<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1999
REGISTRATION NO. 333-84045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
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
Incorporation or Organization) Classification Code Number) 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. / /
------------------------------
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 OCTOBER 22, 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.
------------------------
ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
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 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
offering................................... 22,542,280 shares
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
AS
ACTUAL PRO FORMA 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, 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
PRO AS
ACTUAL 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.
18
<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."
19
<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>
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE 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 for
an aggregate purchase price of approximately $4.3 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 purchase and resulted in intangible
assets of approximately $4.3 million representing the excess purchase price over
the fair value of the net assets acquired. The intangible assets will be
amortized over a period of 5 years.
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.
22
<PAGE>
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 our current cash and cash equivalents, together with cash
generated from operations, will be sufficient to meet our foreseeable 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 October
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
29
<PAGE>
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.
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
30
<PAGE>
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. 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
Agreement Workshop assists in the 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
Implementation and systems 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
Analysis Technology Development operating a network.
</TABLE>
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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.
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>
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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.
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>
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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.
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
Services of a security 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;
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- 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
- 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 California
UUNet
</TABLE>
REPRESENTATIVE CLIENT CASE STUDIES
The following case studies are representative of some of the network
consulting services that we have provided to our clients.
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
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the availability requirements of its customers, BT Syncordia turned to us to
help it design and build a world-class network operations center.
We used our Business First methodology and extensive technical experience to
design and build a network operations center for BT Syncordia. We integrated
sophisticated 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.
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.
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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 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
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scope of protection of intellectual property in Internet-related industries is
uncertain and still evolving. 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 February 2000. 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 material 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
Gary N. Papilsky.......................... 28 Vice President and General Counsel
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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<PAGE>
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.
GARY N. PAPILSKY has been Vice President and General Counsel since October
1999. Prior to joining us, Mr. Papilsky was an attorney with Brobeck, Phleger &
Harrison LLP, a law firm specializing in emerging growth technology companies,
from 1998 to 1999. From 1996 to 1998, Mr. Papilsky was an attorney with the law
firm of Sonnenschein Nath & Rosenthal.
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.
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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.
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
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<PAGE>
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.
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, General Manager
North America
Carl D. Humes............................... 112,500 190,000 270,000 3,000(2)
Vice President, Global Operations
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 $13.00
per share.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE PER FOR OPTION TERM
OPTIONS EMPLOYEES SHARE EXPIRATION -----------------------------
NAME GRANTED IN 1998 ($) 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>
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED FISCAL YEAR-END AT FISCAL YEAR-END
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 E. 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 L.
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, Wright and Papilsky options to
purchase 200,000; 200,000; 175,000; 100,000; 60,000; 130,000; 70,000; 80,000 and
50,000, 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
(16 persons) (15)................................. 17,015,906 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>
649,000 After the date of this prospectus
1,050 After 90 days from the date of this prospectus
18,140,030 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
64
<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
18,099,030 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 Securities, Inc., 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 Securities, Inc.................................
---------
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
and the financial statements of Network Resource Consultants and Company B.V. as
of and for the year 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.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PREDICTIVE SYSTEMS, INC. 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-3
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-4
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-5
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-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
<TABLE>
<CAPTION>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
- ---------------------------------------------
<S> <C>
Report of Independent Public Accountants.................... F-18
Balance Sheets as of December 31, 1998 and June 30, 1999
(Unaudited)............................................... F-19
Statements of Income for the Year Ended December 31, 1998
and the Six Months Ended June 30, 1998 and 1999
(Unaudited)............................................... F-20
Statements of Stockholders' (Deficit) Equity for the Year
Ended December 31, 1998 and the Six Months Ended June 30,
1999 (Unaudited).......................................... F-21
Statements of Cash Flows for the Year Ended December 31,
1998 and the Six Months Ended June 30, 1998 and 1999
(Unaudited)............................................... F-22
Notes to Financial Statements............................... F-23
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------
<S> <C>
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Six Months Ended June 30, 1999.......... F-28
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1998............ F-29
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 1999.............................................. F-30
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Predictive
Systems, Inc. (a Delaware corporation) (the "Company") and subsidiary as of
December 31, 1997 and 1998, and the related consolidated 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. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
F-2
<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
---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
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, 20,000,000
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, 50,000,000 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-3
<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-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN TREASURY DEFERRED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL STOCK COMPENSATION
--------- --------- ---------- --------- ----------- ----------- -------------
<S> <C> <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 -- (304,625)
Noncash compensation expense.... -- -- -- -- -- -- 9,875
--------- ------- ---------- ------- ----------- ----------- ---------
Balance at June 30, 1999
(unaudited)..................... 6,512,316 $ 6,512 12,465,750 $12,466 $20,307,511 $(8,398,753) $(294,750)
========= ======= ========== ======= =========== =========== =========
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS LOSS EQUITY
---------- -------------- -------------
<S> <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.................. -- -- --
Noncash compensation expense.... -- -- 9,875
---------- --------- -----------
Balance at June 30, 1999
(unaudited)..................... $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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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 AVERAGE OPTIONS
OUTSTANDING AT REMAINING EXERCISABLE 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-14
<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-15
<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-16
<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)
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V. ("NRCC") in a transaction accounted for as a purchase. 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 Company
acquired net assets of approximately $88,000 and recorded intangible assets of
approximately $4.3 million which represent the excess of the purchase price over
the fair value of the assets acquired.
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-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network Resource Consultants and Company B.V.:
We have audited the accompanying balance sheet of Network Resource
Consultants and Company B.V. (the "Company") as of December 31, 1998, and the
related statements of income, stockholders' (deficit) equity and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Network Resource Consultants
and Company B.V. as of December 31, 1998, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
August 13, 1999
F-18
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash.................................................... $ 32,432 $163,768
Accounts receivable--net of allowance for doubtful
accounts of $10,000 at December 31, 1998 and June 30,
1999 (unaudited)...................................... 465,347 322,149
Prepaid expenses and other current assets............... 175,021 83,771
--------- --------
Total current assets.................................. 672,800 569,688
FURNITURE, FIXTURES AND EQUIPMENT:
Leasehold improvements.................................. 12,390 103,450
Computer equipment...................................... 95,278 84,555
Office furniture........................................ 95,511 126,104
--------- --------
Total................................................. 203,179 314,109
Less--Accumulated depreciation.......................... (59,481) (95,651)
--------- --------
Total furniture, fixtures and equipment, net.......... 143,698 218,458
--------- --------
Total assets.......................................... $ 816,498 $788,146
========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 117,253 $ 81,297
Accrued expenses and other current liabilities.......... 252,615 204,504
Due to shareholder...................................... 322,712 269,150
Deferred revenue........................................ 45,158 17,497
Income taxes payable.................................... 88,350 127,979
--------- --------
Total current liabilities............................. 826,088 700,427
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock $6.086 par value; authorized 20,000 shares;
issued and outstanding 5,714 shares at December 31,
1998 and June 30, 1999 (unaudited).................... 34,775 34,775
Additional paid-in capital.............................. 86,760 86,760
Accumulated deficit..................................... (168,622) (75,870)
Accumulated other comprehensive income.................. 37,497 42,054
--------- --------
Total stockholders' (deficit) equity.................. (9,590) 87,719
--------- --------
Total liabilities and stockholders' (deficit)
equity.............................................. $ 816,498 $788,146
========= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-19
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED -------------------
DECEMBER 31, 1998 1998 1999
----------------- -------- --------
<S> <C> <C> <C>
(UNAUDITED)
REVENUES:
Professional services................................. $1,657,427 $856,406 $963,065
Hardware and software sales........................... 231,498 33,593 36,460
---------- -------- --------
Total revenues.................................... 1,888,925 889,999 999,525
COST OF REVENUES:
Professional services................................. 903,204 468,012 532,868
Hardware and software purchases....................... 148,783 16,108 19,551
---------- -------- --------
Total cost of revenues............................ 1,051,987 484,120 552,419
---------- -------- --------
Gross profit...................................... 836,938 405,879 447,106
SALES AND MARKETING..................................... 26,261 11,141 1,438
GENERAL AND ADMINISTRATIVE.............................. 504,791 247,343 280,157
DEPRECIATION AND AMORTIZATION........................... 44,067 14,435 18,264
---------- -------- --------
Operating profit.................................. 261,819 132,960 147,247
OTHER INCOME (EXPENSE):
Interest income....................................... 8,431 -- 2,355
Other income (expense)................................ 5,070 (146) (132)
Interest expense...................................... (24,760) (9,881) (8,936)
---------- -------- --------
Income before income tax provision................ 250,560 122,933 140,534
INCOME TAX PROVISION.................................... 84,183 41,798 47,782
---------- -------- --------
Net income........................................ $ 166,377 $ 81,135 $ 92,752
========== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-20
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS'
-------------------- PAID-IN ACCUMULATED COMPREHENSIVE (DEFICIT)
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY
--------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998.. 4,000 $24,344 $ -- $(334,999) $ 53,236 $(257,419)
Common stock issued to
stockholder............. 1,714 10,431 86,760 -- -- 97,191
Net income................ -- -- -- 166,377 -- 166,377
Foreign currency
translation
adjustment.............. -- -- -- -- (15,739) (15,739)
---------
Total comprehensive
income.................. 150,638
--------- ------- ------- --------- -------- ---------
BALANCE, December 31,
1998.................... 5,714 34,775 86,760 (168,622) 37,497 (9,590)
Net income................ -- -- -- 92,752 -- 92,752
Foreign currency
translation
adjustment.............. -- -- -- -- 4,557 4,557
---------
Total comprehensive
income.................. 97,309
--------- ------- ------- --------- -------- ---------
BALANCE, June 30, 1999
(unaudited)............. 5,714 $34,775 $86,760 $ (75,870) $ 42,054 $ 87,719
========= ======= ======= ========= ======== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-21
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED -------------------------
DECEMBER 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 166,377 $ 81,135 $ 92,752
Adjustments to reconcile net income to net cash
provided by operating activities-...............
Depreciation and amortization................... 44,067 14,435 18,264
(Increase) decrease in-
Accounts receivable........................... (158,335) (184,494) 143,198
Prepaid expenses and other current assets..... (124,216) (10,671) 91,251
(Decrease) increase in-
Accounts payable.............................. (87,938) 55,292 (35,957)
Accrued expenses and other current
liabilities................................. 157,681 43,824 (48,111)
Deferred revenue.............................. 39,310 (5,848) (27,661)
Income taxes payable.......................... 88,350 16,419 39,629
--------- --------- ---------
Net cash provided by operating activities... 125,296 10,092 273,365
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments to stockholder......................... (115,840) (39,225) (53,563)
Purchase of furniture, fixtures and equipment..... (134,721) (19,474) (93,023)
--------- --------- ---------
Net cash used in investing activities....... (250,561) (58,699) (146,586)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES--
Proceeds from sale of common stock................ 97,191 97,191 --
--------- --------- ---------
Effects of exchange rates......................... (15,739) (59,838) 4,557
Net (decrease) increase in cash............. (43,813) (11,254) 131,336
CASH, beginning of period........................... 76,245 76,245 32,432
--------- --------- ---------
CASH, end of period................................. $ 32,432 $ 64,991 $ 163,768
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-22
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS-
Network Resource Consultants and Company B.V. (the "Company" or "NRCC"), is
based in Veenendaal, the Netherlands. The Company is engaged in rendering
services for the design, implementation and operation of network management
systems.
UNAUDITED INTERIM FINANCIAL STATEMENTS-
The accompanying balance sheet as of June 30, 1999 and statements of income,
stockholders' (deficit) 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, the
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 RECOGNITION-
Revenues are recognized as services are rendered. Amounts billed to clients
in excess of revenues recognized to date are classified as deferred revenues. In
addition, the Company acts as a reseller of certain hardware and software and
sales revenue is recognized when these products are shipped to the customer.
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are stated at cost, net of accumulated
depreciation and amortization. Furniture and equipment are depreciated on a
straight-line basis over estimated useful lives of three to ten years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the estimated useful life of the asset or the lease term.
ACCOUNTING FOR LONG-LIVED ASSETS-
The Company accounts for long-lived assets in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." 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 No. 121 require,
among other things, that an entity review its long-lived assets and certain
related intangibles for impairment whenever changes in circumstances
F-23
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
indicate that the carrying amount of an asset may not be fully recoverable.
Management does not believe that any such changes have taken place.
INCOME TAXES-
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
basis for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets or liabilities of a
change in tax rates is recognized in the period that the tax change occurs.
COMPREHENSIVE INCOME-
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income relate to foreign currency translation adjustments.
FOREIGN CURRENCY TRANSLATION-
All assets and liabilities of the Company are translated into U.S. dollars
at fiscal year-end exchange rates. Income and expense items are translated at
average exchange rates prevailing during the fiscal year. The resulting
translation adjustments are recorded as a component of stockholders' (deficit)
equity in the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS-
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments.
(2) RELATED PARTY TRANSACTIONS:
As of December 31, 1998 and June 30, 1999, the Company had $322,712 and
$269,150 (unaudited) outstanding to one of the Company's stockholders. The
interest rate on the loan was 6%. Subsequent to June 30, 1999, the loan was
settled in full.
F-24
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES:
The components of the Company's income tax provision are as follows-
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -------------------
1998 1998 1999
------------ -------- --------
<S> <C> <C> <C>
(UNAUDITED)
Income tax provision-
Current--International.................................... $84,183 $41,798 $47,782
Deferred--International................................... -- -- --
------- ------- -------
$84,183 $41,798 $47,782
======= ======= =======
</TABLE>
A reconciliation from the U.S. Federal statutory rate to the Company's
effective tax rate is as follows-
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ -------- --------
<S> <C> <C> <C>
(UNAUDITED)
U.S. Federal statutory tax rate............................. 34.0% 34.0% 34.0%
Netherlands tax rate adjustment............................. 1.0 1.0 1.0
Other....................................................... (1.4) (1.0) (1.0)
----- ------ ------
33.6% 34.0% 34.0%
===== ====== ======
</TABLE>
Deferred taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred taxes were not material as of December 31, 1998.
(4) STOCKHOLDERS' (DEFICIT) EQUITY:
In January 1998, the Company issued 1,714 shares of common stock at a price
of approximately $56.70 per share for total proceeds of approximately $97,191.
(5) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE COMMITMENTS-
The Company was committed under operating leases principally for office
space and equipment. Rent expense was $85,742 for the year ended December 31,
1998, and $39,311 and $46,883 for the six months ended June 30, 1998 and 1999
(unaudited), respectively.
F-25
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum payments under lease agreements are as follows-
<TABLE>
<S> <C>
Year ended December 31,
1999........................................................ $137,379
2000........................................................ 110,522
2001........................................................ 73,660
2002........................................................ 53,092
2003........................................................ 50,441
Thereafter.................................................. 8,408
</TABLE>
CONCENTRATIONS OF CREDIT RISK-
As of December 31, 1998 and June 30, 1999, the two largest customer
receivables represented 58% and 54% (unaudited), respectively, of total accounts
receivable.
(6) SUBSEQUENT EVENT:
Subsequent to year-end the Company was acquired by Predictive Systems, Inc.,
a network consulting company based in the United States.
F-26
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements for the six months ended June 30, 1999 and the fiscal year ended
December 31, 1998 have been derived from the application of pro forma
adjustments to the historical financial statements of Predictive Systems, Inc.
("Predictive") and Network Resource Consultants and Company B.V. ("NRCC"),
included elsewhere in this prospectus. The unaudited pro forma condensed
consolidated statement of operations information for the six months ended
June 30, 1999 and for the year ended December 31, 1998, gives effect to the
acquisition as if it had occurred on January 1, 1998. The unaudited pro forma
condensed consolidated balance sheet gives effect to the acquisition of NRCC as
if it had occurred on June 30, 1999.
The unaudited pro forma condensed consolidated financial statements do not
necessarily reflect what our actual financial results would have been had the
acquisition been completed on these dates, nor does it purport to be indicative
of future financial results.
The acquisition has been accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of the purchase price over the fair value of the net
assets acquired was approximately $4.3 million.
F-27
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ----------------------------
PREDICTIVE NRCC ADJUSTMENTS COMBINED
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Professional services..................... $21,278,287 $963,065 $ -- $22,241,352
Hardware and software sales............... 1,287,701 36,460 -- 1,324,161
----------- -------- ---------- -----------
Total revenues.......................... 22,565,988 999,525 -- 23,565,513
COST OF REVENUES:
Professional services..................... 10,245,945 532,868 -- 10,778,813
Hardware and software purchases........... 1,031,889 19,551 -- 1,051,440
----------- -------- ---------- -----------
Total cost of revenues.................. 11,277,834 552,419 -- 11,830,253
----------- -------- ---------- -----------
Gross profit............................ 11,288,154 447,106 -- 11,735,260
SALES AND MARKETING......................... 3,409,297 1,438 -- 3,410,735
GENERAL AND ADMINISTRATIVE.................. 7,376,425 280,157 -- 7,656,582
DEPRECIATION AND AMORTIZATION............... 312,135 18,264 426,354(1) 756,753
NONCASH COMPENSATION EXPENSE................ 9,875 -- 9,875
----------- -------- ---------- -----------
Operating profit (loss)................. 180,422 147,247 (426,354) (98,685)
OTHER INCOME (EXPENSE):
Interest income........................... 69,574 2,355 -- 71,929
Other income (expense).................... 36,882 (132) -- 36,750
Interest expense.......................... (109,078) (8,936) -- (118,014)
----------- -------- ---------- -----------
Income (loss) before income tax
provision............................. 177,800 140,534 (426,354) (108,020)
INCOME TAX PROVISION........................ 361,065 47,782 -- 408,847
----------- -------- ---------- -----------
Net (loss) income....................... $ (183,265) $ 92,752 $ (426,354) $ (516,867)
=========== ======== ========== ===========
NET LOSS PER SHARE--
BASIC AND DILUTED......................... $ (0.02) $ (0.05)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC
AND DILUTED............................... 8,970,694 1,062,814(2) 10,033,508
=========== ===========
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this statement.
F-28
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ -----------------------------
PREDICTIVE NRCC ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Professional services................... $23,857,780 $1,657,427 $ -- $25,515,207
Hardware and software sales............. 2,065,348 231,498 -- 2,296,846
----------- ---------- ---------- -----------
Total revenues.................. 25,923,128 1,888,925 -- 27,812,053
COST OF REVENUES:
Professional services................... 12,861,272 903,204 -- 13,764,476
Hardware and software purchases......... 1,698,356 148,783 -- 1,847,139
----------- ---------- ---------- -----------
Total cost of revenues.......... 14,559,628 1,051,987 -- 15,611,615
----------- ---------- ---------- -----------
Gross profit.................... 11,363,500 836,938 -- 12,200,438
SALES AND MARKETING....................... 3,433,751 26,261 -- 3,460,012
GENERAL AND ADMINISTRATIVE................ 8,184,486 504,791 -- 8,689,277
DEPRECIATION AND AMORTIZATION............. 567,761 44,067 852,707(1) 1,464,535
----------- ---------- ---------- -----------
Operating (loss) profit......... (822,498) 261,819 (852,707) (1,413,386)
OTHER INCOME (EXPENSE):
Interest income......................... 57,976 8,431 -- 66,407
Other income............................ 1,555 5,070 -- 6,625
Interest expense........................ (324,591) (24,760) -- (349,351)
----------- ---------- ---------- -----------
(Loss) income before income tax
(benefit) provision........... (1,087,558) 250,560 (852,707) (1,689,705)
INCOME TAX (BENEFIT) PROVISION............ (460,258) 84,183 -- (376,075)
----------- ---------- ---------- -----------
Net (loss) income............... $ (627,300) $ 166,377 $ (852,707) $(1,313,630)
=========== ========== ========== ===========
NET LOSS PER SHARE--
BASIC AND DILUTED....................... $ (0.11) $ (0.19)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING-
BASIC AND DILUTED....................... 6,015,433 1,062,814(2) 7,078,247
=========== ===========
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this statement.
F-29
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ----------------------------
PREDICTIVE NRCC ADJUSTMENTS COMBINED
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 359,911 $163,768 $ -- $ 523,679
Accounts receivable, net.................. 13,220,569 322,149 -- 13,542,718
Prepaid expenses and other current
assets.................................. 2,125,678 83,771 -- 2,209,449
----------- -------- ---------- -----------
Total current assets.................... 15,706,158 569,688 -- 16,275,846
FURNITURE, FIXTURES AND EQUIPMENT, NET...... 1,741,644 218,458 -- 1,960,102
INTANGIBLES................................. -- -- 4,263,537 (3) 4,263,537
OTHER ASSETS................................ 185,074 -- -- 185,074
----------- -------- ---------- -----------
Total assets............................ $17,632,876 $788,146 $4,263,537 $22,684,559
=========== ======== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..... $ 3,297,868 $285,801 $ 100,000 (4) $ 3,683,669
Deferred income tax liability............. 229,268 -- -- 229,268
Deferred revenue.......................... 25,073 17,497 -- 42,570
Due to shareholder........................ -- 269,150 -- 269,150
Income taxes payable...................... 201,511 127,979 -- 329,490
Current portion of capital lease
obligations............................. 150,511 -- -- 150,511
----------- -------- ---------- -----------
Total current liabilities............... 3,904,231 700,427 100,000 4,704,658
Other long-term liabilities............... 967,632 -- -- 967,632
----------- -------- ---------- -----------
Total liabilities....................... 4,871,863 700,427 100,000 5,672,290
----------- -------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock............... $ 6,512 $ -- $ -- $ 6,512
Common stock.............................. 12,466 34,775 (33,712)(5) 13,529
Additional paid-in capital................ 20,307,511 86,760 4,163,433 (5) 24,557,704
Treasury stock............................ (8,398,753) -- -- (8,398,753)
Deferred compensation..................... (294,750) -- -- (294,750)
Retained earnings (deficit)............... 1,143,726 (75,870) 75,870 (5) 1,143,726
Accumulated other comprehensive (loss)
income.................................. (15,699) 42,054 (42,054)(5) (15,699)
----------- -------- ---------- -----------
Total stockholders' equity.............. 12,761,013 87,719 4,163,537 17,012,269
----------- -------- ---------- -----------
Total liabilities and stockholders'
equity................................ $17,632,876 $788,146 $4,263,537 $22,684,559
=========== ======== ========== ===========
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this balance sheet.
F-30
<PAGE>
PREDICTIVE SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated statements of operations have
been prepared to reflect the acquisition of NRCC as if this acquisition occurred
on January 1, 1998. The unaudited pro forma condensed consolidated balance sheet
was prepared to reflect the acquisition as of June 30, 1999. NRCC's historical
financial statements were derived from its books and records and reflect:
- the statement of operations of NRCC for the six month period from
January 1, 1999 to June 30, 1999;
- the statement of operations of NRCC for the 12 month period ended
December 31, 1998; and
- the balance sheet of NRCC as of June 30, 1999.
The acquisition has been accounted for under the purchase method of accounting.
The following is a summary of the adjustments reflected in the unaudited pro
forma condensed consolidated statements of operations:
1. Represents the amortization of the excess of the purchase price over
the net assets of NRCC acquired.
2. Represents the increase in the number of outstanding shares of common
stock to reflect the 1,062,814 shares issued to the stockholders of NRCC to
fund the purchase price.
The following is a summary of the adjustments reflected in the unaudited pro
forma condensed consolidated balance sheet:
3. Represents the preliminary estimates of the excess purchase price
over the net assets acquired as follows--
<TABLE>
<S> <C>
Purchase price (including $100,000 of transaction
expenses)................................................. $4,351,256
Net tangible assets acquired................................ 87,719
----------
Excess of purchase price over net tangible assets
acquired.................................................. $4,263,537
==========
</TABLE>
Predictive believes that all significant assets and liabilities have been
identified and, accordingly, that the final determination of the allocation of
the NRCC purchase price should not vary materially from the preliminary
estimate. Predictive anticipates finalizing the purchase price allocation upon
completing the preparation and review of the August 12, 1999 (acquisition date)
financial statements of NRCC.
The identifiable assets are being amortized over their estimated useful
lives. Intangible assets resulting from the excess of the purchase price over
the fair value of the net assets acquired, including workforce, customer lists
and goodwill, are being amortized over a period of 5 years.
Subsequent to the acquisition, Predictive will review the carrying values
assigned to the intangible assets to determine whether later events or
circumstances have occurred that indicate that the balance of the intangible
assets may be impaired. Predictive's principal considerations in determining the
impairment of the intangible assets will include the strategic benefit to
Predictive of the particular business as measured by expected undiscounted
future cash flows. Predictive is not aware of any events or circumstances which
would impair the intangible assets.
F-31
<PAGE>
PREDICTIVE SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Represents the amount of estimated cost for legal and accounting
services and other expenses associated with the acquisition.
5. Reflects the adjustments to stockholders' equity as follows:
<TABLE>
<S> <C>
COMMON STOCK:
Elimination of NRCC common stock............................ $ (34,775)
Issuance of common stock in connection with the acquisition
of NRCC.................................................... 1,063
----------
Subtotal.............................................. (33,712)
ADDITIONAL PAID-IN CAPITAL:
Elimination of NRCC additional paid-in capital.............. (86,760)
Additional paid-in capital from issuance of common stock in
connection with the acquisition of NRCC.................... 4,250,193
----------
Subtotal.............................................. 4,163,433
RETAINED EARNINGS (DEFICIT):
Elimination of NRCC retained deficit........................ 75,870
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Elimination of NRCC accumulated other comprehensive
income..................................................... (42,054)
----------
Total................................................. $4,163,537
==========
</TABLE>
F-32
<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>
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).
23.3 Consent of Arthur Andersen LLP.
24.1+ Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
+ 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. 6 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 22nd day of October, 1999.
<TABLE>
<S> <C> <C>
PREDICTIVE SYSTEMS, INC.
By: /s/ RONALD G. PETTENGILL, JR.
-----------------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 6 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 October 22, 1999
/s/ RONALD G. PETTENGILL, JR. Chairman of the Board of
- ------------------------------------------- Directors (principal
Ronald G. Pettengill, Jr. executive officer)
* President and Director October 22, 1999
- -------------------------------------------
Robert L. Belau
/s/ NEERAJ SETHI Vice President, Finance October 22, 1999
- ------------------------------------------- (principal financial and
Neeraj Sethi accounting officer)
* Director October 22, 1999
- -------------------------------------------
Peter L. Bloom
* Director October 22, 1999
- -------------------------------------------
Donald J. Duffy
* Director October 22, 1999
- -------------------------------------------
Braden R. Kelly
* Director October 22, 1999
- -------------------------------------------
Eric Meyer
* Director October 22, 1999
- -------------------------------------------
Inder Sidhu
* Director October 22, 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-6
<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 COSTS AND BALANCE AT
OF 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).
23.3 Consent of Arthur Andersen LLP.
24.1+ Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
+ 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>
Exhibit 1.1
UNDERWRITING AGREEMENT
October ___, 1999
BancBoston Robertson Stephens Inc.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
First Union Capital Markets
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
INTRODUCTORY. Predictive Systems, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
SCHEDULE A (the "Underwriters") an aggregate of 4,000,000 shares (the "Firm
Shares") of its Common Stock, par value $.001 per share (the "Common Shares").
In addition, the Company has granted to the Underwriters an option to purchase
up to an additional 600,000 Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". BancBoston Robertson
Stephens Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette and First
Union Capital Markets have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-84045), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement." Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and
<PAGE>
from and after the date and time of filing of the Rule 462(b) Registration
Statement the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. Such prospectus, in the form first used by the
Underwriters to confirm sales of the Shares, is called the "Prospectus";
provided, however, if the Company has, with the consent of BancBoston Robertson
Stephens Inc., elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (each, a
"preliminary prospectus") dated September __, 1999 (such preliminary prospectus
is called the "Rule 434 preliminary prospectus"), together with the applicable
term sheet (the "Term Sheet") prepared and filed by the Company with the
Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the best knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement,
-2-
<PAGE>
any Rule 462(b) Registration Statement, or any post-effective amendment thereto,
or the Prospectus, or any amendments or supplements thereto, made in reliance
upon and in conformity with information relating to any Underwriter furnished to
the Company in writing by the Representative expressly for use therein. There
are no contracts or other documents required to be described in the Prospectus
or to be filed as exhibits to the Registration Statement which have not been
described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representative four complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representative has
reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE SHARES. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its
-3-
<PAGE>
subsidiaries, considered as one entity, have not incurred any material liability
or obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except for
dividends paid to the Company or other subsidiaries, any of its subsidiaries on
any class of capital stock or repurchase or redemption by the Company or any of
its subsidiaries of any class of capital stock.
(h) INDEPENDENT ACCOUNTANTS. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) and supporting schedules, if
any, filed with the Commission as a part of the Registration Statement and
included in the Prospectus, are independent public or certified public
accountants as required by the Securities Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement, if any, present fairly the
information required to be stated therein. Such financial statements and
supporting schedules have been prepared in conformity with generally accepted
accounting principles as applied in the United States on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary Selected
Financial Data", "Selected Financial Data" and "Capitalization" fairly present
the information set forth therein on a basis consistent with that of the audited
financial statements contained in the Registration Statement.
(j) COMPANY'S ACCOUNTING SYSTEM. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) SUBSIDIARIES OF THE COMPANY. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21 to the Registration Statement.
(l) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of
-4-
<PAGE>
the Company and its subsidiaries has been duly organized and is validly existing
as a corporation or limited liability company, as the case may be, in good
standing under the laws of the jurisdiction in which it is organized with full
corporate power and authority to own its properties and conduct its business as
described in the prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction which
requires such qualification.
(m) CAPITALIZATION OF THE SUBSIDIARIES. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either directly or through wholly owned subsidiaries
free and clear of any security interests, claims, liens or encumbrances.
(n) NO PROHIBITION ON SUBSIDIARIES FROM PAYING DIVIDENDS OR MAKING
OTHER DISTRIBUTIONS. No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or any
other subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(o) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options or warrants, if any,
described in the Prospectus). The Common Shares (including the Shares) conform
in all material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding Common Shares have been duly authorized and
validly issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
Common Shares were issued in violation of any preemptive rights, rights of first
refusal or other similar rights to subscribe for or purchase securities of the
Company. There are no authorized or outstanding options, warrants, preemptive
rights, rights of first refusal or other rights to purchase, or equity or debt
securities convertible into or exchangeable or exercisable for, any capital
stock of the Company or any of its subsidiaries other than those accurately
described in the Prospectus. The description of the Company's stock option,
stock bonus and other stock plans or arrangements, and the options or other
rights granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(p) STOCK EXCHANGE LISTING. The Shares have been approved for listing
on the Nasdaq National Market, subject only to official notice of issuance.
(q) NO CONSENTS, APPROVALS OR AUTHORIZATIONS REQUIRED. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been
-5-
<PAGE>
obtained or made under the Securities Act and such as may be required (i) under
the blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters in the manner contemplated here
and in the Prospectus, (ii) by the National Association of Securities Dealers,
LLC and (iii) by the federal and provincial laws of Canada.
(r) NON-CONTRAVENTION OF EXISTING INSTRUMENTS AGREEMENTS. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of
its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage,
deed of trust, note agreement, loan agreement or other agreement, obligation,
condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties.
(s) NO DEFAULTS OR VIOLATIONS. Neither the Company nor any subsidiary
is in violation or default of (i) any provision of its charter or by-laws, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(t) NO ACTIONS, SUITS OR PROCEEDINGS. No action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.
(u) ALL NECESSARY PERMITS, ETC. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(v) TITLE TO PROPERTIES. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements
-6-
<PAGE>
referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal property
held under lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company or such
subsidiary.
(w) TAX LAW COMPLIANCE. The Company and its consolidated subsidiaries
have filed all necessary federal, state and foreign income and franchise tax
returns or have properly requested extensions thereof and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(i) above in respect of all federal, state
and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(x) INTELLECTUAL PROPERTY RIGHTS. Each of the Company and its
subsidiaries owns or possesses adequate rights to use all patents, patent rights
or licenses, inventions, collaborative research agreements, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
(y) YEAR 2000 PREPAREDNESS. There are no issues related to the
Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i)
are of a character required to be
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described or referred to in the Registration Statement or Prospectus by the
Securities Act or the rules and regulations of the Commission thereunder which
have not been accurately described in the Registration Statement or Prospectus
or (ii) might reasonably be expected to result in any Material Adverse Change or
that might materially affect their properties, assets or rights. All internal
computer systems and each Constituent Component (as defined below) of those
systems and all computer-related products and each Constituent Component (as
defined below) of those products of the Company and each of its subsidiaries
fully comply with Year 2000 Qualification Requirements. "Year 2000
Qualifications Requirements" means that the internal computer systems and each
Constituent Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined below) of
those products of the Company and each of its Subsidiaries (i) have been
reviewed to confirm that they store, process (including sorting and performing
mathematical operations, calculations and computations), input and output data
containing date and information correctly regardless of whether the date
contains dates and times before, on or after January 1, 2000, (ii) have been
designated to ensure date and time entry recognition and calculations, and date
data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any Material Adverse Change.
(z) NO TRANSFER TAXES OR OTHER FEES. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been advised
of the rules and requirements under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an "investment company" or an entity
"controlled" by an "investment company" within the meaning of the Investment
Company Act and will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(bb) INSURANCE. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and Directors and Officers liability. The Company
has no
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reason to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or appropriate
to conduct its business as now conducted and at a cost that would not result in
a Material Adverse Change. Neither of the Company nor any subsidiary has been
denied any insurance coverage which it has sought or for which it has applied.
(cc) LABOR MATTERS. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, subassemblers,
value added resellers, subcontractors, original equipment manufacturers,
authorized dealers or international distributors, as applicable, that might be
expected to result in a Material Adverse Change.
(dd) NO PRICE STABILIZATION OR MANIPULATION. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) LOCK-UP AGREEMENTS. Each officer and director of the company and
each beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the form
attached hereto as EXHIBIT A (the "Lock-up Agreements"). The Company has
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of BancBoston Robertson Stephens Inc.
(ff) RELATED PARTY TRANSACTIONS. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.
Any certificate signed by an officer of the Company and
delivered to the Representative or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter as
to the matters set forth therein.
(gg) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
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(hh) ENVIRONMENTAL LAWS. The Company is in compliance with all rules,
laws and regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment ("Environmental
Laws") which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Change. The Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus. The Company will not be required to make future
material capital expenditures to comply with Environmental Laws and no property
which is owned, leased or occupied by the Company has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. ss. 9601, eT Seq.), or otherwise
designated as a contaminated site under applicable state or local law.
(ii) PERIODIC REVIEW OF COSTS OF ENVIRONMENTAL COMPLIANCE. In the
ordinary course of its business, the Company conducts a periodic review of the
effect of Environmental Laws on the business, operations and properties of the
Company and its subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review and the amount of its established
reserves, the Company has reasonably concluded that such associated costs and
liabilities would not, individually or in the aggregate, result in a Material
Adverse Change.
(jj) ERISA COMPLIANCE. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are
in compliance in all material respects with ERISA. "ERISA Affiliates" means,
with respect to the Company or a subsidiary, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such subsidiary
is a member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates. No "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount of unfounded benefit liabilities"
(as defined under ERISA). Neither the Company, its subsidiaries nor any of their
ERISA Affiliates has incurred or reasonably expects to incur any liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates that is intended to be qualified
under Section 401(a) of the Code is so qualified and nothing has occurred,
whether by action or failure to act, which would cause the loss of such
qualification.
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SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) THE FIRM SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Shares upon the terms herein set forth. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company the respective
number of Firm Shares set forth opposite their names on SCHEDULE A. The purchase
price per Firm Share to be paid by the several Underwriters to the Company shall
be $[___] per share.
(b) THE FIRST CLOSING DATE. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representative at 9:00 a.m. Boston time, at the offices of Hale and Dorr LLP, 60
State Street, Boston, MA 02109 (or at such other place as may be agreed upon
among the Representatives and the Company), (i) on the third (3rd) full business
day following the first day that Shares are traded, (ii) if this Agreement is
executed and delivered after 4:30 p.m., Boston time, the fourth (4th) full
business day following the day that this Agreement is executed and delivered or
(iii) at such other time and date not later that seven (7) full business days
following the first day that Shares are traded as the Representative and the
Company may determine (or at such time and date to which payment and delivery
shall have been postponed pursuant to Section 8 hereof), such time and date of
payment and delivery being herein called the "Closing Date;" provided, however,
that if the Company has not made available to the Representatives copies of the
Prospectus within the time provided in Section 4(d) hereof, the Representative
may, in its sole discretion, postpone the Closing Date until no later that two
(2) full business days following delivery of copies of the Prospectus to the
Representative.
(c) THE OPTION SHARES; THE SECOND CLOSING DATE. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 600,000 Option Shares from the Company at the
purchase price per share to be paid by the Underwriters for the Firm Shares. The
option granted hereunder is for use by the Underwriters solely in covering any
over-allotments in connection with the sale and distribution of the Firm Shares.
The option granted hereunder may be exercised at any time upon notice by the
Representative to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representative and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representative may determine) that bears the same proportion to the total number
of Option Shares to be purchased as the number of Firm Shares set forth on
SCHEDULE A opposite the name of such Underwriter bears to the total number of
Firm Shares and the Company agrees, to sell the number of Option
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Shares (subject to such adjustments to eliminate fractional shares as the
Representative may determine) as the number of Option Shares to be sold by the
Company as set forth in the paragraph "Introductory" of this Agreement) bears to
the total number of Option Shares. The Representative may cancel the option at
any time prior to its expiration by giving written notice of such cancellation
to the Company.
(d) PUBLIC OFFERING OF THE SHARES. The Representative hereby advises
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representative, in its sole judgment, has determined
is advisable and practicable.
(e) PAYMENT FOR THE SHARES. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately availablefunds to the order of the Company.
It is understood that the Representative has been authorized,
for its own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representative by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) DELIVERY OF THE SHARES. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representative for the
accounts of the Representative and the several Underwriters at the First Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representative and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00
noon on the second business day following the date the Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representative shall request.
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SECTION 3. COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Underwriter
as follows:
(a) REGISTRATION STATEMENT MATTERS. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representative
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representative shall not previously have been advised
and furnished with a copy or to which the Representative shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) SECURITIES ACT COMPLIANCE. The Company will advise the
Representative promptly (i) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (ii) of receipt of
any comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus or
for any additional information and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) BLUE SKY COMPLIANCE. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representative may reasonably have designated in writing and
will make such applications, file such documents, and furnish such information
as may be reasonably required for that purpose, provided the Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports and other documents, as are or may be required
to continue such qualifications in effect for so long a period as the
Representative may reasonably request for distribution of the Shares.
(d) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS. The Company will comply with the Securities Act and the Exchange
Act, and the rules
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and regulations of the Commission thereunder, so as to permit the completion of
the distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, any event shall occur as a result of
which, in the judgment of the Company or in the reasonable opinion of the
Representative or counsel for the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the light
of the circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representative, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representative may
request.
(f) INSURANCE. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) NOTICE OF SUBSEQUENT EVENTS. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) USE OF PROCEEDS. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Company Shares.
(j) EARNINGS STATEMENT. As soon as practicable, the Company will make
generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending December 31, 1999 that satisfies the
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provisions of Section 11(a) of the Securities Act.
(k) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.
(l) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. The Company
will not, without the prior written consent of BancBoston Robertson Stephens
Inc., for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction which
is designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) FUTURE REPORTS TO THE REPRESENTATIVE. During the period of five
years hereafter the Company will furnish to the Representative (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
(n) EXCHANGE ACT COMPLIANCE. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in the manner and within the time periods required
by the Exchange Act.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to
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the accuracy of the representations and warranties on the part of the Company
set forth in Section 1 hereof as of the date hereof and as of the First Closing
Date as though then made and, with respect to the Option Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel; and the National Association
of Securities Dealers, LLC shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) CORPORATE PROCEEDINGS. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) NO MATERIAL ADVERSE CHANGE. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date, or the Second
Closing Date, as the case may be, there shall not have been any Material Adverse
Change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus; and
(d) OPINION OF COUNSEL FOR THE COMPANY. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Brobeck, Phleger & Harrison counsel for the Company substantially in the form
of EXHIBIT B attached hereto, dated the First Closing Date, or the Second
Closing Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in EXHIBIT B may rely
as to questions of law not involving the laws of the United States or the State
of New York and Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company, the
Selling Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material
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misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
(e) OPINION OF PATENT COUNSEL FOR THE COMPANY. You shall have received
on the First Closing Date, or the Second Closing Date, as the case may be, an
opinion of ______________________, patent counsel for the Company substantially
in the form of Exhibit C attached hereto.
(f) OPINION OF COUNSEL FOR THE UNDERWRITERS. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Hale and Dorr LLP, substantially in the form of EXHIBIT D hereto. The
Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(g) ACCOUNTANTS' COMFORT LETTER. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus. The Original Letter from Arthur Andersen LLP
shall be addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of December 31, 1998 and
related consolidated statements of operations, shareholders' equity, and cash
flows for the twelve (12) months ended December 31, 1998, (iii) state that
Arthur Andersen LLP has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of Arthur Andersen LLP as described in SAS
71 on the financial statements for each of the quarters in the second-quarter
period ended June 30, 1999
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(the "Quarterly Financial Statements"), (iv) state that in the course of such
review, nothing came to their attention that leads them to believe that any
material modifications need to be made to any of the Quarterly Financial
Statements in order for them to be in compliance with generally accepted
accounting principles consistently applied across the periods presented, and
address other matters agreed upon by Arthur Andersen LLP and you. In addition,
you shall have received from Arthur Andersen LLP a letter addressed to the
Company and made available to you for the use of the Underwriters stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's consolidated financial statements as of December 31, 1998, did not
disclose any weaknesses in internal controls that they considered to be material
weaknesses.
(h) OFFICERS' CERTIFICATE. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the First Closing
Date or the Second Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Securities Act and in all material respects
conformed to the requirements of the Securities Act, the Registration
Statement and the Prospectus, and any amendments or supplements
thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
and, since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
(a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any
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obligation, direct or contingent, that is material to the Company and
its subsidiaries considered as one enterprise, incurred by the Company
or its subsidiaries, except obligations incurred in the ordinary course
of business, (d) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is material
to the Company and its subsidiaries considered as one enterprise, (e)
any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (f) any
loss or damage (whether or not insured) to the property of the Company
or any of its subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.
(i) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY. The
Company shall have obtained and delivered to you an agreement substantially in
the form of EXHIBIT A attached hereto from each officer and director of the
Company, and each beneficial owner of one or more percent of the outstanding
issued share capital of the Company.
(j) STOCK EXCHANGE LISTING. The Shares shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(k) COMPLIANCE WITH PROSPECTUS DELIVERY REQUIREMENTS. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(l) ADDITIONAL DOCUMENTS. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representative and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representative by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and
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engraving costs), (ii) all fees and expenses of the registrar and transfer agent
of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes
in connection with the issuance and sale of the Shares to the Underwriters, (iv)
all fees and expenses of the Company's counsel, independent public or certified
public accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of
the Registration Statement (including financial statements, exhibits, schedules,
consents and certificates of experts), each preliminary prospectus and the
Prospectus, and all amendments and supplements thereto, and this Agreement, (vi)
all filing fees, attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Shares for offer and sale under the state securities or blue sky laws or the
provincial securities laws of Canada or any other country, and, if requested by
the Representative, preparing and printing a "Blue Sky Survey", an
"International Blue Sky Survey" or other memorandum, and any supplements
thereto, advising the Underwriters of such qualifications, registrations and
exemptions, (vii) the filing fees incident to, and the reasonable fees and
expenses of counsel for the Underwriters in connection with, the National
Association of Securities Dealers, LLC review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii) the
fees and expenses associated with listing the Common Shares on the Nasdaq
National Market, (ix) all costs and expenses incident to the preparation and
undertaking of "road show" preparations to be made to prospective investors, and
(x) all other fees, costs and expenses referred to in Item 13 of Part II of the
Registration Statement. Except as provided in this Section 5, Section 6, and
Section 7 hereof, the Underwriters shall pay their own expenses, including the
fees and disbursements of their counsel.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement
is terminated by the Representative pursuant to Section 4, Section 7, Section 8
or Section 9, or if the sale to the Underwriters of the Shares on the First
Closing Date is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse the Representative and the
other Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representative and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters.
(1) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who controls
any Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject,
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under the Securities Act, the Exchange Act or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company, which consent shall not be unreasonably withheld), insofar as such
loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading; or (ii) upon
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any act or failure to act
or any alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon any matter covered by clause
(i), (ii), (iii) or (iv) above, provided that the Company shall not be liable
under this clause (v) to the extent that a court of competent jurisdiction shall
have determined by a final judgment that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling person
for any and all expenses (including the fees and disbursements of counsel chosen
by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred
by such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representative expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
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(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representative expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) INFORMATION PROVIDED BY THE UNDERWRITERS. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and the second
paragraph under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party;
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provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of any
such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of such indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc.
in the case of Section 7(b) and Section 8), representing the indemnified parties
who are parties to such action), (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party, in each of
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(e) SETTLEMENTS. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) CONTRIBUTION. If the indemnification provided for in this Section 7
is unavailable
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to or insufficient to hold harmless an indemnified party under Section 7(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) then each indemnifying party shall contribute
to the aggregate amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other from the offering of
the Shares. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriter on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bears to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(f) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) TIMING OF ANY PAYMENTS OF INDEMNIFICATION. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
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(h) SURVIVAL. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) ACKNOWLEDGEMENTS OF PARTIES. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Shares to be purchased on such date, the other Underwriters shall be
obligated, severally, in the proportions that the number of Firm Common Shares
set forth opposite their respective names on SCHEDULE A bears to the aggregate
number of Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representative with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representative and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 4, and Section 7 shall at
all times be effective and shall survive such termination. In any such case
either the Representative or the Company shall have the right to postpone the
First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be
deemed to include any
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person substituted for a defaulting Underwriter under this Section 8. Any action
taken under this Section 8 shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date, this Agreement may be terminated by the Representative by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representative is material and adverse and makes it impracticable or inadvisable
to market the Common Shares in the manner and on the terms described in the
Prospectus or to enforce contracts for the sale of securities; (iv) in the
judgment of the Representative there shall have occurred any Material Adverse
Change; or (v) the Company shall have sustained a loss by strike, fire, flood,
earthquake, accident or other calamity of such character as in the judgment of
the Representative may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 9 shall be without liability
on the part of (a) the Company to any Underwriter, except that the Company shall
be obligated to reimburse the expenses of the Representative and the
Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 7 shall at all times be effective and shall survive such
termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representative:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
-26-
<PAGE>
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
With a Copy to:
HALE AND DORR LLP
60 State Street
Boston, Massachusetts 02109
Facsimile: (617) 526-5000
Attention: Joseph E. Mullaney, III, Esquire
If to the Company:
PREDICTIVE SYSTEMS, INC.
145 Hudson Street
New York, New York 10013
Facsimile: (212) 219-4499
Attention: Ronald G. Pettengill
With a Copy to:
BROBECK, PHLEGER & HARRISON
1633 Broadway, 4th Floor
New York, New York 10019
Facsimile: (212) 586-7878
Attention: Alexander D. Lynch, Esquire
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and no other person will have any right or obligation
hereunder. The term "successors" shall not include any purchaser of the Shares
as such from any of the Underwriters merely by reason of such purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
-27-
<PAGE>
SECTION 14. GOVERNING LAW PROVISIONS.
(a) GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the internal laws of the State of New York applicable to
agreements made and to be performed in such state.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings" may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
(c) WAIVER OF IMMUNITY. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party
-28-
<PAGE>
whom the condition is meant to benefit. The Table of Contents and the Section
headings herein are for the convenience of the parties only and shall not affect
the construction or interpretation of this Agreement.
[The remainder of this page has been intentionally left blank.]
-29-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
PREDICTIVE SYSTEMS, INC.
By:
-------------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chairman and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION CAPITAL MARKETS
On their behalf and on behalf of each of the several underwriters named in
SCHEDULE A hereto.
BY: BANCBOSTON ROBERTSON STEPHENS INC.
By:
-----------------------------------
Authorized Signatory
-30-
<PAGE>
Exhibit 4.1
NUMBER SHARES
- ------------- -------------
PS PREDICTIVE SYSTEMS
- ------------- -------------
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 74036W 10 2
SEE REVERSE
FOR CERTAIN
DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES, $.001 PAR VALUE, OF THE COMMON STOCK OF
PREDICTIVE SYSTEMS, INC.
(hereinafter called the "Corporation"), transferable only on the books of the
Corporation by the holder hereof in person or by a duly authorized attorney
upon surrender of this certificate properly endorsed. This certificate is not
valid until countersigned by the Transfer Agent and registered by the
Registrar. This certificate and the shares represented hereby are issued and
shall be held subject to all the provisions of the Certificate of
Incorporation of the Corporation and all amendments thereto; copies of which
are on file with the Transfer Agent, to all of which the holder of this
certificate, by acceptance hereof, assents.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Corporation.
DATED
------------------------
PREDICTIVE SYSTEMS, INC.
CORPORATE
SEAL
1995
DELAWARE
*
------------------------
/s/ Robert L. Belau /s/ Ronald G. Pettengill, Jr.
PRESIDENT SECRETARY
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK) TRANSFER AGENT
AND REGISTRAR
BY
Authorized Signature
<PAGE>
PREDICTIVE SYSTEMS, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- _________ Custodian _________
(Cust) (Minor)
under Uniform Gifts to Minors
Act __________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated _______________________________
--------------------------------------------------------------
NOTICE: THIS SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER
Signature(s) Guaranteed:
- -----------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO
S.E.C. RULE 17ad-15.
<PAGE>
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 or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
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 may be brought to our attention through the time of
effectiveness of the Registration Statement, 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 your,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
Exhibit 10.10
BEAR STEARNS & CO. INC.
SERVICE AGREEMENT
This Development and License Agreement (the "Agreement"), dated this 29th day of
July, 1998, is by and between Bear, Stearns & Co. Inc, a Delaware corporation,
having its principal offices at 245 Park Avenue, New York, NY 10167 and other
direct and indirect subsidiaries at the relevant time of its ultimate corporate
parent (collectively, "Bear Stearns"), and Predictive Systems, Inc, having
offices at 145 Hudson Street, New York, NY 10013 ("Predictive").
RECITALS
WHEREAS, Predictive wishes from time to time to perform Enterprise
Management services for Bear Stearns and Bear Stearns wishes to consider
engaging Predictive to perform such services (an "Assignment").
WHEREAS, in the interest of streamlining the startup phase of any such
Assignment, Bear Stearns and Predictive wish to agree in advance as to certain
terms and conditions under which such services may be rendered;
THEREFORE, for good and valuable consideration given pursuant to the
terms, conditions and covenants contained herein, Bear Stearns and Predictive
hereby agree as follows:
SECTION 1: STATEMENT OF WORK, SERVICES AND DELIVERABLES
1.1. Each Assignment will be commenced by a Statement of Work executed by
both Bear Stearns and Predictive (a "Statement of Work") referencing
this Agreement, and setting forth: (i) the deliverables to be produced
(the "Deliverables") and/or the other services to be performed (the
"Services"); (ii) the schedule for delivery of such Deliverables,
performance of such Services, and the date of completion of
Predictive's performance under the Statement of Work ("Completion
Date"); (iii) the agreed fees and costs consistent with this Agreement
for such Services and Deliverables ("Statement of Work Fees"); (iv) the
schedule for payment of such fees and costs ("Payment Schedule"); and
(v) the acceptance criteria against which the completeness of
deliverables will be measured ("Acceptance Criteria"). Notwithstanding
the foregoing, whether or not such Statement of Work sets forth the
items set forth in (i) through (v) above or refers to this Agreement,
the terms, conditions and provisions of this Agreement shall apply to
such Assignment and shall be automatically incorporated into such
Statement of Work, regardless of the terms discussed with any third
party.
1.2. As and when required by and Statement of Work and this Agreement,
Predictive shall perform for Bear Stearns the Services described in the
Statement of Work and shall deliver to Bear Stearns the Deliverables
described in the Statement of Work.
1.3. Notwithstanding the generality of Section 1.2., above and in addition
thereto, at the conclusion of each month during the term of each
Statement of Work, Predictive shall deliver to Bear Stearns all
Deliverables (including drafts and other work in progress) produced by
Predictive in the performance of the Statement of Work over the course
of that month.
1.4. Predictive warrants that it has or will provide the resources and
personnel necessary to carry out its work under each Statement of Work
and will use its best efforts to perform all work required under this
Agreement and each Statement of Work in a timely, skillful, and
efficient manner. Predictive shall not be responsible for any delay in
the performance of Services due to causes beyond reasonable control of
Predictive.
1.5. After completion of each milestone of the Statement of Work against
which a payment in the Payment Schedule is tied, (other than
obligations intended to survive acceptance by Bear Stearns), Predictive
will notify Bear Stearns in writing that Predictive has completed its
performance, that the Services are fully implemented, that the
Deliverables are fully implemented, and that Predictive's testing is
completed. Bear Stearns, with the cooperation and assistance of
Predictive, shall then be entitled to conduct a
<PAGE>
comprehensive, integrated acceptance test of the Acceptance Criteria on
all the Services and Deliverables ("Acceptance Test"), and, if Bear
Stearns reasonably determines that any material part of the Acceptance
Criteria are not met during the Acceptance Test, to reject such
Services and/or Deliverables by notifying Predictive in writing.
"Acceptance" shall mean the receipt by Predictive of written
notification from Bear Stearns that the Acceptance Test on the Services
and Deliverables has been successfully completed. Any rejection shall
state specifically the manner in which the Services and Deliverables
are defective. In the event of rejection, Predictive shall correct any
deficiencies and shall resubmit such Services and Deliverables for
further Acceptance Testing in accordance with this paragraph. Bear
Stearns shall not be invoiced for more than 80% of the aggregate amount
due for any Services or Deliverables until such Services and
Deliverables satisfy the Acceptance Test and are accepted by Bear
Stearns pursuant to this Section 1.5.
SECTION 2: PROPRIETARY RIGHTS IN DELIVERABLES, ETC.
2.1 Predictive agrees that (i) any and all Deliverables, (ii) any and all
original other works of authorship, including, but not limited to all,
user documentation, papers, documents, drawings, databases and other
compilations which may be created, compiled or produced by Predictive
or any of its subcontractors, consultants or employees in the course of
performing Services or producing Deliverables for Bear Stearns (along
with the items described in (i) above, collectively, "Works of
Authorship"), and (iii) any and all copyrights and other proprietary
rights and all foreign and domestic, registered and unregistered,
copyrights, applications for registrations therefor and other
proprietary rights related to any Works of Authorship (collectively,
"Copyrights"), shall be deemed to be works made for hire for and the
exclusive property of Bear Stearns. Except to the extent specifically
agreed in the Statement of Work, to the extent that Predictive has or
obtains any right, title or interest in or to any Work of Authorship of
Copyright, Predictive hereby assigns and agrees to assign to Bear
Stearns all of such right, title and interest therein and thereto, and
to the extent that any employee, agent or sub-contractor of Predictive
has or obtains any right, title or interest in or to any Work of
Authorship or Copyright, Predictive shall cause such employee, agent or
sub-contractor to assign to Bear Stearns all of such right, title and
interest therein and thereto.
2.2. To the extent that any Deliverables or Services embody, contain or
disclose any ideas, concepts, know-how, inventions, formulas,
techniques, processes, ideas, algorithms, discoveries, designs,
developments, improvements, techniques or expertise that are known by
Predictive prior to Predictive's work for Bear Stearns or is developed
by Predictive during the course of Predictive's work for Bear Stearns
(collectively "Know-How") of Predictive, Predictive shall retain
ownership of such Know-How, provided that Bear Stearns shall have the
full, unrestricted and non-exclusive right to use, disclose, prepare
works of authorship based upon any Know-How embodied by, contained in
or disclosed by the Deliverables of Services and to copy, display and
distribute any such works of authorship.
2.3. Nothing herein shall prevent Predictive from providing services
substantially similar to those contemplated herein, whether for a
competitor of Bear Stearns or otherwise, and the parties expressly
agree that in providing such services, or in developing its general,
commercially available software products, Predictive may directly or
indirectly utilize residual know-how in its area of expertise not
specific to Bear Stearns resulting from the performance of the services
contemplated herein.
2.4. Upon the request of Bear Stearns, Predictive shall at Bear Stearns'
reasonable out-of-pocket cost and expense do all acts and things,
including, but not limited to, making and executing documents,
applications, deeds, license agreements, assignments, transfers,
conveyances, powers of attorney and instruments, using its best efforts
to obtain the cooperation of and bringing claims and actions against
its employees, ex-employees, agents, ex-agents and independent
contractors and giving information and testimony, in each case,
requested at any time and from time to time by Bear Stearns, in its
good faith discretion, to vest, secure, defend, protect and/or evidence
the right, title and ownership of Bear Stearns in and to any and all
Works of Authorship and Copyrights. Predictive hereby appoints Bear
Stearns and is successors and assigns as Predictive's attorney-in-fact,
with full power of substitution, in the name and stead of Predictive or
Bear Stearns, for the benefit of Bear Stearns and its successors and
assigns, to from time to time do any and all such acts and things which
Predictive is obligated to do under his paragraph. Predictive declares
that the appointment made and the powers granted hereby are coupled
with an interest and are irrevocable.
2
<PAGE>
SECTION 3: CHARGES, FEES, PAYMENTS AND INVOICING
3.1. Payment shall be made as set forth in the applicable Statement of Work.
3.2. The prices and charges hereunder do not include any excise, sales or
use taxes or duties. If any excise, sales or use taxes or duties, are,
or should ultimately be, assessed against or is required to be
collected by Predictive or by any taxing authority in connection with
their performance required hereunder, Bear Stearns agrees to pay an
amount equal to any and all such charges, except where Bear Stearns is
exempt by law and Bear Stearns provides a bona fide exemption
certificate to Predictive.
3.3. Bear Stearns shall make all payments due hereunder within 30 days from
the receipt of a correct and proper invoice.
SECTION 4. PERSONNEL
4.1. All personnel assigned to supply the Deliverables and perform the
Services shall be full-time employees of Predictive (subject to Section
11.6 hereof), shall be fully qualified to perform the tasks assigned to
them, and shall perform all such tasks in a competent and professional
manner. Predictive is an independent contractor. None of Predictive nor
Predictive's or any Predictive agent's or subcontractor's employees are
or shall be deemed for any purpose to be employees of Bear Stearns.
Bear Stearns shall not be responsible for, and Predictive shall
indemnify and hold Bear Stearns harmless against, any cost, expense,
liability, claim, damages, action, or proceeding relating to any
payroll-related taxes for any person who performs any Services,
produces and Deliverables, or provides maintenance, support or training
to be performed, produced or provided by Predictive hereunder or any
claim arising out of or relating to the employment or application for
employment of any such person.
4.2. Predictive shall maintain, throughout the performance of its
obligations under this Agreement, a policy of Worker's Compensation and
Disability Insurance with a minimum limit of $1 Million. Predictive
shall also provide Bear Stearns with a waiver of the insurers'
Subrogation Rights with respect to losses paid under the Worker's
Compensation or Employers' Liability coverage. Evidence of Predictive's
insurance shall be in the form of a certificate of insurance naming
Bear Stearns as an additional insured and including a thirty (30) day
advance written notice of change and/or cancellation of coverage.
Predictive, prior to commencement of any services, shall provide to
Bear Stearns said certificates from its insurers indicating the amount
of insurance coverage, the nature of such coverage and expiration dates
of each policy.
4.3. While this Agreement is in effect, and for a period of twelve months
subsequent to the termination of this Agreement, neither Predictive nor
Bear Stearns (including either party's subsidiaries and affiliates)
shall (i) solicit for employment any of the other party's employees,
without the prior written consent of such other party or (ii) employ,
either directly or indirectly (as a consultant, independent contractor
or otherwise), any of the other party's employees.
SECTION 5: SUPPORT
5.1. Predictive guarantees that it will make available EMS Support as
described in the Statement of Work on the terms set forth in this
Agreement for a period of at least [****] of the date hereof.
5.2. The annual maintenance fees shall not exceed [****]
5.3. Predictive shall provide training, instruction and consultation to Bear
Stearns as set forth in the relevant Statement of Work. Such services
are to be used at a time to be mutually agreed upon by the parties and
Bear Stearns shall reimburse Predictive for all reasonable
out-of-pocket expenses, including all transportation, lodging, meals
and other expenditures related to providing such services.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
3
<PAGE>
SECTION 6. WARRANTIES
Predictive represents, warrants and covenants to Bear Stearns as the date hereof
and of Acceptance under each Statement of Work as follows:
6.1. To the best of its knowledge and belief, Predictive owns or otherwise
has the valid right by contract or otherwise to deliver and assign to
Bear Stearns the Deliverables and all other Works of Authorship and the
Copyrights and to grant to Bear Stearns the rights as defined in this
Agreement.
6.2. To the best of its knowledge, Bear Stearns may use the Deliverables and
otherwise fully exploit the rights thereto set forth herein without
infringement of any such proprietary rights of third parties, and there
is currently no actual or threatened suit by any such third party based
upon an alleged violation by Predictive of any such proprietary rights.
THE LIMITED WARRANTIES SET FORTH IN THIS AGREEMENT ARE THE ONLY WARRANTIES MADE
BY PREDICTIVE. PREDICTIVE MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS.
SECTION 7: LIMITATIONS OF LIABILITY
7.1. EXCEPT AS STATED HEREIN, NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL,
INCIDENTAL, INDIRECT AND/OR CONSEQUENTIAL DAMAGES OF ANY KIND,
RESULTING FROM EITHER PARTY'S PERFORMANCE OR FAILURE TO PERFORM
PURSUANT TO THE TERMS OF THIS AGREEMENT OR ANY OF THE ATTACHMENTS OR
EXHIBITS HERETO, OR RESULTING FROM THE FURNISHING, PERFORMANCE OR USE
OR LOSS OF ANY LICENSED PRODUCTS OR OTHER MATERIALS DELIVERED TO BEAR
STEARNS THEREUNDER, INCLUDING WITHOUT LIMITATION ANY INTERRUPTION OF
BUSINESS, WHETHER RESULTING FROM BREACH OF CONTRACT OR BREACH OF
WARRANTY, EVEN IF THE PARTIES HERETO HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
7.2. Notwithstanding anything set forth in this Agreement, no limitation of
liability of exculpation of either party hereto shall apply to:
(a) any liability arising out of or in connection with acts or
omissions that constitute bad faith, willful misconduct, gross
negligence, or intentional breach of this Agreement;
(b) losses by the other party (or any of its affiliates) that arise
in connection with any infringement or misappropriation of the
other party's (or any of its affiliate's) intellectual property
by the party to be exculpated (or any of its affiliates);
(c) any liability, loss or claim arising out of a breach by such
party of Section 6, 8 or 9 hereof; or
(d) any liability, loss or claim arising out of or related to any
claim that any of the Deliverables infringe any copyright, trade
secret or other proprietary right of a third party.
SECTION 8: NON-DISCLOSURE
8.1. Predictive acknowledges that in the course of performing its
obligations hereunder, Predictive and its agents, representatives,
employees and sub-contractors may have access to information relating
to Bear Stearns, its business, customers, correspondents, finances,
activities, securities or future positions, software, systems,
strategies or plans that is non-public, proprietary or confidential in
nature(all the foregoing, along with the Deliverables and the
Specifications, collectively, "Bear Stearns Information"). Predictive
shall and shall cause its subcontractors and affiliates and
Predictive's and its subcontractors' and affiliates' agents,
representatives, and employees to (i) keep all Bear Stearns Information
confidential; (ii) not disclose any Bear Stearns Information or any
part thereof, in any manner whatsoever, without Bear Stearns'
4
<PAGE>
prior written consent, and (iii) not use any Bear Stearns Information
or any part thereof, other than to enable Predictive to perform its
obligations under this Agreement. Moreover, Predictive shall and shall
cause its subcontractors and affiliates and Predictive's and its
subcontractors' and affiliates' agents, representatives, and employees
to reveal Bear Stearns Information only to its agents, representatives
and employees who need to know such Information in connection with this
Agreement, who are informed by Predictive of the confidential nature of
such Bear Stearns Information and who shall agree (in writing) to act
in accordance with the terms and conditions of this provision. All
media on which any Bear Stearns Information may be recorded or located,
including, without limitation, documents, papers, outlines, samples,
photocopies, photographs, films, drawings, descriptions, reproductions,
cards, tapes, discs and other storage facilities (collectively, "Bear
Stearns Documentation") made by Predictive or any of its employees,
agents representatives, or sub-contractors in the course of performing
Services or producing Deliverables for Bear Stearns, or that come into
the possession of Predictive or any of its employees, agents
representatives, or sub-contractors in the course of performing
Services or producing Deliverables for Bear Stearns, are the property
of Bear Stearns and shall be returned to Bear Stearns by Predictive
upon the earlier of request by Bear Stearns or termination of
Predictive's engagement by Bear Stearns. Predictive shall not, and
shall cause its any of its employees, agents representatives, or
sub-contractors who obtain or have obtained possession of or develop or
have developed any Bear Stearns Documentation not to, deliver, copy, or
in any way allow any Bear Stearns Documentation to be delivered to or
used, examined or copied by any third party without the written
direction or consent of Bear Stearns. Predictive shall, and shall cause
its employees and agents to, place an appropriate emblem or other
annotation on any and all Bear Stearns Documentation that is in the
possession of Predictive or any of its employees or agents evidencing
Bear Stearns' ownership of such Bear Stearns Documentation. Predictive
acknowledges that the use or disclosure of any Bear Stearns Information
in a manner inconsistent with this Agreement may cause Bear Stearns
irreparable damage, and that Bear Stearns shall have the right to seek
injunctive relief to prevent such unauthorized use or disclosure, and
to such damages as are occasioned by such unauthorized use or
disclosure.
8.2 Notwithstanding anything set forth in this Agreement, the
confidentiality provisions of this Agreement, including, but not
limited to the above shall not apply to: (a) information which (i) is
already in the possession of the party subject to the confidentiality
obligations, ii) is or become generally available to the public other
than as a result of improper disclosure by the party subject to the
confidentiality obligations or its agents, representatives or employees
iii) is independently developed by the party subject to the
confidentiality obligations, or (iv) become available to the party
subject to the confidentiality obligations on a non-confidential basis
from a source which, to the best of such party's knowledge, is not
prohibited from disclosing such information to the party subject to the
confidentiality obligations by a legal, contractual or fiduciary
obligation to the party subject to the confidentiality obligations, or
(b) disclosures required by applicable law, rule, regulation or order
or to legal counsel or auditors of the party who are subject to an
obligation of confidentiality.
SECTION 9: INFRINGEMENT INDEMNIFICATION
9.1 Predictive shall indemnify, defend and hold harmless Bear Stearns for,
from and against any and all losses, liabilities, damages, demands,
claims (including without limitation taxes), and costs, payments and
expenses (including without limitation any and all reasonable
attorneys' fees, reasonable costs of investigation, litigation and
settlement, interest and any judgments and penalties) (collectively,
"Losses") as incurred, arising out of, or in connection with any claims
made against Bear Stearns in connection with any allegations that any
of the Deliverables or their use, sale, disclosure, execution,
reproduction, modification, adaptation, distribution, performance or
display, infringe or misappropriate any copyright, patent, trademark,
service mark, trade secret or other forms of proprietary rights of any
third party. Bear Stearns shall give Predictive prompt notice of any
such claim made against it, shall allow Predictive control of the
defense of any such claim made against it, and shall give Predictive
all reasonable assistance requested by Predictive in writing in
connection therewith.
9.2 If, as a result of any such claim, any preliminary injunction or other
injunctive relief is entered against Bear Stearns, or any temporary
restraining order is obtained affecting Bear Stearns which materially
restricts or in any way precludes any further use of any of the
Deliverables, THEN Predictive shall refund to Bear
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Stearns all license fees and unused maintenance fees (on a pro-rata
basis) paid to Predictive by Bear Stearns, and upon such refund this
Agreement shall be deemed terminated under hereunder; provided,
however, that the foregoing shall not apply if upon issuance of any
such preliminary or other form of injunction or temporary restraining
order, Predictive either:
(a) obtains promptly for Bear Stearns the right to continue to use
the Deliverables which are the subject of the claim of
infringement without additional cost to Bear Stearns, or
(b) provides without cost to Bear Stearns an equally satisfactory
substitute Deliverables which achieve the same objectives as
the Deliverables which are the subject of the claim of
infringement, is equally practicable and functional and does
not infringe any copyright, patent, trade secret or other form
of proprietary or intellectual property rights of third
parties.
SECTION 10: TERMINATION/BANKRUPTCY
10.1 Termination For Convenience By Bear Stearns. Bear Stearns may terminate
this Agreement or a particular Statement of Work by giving thirty (30)
days advance written notice to Predictive. Bear Stearns shall then pay
within (30) days all unpaid amounts that have been incurred as of the
date of termination plus a termination charge equal to thirty percent
(30%) of the total remaining fees that would have been due under the
terminated Statement(s) of Work, if the remainder of the Services
described therein had been fully performed. The remainder balance shall
be computed by subtracting the value of paid invoices from the total
value of the Services under the terminated Statement(s) of Work. The
parties agree that such termination charge shall constitute
consideration for Predictive's time, effort and expense in preparing to
perform its obligations, hereunder, as actual damages are difficult to
ascertain. Predictive shall promptly deliver to Bear Stearns all
Deliverables performed for and prepaid by Bear Stearns prior to the
termination relating to such Statement of Work.
10.2 Termination For Breach by Bear Stearns. If Bear Stearns fails to pay
any outstanding charges within forty-five (45) days after receipt of
written notice of delinquency, or if Bear Stearns fails to perform or
observe any other material term or condition of this Agreement for
forty-five (45) days after receipt of written notice from Predictive of
such failure, Bear Stearns shall be in default and Predictive may,
without prejudice to any other right or remedy, suspend performance
under, or terminate in its entirety, or in relation to a particular
Statement of Work. Any unpaid charges or other obligations accrued to
such termination shall survive termination of this Agreement or
Statement of Work, as applicable.
10.3 Termination For Breach by Predictive. If Predictive fails to perform or
observe any other material term or condition of this Agreement and/or
Statement(s) of Work for forty-five (45) days after Predictive's
receipt of written notice from Bear Stearns of such failure and has not
commenced performance or observance of such material term or condition
within such 45-day period, Bear Stearns shall have the option of
immediately terminating the Agreement and/or Statement of Work involved
in whole or in part, without further obligation including any
additional payments, liability or penalty of any kind.
10.4 If Predictive becomes the subject of a case commenced under Title 11 of
the United States Code (the "Bankruptcy Code") and Predictive, as
debtor-in-possession, or a trustee appointed for Predictive ("Trustee")
decides to reject this Agreement and/or any Statement of Work pursuant
to Section 365(n) of the Bankruptcy Code, then Bear Stearns, in
addition to all rights conferred by the Bankruptcy Code and other
applicable law, shall have the right to treat this Agreement and/or
such Statement of Work as terminated or to retain its rights
thereunder. If Bear Stearns decides to retain its rights under this
Agreement and/or Statement of Work, as the case may be, then (i) on
written request of Bear Stearns, Predictive or the Trustee shall
provide Bear Stearns with any and all information, Deliverables and any
other Works of Authorship held by the Trustee, Escrow Agent or
Predictive; and (ii) Predictive or the Trustee shall not interfere with
the rights of Bear Stearns pursuant to this Agreement including, but
not limited to the right to obtain any information pertaining to the
foregoing from any other entity or individual, including employees,
consultants and former employees and consultants of Predictive.
Predictive acknowledges and consents that the automatic stay imposed by
Section 362 of the Bankruptcy Code shall be automatically lifted,
modified and/or vacated to allow Bear Stearns to realize any and all of
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its rights herein. The provisions of this paragraph shall also apply in
the event that Predictive or the Trustee has not rejected this
Agreement or any Statement of Work. The parties hereby agree and affirm
that the payments already paid by Bear Stearns as of the date of a
rejection under the Bankruptcy Code, as described in the first sentence
hereof, are full consideration for Predictive's obligation and
undertakings under this Agreement and all applicable Statements of
Work. These payments shall not be deemed to be royalty payments for the
purpose of Section 365(n) of the Bankruptcy Code and if Predictive or
the Trustee rejects this Agreement or any Statement of Work and Bear
Stearns decides to retain its rights thereunder, Bear Stearns shall be
relieved from its obligation to make such payments.
10.3. Notwithstanding anything set forth in this Agreement, the assignments
made and licenses granted in this Agreement shall survive the
expiration or termination of the Agreement, regardless of the cause.
SECTION 11: MISCELLANEOUS
11.1. If any provision of this Agreement is declared or found to be invalid,
illegal, unenforceable or void, then both parties shall be relieved of
all obligations arising under such provision, but only to the extent
that such provision is invalid, illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement shall
be deemed amended by modifying such provision to the extent necessary
to make it valid, legal and enforceable while preserving its intent or,
if that is not possible, by substituting therefor another provision
that is valid, legal and enforceable and achieves the same objective.
Each party agrees that it will perform its obligations hereunder in
accordance with all applicable laws, rules and regulations now or
hereafter in effect.
11.2. Headings are for reference purposes only.
11.3 Any notices required or permitted to be sent hereunder shall be served
personally or by registered or certified mail, return receipt
requested, reputable overnight delivery services such as Federal
Express, Airborne Express or DHL, or by facsimile with confirmation of
receipt; to the addresses listed above.
11.4. This Agreement shall be interpreted and construed in accordance with
the Copyright laws of the United States and the internal law of State
of New York, without regard to the conflicts of law principles thereof,
and any action brought in relation to this Agreement shall be brought
in a Federal or state court in the City of New York and Licensee and
Licensor hereby irrevocably consent to the jurisdiction of such Courts,
and both parties hereby waiving any claim or defense that such forum is
not convenient or proper. Each party hereby consents to service of
process by any means authorized by New York law (other than by
publication). Each party waives any right to trial by jury with respect
to any dispute, suit, action or proceeding arising out of or relating
to this Agreement or otherwise relating to the relationship of the
parties, whether in contract, tort or otherwise.
11.5. This Agreement may not be modified or altered except by a written
instrument executed by both parties. The failure of either party to
exercise in any respect any right provided for herein shall not be
deemed a waiver of any rights. This Agreement, together with each
Statement of Work hereunder, constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes
and merges all prior proposals, understandings and all other
agreements, oral and written between the parties relating to such
subject matter. The rights and remedies of Bear Stearns under this
Agreement and any Statement of Work are cumulative.
11.6. Neither party may assign this Agreement or any Statement of Work or
delegate any obligations hereunder or thereunder, except that
Predictive may sub-contract some or all of its performance under the
Agreement only with the written consent of Bear Stearns, which shall
not be unreasonably withheld; provided, however, that all obligations
of Predictive under this Agreement shall apply fully to any such
sub-contractor as if it were "Predictive" under this Agreement and
Predictive shall remain fully liable for the performance of such
assignee or sub-contractor hereunder; and Bear Stearns may from time to
time assign this Agreement, in whole or in part, to one or more of its
then affiliates, and to the extent of any such assignment, the relevant
references in this agreement to shall apply to such affiliate.
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11.7. To the extent that, and only to the extent that, this Agreement
otherwise obligates Bear Stearns to reimburse Predictive for any travel
(including lodging, meals or similar expenses), such obligation is
subject to the following conditions and limitations: (a) the travel
expenses may not exceed the expense of travel to the relevant Bear
Stearns facility from the nearest Predictive facility or office, (b)
any such travel must be at the request of Bear Stearns's designated
liaison person, (c) Predictive provides Bear Stearns with a listing of
all of Predictive's support locations and indicating the nearest
support location to Bear Stearns's location, (d) the travel expenses do
not exceed $150 per day plus carrier travel (lowest coach fare), (e)
Predictive makes travel arrangements via Bear Stearns's Travel
Department, and (f) the travel is in accordance with Bear Stearns's
Travel Policies/Procedures.
11.8. Predictive acknowledges that, as is the custom and practice in Bear
Stearns's industry, from time to time Bear Stearns monitors and/or
records certain telephone lines and other communications devices going
into or out of Bear Stearns's premises, and to the extent that any such
monitoring and/or recording occurs relating to any telephone call and
other communication going into or out of Bear Stearns's premises
involving Predictive or any of its employees, agents and
sub-contractors, then Predictive, on behalf of its self and its
employees, agents and sub-contractors, consents thereto or will ensure
such other party consents thereto.
11.9. Predictive shall not use Bear Stearns's or any of its affiliates' name
or trademarks or service marks without Bear Stearns's written consent.
IN WITNESS WHEREOF, the parties, by their duly authorized representatives,
hereto have executed this Agreement as of the day and year noted below.
Bear, Stearns & Co. Inc. Predictive Systems, Inc.
- ----------------------------------- -----------------------------------
/s/ Geryl W. Darington /s/ Ronald Pettengill
- ----------------------------------- -----------------------------------
Signature Signature
Geryl W. Darington Ronald G. Pettengill
- ----------------------------------- -----------------------------------
Print or Type Name Print or Type Name
Senior Managing Director CEO
- ----------------------------------- -----------------------------------
Title Title
7/27/98 7/29/98
- ----------------------------------- -----------------------------------
Date Date
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CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
Exhibit 10.11
CONSULTING SERVICES AGREEMENT
THIS AGREEMENT, together with the applicable Schedule(s) attached hereto, as
such may be amended from time to time by agreement of the parties,
(collectively, the "Agreement") is made and entered into as of this 14th day of
October, 1998 by and between Predictive Systems, Inc. ("Independent Contractor")
a corporation formed under the laws of Delaware and Pershing
Division of Donaldson, Lufkin & Jenrette Securities Corporation ("Pershing"), a
Delaware Corporation, with offices at One Pershing Plaza, Jersey City, New
Jersey 07399.
1. AGREEMENT. Independent Contractor hereby agrees to perform for Pershing, and
Pershing hereby agrees to compensate Independent Contractor for, the consulting
and other services described in this Agreement and any Schedule(s) attached
hereto (the "Services"), as such Services may be further defined, expanded or
modified by Pershing's authorized personnel, all on the terms and subject to the
conditions more fully set forth below.
Nothing herein shall be deemed to constitute a partnership or a joint venture
between the parties hereto.
For purposes of this Agreement, "Assigned Person(s)" shall mean Independent
Contractor's officers, directors, employees, consultants, agents and
subcontractors performing Services hereunder.
2. STANDARD OF PERFORMANCE.
(a) GENERAL. Independent Contractor warrants and agrees to perform the
Services diligently and with the care and judgment of an experienced
professional. Independent Contractor agrees to use diligent and determined
efforts timely to complete all Services in conformity with any specifications
and standards as may be furnished to Independent Contractor or otherwise
identified by Pershing in connection therewith.
(b) REPORTS. At Pershing's request, Independent Contractor agrees to
promptly furnish to Pershing a written report summarizing the status of work
being performed hereunder.
(c) SUPERVISION. Independent Contractor agrees to diligently supervise
Assigned Person(s). Subject thereto, Independent Contractor and Assigned
Person(s) agree to perform the Services under the direction of such Pershing
personnel or other Pershing independent contractors as Pershing may designate.
Except with Pershing's knowledge and express written consent, Assigned Person(s)
agree(s) to avoid any involvement or activity which may create an appearance of
impropriety or conflict. Such involvement or activity may include engaging in
any undertaking or employment, having any significant financial or other
interest (e.g., ownership of more than 1% by Assigned Person or immediate family
member), or accepting any payment, any of which actually or potentially may
compromise Assigned Person(s)' professional judgment or objectivity, or
interfere with or prevent them from serving Pershing's best interests.
<PAGE>
3. STAFFING.
(a) GENERAL. Independent Contractor warrants that all Assigned Persons
shall have been or shall be willing to be subject to a background check
(including but not limited to a check of criminal record, work experience and
education) prior to beginning work at Pershing. For the purposes of the
foregoing, a criminal record or information indicating that the Assigned Person
may have falsified information provided to Pershing or the Independent
Contractor in the engagement process or otherwise is in all events to be
considered information about which Independent Contractor must promptly notify
Pershing. If such background check is performed by Pershing, Independent
Contractor agrees that Pershing has the right, [****].
(b) QUALIFICATIONS. Independent Contractor agrees that Pershing may
require any [****].
(c) NOTICE OF UNFITNESS. If Independent Contractor becomes aware that
any Assigned Person lacks the skills, knowledge and/or experience necessary to
perform the Services or which may affect his/her acceptability to Pershing,
Independent Contractor agrees promptly to notify Pershing in writing of such
information.
(d) REQUIRED DISCLOSURE. Independent Contractor agrees to disclose to
Pershing the identity of any Assigned Person (or prospective Assigned Person)
who is an employee, significant shareholder or principal of any corporation or
legal entity other than Independent Contractor.
(e) CONTROLLED SUBSTANCES. Independent Contractor acknowledges that
Pershing has the following rule with respect to controlled substances:
Possessing, using, purchasing, distributing, selling or having controlled
substances in your system without medical authorization during the work day, on
Pershing's premises, or while conducting Pershing business is inconsistent with
Pershing's business interest and will be grounds for disciplinary action up to
and including immediate termination. Independent Contractor agrees that Assigned
Persons shall be subject to Pershing's rules concerning controlled substances
and testing by Independent Contractor at Pershing's request for the presence of
controlled substances. A confirmed positive result of testing of any Assigned
Person, or the refusal by any to submit to testing, will, among other things,
result in such individual being deemed unsuitable by Pershing. Any such
individual will immediately be barred from Pershing's premises, and Pershing
reserves all rights it may have at law or in equity.
(f) REPLACEMENT PROCEDURE. If the replacement of any Assigned Person
is necessary for any reason, Independent Contractor agrees to submit the
names and qualifications of replacement candidates for Pershing Pershing's
approval within [****] following the date on which Independent Contractor (i)
becomes aware of such Assigned Person's prospective unavailability or (ii) if
applicable, receives a notice from Pershing demanding such replacement. Any
replacement Assigned Person agrees to participate in such orientation as
Pershing shall determine appropriate. Pershing shall have no obligation to
compensate
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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Independent Contractor hereunder for any activities (including Services)
performed by a replacement Assigned Person during such orientation period.
Independent Contractor agrees to use its best efforts to minimize any delay or
disruption to Pershing resulting from the replacement or removal of any Assigned
Person.
4. INDEPENDENT CONTRACTOR STATUS. It is the express intention of the parties
that neither Independent Contractor nor any Assigned Person is an employee,
agent (except as set out herein) or partner of Pershing. Nothing in this
Agreement shall be interpreted as creating the relationship of employer and
employee between the Independent Contractor or Assigned Person and Pershing.
Independent Contractor agrees to be solely responsible for the payment of
compensation to Assigned Person(s). Assigned Person(s) shall not be entitled to
participate in or directly receive benefits pursuant to the provisions of any
Pershing employee benefit plans or policies. Pershing shall not be responsible
for payment of workers' compensation, disability benefits, unemployment
insurance or for withholding income taxes or social security payments for any
Assigned Person. Independent Contractor agrees to be solely responsible for, and
agrees to duly perform, all such payment and withholding obligations as may be
required by law.
5. PERSHING FACILITIES AND EQUIPMENT.
(a) EQUIPMENT. Subject to Pershing's prior written approval, it may
become necessary for Assigned Persons to utilize Pershing equipment (including
software) away from Pershing's premises for Pershing's business purposes. In
such event, Independent Contractor and the Assigned Person(s) hereby agree to
the following:
(i) each agrees to exercise at least reasonable care in the use of
the equipment;
(ii) upon the termination of the engagement with Pershing, or at
such earlier time as Pershing shall demand, the Assigned
Person(s) shall surrender the equipment to Pershing in as good
order and condition as the same now is in, reasonable wear and
tear resulting from the proper use thereof alone excepted;
(iii) not to surrender possession of the equipment or permit the use
of the equipment by anyone other than the Assigned Person
without the prior written consent of Pershing;
(iv) to reimburse Pershing should Pershing incur any charge by
reason of Independent Contractor's use of the equipment for
any purpose other than the business of Pershing. Pershing may
deduct the amount of such charge from any amounts due to
Independent Contractor from Pershing by reason of this
Agreement or, if no such amounts are due Independent
Contractor, Pershing may bill Independent Contractor
accordingly;
(v) not to install software on the equipment unless it has been
duly licensed to Pershing. As a matter of Pershing policy,
each Assigned Person is required to respect any and all
copyrights, patents, trade secrets and
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trademarks of any other entity. Each Assigned Person shall be
a custodian of third party propriety information that may have
been lawfully provided to Pershing. Accordingly, third party
software may not be used for personal benefit or disclosed to
other parties (or used for any purposes beyond the scope of
the license to Pershing). Copies should not be made for any
reason, unless permitted by the license agreement. Moreover,
the Assigned Person may not make reference to (i.e., copy) the
work of third parties in the development of software systems
for Pershing. Assigned Persons who make, acquire or use
unauthorized copies of computer software will have their work
orders terminated without limiting Pershing's other rights it
may have at law or in equity.
Unauthorized or otherwise personal information should not be installed,
created, sorted or transmitted using the equipment. Pershing will treat
any personal information or files that are stored, processed, or
transmitted using the equipment as Pershing's property and may copy,
access and disclose any such information or files in accordance with
its business needs and polices. This includes, without limitation, the
right to conduct a software audit of the equipment loaned to Assigned
Person, at any off-site location, including his/her residence.
(b) FACILITIES. Pershing agrees to provide Independent Contractor with
such access to office space and related information processing and
telecommunications systems, storage media and other systems, equipment and
facilities ("Facilities") as Independent Contractor may reasonably require to
perform its obligations hereunder.
Pershing's facilities are to be used by Assigned Person(s) solely for the
conduct of Pershing's business and performance of the services and for no other
purpose. Independent Contractor and Assigned Person(s) hereby acknowledge(s) and
agree(s) that Pershing may treat as Pershing's property and may, without
restriction or prior notice, copy, access, modify, destroy or disclose in
accordance with its business needs and policies, any information or files,
whether or not of a personal nature or unrelated to the Services, that any
Assigned Person(s) may create, copy, store, process, receive or transmit using
Pershing's facilities.
Pershing shall have the right, in its discretion, at any time and for any
business purposes, to exclude or eject, either temporarily or permanently, any
Assigned Person(s) from its premises.
(c) WORK POLICY. Except as otherwise specified by Pershing, Independent
Contractor and Assigned Person(s) agree to observe the working hours, rules and
holiday schedule of Pershing while working on Pershing's premises. Adherence to
such working hours, rules and holiday schedules shall not constitute
justification for failure to timely complete any Services, nor shall adherence
to Pershing's rules and schedule create an employment relationship between
Pershing and Independent Contractor or Assigned Person(s). Assigned Person(s)
shall not be entitled to receive any benefits or payments which Pershing may
provide to its employees.
(d) SECURITY. Independent Contractor agrees to observe and comply with
(and agrees to cause Assigned Person(s) to observe and comply with) all
policies, measures, procedures and regulations governing the workplace that
Pershing may establish from time to time, including
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without limitation those relating to security, safety, health and decorum.
Without limitation on the foregoing, if Pershing maintains a log book or other
means of tracking entry and exit at its premises where Services are performed,
Assigned Person(s) shall diligently record the date and time of his/her arrival
at and departure from the premises, and any other information that Pershing may
reasonably request. Upon request at any time by Pershing security personnel,
Assigned Person(s) shall display any identification cards furnished by Pershing
or otherwise establish their identity to the satisfaction of such security
personnel.
(e) COMPUTER CENTER. Independent Contractor agrees not to break, bypass
or circumvent. Or attempt to break, bypass or circumvent, any security system of
Pershing or obtain, or attempt to obtain, access to any program or data other
than that which Independent Contractor owns, is developing or testing pursuant
hereto or to which it has expressly been granted access by Pershing in writing.
In the event that Independent Contractor obtains access to any such program or
data, it shall promptly notify Pershing of such access and shall cooperate as
requested by Pershing in any investigation thereof or prosecution resulting
therefrom. Independent Contractor shall not, in any manner whatsoever, use such
program or data, or disclose such program or data to any third party.
Independent Contractor agrees to establish appropriate procedures to limit
access to Pershing facilities by Assigned Persons to those having a need for
such access in connection with the Services and in accordance with the
limitations set forth herein and for the protection of Pershing Confidential
Information (as defined in Section 8 herein). Independent Contractor agrees to
cause Assigned Person(s) to comply with these procedures.
6. TERMINATION.
(a) GENERAL. Either party may terminate this Agreement at any time
and for any reason upon thirty (30) days' advance written notice to the
other, setting forth the effective date of such termination.
If either party fails to discharge a material obligation or to remedy a
material default under this Agreement, the other party may give written
notice specifying the material obligation or material default and indicating
an intent to terminate this Agreement if the material obligation is not
discharged or the material default is not corrected. The party receiving such
notice shall have fourteen (14) days from the date of receipt of such notice
to discharge such material obligation or cure such material default. If the
material obligation is not discharged or the material default is not
corrected by the end of such fourteen (14) day period, the other party may
terminate this Agreement, effective immediately upon written notice to the
defaulting party given at any time after the end of such period, provided
that the material obligation has not been discharged or the material default
is continuing on the date of such notice. Notwithstanding the foregoing,
Pershing may request any Assigned Person to leave its premises immediately in
the event of any perceived risk during the fourteen (14) day period, without
responsibility for payment beyond the actual time worked.
(b) ORDERLY TERMINATION. In the event this Agreement is terminated for
any reason, including, without limitation, default by either party, and
notwithstanding any claim by Independent Contractor for amounts unpaid and in
dispute by Pershing, Independent Contractor
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agrees to provide such information, cooperation and assistance to Pershing or
its designee, as Pershing may reasonably request to assure the orderly
termination of this Agreement and the orderly transfer to Pershing or its
designee of materials relating to, and responsibility for providing, the
Services or services related thereto. Notwithstanding any other provision
hereof, Independent Contractor's obligations to Pershing under this Agreement
shall not terminate until completion of the orderly transfer contemplated by
this section (notwithstanding the fact that Independent Contractor's other
obligations may survive longer as provided by this Agreement).
(c) RETURN OF MATERIALS. Upon termination, Independent Contractor and
Assigned Person(s) are obligated to return to Pershing all copies of such
materials, documentation. programs, drawings, specifications and work product in
its possession or stored in any computer system and to purge all such computer
systems of such copies once copies of same are provided to Pershing. In
addition, Independent Contractor and its Assigned Person(s) are obligated to
immediately return any security identification pass provided by Pershing.
7. INDEMNITY AND INSURANCE.
(a) GENERAL INDEMNITY. Independent Contractor agrees to defend,
indemnify and hold harmless Pershing and its affiliates and their respective
partners, directors, principal, agents, employees, and officers (collectively,
"Pershing Indemnitees") from any loss, damage, liability, cost or expense
resulting or caused by (i) any negligent act or omission or willful misconduct
of Independent Contractor or any Assigned Person; (ii) any breach or default by
Independent Contractor in the performance of this Agreement; (iii) claims for
personal injury or property damage arising out of Independent Contractor's
performance of the Services; or (iv) any claim by an employee or subcontractor
of Independent Contractor against Independent Contractor and/or Pershing
Indemnitees.
(b) INSURANCE REQUIREMENT. Without limiting the scope of the foregoing
indemnification, Independent Contractor agrees to provide to Pershing, within
ten (10) days after the date hereof, a certificate of insurance endorsing
Pershing as an additional named insured to Independent Contractor's insurance,
evidencing the following insurance coverage in the following minimum amounts:
<TABLE>
<CAPTION>
Workers' Compensation Statutory limits
<S> <C>
General Liability $1,000,000 per Occurrence
Automobile Liability $1,000,000 per Occurrence
Errors and Omissions $1,000,000
</TABLE>
The certificate of insurance referred to above shall also state that each
insurance policy is in full force and effect, that the premiums in respect
thereof have been paid in full, and that such policy may not be canceled or
materially changed unless Pershing shall receive thirty (30) days advance
written notice in the event of such cancellation of or material change in the
policy. For so long as Independent Contractor is performing Services hereunder,
at least thirty (30) days before the expiration of any such insurance policy,
Independent Contractor agrees to deliver to Pershing certificates of insurance
attesting to the renewal of such insurance. Receipt by Pershing of any
certificate of insurance which does not conform to the requirements of this
section shall not
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relieve Independent Contractor of its obligation to provide insurance conforming
to the requirements hereof.
(c) ADVERSE TAX INDEMNITY. In the event that the Internal Revenue
Service, any state or local government agency or any other applicable taxing
authority determines that any Assigned Person is an employee of Pershing for
the purpose of any tax liability (including, without limitation, liabilities
relating to employee withholdings and payroll taxes), Independent Contractor
agrees to reimburse Pershing upon demand for, and shall otherwise defend,
indemnify and hold harmless Pershing from and against, all losses, claims,
damages, liabilities, costs and expenses (including but not limited to taxes,
fees, imposts, penalties, interest, and reasonable attorneys' and
accountants' fees), as incurred and on an after tax basis, based on or
arising from or in connection with any such determination.
(d) SURVIVAL. The indemnification provisions in this Agreement shall
remain operative and in full force and effect, regardless of the termination of
this Agreement, and shall survive any such termination.
8. DEFINITION OF CONFIDENTIAL INFORMATION. Information disclosed by Pershing,
including but not limited to, information learned by the Independent Contractor
and Assigned Persons from Pershing's employees, agents or through inspection or
discussion of Pershing's property, that relates to Pershing's or a customer's
methods, trade secrets, programs, operations, customers, products, services,
designs, business plans, business opportunities, finances, research,
development, know-how, personnel or third-party confidential information and the
terms and conditions of this Agreement, will be considered and referred to
collectively in this Agreement as "Confidential Information." Confidential
Information, however, does not include information that: (i) is now or
subsequently becomes generally available to the public through no fault or
breach on the part of the Independent Contractor or Assigned Person; (ii) the
Independent Contractor or Assigned Person can demonstrate to have had rightfully
in its possession prior to exposure to it; (iii) is independently developed by
the Independent Contractor or Assigned Person without the use of any
Confidential Information; or (iv) the Independent Contractor or Assigned Person
rightfully obtains from a third party who has the right to transfer or disclose
it.
All Confidential Information, and any Derivative thereof, whether created by the
Independent Contractor, Assigned Person or Pershing, remains the property of
Pershing and no license or other right to Confidential Information is granted or
implied hereby. For purposes of this Agreement, "Derivatives" shall mean: (i)
for copyrightable or copyrighted material, any translation, abridgment, revision
or other form in which an existing work may be recast, transformed or adapted;
(ii) for patentable or patented material, any improvement thereon; and (iii) for
material which is protected by trade secret, any new material derived from such
existing trade secret material, including any new material which may be
protected by copyright, patent and/or trade secret.
9. NON-DISTRIBUTION/NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Independent
Contractor further covenants and agrees that it: (i) will neither copy,
disclose, publish or distribute Confidential Information to anyone other than
those to whom such disclosure is authorized or necessary for performance of this
Agreement; (ii) will take reasonable
7
<PAGE>
precautions to prevent any unauthorized use, disclosure, publication or
dissemination of Confidential Information; (iii) will not, during the
contractual relationship with Pershing, nor at any time thereafter, directly or
indirectly disclose to others and/or use for its own benefit or for the benefit
of others, Confidential Information, including, but not limited to: trade
secrets, customer lists, employee and prospective employee information,
proprietary software products, any financial information pertaining to
Pershing's business or that of any of its clients, consultants, licensees or
affiliates, acquired by it during the period of its employment, except to the
extent necessary in the ordinary course of performing its duties with respect to
Pershing; (iv) upon termination of its contract with Pershing, the Independent
Contractor will return Confidential Information, and any copies or compilations
thereof and certify to Pershing that it no longer has any rights to such
materials or information, and it covenants that the original and all copies of
such materials and information have been returned to Pershing. In the event of a
breach or threatened breach by the Independent Contractor of the provisions of
this paragraph, Pershing shall be entitled, in addition to all other remedies
available, to an injunction restraining the Independent Contractor from
disclosing any such information or knowledge.
10. PERMITTED DISCLOSURE. The Independent Contractor only may disclose
Confidential Information if required by a judicial or governmental request,
requirement, order or subpoena, and provided that the Independent Contractor
gives Pershing notice of such request, requirement, order or subpoena within
[****] of receipt by Independent Contractor.
11. WARRANTIES. Independent Contractor represents and warrants that: (a) it has
full and unrestricted right to disclose any information, knowledge or data
disclosed by it to Pershing in the performance of this Agreement; (b) it is free
to undertake the Services provided for in this Agreement, and there is no
conflict of interest between Independent Contractor's performance of this
Agreement and any existing obligation Independent Contractor has to other
parties; (c) performance of this Agreement will not violate any non-compete or
non-disclosure provision (or any substantially similar provision) of any
contract or agreement previously entered into by Independent Contractor; and (d)
will not disclose to Pershing or attempt to induce Pershing to use any
Confidential Information or material to which Pershing is not entitled.
12. WORK FOR HIRE. The Independent Contractor will immediately disclose to
Pershing any and all improvements and inventions that it makes solely, or
jointly or commonly with others during the term of its contractual relationship
with Pershing, with respect to:
(a) methods, processes or apparati relating to the services
performed by Pershing; and/or
(b) any character of services sold or used by Pershing.
13. ASSIGNMENT OF RIGHT, TITLE AND INTEREST. The Independent Contractor agrees
to immediately assign, transfer and convey to Pershing its entire right, title
and interest in and to any and all such inventions, as specified herein, and in
and to any and all applications for letters patent that may be filed on such
inventions and in and to all letters patent that may be issued upon such
applications.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
8
<PAGE>
14. NECESSARY STEPS/PROCEDURES FOR ASSIGNMENT. The Independent Contractor agrees
to immediately:
(a) sign any and all instruments necessary for the filing and
processing of any applications for letters patent of the
United States, or of any foreign country, that Pershing may
desire to file upon such inventions as are specified herein;
(b) sign all instruments necessary for reviving or renewing any of
such applications as may become necessary or desirable; and
(c) sign all instruments necessary to the filing and processing of
any continued applications, or reissue applications, that may
subsequently appear to be necessary or desirable to render
such inventions as are mentioned herein effective and of full
force for the purposes of Pershing.
15. HIRING. Independent Contractor agrees that it will not directly or
indirectly hire, solicit or otherwise contract for services with any Pershing
employees or other Pershing contractors or their employees, agents, consultants
or subcontractors during the term of this Agreement and for a period of one (1)
year following the termination thereof. The Pershing Division of Donaldson,
Lufkin & Jenrette Securities Corporation agrees that it will not knowingly
solicit for employment without prior written consent any predictive employee,
consultant or subcontractor during the term of this Agreement and for a period
of one (1) year following the termination thereof.
16. LIMITATION OF LIABILITY. INDEPENDENT CONTRACTOR AGREES THAT NO PERSHING
INDEMNITEES SHALL BE LIABLE FOR ANY LOST PROFITS OR SPECIAL, INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING UNDER THIS AGREEMENT FOR ANY CAUSE
WHATSOEVER, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT OR
STRICT LIABILITY, AND WHETHER OR NOT ANY PERSHING INDEMNITEE HAD BEEN ADVISED OF
OR COULD HAVE FORESEEN THE POSSIBILITY OF SUCH DAMAGES. NO PERSHING INDEMNITEE
SHALL BE LIABLE FOR ANY LOSS, COST, EXPENSE, CLAIM, INJURY OR DAMAGE TO
INDEPENDENT CONTRACTOR OR ITS PROPERTY OR PERSONNEL EXCEPT LOSSES, COSTS,
EXPENSES, CLAIMS, INJURIES OR DAMAGES CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF A PERSHING INDEMNITEE.
Neither party to this Agreement shall be liable to the other for consequential,
incidental or indirect damages, including lost profits arising from default in
the performance of its respective obligations under, or otherwise in connection
with, this Agreement. This limitation applies regardless of the form of action,
whether in contract or tort. However, the provisions of this Section shall not
apply to Independent Contractor's obligation to indemnify any indemnified party.
17. FORCE MAJEURE. In no event shall either party be liable to the other for any
delay or failure to perform hereunder, which delay or failure to perform is due
to causes beyond the control of said party, including but not limited to, acts
of God, acts of the public enemy, acts of the United States of America, or any
state, territory or political division of the United States of
9
<PAGE>
America, or of the District of Columbia, fires, floods, epidemics, quarantine
restrictions, strikes or any other labor disputes and freight embargoes. In
every case the delay or failure to perform must be beyond the control and
without the fault or negligence of the party claiming excusable delay, and the
party claiming excusable delay must promptly notify the other party of such
delay. Performance times under this Agreement shall be considered extended for a
period of time equivalent to the time lost because of any delay which is
excusable under this Section; provided, however, that if any such delay
continues for a period of more than five (5) business days, the party not
claiming excusable delay shall have the option of terminating this Agreement
upon notice to the party claiming excusable delay.
18. ASSIGNMENT. This Agreement shall inure to the benefit of, and be binding
upon, the respective successors and assigns, if any, of the parties hereto.
Neither party shall assign its rights under this Agreement without the prior
written consent of the other party, such consent not to be unreasonably
withheld.
19. NON-USE OF PERSHING NAME. Independent Contractor agrees that it will not, in
the course of performance of this Agreement, or thereafter, use Pershing's name
in any advertising or promotional media without the prior written consent of
Pershing.
20. COMPLIANCE WITH LAWS. Independent Contractor warrants that no laws,
regulations or ordinances of the United States, or any state or government
authority or agency, have been violated, including the Fair Labor Standard Act,
as amended, in the performance of the Services hereunder, and agrees to
indemnify and hold Pershing harmless from any and all claims arising out of
breach by Independent Contractor of its obligations hereunder. Independent
Contractor agrees to, at its own expense, comply with all other laws, rules and
regulations and assume all liabilities or obligations imposed by such laws,
rules and regulations with respect to Independent Contractor's performance.
21. REMEDIES. Independent Contractor acknowledges that any failure to perform
its obligations under this Agreement shall cause Pershing irreparable injury not
compensable by money damages, for which Pershing will not have an adequate
remedy at law. Accordingly, if Pershing institutes an action or proceeding to
enforce the provisions of this Agreement, Pershing shall be entitled, without
the posting of any bond or security, to such injunctive or other equitable from
a court of competent jurisdiction as may be necessary or appropriate to require
Independent Contractor to perform such obligations. The foregoing shall be in
addition to, and without prejudice to, such rights as Pershing may have, subject
to the express provisions of this Agreement, at law or in equity.
Without limiting Pershing's rights in any way, the maximum liability which
Pershing may incur to Independent Contractor for damages of any kind (whether
direct or otherwise), [****]. Independent Contractor's exclusive remedy for
any claim arising out of, connected with, relating to, or resulting from this
Agreement and the obligations under this Agreement are limited to a claim for
the damages set out in this section. This limitation shall apply regardless
of whether the Independent Contractor brings a claim in
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
10
<PAGE>
contract, equity or tort (including but not limited to claims for negligence and
willful misconduct).
All remedies available to either party for breach of this Agreement are
cumulative and may be exercised concurrently or separately, and the exercise of
any one remedy shall not be deemed an election of such remedy to the exclusion
of other remedies.
22. INVOICES, FINANCIAL RECORDS AND AUDIT CAPABILITY. Independent Contractor
agrees to bill Pershing by monthly invoice as of the last calendar day of the
month addressed to:
Ms. Sandra Baptiste
Pershing
19 Vreeland Road
Florham Park, NJ 07932
and agrees to maintain full and detailed records of all items billed to Pershing
under this Agreement. Pershing reserves the right to audit and copy, during
regular business hours, the records pertaining to the scope of this Agreement,
including the records maintained at Independent Contractor's office which may
provide Pershing with evidence that reveals any excessive charges against
Pershing or noncompliance with the terms and conditions herein, for a
[****] period after the termination of this Agreement. If such
audit reveals any excessive charges against Pershing, such excessive charges
shall be refunded to Pershing immediately upon written notification by Pershing
to Independent Contractor, notwithstanding that Pershing may have previously
paid such excessive charges for accepted services. Independent Contractor shall
be given thirty (30) days to refute or approve the findings of any such audit.
Moreover, Independent Contractor agrees to maintain full and detailed records of
all sales tax charged to Pershing and paid to the Government by Independent
Contractor. Pershing reserves the right to copy and audit these tax records
during regular business hours, including any records maintained at Independent
Contractor's office pertaining to sales tax billed to Pershing, for a period of
[****] after the termination of this Agreement.
23. SEVERABILITY. In the event any one or more of the provisions of this
Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable, the remaining provisions of this Agreement shall be unimpaired
and shall continue in full force and effect, and the invalid, illegal or
unenforceable provision shall be replaced by a mutually acceptable provision,
which, being valid, legal and enforceable, comes closest to the intention of the
parties underlying the invalid, illegal or unenforceable provision.
24. WAIVER. The failure of either party to insist upon the performance of any
terms or conditions of this Agreement or to exercise any right or privilege
conferred in this Agreement or the waiver of enforcing penalties resulting from
any breach of any terms and conditions of this Agreement, shall not be construed
as waiving any such terms, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
11
<PAGE>
25. AMENDMENT. Any supplement, amendment or modification of this Agreement shall
be binding upon the parties if it has been made in writing and signed by
authorized representatives of both parties.
26. GOVERNING LAW. This Agreement, and any amendments thereto, shall be governed
by the laws of the State of New York without giving effect to those provisions
governing conflicts of law. By entering into this Agreement Independent
Contractor consents to personal jurisdiction in the courts of the State of New
York.
27. ARBITRATION. The parties agree and acknowledge that any dispute, controversy
or claim, whether statutory or common law, arising out of this Agreement or the
business relationship between Independent Contractor and Pershing, or the
termination of that relationship, included but not limited to, any claims
alleging breach of contract, or any violation of any provision of this Agreement
shall be submitted and finally settled by arbitration in accordance with the
rules of the National Association of Securities Dealers, Inc. ("NASD").
Arbitration must be commenced by service upon the other party of a written
demand for arbitration or a written notice of intention to arbitrate.
- ARBITRATION IS FINAL AND BINDING ON THE PARTIES.
- THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
- PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND
DIFFERENT FROM COURT PROCEEDINGS.
- THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR
TO SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY
LIMITED.
- THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES
INDUSTRY.
Any court of competent jurisdiction may enter a judgment upon the arbitration
award. Any claims for injunctive relief provided for in Section 21 of this
Agreement are not subject to arbitration. The mutual promises by the parties to
arbitrate differences and the considerations set forth on the Schedule(s)
attached to this Agreement, constitute consideration for this agreement to
arbitrate.
The Arbitrator's authority to award damages is limited to the damages set out in
Section 21 of this Agreement. The decision of the Arbitrator will be final and
binding on the parties.
Either party may bring an action in any court of competent jurisdiction to
compel arbitration under this Agreement, to enforce an arbitration award, or to
vacate an arbitration award. The standards for confirmation or vacation of the
award shall be those of the law of the State of New York
NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION, NOR
SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION
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<PAGE>
AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION;
WHO IS A MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH
RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (i) THE
CLASS CERTIFICATION IS DENIED; (ii) THE CLASS IS DECERTIFIED; OR (iii) THE
CUSTOMER IS EXCLUDED FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS
AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
28. HEADINGS. The headings in this Agreement are for purposes of reference only
and shall not limit or affect any of the terms hereof.
29. NOTICES. Any notice or other communication hereunder shall be in writing and
shall be deemed to have been given, when delivered personally; or received by
certified or registered mail, return receipt requested, postage prepaid, at the
respective addresses for the parties as set forth below, or at such other
address as the intended recipient may specify in a written notice pursuant to
this paragraph.
IF TO PERSHING:
---------------
Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corporation
19 Vreeland Road
Florham Park, NJ 07932
Attention: Peter B. Kaim
IF TO INDEPENDENT CONTRACTOR:
-----------------------------
Predictive Systems
25A Vreeland Road
Florham Park, NJ 07932
Attention: Gregory Barry
30. AFFILIATES. The rights, protections and privileges of Pershing under this
Agreement shall inure to the benefit of each affiliate controlling, controlled
by or under common control with Pershing, and each such affiliate or subsidiary
shall be entitled to exercise such rights, benefits, protections and privileges
as if such affiliate or subsidiary were Pershing hereunder.
31. NO THIRD PARTY BENEFICIARIES. Except as provided in Section 30 above, no
third party is intended, or shall be deemed to be, a beneficiary of any
provision of this Agreement.
32. COUNTERPARTS. This Agreement may be executed in counterparts each of which
shall be deemed an original and all of which together shall constitute one
instrument.
33. ENTIRE AGREEMENT. The provisions, terms and conditions of this Agreement
represent the entire agreement between the parties and supersede any prior
written or oral communications, discussions or understandings not incorporated
herein. In the event inconsistencies exist between this Agreement and any prior
written agreement or understanding, the terms of this Agreement shall prevail.
13
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and do
each hereby warrant and represent that their respective signatory whose
signature appears below has been, and is on the date of this Agreement, duly
authorized by all necessary and appropriate corporate action to execute this
Agreement.
This Agreement contains a pre-dispute arbitration clause in paragraph 27
beginning on page 12. Independent Contractor acknowledges receiving a copy of
this Agreement.
10/14/98 PERSHING DIVISION OF DONALDSON,
- ---------------------- LUFKIN & JENRETTE SECURITIES
(Date) CORPORATION
By: /s/ Gregory J. Barry By: /s/ [illegible]
-------------------------------- ----------------------------
14
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
Exhibit 10.12
AGREEMENT
(CONSULTING SERVICES)
THIS AGREEMENT, hereinafter called "Agreement", made as of October 15, 1998, by
and between FIRST UNION CORPORATION, 301 South College Street, Charlotte, NC
28288-0860, hereinafter called "First Union" and PREDICTIVE SYSTEMS, INC, 620
Hernden Parkway, Suite 360, Hernden, Virginia 20170, hereafter called
"Supplier".
IN CONSIDERATION of the mutual premises, covenants, and agreements made and
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Definitions: When used herein with initial capitalization whether in
the singular or in the plural, the following terms shall have the
following meanings:
"Changes Order" = An official document issued by First Union, and
countersigned by Supplier, after the Effective Date of this Agreement to
amend the method, manner or the performance of the work, the Statement of
Work, Statement of Work or Project Plan within the general scope of
services provided under this agreement.
"Effective Date" = The date first set forth above.
"First Union" = First Union Corporation and all banks and other
organizations which are or hereafter became subsidiaries of, or otherwise
controlled by, First Union Corporation, and any bank or other organization
which may hereafter acquire a controlling interest in First Union
Corporation or any of its subsidiaries.
"First Union Representative" = A First Union employee designated to
coordinate the performance of Services (as hereinafter defined).
"Statement of Work" = The more particular description of Services to be
provided by Supplier to First Union, executed and delivered by Supplier and
First Union, sequentially numbered, attached hereto and made a part hereof.
"Work Order" = A document drafted hereunder by First Union to Supplier, and
countersigned by Supplier setting forth, without limitations, a description
of specific Services to be performed, the performance schedule, a list of
the personnel required from Supplier, and the name of the First Union
Representative.
2. Acceptance: First Union hereby engages Supplier to perform the services
(the "Services") described in the Statement of Work attached hereto and
such additional statements of Work, Change Orders and/or Work Orders as
may be mutually entered into by First Union and Supplier from time to
time. Supplier hereby accepts said engagement, and agrees to provide
personnel to render such Services to the best of their ability at such
place or places as shall be mutually agreeable to First Union and
Supplier. First Union shall have the right to reject at any time any of
Supplier's personnel whom First Union determines to be unqualified or
otherwise unsatisfactory to perform such Services.
<PAGE>
3. Supplier Warranty: Supplier shall perform the Services during the
period commencing on the date hereof and ending on the completion of
work specified on attached Statement(s) of Work, or any exception
thereof. Supplier warrants that the Services shall be performed in
a workmanlike manner in accordance with the prevailing reasonable
commercial standards applicable hereto, and in compliance with all
applicable statutes, acts, ordinances, laws, rules, regulations,
odes, and standards. The warranties provided herein are cumulative
of any other warranties agreed to by Supplier and are subject to
Section 28 hereof.
4. Fees & Invoices: First Union agrees to pay the Fees provided in the
Statement of Work in U.S. dollars at the address of the Supplier stated
herein. If provided for in the Statement(s) of Work, First Union shall
reimburse Supplier for transportation (except for normal commuting),
lodging and substances for travel authorized in advance by First Union.
Travel expenses will be paid only in accordance with the effective
policy of First Union covering such expenses invoices shall be sent by
Supplier for all payments hereafter. Invoices shall describe the items
charged for in the invoice and shall be subject to approval by the
First Union Representative for conformity with this Agreement and the
statement(s) of Work. Invoices shall be payable within thirty (30) days
after the receipt at First Union's Accounts Payable Division. First
Union may [****]. Supplier agrees to arrange for an account to
receive payment made by electronic transfer, at First Union's
option. No payment made by First Union shall be considered as
acceptance of satisfactory performance of Suppliers obligations
under this Agreement, nor shall any payment be construed as
acceptance of substandard or careless products or services or as
relieving Supplier from its full responsibility under the Agreement.
5. Performance and Personnel: Supplier's personnel working at First Union
location shall meet the rules and requirements of First Union as may be
in effect from time to time, regarding the conduct, appearance,
cleanliness, work history and qualifications, and personal history
including violent or criminal conduct for persons working at First
Union locations, and Supplier shall perform all drug testing,
background and credit checks and other procedures required by First
Union policy. At the request of First Union Supplier shall provide
services to First Union satisfactory to First Union, that Supplier's
personnel meet the rules and requirements of First Union pertaining to
work history and qualifications and personnel history. Supplier shall
not assign any personnel to work hereunder who would under current
First Union policy be disqualified from employment with First Union due
to a relationship by blood or marriage with a First Union employee, and
shall also apply said policy to its own personnel assigned to work
hereunder, so that none of them are so related to each other. First
Union shall disclose the above employment rules, requirements, and
policies to Supplier, and Supplier shall screen its personnel to ensure
compliance. Supplier shall provide First Union with the name, address,
date of birth, and social security number of each personnel assigned to
work on First Union's premises, and shall update such information
whenever changes occur. While at any First Union location, Supplier and
Suppliers personnel shall follow all
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
2
<PAGE>
reasonable directions and instructions given by First Union. Upon the
request of First Union, which request may be made without reasons,
Supplier shall reassign or otherwise arrange so that a particular
employee or agent of Supplier does not work at any Firsts Union
location.
6. Locations: At any time during the term hereof, First Union may add or
eliminate locations to be served by Supplier. If locations are
eliminated, payment to Supplier shall be reduced by the charges for
Services attributable to such locations. If location are added, First
Union shall pay the additional location charges set forth in the
Statement of Work. First Union may, from time to time, change the
description of Services in the Statement of Work and in such event
First Union and Supplier shall agree to an adjustment in the price of
Services to reflect any changes in cost to Supplier attributable to
such charges.
7. Security: When Supplier is performing Services on First Union's
premises, Supplier shall comply with First Union's security, safety,
and fire protection procedures. If Supplier is given keys or other
access devices to First Union premises or equipment, Supplier shall use
reasonable efforts to protect such keys or access devices, shall
maintain a log book of the matters of personnel and times when they
have possession of such keys or access devices, shall account for all
such keys and access devices whenever requested to do so by First
Union, and shall return all such keys and access devices upon request
and upon termination of its obligations hereunder. First Union may
require Supplier's personnel to carry or display identification cards
when on First Union's premises. First Union shall have the right to
inspect the contents of all containers or packages being brought into
or removed from First Union' locations.
8. Copyrights: Supplier agrees that all right, title and interest in and
to all Deliverables, as identified in the applicable Statement(s) of
Work which Supplier produces or composes in connection with the
Services to be performed hereunder for First Union or any of its
affiliates shall be considered work made for hire and shall belong to
First Union. Supplier hereby assigns all rights, title, and interest to
each work to First Union and agrees to execute any additional documents
appropriate to further such assignment. Notwithstanding anything to the
contrary herein, Supplier shall retain all ownership rights in and to
underlying ideas or constituent elements of procedures, processes,
architectures, systems, concepts, techniques and methods of operation
embodied in such Deliverables (collectively the "Know How"), provided,
however, that First Union shall have a perpetual personal,
non-exclusive license to use the Know-How contained in any Deliverables
hereunder solely in connection with First Union's use of such
Deliverables.
9. Disaster Recovery: Supplier shall provide disaster recovery and backup
capabilities and facilities through which Supplier will be able to
order the Services to First Union with minimal disruptions or delays.
Supplier shall provide to First Union copies of the writing plan or
plans for any such disaster recovery and backup arrangements.
10. Remedies: Services are "Non-conforming" when particular services do not
meet the requirements of this Agreement (including the applicable
Statements(s) of Work), the warranties set forth herein, or other
applicable express warranties or implied warranties.
3
<PAGE>
First Union may require Supplier to , at Supplier's expense, re-perform
or replace non-conforming Services. In the event Supplier has attempted
and failed to satisfactorily perform such Non-conforming Services,
First Union, at is option, may engage another person to re-perform or
replace Non-conforming Services at Supplier's expense, if First Union
has paid Supplier for said Services.
11. Indemnification: Supplier agrees to indemnify and hold harmless First
Union, and any employee or agent thereof (each of the foregoing being
hereinafter referred to individually as the "Indemnified Party")
against all liability (including reasonable attorney's fees and costs)
to third parties (other than to the extent such liability is
attributable to the fault of the Indemnified Party) arising from the
negligence of the Supplier or its agents in the performance of its
obligations hereunder. Supplier's obligation to indemnify shall survive
the expiration or termination of this Agreement by either party for
any reason. Supplier may, at its option, conduct the defense in any
such third party action arising as described herein and First Union
shall cooperate fully with such defense.
12, Insurance: For and during the term of this Agreement and for as long as
Supplier is performing Services hereunder, Supplier shall maintain
insurance coverage and bonding as follows:
<TABLE>
<S> <C> <C>
Commercial General $1,000,000 per occurrence Covering, bodily injury,
Liability $2,000,000 general aggregate personal injury, including
without limitation, all
contractual liability for such
injury or damage assumed by
supplier under this Agreement.
Worker's Compensation Statutory In accordance with all federal
State & local requirements.
Employers Liability $500,000 each accident Covering bodily injury by
$500,000 disease/policy limit disease (including death)
$500,000 disease/each employee
Automobile Liability $1,000,000 combined single limit Covering bodily injury
(including death) and property
damage for all vehicles that
Supplier owns, hires or leases
Employee Dishonesty $500,000
Umbrella Liability $5,000,000
Errors and Omissions Liability $1,000,000
</TABLE>
First Union Corporations shall be named as additional insured under each
such policy of insurance obtained by Supplier. [****]. These insurance
provisions set
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
4
<PAGE>
forth the minimum amounts and scopes of coverage to be maintained by
Supplier and are not to be construed in any way as a limitation on
Supplier's liability under this agreement. The insurance coverage shall be
primary and will not participate with nor will be access over any valid and
collectable insurance or program of self-insurance carried or maintained by
First Union.
Supplier shall furnish Certificate of Insurance evidencing all of the
foregoing insurance coverage prior to or upon execution of this Agreement.
Full copies of the policies required above shall be furnished to First
Union Upon request, subject to availability. All of the above described
policies shall provide that no less than (30) days prior written notice of
cancellation, notification, reduction in coverage or non-renewal shall be
given to First Union. The failure of Supplier to comply with any of the
terms of these policies shall not adversely affect First Union's coverage
thereunder. Certificates of Insurance evidencing any notification renewal
or replacement of any of these insurance coverages shall be furnished to
First Union promptly after such modification, renewal, replacement, or
reduction in coverages below the limits set forth above. In the event that
any Services under this Agreement are to be rendered by persons other than
the Suppliers own employees, Supplier shall arrange for such persons
forward to First Union, prior to commencement of Services by them,
Certificates of Insurance evidencing such amounts, in such form, and with
such insurance companies as are satisfactory to First Union.
13. Termination Assistance: In connection with the termination of this
Agreement for any reason, and notwithstanding any dispute between the
parties, Supplier shall provide to First Union such termination
assistance as it may reasonably request in order to provide an orderly
transition from Supplier to another provider of Services. If any such
termination assistance requires resources in addition to those being
used by Supplier in the performance of the Services, First Union shall
pay Supplier therefor on a mutually acceptable basis. First Union shall
continue to pay for all Services performed by Supplier after the
termination date, provided that if termination was by reason of a
payment default by First Union, Supplier shall be entitled to
reasonable assurances acceptable to it prior to commencing such
termination assistance that it will be fully compensated for such
termination assistance.
14. Authority: Supplier and First Union each represent to the other that
the execution, delivery and performance of this Agreement by such party
has been fully approved by all necessary corporate action, and does not
conflict with, or result in a material breach of, the articles of
incorporation or by-laws of such party, any material agreement by which
such party is bound, or any law, regulation, rule, judgment or decree
of any governmental instrumentality or court having jurisdiction over
such party; and this Agreement has been duly executed by such party and
constitutes a valid and legally binding obligation of such party
enforceable in accordance with its terms.
15. Compliance with Laws: Supplier warrants that it shall perform its
obligations under this Agreement in accordance with the prevailing
reasonable commercial standards applicable thereto, and in compliance
with all applicable statues, acts, ordinances, laws, rules,
regulations, codes, and standards.
5
<PAGE>
16. Year 2000 Date Change Warranty: Supplier warrants that all Goods,
Equipment, and Software delivered in connection with the Services
("Deliverables") include, at no additional cost to First Union, design
and performance capabilities so that prior to, during, and after the
calendar year 2000, the Deliverables will not malfunction, produce
invalid or incorrect results, or abnormally cause to function because
of the year 2000 date change. Such design and performance capabilities
shall include without limitation the ability to recognize the century
and to manage and manipulate date involving dates, including single
century and multi-century formulas and date values, without resulting
in the generation of incorrect values involving such dates or causing
an abnormal ending; date data interfaces with functionalities and data
fields that indicate the century; and date related functions that
indicate the century. Supplier warrants that all Services performed
shall not cause any affected Goods, Equipment or Software supplied by
it to breach this warranty. Supplier further warrants that all methods
and procedures by which it interfaces with First Union hereunder,
including without limitation, its ordering involving, and payment
procedures, shall be Year 2000 compliant.
17. Taxes: First Union shall pay all sales, excise, or use taxes due on the
transactions hereunder or provide Supplier customary proof that the
transactions are exempt from sales taxes. Invoices shall separately
identify any tax and shall include either Supplier's sales tax or use
tax permit number. Supplier shall pay any other taxes, assessments or
fines arising from Supplier's performance or the transactions under
this Agreement, including taxes based upon Supplier's Net Income and
penalties imposed due to failure to file or pay collected sales or
use taxes.
18. Good Standing and Permits: Supplier represents and warrants that it is
in good standing in the state of its incorporation and that it has all
licenses and permits necessary or required to provide such products
and/or services. Supplier shall provide copies or other evidence
thereof to First Union upon request. Any fees for licenses and permits
required by law or regulation that may be necessary to Supplier's
performance hereunder shall be the responsibility of Supplier.
19. Employee Matters: Supplier's personnel shall not be considered
employees of First Union within the meaning or application of any
federal, state, or local laws or regulations. Supplier shall be
responsible for the payment of wages, salaries, and other amounts due
its employees in connection with the services performed hereunder, and
shall be responsible for all payroll reports and obligations,
including, but not limited to withholding, social security,
unemployment insurance, worker's compensation, immigration and
naturalization, and similar items.
20. Equal Employment: Both parties agree that they shall not discriminate
against any employee or applicant for employment because of race,
creed, color, age, sex, national origin, marital status, liability for
services in the armed forces, disability due to veteran status, status
as veteran of the Vietnam era, or the handicapped, and they shall
comply with all the requirements of the Equal Opportunity Clause set
forth in Executive Order 11246, as amended, and its implementing
instructions, as well as the Rehabilitation Act
6
<PAGE>
of 1973 and the Vietnam Era Veterans' Readjustment Assistance Act
of 1974, which are incorporated herein by reference. In the event
that and at such time as First Union requests, Supplier shall furnish
to First Union written certification that Supplier is in compliance
with Executive Order 11246 and applicable regulations thereunder. Both
parties certify that they do not and shall not maintain facilities for
their employees in a segregated manner or permit their employees to
perform their services at any location under their control where
segregated facilities are maintained, and agree to obtain similar
certifications from any subcontractors.
21. Non-Solicitation of Employees: Both Supplier and the First Union agrees
not to directly solicit employment of each other" employees directly
associated with this Agreement during the term hereof and for a period
of one (1) year thereafter.
22. Confidential Information: Each party agrees that information concerning
the other party's business (including that of all corporate affiliates
and subcontractors) is "Confidential Information" and shall be
maintained in confidence and not disclosed, used or duplicated, except
in accordance with this Agreement. Confidential Information may
include, without limitation, list of customers, business volumes or
usage , financial information, pricing information, information related
to mergers or acquisitions, software, software documentation, and
information concerning business plans or business strategy. Each party
may use Confidential Information of the other only in connection with
performance under this Agreement. The parties shall not copy
Confidential Information or disclose Confidential Information to
persons who do not need Confidential Information in order to perform
under this Agreement. Confidential Information shall be returned to the
party seeking to protect such information upon request of the other
party. Confidential Information does not include information that is
(i) generally known or available to the public, (ii) not treated as
confidential by the party claiming information to be confidential,
(iii) was already known to Supplier or in Supplier's procession, (iv)
Supplier can reasonably demonstrate was developed by Supplier without
making use of First Union Confidential Information (which may
include providing other customers of Supplier having network
environments similar to that of First Union with solutions similar to
those provided by it to First Union), or (v) Supplier rightfully
received from a third party without knowledge of violation of any
obligation of confidentiality. Nothing contained in this Section 22 or
otherwise shall prohibit Supplier from making disclosure of
Confidential Information to the extent required by law, rule or
regulation, provided that Supplier shall give First Union prior notice
as to the nature of the required disclosure so as to afford First Union
the opportunity to challenge the need for such disclosure. Supplier
shall not advertise, market or otherwise make known to others any
information relating to the subject matter of this Agreement, including
mentioning or implying the name of First Union. If requested by First
Union any employee, representative, agent or subcontractor of
Supplier's shall enter into a non-disclosure agreement with First Union
to protect the Confidential Information of First Union satisfactory to
First Union. A breach of either party's confidentiality obligations or
the use by Supplier of First Union's name without prior consent may
cause First Union to suffer irreparable harm in an amount not easily
ascertained. The parties agree that such breaches whether threatened or
serious, will give
7
<PAGE>
the non-breaching party the right to terminate this Agreement
immediately, obtain equitable relief, i.e., obtain an injunction to
restrain such disclosure or use, and pursue all other remedies said
party may have at law or in equity. The provisions of this section
shall survive the termination of this Agreement.
23. Use of Name: Neither party shall use the name of the other for
advertising or other such purposes without the prior written approval
of the other party.
24. First Union's Instructions: During the term of the Agreement, Supplier
shall cause its employees and agent to obey all reasonable instructions
and directions issued by First Union concerning the First Union's
business operations when Supplier's employees and agents are on First
Union's premises.
25. Change Orders: Supplier shall promptly evidence its acceptance of each
Change Order by promptly executing the Acceptance Copy of such Change
Order and returning such Acceptance Copy to First Union. Supplier shall
promptly notify First Union of any objections to the Change Order and
Supplier's failure to timely object shall constitute acceptance of the
Change Order.
26. Audits: The audits personnel of First Union, as well as examiners and
representatives of First Union's regulatory agencies, will have the
right to make such audits, examinations and inspections of Supplier's
financial records and procedures as maybe reasonably relevant to
Supplier's compliance with its obligations under this Agreement,
following reasonable prior notice and conducted so as to minimize any
interference with Supplier's business. Supplier may require such
persons to provide reasonable evidence of their authority before being
admitted to Supplier's facilities.
27. Force Majeure: In the event that either party is unable to perform any
of its obligations under this agreement, or to enjoy any of its
benefits because of fire, natural disaster, action or decrees
governmental bodies (a "Force Majeure Event"), the party who has been
so affected shall immediately give written notice to the other party
and shall do everything possible to resume performance. Upon receipt
of such notice, all obligations under this Agreement shall be
immediately suspended. If the period of nonperformance exceeds
thirty (30) days from the receipt of notice of the Force Majeure Event,
the party whose ability to perform has not been so affected, may by
giving written notice, terminate this agreement. Delays in delivery
due to Force Majeure Events shall automatically exceed the delivery
date for a period equal to the duration of such Events, any warranty
period affected by a Force Majeure Event shall likewise be extended
for a period equal to the duration of such Force Majeure Event. As
applied to this section and to determine whether an event is wholly
beyond control of a party, strikes, slowdowns or other labor related
delays are not Force Majeure Events.
28. Limitation of Liability: Neither First Union nor Supplier shall be
liable to the other party for any consequential, incidental or
punitive damages. This limitation shall not diminish Supplier's
obligation to indemnify, hold harmless and defend First Union under
the express terms of this Agreement. WITHOUT LIMITING THE FOREGOING,
8
<PAGE>
SUPPLIER MAKES NO EXPRESS OR IMPLIED REPRESENTATIONS WITH RESPECT TO
ITS PERFORMANCE OF THE SERVICES HEREUNDER OR ANY DELIVERABLES
CONTEMPLATED HEREBY, INCLUDING, WITHOUT LIMITATION, ANY REPRESENTATION
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. In performing
the evaluation of risk contemplated by the Statement of Work attached
hereto, Supplier will perform certain procedures referred to in the
Statement of Work in an attempt to identify certain risks referred to
therein and to develop estimates as to their probability and risk
potential, based in part on information supplied by First Union.
Supplier will also utilize certain publicly available information in
performing the Services, but makes no representation or warranty with
respect thereto or with respect to my analysis based thereon. While
Supplier believes that the procedures to be performed by it provide a
reasonable method of attempting to analyze and qualify certain risk,
there can be no assurance that all applicable risks will be identified
or that any such risk can be adequately qualified, and Supplier makes
no representation or warranty with respect to any risk identification
or qualification made or delivered by it. In no event shall Supplier
have any liability for any loss or harm suffered by First Union arising
out of or relating to any such risks or the failure to identify or
accurately quantify any thereof.
29. Future Acquisitions: If during the term of this Agreement, First Union
shall acquire control of any entity which is under an existing contract
with Supplier that covers or relates to the subject matter of the
Agreement, First Union, at its option, may keep the acquired entity's
existing contract in effect until the date of termination of the
existing contract, after which, such acquired entity may receive the
benefits of this Agreement, or may immediately cancel such existing
contract after which such acquired entity may receive the benefits of
this Agreement.
30. Term: The term of this Agreement shall commence on the Effective Date,
and end on date on which all Services to be performed under the
Statement(s) of Work issued hereunder are completed.
31. Termination for Convenience: First Union may terminate this Agreement
at any time by providing at least thirty (30) days written notice of
termination to Supplier.
32. Termination for Cause: If either party materially or repeatedly
defaults in the performance of any of its duties or obligations
hereunder (including defaults for which specific remedies, are provided
herein), and said default is not substantially cured within thirty (30)
days after written notices specifying the default is given to the
defaulting party, or, with respect to those defaults that cannot
reasonably be cured within thirty (30) days if the defaulting party
fails to provide in writing within thirty (30) days to the party not
in default a reasonable plan and completion date for curing such
default and thereafter proceed with all due diligence to substantially
cure the same in accordance with such plan and by such completion date,
then the party not in default may, by giving written notice thereof to
the defaulting party, terminate this Agreement as of the date specified
in such notice of termination. If either party becomes or is declared
insolvent or bankrupt, is the subject of any proceedings relating
to its liquidation or insolvency
9
<PAGE>
or for the appointment of a receiver for it, makes an assignment for
the benefit of all or substantially all of its creditors, or enters
into an agreement for the composition, extension, or readjustment of
all or substantially all of its obligations, then the other party may,
by giving written notice thereof to such party, terminate this
Agreement as of a date specified in such notice of termination. If any
of the insurance coverages or policies required to be maintained by
Supplier under this Agreement is terminated, lapses or for any reason
does not remain in full force and effect, or any such coverage or
policy is replaced or partially modified without the prior written
consent of First Union, then First Union may, by giving written notice
thereof to Supplier, terminate this Agreement upon the date specified
in the notice, which date may be the date of the notice.
33. Mandatory Arbitration & Applicable Law: Any dispute, claim or
controversy arising out of, connected with or relating to this
Agreement shall be resolved by binding arbitration administered and
conducted under the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of the United States Code. The
prevailing party in any judicial action or arbitration shall be
entitled to reimbursement from the other party for costs, filing fees,
arbitration filing fees, reasonable pretrial, trial and appellate
attorney's fees, witness fees, expert fees, arbitration panel fees,
and travel fees. A judgment upon the arbitration award may be entered
in any court having jurisdiction. Any arbitration hearing shall take
place at Charlotte, North Carolina. Nothing in this section, however,
shall prevent either party from seeking equitable relief from a court
of competent jurisdiction for the other party's breach of the
Confidential obligation or infringement of intellectual property
rights and any proprietary sections of this Agreement. The Agreement
shall be governed by the laws of North Carolina.
34. Subcontracts and Assignment: Supplier shall not assign, in whole or
part, any of its obligations under this Agreement without First Union
written consent. First Union may assign any benefits or obligations
under this Agreement to any "affiliate" (as defined in 11 U.S.C.
101(2)) of First Union. The assignor under such assignment by First
Union shall remain liable under the Agreement. Supplier shall not
subcontract any portion of its performance obligations under
an Agreement without First Unions prior written approval of
the subcontractor.
35. Miscellaneous: Termination of this Agreement shall not release either
party form their respective obligations hereunder with regard to
products or services already delivered or performed, including, without
limitation, obligations of payment, warranty, and from the
confidentiality and indemnity provisions hereof. Any invalidity in
whole or in part, or any provision of this Agreement shall not affect
the validity of any other of its provisions. No term or provision
hereof shall be deemed waived and no breach executed unless such waiver
or consent shall be in writing and signed by the party claimed to have
waived or consented. Failure to exercise a right or remedy at law
granted hereunder shall not be deemed a waiver of such right or remedy.
Failure to claim default hereunder shall not waive any default.
36. Relationship Between the Parties: The services of Supplier are to be
rendered as an Independent contractor, and Supplier is not an employee,
agent, or partner of First Union.
10
<PAGE>
This Agreement and the transactions referred to herein were negotiated
in an "arms length" manner. Supplier warrants that this Agreement and
such transactions have not been procured through unfair or unethical
conduct. This Agreement is solely for the benefit of the parties hereto
and no other persons.
37. Notices: All notices of other communications required or contemplated
herein shall be sufficient and deemed delivered if in writing and
deposited with the Unites States Postal Service, postage prepaid via
certified mail, addressed to the parties as set forth below, or to such
other address as may be changed from time to time by notice duly given.
To: Predictive Systems, Inc To: First Union Corporation
620 Harnsdow Parkway 1525 West W.T. Harris Blvd.
Suite 360 Charlotte, NC 28273
Herndon, Virginia 20170 Attention: James Reagan
cc: First Union Corporation
301 South College Street
Charlotte, NC 28288-0860
Attention: General Services
1. The Agreement: This Agreement, including all documents referred to herein
and attached hereto, constitutes the entire agreement of the parties on the
subject matter hereof and supersedes all prior representations,
understandings and agreements between the parties with respect to such
subject matter, and the signing of same by both parties shall cause this
Agreement to be valid upon the Effective Date designated hereof. The
documents referred to herein and attached hereto shall be read together
with this Agreement to determine the parties' intent. If there is a
conflict between or among such documents, this Agreement shall be the final
expression of the parties' intent.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
FIRST UNION CORPORATION PREDICTIVE SYSTEMS, INC.
By: /s/ Lawrence Platter By: /s/ Mark L. Farrar
------------------------- ------------------------
Name: Lawrence Platter Name: Mark L. Farrar
------------------------- ------------------------
Title: Assistant V.P. Title: Regional Vice President
------------------------- ------------------------
Date: 10/29/98 Date: October 21, 1998
------------------------- ------------------------
This Agreement has been reviewed and authorized by the following First Union
business unit:
By: /s/ Kellie Scott
---------------------------
11
<PAGE>
Name: Kellie Scott
---------------------------
Title: Director Internet Center
---------------------------
Date: 10/27/98
---------------------------
12
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
Exhibit 10.13
STRATEGIC PARTNERING AGREEMENT
BY AND BETWEEN
CABLETRON SYSTEMS, INC.
AND
PREDICTIVE SYSTEMS, INC.
EFFECTIVE DATE: JULY 30,1999
<PAGE>
TABLE OF CONTENTS
SECTION 1. PAGE 1
SECTION 2. PAGE 2
SECTION 3. PAGE 3
SECTION 4. PAGE 7
SECTION 4A. PAGE 8
SECTION 5. PAGE 8
SECTION 6. PAGE 11
SECTION 7. PAGE 11
SECTION 8. PAGE 11
SECTION 9. PAGE 11
SECTION 10. PAGE 11
SECTION 11. PAGE 12
SECTION 12. PAGE 12
SECTION 13. PAGE 13
SECTION 14. PAGE 14
SECTION 15. PAGE 15
SECTION 16. PAGE 15
SECTION 17. PAGE 15
SECTION 18. PAGE 16
SECTION 19. PAGE 17
SECTION 20. PAGE 17
SECTION 21. PAGE 18
SCHEDULES PAGE 20
<PAGE>
STRATEGIC PARTNERING AGREEMENT
BETWEEN
CABLETRON SYSTEMS, INC.
AND
PREDICTIVE SYSTEMS, INC.
THIS AGREEMENT (the "Agreement") made and entered into this
30th day of July, 1999, by and between Cabletron Systems, Inc., a Delaware
corporation with offices located at 35 Industrial Way, Rochester, New Hampshire
03867 (hereinafter "Cabletron"), and Predictive Systems, Inc., a Delaware
corporation with offices located at 145 Hudson Street, New York, New York, 10013
(hereinafter "Predictive").
RECITALS
WHEREAS, Cabletrom is a provider of network technology and consulting services
worlwide; and
WHEREAS, Predictive is a provider of services which, among
other things, assess the effectiveness of customers' security systems with
respect to specified applications, networks, network servers, and other
information assets; and
WHEREAS, Cabletron desires to enter into an agreement with
Predictive, and Predictive desires to do the same with Cabletron, to enable
Cabletron to offer such security assessment and other services to its customers,
on the terms and conditions set forth below.
NOW THEREFORE, in consideration of the foregoing and the
mutual covenants set forth in this Agreement, and other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to as follows:
1. DEFINITIONS
1.1 "Customer" is a customer to whom services are provided in a Project
pursuant to this Agreement
1.2 "Project" is a work project for a Customer that is subject to this
Agreement. A Project may be an Assessment Project, a Follow-On Project or a
Teaming Project.
A. An "Assessment Project" is a Project involving only
delivery of the services contemplated by the relevant Assessment Product.
B. A "Follow-On Project" is a Project for a Customer that
addresses a particular issue or issues identified by Predictive or Cabletron in
connection with, or that otherwise arises out of, and Assessment Project, a
Teaming Project, or a Follow-On Project arising out of an Assessment Project or
a Teaming Project.
C. A "Teaming Project" is a Project mutually determined by the
parties to be undertaken as a team with respect to customers of Cabletron, in
accordance with Section 4A hereof.
1.3 "Assessment Product" means a packaged service development by
Predictive and marketed by Cabletron's sales force pursuant to this Agreement,
including without limitation, the ISRA product referred to in Section 3.
3
<PAGE>
1.4 "Assessment Project Agreement" means the statement of work and
associated purchase order between Cabletron and Predictive or Cabletron and the
Customer, as the case may be, with respect to an Assessment Product. The form of
Assessment Project Agreement relating to the ISRA product is attached hereto
Schedule 1.4, and the Assessment Project Agreements for other Assessment
Projects shall be substantially similar thereto, with such changes as may be
mutually agreed to by Predictive and Cabletron. Assessment Project Agreements
may be modified only by mutual agreement of Cabletron, and Predictive, and shall
be subject to the terms of this Agreement.
1.5 "Pricing Algorithm" means Predictive's proprietary pricing
algorithm for each Assessment Product.
1.6 "Term" means the two (2) year period beginning on the date of
hereof, which shall be automatically extended for successive one(1) year
periods, unless sooner terminated in accordance with Section 17.
2. STRATEGIC PARTNERSHIP
Cabletron and Predictive are entering into a strategic partnership
during the Term hereof pursuant to the terms and conditions of this Agreement.
2.1 Cabletron and Predictive will cooperate as to Assessment Projects
and Follow-On Projects in accordance with Sections 3 and 4, respectively.
2.2 Cabletron and Predictive will actively cooperate to identify and
carry out Teaming Projects in accordance with Section 4A. The parties shall
cooperate to produce a standard agreement for Teaming Projects, but recognize
that the Customer may require changes thereto. Each of the parties agrees not
unreasonably withhold consent to such changes, consistent with its generally
applicable operational and risk management policies.
2.3 Except as otherwise mutually agreed to by the parties in writing,
[****]. If so agreed by the parties in writing with respect to a particular
Project, Predictive and Cabletron personnel carrying out such Project will
identify themselves as members of their respective organizations acting
pursuant to the "Cabletron/Predictive Strategic Partnership" (or such other
name as may be jointly determined by the parties).
2.4 The form of any announcements relating to the relationship
contemplated hereby, marketing materials relating thereto and other
communications regarding the parties' common activities hereunder, shall be
subject to the approval of both parties (subject to disclosure obligations, if
any, under applicable securities laws).
2.5 A. The parties hereby establish an Oversight Committee to monitor
and oversee the strategic relationship contemplated hereby. The Oversight
Committee shall act as a facilitator of this Agreement and shall have authority
to act on behalf of the parties, except as otherwise provided in this Agreement,
and except to the extent that any act or decision of the oversight Committee is
subject to the internal review or approval of either party (in which event such
party shall so inform the other members of the Committee). Each party shall
appoint two (2) members of the Oversight Committee, who shall serve at the
pleasure of their employers or until they resign or are unwilling or unable to
serve. Subsequent appointments to fill vacancies or otherwise to replace a
member shall be made by the respective parties. The initial members appointed by
Predictive shall be [****] and the initial members appointed by Cabletron shall
be [****].
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
4
<PAGE>
The Oversight Committee shall meet at least quarterly, preferably in person,
alternating between the respective facilities of Cabletron and Predictive.
B. The parties may also form such implementation and other
teams and committees as they may deem necessary or desirable from time to time.
Any such teams or committees shall report to the Oversight Committee, and shall
have the authority granted them by such Committee (subject to Section 2.5A).
Each of the parties hereto shall also appoint contact persons to handle
operating issues arising under this Agreement from time to time, whose functions
and authority may be determined by the Oversight Committee. The Oversight
Committee (or its subcommittees or the contact persons referred to in the
preceding sentence, as determined by the Oversight Committee) shall be
responsible for, among other things, preparing and/or coordinating approval and
execution of any modifications to this Agreement or any schedules or other
documents to be created pursuant hereto, and resolving any disagreements or
disputes (in accordance with Section 21.8 hereof).
2.6 Predictive shall provide Cabletron with all necessary information
and training to enable Cabletron to promote and market the services contemplated
hereby, Cabletron shall afford representatives of Predictive reasonable access
to Cabletron's sales force (including, without limitation, permitting such
representatives to attend appropriate national and/or regional sales training
conferences) to enable Predictive to assist such sales force in the marketing of
Assessment Products, Follow-On Projects and other services provided by the
parties pursuant to this Agreement. Such access may be coordinated through the
Oversight Committee or its designees.
3. ASSESSMENT PROJECTS.
3.1 Concurrently with the date of this Agreement, Predictive is
delivering to Cabletron, for marketing in accordance with this Agreement, all
relevant materials relating Predictive's Information Security Requirements
Analysis ("ISRA") product, including related marketing materials and customer
service software containing the Pricing Algorithm. A list of all materials
relating to the ISRA product delivered to Cabletron by Predictive is attached
hereto as Schedule 3.1. Cabletron has introduced the ISRA product to is sales
force and is commencing the active marketing and sale of the ISRA product as of
the date hereof.
3.2 The parties anticipate that additional Assessment Products will be
marketed under this Agreement. At approximately [****] intervals beginning in
July 1999, Predictive will present to the Oversight Committee in general terms
[****] ideas for Assessment Products for possible inclusion under this
Agreement. The Oversight Committee will discuss and evaluate the product ideas
so presented, conduct such market or other evaluations as it deems appropriate,
and select a product idea for further development in accordance with this
Section. In the course of such selection, the Oversight Committee may consider
and propose minimum commitments and other financial details similar to those
contemplated by Section 3.7 with respect to the ISRA product. Predictive will
then deliver to Cabletron a more detailed description of the product so
selected, including a related service description and statement of work,
together with sales training marketing materials and Pricing Algorithm, within a
reasonable period of time after such selection, not to exceed [****]. Upon such
delivery, Cabletron shall have the option, exercisable within [****] after such
delivery, to include such product as an Assessment Product hereunder. During
the period between delivery of each proposed Assessment Product and the
option exercise deadline relating thereto, Cabletron and Predictive will
continue to consult regarding such product. If Cabletron does not exercise
its option with respect to the product offered by Predictive on or before the
expiration of the foregoing [****] option period, such option shall lapse as
to such product and such product shall not be deemed to be an Assessment
Product for any purposes under this agreement (except that the provisions of
Section 5.3 shall apply to Cabletron as though such product were an
Assessment Product). A list of all materials relating to each
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
5
<PAGE>
such Assessment Product and so delivered to Cabletron shall e attached hereto as
Schedule 3.2. Notwithstanding the foregoing, the parties may at any time, by
mutual written agreement, add additional Assessment Products under this
Agreement, including products previously presented to Cabletron under this
Section but as to which Cabletron did not exercise its opinion during the option
period
3.3 With respect to the ISRA Assessment Product and each other
Assessment Product added under this Agreement in accordance with Section 3.2,
Cabletron will use commercially reasonable efforts to promptly commence
marketing and thereafter actively market such product through its sales force
and sales representatives, including but not limited to its telemarketing sales
force. Each proposal developed by Cabletron with respect to an Assessment
Project shall be subject to review and approval by Predictive, such approval not
to be unreasonably withheld. Predictive shall complete such review promptly upon
receipt of such plans, but in no event later than [****] from the time of
such receipt. The parties shall endeavor in god faith to promptly resolve any
issues arising with respect to a particular proposal for an Assessment
Project. Cabletron will be responsible for (i) responding to any customer
inquiries or RFP's for assessment products and services, or bids for
Assessment Projects; (ii) generating and issuing to the Customer a statement
of work with regard to an Assessment Project; (iii) procuring and retaining
Assessment Project Agreements from Customers (as applicable); and (iv)
billing charges to Customers and collecting receivables for all Assessment
Projects.
3.4 A. With respect to each Assessment Product marketed by the parties
under this Agreement, Predictive will provide (i) initial sales force training
and periodic re-training, (ii) dedicated marketing support consistent with the
activity levels and sales volumes hereunder, and (iii) all goods and services
needed to carry out each Assessment Project, all in accordance with and as set
forth in the relevant Assessment Project Agreement and Implementation Schedule
(as defined in Section 3.5).
B. Predictive shall maintain sufficient staff and infrastructure
to deliver the volume of services contemplated by this Agreement. Upon
delivery of each Assessment Product, Predictive will have sufficient
personnel and resources to undertake a limited number of simultaneous
Assessment Projects is two (2) in the case of the ISRA product and shall be
determined by the Oversight Committee in connection with the inclusion of
other products under Section 3.2, on the basis generally of the anticipated
volume levels as reflected in Cabletron's initial commitment. Predictive will
add additional capacity over the Term of this Agreement consistent with
Cabletron's revenue commitments, or as otherwise mutually determined by the
parties to be appropriate in light of then-current service volumes.
3.5 Attached hereto as Schedule 3.5 is a detailed product intake and
implementation schedule relating to the ISRA product described above. The
parties shall in good faith mutually agree upon and attach to this Agreement,
as an addendum to Schedule 3.5, a detailed product intake and implementation
procedure ("Implementation Schedule") for each Assessment Product to be
included under this Agreement after the date hereof. Predictive will use its
reasonable best efforts to commence work on a committed Assessment Project
within [****] after being advised by Cabletron of the Customer's execution
and delivery of the commitment; PROVIDED, HOWEVER, that predictive shall have
up to [****] to commence such work, due to unanticipated staffing shortages
or other reasonably unforeseen circumstances, it is not practicable to do so
within the first fifteen-day period. Unless otherwise agreed by the parties
in writing, in the event that Predictive fails to commence work on a
committed Assessment Project by the end of the second fifteen-day period, the
Minimum Committed Amount (as defined in Section 3.1) for the Assessment
Product to which the Assessment Project relates shall be reduced by the
amount of Predictive's price to Cabletron for such Assessment Project, as
determined under Section 3.6 hereof.
3.6 Subject to Section 3.7, Predictive's price to Cabletron for
performing the services deliverable pursuant to each Assessment Project shall
be determined in accordance with the Pricing Algorithm for the relevant
Assessment Product. [****]. In addition, Predictive shall be entitled to
reimbursement for travel and lodging expenses and other expenses in
accordance with Cabletron's standard expense reimbursement policy; PROVIDED,
HOWEVER, that reasonable travel and lodging reimbursement will be applicable
for travel beyond a [****] of all Predictive offices and such further
locations designated by Cabletron, all as listed on Schedule 3.6 hereto, and
PROVIDED, FURTHER that Predictive personnel may continue to use Predictive's
reimbursement form to submit their expense reports. Predictive's fees for
each Assessment Product shall be subject to review [****] by the Oversight
Committee and shall be modified upon written agreement of a majority of the
members thereof, subject to the parties' respective operational and risk
management policies.
3.7 The parties recognize that in order to carry out its duties
under this Agreement, Predictive will be required to put substantial effort
into the development of the various Assessment Products and build and
maintain a sizable additional marketing and service-delivery capability.
Accordingly, Cabletron hereby commits to and agrees to pay certain
non-refundable amounts to Predictive in accordance with this Section 3.7, in
consideration of Predictive's entering into this Agreement and making the
Assessment Products available hereunder.
With respect to each Assessment Product, Cabletron shall issue a
[****] purchase order (each, a "Purchase Order") having an aggregate face
amount for the [****] (the "Face Amount"), as determined by the parties.
[****] of the Face Amount, or such other portion as the parties shall agree,
(the "Minimum Committed Amount") will constitute Cabletron's minimum
commitment payable in accordance with this Section 3.7. A portion of the
Minimum Committed Amount, as agreed to by the parties, (the "Up-Front
Payment") will be paid upon delivery by Predictive of the applicable
Assessment Product for marketing under this Agreement, and the remainder
shall be payable as further provided in this Section. That portion of the
Face Amount in excess of the Minimum Committed Amount shall be payable in
accordance with Section 3.8 against work performed by Predictive with respect
to Assessment Projects relating to the applicable Assessment Product. With
respect to each additional Assessment Product added to this Agreement under
Section 3.2, the Face Amount, Minimum Committed Amount and Up-Front Payment
shall be determined as contemplated by this Section 3.7.
Subject to the above, the parties shall negotiate payment schedules
and amounts for all Assessment Products (other than the ISRA product) upon
delivery of the product for marketing under this Agreement. Notwithstanding
any other provision in this Agreement to the contrary, unless the parties
otherwise agree, in no event shall Predictive be obligated hereunder with
respect to any Assessment Product as to which Cabletron does not agree to a
Minimum Committed Amount of at least [****].
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
6
<PAGE>
In the case of the ISRA product, the Face Amount of the Purchase Order
is [****] the Minimum Committed Amount is [****] and the Up-Front Payment is
[****] and Cabletron is issuing such Purchase Order and paying such Up-Front
Payment concurrently with the execution and delivery of the Agreement.
Other payments with regard to ISRA Product and other Assessment
Products, as applicable, shall be made as follows:
A. Subject to the terms of this Section 3.7, [****] of the
Minimum Committed Amount will be payable to Predictive on or before the end
of each succeeding [****] period following delivery of the Assessment Product
(crediting at the time of each payment the amount of the Up-Front Payment, to
the extent not previously credited pursuant hereto). Payment of the Minimum
Committed Amount with respect to the ISRA product shall be made according to
the following schedule:
<TABLE>
<CAPTION>
----------------------------- ------------------------
PAYMENT DATE AMOUNT DUE
----------------------------- ------------------------
<S> <C>
[****] [****]
----------------------------- ------------------------
[****] [****]
----------------------------- ------------------------
[****] [****]
----------------------------- ------------------------
[****] [****]
----------------------------- ------------------------
</TABLE>
For purposes hereof, each of the above dates (and any similar dates signifying
the end of a [****] payment period with respect to any other Assessment
Product) shall hereinafter be referred to as a "Calculation Date." Calculation
Dates for Assessment Products other than the ISRA product shall be each June 30
and December 31 following delivery of such products, unless otherwise agreed by
the parties.
B. On each Calculation Date, the aggregate of all revenues
accrued by Predictive from all Projects (based on work performed, and any
amounts against which credits are allowed pursuant to Section 3.7 C.), together
with the amount of any Up-Front Payments and Minimum Payments (as such term is
defined below) made prior to such date (collectively, "Aggregate Revenues")
shall be compared with the aggregate Minimum Committed Amounts for all Projects
payable through such Calculation Date. To the extent that such aggregate Minimum
Committed Amounts exceed the amount of the Aggregate Revenues, Cabletron shall
pay Predictive the difference (a "Minimum Payment") in accordance with Section
3.8.
C. All Up-Front Payments and Minimum Payments shall be fully
earned when paid and shall be non-refundable; however, Cabletron shall be
entitled to a credit against any consideration payable to Predictive based on
work performed by Predictive with respect to any Project, but shall not be
credited against any reimbursable expenses. To the extent that any such
non-refundable amounts exceed the amounts credited pursuant to the preceding
sentence, Cabletron shall be entitled to commission new work from Predictive
within Predictive's core competencies, either directly for Cabletron or for a
Cabletron customer, and to take a credit against such work. Any amounts due to
Predictive in excess of any such credit (including any amounts payable from that
portion of any Purchase Order in excess of the Minimum Committed Amount thereof)
shall be paid by Cabletron in accordance with Section 3.8 hereof.
D. Attached hereto as Schedule 3.7, for illustrative purposes
only, is an example of the computation of payments pursuant to this Section 3.7.
3.8 Predictive shall furnish Cabletron monthly invoices for its
services in connection with all Projects hereunder and any additional amounts
and reimbursable expenses payable under this Agreement. All such invoices shall
be payable net [****] days (together with any applicable Minimum Payments
payable as of any Calculation Date, accompanied by a schedule showing the
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
7
<PAGE>
calculation thereof). All payments hereunder shall be made by check, except
that upon mutual agreement of the parties such payments may be made by wire
transfer to an account designated by Predictive. [****].
3.9 [****] Cabletron may within sixty (60) days after receiving such
notice elect to substitute the Pricing Algorithm (or its equivalent) for such
product under such agreement for the then-applicable Pricing Algorithm
hereunder, provided, in such event, that Cabletron shall be required to
assume in writing and to perform all materials terms governing consideration
and material other obligations, and satisfy any material conditions, to which
such third party is subject under its agreement with Predictive. Nothing in
this Section 3.9 shall be construed to modify the restrictions on the parties
contained in Section 5 of this Agreement.
4. FOLLOW-ON PROJECTS
4.1 It is anticipated that Follow-On Projects will either consist of
work as to which only one of the parties has the relevant service capability
("Non-Overlap Work") or work as to which both parties have the relevant service
capability ("Overlap Work"). Listed in Schedule 4.1 are the categories
constituting Overlap Work and Non-Overlap Work between the parties (the "Overlap
Schedule"). The Overlap Schedule shall be periodically updated by the parties to
reflect changes in their respective capabilities. In the event that a dispute
arises as to which party has the relevant capability (or as to whether a
particular Project constitutes Overlap Work or Non-Overlap Work), such issue
shall be resolved in accordance with Section 21.8.
4.2 Non-Overlap work in connection with any Follow-On Project shall
be performed by the party having the relevant capability. [****] All
Non-Overlap Work, whether performed by Predictive or Cabletron [****] with
respect to Non-Overlap Work performed by Cabletron.
4.3 The parties agree that Overlap Work in connection with any
Follow-On Project shall be [****] them. On a quarterly basis or at such other
intervals as may be determined by the parties, the Oversight Committee shall
review all such Projects on a case-by-case basis, with a view towards
allocating such Projects so that their benefits, and the nature and character
of business so conducted, [****].
4.4 Prior to undertaking any Follow-On Projects, the parties shall
mutually agree to, and attach hereto as Schedule 4.4, an Implementation Schedule
for Follow-On Projects generally.
4.5 The parties shall cooperate to produce a standard agreement for
Follow-On Projects, but recognize that the Customer may require changes thereto.
Each of the parties agrees not to unreasonably withhold consent to such changes,
consistent with its generally applicable operational and risk management
policies.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
8
<PAGE>
4.6 Cabletron shall use commercially reasonable efforts to market
Follow-On Projects to its Customers that have ordered Assessment Projects,
consistent with reasonable business practices and the Customers' interests.
Predictive shall conduct each Assessment Project, and each party shall conduct
each Follow-On Project performed by it, with a view to developing and/or
maintaining good business relations between the Customer and the
Cabletron/Predictive Strategic Partnership.
4A. TEAMING PROJECTS
The parties may mutually agree as t specific Cabletron customers as to
which it may be more advantageous to service through a Teaming Project than for
either party to service independently. Such potential customers shall be listed
on (or added to ) Schedule 4A hereto, to be mutually executed by the parties,
which Schedule shall also indicate the date each such potential customer was
added to the Schedule. Except to the extent otherwise provided in this
Agreement, Teaming Projects shall be treated as Follow-On Projects for all
purposes hereof, including but not limited to pricing and implementation.
5. CERTAIN OPERATING RESTRICTIONS.
5.1 A. Predictive acknowledges that Cabletron enjoys an advantageous
relationship with its customers. Predictive further acknowledges that, by
performing services for Cabletron under this Agreement, Predictive, and its
employees and agents, may become privy to certain confidential information of
Cabletron which if disclosed to or used by third parties, including Predictive
and its employees and agents, would prejudice Cabletron's competitive advantage
in the marketplace. Therefore, Predictive agrees that:
(1) Except as permitted under Section 5.6, and subject to the
remaining provisions of this Section 5.1, following a
commitment by a Customer for a Project that results in fees to
Predictive of at least [****], Predictive will not
independently, directly or indirectly, solicit such Customer
to perform services covered by this Agreement of substantially
similar thereto from the time of such commitment until the
expiration of [****] following the delivery of services
hereunder (including any Follow-On or Teaming Projects
subsequently performed for such Customer). Such period shall
be increased to [****] following delivery for any Project
which generates fees to Predictive of [****] or more. For
purposes of the foregoing provisions of this Section 5.1A, the
"Customer" shall be deemed to be the business unit as to which
the relevant Customer decision-maker exercises purchasing
authority (regardless of whether such business unit
comprises one or more locations), and shall not be construed
to preclude Predictive from offerings its services to other
business units within the same organization; PROVIDED,
HOWEVER, that Predictive shall promptly notify Cabletron of
any other business units of a Cabletron Customer with which it
has entered an agreement to sell such services. Nothing in
this Section 5.1A (1) shall be construed to prohibit
Predictive from participation in the efforts of a third party
to market a potential project for services which Predictive
from participating in the efforts of a third party to market a
potential project for services which Predictive is not
otherwise obligated by this Agreement to perform with or for
Cabletron, or is not otherwise prohibited from performing by
this Agreement, and as to which Cabletron does not have a
reasonable chance of performing, as reasonably determined by
the Oversight Committee; provided, HOWEVER, that Predictive
shall not engage in such marketing efforts without the prior
written consent of the Oversight Committee, such consent not
to be unreasonably withheld or delayed. Predictive shall, in
any such instance, provide to the Oversight Committee for its
consideration any information the Oversight Committee may
reasonably require,
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
9
<PAGE>
including but not limited to the name(s) of the Customer(s)
to whom such services are to be furnished; PROVIDED, HOWEVER,
that Predictive shall not be required to provide the name
of the third party with whom it may intend to offer such
services.
(2) [****] either on a subcontract basis or otherwise. [****]
may be added to Schedule 5.12 from time to time by Cabletron
with the written consent of Predictive, not to be unreasonably
withheld. Notwithstanding the foregoing, nothing in this
Section 5.1.A(2) shall be construed to [****], as reasonably
determined by the Oversight Committee. PROVIDED, HOWEVER, that
Predictive shall not offer or provide such services in such
manner without the prior written consent of the Oversight
Committee, such consent not to be unreasonably withheld or
delayed. Predictive shall, in any such instance, provide to
the Oversight Committee for its consideration any information
the Oversight Committee may reasonably require, including but
not limited to the name(s) of the customer(s) to whom such
services are to be furnished; PROVIDED, HOWEVER, [****].
B. Predictive agrees to notify its employees and agents in
writing of the restrictions contained in this Section 5.1, to obtain signed
agreements of all personnel providing services for or on behalf of Predictive
under this Agreement to the effect that they acknowledge such restrictions and
agree to adhere to them, to provide copies of said agreements Cabletron upon
request, and otherwise to use its best efforts to insure that such restrictions
are fully observed.
5.2 Each of Cabletron and Predictive agrees not to approach potential
Teaming Project customers independently for a period of [****] following their
addition to Schedule 4A, or such other period as may be expressly agreed to
by the parties and set forth on such schedule (provided that, in the case of
Cabletron, such agreement shall be limited to services constituting
Non-Overlap Projects to be performed by Predictive, or Overlap Projects). The
parties may mutually agree to such other restrictions relating to such
potential customers as they deem appropriate. If Projects are generated from
such customers, the provisions of Section 5.1 shall apply.
5.3 With respect to any Assessment Product marketed by Cabletron under
this Agreement, unless this Agreement is sooner terminated either in its
entirety or with specific respect to such Assessment Product in accordance with
Section 17, Cabletron shall not directly or indirectly (including through a
"branding" arrangement) offer or sell such Assessment Product (or combination of
goods and services substantially similar thereto) except pursuant to this
Agreement. With respect to any Assessment Product as to which detailed
information is furnished to Cabletron under Section 3.2 and as to which
Cabletron does not exercise its option thereunder, unless this Agreement is
sooner terminates in accordance with Section 17, Cabletron shall not directly or
indirectly (including through a "branding" arrangement) offer or sell such
Assessment Product (or combination of goods and services substantially similar
thereto) for a period of [****] after the expiration of the deadline for
the exercise of Cabletron's option with respect thereto under Section 3.2 unless
the parties subsequently agree during the Term hereof to offer the Assessment
Product hereunder (in which event the first sentence of this Section 5.3 shall
apply).
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
10
<PAGE>
5.4 During the Term of this Agreement and for a period of [****]
neither Cabletron nor Predictive shall, without the prior written consent of
the other, directly or indirectly solicit the employment or consulting or
other services of any employee or consultant of the other party, or otherwise
induce any such employee or consultant to leave the other party's employment
or cease providing services thereto, as the case may be, whether or not such
employee's or consultant's actions in doing so would constitute a breach of
any agreement with such other party.
5.5 The parties each acknowledge and agree that monetary damages shall
not be an adequate remedy for breach by the other party of the provisions of
Sections 5.1 through 5.4 above, and that irreparable injury shall result to the
nonbreaching party and its subsidiaries and affiliates (if any) in the event of
such breach. Accordingly, the parties agree that in addition to any other remedy
available to the nonbreaching party at law or in equity in such instance, such
party may seek the entry of an order restraining and enjoining the breaching
party , or any employee or agent thereof, from further violations of such
provisions. The period of time applicable to any such breached provisions shall
be extended by one day for each day such violation continues subsequent to the
entry of such order.
5.6 Attached hereto as Schedule 5.6 is a list of existing Predictive
customers. Notwithstanding any provision to the contrary in this Agreement,
such customers (and services provided by Predictive therefor, but only to the
extent provided to such customers) shall not be subject to this Agreement.
Additional customers of Predictive may be added to Schedule 5.6 with the
written consent of Cabletron, not to be unreasonably withheld, provided that
such customers are obtained through Predictive's own independent sales
efforts and not in violation of this Agreement.
5.7 During the Term of this Agreement, Predictive shall have the right
of first refusal to perform all network security services that Cabletron intends
to subcontract, so long as Predictive has an office from which to perform such
services within [****] of the potential customer's site or can otherwise
practicably perform such services at reasonable cost. Predictive shall have
[****] after receipt of the offer from Cabletron to perform such network
security services, to inform Cabletron in writing of its desire to perform
the services. If Cabletron does not receive written acceptance of such offer
from Predictive within the aforesaid [****]. Cabletron may subcontract such
security service to a third party on substantially the same basis as was
offered to Predictive.
6. COMPENSATION OF PREDICTIVE'S PERSONNEL: EXPENSES.
6.1 Predictive shall bear sole responsibility for payment of
compensation to its personnel and contractors. Predictive shall pay and report,
for all personnel assigned to Cabletron or a Customer site, any applicable
federal and state income tax withholding, social security taxes, and
unemployment insurance applicable to such personnel. Predictive shall bear sole
responsibility for any health or disability insurance, retirement benefits, or
other welfare or pension benefits, if any, to which such personnel may be
entitled. Predictive agrees to defend, indemnify, and hold harmless Cabletron,
Cabletron's officers, directors, employees and agents, and the administrators of
Cabletron's benefit plans, from and against any claims, liabilities, or expenses
relating to such compensation, tax, insurance, or benefit matters.
6.2 Except as otherwise agreed to in writing, Predictive shall be
responsible for all costs and expenses incident to the performance of Projects
hereunder, including all costs of doing business incurred by Predictive.
7. WORKERS' COMPENSATION
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
11
<PAGE>
Notwithstanding any other workers' compensation or insurance policies
maintained by Cabletron, Predictive shall procure and maintain workers'
compensation coverage sufficient to meet the statutory requirements of every
state in which Predictive's personnel are engaged at Cabletron's or a Customer's
site. Predictive agrees to defend, indemnify, and hold harmless Cabletron, and
Cabletron's officers, directors, employees, and agents, from and against any
claims, liabilities or expenses arising from Predictive's failure to maintain
workers' compensation coverage in accordance herewith.
8. PREDICTIVE'S AGREEMENTS WITH PERSONNEL
Predictive shall obtain and maintain in effect written agreements with
each of its personnel and subcontractors who participate in any work under a
Project. Such agreements shall contain terms sufficient for Predictive to comply
with all provisions of this Agreement, including but not limited to Sections 5
(Certain Operating Restrictions), 12 (Confidential and Proprietary Data) and 13
(Ownership of Work Product), and shall provide that such personnel shall have no
status as employees of Cabletron and no claim under any Cable
9. TAXES
Any taxes incurred in performing Projects hereunder shall be borne by
the Customers, other than taxes in respect of the net income of Cabletron or
Predictive (which taxes shall be borne by the party incurring the same), and the
Assessment Project Agreement or other relevant Customer agreement for each
Project shall so provide.
10. RECORDS.
10.1 Each of Predictive and Cabletron shall maintain accounting
records, in accordance with sound accounting practices, to substantiate all
invoices to Projects, and shall keep such records for [****] from the date of
final payment.
10.2 A. Either party hereto (for purposes hereof, the "Auditing Party")
shall have the right to audit the appropriate records of the other party (the
"Audited Party") for the sole purpose of determining the Audited Party's
compliance with the terms and conditions of this Agreement. Any such audit shall
be at the expense of the Auditing Party. All such audits shall be conducted by
an independent certified public accountant, and shall take place during regular
business hours at the Audited Party's offices, and shall not interfere
unreasonably with the Audited Party's business activities. Audits shall be
conducted no more frequently than annually, and the Audited Party shall be given
[****] prior written notice of the date of each audit and the name of the
accountant who will be conducting the same. Each audit shall cover a period
of time beginning no earlier than [****] immediately preceding the date of
audit.
B. Adjustments shall be made by the proper party within [****]
following the audits completion to compensate for any errors or omissions
disclosed by the audit. If the parties do not agree to the amount of the
adjustment hereunder, the Audited Party may perform its own audit within a
reasonable period of time following completion of the initial audit by the
Auditing Party. If following the second audit the parties still do not agree
as to the amount of such adjustment, such disagreement shall be settled in
accordance with Section 21.8 hereof.
C. Any information received by the accountant during the audit
shall be retained in confidence. Any auditor's report presented to the Auditing
Party shall be copied to the Audited Party, shall only address compliance with
this Agreement, and shall contain no other information pertaining to the Audited
Party or its business.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
12
<PAGE>
11. SAFETY
Predictive shall comply with all Cabletron and Customer safety
regulations.
12. CONFIDENTIAL AND PROPRIETARY DATA.
12.1 In the performance of this Agreement or in contemplation thereof,
each party or its employees and agents (for purposes hereof, a "Receiving
Party") may have access to private or confidential information owned or
controlled by the other (or, in the case of Cabletron, its Customers) (for
purposes hereof, a "Disclosing Party") relating to the Disclosing Party's
business, equipment, apparatus, programs, software, specifications, drawings and
other data, and such information may contain proprietary details and
disclosures. Without limiting the foregoing, all work products, software
(including without limitation Predictive's Pricing Algorithm) and tangible
materials (including without Predictive's product descriptions and marketing
materials) produced by a Disclosing Party in developing any products marketed
hereunder, and all materials produced by the Disclosing Party in providing
services in connection with any Project, are and shall be deemed to be the
confidential information of the Disclosing Party, except and only to the extent
otherwise set forth in the applicable Assessment Project Agreement or other
relevant Customer contract. With respect to an confidential information
consisting of or embedded in software (including the Pricing Algorithm), the
Receiving Party shall not disassemble, decompile, "scope", or reverse engineer
such software without the express written consent of the Disclosing Party. All
information and data so acquired by the Receiving Party under this Agreement or
in contemplation thereof shall be and shall remain the Disclosing Party's
exclusive property, and the Receiving Party shall keep and shall use its best
efforts to have its employees and agents keep, any and all such information and
data confidential, and shall not copy or publish or disclose it to others, or
authorize its employees, agents or anyone else to copy publish or disclose it to
others, without the Disclosing Party's prior written approval. The Receiving
Party shall return all tangible confidential information to the Disclosing Party
(i) upon the termination of this Agreement, (ii) in the case of confidential
information that relates only to a particular product type or Project, promptly
following the option deadline relating thereto if Cabletron fails to exercise
its option under Section 3.2, and otherwise upon the termination of this
Agreement with respect to such product type or Project pursuant to Section 17,
or (iii) in any case at the request of the Disclosing Party. Each Assessment
Project Agreement or other Project agreement to which a Customer is a party
shall contain a mutually acceptable provision relating to confidential
information.
12.2 The foregoing obligations of confidentiality shall not apply to
information which lawfully comes into the possession of the Receiving Party and
which (i) is received from a third party who is not subject confidentiality
obligations with respect to such information, (ii) can be demonstrated to have
been previously known to the Receiving Party without any obligation of
confidentiality, (iii) is or becomes part of public industry knowledge through
no action or omission of the Receiving Party, or (iv) can be demonstrated to
have been independently developed by or to be the subject of independent
development efforts of the Receiving Party from making disclosure of
confidential information to the extent required by law, rule or regulation,
provided that the Receiving Party shall give the Disclosing Party prior notice
as to the nature of the required disclosure so a to afford the Disclosing Party
the opportunity to the challenge the need for such disclosure.
12.3 The parties each acknowledge and agree that monetary damages shall
not be an adequate remedy for breach of the provisions of this Section 12, and
that irreparable injury shall result to the nonbreaching party and its
subsidiaries and affiliates (if any) in the event of such breach. Accordingly,
the parties agree that in addition to any other remedy available at law or
inequity, the nonbreaching party may seek the entry of an order restraining and
enjoining the breaching party, or any employee or agent thereof, from further
violations of such provisions. The period of time applicable to any such
breached
13
<PAGE>
provisions shall be extended by one day for each day such violation
continues subsequent to the entry of such order.
14
<PAGE>
OWNERSHIP OF WORK PRODUCT
13.1 All copyrights, patents, trade secrets, or other intellectual
property rights ("IP Rights") associated with any ideas, concepts, techniques,
inventions, processes, or works of authorship developed or created exclusively
by either party or its personnel during the course of performing its obligations
hereunder shall belong exclusively to such party. All IP Rights associated with
any ideas, concepts, techniques, inventions, processes or works of authorship
that are jointly developed by Cabletron and Predictive shall be jointly owned b
them and may be used by each of them upon written notice to the other; PROVIDED,
HOWEVER, that neither party hereto shall assign, license or otherwise transfer
any such joint IP Rights to any person entity engaged in the same business as,
or in a business similar to, the other party's.
13.2 Predictive hereby grants to Cabletron a limited, non-exclusive
license to use the products, materials, software and intellectual property
delivered to Cabletron by Predictive during the Term solely for the purpose of
marketing Predictive's products and services to its Customers in accordance with
this Agreement. Such license shall be royalty-free during the Term. IN the case
of any proprietary rights obtained by Predictive by license or assignment from
third parties, the foregoing grant shall be subject to any limitations imposed
by the licensor or assignor of such rights. Except as expressly set forth in
this Agreement, neither party has any right, title or interest in or to the
intellectual property of the other.
14. WARRANTIES
14.1 Each party warrants that all services required of it hereunder
will be performed in a workmanlike manner and within the time schedule provided,
and that such services shall conform in all material respects with relevant
Implementation Schedule and Assessment Project Agreement (or other agreement to
which the Customer is party). In the event of a warranty breach, the breaching
party agrees to reperform the services without charge and without delay. The
warranties hereunder shall expire [****] after the time such services
are rendered.
14.2 Each party certifies that it owns or has the valid right to use
all intellectual property to be used by it in performance of its obligations
hereunder, and that such rights do not violate any intellectual property rights
of any third party.
14.3 Each party warrants that neither it nor it agents or employees
shall make any representation or warranty to Customers or otherwise regarding
Project or product, or the quality of any work to be done b Predictive, except
to the extent set forth in the agreed-upon form of Assessment Project Agreement
or other Customer contract, without the prior written consent of the other
party.
14.4 A. Predictive warrants that all services provided by it and any
deliverables produced or created by it under this Agreement (including but not
limited to products, software, and other deliverables) are Year 2000 compliant.
Subject to the further provisions of this Section 14.4, commercial hardware or
software produced or created by third parties shall be subject to the
manufacturer's warranty and not the provisions of the preceding sentence;
PROVIDED, HOWEVER, that nothing in this Section shall be construed to lessen,
diminish, or otherwise affect the service warranty set forth in the preceding
sentence. Year 200 compliance, for the purposes hereof, shall mean that such
goods and material, where applicable, accurately process, provide and/or receive
date/time data (including but not limited to calculating, comparing and
sequencing) from, into, and between the twentieth and twenty-first centuries,
and he years 1999 and 2000, and leap year calculations, to the extent that other
information technology not provided by Predictive to Cabletron and/or Customers
under this Agreement, which issued in combination with foregoing goods and
materials and has received warranties therefor from said third parties.
Predictive shall indemnify, defend and hold Cabletron harmless from and against
all claims, losses, damages or costs
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
15
<PAGE>
arising from any action, suit proceeding by any third party to the extent, and
only to the extent, that such action, suit or proceeding is based upon claims or
allegations that any services provided by Predictive and any deliverables
produced or created by it under this Agreement are not Year 2000 compliant.
Predictive agrees that the warranty and representations set forth herein shall
be extended to all Customers.
B. Cabletron does not warrant to Predictive that any services
provided by it or nay deliverables produced or created by it under this
Agreement are Year 2000 compliant; however, Cabletron shall indemnify, defend
and hold Predictive harmless from and against all claims, losses, damages or
cost arising from any action, suit or proceeding by any third party to the
extent, and only to the extent, that such action, suit or proceeding is based
upon claims or allegations that any services provided by Cabletron and any
deliverables produced or created by it under this Agreement (i.e., exclusive of
any services provided by Predictive and any deliverables produced or created by
Predictive) are not Year 2000 compliant.
14.5 EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY
HERETO MAKES ANY WARRANTY, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING
WITHOUT LIMITATION ANY WARRANTY OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, WITH RESPECT TO THE PERFORMANCE OF ITS DUTIES OR ANY DELIVERABLES
DELIVERED BY IT PURSUANT TO THIS AGREEMENT.
15. PERSONNEL
15.1 Personnel provided by Predictive will not for any purpose be
considered employees of Cabletron. Except as specifically authorized in writing
by Cabletron, Predictive's personnel shall make no commitments on behalf of
Cabletron for any purpose. Predictive assumes full responsibility for its
employees' actions while performing hereunder and shall be responsible for their
supervision, daily direction and control.
15.2 [****]. Cabletron reserves the right to disapprove such
assignment if reasonable grounds exist for such disapproval.
15.3 Except as expressly limited by Section 15.2, and subject to
applicable Customer requirements, Predictive shall obtain qualified personnel to
staff Projects performed by it hereunder in such manner as it may determine.
Without limiting the forgoing, Predictive may engage contractors or
subcontractors to perform any such work, provided such persons execute a written
agreement binding them to the applicable obligations of Predictive under this
Agreement.
16. LIMITS OF LIABILITY
16.1 EXCEPT IN THE CASE OF A VIOLATION OF SECTION 5 (CERTAIN OPERATING
RESTRICTIONS) SECTION 12 (CONFIDENTIAL AND PROPRIETARY DATA), OR SECTION 13
(OWNERSHIP OF WORK PRODUCT), NEITHER PARTY HERETO NOR THEIR SUBSIDIARIES OR
OTHER AFFILIATES SHALL BE LIABLE FOR ANY CONSEQUENTIAL DAMAGES (INCLUDING BUT
NOT LIMITED TO LOST PROFITS AND LOSS OF DATA) OR INCIDENTAL DAMAGES, EVEN IF
INFORMED OF THE POSSIBILITY THEREOF. Any reprocurement costs associated with
Predictive's breach of this Agreement or any statement of work or purchase order
shall be deemed direct damages for purposes hereof.
16.2 IN ANY ACTION, SUIT OR PROCEEDING RELATING TO THE PERFORMANCE BY
EITHER PARTY OF ITS OBLIGATIONS WITH RESPECT TO ANY PROJECT OR PROJECTS,
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
16
<PAGE>
SUCH PARTY SHALL NOT BE LIABLE TO THE OTHER OR TO ANY CUSTOMER FOR ANY AMOUNTS
IN EXCESS OF THE AGGREGATE AMOUNT OF REVENUES RECEIVED BY SUCH PARTY RELATING TO
SUCH PROJECT(S).
17. TERM AND TERMINATION.
17.1 Either party may terminate this Agreement effective at the end
of the original two-year term of this Agreement or at the end of any
applicable renewal period by giving not less than one hundred eighty (180)
days' notice of such termination. In the event of termination under this
Section 17.1, this Agreement shall remain in effect regarding any Project
already in progress until such Project is terminated or performance is
completed.
17.2 Without prejudice to any other remedies available hereunder,
either party shall have the right to terminate this Agreement either as a whole
or with respect to any product or Project as to which a default described under
this Section 17.2 has occurred (if applicable) in the event that (i) the other
party fails to make any payment due hereunder following ten (10) days' written
notice thereof from the party to be paid; (ii) the other party commits a
material default under this Agreement, which remains uncured after written
notice thereof to such party followed by a reasonable period of time (not to
exceed thirty (30) days) in which to cure such violation or default; (iii) a
court of competent jurisdiction enters a decree or order of relief (1) in
respect of the other party in any voluntary or involuntary case or proceeding
under any bankruptcy, insolvency or similar law, s now or hereafter in effect or
(2) appointing a receive, liquidator, assignee, trustee or similar official of
the other party or any substantial part of its assets, and such decree or order
is consented to by the other party or continues unstayed an in effect for a
period of sixty (60) consecutive days; or (iv) the other party makes a general
assignment for the benefit or creditors. Notice given hereunder shall specify
whether this Agreement is being terminates as a whole or only with respect to a
particular product or Project (if applicable), and if the latter, which product
or Project is being terminated. The existence of a material default (and the
related period for cure hereunder) shall be determined in accordance with
Section 21.8.
17.3 Each of the parties hereto acknowledges that a change of control
of either party hereto or a material acquisition by such party could materially
alter the business relationship contemplated hereby. In the event that either
party is subject to a change of control or is a party to a material acquisition,
and either such party or the other party reasonably determines that such change
of control or acquisition would materially alter the business relationship
contemplated by this Agreement or the mutual expectations on which it is based,
then either party may terminate this Agreement upon ninety (90) days' prior
written notice to the other. Any dispute as to whether this Section is
applicable shall be resolved in accordance with Section 21.8.
17.4 In the event of any termination of this agreement (either in its
entirety or with respect to a particular product or Project), all parties shall
promptly discontinue work as of the date of such termination (except otherwise
specifically provided in Section 17.1), and each party shall be entitled to any
compensation payable by the other for goods and services rendered up to the date
of such termination upon receipt and acceptance thereof by the other party. In
the event of termination by Cabletron under Section 17.2, Predictive shall
forfeit and shall no longer be entitled to any portion of the Minimum Committed
Amount not yet payable by Cabletron pursuant to the payment schedule established
under Section 3.7 hereof.
17.5 The rights and obligations of the parties under Sections 3.7, 3.8,
5,6,7,9,10,12,13,14,15,16,17,18,20 and 21 shall continue after expiration or
termination of this Agreement and shall bind the parties and their legal
representatives, successors, heirs, and assigns.
17
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18. INDEMNIFICATION
18.1 Predictive shall be liable for expenses or damages incurred by
Cabletron which result from the wrongful or negligent acts or omissions of
Predictive's employees and other personnel providing services for or on behalf
of Predictive hereunder.
18.2 Predictive shall indemnify, defend, and hold Cabletron harmless
from and against any and all actual or threatened claims for bodily injury or
death or for damage to real property or to personal property, tangible or
intangible, which result from the wrongful or negligent acts or omissions of
Predictive's employees and other personnel providing services for or on behalf
of Predictive hereunder.
18.3 Predictive shall defend, at its own expense, any actual or
threatened suit or other proceeding against Cabletron based on a claim that the
products or services (or any portion thereof) to be provided by Predictive under
this Agreement infringes any patent, trademark, copyright, trade secret, or any
intellectual property right of any third party. Predictive shall also pay all
damages and costs that are assessed against Cabletron as a result of such
infringement. If the products or services (or any portion thereof) at issue in
such suit or proceeding are deemed in violation of any patent, trademark,
copyright, trade secret, or other intellectual property right, and the use,
provision or delivery thereof is enjoined or is likely to be enjoined as a
result, Predictive shall at its own expense and option either (1) procure for
Cabletron the right to continue using, providing or delivering said products or
services; (2) modify the same so as to make them non-infringing; or (3) replace
said products or services with substantially equivalent and non-infringing
services or deliverables. If Predictive fails to meet its obligations hereunder
to defend such suit, Cabletron may take control of its own defense at
Predictive's sole expense.
19. NOTICES.
All notices required or desired to be given hereunder shall be in
writing and, if not personally delivered, shall be sent by facsimile
transmission (with a copy by first class mail) or by registered or certified
mail. If sent via facsimile transmission or personally delivered, notices shall
be deemed to have been given on the day when personally delivered or facsimile
addressed to the other party at the address shown below, provided that either
party may from time to time change the address to which notices to it are to be
sent giving notice of such change to the other party. If mailed by registered or
certified main, notices shall be deemed to have been given when received.
<TABLE>
<CAPTION>
IF TO CABLETRON: IF TO PREDICTIVE:
<S> <C>
35 Industrial Way 145 Hudson Street
Rochester, New Hampshire 03867 New York, New York 10013
Attention: Manager - Legal Contracts Attention: [****]
Facsimile: (603)337-3295 Facsimile: (212) 219-4499
</TABLE>
20. GOVERNMENT LAWS.
20.1 Predictive shall, at Predictive's own expense, comply with all
laws and regulations of federal, state, and local governmental authorities
relating to Predictive's obligations under this Agreement.
20.2 To the extent that any Project is to be ultimately provided under
a United States Government contract, additional Federal Acquisition Regulations
(FAR) and Department of Defense
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
18
<PAGE>
FAR Supplement (DFARs) clauses may be incorporated by reference in the
Assessment Project Agreement or other relevant customer contract.
20.3 The clauses listed below are applicable to all work performed
hereunder;
A. 52.222-26, Equal Opportunity (E.O. 11246);
B. 52.222-35, Affirmative Action for Special Disabled and
Vietnam Era Veterans (38 U.S.C. 4212(a)); and
C. 52.222-36, Affirmative Action for Handicapped Workers (29.
U.S.C. 793).
21. GENERAL
21.1 Neither party shall use the other's trademarks, trade names,
logos, or other designations for any reason without the other's prior written
consent.
21.2 This Agreement, and all statements of work and purchase orders
associated herewith, shall be contingent upon Cabletron's receipt from
Predictive of insurance certificates evidencing insurance coverage satisfactory
to Cabletron before work is commenced. Cabletron Systems, Inc. and all
subsidiaries shall be named as additional insureds on the general and automobile
liability insurance policies. Such certificates shall provide that the insurance
company shall give Cabletron thirty (30) days advance written notice prior to
any cancellation or change in the stated coverage. Such coverages shall include
the following:
A. General Liability Insurance - Personal Injury and Property
Damage, Combined Single Limit: $2,000,000
B. Automobile Insurance - Bodily Injury and Property Damage,
Combined Single Limit: $2,000,000
C. Workers' Compensation Insurances - In accordance with the
provisions of applicable law.
D. Contractual Liability Insurance - Covering Predictive's
contractual undertakings generally.
Predictive agrees to add any additional coverages as Customers may reasonably
request, so long as such additional coverages may be obtained at reasonable
expense.
21.3 Neither Predictive nor Cabletron shall sell, transfer, or assign
any right or obligation hereunder without the prior written consent of the
other, which may be withheld for any reason.
21.4 Subject to its obligations under Section 5 hereof, Cabletron
reserves the right, at its sole option, to enter into negotiations with,
and/or contract with, any other party to perform the same or similar
functions or services as those contemplated under this Agreement.
21.5 Each party represents to the other that such party is under no
obligation or restriction nor will such party assume any, which would interfere
or present a conflict of interest with the work that each is to perform under
this Agreement.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
19
<PAGE>
21.6 Predictive acknowledges that Predictive is incorporated or
organized as a corporation under the laws of a state in the United States.
21.7 The price to be charged Customers for the products and services
provided herunder shall be solely at Cabletron's discretion.
21.8 In event of any dispute concerning the implementation of this
Agreement or relating to an alleged immaterial breach hereof, the relevant
operating personnel of each party, together with their managers, shall use
reasonable efforts, acting in good faith, to resolve such dispute. If either
party determines in good faith that such efforts have not yielded a satisfactory
result, then such party may request that the dispute be addressed by the
Oversight Committee. The Oversight Committee shall also be responsible for
initially attempting to resolve any commercially material dispute or any dispute
relating to an alleged material breach hereof. The Oversight Committee shall
meet promptly and use commercially reasonable efforts to arrive at a mutually
acceptable resolution. Any such dispute not so resolved within thirty (30) days
after initially being reported to the Oversight Committee (or such longer period
as to which the parties shall have agreed in writing) shall be finally
determined by binding arbitration in Manchester, New Hampshire, before a single
arbitrator chosen in accordance with the rules of the American Arbitration
Association then and there obtaining. The arbitration shall be conducted in
accordance with such rules, and the arbitrator shall have the authority to order
such injunctive relieve as he may determine, to determine how the parties shall
bear the costs of such arbitration, and to award such damages (but not any
punitive or exemplary damages) as are appropriate. Each of the parties hereby
waives any and all objections he or it may have with respect to the jurisdiction
of such arbitral forum or the inconvenience of its venue.
21.9 No waiver by either party hereto of a breach by the other of any
terms or conditions of this Agreement, or any statement of work or purchase
order related hereto, shall be deemed a waiver of any other breach of the same
or other terms or conditions, and no delay or failure by any party to enforce or
exercise any right under this Agreement, or any such statement of work or
purchase order shall constitute a waiver of such right or any other right
hereunder.
21.10 The laws of the State of New Hampshire shall govern this
Agreement, without regard to its conflicts of law principles.
21.11 Except as otherwise noted herein, references in this Agreement to
Sections and Schedules are to the sections and schedules of this Agreement.
21.12 This Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective successors and permitted assigns.
21.13 This Agreement may be amended only by an instrument in writing
signed by all parties hereto.
21.14 Both parties acknowledge that they have read this Agreement and
understand and agree to be bound by its terms. This Agreement, its Schedules,
and any relevant contracts to which the Customers and one or both of the parties
hereto are party to, constitute the complete agreement regarding these
transactions, and replace any prior oral or written communication between the
parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
20
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------- ---------------------------------------
CABLETRON SYSTEMS, INC. PREDICTIVE SYSTEMS, INC.
- --------------------------------- ---------------------------------------
<S> <C>
By: /s/ David Kirkpatrick By: /s/ Ronald Pettengill
------------------------ -------------------------------
David Kirkpatrick Name: Ronald Pettengill
Chief Financial Officer
Date: August 05, 1999 Title: Chairman and CEO
Date: August 9, 1999
- ---------------------------------- --------------------------------------
</TABLE>
21
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
Exhibit 10.14
CONFIDENTIAL
THIS SYSTEMS INTEGRATION CONSULTING SERVICES AGREEMENT, together with any
attached Exhibits and Statements of Work ("Agreement"), is between LCI
International Management Services, Inc. ("LCI") having a place of business at
8180 Greensboro Drive, Suite 800, McLean, VA 22102 and Predictive Systems, Inc.
("Contractor") having a place of business at 620 Herndon Parkway, Suite 360,
Herndon, VA 20170.
WHEREAS, Contractor performs consulting services; and
WHEREAS, LCI and Contractor desire to establish standard terms and conditions
that shall apply to such services to be performed by Contractor for LCI;
NOW, THEREFORE, it is mutually agreed as follows:
ARTICLE 1 - DEFINITIONS
As used throughout this Agreement, the following shall have the meanings below
unless otherwise indicated:
(a) The term "Acceptance Date" means the first five business day after LCI
accepts an individual phase of the Work or it is deemed accepted
pursuant to Section 8 herein. The term "Final Acceptance date" means
the first business day after LCI accepts the completed NOC.
(b) The term "Affiliate" of a named Party means an entity directly or
indirectly controlling, controlled by or under common control with such
Party.
(c) The term "Agreement" means the terms and conditions of attached
Exhibits, Statements of Work and any other documents made a part of
this Agreement or Incorporated by reference, including any written
amendments which have been signed by the authorized representatives of
the Parties.
(d) The term "Authorized LCI Representative" means a designated member of a
LCI, who is empowered to approve Work.
(e) The term "Confidential Information" shall mean any oral, written,
computer generated or other information, whether in intangible or
tangible form and regardless of the media, including without limitation
all Work, notes, notations, or drafts, provided by LCI or Contractor
Personnel to Contractor in connection with this Agreement, the Work or
relating thereto or developed and/or supplied by Contractor to LCI as
part of, or in connection with the Work.
(f) The term "Contractor Personnel" means any and all Contractor employees,
agents, and subcontractors supplied by Contractor perform services for
LCI and in no event or for any purpose will these persons be considered
employees of LCI.
(g) The term "deliverables" has the meaning given to it in Article 16 of
this Agreement.
(h) The term "Documentation" means all or any portion of the following: NOC
system designs, NOC processes or procedures, NOC process or procedure
designs, software summaries, software design, functional
specifications, user guides, operator guides, installation guides, and
other similar materials generated as part of this Agreement pursuant to
the statements of Work.
(i) The term "Equipment" means all tangible property not covered under the
definition of Hardware to be used in conjunction with or installed as
part of the NOC.
(j) The term "FOC" means Final Operating Capability under which contractor
shall provide NOC capability as defined in the Statements of Work.
Contractor shall perform all phases for which Statements of Work are
entered into by the parties.
<PAGE>
(k) The term "Hardware" means tangible electronic equipment, including, but
not limited to, computers, drives, switches, wiring, printers and other
peripherals used in conjunction with or installed as part of the NOC.
(l) The term "IOC" means Initial Operating Capability, under which
Contractor shall provide the services and shall implement the
capabilities set forth in the Statements of Work attached as Exhibit A.
(m) The term "LCI" means LCI International Management Services, Inc. Its
employees, directors, officers, agents, subcontractors, subsidiaries,
successors and assignees, existing now or created in the future.
(n) The term "NOC" means the Network Operations Center to be created at
LCI's Arlington, Virginia location together with all of the related and
fully integrated Systems, all as described in one or more Statements of
Work.
(o) The term "Operative" means that the NOC and/or any of its Systems or
subsystems conforms to or exceeds the acceptance criteria set forth in
the applicable Statements of Work.
(p) The term "Party" in its singular or plural form, refers to either LCI
or Contractor or both, as dictated by the use.
(q) The term "RFI" means the Request for Information issued by LCI
regarding the Work on February 25, 1996.
(r) The term "Software" means computer programs, including without
limitation, the related media and Documentation, in machine-readable
and printed forms.
(s) "Statements of Work" mean the written descriptions of the Work which
Contractor may agree from time to time to provide LCI under this
Agreement, which shall include descriptions of all related
Deliverables, prices, billing rates, schedules and milestones,
acceptance tests and criteria and specifications (unless the Statement
of Work provides for the development of specifications). All Statements
of Work shall be attached to this Agreement as exhibits and shall be
incorporated into this Agreement by this reference.
(t) The term "Systems" means the combination of Work, Software, Equipment
and Hardware to be provided by Contractor (with the assistance of LCI
as provided in specific Statements of Work or other exhibits), all as
set forth in the applicable Statements of Work.
(u) The term "Task Orders" means a request form (as shown in Exhibits B,
B1, B2) issued by LCI describing the Work to be performed under this
Agreement and identifying the Contractor Personnel necessary to
perform such Work.
(v) The term "Technical Representative" means the LCI technical
representative assigned by LCI to oversee and coordinate Work to be
performed.
(w) The terms "Third-Party Work", "Third-Party Systems"; "Third-Party
Hardware"; "Third-Party Equipment" and "Third-Party Products"
(collectively "Third-Party Activities") means the Work and Products
delivered by parties not under contract with Contractor ("Third
Parties").
(x) The term "Work" means the tasks, performance, reports, services.
Documentation and other items to be provided by Contractor (but not by
Third Parties) to LCI, at LCI's request, pursuant to one or more
Statements of Work.
ARTICLE 2. - SCOPE OF AGREEMENT
(a) Contractor shall deliver all of the Deliverables identified in the
Statements of Work attached or subsequently attached hereto within the
time-frames identified therein. As and to the extent specified in the
CONFIDENTIAL
2
<PAGE>
Statements of Work., Contractor shall supervise and manage all
Third-Party Activities in creating the NOC, and Contractor shall
provide the NOC from conceptualization and design through final
implementation and sustained engineering fully compliant with the
compliant with the specifications set forth in, or developed pursuant
to, the Statements of Work. Time is of the essence of Contractor's
performance hereunder. The Work to complete the NOC shall be subdivided
into four (4) phases, identified below and as are or shall be more
fully detailed in the Statements of work
(i) Assessment and Service Definition. Contractor shall deliver
all Deliverables to be provided in this phase by July 1, 1996
(ii) NOC Architecture Framework and System Design.
(iii) Production Implementation; and
(iv) Sustained Engineering.
(b) Contractor shall provide Contractor Personnel to perform Work in
accordance with the Statements of Work. This Agreement establishes the
general terms and conditions that will apply to such Work performed by
Contractor for LCI.
(c) LCI does not guarantee that any minimum amount of Work will be
purchased from Contractor under this Agreement.
(d) (i) Any Affiliate of LCI, shall be entitled to request Work from
Contractor pursuant to the terms and conditions, including
pricing, of this Agreement by issuing a Task Order for such
Work and then agreeing with Contractor on a related Statement
of Work, provided that any such Statement of Work shall
constitute a separate agreement between Contractor and the
Affiliate incorporating the terms and conditions of this
Agreement so as to be applicable between Contractor and the
Affiliate, unless expressly agreed otherwise.
(ii) Any Work performed for LCI or any LCI Affiliate pursuant to
the terms and conditions of this Agreement shall accrue to the
benefit of LCI and its Affiliates for the purpose, as
applicable of determining pricing hereunder.
(iii) Nothing in this Agreement shall be deemed at any time either
to obligate LCI or any LCI Affiliate to obtain from Contractor
any minimum quality of Work hereunder, or to limit the right
of LCI or any LCI Affiliate, in their sole discretion, from
obtaining at any time informally or from any third party the
same or similar Work as may be obtained or be available
hereunder.
ARTICLE 3. - TERM
This Agreement shall have an effective date of May 21, 1998, and shall remain in
full force and effect until December 31, 1998 or a later date if agreed to in a
Statement of Work, unless terminated pursuant to the Article entitled
"Termination".
ARTICLE 4. - TASK ORDERS
In order for LCI to purchase and for Contractor to perform Work, LCI shall issue
Task Orders using the forms attached hereto as Exhibit D, which shall be
governed by the terms and conditions of this Agreement. Each Task Order shall
specify the Authorized LCI Representative and the Work to be performed. The Task
Order may be a blanket Task Order or an individual Task Order for Work to be
performed for LCI. Contractor shall respond to each Task Order by submitting to
LCI a Statement of Work, which when agreed to by the parties shall govern the
Work to be performed and shall supersede the Task Order.
ARTICLE 5. - TIMING OF MILESTONES (DELIVERY), SHIPMENT, AND INSTALLATION
CONFIDENTIAL
3
<PAGE>
(a) Contractor shall be responsible for performing all Work and delivering
all Deliverables described in the Statements of Work in accordance with
the schedules, milestones and specifications set forth therein.
Further, contractor shall be responsible for delivering and achieving
acceptance of the NOC and each phase of the NOC project and position,
and on the date(s) described in the Statements of Work, provided
that all appropriate Statements of Work have been agreed to by the
parties, and pursuant thereto, the NOC will be completed on or
before February 28, 1998 subject to changes in Deliverables and Work
specified in any subsequent Statements of Work.
(b) To the extent provided in the Statements of Work, Contractor shall
coordinate, manage and supervise Third-Party Activities in the
implementation of individual components of the NOC and its Systems,
including Software, Hardware and Equipment, whether ordered by
Contractor, LCI or a subcontractor. Contractor shall, with respect to
Third-Party Activities, be responsible for notifying LCI on a weekly
basis of any potential or actual delays due to Third-Party Activities.
The foregoing shall constitute Contractor's sole responsibilities with
respect to Third-Party Activities.
(c) Time is of the essence of Contractor's obligations hereunder.
(d) Deliveries are to be made in quantities, qualities and at times
specified in the applicable Statements of Work. except for electronic
transmission as agreed by the parties. Contractor shall ship all
individual components of the NOC for which it is responsible in
accordance with the applicable Statements of Work via carrier of
Contractor's choice, with freight prepaid.
(e) If Contractor's efforts or deliveries fail to meet any scheduled due
date and/or schedule, LCI without limiting its other rights or remedies
as specified herein, may direct expedited routing and any costs
incurred thereby shall be paid for by Contractor, LCI shall not be
liable for Contractor's commitments or production arrangements in
excess of the amount, or in advance of the time, necessary to meet
LCI's delivery or milestone schedule.
(f) As provided in subsection (b) above, Contractor shall not be
responsible for delays caused by Third-Party Activities provided that
Contractor notifies LCI of any potential or actual delay due to
Third-Party Activities as soon as Contractor learns of such potential
or actual delay. In such cases and subject to the cooperation and
performance of Third Parties, Contractor shall promptly provide LCI
with revised delivery dates for the completion of the particular phase,
subsequent phases and the final delivery of the NOC, and such revised
dates shall become Contractor's delivery date for purposes of the
remainder of this section.
(g) Contractor and LCI agree that it may be difficult, if not impossible,
to accurately determine the amount of damages that LCI may Incur if
Contractor fails to achieve each delivery and acceptance data in a
timely manner as scheduled. Accordingly, and subject to the provisions
of Article 21, if delivery or acceptance have not occurred in a timely
manner, [****]. Contractor shall have a grace period of ten (10) days
to fully cure the delayed delivery or acceptance. LCI shall not be
liable for Contractor's costs in completing the delayed delivery and/or
acceptance effective the day following the [****].
(i) In the case of delayed delivery of the final NOC (FOC) -
[****].
(ii) In the case of delayed delivery of IOC - [****].
(iv) In the case of delayed delivery of any work specified in a
Statement of Work - [****].
(h) To the extent provided in the Statement of Work, Contractor shall be
responsible for diligently installing, or supervising installation by
Third Parties, and shall be responsible to provide customization to the
CONFIDENTIAL
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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Deliverables and/or Systems, using adequate numbers of technically
skilled personnel, and shall notify LCI promptly after such Work is
complete.
(i) LCI may by written notice and without penalty, (a) delay the scheduled
data for delivery of any or all of the Systems or milestones, including
the dates of any interim milestones, the final delivery date of the
completed NOC, or any Equipment, Hardware, Software, or Systems
ordered under this Agreement (in the event, of any such delay of more
than 15 days, Contractor shall have the right to render interim
invoices for Work performed through the date of suspension): and/or (b)
cancel all or any part of the NOC project including equipment software,
and/or systems ordered under this Agreement prior to the delivery of
the individual NOC component: PROVIDED, HOWEVER, that if Contractor
has already paid for Third Party Products for which it may not obtain
refunds or otherwise has incurred costs which it cannot recover,
Contractor shall be reimbursed for such expenses by LCI.
ARTICLE 6 - ORDERING THIRD-PARTY PRODUCTS
It is anticipated that the creation of the NOC shall combine the know-how and
consultancy services of Contractor with Products from third-parties. Contractor
shall coordinate with the Authorized LCI Representative when it is necessary for
LCI to order Products for use with the NOC system. LCI and its Authorized
Representatives shall fully cooperate with Contractor in this process.
ARTICLE 7. - TECHNICAL DESIGN
All Work to be performed, including general direction and guidance in connection
with the Work, is to be coordinated with, and will be subject to the approval of
LCI's Technical Representative. Nothing in this paragraph shall diminish
Contractor's responsibilities to supervise and manage the NOC project hereunder.
ARTICLE 8. - PROJECT COORDINATION/PERFORMANCE/ACCEPTANCE
(a) During the course of Contractor's performance under this Agreement, LCI
shall have the right of approval, which shall not be unreasonably
withheld, over any major milestones and deliverables related thereto as
well as final Acceptance of Products, Systems and the completed NOC,
PROVIDED, HOWEVER, that LCI's approval shall be given or withheld in
accordance with the acceptance criteria set forth in the applicable
Statements of Work or specifications developed pursuant thereto.
(b) If a Statement of Work requires Contractor to develop specifications.
Contractor shall deliver the specifications to LCI in writing in
sufficient detail as reasonably required by LCI. The specifications
shall be subject to LCI's satisfaction, review and approval, which
shall not be unreasonably withheld.
(c) Deliverables will be developed through Statements of Work, subject to
the following exceptions:
(i) As is deliverable under the Assessment and Service Definition
Phase, Contractor shall provide the due date for the
completion of the NOC Architecture Framework and System Design
phase.
(ii) As is deliverable under the NOC Architecture Framework
and System Design Phase, Contractor shall provide
escalation procedures and timing for repair of the NOC and
any of its Component Systems.
(iii) As is deliverable under the NOC Architecture Framework and
System Design Phase, Contractor shall provide the due date for
the completion of the Production Implementation phase and the
final NOC, and shall reflect modification required to the due
date reflected in Article 5 (a).
Acceptance of these specific deliverables will be by LCI's approval:
PROVIDED, HOWEVER, that LCI's approval shall not be unreasonably
withheld.
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(d) Contractor shall provide to LCI detailed written progress reports, on
at least a [****] basis, which shall provide the status of items
completed, items to be completed within the next reporting period and
open action items and any other items required by LCI. Contractor shall
report all Third-Party Activities for which it is responsible under its
duty to manage and supervise all Third-Party Activities. Including
status of work and upcoming deliveries to be made by Third-Parties.
(d) In determining its Acceptance, LCI shall use the applicable acceptance
tests specified in the applicable Statements of Work or as developed
pursuant thereto on the Deliverables and/or the NOC (including the
entire System) to confirm that they are Operative Contractor shall run
any Acceptance tests under LCI's review. If LCI discovers any
Deliverables (including the entire System) are not Operative, LCI shall
notify Contractor of the deficiencies. Contractor at its own expense,
shall modify, repair, adjust or replace the Deliverables (including the
entire system) to make it Operative within 15 business days after the
date of LCI's deficiency notice. LCI may perform additional acceptance
tests during a period commencing when Contractor has delivered revised
Deliverables correcting all the deficiencies LCI has noted. If the
Deliverables still are not Operative in LCI's reasonable judgment,
subject to Article 8 (a) above, LCI may terminate all or part of this
Agreement for material breach or, at its option, repeat the procedure
of this paragraph as often as it determines necessary.
(e) LCI, at its discretion, may use the procedure in this Section to
determine acceptance of interim Deliverables updates and enhancements.
If LCI finds an enhancement not to be Operative and rejects it, LCI
shall have no obligation to pay for such update or enhancement, and
Contractor shall continue to support the version or release of the NOC
or applicable System currently installed pursuant to the applicable
Statement(s) of Work.
ARTICLE 9. - SELECTION AND REPLACEMENT PROCESS
(a) LCI, at its option, may request Contractor to provide names of
Contractor Personnel, as well as their respective resumes, for review
prior to entering into a Statement of Work. The information on the
resume must include, without limitation, previous work experience
including names of companies, and the names of LCI Technical
Representatives for whom that individual had worked. LCI reserves the
right in its sole discretion, to approve or reject any person whose
name is submitted by Contractor.
(b) LCI reserves the right to approve or reject Contractor Personnel
assigned to any Work and to request replacement at any time. When a
replacement is requested by LCI, Contractor shall submit to LCI the
name and resume of the proposed replacement, and such replacement shall
be at least as qualified as the individual it is replacing. LCI may, in
its sole discretion, reject such replacement. If Contractor cannot
within [****] provide a qualified replacement which is acceptable to
LCI, then LCI may reduce the Work in accordance with the Article
entitled, "Termination" and LCI may perform, or contract with a third
party for the performance of, the terminated Work outside the scope of
this Agreement.
(c) Contractor Personnel may not begin Work without an approved Statement
of Work or other approval in writing from an Authorized LCI
Representative. Any Contractor Personnel reporting for Work without
such authorization shall not be billed to LCI for the period of time in
which the letter of engagement has not been executed by LCI (but the
foregoing shall not apply to any work performed prior to the date of
this Agreement).
ARTICLE 10. - PRICE AND PAYMENT
(a) Each phase or sub-phase of the NOC project shall be covered by a
Statement of Work. Contractor may invoice for Work at the times, and on
a fixed price or time and materials basis, and at the rates, as
provided in the applicable Statements of Work. If a Statement of Work
provides that invoices shall be issued on terms other than upon
acceptance of the Deliverables under such Statement of Work, [****] of
each invoice shall be withheld until acceptance of the Deliverables
under such Statement of Work. An
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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additional [****] of all invoices shall be withheld until Final
Acceptance, and the withheld amounts may be invoiced upon Final
Acceptance.
(b) Contractor shall submit invoices to LCI via a shipping method that
provides contractor with notice of the date on which LCI received such
invoice. Each invoice shall include the following:
(i) Task Order Number
(ii) Period Billed
(iii) Name(s) and labor description of Contractor Personnel
(iv) Number of hours worked by each individual(s) during the
billing period and the applicable hourly rate, if on a time
and materials basis.
(c) All amounts to be billed to and paid by LCI are gross amounts.
(d) The applicable amounts due Contractor shall be paid in United States
dollars after receipt of a properly executed invoice. LCI shall pay
such invoices within net thirty (30) days of receipt. [****]. Invoices
that are not properly prepared shall be returned to the Contractor for
revision. amounts withheld from invoices or payments, as provided in
Article 10 (a) shall be paid in United States dollars within net
fifteen (15) days of the applicable acceptance date.
(e) The first Statement of Work attached hereto shall form the rate basis
for Contractor's work hereunder (for time and materials activities).
This Statement of Work shall include all of the rates for Contractor
Personnel by designated title that Contractor anticipates will perform
Work hereunder. [****].
(f) All rates shall include regular time, overtime, holiday and weekend
time spent by Contractor Personnel on LCI Work. Unless otherwise
provided by the applicable Statement of Work, overtime, holiday
and/or weekend Work shall not be performed by Contractor without
prior consent from the Authorized LCI Representative.
(g) For time and materials activities, LCI shall be invoiced for actual
time spent by Contractor Personnel performing LCI Work. Except as
provided in Article 11, LCI shall not be invoiced for [****],
lunch breaks or other breaks taken by Contractor Personnel.
ARTICLE 11.- TRAVEL
(a) The LCI Technical Representative may request Contractor Personnel to
travel outside of Northern Virginia in the performance of duties.
Contractor Personnel must receive approval from Contractor and must
have the written authorization of the appropriate LCI Director before
commencing travel.
(b) Payment Procedure.
(i) Contractor shall initially be responsible for travel expenses
and shall reimburse Contractor Personnel, as appropriate.
(ii) Contractor will then invoice LCI for the travel. All travel,
transportation and per diem expenses, copies of which shall
accompany invoices, for which reimbursement is sought, shall
have the signature of the LCI Technical Representative and
shall be itemized and substantiated with appropriate receipts.
(iii) Expense reports must be filed within [****] of completion of
travel and invoiced on the next regular invoice submission to
LCI.
(c) Payment Policy. LCI-approved travel and related LCI-approved
out-of-pocket expenses incurred in performing services for LCI under
the Agreement shall be invoiced to LCI at cost.
CONFIDENTIAL
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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(d) Reimbursement will be as follows:
(i) Commercial transportation - Reimbursable on an "incurred cost"
basis [****].
(ii) Private automobile - Reimbursable at $.26 cents per mile.
(iii) Per diem - Reimbursable for actual lodging and local
transportation. Actual meal expenses shall not exceed [****]
per day.
(iv) Rental cars if required in "out-of-town" assignments with
prior approval of LCI Authorized Representative.
(e) LCI will not reimburse Contractor for local travel incurred as a result
of commuting to LCI's facility to perform work including but not
limited to the use of rental vehicles.
(f) In no event shall LCI be liable for any travel changes associated with
relocation of Contractor Personnel without the written approval of the
Authorized LCI Representative.
(g) Contractor shall not bill LCI for travel expenses of Contractor's New
Jersey employees (only Program Managers Service Architects and Senior
Systems Engineers) who travel to LCI's site, but LCI shall pay for the
time spent by such Employees in so traveling at the applicable hourly
rates set forth in the Statement of Work.
ARTICLE 12. - TIME ENTRY AND REPORTS
Contractor Personnel shall submit on LCI's time entry system on a bi-weekly
basis time sheets. Such time sheets shall be prepared by a LCI's Technical
Representative prior to submission. Contractor shall provide reports as
requested by LCI on a monthly basis. The reports shall contain a cumulative
amount billed to LCI under all Statements of Work along with any appropriate
discounts.
ARTICLE 13. - RECORDS
For Work performed by Contractor Personnel pursuant to this Agreement,
Contractor shall maintain such records as will adequately substantiate charges
and hours worked and shall produce such records for LCI's inspection at
Contractor's business office where such records are kept, upon LCI's request,
for a period of [****] following the furnishing of the respective Work.
LCI shall give timely notice of its Intent to inspect such records and preserve
the confidentiality of such terms as Contractor may reasonably request.
ARTICLE 14. - WORK IN PROGRESS
(a) In the event all or part of this agreement is terminated for any reason
whatsoever, Contractor shall immediately, at LCI's option and request
document in detail the status of the Work that has been terminated and
either deliver to LCI or dispose, in accordance with LCI's instructions
and the terms of this Agreement, of all Software, Documentation or
other materials relating to or failing under the Work that are in its
or any Third Party's possession., whether or not such Work has been
completed or is still in progress. LCI shall have all rights to such
Software, Documentation and materials in accordance with Articles 17
and 18. If termination occurs due to LCI's termination for convenience
or LCI's default hereunder, any Work performed by Contractor under this
section may be billed at time and materials rates.
ARTICLE 15. - ENHANCEMENT AND UPDATES
Should LCI so request, and pursuant to an agreed Statement of Work, Contractor
shall deliver procedures to LCI to update and enhance the NOC, its component
Systems, and any Deliverables provided hereunder as part of the Sustained
Engineering phase.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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ARTICLE 16. - CONTRACTOR'S RESPONSIBILITY
(a) Contractor shall perform all work hereunder to the highest standards of
quality in the industry and is solely responsible for providing all
Deliverables and meeting all milestones and phase deadlines as provided
in the Statements of Work.
(b) Contractor shall manage and supervise to the highest standards of
quality in the industry all Third-Party Activities in creating the NOC
and for which it is responsible pursuant to the Statements of Work.
Contractor's responsibilities in this regard include, but are not
limited to:
(i) Supervising and managing all aspects of the NOC project and
all Third-Party Activities for which it is responsible
pursuant to the Statements of Work:
(ii) Reporting all issues, problems and delays to LCI together with
suggested resolutions of such issues, problems and delays as
soon as practicable thereafter, but no later than the weekly
report and/or meeting described in Article 8 (c) (Project
Coordination).
(iii) Developing and implementing and providing to LCI in writing
procedures Contractor will use to diligently identify issues,
problems and delays so that those issues, problems and delays
are quickly identified and resolved in a manner not to impact
the timely delivery of each Phase and the NOC project as a
whole.
(iv) Meeting with LCI's Authorized Representative and/or Technical
Representative on a weekly basis to discuss the status of the
NOC project, notify LCI of any actual or potential issues,
problems and delays, and to deliver and discuss all reports
required hereunder.
Provided that Contractor has performed its obligations under this
Article 15(b). Contractor shall not be responsible for Third-Party
Products. Work and/or Activities for which they did not contract with
LCI.
(c) For any and all Third-Party Products Contracted by Contractor
hereunder, whether Equipment, Hardware or Software. Contractor will
pass through any and all warranties provided by third-Parties to LCI
(as provided in Warranties, below). All such warranties shall be
approved by LCI prior to contracting.
(d) Contractor shall be responsible to LCI for all acts and omissions of
Contractor Personnel.
(e) Contractor shall perform the Work in accordance with the conditions of
all applicable governmental permits and licenses.
(f) Contractor shall not assign or delegate this Agreement or any of its
rights, duties or obligations to any other person or entity without the
prior express written approval of LCI. Contractor shall not subcontract
any Work under this Agreement without the express written approval of
LCI on a case-by-case basis.
(g) Contractor is responsible for all employee-related benefits applicable
to Contractor Personnel performing Work under this Agreement. LCI shall
not be obligated to provide Contractor Personnel with LCI benefits
unless otherwise required by law. Contractor is responsible for
withholding Contractor Personnel's portion of FICA and Medicare and for
withholding income for federal and state income tax purposes to the
extent required by law. Contractor will pay over all amounts withheld
to the IRS, and will pay its share of FICA taxes for Contractor
Personnel provided to LCI under this Agreement. Contractor agrees to
indemnify and hold LCI, its parent, and Affiliates harmless from any
and all claims and expenses relating to contractor's reporting and
payment obligations with respect to Contractor Personnel.
(h) If requested by LCI, Contractor , at LCI's expense, shall provide drug
testing of Contractor Personnel presented for work at LCI in accordance
with LCI's established policy and any applicable federal and state laws
regulating employee drug testing. Results shall be reported to LCI
within ten (10) days of the request.
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(i) Contractor and Contractor Personnel shall fully cooperate with any
other contractors performing similar or related Work for LCI.
(j) As called for under the applicable Statements of Work, Contractor shall
transfer all knowledge necessary to fully operate and maintain the NOC
to skilled LCI personnel. Such training shall be to the highest
industry standards.
(k) Contractor agrees that it and Contractor Personnel shall at all times
comply with all security regulations in effect at LCI's premises.
ARTICLE 17. - LCI PROPERTY
Unless the Parties otherwise agree in writing, any property including, but not
limited to Software, Documentation, designs, reports, manuals, documents,
patterns, specifications, data or other technical or proprietary information,
and other equipment or material of every description furnished to Contractor by
LCI is and shall remain the property of LCI. Contractor shall not substitute any
other property for LCI's property and shall not use such property except in
performing Work as required by this Agreement. Such property while in
Contractor's custody or control shall be maintained in good condition at
Contractor's expense and shall be held at Contractor's risk.
ARTICLE 18. - INTELLECTUAL PROPERTY RIGHTS AND INDEMNIFICATION
(a) Contractor warrants, represents and agrees that:
(i) Except to the extent that LCI specifically provides an idea or
ideas, materials, specifications or directions to Contractor
that necessarily preclude the related Work from being original
to Contractor, and except for Third Party IP (Intellectual
property owned by Third-Parties) all Work provided by
Contractor shall be original to Contractor.
(ii) The Work shall not infringe upon or violate any patent,
copyright, trademark, trade secret or other intellectual
property right of any third party. Contractor, at its own
expense, shall indemnify and hold LCI, its parent, and
Affiliates harmless from any loss, damage, liability or
expense (including attorneys' fees) arising from any claim(s),
action(s) or other proceeding(s) based on a claim that any
Work provided by Contractor to LCI infringes upon or violates
any patent, copyright, trademark, trade secret or other
intellectual property right of any third party. Contractor
shall pay all damages, fees, losses, liabilities, cost or
expenses, including attorney's fees, in any such action or
other proceeding or the settlement of any such claim, as the
case may be. Contractor shall immediately notify LCI and
defend LCI and Affiliates against any such claims, actions, or
other proceedings, and shall conduct any settlement
negotiations, on behalf of LCI at Contractor's sole cost and
expense: provided that LCI may elect to participate in the
defense and any settlement negotiations through counsel of its
own choosing and at its own cost, and provided that LCI shall
have final approval of any settlement requiring payment from
LCI or reducing LCI's rights to use any property which forms
the subject matter of the claim, action or proceeding. The
foregoing provisions of this Article 18 (a)(ii) and the
provisions of Article 18(a)(iii) shall not apply to any Third
Party IP.
(iii) Should the Work or any portion of the Work provided by
Contractor become, or in Contractor's opinion is likely to
become, the subject of a claim or infringement, or should
LCI's use of the Work be finally enjoined, Contractor shall,
at its expense:
(A) Procure for LCI the right to continue using,
relying upon and receiving the Work;
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(B) Replace or modify the Work to make it
non-infringing provided that such replacement or modified Work
continues to comply substantially with all applicable specifications or
other requirements under this Agreement; or
(C) If neither of the foregoing can be suitably
accomplished, reimburse LCI for the Work by refunding to LCI the price
paid by LCI for the Work.
(i) In the course of performing its services
under this agreement, Contractor may devise, create or develop computer
software or hardware (including, without limitation, customization of
software provided by others, development of software or hardware for
the purposes of connecting or integrating elements of the overall NOC
System and development of software designed to enhance overall NOC
System performance or the performance of discrete NOC system elements)
or other material, devices or inventions in order to deliver the
assessment, architectural, engineering. Implementation and other system
integration services contemplated in the Statements of Work
contemplated by Article 2(a), including the completed NOC and each
phase of the NOC project ("System Deliverables"). In addition, LCI may
request, and Contractor may deliver, other software, hardware,
material, devices inventions for other, specific purposes which would
be defined, other software, hardware, material, devices or inventions
for other, specific purposes which would be defined in one or more
Statements of Work in addition to those contemplated in Article 2(a)
("Additional Deliverables"). "Deliverables" collectively refers to the
combination of System Deliverables and Additional Deliverables, if any.
(ii) Contractor owns and shall retain all
right, title and interest in and to all of the System Deliverables and
all of its architecture, programming and engineering ideas, techniques,
methods or know-how, as well as all patents, copyrights, trademarks,
trade secrets, rights of authorship and other intellectual property
rights related thereto, including without limitation, all rights to
derivative works, and LCI agrees and acknowledges, other than the
license granted in Article 18 (b)(iii), it shall make no claim to the
contrary by virtue of this Agreement or otherwise.
(iii) Contractor grants to LCI an
irrevocable, perpetual, non-exclusive, fully-paid license to use all
System Deliverables, solely in connection with the installation, use
and maintenance of the Deliverable. In whole or in part, LCI may copy,
modify, and create derivative works of the System Deliverables, but
only in connection with the installation, use and maintenance of the
NOC, LCI may use the System Deliverables outside the United States only
in accordance with applicable export controls laws. LCI shall use its
best efforts to see that its employees and users of any System
Deliverables comply with the terms and conditions of this Article
18(b).
(b) Contractor shall promptly disclose to LCI all material (including
Software, Documentation reports, programs, source code, manuals, flow
charts, tapes, card decks, listings and any other programming materials
and all inventions, whether or not patentable) forming any portion of
any Additional Deliverables created, composed, made or conceived by
Contractor or Contractor Personnel during the performance of Work. The
Parties agree that, except as may be otherwise provided in the related
Statement of Work or amendment to this Agreement, each Additional
Deliverable is a work made for hire, that all portions of any
additional Deliverable, including all copyrights, any extension or
renewals, and all related work, shall be the exclusive property of LCI,
and that LCI shall have the right, at its own expense, to obtain and to
hold in its own name copyrights, registrations, patents, or such other
protection as may be appropriate to said Additional Deliverable.
Contractor warrants and shall provide LCI and its assigns the full,
sole and continuing right (without any payments or liabilities to any
person) to use the Additional Deliverables and to publish, perform,
reproduce and distribute throughout the world any or all portions of
such Additional Deliverables, either as a complete unit or in segments,
in any way LCI sees fit and for any purpose whatsoever. Contractor
shall insert a proper statutory copyright notice at an appropriate
location on copyrightable material, and on all portions and on all
related items which may be subject to copyright protection, which
copyright notice shall specify LCI as the sole copyright owner.
Contractor further agrees to give LCI or any person designated by LCI,
at LCI's expense, all such information and to execute all such
additional documents including, without limitation, patent
applications, as may be reasonably required to
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perfect the rights referred to herein. In the event Contractor or third
party is deemed to be author for copyright purposes of any such
materials and Additional Deliverables under this Agreement, Contractor
agrees to assign or cause such third party to assign and execute and
have its Contractor Personnel execute any documents (including patent
applications and assignments) reasonably requested by LCI, at LCI's
expense, to provide LCI the right to won, use and protect the
Additional Deliverable under this subparagraph.
(i) Notwithstanding the foregoing provisions of this Article 14,
the Parties acknowledge that in some cases the Work, or as portion
thereof, may use, incorporate or be dependent upon patents, copyrights,
trade secrets and/or other intellectual property that is either owned
by Contractor, the ownership of which by Contractor pre-dates the Task
Order for the affected Work (the "Pre-Existing Contractor IP") or is
owned by third parties ("Third Party IP"). Contractor shall disclose to
LCI prior to entering into any Task Order for Work hereunder, but in
any case in advance of commencing any affected Work hereunder, the
extent to which such Work, or any portion thereof, will use,
incorporate or be dependent upon any such Pre-Existing Contractor IP or
Third Party IP, and whether or not so identified to LCI.
(A) Contractor hereby grants to LCI a non-exclusive, fully-paid,
irrevocable and perpetual license to use such Pre-Existing
Contractor IP solely in connection with the installation use
and maintenance of the NOC and otherwise on the terms and
conditions set forth in Article 18(b)(iii) above. Contractor
represents and warrants that Contractor has sufficient right,
title and interest to grant the foregoing license in the
Pre-Existing Contractor IP to LCI.
(B) Contractor shall further use its best efforts to obtain for
LCI license rights to any such Third Party IP as are necessary
or appropriate to LCI's ownership and use of the Work.
(C) Contractor agrees to give LCI or any person designated by LCI,
at Contractor's expense, all such information and to execute
all such additional documents as may be reasonably required to
perfect LCI's rights to the license granted pursuant to
subsection (c)(i)(A) above or any license granted pursuant to
subsection (c)(i)(A) above.
ARTICLE 19 [****]
During the period covering any Statement of Work in which Contractor
Personnel are assigned to perform Work and for a period of six (6) months
following the earlier of either the expiration or termination of such
Statement of Work [****]Further, for such Contractor Personnel who have
executed a non-disclosure agreement, Contractor shall give written notice to
LCI in writing within seven (7) days [****].
ARTICLE 20 - CONFIDENTIAL INFORMATION
(a) In order that Contractor may perform this Agreement, LCI may disclose
confidential and proprietary information pertaining to LCI's past,
present and future activities, including without limitation, research,
development, or business plans, operations or systems. It is
CONFIDENTIAL
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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further recognized that Contractor will develop material and
information which LCI will wish to hold and to be held by Contractor as
confidential and proprietary information of LCI. Accordingly,
Contractor agrees to the following with respect to Confidential
information:
(i) To use Confidential Information only in performance of this
Agreement;
(ii) Not to make copies of any Confidential Information or any part
without the permission of LCI;
(iii) Not to disclose any Confidential Information or any part to
others for any purpose without the prior written consent of LCI;
(iv) To limit dissemination of Confidential Information to Contractor
Personnel who are directly involved in the performance of this Agreement, who
have a need to know and to use Confidential Information for purposes of such
performance and who have been advised of and agree to the obligations and
restrictions on persons receiving such information as set forth in this
Agreement, provided that Contractor notifies LCI in advance of the names of any
Contractor Personnel having access to Confidential Information under this
Agreement;
(v) To treat Confidential Information as strictly confidential and as
trade secret information, by protecting such information in the same manner and
subject to the same protection as Contractor treats and protects its own
respective proprietary information of like importance but in any event using no
less than reasonable care;
(vi) To disclose Confidential Information to third parties only with
the prior written consent of LCI only after such third parties have agreed in
writing to be bound by the confidentiality and use restrictions of this
Agreement;
(vii) Subject to Article 18, to return LCI information and any
copies thereof to LCI at the completion of all Work under this Agreement or
at such earlier date as LCI may designate, with a certification by an officer
of Contractor that Contractor retains no Confidential Information in any form
whatsoever. Subject to Article 18, upon completion of all Work or upon
receipt of a request by LCI, Contractor shall also erase or destroy, or cause
to be erased or destroyed, any Confidential Information in any computer
memory or date storage apparatus: provided, however, that Contractor shall
deliver to LCI the database or data flat file and full accompanying
Documentation identifying record format and record data elements, and
(viii) To ensure that all Contractor Personnel having access to such
Confidential Information terminating employment for Contractor are reminded
prior to such termination of his/her nondisclosure obligations undertaken
pursuant to this or other employee nondisclosure agreement(s).
(b) It is understood by both Parties that Contractor shall not disclose to
LCI any Contractor Confidential Information without the express prior
written agreement of LCI and under appropriate nondisclosure terms to
be negotiated by the Parties in good faith.
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(c) For the purpose of protecting LCI's proprietary interest in
Confidential Information under this Agreement, Contractor shall
designate by appropriate markings all Work as LCI Confidential
Information upon its generation.
(d) Confidential Information will not disclosed to any third party during
the term of this Agreement or thereafter except with the express prior
written approval of LCI or under the following conditions:
(i) It was in the public domain at the time of LCI's communication to
Contractor;
(ii) It enters into the public domain through no fault of Contractor
subsequent to the time of LCI's communication to Contractor;
(iii) It was in Contractor's possession of any obligation of confidence
at the time of LCI's disclosure to Contractor; provided, however, that
Contractor immediately informs LCI in writing to establish Contractor's prior
possession; provided further, however, that this exception shall not apply to
the Work, all of which upon its generation by Contractor constitutes LCI
Confidential Information;
(iv) It is developed by Contractor Personnel independently of and
without reference to any LCI Confidential Information or other information that
LCI has disclosed in confidence to any third party;
(v) It is rightfully obtained by Contractor from third parties without
being subject to obligation of confidentiality;
(vi) It is released for disclosure by LCI with its written consent; or
(vii) It is identified by LCI as no longer proprietary.
(e) Notwithstanding the return, erasure, or destruction of Confidential
Information or the termination, through completion or otherwise, of
this Agreement, the rights and obligations with respect to the
disclosure and use of Confidential Information [****]. To the extent
reasonably possible Contractor agrees to give LCI prompt notice if
Contractor becomes aware either [****]
(f) Contractor will enter into non-disclosure agreements with its
Contractor Personnel sufficient in form and substance to ensure
compliance by such Contractor Personnel with the provisions of this
Article 16; provided that in any event Contractor shall remain liable
at all times for compliance of such Contractor Personnel with this
Article for so long as they are in the employment of Contractor and a
period of six (6) months thereafter.
(g) As to any Confidential Information either disclosed by LCI to
Contractor, or developed by Contractor, prior to the effective date of
this Agreement and in connection with the Work to be performed
hereunder, Contractor agrees that: (i) where the parties entered into
an applicable separate Nondisclosure Agreement prior to such effective
date, then
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
CONFIDENTIAL
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<PAGE>
such Nondisclosure Agreement shall continue to apply to such
information for the period prior to the effective date of this
Agreement and after the effective date the provisions of this Agreement
shall apply, and (ii) where an applicable separate Nondisclosure
Agreement was not entered into between the parties, all such disclosed
and developed information shall be deemed to be LCI Confidential
Information subject to the terms and conditions of this Agreement. In
any event, any such information developed by Contractor prior to the
effective date of this Agreement shall nonetheless be deemed to be part
of the Work subject to the terms and conditions of this Agreement.
(h) Contractor acknowledges that the Confidential Information under this
Agreement constitutes unique, valuable and special trade secret and
business information of LCI, and that disclosure may cause irreparable
injury to LCI. Accordingly, Contractor acknowledges and agrees that the
remedy at law for any breach or threatened breach of the covenants
contained in this Agreement may be inadequate, and in recognition,
agrees that LCI shall, in addition, be entitled to injunctive relief
without bond including reasonable attorneys' fees and other court costs
and expenses.
ARTICLE 21 - FORCE MAJEURE
(a) Neither Contractor nor LCI shall suffer any liability for
nonperformance, defective performance or late performance of the work
due to causes beyond its control such as, but not limited to, acts of
God, war (including civil war), civil unrest, acts of government, fire,
floods, explosions, the elements, epidemics, quarantine, restrictions,
strikes, lock-outs, plant shutdown. Third Party defaults (provided
Contractor has complied with Article 16(b)) or delays in
transportation. In the event of an excusable delay as defined in the
preceding sentence, then Contractor, upon giving prompt written notice
to LCI, shall be excused from such performance on a day-to-day basis to
the extent of such prevention, restriction, or interference, provided
that Contractor shall use its best efforts to avoid or remove such
causes of nonperformance and both parties shall proceed to perform with
dispatch whenever such causes are removed to cease to exist.
(b) It any performance date under this Agreement is postponed or extended
pursuant to this Section for longer than 60 calendar days, LCI may, at
its option, by written notice given during the postponement or
extension, terminate Contractor's right to render further performance
after the effective date of termination without liability for that
termination.
ARTICLE 22 - PUBLICITY
Both parties agree that no news releases, public announcements or advertising
materials, or confirmation of same, concerning any part of this Agreement or any
of its performance, or use of the other Party's name, logo or service marks in
advertising or sales materials shall be made without the prior written approval
of the other Party. Such requests shall be in writing and addressed in
accordance with the article entitled "Notices."
ARTICLE 23 - INDEPENDENT CONTRACTOR
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(a) Contractor represents and warrants that Contractor qualifies as an
Independent Contractor under the provisions of the Internal Revenue
Code's common law rules enacted as part of Section 1706 of the 1986 Tax
Reform Act, and as such Contractor is filing all required forms and
necessary payments appropriate to the Contractor's tax status. In the
event the Contractor Personnel's independent status is denied or
changed and the Contractor or Contractor Personnel are declared to have
"common law" status with respect to Work performed for LCI, Contractor
agrees to hold LCI, its parent and Affiliates harmless from all costs,
including legal fees, which LCI may incur as a result of such changes
in status.
(b) Personnel supplied by Contractor will be deemed employees of Contractor
and will not for any purposes be considered employees or agents of LCI.
Contractor shall be solely responsible for their supervision, direction
and control, as well as payment of salary (including withholding of
income taxes and social security), worker's compensation, disability
benefits and the like.
(c) Nothing contained in this Agreement shall be deemed or construed as
creating a joint venture or partnership between Contractor and LCI.
Neither Party is by virtue of this Agreement authorized as an agent,
employee or legal representative of the other. Except as specifically
set forth, neither Party shall have power to control the activities and
operations of the other and their status is, and at all times will
continue to be, that of independent contractors. Neither Party shall
have any power or authority to bind or commit the other.
ARTICLE 24 - WARRANTIES
(a) Contractor warrants that the Work provided hereunder will be performed
in a professional and workmanlike manner in accordance with the highest
professional standards in the industry, shall be free of defects in
materials and design, and that the Deliverables shall comply with the
specifications set forth in the Statements of Work for six (6) months
("the Warranty Period") from the date of Final Acceptance by LCI. This
warranty applies to the final integration of the NOC pursuant to the
specifications developed in applicable Statements of Work.
(b) Contractor further warrants that the NOC shall be Operative during the
Warranty Period.
(c) Contractor represents, warrants and agrees that no material portion of
the Work is or will be intended, other than under documented control of
LCI, (1) at some specific time or on a specific instruction or
occurrence of a given event, to stop, limit or interfere with the
operation of the Work in conformity with the specifications therefore
set forth in, or developed pursuant to, the Statements of Work, or
(2) to damage or materially alter or render inaccessible the Work, or
any other hardware, software or data which the Work id designed to
process or use, or any other hardware, software or data hardware,
software or data which the Work is designed to process or use, or
any other hardware, software or data attached to, resident on, or
accessible to the system on which the Work is executed or stored.
Contractor shall be responsible for, indemnify and hold LCI or its
Affiliates
CONFIDENTIAL
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harmless from any damages, costs, liabilities, and/or expenses,
including attorneys' fees and other legal costs, arising out of the
breach of the foregoing.
(d) Contractor shall warrant, without limitation as to any time period,
that the Work shall not incur default problems or other errors as a
result of the century date change in the year 2000.
(e) Contractor warrants and represents that it is not currently bound by
any other agreements, restrictions or obligations, nor will Contractor
assume any such obligations or restrictions which do or would in any
way interfere or be inconsistent with the Work to be furnished by
Contractor to LCI under this Agreement.
(f) Contractor warrants and represents that it is capable of entering into
this Agreement with LCI in every and all respects.
(g) Contractor warrants and represents that it is a corporation duly
organized and in good standing under the laws of Delaware with Federal
EIN or SSN of 133808483, and is qualified to do business in the state
of Virginia.
(h) Contractor represents and warrants it has full power and authority to
enter into and perform this Agreement, and the person signing this
Agreement on behalf of Contractor has been properly authorized and
empowered to enter into this Agreement. This Agreement, when executed
by the Contractor, will constitute a legal, valid and binding agreement
and obligation of the Contractor, enforceable according to its
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, and other laws of general application
relating to creditors' rights generally and by general principles of
equity. CONTRACTOR FURTHER ACKNOWLEDGES THAT IT HAS READ THIS
AGREEMENT, UNDERSTANDS IT, AND AGREES TO BE BOUND BY IT.
(i) LCI acknowledges that Contractor will be purchasing Third-Party
Products. Contractor shall transfer to LCI any warranties offered by
third parties on such Third-Party Products. All such warranties shall
be approved by LCI prior to contracting. Contractor, however shall have
final responsibility for the installation and integration of such
Third-Party Products into the NOC if so required under the Statements
of Work.
(j) Each of the Deliverables, Updates and Enhancements and any media
used to distribute [****] of its computer and telecommunications
facilities for their commercial, test or research and development
purposes. Contractor shall indemnify LCI and hold LCI harmless from
all claims, losses, damages and expenses, including attorneys fees
and allocated cost of internal counsel, arising from the [****] or
with any [****].
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
CONFIDENTIAL
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(k) THE WARRANTIES SET FORTH IN THIS ARTICLE 24 ARE IN LIEU OF ALL
WARRANTIES WHETHER EXPRESSED OR IMPLIED, INCLUDING THE WARRANTIES OR
MERCHANTABILITY AND FITNESS FOR INTENDED OR PARTICULAR PURPOSE.
ARTICLE 26 - MAINTENANCE SERVICES
(a) Contractor shall provide, during the Warranty Period and during all
Maintenance Period, Maintenance Services regarding the Deliverables,
which services shall be defined in the Statements of Work, and
consistent with Article B(c)(ii), available twenty-four (24) hours per
day, seven (7) days per week performed by qualified and competent
consultant(s). Contractor shall deliver to LCI and keep current a list
of persons and telephone numbers ("Calling List") for LCI to contact in
order to obtain answers to questions arising, or assistance in solving
problems or errors occurring during LCI's use of any of the Products.
The Calling List shall include (1) the first person to contact if a
person arises or problem occurs, and (2) the persons in successively
more responsible or qualified positions to provide the answer or
assistance desired. If Contractor does not respond promptly to any
request by LCI for telephone consultative service, then LCI may attempt
to contact the next more responsible or qualified person on the Calling
List until contact is made and a designated person responds to the
call.
(b) The parties acknowledge that under this agreement, LCI has ordered no
Maintenance Services, and the Maintenance Period is not defined. Such
definitions shall be made, if at all, under a separate Statement of
Work to be negotiated by the parties in good faith.
ARTICLE 26 - INSURANCE
(a) During the term of this Agreement, Contractor shall maintain insurance
of the types and in the amounts specified below with insurers of
recognized responsibility, licensed to do business in the State(s)
where the Work is the being performed, and having either an A.M.
Best's rating of AB, a Standard & Poor's ("S&P") rating of AA or a
Moody's rating of AaZ. If any Work provided for or to be performed
under this Agreement is subcontracted, Contractor shall require such
Contractor Personnel to maintain insurance equivalent to that which is
required of Contractor.
In accordance with the above, the following insurance coverages shall
be maintained by Contractor and Contractor Personnel:
(i) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY INSURANCE:
$1,000,000 per occurrence combined single limit/$2,000,000
general aggregate and will include coverage for contractual
liability, coverage for the use of subcontractors, products
and completed operations, and will not contain an exclusion
or explosion collapse, and underground coverage.
(ii) BUSINESS AUTOMOBILE LIABILITY INSURANCE:
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Business Automobile Liability insurance including coverage for
owned, hired, leased, rented and non-owned vehicles as
follows:
$1 Million combined single limit per accident
(iii) WORKERS' COMPENSATION AND EMPLOYERS' INSURANCE:
Workers' Compensation in the statutory amount(s) and with
benefits required by laws of the state in which the Work is
performed and the state(s) in which employees are hired, if
the state(s) are other than that in which the Work is
performed. Employers' Liability with minimum limit of
liability of:
$1 Million bodily injury by accident/each accident, bodily
$1 Million injury by disease/each employee, and for bodily
$1 Million injury by disease/policy limit (aggregate).
A combination of primary and excess/umbrella liability
policies will be acceptable as a means to meet the funds
specifically required hereunder. THE REQUIRED MINIMUM LIMITS
OF COVERAGE SHOWN ABOVE, HOWEVER, WILL NOT IN ANY WAY RESTRICT
OR DIMINISH CONTRACTORS LIABILITY UNDER THIS AGREEMENT.
(iv) PROFESSIONAL LIABILITY INSURANCE:
Professional Liability Insurance coverage the effects
and errors and omissions in the performance of
professional duties in the amount of $1 Million for
each occurrence and aggregate, associated with Work
performed under this Agreement
(b) Certificates of such insurance shall be submitted to LCI naming LCI as
ADDITIONAL INSURED on such policies as appropriate, prior to the start
of any Work associated with this Agreement. These certificates shall
certify that no material alteration, modification or termination of
such coverage shall be effective without at least thirty (30) days
advance notice to LCI.
(c) Contractor shall furnish or require each Contractor Personnel to
provide and maintain at all times during the term of the Agreement
insurance equivalent to that which is required of the Contractor. All
carriers insuring Contractor Personnel, including the subcontractors,
shall waive all right to recovery against LCI for any injuries to
persons or damage to property in the execution of Work performed under
this Agreement.
(d) Contractor shall permit any authorized representative of LCI to examine
Contractor's original insurance policies should LCI so request. Should
Contractor at any time neglect or refuse or provide the insurance
required, or should such insurance be canceled or non-renewed, LCI
shall have the right to purchase such insurance, and the cost shall be
billed to Contractor. In addition, should Contractor at any time
neglect or refuse to pay the
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necessary premium, LCI shall have the right to deduct this amount from
monies due the Contractor.
(e) Contractor and Contractor Personnel shall ensure full compliance with
the terms of the Occupational Safety and Health Administration (OSHA)
and all jurisdictions' safety and health regulations during the full
term of this Agreement.
ARTICLE 27 - INDEMNIFICATION AND LIMITATION OF LIABILITY
(a) Contractor, at its own expense, shall indemnify and hold LCI, its
directors, officers, employees, agents, subsidiaries, Affiliates,
customers, designers, and assignees harmless from any loss, damage,
liability or expense, on account of damage to property and injuries,
including without limitation death, to all persons, arising from any
occurrence caused by any act or omission of Contractor Personnel
related to the performance of this Agreement. Contractor, at its own
expense, shall defend any suit or dispose of any claim or other
proceedings brought against said indemnities on account of such damage
or injury, and shall pay all expenses, including attorney's fees, and
satisfy all judgments which may be incurred by or rendered against said
indemnities.
(b) Contractor further agrees to and does hereby indemnify and hold LCI,
its directors, officers, employees, agents, subsidiaries, Affiliates,
parent, consultants and subcontractors harmless from any and all
liability, loss, damage, or injury, together with all reasonable costs
and expenses relating thereto, including attorneys' fees, arising out
of or resulting from any breach of any representation, warranty,
covenant or obligation of the Contractor contained in the Agreement.
(c) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY INDIRECT,
SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS OR DAMAGE OF ANY
KIND, INCLUDING LOST PROFITS (WHETHER OR NOT LCI OR CONTRACTOR HAS BEEN
ADVISED OF THE POSSIBILITY OR SUCH LOSS OR DAMAGE(S) BY REASON OF ANY
ACT OR OMISSION IN ITS PERFORMANCE UNDER THIS AGREEMENT
ARTICLE 28 - IMMIGRATION LAWS COMPLIANCE
(a) Contractor warrants, represents, covenants and agrees that it will not
assign any individual to perform Work under this Agreement who is an
unauthorized alien under the Immigration Reform and Control Act of 1986
or its implementing regulations.
(b) In the event any Contractor Personnel working under this Agreement, or
other individual(s) providing Work to LCI on behalf of Contractor under
this Agreement, are discovered to be unauthorized aliens, contractor
will immediately remove such individuals from performing Work and
replace such individuals who are not unauthorized aliens.
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(c) Contractor shall indemnify and hold harmless LCI, its parent, and
Affiliates from and against any and all liabilities, damages, losses,
claims or expenses (including attorneys' fees) arising out of any
breach by Contractor of this Article.
ARTICLE 29 - ANTIDISCRIMINATION WARRANTY AND INDEMNITY
Contractor agrees and warrants that it will:
(a) Comply with all applicable provisions and requirements of Title VII of
the Civil Rights Act of 1964, as amended, the Age Discrimination in
Employment Act of 1967, as amended, the Americans With Disabilities Act
of 1990, and all other applicable Federal, state, and local employment
laws and regulations; and
(b) Indemnify and hold LCI, its parent and Affiliates harmless from and
against all liabilities, claims, costs, losses, damages (including
without limitation punitive or special damages), and expenses
(including attorneys' fees and allocated in-house legal expenses)
arising out of breach of the foregoing warranty.
ARTICLE 30 - OTHER SERVICES
Each Party reserves the right to contract with other firms or individuals during
the term of this Agreement for Work similar to that being performed under this
Agreement subject to the Article entitled "Conflict of Interest."
ARTICLE 31 - TERMINATION
(a) By written notice to Contractor, LCI may immediately terminate this
Agreement, any outstanding Statements of Work or a Contractor Request,
in whole or in part, at any time prior to completion for the following
reasons:
(i) LCI's convenience;
(ii) LCI is dissatisfied with the performance of Contractor
Personnel for any reason, or
(iii) Contractor applies for or consents to the appointment of or
the taking of possession by a receiver, custodian, trustee, or
liquidator of itself or of all or a substantial part of its
property, makes a general assignment for the benefit of
creditors; commences a voluntary case under the Federal
Bankruptcy Code (as now or hereinafter in effect); or fails to
contest in a timely or appropriate manner or acquiesces in
writing to any petition filed against it in an involuntary
case under such Bankruptcy Code or any application for the
appointment of a receiver, custodian, trustee or liquidation
of itself or of all or a substantial part of its property, or
its liquidation, reorganization or dissolution.
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(b) In the event of termination under this Article, in accordance
with the Article entitled "Price and Payment," LCI shall be
liable for payment only for Work performed prior to the
effective date of the termination notice and for any items
referred to in the provision of Article 5(i). In no event
shall LCI be liable for anticipated profit on Work not
performed.
(c) In the event of termination under this Article, and regardless
of any dispute which may exist between Contractor and LCI, all
LCI Property and materials in Contractor's possession,
including any and all related documents in the possession of
Contractor and/or Contractor Personnel, shall be delivered to
LCI.
(d) Contractor shall continue performance of any portion of the
Statements of Work not terminated. LCI shall have no
obligation to Contractor with respect to any terminated
portions of this Agreement except as provided in this
Agreement.
ARTICLE 32 - ASSIGNMENT
Neither party shall assign any of its rights nor designate any of its
obligations under this Agreement without the prior written consent of the other
party or as provided herein. Any prohibited assignment or delegation shall be
null and void. LCI may assign this Agreement and any licenses to any company or
entity controlling, controlled by or under common control of its Affiliates.
Subject to the Article of this Agreement entitled "Contractor's Responsibility,"
the respective rights and obligations provided in this Agreement shall bind and
inure to the benefit of the Parties, their legal representatives, successors and
assigns.
ARTICLE 33 - WAIVER
The failure of either Party to insist on the strict performance of any terms,
covenants and conditions of this Agreement at any time, or in any one or more
instances, or its failure to take advantage of any of its rights shall not be
construed as a waiver or relinquishment of any such rights or conditions at any
further time and shall in no way affect the continuance in full force and effect
of this Agreement.
ARTICLE 34 - HEADINGS
Headings used in this Agreement are for convenience of reference only and shall
not be construed as altering the meaning of an Article or this Agreement.
ARTICLE 35 - ORDER OF PRECEDENCE
In the event of any inconsistency between provisions of this Agreement and any
document issued under this Agreement, the inconsistency shall be resolved by
giving precedence in the following order:
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(a) Terms and Conditions of this Agreement
(b) Statements of Work
The terms of the Agreement shall prevail over any conflicting terms of any LCI
acknowledgment of a Statement of Work.
ARTICLE 36 - APPLICABLE LAW
This Agreement shall be interpreted, construed, and governed by the laws of the
State of Virginia, without regard to conflict of law provisions.
ARTICLE 37 - CONTRACTUAL ISSUES
(a) All contractual matters related to this Agreement, including but not
limited to discussions concerning Work outside the scope of this
Agreement, shall be coordinated with the Authorized LCI Representative.
Contractor further understands that any verbal agreement or written
agreement reached with or signed by any LCI employee other than the
designated Authorized LCI Representative, is null and void and does not
obligate LCI in any manner.
(b) All payment related issues should be referred to the LCI Authorized
Representative specified on the Task Order.
ARTICLE 38 - NOTICES
All notices, requests, demands, or communications requited or permitted shall be
in writing and delivered personally or by fax, LCI Mail or certified,
registered, or express mail at the respective addresses set forth below. All
notices, requests, demands or communications shall be deemed effective upon
personal delivery, on the day of the fax or LCI Mail, or when received if sent
by registered, certified, or express mail.
LCI: LCI International
5150 Greensboro Drive
Suite 800
McLean, VA 22102
ATTN: General Counsel
Facsimile: (703) 714-1750
Contractor: Predictive Systems, Inc.
620 Herndon Parkway
Suite 360
Herndon, VA 20170
ATTN: Thomas Joseph
Facsimile: (703) 925-1899
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ARTICLE 39 - PRIOR WORK
Contractor acknowledges and agrees that Work was provided to LCI prior to the
Effective Date of this Agreement in anticipation of the execution of this
Agreement. Contractor acknowledges and agrees that the purchase of such Work was
and is subject to the terms hereof.
ARTICLE 40 - ENTIRE UNDERSTANDING
This Agreement shall become binding when signed by both Parties. This Agreement
constitutes the entire understanding of the Parties, and supercedes all prior
and contemporaneous written an oral agreements, with respect to the subject
matter. This Agreement may not be modified or amended except in writing signed
by both Parties. Any person not a Party shall not have any interest or be deemed
a third party beneficiary.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
Effective date first written above.
LCI INTERNATIONAL MANAGEMENT SERVICES, INC. PREDICTIVE SYSTEMS, INC.
<TABLE>
<S> <C>
Signature: /s/ L.J. Bowman Signature: /s/ Carl D. Humes
-------------------------------- ---------------------------------------------
Name: L.J. Bowman Name: Carl D. Humes
------------------------------------- --------------------------------------------------
Title: SVP Title: Vice President, Technical Services, Mid-Atlantic
------------------------------------ -------------------------------------------------
Date: 5/22/98 Date: 5/21/98
------------------------------------- --------------------------------------------------
</TABLE>
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Exhibit 10.20
Certain portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission, pursuant to a request for
confidential treatment under 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: /s/ Inder Sidhu By: /s/ Robert Belau
Name: Inder Sidhu Name: Robert Belau
Title: Vice President Title: President
WorldWide Professional Services
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 and filed separately with
the Commission pursuant to a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933, as amended.
1
<PAGE>
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. [****] with respect to this Agreement, any SOW, and any PSA. [****]
any SOW or a PSA, then [****] shall coordinate and communicate with
[****] This limitation does not apply to [****]. Subcontractor will
provide to Cisco all relevant operational information regarding the
Services, will participate in meetings with Customer and Cisco as
requested by Cisco and will take all reasonable action requested by
Cisco to enable Cisco to comply with the PSA.
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 and filed separately with
the Commission 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 three (3) years 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
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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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<PAGE>
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. SOW WORK PRODUCT OWNERSHIP; CISCO INTELLECTUAL PROPERTY. Cisco or
its assigns shall own all right, title and interest in all
intellectual property that is provided to Subcontractor by or on
behalf of Cisco or, subject to Section 6.2 and Section 6.3, which
Subcontractor uses under this Agreement or any SOW ("Cisco Owned
IP"). Subject to Sections 6.2 and 6.3, Subcontractor acknowledges
and agrees that Cisco or its assigns shall own, and Subcontractor
hereby assigns to Cisco, all intellectual property rights and other
proprietary rights in and to the Services and the Subcontractor Work
Product, and any other materials and information Subcontractor is
required to deliver to Cisco as part of this Agreement and any SOWs
issued hereunder, and any Results created as a result of performance
of this Agreement and any SOW hereunder (the "Developed IP"; the
Developed IP and the Cisco Owned IP are collectively referred to as
the "Cisco Intellectual Proeprty"). Cisco shall own any derivatives,
improvements or modifications to the Subcontractor's intellectual
property developed, designed or discovered under this Agreement or
any SOW and Subcontractor hereby assigns all intellectual property
rights and other proprietary rights in such intellectual property to
Cisco. The intellectual property rights and proprietary rights
described in this Section 6.1 may include, but are not limited to,
all current and future worldwide patents and other patent rights,
utility models, copyrights, trade secrets, trademarks, inventions,
mask work rights, programs, program listings, procedures,
programming tools, documentation, reports and drawings, and the
related documentation or tangible expression thereof. Cisco shall
have the exclusive right to apply for or register any patents, mask
work rights, copyrights, and such other proprietary rights
protections with respect to the intellectual property rights
described in this Section 6.1. Subcontractor shall execute such
documents, render such assistance, and take such other actions as
Cisco may reasonably request, at Cisco's expense, to apply for,
register, perfect, confirm and protect Cisco's rights in any
intellectual property described in this Section 6.1. Without
limiting the foregoing, Cisco shall have the exclusive right to
commercialize, prepare and sell products based upon, sublicense,
prepare derivative works from, or otherwise use or exploit the
intellectual property rights granted to it under this Section 6.1.
6.2. OWNERSHIP BY SUBCONTRACTOR. Except as otherwise set forth below,
Subcontractor shall own or retain its rights in all right, title and
interest in Subcontractor intellectual property which is used in the
performance of this Agreement or any SOW hereunder that is wholly
developed and owned by or licensed to Subcontractor prior to the
Effective Date of this Agreement. Cisco grants to Subcontractor a
perpetual, irrevocable, worldwide, fully paid up, royalty-free,
non-exclusive, personal and nontransferable license to use
intellectual property which Subcontractor develops in the course of
performance of the Services and or otherwise develops after the
Effective Date which is discernible by, or disclosed or delivered
to, either Cisco or Customer. Notwithstanding the foregoing, Cisco
shall own all Deliverables pursuant to the provisions of Section 6.1
and the license rights set forth in this Section 6.2 shall not apply
to any such Deliverable (but such license shall apply to the
intellectual property therein).
6.3. SUBCONTRACTOR GRANT OF LICENSE. If any intellectual property used or
developed hereunder or any Services, Subcontractor Work Product or
Results are based on, or incorporate or are improvements or
derivatives of, or cannot reasonably be made, used, reproduced and
distributed without using or violating intellectual property rights,
the rights of which are not assigned or otherwise obtained by Cisco
hereunder, Subcontractor hereby grants to Cisco a perpetual,
irrevocable, worldwide, fully paid up, royalty-free, non-exclusive,
right and license, including the right to sublicense and to
authorize the granting of sublicenses, to exploit and exercise all
such technology and rights (including any modification, improvements
and derivatives thereof).
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6.4 WAIVER OF MORAL RIGHTS. Subject to Section 6.2, Subcontractor hereby
waives any and all moral rights, including without limitation any
right to identification of authorship or limitation on subsequent
modification that Subcontractor (or its employees, agents,
subcontractors or consultants) has or may have in the Services,
Subcontractor Work Product or Results, and in any other intellectual
property that is or becomes the property of Cisco under this Section.
6.5. CISCO AS ATTORNEY IN FACT. Subcontractor agrees that if Cisco is
unable because of Subcontractor's unavailability, dissolution or
incapacity, or for any other reason, to secure Subcontractor's
signature to apply for or pursue any application for any United
States or foreign patents or mask work or copyright registrations
covering the inventions assigned to Cisco above; then Subcontractor
hereby irrevocably designates and appoints Cisco and its duly
authorized officers and agents as Subcontractor's agent and attorney
in fact, to act for and in Subcontractor's behalf and stead to
execute and file any such applications and to do all other lawfully
permitted acts to further the prosecution and issuance of patents,
copyright and mask work registrations thereon with the same legal
force and effect as if executed by Subcontractor.
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
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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
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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
10 days 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. Subcontractor represents and warrants to Cisco that the [****] set
forth in this Agreement are not and will not [****]. In the event
that Subcontractor enters into an agreement with a third party
pursuant to which [****] to assume in writing and perform all
material terms governing consideration and other obligations, and
satisfy any material conditions, [****] The provisions so
substituted and terms and conditions so assumed by [****] in which
event Subcontractor shall comply with [****] with respect to any
[****].
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
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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 four (4) 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
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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 ten (10) days 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
ten (10) day 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 thirty (30) days 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.
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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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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 $1,000,000. 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
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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:
$1,000,000 each occurrence combined single limit (for bodily
injury and property damage)
$2,000,000 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 $1,000,000
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 $2,000,000 per claim and $5,000,000
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.
$5,000,000 each occurrence (combined single limit for bodily
injury and property damage)
$10,000,000 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
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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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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: Senior Vice President, Customer
Advocacy; if to Subcontractor, Attention: Kimberly King. 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
State of California, 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.
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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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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
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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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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
October 22, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated August 13, 1999 for Network Resource Consultants and Company B.V.
included in or made a part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
October 22, 1999
