,287) (159,747) (22,268)
---------- ---------- ----------- ----------- -----------
463,229 838,572 (540,469) (540,880) (153,350)
---------- ---------- ----------- ----------- -----------
$ 718,678 $ 870,504 $ (460,258) $ (540,880) $ 361,065
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The following table indicates the significant elements contributing to the
difference between the Federal statutory rate and the Company's effective tax
rate--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate................................. 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes net of Federal effect...................... 6.6 6.6 (6.6) (6.6) 6.6
Valuation allowance.................................... -- -- -- -- 139.0
Noncash compensation expense........................... -- -- -- -- 10.7
Other.................................................. 4.8 5.7 (1.7) (1.7) 12.8
--------- --------- --------- --------- ---------
45.4% 46.3% (42.3)% (42.3)% 203.1%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of
F-16
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES: (CONTINUED)
approximately $1,667,000. Other major components of the deferred tax assets and
(liabilities) as of December 31, 1997, 1998 and June 30, 1999 are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve................................. $ 32,486 $ 57,529 $ 173,544
Prepaid expenses................................. (66,407) -- --
Accounts receivable.............................. (1,739,221) -- --
Unbilled receivables............................. (72,946) -- --
Accounts payable and accrued expenses............ 255,872 -- --
Depreciation..................................... 14,231 100,124 88,405
Section 481 A. adjustment........................ -- (1,249,974) (1,028,959)
Net operating loss carryforwards................. 227,732 174,474 260,000
Valuation allowance.............................. -- -- (260,000)
Other, net....................................... (91,362) 18,701 21,214
------------- ------------- -------------
Total deferred taxes, net.................... $ (1,439,615) $ (899,146) $ (745,796)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $580,000 and $390,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(9) RELATED PARTIES:
During 1998, the Company started a software development company which had
previously been consolidated with the Company. In March 1998, the software
development company was spun off through a pro rata distribution to shareholders
accounted for at historical cost. In connection with the spin-off the Company
sold certain assets with minimal book value to the software development company
and received a note for approximately $130,000 for the sale of certain software.
Additionally, the Company provided a $1,000,000 line of credit bearing interest
at 8%. As of December 31, 1998, $916,948 was due from this company.
(10) NOTES RECEIVABLE--STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options. The stockholders
signed notes payable to the Company in exchange for the loans which had interest
rates of 7%. All amounts due under these notes were paid in full subsequent to
December 31, 1998.
(11) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES--
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately six months to five years, with an
option to renew two of these leases for an additional five years. These leases
provide for minimum annual lease payments and additional
F-17
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
operating expense charges, as well as rent concessions for two locations, which
are being amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 857,708
2000............................................................................ 723,319
2001............................................................................ 690,309
2002............................................................................ 437,821
2003............................................................................ 211,934
------------
Total minimum lease payments................................................ $ 2,921,091
------------
------------
</TABLE>
Rent expense was approximately $202,568, $457,825 and $736,120 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $284,300 (unaudited) and $527,118 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(12) SUBSEQUENT EVENTS: (UNAUDITED)
Subsequent to year-end the Company amended and restated its certificate of
incorporation to increase its authorized common stock to 200,000,000 shares and
decrease its authorized preferred stock to 10,000,000 shares.
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V., ("NRCC") in a transaction accounted for as a pooling of interests.
In connection with this acquisition, the Company exchanged 1,062,814 shares of
its common stock in exchange for all of the outstanding stock of NRCC.
The warrants issued to General Atlantic Partners 54, L.P. and GAP
Coinvestment Partners II, L.P. to purchase shares of common stock equal to 15%
of the number of shares sold in the proposed initial public offering expired 20
business days after the first filing of this Form S-1.
On September 14, 1999, the Company sold 1,242,000 shares of its common stock
to Cisco Systems, Inc. at a price of $12.00 per share. In connection with this
transaction, the Company entered into an Investor's Rights Agreement with Cisco
Systems, Inc. pursuant to which the Company granted Cisco Systems, Inc. certain
registration rights.
On September 22, 1999, the Company sold 94,867 and 18,133 shares of its
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment Partners
II, L.P., respectively, at a price of $12.00 per share.
F-18
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 500,556 $ 32,432 $ 523,679
Accounts receivable--net of allowance for doubtful accounts of $79,613,
$151,489 and $436,817, respectively......................................... 4,520,396 9,271,531 13,548,697
Unbilled work in process...................................................... 179,404 1,062,824 1,477,863
Notes receivable--employees................................................... 53,371 55,100 50,461
Notes receivable--stockholders................................................ -- 515,000 --
Due from related party........................................................ -- 916,948 --
Prepaid income taxes.......................................................... 344,049 342,829 --
Other current assets.......................................................... 329,981 561,474 658,000
---------- ----------- -----------
Total current assets........................................................ 5,927,757 12,758,138 16,258,700
PROPERTY AND EQUIPMENT--net of accumulated depreciation and amortization of
$485,511, $1,007,210 and $1,355,521, respectively............................. 949,712 1,500,333 1,960,102
DEFERRED TAX ASSET.............................................................. 351,222 -- --
OTHER ASSETS.................................................................... 267,314 235,047 185,074
---------- ----------- -----------
Total assets................................................................ $7,496,005 $14,493,518 $18,403,876
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................ $ 545,351 $ 475,610 $ --
Short-term borrowings......................................................... 780,000 5,624,043 15,881
Due to shareholders........................................................... 460,714 349,178 292,274
Accounts payable and accrued expenses......................................... 969,670 3,121,046 3,520,003
Deferred income tax liability................................................. 1,676,937 185,000 229,268
Deferred income............................................................... 39,099 490,572 62,121
Dividends payable............................................................. 26,250 61,250 --
Income taxes payable.......................................................... -- 4,166 211,498
Current portion of capital lease obligations.................................. 76,981 151,027 150,511
---------- ----------- -----------
Total current liabilities................................................... 4,575,002 10,461,892 4,481,556
---------- ----------- -----------
NONCURRENT LIABILITIES:
Deferred rent................................................................. 23,306 70,957 52,177
Capital lease obligations..................................................... 282,013 446,018 398,927
Deferred income tax liability................................................. -- 684,430 516,528
---------- ----------- -----------
Total liabilities........................................................... 4,880,321 11,663,297 5,449,188
---------- ----------- -----------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par value, 5%
cumulative, 4,200,000, 4,200,000 and 0 shares issued and outstanding)......... 700,000 700,000 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 10,000,000 shares authorized, 0,
0 and 6,512,316 shares issued and outstanding).............................. -- -- 6,512
Common stock ($.001 par value, 200,000,000 shares authorized, 5,152,170,
8,963,014 and 13,528,564 shares issued and 5,152,170, 8,963,014 and
10,673,464 shares outstanding).............................................. 5,152 8,963 13,529
Additional paid-in capital.................................................... 93,354 802,734 20,427,975
Treasury stock, 2,855,100 shares.............................................. -- -- (8,398,753 )
Deferred compensation......................................................... -- -- (294,750 )
Retained earnings............................................................. 1,776,942 1,281,019 1,181,756
Accumulated other comprehensive income........................................ 40,236 37,505 18,419
---------- ----------- -----------
Total stockholders' equity.................................................. 1,915,684 2,130,221 12,954,688
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $7,496,005 $14,493,518 $18,403,876
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated balance sheets.
SF-1
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services................. $ 6,959,193 $ 17,914,486 $ 25,515,207 $ 9,791,626 $ 22,241,353
Hardware and software sales........... 1,287,649 1,442,414 2,296,846 563,851 1,324,161
------------- ------------- ------------- ------------- -------------
Total revenues...................... 8,246,842 19,356,900 27,812,053 10,355,477 23,565,514
COST OF REVENUES:
Professional services................. 3,502,566 10,387,304 13,764,476 5,647,289 10,778,814
Hardware and software purchases....... 970,479 954,958 1,847,139 453,928 1,051,440
------------- ------------- ------------- ------------- -------------
Total cost of revenues.............. 4,473,045 11,342,262 15,611,615 6,101,217 11,830,254
------------- ------------- ------------- ------------- -------------
Gross profit........................ 3,773,797 8,014,638 12,200,438 4,254,260 11,735,260
SALES AND MARKETING..................... 418,332 1,116,973 3,460,012 1,266,848 3,410,735
GENERAL AND ADMINISTRATIVE.............. 1,896,870 4,733,922 8,689,277 3,834,154 7,656,582
DEPRECIATION AND AMORTIZATION........... 150,706 339,256 611,828 243,783 330,399
NONCASH COMPENSATION EXPENSE............ -- -- -- -- 9,875
------------- ------------- ------------- ------------- -------------
Operating profit (loss)............. 1,307,889 1,824,487 (560,679) (1,090,525) 327,669
OTHER INCOME (EXPENSE):
Interest income....................... 31,535 26,575 66,407 12,662 71,929
Other income (expense)................ 7,613 3,849 6,625 (111) 36,750
Interest expense...................... (11,884) (61,837) (349,350) (76,510) (118,014)
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax
provision (benefit)............... 1,335,153 1,793,074 (836,997) (1,154,484) 318,334
INCOME TAX PROVISION (BENEFIT).......... 634,822 840,460 (376,074) (499,082) 408,847
------------- ------------- ------------- ------------- -------------
Net income (loss)................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (90,513)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS) PER SHARE
BASIC................................. $ 0.14 $ 0.18 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DILUTED............................... $ 0.06 $ 0.07 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC................................. 4,919,974 5,126,387 7,075,000 5,684,315 10,033,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DILUTED............................... 12,237,104 13,508,580 7,075,000 5,684,315 10,033,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-2
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN TREASURY
SHARES PAR VALUE SHARES PAR VALUE CAPITAL STOCK
--------- ----------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......................... -- $ -- 4,269,000 $ 4,269 $ 37,901 $ --
Net income......................................... -- -- -- -- -- --
Foreign currency translation adjustment............ -- -- -- -- -- --
Total comprehensive income.........................
Issuance of common stock........................... -- -- 743,970 744 23,592 --
Exercise of options................................ -- -- 30,000 30 4,970 --
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31, 1996......................... -- -- 5,042,970 5,043 66,463 --
Net income......................................... -- -- -- -- -- --
Foreign currency translation adjustment............ -- -- -- -- -- --
Total comprehensive income.........................
Exercise of options................................ -- -- 109,200 109 26,891 --
Preferred stock dividends.......................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31, 1997......................... -- -- 5,152,170 5,152 93,354 --
Net loss........................................... -- -- -- -- -- --
Foreign currency translation adjustment............ -- -- -- -- -- --
Total comprehensive loss...........................
Issuance of common stock........................... -- -- 318,844 319 96,872 --
Exercise of options................................ -- -- 3,492,000 3,492 612,508 --
Preferred stock dividends.......................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ----------
Balance at December 31, 1998......................... -- -- 8,963,014 8,963 802,734 --
Net loss........................................... -- -- -- -- -- --
Foreign currency translation adjustment............ -- -- -- -- -- --
Total comprehensive loss...........................
Preferred stock dividends.......................... -- -- -- -- -- --
Conversion of preferred to common.................. -- -- 4,200,000 4,200 695,800 --
Issuance of preferred stock........................ 6,512,316 6,512 -- -- 18,559,713 --
Exercise of options................................ -- -- 365,550 366 65,103 --
Common stock repurchase to treasury, 2,855,100
shares........................................... -- -- -- -- -- (8,398,753)
Recognition of deferred compensation............... -- -- -- -- 304,625 --
Noncash compensation expense....................... -- -- -- -- -- --
--------- ----------- --------- ----------- ---------- ----------
Balance at June 30, 1999 (unaudited)................. 6,512,316 $ 6,512 13,528,564 $ 13,529 $20,427,975 $(8,398,753)
--------- ----------- --------- ----------- ---------- ----------
--------- ----------- --------- ----------- ---------- ----------
<CAPTION>
ACCUMULATED
OTHER TOTAL
DEFERRED RETAINED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION EARNINGS INCOME (LOSS) EQUITY
------------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995......................... $ -- $ 150,247 $ -- $ 192,417
Net income......................................... -- 700,331 -- 700,331
Foreign currency translation adjustment............ -- -- 4,973 4,973
------------
Total comprehensive income......................... 705,304
------------
------------
Issuance of common stock........................... -- -- -- 24,336
Exercise of options................................ -- -- -- 5,000
------------- --------- -------------- ------------
Balance at December 31, 1996......................... -- 850,578 4,973 927,057
Net income......................................... -- 952,614 -- 952,614
Foreign currency translation adjustment............ -- -- 35,263 35,263
------------
Total comprehensive income......................... 987,877
------------
------------
Exercise of options................................ -- -- -- 27,000
Preferred stock dividends.......................... -- (26,250) -- (26,250)
------------- --------- -------------- ------------
Balance at December 31, 1997......................... -- 1,776,942 40,236 1,915,684
Net loss........................................... -- (460,923) -- (460,923)
Foreign currency translation adjustment............ -- -- (2,731) (2,731)
------------
Total comprehensive loss........................... (463,654)
------------
------------
Issuance of common stock........................... -- -- -- 97,191
Exercise of options................................ -- -- -- 616,000
Preferred stock dividends.......................... -- (35,000) -- (35,000)
------------- --------- -------------- ------------
Balance at December 31, 1998......................... -- 1,281,019 37,505 2,130,221
Net loss........................................... -- (90,513) (90,513)
Foreign currency translation adjustment............ -- -- (19,086) (19,086)
------------
Total comprehensive loss........................... (109,599)
------------
------------
Preferred stock dividends.......................... -- (8,750) -- (8,750)
Conversion of preferred to common.................. -- -- -- 700,000
Issuance of preferred stock........................ -- -- -- 18,566,225
Exercise of options................................ -- -- -- 65,469
Common stock repurchase to treasury, 2,855,100
shares........................................... -- -- -- (8,398,753)
Recognition of deferred compensation............... (304,625) -- -- --
Noncash compensation expense....................... 9,875 -- -- 9,875
------------- --------- -------------- ------------
Balance at June 30, 1999 (unaudited)................. $ (294,750) $1,181,756 $ 18,419 $12,954,688
------------- --------- -------------- ------------
------------- --------- -------------- ------------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (90,513)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Noncash compensation expense......................... -- -- -- -- 9,875
Deferred income taxes................................ 379,373 808,528 (456,285) (542,258) (123,634)
Depreciation and amortization........................ 150,706 339,256 611,828 243,783 330,399
Provision for doubtful accounts...................... 20,840 99,308 102,196 55,110 285,328
(Increase) decrease in--
Accounts receivable................................ (1,270,247) (2,967,653) (4,853,331) (576,235) (4,562,493)
Unbilled work in process........................... (300,190) 204,978 (883,420) (27,773) (415,039)
Prepaid income taxes............................... (133,133) (210,916) 1,220 42,076 342,829
Other current assets............................... (195,753) (92,104) (231,493) (44,749) (96,526)
Other assets....................................... (66,191) (114,784) 32,267 (19,313) 49,973
Increase (decrease) in--
Accounts payable and accrued expenses.............. 632,203 196,801 2,151,376 545,381 398,957
Deferred income.................................... 494,948 (458,349) 451,473 (9,986) (428,451)
Deferred rent...................................... 16,462 (7,269) 47,651 (4,798) (18,780)
Income taxes payable............................... -- -- 4,166 270 207,332
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 429,349 (1,249,590) (3,483,275) (993,894) (4,110,743)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to employees.................................. -- (57,151) (26,950) (10,206) (30,938)
Repayments from employees.............................. -- 3,780 25,221 -- 35,577
Payments to stockholders............................... -- -- (626,535) (58,932) (56,905)
Repayments from stockholders........................... 17,353 443,361 -- -- 515,000
Payments to related party.............................. -- -- (916,948) (424,633) (478,078)
Repayments from related party.......................... -- -- -- -- 1,395,026
Purchase of property and equipment..................... (384,476) (394,299) (924,399) (398,336) (837,775)
---------- ---------- ----------- ---------- ----------
Net cash used in investing activities............ (367,123) (4,309) (2,469,611) (892,107) 541,907
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares repurchased to treasury.................. -- -- -- -- (8,398,753)
Cash overdraft......................................... -- 545,351 (69,741) (221,054) (475,610)
Proceeds from short-term borrowings.................... 271,524 2,452,000 4,844,043 -- --
Repayments of short-term borrowings.................... -- (1,943,524) -- 1,620,000 (5,608,162)
Payment of preferred dividends......................... -- -- -- -- (70,000)
Proceeds from sale of preferred stock.................. -- -- -- -- 18,566,225
Proceeds from sale of common stock..................... 24,336 -- 97,191 97,191 --
Proceeds from exercise of stock options................ 5,000 27,000 616,000 95,990 65,469
---------- ---------- ----------- ---------- ----------
Net cash provided by financing activities........ 300,860 1,080,827 5,487,493 1,592,127 4,079,169
---------- ---------- ----------- ---------- ----------
Effects of exchange rates.............................. 4,973 35,263 (2,731) 2,351 (19,086)
Net increase (decrease) in cash.................. 368,059 (137,809) (468,124) (291,523) 491,247
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,365 500,556 500,556 32,432
---------- ---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,365 $ 500,556 $ 32,432 $ 209,033 $ 523,679
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The supplemental financial statements and footnotes reflect the
combined operations and financial position of the Company and the Parent for all
periods presented.
The Company provides network consulting services for the design,
performance, management and securities of complex business-critical computing
network. Services are currently provided through the Company's offices located
throughout the United States and its wholly-owned subsidiary in England which
was formed in the first quarter of 1999.
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V., ("NRCC") in a transaction accounted for as a pooling of interests.
In connection with this acquisition, the Company exchanged 1,062,814 shares of
its common stock in exchange for all of the outstanding stock of NRCC. The
accompanying supplemental financial statements have been restated to reflect the
merger for all periods presented.
The Company is proposing an initial public offering of up to 4,600,000
shares of common stock including overallotment. See "Risk Factors" in the
accompanying prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS--
The accompanying supplemental consolidated balance sheet as of June 30, 1999
and supplemental consolidated statements of operations, stockholders' equity and
cash flows for the six months ended June 30, 1998 and 1999 included herein have
been prepared by the Company and are unaudited. The information furnished in the
unaudited supplemental financial statements referred to above includes all
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION--
Revenue for time-and-material contracts are recognized as the services are
rendered. Revenues for fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting based on the ratio
of costs incurred to total estimated costs. Unbilled work in process represent
costs incurred and estimated earnings, production, and other client-reimbursable
costs. Included in unbilled work in process as of December 31, 1997 and 1998 and
June 30, 1999 is $39,580, $1,032,390 and $1,448,809 (unaudited), respectively,
related to fixed-price contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. The
Company acts as a reseller of certain hardware and software and sales revenue is
recognized when these products are shipped to the customer.
SF-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Deferred income represents prepayments from customers that are recorded as
liabilities for future services to be performed. Income is recognized upon
performance of these related services.
CASH EQUIVALENTS--
The Company considers all short-term marketable equity securities with a
maturity of three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT--
Computer equipment and office furniture are carried at their cost basis and
depreciated using the straight-line method over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the life of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred and major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives.
BUSINESS CONCENTRATIONS AND CREDIT RISK--
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, approximately 79% of sales were from
six customers. For the year ended December 31, 1997, approximately 60% of sales
were from four customers. For the year ended December 31, 1998, approximately
20% of sales were from one customer. The amounts due from these customers at
December 31, 1997 and 1998 were approximately $2,357,000 and $2,931,000,
respectively.
INCOME TAXES--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company converted from a cash basis to an accrual basis taxpayer on January 1,
1998.
NET INCOME (LOSS) PER SHARE--
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding. Diluted net income (loss) per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
outstanding.
SF-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS--
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. The Company does not believe that any
such changes have taken place.
STOCK-BASED COMPENSATION--
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), and elected to continue the accounting
set forth in Accounting Principles Board No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and to provide the necessary pro forma disclosures as if
the fair value method had been applied (Note 7).
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amounts of cash and cash equivalents, accounts and other
receivables, and accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of outstanding borrowings
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS--
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15, 1997
and need not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
Company does not believe it operates in more than one segment. The chief
operating decision maker allocates resources and assesses the performance
associated with its business on a single-segment basis.
SF-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS No. 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------ ------------ -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss).................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (90,513)
Preferred stock dividends............ -- (26,250) (35,000) (17,500) (8,750)
------------- ------------- ------------ ------------ -------------
Numerator for basic earnings per
share--net income (loss)
available to common
stockholders..................... 700,331 926,364 (495,923) (672,902) (99,263)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Effect of dilutive securities--
preferred stock dividend............. -- 26,250 -- -- --
------------- ------------- ------------ ------------ -------------
Numerator for diluted earnings per
share--net income (loss) available to
common stockholders after assumed
conversions.......................... $ 700,331 $ 952,614 $ (495,923) $ (672,902) $ (99,263)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Denominator--
Denominator for basic earnings per
share--weighted average shares..... 4,919,974 5,126,387 7,075,000 5,684,315 10,033,508
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred stock..... 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options............. 3,117,130 4,182,193 -- -- --
------------- ------------- ------------ ------------ -------------
Dilutive potential common shares..... 7,317,130 8,382,193 -- -- --
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions....... 12,237,104 13,508,580 7,075,000 5,684,315 10,033,508
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Basic earnings per share from net
income (loss)........................ $ 0.14 $ 0.18 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Diluted earnings per share from net
income (loss)........................ $ 0.06 $ 0.07 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
</TABLE>
The following table summarizes the weighted average of securities
outstanding which are excluded from the loss per share calculation for the year
ended December 31, 1998 and the six months ended
SF-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
June 30, 1998 and 1999, respectively. Preferred stock is reflected on an "if
converted" basis. See Note 7.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Mandatory redeemable convertible preferred............ 4,200,000 4,200,000 1,516,667
Convertible preferred................................. -- -- 4,160,646
Stock options......................................... 2,396,092 4,557,823 3,856,450
------------ ---------- ----------
6,596,092 8,757,823 9,533,763
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(4) BUSINESS COMBINATIONS:
On August 12, 1999, the Company acquired NRCC in a transaction accounted for
as a pooling of interests. NRCC provides consulting services to help companies
manage the performance of their networks and communications systems.
The following table summarizes results of the Company and NRCC as standalone
entities for the year ended December 31, 1998 and the six months ended June 30,
1999 (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -----------------
<S> <C> <C>
Predictive Systems, Inc.
Revenues.................................................................. $ 25,923,128 $ 22,565,988
Net loss.................................................................. (627,300) (183,265)
NRCC
Revenues.................................................................. $ 1,888,925 $ 999,526
Net income................................................................ 166,377 92,752
</TABLE>
(5) PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment.................................. $ 646,026 $ 1,338,750 $ 1,897,142
Office furniture.................................... 383,949 726,231 771,029
Leasehold improvements.............................. 405,248 442,562 647,452
------------ ------------ ------------
1,435,223 2,507,543 3,315,623
Less--Accumulated depreciation and amortization..... 485,511 1,007,210 1,355,521
------------ ------------ ------------
$ 949,712 $ 1,500,333 $ 1,960,102
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Depreciation and amortization expense aggregated $150,706, $339,256,
$611,828, $243,783 (unaudited) and $330,399 (unaudited), respectively, for the
years ending December 31, 1996, 1997 and 1998 and for the six months ended June
30, 1998 and 1999.
SF-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) SHORT-TERM BORROWINGS:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts receivable,
as defined. At December 31, 1998, the balance outstanding on this demand loan
was $5,598,000 as the lender has informally extended the Company's ability to
borrow under this demand loan. The interest rate on the demand loan was 11.25%
at December 31, 1998. During the first quarter of 1999, the balance outstanding
on the demand loan was paid in full.
(7) CAPITAL LEASE OBLIGATIONS:
The Company has entered into various leases for computer equipment, office
furniture, and leasehold improvements. These leases have been capitalized using
interest rates ranging from 7.88% to 18.83% and expire on various dates through
2003. Depreciation on the capitalized assets has been included in depreciation
expense in the accompanying statements of operations.
The future minimum lease payments required under the above mentioned capital
leases for the twelve months ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1999............................................................................. $ 211,951
2000............................................................................. 209,297
2001............................................................................. 155,655
2002............................................................................. 87,812
2003............................................................................. 55,697
Less--Amount representing interest............................................... (123,367)
-----------
Present value of net minimum lease payments...................................... 597,045
Less--Current portion............................................................ (151,027)
-----------
$ 446,018
-----------
-----------
</TABLE>
(8) STOCKHOLDERS' EQUITY:
PREFERRED STOCK--
Since inception, the Company has issued two types of preferred stock. The
following is a discussion of each of these issuances--
In 1995, the Company issued 4,200,000 shares of mandatory redeemable
convertible preferred stock (the "1995 Preferred Shares") at a price of
$0.17 per share. The shares accrue dividends at 5% per year, commencing
March 1, 1997. Each share is convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. The shares
automatically convert upon successful completion of an initial public
offering yielding gross proceeds of at least $10.0 million and at an initial
public offering price of not less than $0.83 per share. Commencing March 1,
1998, the Company was able to redeem the 1995 Preferred Shares. Commencing
March 1, 2001, if not previously redeemed, the Company was required to
redeem the 1995 Preferred Shares in three equal annual installments.
During the quarter ended March 31, 1999, the holders of the 1995
Preferred Shares exercised their conversion rights and converted all
outstanding shares into 4,200,000 shares of common stock. In connection with
the conversion, the Company paid $70,000 of accumulated dividends on the
1995 Preferred Shares.
Subsequent to the conversion of the 1995 Preferred Shares, the Company
redeemed 2,855,100 shares of common stock at a purchase price of
approximately $2.94 per share.
On March 5, 1999, the Company sold 6,512,316 shares of convertible
preferred stock (the "1999 Preferred Shares") to General Atlantic Partners
54, L.P. (5,350,441 shares), GAP Coinvestment Partners II, LP (1,112,765
shares), and other investors (49,110 shares) resulting in
SF-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY: (CONTINUED)
net proceeds of approximately $18,600,000. The 1999 Preferred Shares are
convertible to common shares on a 1 to 1 ratio at any time at the option of
the holder, subject to certain adjustments. The shares will automatically
convert (i) prior to the closing of the proposed initial public offering
yielding net proceeds of at least $25 million and resulting in a market
capitalization of at least $100 million or (ii) upon the conversion of at
least 67% of all 1999 Preferred Shares.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, L.P., warrants
were issued to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering at a price equal to the
initial price to the public. In order to exercise the warrants, a notice of
exercise must be delivered within 20 business days following the first
filing of the Company's registration statement on Form S-1. (See Note 13)
STOCK OPTIONS--
In 1998, the Company adopted its Stock Option/Stock Issuance Plans (the
"Option Plans"). Prior to this time, options issued were not issued in
connection with a plan. The Option Plans are each divided into two separate
equity programs, the Option Grant Program and the Stock Issuance Program. Under
the Option Grant Program, the Company may issue either incentive stock options
or nonqualified stock options. Under the Stock Issuance Program the Company may
issue shares of common stock either through the purchase of such shares or as a
bonus for services rendered. To date, no shares have been issued under the Stock
Issuance Programs. Awards under either program may be granted to such directors,
employees and consultants of the Company as the Board of Directors selects in
its discretion. As of December 31, 1998 a combined total of 2,084,908 shares of
common stock has been reserved for issuance under the two Option Plans.
A summary of the activity under the Option Grant Programs is as follows--
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30, 1999
1996 1997 1998 (UNAUDITED)
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Outstanding at beginning of
period............................ 4,386,000 $ 0.17 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02
Granted............................. 1,560,000 0.78 3,856,800 1.04 2,427,000 1.41 1,925,085 3.31
Exercised........................... (30,000) 0.17 (109,200) 0.25 (3,492,000) 0.18 (365,550) 0.18
Forfeited........................... -- -- (192,000) 0.83 (9,000) 0.83 (160,650) 1.05
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02 9,796,485 $ 1.50
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Options exercisable at end of
period............................ 3,588,000 $ 0.27 5,700,300 $ 0.42 4,586,250 $ 0.80 4,859,100 $ 0.89
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted during period..... $ 0.17 $ 0.23 $ 0.26 $ 0.62
</TABLE>
SF-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- ------------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$0.17............................................ 789,000 6.20 years 789,000
0.50............................................ 240,000 7.00 years 240,000
0.83............................................ 3,040,800 7.83 years 2,557,800
1.25............................................ 2,788,800 8.61 years 912,450
1.50............................................ 1,539,000 9.59 years 87,000
-------------- -------------
8,397,600 4,586,250
-------------- -------------
-------------- -------------
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1996 1997 1998 1999
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported.......................... $ 700,331 $ 952,614 $ (460,923) $ (90,513)
Pro forma............................ 668,188 716,107 (840,029) (372,338)
Basic net income (loss) per share:
As reported.......................... $ 0.14 $ 0.18 $ (0.07) $ (0.01)
Pro forma............................ $ 0.14 $ 0.13 $ (0.12) $ (0.04)
Diluted net income (loss) per share:
As reported.......................... $ 0.06 $ 0.07 $ (0.07) $ (0.01)
Pro forma............................ $ 0.06 $ 0.05 $ (0.12) $ (0.04)
</TABLE>
SF-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY: (CONTINUED)
DEFERRED COMPENSATION--
During 1999, the Company granted stock options with exercise prices which
were less than the fair market value of the underlying shares of common stock at
the date of grant. As a result, the Company has recorded deferred compensation
of $304,625. This amount will be recognized as noncash compensation expense over
the vesting period of the options (4 years).
(9) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 are as follows--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision--
Federal......................................... $ 185,521 $ 26,882 $ -- $ -- $ 399,865
State........................................... 69,928 5,050 80,211 -- 114,550
Foreign......................................... -- -- -- 43,176 18,066
---------- ---------- ----------- ----------- -----------
255,449 31,932 80,211 43,176 532,481
---------- ---------- ----------- ----------- -----------
Deferred income tax provision (benefit)--
Federal......................................... 331,790 578,823 (407,182) (381,133) (131,082)
State........................................... 131,439 259,749 (133,287) (159,747) (22,268)
Foreign......................................... (83,856) (30,044) 84,184 (1,378) 29,716
---------- ---------- ----------- ----------- -----------
379,373 808,528 (456,285) (542,258) (123,634)
---------- ---------- ----------- ----------- -----------
$ 634,822 $ 840,460 $ (376,074) $ (499,082) $ 408,847
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The following table indicates the significant elements contributing to the
difference between the Federal statutory rate and the Company's effective tax
rate--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate....................................... 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes net of Federal effect............................ 6.6 6.6 (6.6) (6.6) 6.6
Valuation allowance.......................................... -- -- -- -- 79.2
Noncash compensation expense................................. -- -- -- -- 3.8
Other........................................................ 6.9 6.3 (4.3) (2.6) 4.8
--------- --------- --------- --------- ---------
47.5% 46.9% (44.9)% (43.2)% 128.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SF-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES: (CONTINUED)
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of approximately $1,667,000. Other major
components of the deferred tax assets and (liabilities) as of December 31, 1997,
1998 and June 30, 1999 (unaudited) are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve................................. $ 32,486 $ 57,529 $ 173,544
Prepaid expenses................................. (66,407) -- --
Accounts receivable.............................. (1,739,221) -- --
Unbilled receivables............................. (72,946) -- --
Accounts payable and accrued expenses............ 255,872 -- --
Depreciation..................................... 14,231 100,124 88,405
Section 481 A. adjustment........................ -- (1,249,974) (1,028,959)
Net operating loss carryforwards................. 341,632 204,190 260,000
Valuation allowance.............................. -- -- (260,000)
Other, net....................................... (91,362) 18,701 21,214
------------- ------------- -------------
Total deferred taxes, net.................... $ (1,325,715) $ (869,430) $ (745,796)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $725,000 and $475,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(10) RELATED PARTIES:
During 1998, the Company started a software development company which had
previously been consolidated with the Company. In March 1998, the software
development company was spun off through a pro rata distribution to shareholders
accounted for at historical cost. In connection with the spin-off the Company
sold certain assets with minimal book value to the software development company
and received a note for approximately $130,000 for the sale of certain software.
Additionally, the Company provided a $1,000,000 line of credit bearing interest
at 8%. As of December 31, 1998, $916,948 was due from this company.
(11) TRANSACTIONS WITH STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options which is included in
Notes receivable--stockholders, in the accompanying December 31, 1998 balance
sheet. The stockholders signed notes payable to the Company in exchange for the
loans which had interest rates of 7%. All amounts due under these notes were
paid in full subsequent to December 31, 1998.
Certain stockholders of the Company provided the Company with loans bearing
interest at rates ranging from 6% to 6.5%. The loans were provided on an
unsecured basis and are due on demand. Amounts outstanding under these
arrangements were $460,714, $349,178 and $292,274 as of December 31, 1997 and
1998 and June 30, 1999 (unaudited).
SF-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES--
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately six months to five years, with an
option to renew two of these leases for an additional five years. These leases
provide for minimum annual lease payments and additional operating expense
charges, as well as rent concessions for two locations, which are being
amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 995,087
2000............................................................................ 883,841
2001............................................................................ 763,969
2002............................................................................ 490,913
2003............................................................................ 262,375
Thereafter...................................................................... 8,408
------------
Total minimum lease payments................................................ $ 3,404,593
------------
------------
</TABLE>
Rent expense was approximately $206,223, $481,515 and $759,332 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $396,279 (unaudited) and $548,154 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(13) SUBSEQUENT EVENTS: (UNAUDITED)
Subsequent to year-end the Company amended and restated its certificate of
incorporation to increase its authorized common stock to 200,000,000 shares and
decrease its authorized preferred stock to 10,000,000 shares.
The warrants issued to General Atlantic Partners 54, L.P. and GAP
Coinvestment Partners II, L.P. to purchase shares of common stock equal to 15%
of the number of shares sold in the proposed initial public offering expired 20
business days after the first filing of this Form S-1.
On September 14, 1999, the Company sold 1,242,000 shares of its Common Stock
to Cisco Systems, Inc. at a price of $12.00 per share. In connection with this
transaction, the Company entered into an Investor's Rights Agreement with Cisco
Systems, Inc. pursuant to which the Company granted Cisco Systems, Inc. certain
registration rights.
On September 22, 1999, the Company sold 94,867 and 18,133 shares of its
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment Partners
II, L.P., respectively, at a price of $12.00 per share.
SF-15
<PAGE>
[PREDICTIVE LOGO WITH PICTURES OF NETWORK CONSULTANTS
AND THE TEXT
"THE PREDICTIVE SYSTEMS SOLUTION
IN-DEPTH NETWORK CONSULTING EXPERTISE
FLEXIBLE AND INNOVATIVE SERVICE DELIVERY
QUANTIFIABLE BUSINESS ANALYSIS
CROSS-INDUSTRY CLIENT BASE"]
<PAGE>
[LOGO]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1999.
[LOGO]
4,000,000 SHARES
COMMON STOCK
Predictive Systems, Inc. is offering 4,000,000 shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "PRDS." We anticipate
that the initial public offering price will be between $12.00 and $14.00 per
share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- -------------
<S> <C> <C>
Public Offering Price.............................................................. $ $
Underwriting Discounts and Commissions............................................. $ $
Proceeds to Predictive............................................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc.; Bear, Stearns & Co. Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation, have severally agreed with us, subject
to the terms and conditions of the underwriting agreement, to purchase from us
the number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all of the shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
Bear, Stearns & Co. Inc..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
First Union Capital Markets Corp.................................................
<CAPTION>
INTERNATIONAL UNDERWRITER
- ---------------------------------------------------------------------------------
<S> <C>
BancBoston Robertson Stephens International Limited..............................
Bear, Stearns International Limited..............................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
----------
Total........................................................................ 4,000,000
----------
----------
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,000,000 shares offered by this prospectus. If purchased, the additional
shares will be sold by the underwriters on the same terms as those on which the
4,000,000 shares are being sold. We will be obligated, under this option, to
sell shares to the extent the option is exercised. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of the
4,000,000 shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid by us to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Assumed public offering price................................. $ $ $
Underwriting discounts and commissions........................
Proceeds, before expenses, to us..............................
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on , 1999.
66
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the issuance and distribution of the common stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
------------
<S> <C>
SEC registration fee............................................................ $ 17,904
NASD filing fee................................................................. 6,940
Nasdaq National Market listing fee.............................................. 95,000
Legal fees and expenses......................................................... 500,000
Accounting fees and expenses.................................................... 150,000
Printing and engraving.......................................................... 250,000
Blue sky fees and expenses (including legal fees)............................... 12,500
Transfer Agent and Registrar fees and expenses.................................. 15,000
Miscellaneous................................................................... 452,656
------------
Total....................................................................... $ 1,500,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof (the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the
Registrant's directors shall not be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
Registrant has applied for liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the Registrant may fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding
II-1
<PAGE>
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities since January 1,
1996:
1. On March 5, 1999, the Registrant issued 6,512,316 shares of Series A
Convertible Preferred Stock for an aggregate amount of $18,565,225.44 in
a private placement to six accredited investors in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act.
2. On March 5, 1999, the Registrant issued warrants to purchase 15% of the
number of shares registered in its initial public offering at the initial
public offering price for an aggregate amount of $1,000 in a private
placement to two accredited investors in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
3. On August 12, 1999, the Registrant issued 1,062,814 shares of common
stock to two persons in exchange for all of the outstanding capital stock
of Network Resource Consultants and Company, B.V. in reliance upon the
exemption from registration provided by Section 4(2).
4. On September 16, 1999, the Registrant issued 1,242,000 shares of common
stock to Cisco Systems, Inc., an accredited investor, in a private
placement for an aggregate amount of $14,904,000 in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act.
5. On September 22, 1999, the Registrant issued 94,867 and 18,133 shares of
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment
Partners II, L.P., both accredited investors, in a private placement for
an aggregate amount of $1,356,000 in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
6. The Registrant from time to time has granted stock options to employees,
directors and consultants in reliance upon exemption from registration
pursuant to either (i) issuances to accredited investors in private
placements pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) issuances to employees, directors
and consultants for services pursuant to Rule 701 promulgated under the
Securities Act. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICES
---------- --------------
<S> <C> <C>
January 1, 1996 to December 31, 1996....................................... 1,560,000 $ 0.50-$ 0.83
January 1, 1997 to December 31, 1997....................................... 3,856,800 $ 0.83-$ 1.25
January 1, 1998 to December 31, 1998....................................... 2,427,000 $ 1.25-$ 1.50
January 1, 1999 to present................................................. 2,980,363 $ 1.50-$11.05
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2 Form of amended and restated certificate of incorporation to be in effect upon the closing of the
offering.
3.3+ By-laws.
3.4 Form of amended and restated by-laws to be in effect upon the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-laws of
the Registrant defining the rights of holders of Common Stock of the Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between General Atlantic Partners 54, L.P. and
the Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between Gap Coinvestment Partners II, L.P. and
the Registrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Incentive Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.4+ Employment Agreement, dated May 11, 1999, by and between Ronald Pettengill and the Registrant.
10.5+ Employment Agreement, dated May 11, 1999, by and between Robert Belau and the Registrant.
10.6+ Employment Agreement, dated January 22, 1999, by and between Kevin Holt and the Registrant.
10.7+ Registration Rights Agreement, dated March 5, 1999.
10.8+ Secured Promissory Note, dated August 31, 1998, in favor of Brown Brothers Harriman & Co.
10.9+ Agreement of Lease, dated June 25, 1999, by and between the Registrant and Polestar Fifth Property
Associates LLC.
10.10+** Development and License Agreement, dated July 29, 1998, by and between Bear, Stearns & Co. Inc. and
the Registrant.
10.11+** Consulting Agreement, dated October 14, 1998, by and between Pershing Division of Donaldson, Lufkin &
Jenrette Securities Corporation and the Registrant.
10.12+** Consulting Services Agreement, dated October 15, 1998, by and between First Union Corporation and the
Registrant.
10.13+** Strategic Partnering Agreement, dated July 30, 1999, by and between Cabletron Systems Inc. and the
Registrant.
10.14+** Systems Integration Consulting Services Agreement, dated May 21, 1998, by and between LCI
International Telecom Corp. dba Qwest Communications Corporation and the Registrant.
10.15+ Amendment No. 1 to Consulting Services Agreement dated June 21, 1999, to Systems Integration
Consulting Services Agreement, dated May 21, 1998, by and between LCI International Telecom Corp. dba
Qwest Communications Corporation and the Registrant.
10.16+ Stock and Warrant Purchase Agreement, dated March 5, 1999, by and among General Atlantic Partners 54,
L.P., GAP Coinvestment Partners II, L.P., the Other Purchasers named therein and the Registrant.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.17+ Service Agreement, dated January 1, 1999, by and between John Wright and Predictive Limited.
10.18+ Common Stock Purchase Agreement, dated September 16, 1999, by and between Cisco Systems, Inc. and the
Registrant.
10.19+ Investor's Rights Agreement, dated September 16, 1999, by and between Cisco Systems, Inc. and the
Registrant.
10.20** Professional Services Subcontract, dated May 14, 1999, by and between Cisco Systems, Inc. and the
Registrant.
10.21 Common Stock Purchase Agreement, dated September 22, 1999, by and among General Atlantic Partners 57,
L.P., GAP Coinvestment Partners II, L.P. and the Registrant.
10.22 Amendment No. 1 to the Registration Rights Agreement, dated March 5, 1999, dated September 22, 1999.
10.23 Employment Agreement, dated September 21, 1999 by and between Gerard Dorsey and the Registrant.
10.24 Amendment No. 1 to Common Stock Purchase Agreement, dated September 27, 1999, by and between Cisco
Systems, Inc. and the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
** Confidential treatment has been requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Confidential portions of this Exhibit have been filed separately with the
Securities and Exchange Commission.
(b) Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or
497(h) under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 4 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York, State of New York, on this thirtieth day of September, 1999.
PREDICTIVE SYSTEMS, INC.
By: /s/ RONALD G. PETTENGILL, JR.
-----------------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Predictive Systems, Inc.
(the "Company"), hereby severally constitute and appoint Ronald Pettengill,
Chief Executive Officer, and Robert Belau, President, and each of them
individually, with full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to sign for us, in
our names and in the capacities indicated below, the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, and any and all
amendments to said Registration Statement (including post-effective amendments),
and any registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, in connection with the registration under
the Securities Act of 1933, as amended, of equity securities of the Company, and
to file or cause to be filed the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as each of them might
or could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitute or substitutes, shall do or
cause to be done by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
<S> <C> <C>
Chief Executive Officer and September 30, 1999
/s/ RONALD G. PETTENGILL, JR. Chairman of the Board of
- ------------------------------ Directors (principal
Ronald G. Pettengill, Jr. executive officer)
* President and Director September 30, 1999
- ------------------------------
Robert L. Belau
/s/ NEERAJ SETHI Vice President, Finance September 30, 1999
- ------------------------------ (principal financial and
Neeraj Sethi accounting officer)
* Director September 30, 1999
- ------------------------------
Peter L. Bloom
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
<S> <C> <C>
* Director September 30, 1999
- ------------------------------
Donald J. Duffy
* Director September 30, 1999
- ------------------------------
Braden R. Kelly
* Director September 30, 1999
- ------------------------------
Eric Meyer
/s/ INDER SIDHU Director September 30, 1999
- ------------------------------
Inder Sidhu
/s/ WILLIAM W. WYMAN Director September 30, 1999
- ------------------------------
William W. Wyman
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RONALD G. PETTENGILL, JR.
-----------------------------------
Ronald G. Pettengill, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of Predictive Systems, Inc. included in this
registration statement and have issued our report thereon dated May 12, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
S-1
<PAGE>
SCHEDULE II
PREDICTIVE SYSTEMS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.................................. $ 9 $ 21 $ -- $ 30
----- ----- ----- -----
----- ----- ----- -----
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.................................. $ 30 $ 99 $ (49) $ 80
----- ----- ----- -----
----- ----- ----- -----
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.................................. $ 80 $ 102 $ (41) $ 141
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2 Form of amended and restated certificate of incorporation to be in effect upon the closing of the
offering.
3.3+ By-laws.
3.4 Form of amended and restated by-laws to be in effect upon the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-laws of
the Registrant defining the rights of holders of Common Stock of the Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between General Atlantic Partners 54, L.P. and the
Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between Gap Coinvestment Partners II, L.P. and the
Registrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Incentive Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.4+ Employment Agreement, dated May 11, 1999, by and between Ronald Pettengill and the Registrant.
10.5+ Employment Agreement, dated May 11, 1999, by and between Robert Belau and the Registrant.
10.6+ Employment Agreement, dated January 22, 1999, by and between Kevin Holt and the Registrant.
10.7+ Registration Rights Agreement, dated March 5, 1999.
10.8+ Secured Promissory Note, dated August 31, 1998, in favor of Brown Brothers Harriman & Co.
10.9+ Agreement of Lease, dated June 25, 1999, by and between the Registrant and Polestar Fifth Property
Associates LLC.
10.10+** Development and License Agreement, dated July 29, 1998, by and between Bear, Stearns & Co. Inc. and the
Registrant.
10.11+** Consulting Agreement, dated October 14, 1998, by and between Pershing Division of Donaldson, Lufkin &
Jenrette Securities Corporation and the Registrant.
10.12+** Consulting Services Agreement, dated October 15, 1998, by and between First Union Corporation and the
Registrant.
10.13+** Strategic Partnering Agreement, dated July 30, 1999, by and between Cabletron Systems Inc. and the
Registrant.
10.14+** Systems Integration Consulting Services Agreement, dated May 21, 1998, by and between LCI International
Telecom Corp. dba Qwest Communications Corporation and the Registrant.
10.15+ Amendment No. 1 to Consulting Services Agreement dated June 21, 1999, to Systems Integration Consulting
Services Agreement, dated May 21, 1998, by and between LCI International Telecom Corp. dba Qwest
Communications Corporation and the Registrant.
10.16+ Stock and Warrant Purchase Agreement, dated March 5, 1999, by and among General Atlantic Partners 54,
L.P., GAP Coinvestment Partners II, L.P., the Other Purchasers named therein and the Registrant.
10.17+ Service Agreement, dated January 1, 1999, by and between John Wright and Predictive Limited.
10.18+ Common Stock Purchase Agreement, dated September 16, 1999, by and between Cisco Systems, Inc. and the
Registrant.
10.19+ Investor's Rights Agreement, dated September 16, 1999, by and between Cisco Systems, Inc. and the
Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.20** Professional Services Subcontract, dated May 14, 1999, by and between Cisco Systems, Inc. and the
Registrant.
10.21 Common Stock Purchase Agreement, dated September 22, 1999, by and among General Atlantic Partners 57,
L.P., GAP Coinvestment Partners II, L.P. and the Registrant.
10.22 Amendment No. 1 to the Registration Rights Agreement, dated March 5, 1999, dated September 22, 1999.
10.23 Employment Agreement, dated September 21, 1999 by and between Gerard Dorsey and the Registrant.
10.24 Amendment No. 1 to Common Stock Purchase Agreement, dated September 27, 1999, by and between Cisco
Systems, Inc. and the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
** Confidential treatment has been requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Confidential portions of this Exhibit have been filed separately with the
Securities and Exchange Commission.
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PREDICTIVE SYSTEMS, INC.
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
Predictive Systems, Inc. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated in
Delaware, and the date of its filing of its original Certificate of
Incorporation with the Secretary of State of Delaware was February 10, 1995. A
Certificate of Amendment of the Certificate of Incorporation was filed with the
Secretary of State of the State of Delaware on March 4, 1999.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Certificate of Incorporation of the
Corporation, declaring said amendment and restatement to be advisable and in the
best interests of the Corporation and its stockholders, and authorizing the
appropriate officers of the Corporation to solicit the consent of the
stockholders of the issued and outstanding Common Stock, $0.001 par value, and
Preferred Stock, $0.001 par value, voting as a single class and as separate
classes, all in accordance with the applicable provisions of Sections 228, 242
and 245 of the General Corporation Law of the State of Delaware;
THIRD: That the resolution setting forth the proposed
amendment and restatement is as follows:
RESOLVED, that the Amended and Restated of Certificate of
Incorporation of the Corporation be amended and restated in
its entirety as follows:
ARTICLE I
Name
The name of the Corporation is Predictive Systems, Inc.
<PAGE>
ARTICLE II
Registered Office
The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, State of Delaware 19801, County of New Castle. The name of its
registered agent at such address is The Company Corporation.
ARTICLE III
Powers/Term
The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law. The Corporation is to have perpetual existence.
ARTICLE IV
Capital Stock
A. CLASSES OF STOCK. The total number of shares of stock which
the Corporation shall have authority to issue is two hundred and ten million
(210,000,000), consisting of ten million (10,000,000) shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"), and two hundred million
(200,000,000) shares of Common Stock, par value $.001 per share (the "Common
Stock").
B. PREFERRED STOCK. The Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is hereby authorized
to provide for the issuance of shares of Preferred Stock in one or more series
and, by filing a certificate pursuant to the applicable law of the State of
Delaware (the "Preferred Stock Designation"), to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. The authority of the Board
of Directors with respect to each series shall include, but not be limited to,
determination of the following:
(a) The designation of the series, which may be by
distinguishing number, letter or title.
(b) The number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
2
<PAGE>
(c) The amounts payable on, and the preferences, if any, of
shares of the series in respect of dividends, and whether such dividends, if
any, shall be cumulative or noncumulative.
(d) Dates at which dividends, if any, shall be payable.
(e) The redemption rights and price or prices, if any, for
shares of the series.
(f) The terms and amount of any sinking funds provided for the
purchase or redemption of shares of the series.
(g) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(h) Whether the shares of the series shall be convertible into
or exchangeable for shares of any other class or series, or any other security,
of the Corporation or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates at
which such shares shall be convertible or exchangeable and all other terms and
conditions upon which such conversion or change may be made.
(i) Restrictions on the issuance of shares of the same series
or of any other class or series.
(j) The voting rights, if any, of the holders of shares of the
series.
C. COMMON STOCK; VOTING. The Common Stock shall be subject to
the express terms of the Preferred Stock and any series thereof. Except as may
otherwise be provided in this Certificate of Incorporation, in a Preferred Stock
Designation or by applicable law, the holders of shares of Common Stock shall be
entitled to one vote for each such share upon all questions presented to the
stockholders, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, and holders of Preferred Stock
shall not be entitled to vote at or receive notice of any meeting of
stockholders.
The number of shares of authorized Common Stock may be
increased or decreased (but not below the number then outstanding) by the
affirmative vote of the holders of a majority in voting power of the outstanding
shares of capital stock of the Corporation entitled to vote thereon, voting
together as a single class notwithstanding the provisions of Section 242(b)(2)
of the General Corporation Law of the State of Delaware.
The Corporation shall be entitled to treat the person in whose
name any share of its stock is registered as the owner thereof for all purposes
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person whether or not the Corporation
shall have notice thereof, except as expressly provided by applicable law.
3
<PAGE>
ARTICLE V
Directors
A. NUMBER. The number of directors of the Corporation shall be
such number, not less than six (6) nor more than fifteen (15) (exclusive of
directors, if any, to be elected by holders of preferred stock of the
Corporation, voting separately as a class), as shall be set forth from time to
time in the bylaws, provided that no action shall be taken to decrease or
increase the number of directors unless at least 66.67% of the outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of directors (considered for this purpose as one class) cast at a
meeting of the stockholders called for that purpose approve such decrease or
increase. Vacancies in the Board of Directors of the Corporation, however
caused, and newly created directorships shall be filled by a vote of a majority
of the directors then in office, whether or not a quorum, and any director so
chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of the class to which the director has been
chosen expires and when the director's successor is elected and qualified.
B. Classified Board of Directors. The Board of Directors shall
be and is divided into three classes: Class I, Class II and Class III, each of
which shall be as nearly equal in number as possible. Each director shall serve
for a term ending on the date of the third annual meeting of stockholders
following the annual meeting at which the director was elected; provided,
however, that each initial director in Class I shall hold office until the
annual meeting of stockholders in 2000; each initial director in Class II shall
hold office until the annual meeting of stockholders in 2001; and each initial
director in Class III shall hold office until the annual meeting of stockholders
in 2002. Notwithstanding the foregoing provisions of this ARTICLE V, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal.
Subject to the provisions of this ARTICLE V, should the number
of directors not be equally divisible by three, the excess director or directors
shall be assigned to Classes I or II as follows: (i) if there shall be an excess
of one directorship over a number equally divisible by three, such extra
directorship shall be classified in Class I; and (ii) if there shall be an
excess of two directorships over a number divisible by three, one shall be
classified in Class I and the other in Class II.
In the event of any increase or decrease in the authorized
number of directors, (1) each director than serving as such shall nevertheless
continue as a director of the class of which he is a member until the expiration
of his current term, or his earlier resignation, removal from office or death,
and (2) the newly created or eliminated directorship resulting from such
increase or decrease shall be appointed by the Board of Directors among the
three classes of directors so as to maintain such classes as nearly equal as
possible.
C. Removal of Directors. Notwithstanding any other provisions
of this Amended and Restated Certificate of Incorporation or the bylaws of the
Corporation, any director or the entire Board of Directors of the Corporation
may be removed, at any time, but only for cause or by the affirmative vote of
the holders of not less than 50% of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
4
<PAGE>
(considered for this purpose as one class) cast at a meeting of the stockholders
called for that purpose. Notwithstanding the foregoing, whenever the holders of
any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the preceding provisions of this ARTICLE V shall not apply with
respect to the director or directors elected by such holders of preferred stock.
ARTICLE VI
Stockholder Meetings
Meetings of stockholders may be held within or without the
State of Delaware, as the bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the bylaws of the Corporation. The stockholders of
the Corporation may not take any action by written consent in lieu of a meeting.
ARTICLE VII
Limitation of Directors' Liability
A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect any
right or protection of a director of the Corporation hereunder in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal. If the General Corporation Law of the State of Delaware is amended after
approval by the stockholders of this ARTICLE VII to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
ARTICLE VIII
Indemnification
A. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (a "Covered Person")
who was or is made is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a
5
<PAGE>
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, enterprise or nonprofit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses (including attorneys' fees) reasonably incurred by such Covered Person.
Notwithstanding the preceding sentence, except as otherwise provided in this
Article VIII, the Corporation shall be required to indemnify a Covered Person in
connection with a proceeding (or part thereof) commenced by such Covered Person
only if the commencement of such proceeding (or part thereof) by the Covered
person was authorized by the Board of Directors of the Corporation.
B. PREPAYMENT OF EXPENSES. The Corporation shall pay the
expenses (including attorneys' fees) incurred by a Covered person in defending
any proceeding in advance of its final disposition, PROVIDED, HOWEVER, that, to
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered person is not entitled to be indemnified under this
Article VIII or otherwise.
C. CLAIMS. If a claim for indemnification or advancement of
expenses under this Article VIII is not paid in full within thirty days after a
written claim therefor by the Covered Person has been received by the
Corporation, the Covered Person may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be paid
the expense of prosecuting such claim. In any such action the corporation shall
have the burden of proving that the Covered Person is not entitled to the
requested indemnification or advancement of expenses under applicable law.
D. NONEXCLUSIVITY OF RIGHTS. The rights conferred on any
Covered Person by this Article VIII shall not be exclusive of any other rights
which such Covered Person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, these bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
E. OTHER SOURCES. The Corporation's obligation, if any, to
indemnify or to advance expenses to any Covered person who was or is serving at
its request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Covered Person may collect as indemnification or
advancement of expenses from such other corporation, partnership, joint venture,
trust, enterprise or non-profit enterprise.
F. AMENDMENT OR REPEAL. Any repeal or modification of the
foregoing provisions of this Article VIII shall not adversely affect any right
or protection hereunder of any Covered Person in respect of any act or omission
occurring prior to the time of such repeal or modification.
G. OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES. This
Article VIII shall not limit the right to the Corporation to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Covered Persons when and as authorized by appropriate corporate
action.
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ARTICLE IX
Amendment of Bylaws
In furtherance of and not in limitation of powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the bylaws of the Corporation by vote of
66.67% of the Board of Directors.
ARTICLE X
Amendment of Certificate of Incorporation
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation. Notwithstanding the
foregoing, the provisions set forth in ARTICLES V, VI, VII, VIII, IX and this
ARTICLE X may not be repealed, altered, amended or rescinded in any respect
unless the same is approved by the affirmative vote of the holders of not less
than 66.67% of the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (considered for this
purpose as a single class) cast at a meeting of the stockholders called for that
purpose (provided that notice of such proposed repeal, alteration, amendment or
rescission is included in the notice of such meeting).
* * *
FOURTH: That said amendments were duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law.
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IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed by the Chief Executive Officer and the Secretary
of the Corporation this ___ day of ___, 1999.
-------------------------------------------
Ronald Pettengill, Chief Executive Officer
-------------------------------------------
Robert Belau, Secretary
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AMENDED AND RESTATED BY-LAWS
OF
PREDICTIVE SYSTEMS, INC.
ARTICLE I
CERTIFICATE OF INCORPORATION AND BYLAWS
Section 1. These By-Laws are subject to the Certificate of
Incorporation of the Corporation, as amended to date. In these By-Laws,
references to law, the Certificate of Incorporation and By-Laws mean the law,
the provisions of the Certificate of Incorporation and the By-Laws as from time
to time in effect.
ARTICLE II
OFFICES
Section 1. The registered office of the Corporation in the
State of Delaware shall be at 1013 Centre Road, in the city of Wilmington, state
of Delaware. The registered agent at such address shall be the Company
Corporation.
Section 2. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE III
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election
of directors shall be held at such place as may be fixed from time to time by
the Board of Directors, or at such other place either within or without the
State of Delaware as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. Meetings of stockholders for
any other purpose may be held at such time and place, within or without the
State of Delaware, as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
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Section 2. Annual meetings of stockholders shall be held at
such date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, at which they shall elect by
a plurality vote the directors to be elected at such meeting, and transact such
other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may only be called by the chairman of the board or
the president and shall be called by the chairman of the board, the president or
secretary at the request in writing of two-thirds of the Board of Directors.
Section 6. Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be given not fewer than ten (10) nor more than sixty
(60) days before the date of the meeting, to each stockholder entitled to vote
at such meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
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Section 9. When a quorum is present at any meeting, the vote
of the holders of a majority of the stock having voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Certificate of Incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 10. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the Certificate of
Incorporation, the Chairman of the Board may adjourn a meeting of stockholders
from time to time, without notice other than announcement at the meeting. No
notice of the time and place of an adjourned meeting need be given except as
required by law.
Section 12.
A. Annual Meetings of Stockholders
1. Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the stockholders may
be made at an annual meeting of stockholders only (a) pursuant to the
Corporation's notice of meeting (or any supplement thereto), (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the Corporation
who was a stockholder of record at the time of giving of notice provided for in
this Section 12, who is entitled to vote at the meeting and who complies with
the notice procedures set forth in this Section 12.
2. For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (a)(1) of this Section 12, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation and such other
business must otherwise be a proper matter for stockholder action. To be timely,
a stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
ninetieth (90th) day nor earlier than the close of business on the one hundred
twentieth (120th) day prior to the first anniversary of the date of the
preceding year's annual meeting; provided, however, that if either the date of
the annual meeting is more than thirty (30) days before or more than seventy
(70) days after such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the one hundred
twentieth (120th) day prior to such annual meeting and not later than the close
of business on the later of the ninetieth (90th) day prior to such annual
meeting or the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each
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case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, the text of the proposal or
business (including the text of any resolutions proposed for consideration and
in the event that such business includes a proposal to amend the By-laws of the
Corporation, the language of the proposed amendment), the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner, (ii) the class and number of shares of capital stock of
the Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner, (iii) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to propose such
business or nomination, and (iv) a representation whether the stockholder or the
beneficial owner, if any, intends or is part of a group which intends (a) to
deliver a proxy statement and/or form of proxy to holders of at least the
percentage of the Corporation's outstanding capital stock required to approve or
adopt the proposal or elect the nominee and/or (b) otherwise to solicit proxies
from stockholders in support of such proposal or nomination. The Corporation may
require any proposed nominee to furnish such other information as it may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of the Corporation.
3. Notwithstanding anything in the second sentence of
paragraph (a)(2) of this Section 12 to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the Corporation
is increased and there is no public announcement by the Corporation naming all
of the nominees for director or specifying the size of the increased Board of
Directors at least one hundred (100) days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this Section
12 shall also be considered timely, but only with respect to nominees for any
new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive office of the Corporation not later than
the close of business on the tenth (10th) day following the day on which such
public announcement is first made by the Corporation.
B. Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time notice provided for in
this Section 12 is delivered to the Secretary of the Corporation, who is
entitled to vote at the meeting and upon such election, who complies with the
notice procedures set forth in this Section 12. If the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder entitled to vote in
such election of directors may nominate a person or persons (as the case may
be), for election to such position(s) as specified in the Corporation's notice
of meeting, if the stockholder's notice
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required by paragraph (A)(2) of this Section 12 shall be delivered to the
Secretary at the principal executive offices of the Corporation not earlier than
the close of business on the one hundred twentieth (120) day prior to such
special meeting and not later than the later of (x) the close of business of the
ninetieth (90th) day prior to such special meeting or (y) the close of business
of the tenth (10th) day following the day on which public announcement is first
made of the date of such special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period (or extend any time period) for the giving of a stockholder's
notice as described above.
C. General.
1. Only such persons who are nominated in accordance
with the procedures set forth in this Section 12 shall be eligible to be elected
at an annual or special meeting of stockholders of the Corporation to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 12. Except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws, the chairman of the board shall
have the power and duty (a) to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in this Section 12 (including
whether the stockholder or beneficial owner, if any, on whose behalf the
nomination or proposal is made solicited (or is part of a group which solicited)
or did not so solicit, as the case may be, proxies in support of such
stockholder's nominee or proposal in compliance with such stockholder's
representation as required by clause (A)(2)(c)(iv) of this Section 12) and (b)
if any proposed nomination or business was not made or proposed in compliance
with this Section 12, to declare that such nomination shall be disregarded or
that such proposed business shall not be transacted.
2. For purposes of this Section 12, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 and 15(d) of the Exchange Act.
3. Notwithstanding the foregoing provisions of this
Section 12, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 12 shall be deemed to affect
any rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred Stock to elect directors pursuant
to any applicable provisions of the Certificate of Incorporation.
Notwithstanding any other provision of law, the Certificate of
Incorporation or these By-Laws, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least 66.67% of the votes which all the stockholders would be entitled to cast
at any annual election of directors or class of directors shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Section 12.
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ARTICLE IV
DIRECTORS
Section 1. The number of directors which shall constitute the
whole Board shall be determined by resolution of the Board of Directors or by
the stockholders at the annual meeting of the stockholders, except as provided
in Section 2 of this Article. The Board shall be divided into three classes as
nearly equal in number as possible. The members of each class shall be elected
for a term of three years and until their successors are elected and qualified.
The Board of Directors shall be classified in accordance with the provisions of
the Corporation's Certificate of Incorporation. Directors need not be
stockholders.
Section 2. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by 66.67%
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election at which such director's class is to be elected and until their
successors are duly elected and shall qualify, unless sooner displaced. If there
are no directors in office, then an election of directors may be held in the
manner provided by statute. If, at the time of filling any vacancy or any newly
created directorship, the directors then in office shall constitute less than a
majority of the whole Board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent (10%) of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office.
Section 3. The business of the Corporation shall be managed by
or under the direction of its Board of Directors which may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
statute or by the Certificate of Incorporation or by these By-Laws directed or
required to be exercised or done by the stockholders.
Meetings of the Board of Directors
Section 4. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. Regular meetings of the Board of Directors may be
held without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 6. Special meetings of the Board may be called by the
chairman of the board or the president on seven (7) days' notice to each
director by mail or forty-eight (48) hours notice to each director either
personally or by telecopy; special meetings shall be called by the chairman of
the board, president or secretary in like manner and on like notice on the
written request of two directors unless the Board consists of only one director,
in which case special
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meetings shall be called by the chairman of the board or the president or
secretary in like manner and on like notice on the written request of the sole
director.
Section 7. At all meetings of the Board a majority of the
directors fixed by Section 1 shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
Section 8. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 9. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Committees of Directors
Section 10. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee.
In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution
of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation; and, unless the resolution or the Certificate of
Incorporation
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expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
Section 11. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
Compensation of Directors
Section 12. Unless otherwise restricted by the Certificate
of Incorporation or these By-Laws, the Board of Directors shall have the
authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as director. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees
may be allowed like compensation for attending committee meetings.
Removal of Directors
Section 13. Any director or the entire Board of Directors
may be removed only in accordance with the provisions of the Corporation's
Certificate of Incorporation.
ARTICLE V
NOTICES
Section 1. Whenever, under the provisions of the statutes
or of the Certificate of Incorporation or of these By-Laws, notice is
required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing,
by mail, addressed to such director or stockholder, at his address as it
appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
telecopy.
Section 2. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation
or of these By-Laws, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
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ARTICLE VI
OFFICERS
Section 1. The officers of the Corporation shall be chosen by
the Board of Directors and shall consist of a chief executive officer, chief
financial officer, president, treasurer and a secretary. The Board of Directors
may elect from among its members a Chairman of the Board and a Vice Chairman of
the Board. The Board of Directors may also choose one or more vice-presidents,
assistant secretaries and assistant treasurers. Any number of offices may be
held by the same person, unless the Certificate of Incorporation or these
By-Laws otherwise provide.
Section 2. The Board of Directors at its first meeting after
each annual meeting of stockholders shall choose a chief executive officer, a
president, a treasurer, and a secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
Section 4. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
Section 5. The officers of the Corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
The Chairman of the Board
Section 6. The Chairman of the Board shall be the chief
executive officer of the Corporation and shall preside at all meetings of the
stockholders and directors. The Chairman shall conduct general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board are carried into effect, subject, however, to the right
of the directors to delegate any specific powers, except such as may be by
statute exclusively conferred on the Chairman of the Board, to any other officer
or officers of the Corporation. The Chairman shall have the general powers and
duties of supervision and management usually vested in the office of Chairman of
the Board of a corporation. Such individual shall execute bonds, mortgages and
other contracts requiring a seal, under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some officer or agent of the Corporation.
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The President
Section 7.
The President shall conduct general and active management of
the business of the Corporation and shall see that all orders and resolutions of
the Board are carried into effect, subject, however, to the right of the
directors to delegate any specific powers, except such as may be by statute
exclusively conferred on the President, to any other officer or officers of the
Corporation. The President shall have the general power and duties of
supervision and management usually vested in the office of President of a
corporation. In the absence of the Chairman and Vice Chairman of the Board, the
President shall preside at all meetings of the stockholders and the Board of
Directors
Such individual shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the Corporation.
The Vice-Presidents
Section 8.
In the absence of the president or in the event of his
inability or refusal to act, the vice-president, if any, (or in the event there
be more than one vice-president, the vice-presidents in the order designated by
the directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
The Secretary and Assistant Secretary
Section 9.
The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. Such individual shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or president, under whose supervision such individual shall be. Such individual
shall have custody of the corporate seal of the Corporation and he, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.
Section 10. The assistant secretary, or if there be more than
one, the assistant secretaries in the order determined by the Board of Directors
(or if there be no such
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determination, then in the order of their election) shall, in the absence of the
secretary or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the secretary and shall perform such other duties and
have such other powers as the Board of directors may from time to time
prescribe.
The Treasurer and Assistant Treasurers
Section 11. The treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors.
Section 12. The treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the president and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as treasurer and of the financial condition
of the Corporation.
Section 13. If required by the Board of Directors, such
individual shall give the Corporation a bond (which shall be renewed every six
years) in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his office
and for the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
Section 14. The assistant treasurer, or if there shall be more
than one, the assistant treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VII
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by,
the chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the Corporation, certifying the number of shares owned
by him in the Corporation.
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If the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions or such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation shall issue to represent such class or
series of stock, a statement that the Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 2. Any of or all the signatures on the certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
individual were such officer, transfer agent or registrar at the date of issue.
Lost Certificates
Section 3. The Board of Directors may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Transfer of Stock
Section 4. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Fixing Record Date
Section 5. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to
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express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Registered Stockholders
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Dividends
Section 1. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purposes as the directors shall think conducive to the interest
of the Corporation, and the directors may modify or abolish any such reserve in
the manner in which it was created.
Checks
Section 3. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
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Fiscal Year
Section 4. The fiscal year of the Corporation shall end on
December 31, unless otherwise fixed by resolution of the Board of Directors.
Seal
Section 5. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the Corporation, the year of its
organization and the words "Corporate Seal, Delaware." The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
Section 6. No contract or transaction between the Corporation
and one or more of the directors or officers, or between the Corporation and any
other corporation, partnership, association, or other organization in which one
or more of the directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because such director or officer is present at or participates in the meeting of
the Board of Directors or a committee of the Board of Directors which authorizes
the contract or transaction or solely because his, her or their votes are
counted for such purpose, if:
(1) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum;
(2) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by the Board
of Directors, a committee of the Board of Directors, or the stockholders. Common
or interested directors may be counted in determining the presence of a quorum
at a meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
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ARTICLE IX
AMENDMENTS
These By-Laws may be repealed, altered, amended or rescinded
by the stockholders of the Corporation by vote of not less than 66.67% of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class) cast at a meeting of the stockholders called for that purpose (provided
that notice of such proposed repeal, alteration, amendment or rescission is
included in the notice of such meeting). In addition, in accordance with the
Corporation's Certificate of Incorporation, the Board of Directors may repeal,
alter, amend or rescind these By-Laws by vote of 66.67% of the Board of
Directors.
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EXHIBIT 5.1
September 30, 1999
Predictive Systems, Inc.
145 Hudson Street
New York, New York 10013
Re: Predictive Systems, Inc.--Registration Statement on
Form S-1 (File No. 333-84045)
Ladies and Gentlemen:
We have acted as counsel to Predictive Systems, Inc., a Delaware corporation
(the "Company"), in connection with the proposed issuance and sale by the
Company of up to 4,600,000 shares of the Company's Common Stock (the "Shares")
pursuant to the Company's Registration Statement on Form S-1 (the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of Item
16(a) of Form S-1.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and we
disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Exhibit 10.20
Confidential treatment has been requested for certain portions of this
exhibit pursuant to Rule 406 under the Securities Act of 1933, as amended.
CISCO SYSTEMS
Cisco PSS Agreement Number ___________
Cisco PSS SOW Number ___________
Professional Services Subcontract (PSS)
Professional Services Subcontract Agreement ("Agreement") is made and
entered into between Cisco Systems, Inc., a California corporation, with offices
at 170 West Tasman Drive, San Jose, California 95134 ("Cisco"), and Predictive
Systems, Inc., a Delaware corporation, with its principal place of business at
145 Hudson Street, New York, New York 10013 ("Subcontractor").
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereto have caused this Agreement to be duly executed.
CISCO SYSTEMS, INC. PREDICTIVE SYSTEMS, INC.
By: [****] By: [****]
Name: [****] Name: [****]
Title: [****] Title: [****]
Date: 5/14/99 Date: 5/13/99
GENERAL TERMS AND CONDITIONS
In consideration of the mutual covenants and promises set forth below, the
parties agree as follows:
1. DEFINITIONS; RULES OF INTERPRETATION.
1.1. "Customer" means the entity with which Cisco has entered into a PSA (as
defined below) and which is the recipient of the Services and
Deliverables provided by Subcontractor pursuant to this Agreement and
an SOW. A Customer shall be identified in each Statement of Work issued
hereunder.
1.2. "Deliverables" means, with respect to each SOW, the items specified in
such SOW as deliverables.
1.3. "Effective Date" means the last date written on the first page of this
Agreement.
1.4. [Reserved].
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
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1.5. "Professional Services Agreement" or "PSA" means, with respect to each
SOW, the contract between Cisco and the Customer in connection with
which such SOW is issued to Subcontractor, as amended from time to
time.
1.6. "Results" means all works of authorship, copyrightable works and
inventions made, created, developed, conceived or reduced to practice
by Subcontractor, either alone or jointly with others, during the term
of this Agreement (i) in connection with the Services or Subcontractor
Work Product or (ii) which relate to any Cisco or Customer Confidential
Information (as defined in Section 3, Confidentiality, below).
1.7. "Services" means that portion of the services required under the PSA
which Subcontractor shall provide to Customer and/or Cisco as
subcontractor to Cisco and which are described in any SOW issued
pursuant to this Agreement.
1.8. "Software" means any Cisco software in object code form, which is
listed from time to time on Cisco price list(s) and made available for
license by Cisco, and any new releases (such as standard releases of
the Software which may include bug fixes and new features), updates to,
or upgrades thereof made available by Cisco to its Customers with or
without charge.
1.9. "Statement of Work" ("SOW") means each document agreed upon by Cisco
and Subcontractor which further specifies Services to be performed and
the Deliverables to be provided to Cisco or the Customer, and any other
performance requirements mutually agreed to between the parties. Each
SOW shall be issued substantially in the form shown in Exhibit A and
shall be incorporated herein in its entirety by reference.
1.10. "Subcontractor Work Product" means any and all items and information
delivered to Cisco or generated by Subcontractor or its
subcontractor(s) in the course of providing Services under this
Subcontract, whether in hard copy or electronic form, including all
Deliverables, works of authorship, programming tools, reports, designs,
analyses, source and object code, user or procedural manuals and other
supporting material, summaries, literature, test results,
recommendations, drawings and workpapers.
1.11. The following rules of interpretation shall apply to this Agreement and
each SOW:
1.11.1. The term "including" and its derivatives means "including,
without limitation" unless the context clearly states
otherwise.
1.11.2. Words importing persons include firms, associations, limited
liability companies, partnership, trusts, corporations and
other legal entities, including public bodies, as well as
natural persons.
1.11.3. Any headings preceding the text of the Articles and Sections
of this Agreement are solely for convenience or reference and
do not constitute a part of this Agreement, nor do they affect
the meaning, construction or effect of this Agreement.
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1.11.4. Words importing the singular shall include the plural and vice
versa. Words of the masculine gender shall be deemed to
include the correlative words of the feminine gender.
1.11.5. All references to a number of days mean calendar days, unless
expressly indicated otherwise.
1.11.6. All reference herein to the "Agreement" shall include the
appendices, exhibits and schedules to this Agreement,
including all SOWs.
1.11.7. The word "shall" when used in this Agreement is word of
mandate, construed as "must."
2. DUTIES OF SUBCONTRACTOR.
2.1. Subcontractor shall provide the Services and the Subcontractor Work
Product during the term of this Agreement in accordance with the terms
and conditions of this Agreement, any SOW and the PSA. Subcontractor
shall comply with all obligations of Cisco contained in the terms and
conditions of the PSA which are provided in writing to Subcontractor,
its agent or subcontractor prior to entering into the applicable SOW
that relate to the Services and the Subcontractor Work Product as if
Subcontractor were substituted for Cisco with respect to such terms and
conditions. Subcontractor shall not perform any act with respect to the
Services or the Subcontractor Work Product that Cisco is prohibited
from performing under the PSA which are provided in writing to
Subcontractor, its agent or subcontractor prior to entering into the
applicable SOW. Subcontractor shall not perform any act, or fail to
take any act, that would cause Cisco to be in breach of the PSA so long
as Subcontractor, its agent or subcontractor has been provided with the
applicable provisions of the PSA. Subcontractor will provide all
resources, facilities, management, labor, expertise, skills, tools and
equipment necessary for the performance of this Agreement and any SOW.
2.2. [****]
2.3. Subcontractor shall:
(i) keep Cisco advised of the progress of the delivery of the
Services and the status of the Deliverables,
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
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(ii) permit any designated representative of Cisco periodically to
review the work of Subcontractor personnel performing Services
and preparing Deliverables,
(iii) timely perform the Services in a timely manner and provide the
Deliverables in accordance with each SOW, and
(iv) keep accurate records of work performed on each SOW, evidence
of which Subcontractor shall provide to Cisco upon Cisco's
request, consistent with Section 19.2 hereof.
2.4. Subcontractor shall comply with all reasonable instructions given by
Cisco in connection with performance of this Agreement or any SOW.
2.5. Subcontractor has obtained all licenses, permits and approvals required
by any federal, state or local licensing, regulatory, or other agency
for performance of the work required by this Agreement or any SOW.
2.6. Subcontractor's duties and responsibilities under this Agreement shall
not be subcontracted to any other person or entity, in whole or in
part, without prior written notice to and approval by Cisco and, if
required by the PSA, the Customer.
2.7. If Subcontractor's use of subcontractor(s), consultants or other third
parties is authorized under this Agreement or a particular SOW,
Subcontractor shall execute an agreement with such parties which
requires compliance with the terms of this Agreement and the SOW under
which work is subcontracted. Such agreement shall provide that (i)
Cisco shall have the right to enforce the provisions of such agreement
and (ii) Cisco's audit rights as provided for in Section 19.2 below
shall include access to records of Subcontractor's subcontractor(s) to
assess compliance with this provision.
3. CONFIDENTIALITY.
3.1. Subcontractor acknowledges that, in connection with this Agreement and
its relationship with Cisco, it may obtain information relating to
Cisco or Cisco's hardware, software, services or products which is of a
confidential and proprietary nature ("Confidential Information"). Such
Confidential Information may include, but is not limited to, trade
secrets, know-how, inventions, techniques, processes, programs,
schematics, software source documents, data, customer lists, financial
information, and sales and marketing plans or information which
Subcontractor knows or has reason to know is confidential, -
proprietary or trade secret information of Cisco, its affiliates and
suppliers. Subcontractor shall at all times, both during the term of
this Agreement and for a period of at least [****] after its
expiration or termination or the completion of the last SOW, whichever
is later, keep in trust and confidence all such Confidential
Information, and shall not use such Confidential Information other than
as expressly authorized by Cisco under this Agreement, nor shall
Subcontractor disclose any such Confidential Information to third
parties without Cisco's written consent. Subcontractor further agrees
to immediately return to Cisco all Confidential Information (including
copies thereof) in
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
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<PAGE>
Subcontractor's possession, custody, or control upon expiration or
termination of this Agreement at any time and for any reason or the
completion of the last SOW, whichever is later. The obligations of
confidentiality shall not apply to information which (a) has entered
the public domain except where such entry is the result of
Subcontractor's breach of this Agreement or other applicable
confidentiality agreement; (b) prior to disclosure hereunder was
already rightfully in Subcontractor's possession under no obligation of
confidentiality; (c) subsequent to disclosure hereunder is obtained by
Subcontractor on a nonconfidential basis from a third party who has the
right to disclose such information to the Subcontractor; or (d) is
independently developed without restriction on disclosure and without
the use of any Confidential Information. Nothing contained in this
Section 3.1 shall prohibit Subcontractor from making disclosure of
Confidential Information to the extent (but only to the extent)
required by court order, provided that Subcontractor shall use its best
efforts to give Cisco at the earliest practicable time prior notice as
to the nature of the required disclosure or request for such
disclosure, whichever is earlier, so as to afford Cisco the maximum
possible opportunity to challenge the need for such disclosure; and
provided further that Subcontractor shall cooperate with Disco in
resisting such disclosure.
For purposes of this Agreement, Confidential Information of Cisco is
deemed to include (i) any information provided to Subcontractor which
Cisco is required to keep confidential pursuant to the terms of the PSA
and (ii) any Confidential Information of a Customer which Cisco or the
Customer may provide to Subcontractor in order to propose or perform
work in accordance with any SOW hereunder (collectively (i) and (ii)
are referred to herein as "Customer Confidential Information").
Subcontractor shall comply with the confidentiality provisions of the
PSA related to all Customer Confidential Information.
3.2. Neither party shall disclose, advertise, or publish the terms and
conditions of this Agreement or any SOW without the prior written
consent of the other party. Any press release or publication regarding
this Agreement or any SOW is subject to prior review and written
approval of the parties. Subcontractor shall not disclose the existence
of any relationship with Cisco without Cisco's prior written approval.
3.3. Notwithstanding anything in this Agreement to the contrary, neither
party shall use the other party's name, logo, trademarks, service
marks, or other proprietary symbols or designations (the "Marks")
without the prior consent of the other party. Subcontractor shall have
no claim or right in Cisco's Marks, including but not limited to
trademarks, service marks, or trade names owned, used or claimed now or
in the future by Cisco. Subcontractor shall not make any claim to
Cisco's Marks or lodge any filings with respect to Cisco's Marks or
marks confusingly similar to Cisco's Marks, whether on behalf of Cisco
or in its own name or interest, without the prior written consent of
Cisco.
4. SUBCONTRACTOR'S REPRESENTATIONS, WARRANTIES, AND COVENANTS.
Subcontractor represents, warrants and covenants as follows:
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<PAGE>
4.1. Subcontractor's performance of this Agreement and all SOWs will not
breach any agreement Subcontractor has with another party and there is
no other contract or duty on Subcontractor's part now in existence that
is inconsistent with this Agreement. Subcontractor warrants to Cisco
that the performance of the services shall not cause Cisco to be in
breach of any representation, warranty, covenant or other obligation of
Cisco in the PSA which relate to the Services or the Subcontractor Work
Product. Subcontractor makes the same representations, warranties and
covenants to Cisco as Cisco makes to Customer pursuant to the PSA
(subject to the disclaimers and exclusions therein), which relate to
the Services or the Subcontractor Work Product; provided that
Subcontractor shall have been previously furnished with the relevant
portions of a copy thereof in accordance with Section 2.1.
4.2. Subcontractor, its employees and subcontractor(s), during the term of
the Agreement:
4.2.1. shall comply with all applicable state and local laws,
ordinances, codes, regulations, rules, policies and procedures
and all applicable federal laws, Presidential Executive
Orders, and government regulations, and the requirements of
any other public or private authority, respecting the
performance by Subcontractor of its duties and
responsibilities under this Agreement;
4.2.2. shall (i) have obtained all licenses, permits and approvals
required by any federal, state or local licensing, regulatory,
or other agency or authority for performance of the work
required by this Agreement or any SOW; (ii) maintain, in full
force and effect, all such licenses, permits, authorizations
and approvals during the Term of this Agreement and until all
the Subcontractor Work Product and Services have been accepted
pursuant to Article 8 of this Agreement or such later time as
Cisco may reasonably require (collectively, (i) and (ii) of
this Section 4.2.2 are referred to as "Authorizations"), (iii)
coordinate with Cisco to the extent necessary to obtain
Cisco's or Customer's cooperation in obtaining any
Authorizations, and (iv) inform Cisco immediately of the
expiration, termination, non-renewal, denial or revocation of
any Authorization;
4.2.3. shall not act in any fashion or take any action which will
render Cisco liable for a violation of the U.S. Foreign
Corrupt Practices Act, the provisions of which include a
prohibition against the offering, giving or promising to offer
or give, directly or indirectly, money or anything of value to
any non-U.S. official or a non-U.S. government, political
party or instrumentality thereof in order to assist
Subcontractor or Cisco in obtaining or retaining business;
4.2.4. shall not, directly or through a third party, remove, alter,
change or interface with the Subcontractor Work Product for
the purpose of preventing Cisco or the Customer from utilizing
the Subcontract Work Product; and
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4.2.5. shall take no action, nor fail to take any action, which
action or failure to act could result in Cisco's being in
violation of any law or regulation relating to the performance
of either party's obligations under this Agreement, including
the PSA and any SOW.
4.3. Subcontractor will use qualified individuals with suitable training,
experience, capabilities, skill and licenses to perform its obligations
under this Agreement and any SOW. Notwithstanding Subcontractor's
compliance with this provision, such individuals shall be subject to
approval by Cisco and, if required by the PSA, by Customer' and shall
be removed (and immediately replaced by Subcontractor with personnel
meet under requirements of this Section 4.3) at Cisco or Customer
request.
4.4. Subcontractor will perform this Agreement and any SOW hereunder in a
manner consistent with industry standards reasonably applied to the
performance of such work.
4.5. All Deliverables developed or supplied by Subcontractor hereunder shall
meet the requirements of Section 4.6 and
4.5.1. shall not contain any intentionally designed timer, clock,
counter or other limiting design, function or routine which
causes it to be erased, inoperable, or otherwise incapable of
being used fully in the manner for which it was designed after
the occurrence or lapse of any triggering event;
4.5.2. shall comply with the terms of Cisco's Year 2000 Compliance
Agreement, a copy of which shall be executed by Subcontractor
upon execution of this Agreement and appended hereto as
Exhibit B. and Subcontractor shall cause its subcontractor(s)
and any other third parties who may provide products or
services in support of Subcontractor's performance of this
Agreement or any SOW hereunder to execute and deliver to Cisco
the Year 2000 Compliance Agreement; and
4.5.3. if consistent with the requirements of this Agreement and any
SOW hereunder (including Year 2000 Compliance), shall be in
conformance with Subcontractor's published specifications or,
in the case of purchased software, the specifications of the
third party source.
4.6. The Services and Subcontractor Work Product provided hereunder shall:
4.6.1. be of good and marketable quality;
4.6.2. be free from all defects in design, materials, workmanship,
performance and title; and
4.6.3. meet the applicable specifications, drawings, samples,
descriptions and requirements specified in each SOW and this
Agreement and as required by the PSA.
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4.7. In the event of a breach of the warranties in this Section 4,
Subcontractor shall without charge and without delay repair, replace,
re-perform or modify the affected Services or Subcontractor Work
Product so as to promptly correct such breach or default. All
warranties shall survive inspection, acceptance and payment. Nothing in
this Section 4 shall be construed to limit any other rights or remedies
available to Cisco at law, in equity or otherwise.
4.8. Subcontractor has, or will obtain, confidentiality, non-disclosure,
assignment of rights and other appropriate agreements with its
employees, suppliers, consultants and subcontractor(s) sufficient to
protect Cisco confidential information and Customer Confidential
Information and sufficient to allow Subcontractor to provide Cisco with
the ownership, assignments and licenses required or otherwise provided
for in this Agreement and any SOW hereunder. Such agreements shall
contain terms and conditions no less restrictive than the terms and
conditions set forth in this Agreement and the applicable SOW.
4.9. Subcontractor shall ensure that its personnel and subcontractors, if
any, shall comply with Customer's requests, rules and regulations(i)
regarding conduct of Subcontractor's personnel, (ii) regarding security
at Customer sites or in connection with Customer's systems, and (iii)
regarding document retention. Unless otherwise agreed by Cisco,
Subcontractor's personnel will observe the working hours, working
rules, and holiday schedules of Customer while working on Customer's
premises.
5. INFRINGEMENT.
Other than the Customer Confidential Information obtained in
performance of any SOW, in performing the Services or preparing
Subcontractor Work Product, Subcontractor will not (i) use or bring
onto Cisco's or Customer's premises any confidential or proprietary
information of a third party except to the extent Subcontractor has the
right to use or bring onto Cisco's or Customer's premises such
information, (ii) infringe upon the intellectual property rights
(including, without limitation, patent, copyright, trademark or trade
secret rights) of a third party, or, (iii) disclose or provide to Cisco
or Customer or induce Cisco or Customer to use any confidential
information that belongs to anyone other than Subcontractor except to
the extent Subcontractor has the right to disclose and permit third
parties to use (as applicable) such information. Subcontractor agrees
to indemnify Cisco for any and all losses or liabilities, fines,
penalties and consequences, including attorneys fees, Cisco may incur
by reason of the alleged breach of this Subsection.
6. OWNERSHIP AND LICENSE.
6.1. [****]
6.2. [****]
6.3. [****]
6.4. [****]
6.5. [****]
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
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7. SOFTWARE LICENSE.
7.1. Subject to the terms of this Agreement, Cisco grants to Subcontractor a
nonexclusive and nontransferable license to use the Software specified
in the SOW in object code form and related documents (e.g. technical
specifications, manuals) for the sole purpose of providing Services and
preparing Subcontractor Work Product pursuant to such SOW. The license
granted herein shall be for use of the Software solely as provided in
this Section 7 and the SOW. Unless expressly authorized in a specific
SOW, this license shall extend only to Software to be integrated into
products delivered to and installed for Customer. EXCEPT AS EXPRESSLY
AUTHORIZED UNDER THIS AGREEMENT AND A SPECIFIC SOW, SUBCONTRACTOR SHALL
NOT (AND SHALL NOT PERMIT A THIRD PARTY TO): COPY, IN WHOLE OR IN PART,
SOFTWARE OR RELATED DOCUMENTS; USE THE SOFTWARE ON UNAUTHORIZED) OR
SECONDHAND CISCO EQUIPMENT; MAKE ERROR CORRECTIONS OR OTHERWISE MODIFY
THE SOFTWARE OR DOCUMENTS; DECOMPILE, DECRYPT, REVERSE ENGINEER,
DISASSEMBLE OR OTHERWISE REDUCE ALL OR ANY PORTION OF THE SOFTWARE TO
HUMAN-READABLE FORM; OR TRANSFER, SUBLICENSE, RENT, LEASE, DISTRIBUTE,
SELL, OR CREATE DERIVATIVE WORKS OF THE SOFTWARE OR DOCUMENTS.
7.2. Section 3 of this Agreement, Confidentiality, applies to the Software
licensed herein above. Subcontractor shall maintain and reproduce all
copyright and other proprietary notices on all copies, in any form, of
the Software in the same form and manner that such copyright and other
proprietary notices are included on the Software. Subcontractor agrees
that aspects of the Software and associated documentation, including
the specific design and structure of individual programs, constitute
trade secrets and/or copyrighted material of Cisco. Subcontractor shall
not disclose, provide, or otherwise make available such trade secrets
of copyrighted material in any form to any third party without the
prior written consent of Cisco. Subcontractor shall implement
reasonable security measures
9
<PAGE>
to protect such trade secrets and copyrighted material. Title to
Software and documentation shall remain solely with Cisco.
7.3. This license is effective until terminated either separately or upon
termination of this Agreement. Upon termination Subcontractor shall
destroy or return to Cisco all copies of Software and documents
relating thereto in its possession. If Subcontractor destroys licensed
materials, it shall certify in writing to Cisco that such destruction
has occurred. Termination of the license granted in this Section 7 is
automatic upon expiration or termination of this Agreement. Cisco also
may terminate this license upon written or oral notice to
Subcontractor, with or without prior notice. Subcontractor also may
terminate this license at any time by destroying all copies of Software
and documents relating thereto which are in Subcontractor's possession
and notifying Cisco of the termination. This license will terminate
immediately without notice from Cisco if Subcontractor fails to comply
with any provision of this license.
7.4. If any portion of this license section is found to be void or
unenforceable, the remaining provisions of this license shall remain in
full force and effect. This license constitutes the entire license
between the parties with respect to the use of Software.
7.5. Cisco's commercial software and commercial computer software
documentation is provided to United States Government agencies in
accordance with the terms of this software license, and per
subparagraph "(c)" of the "Commercial Computer Software-Restricted
Rights" clause at FAR 52.227-19 (June 1987). For DOD agencies, the
restrictions set forth in the "Technical Data-Commercial Items" clause
at DFARS 252.227-7015 (Nov 1995) shall also apply.
8. ACCEPTANCE.
For purposes of this Agreement, acceptance of the Services and
Subcontractor Work Product described in each SOW shall occur on the
date such Services and Subcontractor Work Product have met the
completion criteria specified in the Statement of Work to the
reasonable satisfaction of Cisco, as evidenced by issuance of written
confirmation of completion and acceptance by Cisco. Final acceptance of
Services or Subcontractor Work Product may, in Cisco's discretion, be
held in abeyance pending acceptance of same by the Customer.
9. FEES FOR SERVICES PERFORMED.
9.1. Subcontractor shall be paid the amounts determined in accordance with
this Section 9 and the SOW for the Services and Subcontractor Work
Product . Such payments shall be Subcontractor's sole compensation,
including travel and all other expenses, for its rendering of the
Services and preparation and delivery of the Subcontractor Work
Product, including the Subcontractor Work Product and Results required
to be delivered to Cisco under this Agreement and the applicable SOW.
9.2. Except as otherwise set forth in an applicable SOW, Subcontractor shall
determine the amount due for each category of resource listed in the
following chart by multiplying the
10
<PAGE>
hourly rate for each such category times the number of hours [****]
spent by such resource in providing Services for the project
specified in the SOW (the "Project"). Subject to Subcontractor
approval, additional discounts may apply.
<TABLE>
<CAPTION>
DESCRIPTION OF QUALIFICATIONS,
RESOURCE CATEGORY RATE PER HOUR RESPONSIBILITIES AND TASKS
----------------- ------------- --------------------------
<S> <C> <C>
Project Manager US $ [****]
Senior Project Engineer US $ [****]
Project Engineer US $ [****]
___________________ US$
___________________ US$
</TABLE>
9.3. Cisco shall notify Subcontractor in writing within 5 days following the
later of (i) completion of the Services and acceptance of the Services
and Deliverables by Cisco and Customer and (ii) final acceptance of the
Project by Customer. Subcontractor shall invoice Cisco at the address
set forth in the SOW for the Services provided with respect to the
Project in an amount determined in accordance with this Section 9 and
the SOW. Payment terms are thirty days from receipt of a correct
invoice. If Cisco shall send to Vendor payment for an invoice within
[****] of receipt of an invoice from Vendor, the amounts otherwise due
Subcontractor pursuant to such invoice shall be [****] and payment of
such [****] amount by Cisco shall constitute payment in full of the
invoiced amount.
9.4. [****]
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
11
<PAGE>
10. INDEPENDENT CONTRACTOR
Cisco and Subcontractor are independent contractors and have no power
or authority to bind the other or to create any obligation or
responsibility on behalf of the other. Under no circumstances shall any
employee of one party be deemed to be the employee of the other for any
purpose. Nothing herein shall be construed as implying a joint venture,
agency, employer-employee or partnership relationship between the
parties hereto. Subcontractor is solely responsible for all of its own
taxes, withholdings, and other similar statutory obligations related to
this Agreement and any SOW.
11. RELATIONSHIP TO THE PSA.
Selection of subcontractors to perform the work required under a
particular Customer PSA shall be in the sole discretion of Cisco, and
is, if required by the PSA, subject to Customer approval. Subcontractor
agrees that all its personnel who, pursuant to this Agreement, will be
on Cisco's or a Customer's premises shall have appropriate
authorization issued by Cisco and/or Customer prior to being accorded
access to such premises. Denial of access because of failure to comply
with either Cisco's or Customer's security procedures shall not be the
basis of a claim for breach, nor substantiate any other claim
whatsoever by Subcontractor.
12. CHANGES TO A SOW.
Cisco may at any time by written request make changes to a SOW,
provided such changes are within the general scope of the SOW, and
Subcontractor shall proceed without delay to evaluate requested changes
and notify Cisco promptly (but in all cases within twenty-four (24)
hours after receiving such request) of any objections to the requested
changes. Should any change to an SOW directly result in a change to the
time, place or cost of performance of the SOW, Subcontractor shall,
within the earlier of the time specified in such request or fifteen
(15) days of being directed to implement the change, notify Cisco that
there will be an impact to the SOW cost or schedule and describe such
impact. In the event the Parties reasonably determine such a change
increases or decreases the cost of, or the time required for,
performance of the Services or preparation of the Subcontractor Work
Product under any SOW, the Parties shall agree upon an equitable
adjustment to the SOW, including possible adjustment of prices or
delivery schedules. For changes requested by Cisco at Customer's
request or direction, such equitable adjustment shall be subject to
Customer's approval and funding.
13. TERM.
This Agreement will commence on the Effective Date and will continue in
effect for a period of [****] years or for the period of any
incomplete SOW in existence on the expiration date, whichever is later,
unless amended to establish a later expiration date by
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
12
<PAGE>
a written agreement signed by both parties, or until terminated as
provided in this Agreement.
14. TERMINATION.
14.1. Cisco may terminate this Agreement or any individual SOW at any time,
with or without cause, by giving [****] written notice to
Subcontractor. In the event of a termination due to breach by
Subcontractor of this Agreement or any SOW, Cisco may, in its sole
discretion, offer Subcontractor the opportunity to cure within the
[****] notice period. In the event of a termination or failure to
cure under this subsection, as of the tenth day after receipt of notice
of termination, Subcontractor shall immediately cease work on the
terminated matter(s), performing only efforts reasonably necessary to
wind down and preserve work that has been performed or as specified in
Section 14.4. In the event of a termination of this Agreement, or any
SOW, for any reason, Subcontractor shall be obligated to deliver, and
Cisco will be obligated to pay Subcontractor for, only Services and
Subcontractor Work Product actually performed or prepared by
Subcontractor prior to the date of termination, and delivered to and
accepted by Cisco (such acceptance by Cisco to not be unreasonably
withheld) and by Customer within a reasonable time after the effective
date of termination, consistent with the payment terms in the SOW.
Subcontractor shall also take all actions required to protect and
preserve new property in the possession of Subcontractor in which Cisco
or Customer has an interest. Cisco may, upon notice to Subcontractor,
deduct from the amounts otherwise payable by Cisco to Subcontractor any
undisputed amounts payable by Subcontractor to Cisco.
14.2. Subcontractor may terminate this Agreement and/or any individual SOW if
Cisco breaches a material provision of this Agreement or any SOW and
fails to cure such breach within [****] of receipt of written notice of
the breach from Subcontractor.
14.3. Notwithstanding the foregoing, this Agreement and/or any SOW hereunder
may be terminated immediately by Cisco in the event of (i)
Subcontractor's breach of Subsection 2.5 (licenses and permits),
Section 3 (Confidentiality), Section 4 (Subcontractor's
Representations, Warranties and Covenants), Section 6 (Ownership and
License), Section 7 (Software License), or Subsection 19.10 (Export Law
Control), (ii) in the event of a sale of all or substantially all of
Subcontractor's assets, or transfer of a controlling interest in
Subcontractor to an unaffiliated third party or (iii) expiration or
termination of the PSA for any reason.
14.4. Notwithstanding the foregoing, upon termination of this Agreement for
any reason, Cisco reserves the right to determine whether to require
Subcontractor to complete any SOWs previously executed by Cisco and
Subcontractor. If completion is required by Cisco, Subcontractor shall
perform the relevant SOW(s) in conformance with their respective terms
and conditions, and this Agreement, including this termination section,
will continue to apply to that performance.
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
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<PAGE>
14.5. Subcontractor shall, if requested by Cisco, take all reasonable steps
to achieve an orderly transition upon termination and shall, if
requested by Cisco, provide reasonable training for Cisco or third
party personnel and other support and assistance to ensure continuity
in the performance of the obligations set forth in the PSA. If the
efforts required are more than nominal transfers of residual materials
and information, Cisco will pay Subcontractor a reasonable fee for such
training and other services as may be mutually agreed by the parties;
provided, however that Subcontractor shall not refuse to provide such
training and other services prior to agreement by the parties with
respect to such fees.
14.6. Subcontractor and Cisco shall continue performing its obligations under
this Agreement while any dispute with Cisco is being resolved unless
and until this Agreement and all SOWs expire or terminate.
14.7. The rights and remedies of each party provided in this Section shall
not be exclusive and are in addition to other rights and remedies
provided at law, in equity or otherwise under this Agreement.
15. INDEMNIFICATION.
15.1. Subcontractor shall defend, indemnify and hold harmless Cisco, its
corporate affiliates and their officers, directors, employees and
agents and their successors and assigns, against and from any and all
claims, judgments, liabilities, losses, injuries, penalties, fines and
damages of every nature (including, without limitation, incidental
costs and expenses, reasonable attorney's fees, reasonable costs of
investigation and litigation, interest and penalties) to the extent
caused by the acts or failure to act of Subcontractor, its officers,
directors, employees, agents, consultants, subcontractors or vendors,
directly or indirectly arising out of or in conjunction with
Subcontractor's performance of this Agreement or related SOWs,
including without limitation failing to comply with any applicable law
or regulation or failing to obtain or maintain the validity of any
state, local or federal permit, license, or approval required for
performance of either party's obligations hereunder.
15.2. This indemnity protection includes any claims of infringement of
intellectual property rights and claims of use of confidential or
proprietary information of third parties, as provided in Section 5
hereof. In such cases, as for other indemnifiable actions,
Subcontractor will pay the costs of defense and settlement and any
costs and damages finally awarded by a court, arbitrator, mediator, or
the other decision making authority of competent jurisdiction against
Cisco. If such a claim is made or appears likely to be made,
Subcontractor may procure the right for Cisco to continue using the
allegedly infringing item, may modify the item or may replace it. If
use of the alleged infringing item by Cisco or a Customer is enjoined,
and Subcontractor determines that none of these alternatives is
reasonably available, Subcontractor will take back the infringing item
and refund its depreciated value, and replace the item or re-perform
the affected work with non-infringing items. The rights and remedies of
Cisco provided in this Section shall not be Cisco's exclusive remedy
and are in addition to all ocher rights and remedies of Cisco provided
at law, in equity or otherwise.
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<PAGE>
Subcontractor shall not settle any claims under this Section 15 without
Cisco's prior written consent. Cisco shall reasonably cooperate with
Subcontractor, at Subcontractor's expense, in the defense of any claims
under this Section 15.
16. CONSEQUENTIAL DAMAGES WAIVER
EXCEPT FOR LIABILITY ARISING OUT OF OR IN CONNECTION WITH
SUBCONTRACTOR'S BREACH OF SECTION 3 (CONFIDENTIALITY), SECTION 6
(OWNERSHIP AND LICENSE) ) OR SECTION 7 (SOFTWARE LICENSE) OR SECTION
8.10 (EXPORT LAW CONTROL) OR ANY OTHER BREACH OF CISCO'S PROPRIETARY
RIGHTS UNDER THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY OR ITS
SUPPLIERS BE LIABLE TO THE Old PARTY FOR ANY PUNITIVE, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS OR LOST DATA, OR ANY
OTHER INDIRECT DAMAGES AS A RESULT OF A BREACH OF THIS AGREEMENT EVEN
IF SUCH PARTY OR ITS SUPPLIERS HAVE BEEN INFORMED OF THE POSSIBILITY
THEREOF. Payments based on the indemnification obligations of
Subcontractor shall be considered direct damages and are not subject to
the foregoing waiver of consequential damages without regard to the
nature of the third party claim giving rise to the indemnification
obligation.
17. INSURANCE.
17.1. Subcontractor shall at all times during the term of this Agreement and
at its own expense provide and maintain, and shall require each
subcontractor (regardless of tier) to provide and maintain, in effect
those insurance policies and minimum limits of coverage as designated
below or such additional policies or higher amount as required (and
subject to any additional terms) as are required by the PSA, and any
other insurance required by an SOW or by law in any state where
Subcontractor or its subcontractor(s) (regardless of tier) provides
Services under this Agreement, in insurance companies with an A.M.
Best's Insurance Rating of A:VIII or better or otherwise acceptable to
Cisco, and will comply with all those requirements as stated herein. In
no way do these minimum requirements limit the liability assumed
elsewhere in this Agreement.
17.1.1. Workers' Compensation and Employers Liability Insurance.
Workers' Compensation insurance shall be provided as required
by any applicable law or regulation and, in accordance with
the provisions of the laws of the nation, state, territory or
province having jurisdiction over Subcontractor's employees.
Employers Liability insurance shall be provided in amounts not
less than [****]. If there is an exposure to injury of
Subcontractor's employees under the US Longshoremen's and
Harbor Workers' Compensation Act, the Jones Act or under laws,
regulations or statutes applicable to maritime employees,
coverage shall be included for such injuries or claims.
17.1.2. General Liability Insurance. Subcontractor shall carry a
policy of Commercial General Liability or Public Liability
insurance covering all operations by or on behalf of
Subcontractor arising out of or connected with
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
15
<PAGE>
this Agreement providing insurance for bodily injury liability
and property damage liability for the limits of liability
indicated below and including but not limited to coverage for:
o premises and operations
o products-completed operations
o contractual liability (including advertising and
personal injury) insuring the obligations assumed by
Subcontractor in this Agreement
o broad form property damage (including completed
operations) personal injury liability (with deletion
of the exclusion for liability assumed
o under contract)
o independent contractor's protective liability
The limits of liability shall not be less than:
[****] each occurrence combined single limit (for bodily
injury and property damage)
[****] general aggregate
17.1.3. AUTOMOBILE LIABILITY INSURANCE. Subcontractor shall carry
Business Automobile Liability insurance, including bodily
injury and property damage for all vehicles used in the
performance of Subcontractor's SOWs under this Agreement,
including but not limited to all owned, hired and non-owned
vehicles. The limits of liability shall be [****] combined
single limit for each accident or whatever is required by
statute, whichever is greater.
17.1.4. ERRORS AND OMISSIONS LIABILITY INSURANCE (PROFESSIONAL
LIABILITY). Subcontractor shall provide evidence of insurance
for design and professional liability evidencing coverage with
a limit of not less than [****] per claim and [****] in the
aggregate.
17.1.5. UMBRELLA LIABILITY AND/OR EXCESS LIABILITY INSURANCE.
Subcontractor shall carry Umbrella Liability and/or Excess
Liability insurance for not less than the following limits in
excess of the limits provided by the Subcontractor's
Employer's Liability, Commercial General Liability, and
Automobile Liability insurance policies. The Umbrella/Excess
policy shall not contain an exclusion for contractual
liability.
[****] each occurrence (combined single limit for bodily
injury and property damage)
[****] general aggregate
17.1.6. Subcontractor shall continue to maintain liability insurance
for the products-completed operations hazard and for the
errors and omissions hazard for three years following
completion of and acceptance of the Services and
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
16
<PAGE>
Subcontractor Work Product by Cisco. Subcontractor shall
furnish Certificates of Insurance annually to Cisco at the
beginning of each of these subsequent three years as evidence
of this required insurance.
17.1.7. Cisco, its officers, directors, employees and agents shall be
named as Additional Insureds for General Liability and
Excess/Umbrella liability policies above. The policy(s) shall
be endorsed to stipulate that Subcontractor's insurance shall
be primary insurance and that any other insurance maintained
by Cisco shall be excess only and non-contributing.
17.1.8. Certificates of Insurance shall be furnished by Subcontractor
to Cisco before work on any Services or Subcontractor Work
Product are commenced hereunder by Subcontractor and thirty
(30) days prior to policy renewal. The Certificates of
Insurance shall provide that there will be no cancellation or
non-renewal of coverage without thirty (30) days prior written
notice to Cisco. Copies of the endorsements required hereunder
shall be furnished with the certificates. If reasonably
requested by Cisco, a certified copy of the actual policy(s)
with appropriate endorsement(s) shall be provided to Cisco.
17.1.9. If Subcontractor does not comply with the insurance
requirements of this Section, Cisco may, at its option,
provide insurance coverage to protect Cisco and Subcontractor
and charge Subcontractor for the cost of that insurance. The
required insurance shall be subject to the approval of Cisco,
but any acceptance of insurance certificates by Cisco shall
not limit or relieve Subcontractor of the duties and
responsibilities assumed by it under this Agreement.
17.1.10. Except where prohibited by law, Subcontractor does hereby and
its insurers and its subcontractor(s), consultants, suppliers,
and agents (regardless of tier) and their respective insurers
do hereby, waive all rights of recovery or subrogation against
Cisco, its affiliates and their respective officers,
directors, employee, agents, and insurers. Subcontractor shall
cause its subcontractor(s), consultants, suppliers and agents
(regardless of tier) and their respective insurers to
acknowledge and agree to such waiver and shall provide Cisco
with a copy of such waiver.
17.1.11. Subcontractor shall obtain insurance or shall reimburse Cisco
or Customer, as appropriate, for loss or damage to any
Cisco-owned or Customer-owned property in the care, custody,
or control of Subcontractor, for all losses including, but not
limited to theft, loss, misappropriation or destruction caused
by Subcontractor, its employees, agents, members or
consultants whether intentional or through negligence.
17.1.12. In the event Subcontractor utilizes the services of
subcontractors of any type to perform the Services
contemplated hereunder, Subcontractor shall require from or
provide for all subcontractors the same minimum insurance
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<PAGE>
requirements detailed above. Cisco reserves the right to
request copies of subcontractor certificates and/or certified
copies of insurance policies from Subcontractor when deemed
necessary.
18. INJUNCTIVE RELIEF.
The parties agree unauthorized use of Confidential Information,
Subcontractor Work Product, or any information contained therein could
irreparably diminish the value to Cisco of its trade secrets or
proprietary information such that Cisco will have no adequate remedy in
damages. Therefore, if Subcontractor breaches any of its
confidentiality obligations hereunder, Cisco shall be entitled to
equitable relief to protect its interests therein, including but not
limited to injunctive relief, as well as monetary damages.
19. GENERAL.
19.1. NOTICES. All notices intended for the parties shall be effective if
sent to their respective addresses set forth in the preamble to this
Agreement; if to Cisco, Attention: [****]; if to Subcontractor,
Attention: [****]. Notices under this Agreement will be sufficient
only if personally delivered, delivered by a major commercial rapid
delivery courier service with next business day delivery and tracking
capabilities and costs prepaid, or mailed by prepaid certified or
registered mail, return receipt requested, to a party at its address
first set forth in this Agreement. If not received sooner, notices by
mail shall be deemed received three (3) days after deposit in the
U.S. mails.
19.2. AUDIT. Subcontractor shall maintain accurate records of all amounts
billable to and payments made by Cisco hereunder in accordance with
recognized accounting practices and the requirements of the PSA. Cisco
shall have the right to audit any and all records of Subcontractor
relating to this Agreement and any SOW hereunder, including all
documents related to Subcontractor's compliance with Sections 2.5, 2.9,
4.2 and employee timecards upon reasonable notice, during business
hours and with minimal disruption to Subcontractor's business.
Subcontractor agrees that such records will be available for audit by
Cisco or its agents during nonnal business hours upon reasonable
notice. Customer shall have the right to audit the records and
operations of Subcontractor in accordance with the applicable
provisions of the PSA; provided that Subcontractor is furnished with
the applicable portions of the PSA prior to entry into an SOW.
19.3. CHOICE OF LAW. The validity, interpretation, and performance of this
Agreement shall be controlled by and construed under the laws of the
[****], United States of America, as if performed wholly within the
state and without giving effect to the principles of conflicts of
laws. The parties specifically disclaim the UN Convention on Contracts
for the International Sale of Goods.
19.4. NO WAIVER. No waiver of rights under this Agreement or any SOW
hereunder by either party shall constitute a subsequent waiver of this
or any other right under this Agreement or any SOW.
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended.
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<PAGE>
19.5. ASSIGNMENT. Neither this Agreement nor any rights or obligations under
this Agreement (nor any SOW hereunder), other than monies due or to
become due, shall be assigned or otherwise transferred by Subcontractor
(by operation of law or otherwise) without the prior written consent of
Cisco. Cisco shall have the right to assign all or part of this
Agreement without Subcontractor's approval. This Agreement and any SOW
shall bind and inure to the benefit of the successors and permitted
assigns of the parties.
19.6. ILLEGALITY. In the event that any of the terms of this Agreement or any
SOW hereunder or the performance of any obligation by either party
thereunder becomes or is declared to be illegal by any court of
competent jurisdiction or other governmental body, such term(s) shall
be null and void and shall be deemed deleted from this Agreement or the
SOW. All remaining terms of this Agreement or the SOW shall remain in
full force and effect. Notwithstanding the foregoing, if this paragraph
becomes applicable and, as a result, the value of this Agreement or any
SOW is substantially impaired for either party, then the affected party
may terminate this Agreement or the SOW by written notice to the other.
19.7. ATTORNEYS' FEES. In any suit or proceeding between the parties redating
to this Agreement or any SOW hereunder, the prevailing party will have
the right to recover from the other its costs and reasonable fees and
expenses of attorneys, accountants, and other professionals incurred in
connection with the suit or proceeding, including costs, fees and
expenses upon appeal, separately from and in addition to any other
amount included in any judgment in its favor issued by a court or other
tribunal or decision maker of competent jurisdiction. This provision is
intended to be severable from the other provisions of this Agreement,
and shall survive and not be merged into any such judgment.
19.8. NO AGENCY. Neither party has the right or authority to, and shall not,
assume or create any obligation of any nature whatsoever on behalf of
the other party or bind the other party in any respect whatsoever.
19.9. SURVIVAL. Sections 3, 4, 5, 6, 14, 15, 16, 17.1.6, 17.1.10, 17.2, 18
and 19 shall survive termination or expiration of this Agreement.
19.10. EXPORT LAW CONTROL
19.10.1. Subcontractor hereby acknowledges that the Services,
Subcontractor Work Product, Results, Cisco products and
technology or direct products thereof (hereafter referred to
as "Products and Technology"), supplied by Cisco or used or
created by Subcontractor under this Agreement are subject to
export controls under the laws and regulations of the United
States (U.S.). Subcontractor shall comply with such laws and
regulations and agrees not to export, re-export or transfer
Products and Technology without first obtaining all required
U.S. government authorizations or licenses. Cisco and
Subcontractor each agree to provide the other such information
and assistance as may reasonably be required by the other in
connection with securing such authorizations or licenses, and
to take timely action to obtain all required support
documents.
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<PAGE>
19.10.2. Subcontractor hereby certifies that none of the Products and
Technology supplied by Cisco or used or created by
Subcontractor under this Agreement will be exported,
re-exported, or otherwise transferred by Subcontractor:
(i) to a U.S. embargoed or highly restricted destination,
(15 United States Code of Federal Regulations ("CFR")
Part 746)
(ii) for use by or for any military end-user, or in any
military end-use located in or operating under the
authority of any country identified in Country Group
D1 under 15 CFR, Supplement No. 1 to Part 740, (15
CFR Part 740)
(iii) to, or made available by Subcontractor for use by or
for, any entity that is engaged in the design,
development, production, stockpile or use of nuclear,
biological or chemical weapons or missiles, (15 CFR
Part 744)
(iv) to parties on any of the U.S. Government's lists of
denied persons, (15 CFR Part 764)
without first obtaining all required U.S. Government authorizations or
licenses.
Subcontractor's obligation under this Section 19 shall survive the
expiration or termination of this Agreement. Subcontractor agrees to
maintain a record of exports, re-exports, and transfers of the Products
and Technology for five years and to forward within that time period
any required records to Cisco or, at Cisco's request, the U.S.
Government. Subcontractor agrees to permit audits by Cisco or the U.S.
Government as required under the regulations to ensure compliance with
this Agreement.
19.11. MISREPRESENTATION WARRANTY. Subcontractor hereby agrees to indemnify
Cisco for the cost of satisfying any warranties made by Subcontractor
to Customer in performance of this Agreement or any SOW hereunder, and
for any representation or misrepresentation regarding Cisco's
reputation or Cisco's products.
19.12. FORCE MAJEURE. Neither party shall be liable for any delay or failure
in performance due to acts of God, earthquake, flood, riots, fire,
epidemics, war or terrorism (a "Force Majeure Event"). Each party shall
immediately notify the other party of the occurrence of Force Majeure
Event affecting such party and shall use all reasonable efforts to !
recommence performance as soon as possible. The obligations and rights
of the excused party shall be extended on a day-to-day basis for the
time period equal to the period of the excusable delay.
19.13. ENTIRE AGREEMENT. This Agreement, together with the terms of the PSA
with which Subcontractor must comply pursuant to this Agreement and all
SOWs expressly incorporated herein, is the complete agreement between
the parties hereto concerning the subject matter of this Agreement and
replaces any prior oral or written communications between the parties,
and expressly supersedes that Professional Services Subcontract
Agreement between the parties dated November 24, 1998 and such
agreement shall be terminated as of the date hereof and be of no
further force or effect. There are no
20
<PAGE>
conditions, understandings, agreements, representations, or warranties,
expressed or implied, which are not specified herein. This Agreement
may only be modified by a written document executed by the parties
hereto.
19.14. NO THIRD PARTY BENEFICIARIES. Except as expressly set forth herein,
nothing expressed or referred to in this Agreement shall be construed
to give any person or entity other than the parties to this Agreement
any legal or equitable right, remedy, or claim under or with respect to
this Agreement or any provision of this Agreement. This Agreement and
all of its provisions and conditions are for the sole and exclusive
benefit of the parties to this Agreement.
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PREDICTIVE SYSTEMS, INC.
COMMON STOCK PURCHASE AGREEMENT
SEPTEMBER 22, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. PURCHASE AND SALE OF STOCK...............................................................................1
1.1. SALE AND ISSUANCE OF COMMON STOCK...............................................................1
1.2. CLOSING.........................................................................................1
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................1
2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION...................................................1
2.2. CAPITALIZATION AND VOTING RIGHTS................................................................1
2.3. SUBSIDIARIES....................................................................................2
2.4. AUTHORIZATION...................................................................................2
2.5. VALID ISSUANCE OF COMMON STOCK..................................................................3
2.6. GOVERNMENTAL CONSENTS...........................................................................3
2.7. OFFERING........................................................................................3
2.8. LITIGATION......................................................................................3
2.9. PATENTS AND TRADEMARKS..........................................................................3
2.10. COMPLIANCE WITH OTHER INSTRUMENTS...............................................................4
2.11. FINANCIAL STATEMENTS............................................................................4
2.12. CHANGES.........................................................................................5
2.13. TAX RETURNS.....................................................................................5
2.14. PERMITS.........................................................................................5
2.15. ENVIRONMENTAL AND SAFETY LAWS...................................................................5
2.16. DISCLOSURE......................................................................................5
2.17. TITLE TO PROPERTY AND ASSETS....................................................................5
2.18. EMPLOYEE BENEFIT PLANS..........................................................................5
2.19. LABOR AGREEMENTS AND ACTIONS....................................................................6
2.20. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS...............................................6
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
2.21. AGREEMENTS; ACTIONS; RELATED-PARTY TRANSACTIONS.................................................6
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS..........................................................6
3.1. AUTHORIZATION...................................................................................6
3.2. PURCHASE ENTIRELY FOR OWN ACCOUNT...............................................................6
3.3. DISCLOSURE OF INFORMATION.......................................................................6
3.4. INVESTMENT EXPERIENCE...........................................................................7
3.5. ACCREDITED INVESTOR.............................................................................7
3.6. RESTRICTED SECURITIES...........................................................................7
3.7. TAX ADVISORS....................................................................................7
4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING..........................................................7
4.1. REPRESENTATIONS AND WARRANTIES..................................................................7
4.2. PERFORMANCE.....................................................................................8
4.3. COMPLIANCE CERTIFICATE..........................................................................8
4.4. QUALIFICATIONS..................................................................................8
4.5. PROCEEDINGS AND DOCUMENTS.......................................................................8
4.6. OPINION OF COMPANY COUNSEL......................................................................8
4.7. STOCKHOLDERS AGREEMENT..........................................................................8
4.8. REGISTRATION RIGHTS AGREEMENT...................................................................8
4.9. WAIVER..........................................................................................8
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING.......................................................8
5.1. REPRESENTATIONS AND WARRANTIES..................................................................8
5.2. PAYMENT OF PURCHASE PRICE.......................................................................8
5.3. QUALIFICATIONS..................................................................................8
5.4. STOCKHOLDER AGREEMENT...........................................................................9
5.5. REGISTRATION RIGHTS AGREEMENT...................................................................9
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
5.6. WAIVER..........................................................................................9
6. MISCELLANEOUS............................................................................................9
6.1. SURVIVAL........................................................................................9
6.2. SUCCESSORS AND ASSIGNS..........................................................................9
6.3. GOVERNING LAW...................................................................................9
6.4. TITLES AND SUBTITLES............................................................................9
6.5. NOTICES.........................................................................................9
6.6. FINDER'S FEE...................................................................................10
6.7. AMENDMENTS AND WAIVERS.........................................................................10
6.8. SEVERABILITY...................................................................................10
6.9. AGGREGATION OF STOCK...........................................................................10
6.10. ENTIRE AGREEMENT...............................................................................10
6.11. COUNTERPARTS...................................................................................10
6.12. MOST FAVORED NATION............................................................................10
</TABLE>
SCHEDULE A Schedule of Investors
SCHEDULE B Schedule of Exceptions
EXHIBIT A Opinion of Counsel for the Company
EXHIBIT B Amendment No. 1 to the Stockholders Agreement
EXHIBIT C Amendment No. 1 to Registration Rights Agreement
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is
made on the 22st day of September, 1999, by and among Predictive Systems, Inc.,
a Delaware corporation (the "Company"), General Atlantic Partners 57, L.P., a
Delaware limited partnership ("GAP 57"), and GAP Coinvestment Partners II, L.P.,
a Delaware limited partnership ("GAP Coinvestment" and, together with GAP 57 ,
the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1. SALE AND ISSUANCE OF COMMON STOCK. Subject to the
terms and conditions of this Agreement, each of the Investors agrees to purchase
at the Closing and the Company agrees to sell and issue to each of the Investors
at the Closing, that number of shares of the Company's Common Stock set forth
opposite such Investor's name on Schedule A hereto for the purchase price set
forth thereon.
1.2. CLOSING. The purchase and sale of the Common Stock
shall take place at the offices of Brobeck, Phleger & Harrison LLP, 1633
Broadway, 47th Floor, New York, New York 10019 at 12:00 P.M., on September 22,
1999, or at such other time and place as the Company and the Investors mutually
agree upon orally or in writing (which time and place are designated as the
"Closing"). At the Closing, the Company shall deliver to each of the Investors a
certificate representing the shares of Common Stock that such Investor is
purchasing against payment of the purchase price therefor by check, wire
transfer, cancellation of indebtedness or any combination thereof. In the event
that payment by the Investors is made, in whole or in part, by cancellation of
indebtedness, then such Investor shall surrender to the Company for cancellation
at the Closing any evidence of such indebtedness or shall execute an instrument
of cancellation in form and substance acceptable to the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to each of the Investors that, except as set
forth on a Schedule of Exceptions (the "Schedule of Exceptions") furnished such
Investor and special counsel for such Investor prior to execution hereof and
attached hereto as Schedule B, which exceptions shall be deemed to be
representations and warranties as if made hereunder:
2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties. The Company has all requisite power and authority necessary to own
and operate its property, to carry on its business as now conducted and as
currently proposed to be conducted and to carry out the transactions
contemplated by this agreement.
2.2. CAPITALIZATION AND VOTING RIGHTS.
The authorized capital of the Company consists of:
<PAGE>
(a) PREFERRED STOCK. 6,512,316 shares of Preferred
Stock, par value $.001 (the "Preferred Stock"), all of which have been
designated Series A Convertible Preferred Stock (the "Preferred Stock") and all
of which are issued and outstanding. The rights, privileges and preferences of
the Preferred Stock are stated in the Company's Certificate of Incorporation.
(b) COMMON STOCK. 50,000,000 shares of common stock,
par value $.001 ("Common Stock"), of which 12,053,016 shares are issued and
outstanding.
(c) The outstanding shares of Preferred Stock and
Common Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) Except for (i) the conversion privileges of the
Preferred Stock, (ii) currently outstanding options to purchase 10,373,763
shares of Common Stock granted to employees pursuant to the Company's Stock
Incentive Plan (the "Option Plan"), and (iii) 750,000 shares available for
issuance under the Company's 1999 Employee Stock Purchase Plan, there are not
outstanding any options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock. In addition to the aforementioned options, the
Company has reserved an additional 2,626,237 shares of its Common Stock for
purchase upon exercise of options to be granted in the future under the Option
Plan. The Company is not a party or subject to any agreement or understanding,
and, to the Company's knowledge, there is no agreement or understanding between
any persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of the Company.
2.3. SUBSIDIARIES. The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.4. AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement , Amendment No. 1 to the
Stockholders Agreement, dated as of the date hereof, by and among the Company,
General Atlantic Partners 54, L.P. ("GAP 54"), GAP 57, GAP Coinvestment and the
stockholders signatory thereto (the "Stockholders Agreement") and Amendment No.
1 to the Registration Rights Agreement, dated as of the date hereof, by and
among the Company, GAP 54, GAP 57, GAP Coinvestment and the stockholders
signatory thereto (the "Registration Rights Agreement"), the performance of all
obligations of the Company hereunder and thereunder, and the authorization, sale
and issuance of the Common Stock being sold hereunder has been taken or will be
taken prior to the Closing. This Agreement, the Stockholders Agreement and the
Registration Rights Agreement constitute valid and legally binding obligations
of the Company, enforceable in accordance with their respective terms, except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting enforcement of creditors' rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other
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equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Registration Rights Agreement may be limited by applicable
federal or state securities laws.
2.5. VALID ISSUANCE OF COMMON STOCK. The Common Stock that
is being purchased by the Investor hereunder, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable and will
be free of restrictions on transfer, other than restrictions on transfer under
this Agreement and the Stockholders Agreement and under applicable state and
federal securities laws.
2.6. GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for such filings required pursuant to
applicable federal and state securities laws and blue sky laws, which filings
will be effected within the required statutory period.
2.7. OFFERING. Subject in part to the truth and accuracy of
each of the Investor's representations set forth in Section 3 of this Agreement,
the offer, sale and issuance of the Common Stock as contemplated by this
Agreement are exempt from the registration requirements of the Securities Act of
1933, as amended (the "Act"), and the qualification or registration requirements
of the Law or other applicable blue sky laws. Neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemptions.
2.8. LITIGATION. There is no action, suit, proceeding or
investigation pending, or to the Company's knowledge, currently threatened
against the Company or its officers or directors that questions the validity of
this Agreement or the right of the Company to enter into such agreement or to
consummate the transactions contemplated hereby, or that might result, either
individually or in the aggregate, in any material adverse changes in the
business, assets or condition of the Company, financially or otherwise, or any
change in the current equity ownership of the Company. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or that the
Company intends to initiate.
2.9. PATENTS AND TRADEMARKS. To its knowledge (but without
having conducted any special investigation or patent search), except for the
disclosures made in the Company's Registration Statement on Form S-1 (File No.
333-84045), as amended (the "Registration Statement"), the Company possesses all
patents, patent rights, trademarks, trademark rights, service marks, service
mark rights, trade names, trade name rights and copyrights (collectively, the
"Intellectual Property") necessary for its business without any conflict with or
infringement of the valid rights of others and the lack of which could
materially and adversely affect the operations or condition, financial or
otherwise, of the Company, and the Company has not received any notice of
infringement upon or conflict with the asserted rights of others. The Company
has a valuable body of trade secrets, including know-how, concepts, computer
programs and other technical data (the "Proprietary Information") for the
development,
3
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manufacture and sale of its products. To its knowledge, the Company has the
right to use the Proprietary Information free and clear of any rights, liens,
encumbrances or claims of others, except that the possibility exists that other
persons may have independently developed trade secrets or technical information
similar or identical to those of the Company. The Company is not aware of any
such independent development nor of any misappropriation of its Proprietary
Information. The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of the Company or that would conflict with the
Company's business. The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company, except for inventions
that have been assigned or licensed to the Company as of the date hereof.
2.10. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not
in violation in any material respect of any provision of its Certificate of
Incorporation, as amended to date, or Bylaws, as amended to date, nor in any
material respect of any instrument, judgment, order, writ, decree or contract,
statute, rule or regulation to which the Company is subject and a violation of
which would have a material adverse effect on the condition, financial or
otherwise, or operations of the Company. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
will not result in any such violation, or be in conflict with or constitute,
with or without the passage of time and giving of notice, either a default under
any such provision or an event that results in the creation of any lien, charge
or encumbrance upon any assets of the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
2.11. FINANCIAL STATEMENTS. The Company has delivered to
the Investors its audited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at December 31, 1998 and for the fiscal year then
ended, and its unaudited financial statements (balance sheet and statement of
operations) as, at and for the six-month period ended June 30, 1999 (the
"Financial Statements"). The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and with each other, except that
unaudited Financial Statements may not contain all footnotes required by
generally accepted accounting principles. The Financial Statements fairly
present the financial condition and operating results of the Company as of the
dates, and for the periods, indicated therein, subject in the case of unaudited
Financial Statements to normal year-end audit adjustments. Except as set forth
in the Financial Statements, the Company has no material liabilities, contingent
or otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to June 30, 1999 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company. Except
as disclosed in the Financial Statements, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation. The
Company maintains and will
4
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continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.12. CHANGES. To the Company's knowledge, since June 30,
1999 there has not been any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not been, in the aggregate, materially adverse.
2.13. TAX RETURNS. The Company has timely filed all tax
returns (federal, state and local) required to be filed by it and all taxes,
assessments and other government changes imposed upon the Company, or upon any
of the assets, income or franchises of the Company, have been timely paid or, if
not yet payable, are adequately accrued on the Company's books and records.
There are no actual or proposed tax deficiencies, assessments or adjustments
with respect to the Company or any assets or operations of the Company. The
Company has not been advised that any of its returns have been or are being
audited.
2.14. PERMITS. The Company has all franchises, permits,
licenses and any similar authority necessary for the conduct of its business,
the lack of which could materially and adversely affect the business, properties
or financial condition of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.15. ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, the
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16. DISCLOSURE. The Company has fully provided each
Investor with all the information that such Investor has requested for deciding
whether to purchase the Common Stock. Neither this Agreement (including all the
exhibits and schedules hereto) nor any other statements or certificates made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading in light of the circumstances under which they were
made.
2.17. TITLE TO PROPERTY AND ASSETS. The property and assets
the Company owns are owned by the Company free and clear of all mortgages,
liens, loans and encumbrances, except (i) as reflected in the Financial
Statements, (ii) for statutory liens for the payment of current taxes that are
not yet delinquent, and (iii) for liens, encumbrances and security interests
that arise in the ordinary course of business and minor defects in title, none
of which, individually or in the aggregate, materially impair the Company's
ownership or use of such property or assets. With respect to the property and
assets it leases, the Company is in material compliance with such leases and, to
its knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances, subject to clauses (i)-(iii).
2.18. EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security Act
of 1974.
5
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2.19. LABOR AGREEMENTS AND ACTIONS. The Company is not
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the Company's knowledge,
threatened, that could have a material adverse effect on the assets, properties,
financial condition, operating results or business of the Company, nor is the
Company aware of any labor organization activity involving its employees. The
Company is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any of the
foregoing.
2.20. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS.
Each employee, officer and consultant of the Company has executed a Proprietary
Information and Inventions Agreement in the form provided to special counsel to
the Investor. The Company, after reasonable investigation, is not aware that any
of its employees, officers or consultants are in violation thereof, and the
Company will use commercially reasonable efforts to prevent any such violation.
2.21. AGREEMENTS; ACTIONS; RELATED-PARTY TRANSACTIONS. The
Registration Statement accurately discloses all agreements, understandings or
proposed transactions required to be disclosed pursuant to Regulation S-K. There
are no agreements, understandings or proposed transactions, judgements, orders,
writs or decrees to which the Company is a party or by which it is bound that
would be required to be filed as part of the Registration Statement that are not
filed as part of the Registration Statement.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each
Investor hereby represents, warrants and covenants severally and not jointly
that:
3.1. AUTHORIZATION. The Investor has full power and
authority to enter into this Agreement, the Stockholders Agreement and the
Registration Rights Agreement, and each such agreement constitutes its valid and
legally binding obligation, enforceable in accordance with its terms.
3.2. PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is
made with such Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Common Stock to be received by such Investor
(collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in or otherwise
distributing the same. By executing this Agreement, the Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
3.3. DISCLOSURE OF INFORMATION. Such Investor believes it
has received all the information it considers necessary or appropriate for
deciding whether to purchase the
6
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Common Stock. Such Investor further represents that it has had an opportunity to
ask questions and receive answers from the Company regarding the terms and
conditions of the offering of the Common Stock and the business, properties,
prospects and financial condition of the Company. The foregoing, however, does
not limit or modify the representations and warranties of the Company in Section
2 of this Agreement or the right of the Investor to rely thereon.
3.4. INVESTMENT EXPERIENCE. Such Investor is an investor in
securities of similarly situated companies and acknowledges that it is able to
fend for itself, can bear the economic risk of its investment, and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Common Stock. Such
Investor also represents it has not been organized for the purpose of acquiring
the Common Stock.
3.5. ACCREDITED INVESTOR. Such Investor is an "accredited
investor" within the meaning of Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect.
3.6. RESTRICTED SECURITIES. Such Investor understands that
the Securities it is purchasing are characterized as "restricted securities"
under the federal securities laws inasmuch as they are being acquired from the
Company in a transaction not involving a public offering and that under such
laws and applicable regulations such Securities may be resold without
registration under the Act only in certain limited circumstances. In the absence
of an effective registration statement covering the Securities or an available
exemption from registration under the Act, the Common Stock must be held
indefinitely. In this connection, such Investor represents that it is familiar
with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act, including without limitation the
Rule 144 condition that current information about the Company be available to
the public. Such information is not now available.
3.7. TAX ADVISORS. Such Investor has reviewed with such
Investor's own tax advisors the federal, state and local tax consequences of
this investment, where applicable, and the transactions contemplated by this
Agreement. Such Investor is relying solely on such advisors and not on any
statements or representations of the Company or any of its agents and
understands that each such Investor (and not the Company) shall be responsible
for such Investor's own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The
obligations of the Investor under subsection 1.1 of this Agreement are subject
to the fulfillment on or before the Closing of each of the following conditions,
unless waived in writing by the Investor:
4.1. REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Company contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the date of such Closing.
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4.2. PERFORMANCE. The Company shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3. COMPLIANCE CERTIFICATE. The Chief Executive Officer or
President of the Company shall deliver to Investor at the Closing a certificate
stating that the conditions specified in Sections 5.1 and 5.2 have been
fulfilled.
4.4. QUALIFICATIONS. All authorizations, approvals or
permits, if any, of any governmental authority or regulatory body of the United
States or of any state that are required in connection with the lawful issuance
and sale of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
4.5. PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
4.6. OPINION OF COMPANY COUNSEL. The Investor shall have
received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an
opinion, dated as of the Closing, in the form attached hereto as Exhibit A.
4.7. STOCKHOLDERS AGREEMENT. The Company, the Investors and
the other signatories thereto shall have entered into the Amendment No. 1 to
Stockholders Agreement in the form attached as Exhibit B.
4.8. REGISTRATION RIGHTS AGREEMENT. The Company, the
Investors and the other signatories thereto shall have entered into the
Amendment No. 1 to Registration Rights Agreement in the form attached as EXHIBIT
C.
4.9. WAIVER. The Company shall have received a waiver of
its obligations under Section 4 of the Stockholders Agreement.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by that
Investor:
5.1. REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Investor contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2. PAYMENT OF PURCHASE PRICE. The Investor shall have
delivered the purchase price specified in Section 1.
5.3. QUALIFICATIONS. All authorizations, approvals or
permits, if any, of any governmental authority or regulatory body of the United
States or of any state that are
8
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required in connection with the lawful issuance and sale of the Securities
pursuant to this Agreement shall be duly obtained and effective as of the
Closing.
5.4. STOCKHOLDERS AGREEMENT. The Company, the Investors and
the other signatories thereto shall have entered into the Amendment No. 1 to
Stockholders Agreement in the form attached as EXHIBIT B.
5.5. REGISTRATION RIGHTS AGREEMENT. The Company, the
Investors and the other signatories thereto shall have entered into the
Amendment No. 1 to Registration Rights Agreement in the form attached as
EXHIBIT C.
5.6. WAIVER. The Company shall have received a waiver of
its obligations under Section 4 of the Stockholders Agreement.
6. MISCELLANEOUS.
6.1. SURVIVAL. The warranties, representations and
covenants of the Company and Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing for a period of one year after the Closing and shall in no way be
affected by any investigation of the subject matter thereof made by or on behalf
of the Investor or the Company.
6.2. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3. GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York as applied to agreements among
State of New York residents entered into and to be performed entirely within the
State of New York.
6.4. TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5. NOTICES. All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day; (iii) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (iv) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the address as set forth on the signature page hereof or at such other
address as such party may designate by ten days advance written notice to the
other parties hereto.
9
<PAGE>
6.6. FINDER'S FEE. Each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with this
transaction. Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which Investor or any of its officers, partners, employees or
representatives is responsible. The Company agrees to indemnify and hold
harmless Investor from any liability for any commission or compensation in the
nature of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Company or any of its officers,
employees or representatives is responsible.
6.7. AMENDMENTS AND WAIVERS. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the public that is issued
hereunder. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any securities purchased under this
Agreement at the time outstanding (including securities into which such
securities are convertible), each future holder of all such securities and the
Company.
6.8. SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
6.9. AGGREGATION OF STOCK. All shares of the Common Stock
issued hereunder or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
6.10. ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein.
6.11. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.12. MOST FAVORED NATION. For a period of three (3) months
following the date of this Agreement, the Company shall not enter into any
agreement or commitment to sell, transfer or otherwise convey any security of
the Company in connection with a financing transaction, other than the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the initial firm commitment underwritten offering of its
securities to the general public, at a valuation of less than $12.00 per share.
10
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
PREDICTIVE SYSTEMS, INC.
By: /s/ ROBERT BELAU
--------------------------------------------------
Robert Belau, President
Address: 145 Hudson Street
New York, New York 10013
GENERAL ATLANTIC PARTNERS 57, L.P.
By: General Atlantic Partners, LLC, its general partner
By: /s/ David C. Hodgson
---------------------------------------------------
Name: David C. Hodgson
Title: A Managing Member
Address: c/o General Atlantic Service Corporation
3 Pickwick Plaza
Greenwich, Connecticut 06830
GAP COINVESTMENT PARTNERS II, L.P.
By: /s/ David C. Hodgson
---------------------------------------------------
Name: David C. Hodgson
Title: A General Partner
Address: c/o General Atlantic Service Corporation
3 Pickwick Plaza
Greenwich, Connecticut 06830
11
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
<S> <C> <C>
Name of Investor Number of Shares Total Purchase Price
- ---------------- ---------------- --------------------
General Atlantic Partners 57, L.P. 94,867 $1,138,404
GAP Coinvestment Partners II, L.P. 18,133 $217,596
</TABLE>
<PAGE>
Execution Copy
AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT
This Amendment No. 1 to the Registration Rights Agreement
("Amendment No. 1"), dated as of March 5, 1999, among Predictive Systems, Inc.,
a Delaware corporation (the "Company"), General Atlantic Partners 54, L.P., a
Delaware limited partnership ("GAP 54"), GAP Coinvestment Partners II, L.P., a
Delaware limited partnership ("GAP Coinvestment"), Ronald Pettengill
("Pettengill"), Robert Belau ("Belau"), Meyer, Duffy & Associates, L.P. ("MDA")
and the persons signatory thereto (the "Agreement"), is made on September 22,
1999, among the Company, GAP 54, GAP Coinvestment, General Atlantic Partners 57,
L.P., a Delaware limited partnership ("GAP 57"), Pettengill, Belau and MDA.
Capitalized terms used herein but not otherwise defined herein shall have the
respective meanings ascribed thereto in the Agreement.
WHEREAS, pursuant to the Common Stock Purchase Agreement,
dated the date hereof (the "Common Stock Purchase Agreement") among the Company,
GAP 57 and GAP Coinvestment, the Company intends to issue and sell to GAP 57 and
GAP Coinvestment 94,867 and 18,133 shares, respectively, of common stock, par
value $.001 per share, of the Company (the "Common Stock"); and
WHEREAS, in order to induce each of GAP 57 and GAP
Coinvestment to purchase its shares of Common Stock under the Common Stock
Purchase Agreement and to enter into Amendment No. 1, dated as of the date
hereof, to the Stockholders Agreement, among the Company and the other parties
thereto, the parties hereto desire to amend the Agreement to grant registration
rights with respect to such shares of Common Stock.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The following definition is hereby added to Section 1 of
the Agreement in the appropriate alphabetical order:
"GAP 57" means General Atlantic Partners 57, L.P., a
Delaware limited partnership.
2. Each of the definitions of "Affiliate", "General Atlantic
Stockholders", "Preferred Stock" and "Registrable Securities" in Section 1 of
the Agreement is hereby amended and restated in its entirety to read as follows:
"AFFILIATE" shall mean any Person who is an
"affiliate" as defined in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act. The following shall be deemed to be
Affiliates of GAP LP: (a) GAP LLC, the members of GAP LLC and the
limited partners of GAP LP or GAP 57; (b) any
<PAGE>
2
Affiliate of GAP LLC, the members of GAP LLC and the limited partners
of GAP LP or GAP 57; and (c) any limited liability company or
partnership a majority of whose members or partners, as the case may
be, are members of GAP LLC. In addition, GAP LP, GAP 57 and GAP
Coinvestment shall be deemed to be Affiliates of one another. Also, the
following shall be deemed to be Affiliates of MDA: (a) MD Strategic,
L.P.; (b) any general or limited partner of MDA; (c) any Affiliate of
the general or limited partners of MDA and (d) any limited liability
company or partnership a majority of whose members or partners, as the
case may be, are partners of MDA.
"GAP LLC" means General Atlantic Partners, LLC, a
Delaware limited liability company and the general partner of GAP LP,
GAP 57 and any successors to such entities.
"GENERAL ATLANTIC STOCKHOLDERS" means GAP LP, GAP 57,
GAP Coinvestment and any Permitted Transferee (as defined in the
Stockholders Agreement) of any of them to which Registrable Securities
are transferred in accordance with Section 2.2 of the Stockholders
Agreement.
3. ACKNOWLEDGMENT OF THE AGREEMENT. The Company and each of
the parties to this Amendment No. 1 acknowledges and agrees that the shares of
Common Stock purchased by GAP 57 and GAP Coinvestment pursuant to the Common
Stock Purchase Agreement are Registrable Securities under, and subject to the
terms and conditions set forth in, the Agreement.
4. RATIFICATION OF THE AGREEMENT. Except as otherwise
expressly provided in this Amendment No. 1, all of the terms and conditions of
the Agreement are hereby ratified and shall remain unchanged and continue in
full force and effect.
5. COUNTERPARTS. This Amendment No. 1 may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
6. GOVERNING LAW. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed and
delivered this Amendment No. 1 to the Registration Rights Agreement as of the
day and year first above written.
PREDICTIVE SYSTEMS, INC.
By:/s/ Robert Belau
---------------------------------
Name: Robert Belau
Title: President
GENERAL ATLANTIC PARTNERS 54, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC,
its General Partner
By: /s/ David C. Hodgson
---------------------------------
Name: David C. Hodgson
Title: A Managing Member
GENERAL ATLANTIC PARTNERS 57, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC,
its General Partner
By: /s/ David C. Hodgson
---------------------------------
Name: David C. Hodgson
Title: A Managing Member
GAP COINVESTMENT PARTNERS II, L.P.
By: /s/ David C. Hodgson
---------------------------------
Name: David C. Hodgson
Title: A General Partner
<PAGE>
MEYER, DUFFY & ASSOCIATES, L.P.
By:
its General Partner
By: /s/ Donald Duffy
---------------------------------
Name: Donald Duffy
Title: General Partner
/s/ Ronald Pettengill
------------------------------------
Ronald Pettengill
/s/ Robert Belau
------------------------------------
Robert Belau
<PAGE>
Exhibit 10.23
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), made and entered into this
21 day of September, 1999, by and between Predictive Systems, Inc., Delaware
corporation with principal offices located at 145 Hudson Street, New York, New
York (the "Company"), and Gerard Dorsey (the "Executive").
WITNESSETH
WHEREAS, the Company has a need for the Executive's personal services
in an executive capacity; and
WHEREAS, the Executive possesses the necessary strategic, financial,
planning, operational and managerial skills necessary to fulfill those needs;
and
WHEREAS, the Executive and the Company desire to enter into a formal
Employment Agreement to assure continuous harmonious performance of the affairs
of the Company.
NOW, THEREFORE, in consideration of the mutual promises, terms,
provisions, and conditions contained herein, the parties agree as follows:
1. POSITION.
The Company hereby agrees to continue to employ the Executive to serve
in the role of Chief Financial Officer of the Company, subject to the limitation
set forth herein. The Executive accepts such employment upon the terms and
conditions set forth herein, and further agrees to perform to the best of his
abilities the duties generally associated with his position, as well as such
other duties commensurate with his position as CFO as may be reasonably assigned
by the Company. The Executive shall, at all times during the Term, report
directly to the President or Chief Executive Officer. The Executive shall
perform his duties diligently and faithfully and shall devote his full business
time and attention to such duties.
2. TERM OF EMPLOYMENT AND RENEWAL.
The term of Executive's employment under the Agreement will commence on
the date of this Agreement (the "Effective Date"). Subject to the provisions of
Section 10 of this Agreement, the term of Executive's employment hereunder shall
be for an initial term of three (3) years from the Effective Date (the "Initial
Term"). The Initial Term of this Agreement shall be automatically extended for
successive one (1) year periods (each a "Renewal Period") unless the Company or
the Executive gives written notice to the other at least thirty (30) days prior
to the expiration of the Initial Term, or a Renewal Period, of such party's
election not to extend this Agreement. References herein to the "Term" shall
mean the Initial Term and any Renewal Periods, each as may be terminated
pursuant to Section 10 below. The last day of the Term is the "Expiration Date."
<PAGE>
3. COMPENSATION AND BENEFITS.
(a) SALARY. Commencing on the Effective Date, the Company agrees to pay
the Executive a base salary at an annual rate of two hundred ten thousand
dollars ($210,000), payable in such installments as is the policy of the Company
(the "Salary"), but no less frequently than monthly. Thereafter, the Executive's
Salary shall be reviewed on an annual basis and increased at the discretion of
the Company.
(b) BONUS. The Executive shall be eligible to receive annual bonuses,
up to a maximum of seventy five thousand dollars ($75,000). The bonus shall be
paid on a quarterly basis. The Executive must be employed by the Company on the
bonus payment date in order to be eligible to receive such bonus payment.
(c) BENEFITS. The Executive shall be entitled to participate in all
employee benefit plans which the Company provides or may establish from time to
time for the benefit of its employees, including, without limitation, group
life, medical, surgical, dental and other health insurance, short and long-term
disability, deferred compensation, profit-sharing and similar plans. The
Executive shall also be entitled to paid vacation in the amount of 20 days per
year. During the Term, the Executive shall be reimbursed six hundred fifty
dollars ($650) per month for the purchase or lease and upkeep of an automobile.
(d) STOCK OPTIONS. As of the Effective Date, the Company shall grant
the Executive, pursuant to the Company's 1999 Stock Option/Stock Issuance Plan,
options to purchase one hundred seventy five thousand (175,000) shares of the
Company's common stock (the "Stock Option"), at a purchase price of eleven
dollars and five cents ($11.05) per share, vesting, as long as the Executive is
employed by the Company, annually over a four (4) year period commencing on the
date of the option grant at a rate of twenty five percent per year unless
vesting is accelerated pursuant to Section 10 below. The Stock Option shall be
governed by the terms and conditions set forth in the Company's standard Notice
Of Grant of Stock Options, and the exhibits thereto, which shall be provided to
the Executive upon the date of the stock option grant provided for herein.
(e) EXPENSES. The Company shall pay or reimburse the Executive for all
reasonable out-of-pocket expenses actually incurred by him during the Term in
performing services hereunder, provided that the Executive properly accounts for
such expenses in accordance with the Company's policies.
4. CONFIDENTIALITY, DISCLOSURE OF INFORMATION.
(a) The Executive recognizes and acknowledges that the Executive has
had and will have access to Confidential Information (as defined below) relating
to the business or interests of the Company or of persons with whom the Company
may have business relationships. Except as permitted herein, the Executive will
not during the Term, or at any time thereafter, use, disclose
<PAGE>
or permit to be known by any other person or entity, any Confidential
Information of the Company (except as required by applicable law or in
connection with the performance of the Executive's duties and responsibilities
hereunder). The term "Confidential Information" means information relating to
the Company's business affairs, proprietary technology, trade secrets, patented
processes, research and development data, know-how, market studies and
forecasts, competitive analyses, pricing policies, employee lists, employment
agreements (other than this Agreement), personnel policies, the substance of
agreements with customers, suppliers and others, marketing arrangements,
customer lists, commercial arrangements, or any other information relating to
the Company's business that is not generally known to the public or to actual or
potential competitors of the Company (other than through a breach of this
Agreement). This obligation shall continue until such Confidential Information
becomes publicly available, other than pursuant to a breach of this Section 4 by
the Executive, regardless of whether the Executive continues to be employed by
the Company.
(b) It is further agreed and understood by and between the parties to
this Agreement that all "Company Materials," which include, but are not limited
to, computers, computer software, computer disks, tapes, printouts, source, HTML
and other code, flowcharts, schematics, designs, graphics, drawings,
photographs, charts, graphs, notebooks, customer lists, sound recordings, other
tangible or intangible manifestation of content, and all other documents whether
printed, typewritten, handwritten, electronic, or stored on computer disks,
tapes, hard drives, or any other tangible medium, as well as samples,
prototypes, models, products and the like, shall be the exclusive property of
the Company and, upon termination of Executive's employment with the Company,
and/or upon the request of the Company, all Company Materials, including copies
thereof, as well as all other Company property then in the Executive's
possession or control, shall be returned to and left with the Company.
5. INVENTIONS DISCOVERED BY EXECUTIVE.
The Executive shall promptly disclose to the Company any invention,
improvement, discovery, process, formula, or method or other intellectual
property, whether or not patentable or copyrightable (collectively,
"Inventions"), conceived or first reduced to practice by the Executive, either
alone or jointly with others, while performing services hereunder (or, if based
on any Confidential Information, within one (1) year after the Term), (a) which
pertain to any line of business activity of the Company, whether then conducted
or then being actively planned by the Company, with which the Executive was or
is involved, (b) which is developed using time, material or facilities of the
Company, whether or not during working hours or on the Company premises, or (c)
which directly relates to any of the Executive's work during the Term, whether
or not during normal working hours. The Executive hereby assigns to the Company
all of the Executive's right, title and interest in and to any such Inventions.
During and after the Term, the Executive shall execute any documents necessary
to perfect the assignment of such Inventions to the Company and to enable the
Company to apply for, obtain and enforce patents, trademarks and copyrights in
any and all countries on such Inventions, including, without limitation, the
execution of any instruments and the giving of evidence and testimony, without
further compensation beyond the Executive's agreed compensation during the
course of the Executive's employment. Without limiting the foregoing, the
Executive further acknowledges
<PAGE>
that all original works of authorship by the Executive, whether created alone or
jointly with others, related to the Executive's employment with the Company and
which are protectable by copyright, are "works made for hire" within the meaning
of the United States Copyright Act, 17 U.S.C. ss. 101, as amended, and the
copyright of which shall be owned solely, completely and exclusively by the
Company. If any Invention is considered to be work not included in the
categories of work covered by the United States Copyright Act, 17 U.S.C. ss.
101, as amended, such work is hereby assigned or transferred completely and
exclusively to the Company. The Executive hereby irrevocably designates counsel
to the Company as the Executive's agent and attorney-in-fact to do all lawful
acts necessary to apply for and obtain patents and copyrights and to enforce the
Company's rights under this Section. This Section 5 shall survive the
termination of this Agreement. Any assignment of copyright hereunder includes
all rights of paternity, integrity, disclosure and withdrawal and any other
rights that may be known as or referred to as "moral rights" (collectively
"Moral Rights"). To the extent such Moral Rights cannot be assigned under
applicable law and to the extent the following is allowed by the laws in the
various countries where Moral Rights exist, the Executive hereby waives such
Moral Rights and consents to any action of the Company that would violate such
Moral Rights in the absence of such consent. The Executive agrees to confirm any
such waivers and consents from time to time as requested by the Company.
6. NON-COMPETITION AND NON-SOLICITATION.
The Executive acknowledges that the Company has invested substantial
time, money and resources in the development and retention of its Inventions,
Confidential Information (including trade secrets), customers, accounts and
business partners, and further acknowledges that during the course of the
Executive's employment with the Company the Executive has had and will have
access to the Company's Inventions and Confidential Information (including trade
secrets), and will be introduced to existing and prospective customers, accounts
and business partners of the Company. The Executive acknowledges and agrees that
any and all "goodwill" associated with any existing or prospective customer,
account or business partner belongs exclusively to the Company, including, but
not limited to, any goodwill created as a result of direct or indirect contacts
or relationships between the Executive and any existing or prospective
customers, accounts or business partners. Additionally, the parties acknowledge
and agree that Executive possesses skills that are special, unique or
extraordinary and that the value of the Company depends upon his use of such
skills on its behalf.
In recognition of this, the Executive covenants and agrees that:
(a) During the Term, and for a period of one (1) year thereafter, the
Executive may not, without the prior written consent of the Board, (whether as
an employee, agent, servant, owner, partner, consultant, independent contractor,
representative, stockholder or in any other capacity whatsoever): (i) conduct
any business with any customer of the Company on behalf of any entity or person
other than the Company (including the Executive), or (ii) perform any work
competitive in any way to the actual or planned business of the Company on
behalf of any entity or person other than the Company (including the Executive).
<PAGE>
(b) During the Term, and for a period of one (1) year thereafter, the
Executive may not entice, solicit or encourage any Company employee to leave the
employ of the Company or any independent contractor to sever its engagement with
the Company, absent prior written consent to do so from the Board.
(c) During the Term, and for a period of one (1) year thereafter, the
Executive may not, directly or indirectly, entice, solicit or encourage any
customer or prospective customer of the Company to cease doing business with the
Company, reduce its relationship with the Company or refrain from establishing
or expanding a relationship with the Company.
7. NON-DISPARAGEMENT.
The Executive hereby agrees that during the Term, and at all times
thereafter, the Executive will not make any statement that is disparaging about
the Company, any of its officers, directors, or shareholders, including, but not
limited to, any statement that disparages the products, services, finances,
financial condition, capabilities or other aspect of the business of the
Company. The Executive further agrees that during the same period the Executive
will not engage in any conduct that is intended to inflict harm upon the
professional or personal reputation of the Company or any of its officers,
directors, shareholders or employees.
8. PROVISIONS NECESSARY AND REASONABLE.
(a) The Executive agrees that (i) the provisions of Sections 4, 5, 6
and 7 of this Agreement are necessary and reasonable to protect the Company's
Confidential Information, Inventions, and goodwill; (ii) the specific temporal,
geographic and substantive provisions set forth in Section 6 of this Agreement
are reasonable and necessary to protect the Company's business interests; and
(iii) in the event of any breach of any of the covenants set forth herein, the
Company would suffer substantial irreparable harm and would not have an adequate
remedy at law for such breach. In recognition of the foregoing, the Executive
agrees that in the event of a breach or threatened breach of any of these
covenants, in addition to such other remedies as the Company may have at law,
without posting any bond or security, the Company shall be entitled to seek and
obtain equitable relief, in the form of specific performance, and/or temporary,
preliminary or permanent injunctive relief, or any other equitable remedy which
then may be available. The seeking of such injunction or order shall not affect
the Company's right to seek and obtain damages or other equitable relief on
account of any such actual or threatened breach.
(b) If any of the covenants contained in Sections 4, 5, 6 and 7 hereof,
or any part thereof, are hereafter construed to be invalid or unenforceable, the
same shall not affect the remainder of the covenant or covenants, which shall be
given full effect without regard to the invalid portions.
(c) If any of the covenants contained in Sections 4, 5, 6 and 7 hereof,
or any part thereof, are held to be unenforceable by a court of competent
jurisdiction because of the temporal or geographic scope of such provision or
the area covered thereby, the parties agree that the court making such
determination shall have the power to reduce the duration and/or geographic area
of
<PAGE>
such provision and, in its reduced form, such provision shall be enforceable.
9. REPRESENTATIONS REGARDING PRIOR WORK AND LEGAL OBLIGATIONS.
(a) The Executive represents that the Executive has no agreement or
other legal obligation with any prior employer, or any other person or entity,
that restricts the Executive's ability to accept employment with, or to perform
any function for, the Company.
(b) The Executive has been advised by the Company that at no time
should the Executive divulge to or use for the benefit of the Company any trade
secret or confidential or proprietary information of any previous employer. The
Executive expressly acknowledges that the Executive has not divulged or used any
such information for the benefit of the Company.
(c) The Executive acknowledges that the Executive has not and will not
misappropriate any Invention that the Executive played any part in creating
while working for any former employer.
(d) The Executive acknowledges that the Company is basing important
business decisions on these representations, and affirms that all of the
statements included herein are true.
10. TERMINATION AND SEVERANCE.
Notwithstanding the provisions of Section 2 of this Agreement, the
Executive's employment hereunder may terminate under the following
circumstances:
(a) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
this Agreement for Cause at any time, upon written notice to the Executive
setting forth in reasonable detail the nature of such Cause. For purposes of
this Agreement, Cause is defined as (i) the Executive's willful and material
breach of the terms of this Agreement; (ii) the Executive's commission of any
felony or any crime involving moral turpitude; or (iii) gross negligence or
willful misconduct by the Executive in connection with the performance of his
duties hereunder, or his willful refusal to perform such duties. Upon the
termination for Cause of Executive's employment, the Company shall have no
further obligation or liability to the Executive other than for salary earned
under this Agreement to the date of termination, and any accrued but unused
vacation.
(b) TERMINATION BY THE COMPANY WITHOUT CAUSE. The Executive's
employment hereunder may be terminated without Cause by the Company upon written
notice to the Executive, provided, however, that if the Company terminates the
Executive's employment without Cause, the Company shall continue to pay the
Executive the Salary and shall provide health coverage, under the same
conditions as exist at the time of termination, for a twelve (12) month period
commencing on the effective date of the termination.
<PAGE>
(c) TERMINATION BY THE EXECUTIVE. The Executive may terminate his
employment hereunder upon one (1) month's written notice to the Company. In the
event of termination by the Executive pursuant to this subsection 10(c), the
Company may elect to pay the Executive during the notice period (or for any
remaining portion of that period) the Salary and benefits at the rate of
compensation the Executive was receiving immediately before such notice of
termination was tendered in lieu of actual notice. If the Executive terminates
his employment within thirty (30) days after the occurrence of a "Change or
Control," as defined below, any portion of the Stock Option that is unvested
shall vest immediately and in full and the Company shall continue to pay the
Executive the Salary and shall provide health coverage, under the same
conditions as exist at the time of termination, for a twelve (12) month period
commencing on the effective date of the termination. As used herein, a "Change
of Control" shall be deemed to occur if: (i) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which the stock of the
Company would be converted into cash, securities or other property, other than a
merger or consolidation of the Company in which the holders of the Company's
stock immediately prior to the merger or consolidation hold more than fifty
percent (50%) of the stock or other forms of equity of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, the assets of the Company, or (ii) the Board approves any
plan or proposal for liquidation or dissolution of the Company.
(d) DEATH. In the event of the Executive's death during the Term of
this Agreement, the Executive's employment hereunder shall immediately and
automatically terminate, and the Company shall have no further obligation or
duty to the Executive or his estate or beneficiaries other than for the Salary
earned under this Agreement to the date of termination and any payments or
benefits due under Company policies or benefit plans.
(e) DISABILITY. The Company may terminate the Executive's employment
hereunder, upon written notice to the Executive, in the event that the Executive
becomes disabled during the Term through any condition of either a physical or
psychological nature and, as a result, is, with or without reasonable
accommodation, unable to perform the essential functions of the services
contemplated hereunder for (a) a period of ninety (90) consecutive days, or (b)
for shorter periods aggregating one hundred twenty (120) days during any twelve
(12) month period during the Term. Any such termination shall become effective
upon mailing or hand delivery of notice that the Company has elected its right
to terminate under this subsection 10(e), and the Company shall have no further
obligation or duty to the Executive other than for salary earned under this
Agreement to the date of termination and any payments or benefits due under
Company policies or benefit plans.
(f) EFFECT OF NON-RENEWAL. In the event that the Company gives notice
of its election not to extend the Term of the Agreement for a Renewal Period
pursuant to Section 2 above, the Company shall continue to pay the Executive
full compensation as defined in Section 3 of this Agreement from the date the
Executive receives such notice through the Expiration Date. The Executive shall
not be entitled to any additional compensation other than any payments or
<PAGE>
benefits due under Company policies or benefit plans.
11. CHOICE OF LAW.
The Executive acknowledges that a substantial portion of the Company's
business is based out of and directed from the State of New York. The Executive
also acknowledges that during the course of the Executive's employment with the
Company the Executive will have substantial contacts with New York.
The validity, interpretation and performance of this Agreement shall be
governed by, and construed in accordance with, the internal law of New York,
without giving effect to conflict of law principles. Both parties agree that the
exclusive venue for any action, demand, claim or counterclaim relating to the
terms and provisions of Sections 4, 5, 6 and 7 of this Agreement, or to their
breach, shall be in the state or federal courts located in the State and City of
New York and that such courts shall have personal jurisdiction over the parties
to this Agreement.
12. MISCELLANEOUS.
(a) ASSIGNMENT. The Executive acknowledges and agrees that the rights
and obligations of the Company under this Agreement may be assigned by the
Company to any successors in interest. The Executive further acknowledges and
agrees that this Agreement is personal to the Executive and that the Executive
may not assign any rights or obligations hereunder.
(b) WITHHOLDING. All salary and bonus payments required to be made by
the Company to the Executive under this Agreement shall be subject to
withholding taxes, social security and other payroll deductions in accordance
with the Company's policies applicable to employees of the Company at the
Executive's level.
(c) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties and supersedes any prior communications, agreements and
understandings, written or oral, with respect to the terms and conditions of the
Executive's employment.
(d) AMENDMENTS. Any attempted modification of this Agreement will not
be effective unless signed by an officer of the Company and the Executive.
(e) WAIVER OF BREACH. The Executive understands that a breach of any
provision of this Agreement may only be waived by an officer of the Company. The
waiver by the Company of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any subsequent breach.
(f) SEVERABILITY. If any provision of this Agreement should, for any
reason, be held invalid or unenforceable in any respect by a court of competent
jurisdiction, then the remainder of this Agreement, and the application of such
provision in circumstances other than those as to which it is so declared
invalid or unenforceable, shall not be affected thereby, and each such
<PAGE>
provision of this Agreement shall be valid and enforceable to the fullest extent
permitted by law.
(g) NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be in writing and shall be effective when
delivered by private messenger, private overnight mail service, or facsimile as
follows (or to such other address as either party shall designate by notice in
writing to the other in accordance herewith):
If to the Company:
145 Hudson Street
New York, NY 10013
With a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, New York 10019
Attn: Alexander D. Lynch, Esq.
If to Executive:
[EXECUTIVE ADDRESS]
(h) SURVIVAL. The Executive and the Company agree that certain
provisions of this Agreement shall survive the expiration or termination of this
Agreement and the termination of the Executive's employment with the Company.
Such provisions shall be limited to those within this Agreement which, by their
express and implied terms, obligate either party to perform beyond the
termination of the Executive's employment or termination of this Agreement.
(i) DISCLOSURE AND CONFIDENTIALITY. The Executive agrees to provide,
and agrees that the Company similarly may provide in its discretion, a copy of
the covenants contained in this Agreement to any business or enterprise which
the Company may directly or indirectly own, manage, operate, finance, join,
control or in which the Company participates in the ownership, management,
operation, financing or control, or with which the Company may be connected or
may become connected as an officer, director, executive, partner, principal,
agent, representative, consultant or otherwise. The Executive also agrees that
the Company may disclose a copy of this Agreement if legally required to do so,
and in connection with a partnering transaction or financing, assuming that an
appropriate confidentiality agreement is in place. The Executive further agrees
not to disclose the existence or terms of this Agreement to any person other
than the Executive's immediate family and legal, financial or accounting
professional.
(j) ARBITRATION OF DISPUTES. Any controversy or claim arising out of
this Agreement
<PAGE>
or any aspect of the Executive's relationship with the Company including the
cessation thereof (other than disputes with respect to alleged violations of the
covenants contained in Sections 4, 5, 6 or 7 hereof, and the Company's pursuit
of the remedies described in Section 8 hereof in connection therewith) shall be
resolved by arbitration in accordance with the then existing Employment Dispute
Resolution Rules of the American Arbitration Association, in New York, New York,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof. The parties shall split equally the costs of arbitration,
except that each party shall pay its own attorneys' fees. The parties agree that
the award of the arbitrator shall be final and binding.
(k) RIGHTS OF OTHER INDIVIDUALS. This Agreement confers rights solely
on the Executive and the Company. This Agreement is not a benefit plan and
confers no rights on any individual or entity other than the undersigned.
(l) HEADINGS. The parties acknowledge that the headings in this
Agreement are for convenience of reference only and shall not control or affect
the meaning or construction of this Agreement.
(m) ADVICE OF COUNSEL. The Executive and the Company hereby acknowledge
that each party has had adequate opportunity to review this Agreement, to obtain
the advice of counsel with respect to this Agreement, and to reflect upon and
consider the terms and conditions of this Agreement. The parties further
acknowledge that each party fully understands the terms of this Agreement and
has voluntarily executed this Agreement. The Company shall pay the legal fees
and costs incurred by the Executive in connection with the negotiation and
preparation of this Agreement, upon the presentation of invoices in appropriate
form.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as of the day and year set forth below.
EXECUTIVE PREDICTIVE SYSTEMS, INC.
/s/ Gerard Dorsey By: /s/ Ronald G. Pettengill
- -------------------------------- --------------------------------
GERARD DORSEY RONALD G. PETTENGILL
Title: Chaiman & CEO
-----------------------------
Dated: September 24, 1999 Dated: September 21, 1999
------------------------- -----------------------------
<PAGE>
Exhibit 10.24
AMENDMENT NO. 1 TO COMMON STOCK PURCHASE AGREEMENT
This Amendment No. 1 to Common Stock Purchase Agreement
("Amendment"), dated as of September 16, 1999, by and between Predictive
Systems, Inc. (the "Company"), a Delaware corporation, and Cisco Systems, Inc.
(the "Investor"), a California corporation, (the "Agreement") is made on
September 27, 1999, by and between the Company and the Investor. Capitalized
terms used herein but not otherwise defined herein shall have the respective
meanings ascribed thereto in the Agreement.
WHEREAS, the Investor and the Company wish to amend the terms
of the Agreement as hereinafter set forth.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Schedule A of the Agreement is hereby amended and restated
in its entirety to read as follows:
<TABLE>
<CAPTION>
NAME OF INVESTOR NUMBER OF SHARES TOTAL PURCHASE PRICE
- ---------------- ---------------- --------------------
<S> <C> <C>
Cisco Systems Inc. 1,242,000 $14,904,000
</TABLE>
2. The Investor agrees to tender to the Company for
cancellation the certificate issued to the Investor at the Closing (the
"Certificate").
3. Upon receipt of the Certificate, the Company agrees to
cancel the Certificate, and issue and deliver to the Investor a new certificate
representing 1,242,000 shares of Common Stock, together with a check in the
amount of $1,632,624.
4. MISCELLANEOUS.
4.1. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Amendment shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties hereto.
Nothing in this Amendment, express or implied, is intended to confer upon any
party, other than the parties hereto or their respective successors and assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Amendment, except as expressly provided in this Amendment.
4.2. GOVERNING LAW. This Amendment shall be governed by and
construed under the laws of the State of New York as applied to agreements among
State of New York residents entered into and to be performed entirely within the
State of New York.
4.3. TITLES AND SUBTITLES. The titles and subtitles used in
this Amendment are used for convenience only and are not to be considered in
construing or interpreting this Amendment.
<PAGE>
4.4. SEVERABILITY. If one or more provisions of this
Amendment are held to be unenforceable under applicable law, such provision
shall be excluded from this Amendment and the balance of the Amendment shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
4.5. COUNTERPARTS. This Amendment may be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
PREDICTIVE SYSTEMS, INC.
By: /s/ ROBERT BELAU
------------------------------------------
Robert Belau, President
Address: 145 HUDSON STREET
---------------------------------------------
NEW YORK, NY 10013
---------------------------------------------
CISCO SYSTEMS INC.
By: /s/ LARRY CARTER
------------------------------------------
Larry Carter SVP & CFO
Address: 170 WEST TASMAN DRIVE
---------------------------------------------
SAN JOSE, CA 95134-1706
---------------------------------------------
3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 12, 1999 for Predictive Systems, Inc. included in or made a
part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
September 30, 1999
