<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1999
REGISTRATION NO. 333-84045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
PREDICTIVE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 13-3808483
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
------------------------
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
RONALD G. PETTENGILL, JR. ROBERT L. BELAU
CHIEF EXECUTIVE OFFICER PRESIDENT
PREDICTIVE SYSTEMS, INC.
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. PETER B. TARR, ESQ.
BABAK YAGHMAIE, ESQ. JOSEPH E. MULLANEY III, ESQ.
BROBECK, PHLEGER & HARRISON LLP HALE AND DORR LLP
1633 BROADWAY, 47(TH) FLOOR 60 STATE STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02109
(212) 581-1600 (617) 526-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
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 AUGUST 31, 1999.
PREDICTIVE SYSTEMS, INC.
SHARES
COMMON STOCK
Predictive Systems, Inc. is offering 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 $ and $ 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 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION CAPITAL MARKETS CORP.
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
[COLOR ARTWORK TO BE PROVIDED]
<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. IN THIS PROSPECTUS, REFERENCES TO
THE "COMPANY," "PREDICTIVE," "WE," "US" AND "OUR" REFER TO PREDICTIVE SYSTEMS,
INC. AND ITS SUBSIDIARIES.
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................................................................................. 15
Use of Proceeds............................................................................................ 16
Dividend Policy............................................................................................ 16
Capitalization............................................................................................. 17
Dilution................................................................................................... 18
Selected Consolidated Financial Data....................................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21
Business................................................................................................... 31
Management................................................................................................. 43
Certain Transactions....................................................................................... 53
Principal Stockholders..................................................................................... 55
Description of Capital Stock............................................................................... 57
Shares Eligible for Future Sale............................................................................ 60
Underwriting............................................................................................... 62
Legal Matters.............................................................................................. 64
Experts.................................................................................................... 64
Where You Can Find More Information........................................................................ 64
Index to Consolidated and Supplemental Financial Statements................................................ F-1
</TABLE>
------------------------
"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.
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 business-critical 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 and
vendor-neutral 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 pre-defined deliverables 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, or
productized services. These services consist of pre-defined, fixed-price
deliverables that are replicated from our best practices. 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 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
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, few have the requisite focus and expertise to address the
complex, multi-faceted issues surrounding today's business-critical networks.
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 productized service 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, Ascend, Bank of
America, Bear Stearns, Bloomberg, British Telecom, Cisco Systems, Lucent
Technologies, Nortel Networks, Pfizer, PricewaterhouseCoopers, Qwest and
Raytheon.
OUR HISTORY
We were organized in Delaware in February 1995. 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 June 30, 1999, our
employee base had grown to 280 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 eight other locations, including 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 common stock upon the completion of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Predictive........... shares
Common stock to be outstanding after this shares
offering...................................
Use of proceeds.............................. For general corporate purposes, including
working capital. We may also use a portion of
the proceeds for acquisitions of
complementary businesses or technologies.
Please see "Use of Proceeds."
Proposed Nasdaq National Market symbol....... PRDS
</TABLE>
The number of shares outstanding after this offering is based on our shares
of common stock outstanding as of June 30, 1999 and gives effect to the
conversion of all outstanding shares of series A convertible preferred stock
into 6,512,316 shares of common stock automatically on the closing of this
offering. This information excludes:
- 9,920,235 shares subject to options outstanding as of June 30, 1999 at a
weighted average exercise price of $1.51 per share; and
- shares subject to warrants outstanding as of June 30, 1999 at an
exercise price per share equal to the initial public offering price of our
common stock; and
- additional shares reserved for issuance under our stock option
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
Operating profit (loss).................................. 1,543 1,887 (822) (1,223) 190
Net income (loss)........................................ $ 863 $ 1,011 $ (627) $ (737) $ (173)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
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
pro forma adjusted data give effect to:
- the conversion of 6,512,316 shares of our series A convertible preferred
stock into 6,512,316 shares of common stock and the reissuance of treasury
stock in connection with this conversion; and
- the sale of shares of common stock at an assumed initial public
offering price of $ per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 360 $
Working capital........................................................................... 11,802
Total assets.............................................................................. 17,633
Total stockholders' equity................................................................ 12,761
</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 MAKES EVALUATING OUR BUSINESS DIFFICULT
We commenced operations in February 1995. Accordingly, you can only evaluate
our business based on our limited operating history. 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. As a result of our limited
operating history, rapid growth and the emerging nature of the markets in which
we compete, we believe that quarter-to-quarter comparisons of our results of
operations for preceding quarters are not necessarily meaningful. 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 REVENUE IS 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, our business,
results of operations and financial condition could materially suffer. In
addition, the non-payment or late payment of amounts due from a major client
could have a material adverse effect on our business, results of operations and
financial condition.
OUR CLIENTS MAY TERMINATE THEIR CONTRACTS WITH US ON SHORT NOTICE, WHICH COULD
ADVERSELY AFFECT OUR OPERATING RESULTS
Our services are often sold 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, our business, results of operations and financial
condition will be materially adversely affected. Consequently, you should not
predict or anticipate our future revenue based upon the number of clients we
have currently or the number and size of our existing projects.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER WHICH MAY NEGATIVELY
IMPACT OUR STOCK PRICE
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 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.
IF WE FAIL TO ACCURATELY ESTIMATE COSTS IN FIXED-PRICE PROJECTS, OUR OPERATING
RESULTS MAY SUFFER
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 materially
adversely affect our operating results. 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 such period equal to the amount by which our revenues were
previously overstated.
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS
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 adversely affects our margins and results of
operations. If in future quarters our results of operations fall below the
expectations of stock market analysts and investors, the market price of our
stock is likely to fall.
OUR LONG SALES CYCLE MAKES OUR REVENUE DIFFICULT TO PREDICT
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 have a material adverse affect on our business, results of
operations and financial condition.
WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS
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.
We may need to raise additional funds in order to meet additional working
capital requirements, support additional capital expenditures or take advantage
of acquisition opportunities. 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 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 growth could be impeded.
9
<PAGE>
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 June 30, 1999, our staff increased from
approximately 123 to approximately 280 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. If we fail to do so, our
business, financial condition or results of operations may be materially
adversely affected.
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 and our business, results of
operations and financial condition will suffer.
COMPETITION COULD HARM OUR BUSINESS
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.
We face competition from systems integrators, value added resellers, local
and regional network services firms, telecommunications providers, and network
equipment and computer systems vendors. Many of these competitors have:
- longer operating histories;
- greater name recognition;
- larger established client relationships; and
- significantly greater financial, technical and personnel resources.
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, results of operations and
financial condition will be materially adversely effected.
IF WE ARE UNABLE TO INTEGRATE OUR 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 acquisitions could disrupt our
ongoing business, distract our management and employees, increase our expenses
and otherwise adversely affect our business.
10
<PAGE>
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 SUBJECT US TO SIGNIFICANT RISKS, ANY OF WHICH
COULD HARM OUR BUSINESS
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. For
all these reasons, our pursuit of an overall acquisition and investment strategy
or any individual acquisition or investment could have a material adverse effect
on our business, results of operations and financial condition.
IF WE ARE UNABLE TO RETAIN KEY PERSONNEL, OUR BUSINESS AND GROWTH WILL SUFFER
Our future success depends, in significant part, upon the continued service
and performance of our senior management and other key personnel. Losing the
services of any of these individuals would impair our ability to effectively
deliver our services and manage our company. These problems would negatively
affect our business, results of operations and financial condition, as well as
our ability to grow.
OUR INTERNATIONAL EXPANSION EFFORTS MAY NOT BE SUCCESSFUL
We expect to expand our international operations and international sales and
marketing efforts. Recently, we commenced operations in England. In addition, in
August 1999, we acquired Network Resource Consultants and Company, B.V., a
network consulting company based in The Netherlands. We have had limited
experience in marketing, selling and distributing our services internationally.
We may not be able to maintain and expand our international operations or
successfully market our services internationally. Failure to do so may
negatively affect our business, results of operations and financial condition,
as well as our ability to grow.
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. If we do not appropriately
anticipate changes and adapt our practices,
11
<PAGE>
our business, results of operations and financial condition could materially
suffer. 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;
- political and economic instability;
- cultural and language differences;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity, especially during the summer
months in Europe and other parts of the world.
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. If we cannot
keep pace with these changes our services may become less competitive and our
business will suffer. To achieve our goals, we need to keep pace with continuing
changes in industry standards, information technology and client preferences. We
may be unable, for technological or other reasons, 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. This would materially
adversely affect our business, results of operations and financial condition.
THE MARKET FOR OUR SERVICES DEPENDS ON THE CONTINUED GROWTH OF LARGE-SCALE,
COMPLEX NETWORKS
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 of the use of enterprise networks
does not continue or declines, our business, results of operations and financial
condition could materially suffer.
WE ARE DEPENDENT ON THE INTERNET GROWING AND CONTINUING TO DEVELOP AS A VIABLE
BUSINESS TOOL
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;
12
<PAGE>
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
- governmental regulation; or
- other reasons.
This would materially adversely affect our business, results of operations
and financial condition. 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, our business, results of
operations and financial condition would be materially adversely affected.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS
Year 2000 problems could require us, or our clients, to experience delays
and incur unanticipated expenses. Our failure to correct a material Year 2000
problem could have a material adverse effect on our business, results of
operations and financial condition. We may experience operations difficulties
because of undetected errors or defects in the technology we use in our internal
systems. Also, failure to provide Year 2000 compliant solutions to our clients
could have a material adverse effect on our business, results of operations and
financial condition. Additionally, our clients' and future clients' purchasing
patterns, specifically in the fourth quarter of 1999, may be affected by Year
2000 issues as companies expend significant resources to correct or replace
their current systems for Year 2000 compliance.
RISKS RELATED TO LEGAL UNCERTAINTY
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 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 PROTECT SOME OF OUR INTELLECTUAL PROPERTY THROUGH
TRADEMARK PROTECTION, WHICH WOULD IMPAIR OUR ABILITY TO PREVENT OTHERS FROM
USING OUR INTELLECTUAL PROPERTY
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. This could have a material adverse effect on our business, financial
condition and results of operations.
13
<PAGE>
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS 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. 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.
WE MAY BE SUBJECT TO CLAIMS IF OUR SERVICES HARM OUR CLIENTS' BUSINESSES
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. The successful assertion of one or more
significant claims against us could have a material adverse effect on our
business, results of operations and financial condition.
RISKS RELATED TO THIS OFFERING
WE WILL HAVE DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS OFFERING, WHICH WE
MAY NOT USE EFFECTIVELY
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 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, which could have a material adverse effect on our
business, financial condition and results of operations.
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 79.1% of the outstanding shares of our common stock, and after the
offering will beneficially own approximately % 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.
14
<PAGE>
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. 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
net tangible book value per share of $ . Accordingly, investors purchasing
shares in this offering will suffer immediate and substantial dilution of their
investment.
FORWARD-LOOKING STATEMENTS
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" and "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."
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.
15
<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 $ million, assuming an initial public
offering price of $ 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 $ 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. 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.
16
<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 the automatic conversion of
our series A convertible preferred stock into common stock and 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 $ per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us. Please see "Use of Proceeds."
You should read this information together with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
<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,
16,122,966 issued and outstanding, pro forma; issued and
outstanding, pro forma as adjusted)..................................... 12 16
Additional paid-in capital.................................................. 20,003 11,607
Treasury stock.............................................................. (8,399) -- --
Retained earnings........................................................... 1,154 1,154
Accumulated other comprehensive loss........................................ (16) (16)
--------- ----------- -------------
Total stockholders' equity................................................ 12,761 12,761
--------- ----------- -------------
Total capitalization.................................................... $ 12,761 $ 12,761 $
--------- ----------- -------------
--------- ----------- -------------
</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:
- 9,920,235 shares subject to options outstanding as of June 30, 1999 at a
weighted average exercise price of $1.51 per share;
- shares subject to warrants outstanding as of June 30, 1999 at an
exercise price per share equal to the initial public offering price of our
common stock; and
- additional shares that could be issued under our stock option
plans.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$12.8 million, or $0.79 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 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 $ , or $ per share. This
represents an immediate increase in pro forma net tangible book value of $
per share to existing stockholders and an immediate dilution of $ per share
to new investors 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.............................. $
Pro forma net tangible book value per share at June 30, 1999............... $
Pro forma increase attributable to new investors...........................
---------
Pro forma net tangible book value per share after this offering..............
---------
Pro forma dilution per share to new investors................................ $
---------
---------
</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 $ 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.......... 16,122,966 % $ 11,623,111 % $ 0.72
New investors..................
------------ ----- ------------- -----
Total...................... 100.0% $ 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
This discussion and table assume no exercise of any stock options and
warrants outstanding as of June 30, 1999. As of June 30, 1999, there were
options outstanding to purchase a total of 9,920,235 shares of common stock with
a weighted average exercise price of $1.51 per share and warrants exercisable
into shares of common stock at an exercise price per share equal to the
offering price of our common stock in this offering. To the extent that any of
these options are exercised, there will be further dilution to new investors.
Please see "Capitalization."
18
<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.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1998 1999
--------------- ---------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
(UNAUDITED) DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Professional services............. $ 2,090 $ 6,819 $ 16,897 $ 23,858 $ 8,935 $ 21,278
Hardware and software sales....... 161 1,287 1,190 2,065 530 1,288
--------------- ---------- --------- --------- --------- ---------
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
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
--------------- ---------- --------- --------- --------- ---------
Operating profit (loss)........... 291 1,543 1,887 (822) (1,223) 190
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) (188)
Income tax provision (benefit)...... 146 719 871 (460) (540) 361
--------------- ---------- --------- --------- --------- ---------
Net income (loss)................. $ 150 $ 863 $ 1,011 $ (627) $ (737) $ (173)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------------- --------------------
1995 1996 1997 1998 1998 1999
--------------- ---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
(UNAUDITED) DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
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>
20
<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 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.
On August 12, 1999, we acquired Network Resource Consultants and Company,
B.V. in a transaction accounted for as a pooling of interests. In connection
with this acquisition, we issued 1,062,814 shares of our common stock in
exchange for all of the outstanding capital stock of Network Resource
Consultants and Company. Supplemental financial statements reflecting our
combined results with those of Network Resource Consultants and Company as of
December 31, 1997 and 1998 and June 30, 1999 (unaudited) and the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited) are included elsewhere in this prospectus. The acquisition of
Network Resource Consultants and Company resulted in an increase in revenue and
gross profit of less than 10% for all restated periods presented. The operating
profit (loss) increased (decreased) by ($235,000), ($62,000), ($262,000),
($133,000) (unaudited) and $147,000 (unaudited) for the years ended December 31,
1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999,
respectively. Net income (loss) increased (decreased) by ($163,000), ($58,000),
($166,000), ($81,000) (unaudited) and ($93,000) (unaudited) for the years ended
December 31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and
1999, respectively. You should read the discussion herein in conjunction with
21
<PAGE>
the supplemental financial statements reflecting our combined results with those
of Network Resource Consultants and Company, B.V. included elsewhere in this
prospectus.
In addition, 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
Operating income (loss)........................................... 19.0 10.4 (3.2) (12.9) 0.8
Other income (expense)............................................ 0.5 0.0 (1.0) (0.6) 0.0
--------- --------- --------- ----------- -----------
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>
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. 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. This increase was primarily due to an increase in the
number of professional services projects and an increase in the size of these
projects. 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
22
<PAGE>
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. 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 gross
profit was due to efficiencies in completing fixed-price, fixed-time projects,
higher utilization rates and an increase in average billing rates.
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 due to increased sales and marketing efforts,
hiring of additional personnel and an increase 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 due to an increase in our facilities and equipment,
compensation and benefits, recruiting and professional development, and other
administrative 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.
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 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 ($540,000) 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
$188,000. The effective tax rate was 42.3% and 192.4% 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. Revenues from hardware and software
sales increased 73.6% from $1.2 million in 1997 to $2.1 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. 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. Cost of revenues increased from $10.4 million in
1997 to $14.6 million in 1998. This increase in gross profit was due to
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efficiencies in completing fixed-price, fixed-time projects, higher utilization
rates and an increase in average billing rates.
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 due to increased sales and marketing efforts, hiring of additional
personnel and 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 in facilities and
equipment, compensation and benefits, recruiting and professional development,
and other administrative 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.
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. Cost of revenues increased from $4.4 million in
1996 to $10.4 million 1997. 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.
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 sales and marketing efforts, hiring of additional personnel was
due to increased 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 due to an increase in facilities and
equipment, compensation and benefits, recruiting and professional development,
and other administrative costs.
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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.
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
-------- --------- -------- --------- -------- --------- ---------
Operating profit (loss)............ 31 (890) (333) 12 389 (112) 302
Other income (expense)............. (14) (22) (32) (85) (126) (28) 26
-------- --------- -------- --------- -------- --------- ---------
Net income (loss) before income
tax provision (benefit)........ 17 (912) (365) (73) 263 (140) 328
Income tax provision (benefit)... 8 (390) (150) 46 34 (49) 410
-------- --------- -------- --------- -------- --------- ---------
Net income (loss)................ $ 9 $ (522) $ (215) $ (119) $ 229 $ (91) $ (82)
-------- --------- -------- --------- -------- --------- ---------
-------- --------- -------- --------- -------- --------- ---------
<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
-------- --------- -------- --------- -------- --------- ---------
</TABLE>
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<PAGE>
<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>
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
-------- --------- -------- --------- -------- --------- ---------
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>
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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.
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We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our working
capital needs for at least the next 12 months.
IMPACT OF THE YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, it is necessary to update the computer systems and/or software used by
many companies and governmental agencies to comply with Year 2000 requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant.
STATE OF READINESS. We are in the process of determining the Year 2000
readiness of our information technology systems, which include our hardware and
software, and our non-information technology systems, which include the
telephone systems and other office equipment we use internally. Our assessment
plan consists of the following steps:
- evaluating our date dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally-developed proprietary
software;
- contacting third-party vendors and licensors of material hardware,
software and services that we use;
- contacting vendors of material non-information technology systems that we
use;
- formulating repair or replacement requirements and implementing corrective
measures; and
- evaluating the need for, and preparing and implementing, if required, a
contingency plan.
To date, we have determined the following through our assessment:
- We have checked our internally developed software and systems for date
dependent code, and all material files and systems are Year 2000
compliant. We believe that the recently installed code is also Year 2000
compliant;
- We have contacted the vendors of material hardware and software components
of our information technology systems, and they have informed us that the
products we use are currently Year 2000 compliant;
- Commercial software, including financial reporting software, upon which we
depend is either Year 2000 compliant or will be upgraded to be compliant
in the normal course of business through upgrades or installation of
software patches;
- Substantially all hardware we use in our network operations and all of the
hardware we use in our office operations have been certified as Year 2000
compliant by its vendors;
- Our telephone system and mail systems are certified as Year 2000
compliant; and
- Our landlords and third-party advertising sales representative and
servicing organizations have not yet provided us with Year 2000 compliance
information.
While we have assessed the Year 2000 readiness of each of our material
internal systems, we will not conduct an end-to-end system test until August
1999. Accordingly, we cannot yet assess whether our internal system, as a whole,
is Year 2000 compliant. In addition, we will continue to attempt to obtain
verification from all remaining distributors, suppliers and vendors that their
systems are Year 2000 compliant. We intend to complete our assessment, and the
replacement or remediation of any non-Year 2000 compliant technologies, by the
end of the third quarter of 1999.
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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 August 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 September 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
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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. 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.
30
<PAGE>
BUSINESS
OVERVIEW
We are a network consulting company focused on the design, performance,
management and security of complex business-critical 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 and
vendor-neutral 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 and measured against pre-defined deliverables 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, or productized
services. These services consist of pre-defined, fixed-price deliverables that
are replicated from our best practices.
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 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 mission-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 bandwidth-intensive information, conduct retail transactions and access
online sources of entertainment. Business and consumer trends will continue to
positively impact the number of users accessing the Internet and virtual private
networks and the data traffic carried over these networks.
The growth in network-dependent activities requires complex network
solutions that integrate legacy 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
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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 estimates that the worldwide market will grow for these services
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, few have the requisite focus and expertise to address the complex,
multi-faceted issues surrounding today's business-critical 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 legacy 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, vendor neutral 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, business-critical 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 model that is designed to enhance their ability
to cost-effectively leverage our expertise. We are typically engaged by our
clients on either a project outsource or collaborative consulting basis. Our
project outsource services are primarily based and measured against pre-defined
deliverables 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 delivery model through which we offer our
clients packaged service products, or productized services.
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These services consist of pre-defined, fixed-price deliverables that are
replicated from our best practices. We believe that this unique approach to
network services further differentiates us from our competitors.
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.
VENDOR-NEUTRAL APPROACH. As an independent service provider, we offer our
clients unbiased and vendor-neutral expertise that enables the design,
implementation and management of optimal technology solutions. We capitalize on
our extensive experience across complex, multi-vendor network environments to
provide our clients with end-to-end network services utilizing best-of-breed
technologies.
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 best practices identified over numerous engagements. We believe
that this enables us to consistently deliver high-quality network technology
solutions.
EXPAND AND ENHANCE OUR PRODUCTIZED SERVICE OFFERINGS. We intend to continue
to enhance and expand our innovative productized service offerings. These
service offerings provide our clients with a pre-defined set of deliverables
that are characterized by an objective and quantifiable value proposition and
return on investment justification. Moreover, our productized services 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
productized service offerings, which will initially include our Information
Security Requirements Analysis product and will expand to other productized
service 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 that 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 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.
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FURTHER INCREASE OUR INDUSTRY EXPERTISE. We intend to continue to expand
the scope of our industry expertise in order to further penetrate our vertical
markets. 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 e-commerce industries. In each of our vertical industry groups, we employ
industry experts, pursue targeted sales and marketing opportunities and develop
industry-specific service offerings. We intend to expand into other vertical
markets 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 deliverables 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, vendor-neutral
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 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.
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NETWORK AND SYSTEMS MANAGEMENT. Our network and systems management practice
focuses on designing and implementing reliable and continuously available
management systems for large-scale, highly-complex networks. The fundamental
tenet of this practice area is that proactive management is an essential element
of any network design and engineering effort. Our network management consultants
develop systems and processes that are able to identify, isolate and resolve
network failures, sometimes before they occur.
The following table lists some of the services provided by our network and
systems management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Service Definition and Service Level Highlights a client's service level commitments and assists in the
Agreement Workshop development of a rational, long-term plan for meeting and exceeding
those commitments.
Rapid Restart Assessment Determines the readiness of a client's network operations center and
provides short-term and long-term recommendations for addressing its
deficiencies.
Network Operation Center Architecture and Assists clients in evaluating and selecting network and systems
Implementation management technologies appropriate for their network operations
centers. Configures and implements the selected technology and
trains clients' operations staff.
Process and Procedure Development Designs, implements and documents the processes and procedures
required to operate a network operations center.
Automation, Correlation and Root Cause Automates repetitive management tasks associated with operating a
Analysis Technology Development network, including event filtering, extraneous event suppression and
automated root cause analysis.
</TABLE>
INTERNETWORK DESIGN AND ENGINEERING. Our internetwork design and
engineering practice focuses on designing and implementing network solutions in
support of our clients' strategic business initiatives. We have created a team
of seasoned professionals who use their specialized technical skills, real-world
industry experience and methodologies to solve the problems associated with
building and maintaining network foundations. With core competencies in the
areas of backbone technology, local area network switching, Internet Protocol,
or IP, management and design, asynchronous transfer mode, or ATM, and remote
access, our versatile team contributes both technical depth and breadth to
client engagements.
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<PAGE>
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 landscape briefings, vendor/ product selection, solution
design and integration planning and comprehensive testing.
Network Deployment Services Implements network technology into clients' existing networks.
Services include project management, vendor coordination, technology
installations and training.
Remote Access and Virtual Private Network Designs and deploys secure, high-performance remote access and
virtual private network solutions to allow clients, their employees,
supply-chain partners and other business partners to access
information remotely.
Network Audit Services Audits clients' network infrastructure to evaluate its design and
performance, document the configuration, analyze its compliance to
prescribed standards and develop an action plan to meet strategic
objectives.
Internet Protocol Management Solutions Designs and implements Internet Protocol address schemes required
for a client to connect to the Internet. The service also implements
management technologies to administer the Internet Protocol
addresses used within an organization.
</TABLE>
PERFORMANCE MANAGEMENT. Our performance management practice leverages
proven methodologies and our extensive experience to help our clients optimize
their networks. We use sophisticated tools and techniques to gather, organize
and warehouse network performance data. This data may subsequently be used for a
number of related performance analysis applications, including capacity
planning, response time management and network simulation modeling. Consultants
in our performance management practice area are experts in applicable
technologies, including core competencies in remote monitoring, or RMON, data
warehousing and discrete event simulation modeling.
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<PAGE>
The following table lists some of the services provided by our performance
management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Network Baselining Collects data in order to establish a baseline of network resource
utilization. The baseline is then used as a comparison against
future trends.
Application Impact Analysis Analyzes how an application uses network resource to predict
response times that users will experience when the application is
deployed. Recommends improvements that enable the application to
maximize network resources.
Network Usage-Based Billing Services Assists clients' transition from a flat-rate billing model to a
usage-based billing model for buying network services.
Capacity Planning Assists clients in understanding the capacity and network resource
constraints that exist within their network with sufficient advance
warning to enable them to add capacity before user performance is
affected.
Response Time Management Monitors and analyzes end-user application response times to ensure
that they remain within the service level commitments.
Network Simulation Modeling Models a network environment so that new configuration and new
application deployment scenarios can be simulated before going into
production.
</TABLE>
INFORMATION SECURITY. Our information security practice is focused on
ensuring that the confidentiality, integrity and availability of our clients'
networks are protected. Our information security consultants have practical
experience with a wide array of advanced security technologies, as well as the
social and procedural aspects of security. By translating the complexities of
information security into understandable terms such as risks, costs and
benefits, we enable our clients to make clear and informed decisions about
protecting their information assets.
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<PAGE>
The following table lists some of the services provided by our information
security practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Information Security Requirements Analysis Assesses clients' physical security environment, the technical
controls for accessing information assets and employee security
awareness. Highlights deficiencies and makes recommendations to
migrate clients to industry-specific best practices.
Asset and Risk Analysis Identifies critical assets, determines susceptibility to risks and
quantifies the impact of such risks. Recommends a risk mitigation
plan to prioritize corrective actions.
Information Security Policy Development Assists customers to create a comprehensive information security
policy that clearly states requirements for employee behavior,
technical security systems and the physical controls needed to
protect the client's information assets.
Security System Design and Implementation Designs and implements security systems using custom configured
products to enforce the specific information security policy of each
client.
Incident Response and Digital Forensics Provides critical response team services in the event of a security
Services breach. Restores the operational integrity of the systems, maintains
evidence, provides forensic and investigative services and
facilitates changes to prevent a recurrence of the breach.
Information Security Assessments Verifies the implementation and effectiveness of clients' security
policies by reviewing and testing their policies, employee
awareness, perimeter security and response team readiness.
</TABLE>
PRODUCTIZED SERVICES
Using our BusinessFirst methodology, we have standardized our replicable
best practice offerings into productized services that have the following
attributes:
- a defined value proposition;
- a defined set of deliverables;
- a defined return on investment analysis;
- a defined delivery methodology; and
- a flexible pricing strategy.
We believe that our productized services are an innovative approach to
meeting our clients' growing need for cost certainty and guaranteed
deliverables. These productized services also enable us to leverage our best
practices into highly-replicable margin opportunities and to expand our market
penetration through third-party sales channels.
Our current productized services include:
INFORMATION SECURITY REQUIREMENTS ANALYSIS. This product is designed to
discover information security weaknesses and to provide our clients with the
ability to correct them. Our certified security
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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 proposing strategies for
addressing these weaknesses.
NETWORK ASSESSMENT. This product provides a cost-effective expert analysis
of a client's existing network environment using proven tools and methodologies.
They then provide a report that helps the client to understand its network and
provides specific recommendations for improvements to and upgrades of the
client's existing network. This analysis is designed to provide clients with the
analysis they need to assess the business benefits that can be achieved by
improving their networks.
APPLICATION IMPACT STUDY. This product provides clients with the
information they need in order to plan the deployment of applications, and for
correcting mismatched networks and applications. Our network systems engineers
use a combination of commercial, public and privately developed software tools
to perform the application impact study. 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 mission critical applications perform to their requirements.
NETWORK USAGE INFORMATION. This product provides clients with a system to
collect and analyze actual network usage, allowing clients to bill for network
system costs. Our network systems engineers use industry proven tools and
methodologies to assess the client's requirements, implement the systems and
customize the solution for the client's specific business goals.
ENTERPRISE MANAGEMENT ASSESSMENT. This product provides an evaluation of a
client's current enterprise network management architecture. Our network systems
engineers analyze both a client's enterprise network management architecture and
its business objectives for its technology solution. They then provide the
client with a tactical and strategic roadmap that enables the client to
implement network solutions that support the client's business objectives.
NETWORK MODELING. This product provides clients with an understanding of
the performance capabilities of their current network environment. This
tool-based analysis examines network traffic flows, utilization trends,
application response times and general performance statistics of a client's
network environment. We then present the client with a detailed analysis of
their networks performance capabilities and a "what if" analysis tool that
allows them to determine the impact of usage upon their network. Clients can
then use this analysis and tool to predict network performance and evaluate the
need to upgrade their networks.
YEAR 2000 COMPLIANCE ASSESSMENT. This 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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<PAGE>
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 Ascend Allied Signal
Bell Atlantic Bloomberg Analog Devices Houghton Mifflin
Bell South Cigna Cabletron Mary Kay Cosmetics
British Telecom DLJdirect Cisco Systems Norfolk Southern
Cable & Wireless Deutsche Bank Data General Pepsi
Cignal Global Comm. First Union IBM Pfizer
Enron Communications Fleet Bank Lucent Technologies Siemens Energy
iBEAM Broadcasting ING Baring Furman Selz Nortel Networks
ICG Netcom J.P. Morgan PROFESSIONAL SERVICES
Intelsat Morgan Stanley Law Plus
MCI/Worldcom Pershing Lockheed Martin
Primus Telecom. State Street Bank Unisys
PSINet State Farm
Qwest SWIFT
Teligent Union Bank of
UUNet California
</TABLE>
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 productized services 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 productized services. 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 June 30, 1999, we had 280 full-time employees.
RECRUITING. Our success is dependent in part on attracting and retaining
talented and motivated personnel at all levels. Accordingly, we invest
significant resources in our recruiting efforts. We have a proactive recruiting
philosophy and believe in a broad-based model for attracting candidates.
Generally, we hire technical consultants according to profiles that fit into one
of our four practice areas.
CORPORATE CULTURE. Our corporate culture is shaped by our view of employees
as investors because they choose to invest their talents, skills, time and
energy into our organization. This mindset is critical 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'
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professional development and satisfaction. We strive to maintain our relaxed and
supportive workplace despite our rapid growth and expansion.
PROFESSIONAL DEVELOPMENT. We believe that our investment in our employees
must mirror our employees' investment in and commitment to us. Integral to this
goal is the establishment of a career development plan for each of our
employees, which is created and agreed upon by management and the employee. We
provide our consultants with the opportunity to obtain extensive subject matter
expertise in their practice area and to work in collaborative multi-discipline
projects. We have also established Predictive University, a training program
that leverages both our in-house captured knowledge programs, as well as
selected outside certification programs.
COMPENSATION. We believe that linking employee compensation to our success
through performance-based incentive programs encourages a high level of
involvement from each team member and increases our employee retention. We
provide a highly competitive compensation package that consists of a combination
of base salary, performance-based incentives and company stock options.
COMPETITION
The network management consulting industry is comprised of many
participants, is highly competitive and is subject to rapid technological
change. We face intense competition from systems integrators, value added
resellers, local and regional network services firms, telecommunications
providers, network equipment and computer systems vendors. Many of our
competitors have greater name recognition, longer operating histories, more
relationships with large and established clients and greater financial,
technical and managerial resources. Furthermore, we expect that our competitors
may in the future form alliances with other technology vendors, which may give
them an advantage in managing networks that use that vendor's equipment.
Most of our current clients and prospective clients have internal
information technology departments and could choose to satisfy their network
management needs through internal resources rather than by outsourcing them to
third-party service providers such as ourselves. The decision by clients or
prospective clients to rely on their own information technology departments
could have a material adverse affect on our business, results of operations and
financial condition. Moreover, as the domestic and global markets for
information technology services continue to grow, we expect to face stiff
competition from new entrants into the network management consulting industry.
We believe that the principal competitive factors in the network management
market are the ability to attract and retain qualified personnel, quality and
breadth of services offered, price and reliability of services provided and the
strength of client relationships. We believe we compete favorably with respect
to all of these factors. We believe we distinguish ourselves from our
competitors through our expertise in managing complex, multi-vendor networks and
our ability to provide clients with cost certainty and guaranteed deliverables.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. Despite our precautions, it may be possible
for third parties to obtain and use our intellectual property without our
authorization. Furthermore, the validity, enforceability and scope of protection
of intellectual property in Internet-related industries is uncertain and still
evolving. The laws of some foreign countries do not protect intellectual
property to the same extent as do the laws of the United States.
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<PAGE>
We pursue the registration of our trademarks in the United States and
England. We may not be able to secure adequate protection of our trademarks in
the United States and other countries. We currently have applied for trademark
registrations in the United States and England for the PREDICTIVE SYSTEMS and
BUSINESSFIRST marks, and further, a trademark application in the United States
for the Predictive logo. The trademark offices in the United States and England
have raised preliminary objections to the registration of the trademarks
described above on a number of grounds, including likelihood of confusion with
pre-existing trademarks and descriptiveness. We have responded to these
objections and are awaiting the trademark offices' decisions on our responses.
We have not, however, received any objections from third parties asserting
likelihood of confusion claims with respect to our trademarks. Nonetheless, we
may not be able to obtain trademark registrations in the United States or
England, or both, for one or more of these trademarks, in which case we would be
unable to fully enforce our statutory trademark rights against third parties for
these trademarks, and/or we may decide to replace these trademarks with new
trademarks. This could have a material adverse effect on our business, financial
condition and results of operations. Effective trademark protection may not be
available in all the countries in which we conduct business. Policing
unauthorized use of our marks is also difficult and expensive. In addition, it
is possible that our competitors have adopted or will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion.
We cannot be certain that our services and the finished products that we
deliver do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. We may be subject to
legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. We may incur
substantial expenses in defending against these third-party infringement claims,
regardless of their merit. Successful infringement claims against us may result
in substantial monetary liability or may materially disrupt the conduct of our
business.
FACILITIES
Our principal executive offices are currently located in approximately
15,000 square feet of office space in New York, New York. Additionally, in June
1999 we entered into an agreement to lease approximately 32,000 square feet of
office space in another facility in New York, New York, with an option for an
additional 32,000 square feet available by March 2001. We expect to move our
principal executive offices to the new facilities in December 1999. We also
lease office space in:
- Atlanta, Georgia;
- Boston, Massachusetts;
- Dallas, Texas;
- Florham Park, New Jersey;
- Herndon, Virginia;
- Pleasanton, California;
- Santa Cruz, California;
- London, England; and
- Amsterdam, The Netherlands.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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MANAGEMENT
The following table sets forth our executive officers, directors and key
employees, their ages and the positions they hold:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ronald G. Pettengill, Jr............................. 40 Chairman of the Board and Chief Executive Officer
Robert L. Belau...................................... 36 President and Director
Thomas R. Joseph..................................... 32 Vice President, General Manager North America
Carl D. Humes........................................ 33 Vice President, Global Operations
Gregory D. Nicastro.................................. 39 Vice President, Strategic Services
Neeraj Sethi......................................... 36 Vice President, Finance
R. Kevin Holt........................................ 45 Vice President, Human Resources
John Wright.......................................... 36 Managing Director, Europe
Peter L. Bloom (1)................................... 41 Director
Donald J. Duffy (1).................................. 32 Director
Braden R. Kelly (2).................................. 28 Director
Eric Meyer (2)....................................... 38 Director
</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.
THOMAS R. JOSEPH has been Vice President, General Manager North America
since April 1999. Prior to that he 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 he served as Region 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,
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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.
JOHN WRIGHT has been Managing Director, Europe since January 1999. Prior to
joining us, Mr. Wright founded Visia Management Consultants, a strategic
consulting company, in 1997. From 1996 to 1997, Mr. Wright served as Director,
Business Development at Global Village, a communications software firm. From
1987 to 1996, Mr. Wright served in various roles at Gandalf Digital
Communications, including, most recently, Director of Indirect Channels.
PETER L. BLOOM has been a director of Predictive since March 1999. Mr. Bloom
is a managing member of General Atlantic Partners, LLC, a private equity firm
that invests globally in software, services, Internet and related information
technology companies, and has been at General Atlantic since 1995. From 1982 to
1995, Mr. Bloom served in various roles at Salomon Brothers, including as
Managing Director of Salomon's U.S. Technology Division. Mr. Bloom is a Director
of Bindview Development Corporation and a Special Advisor to the Board of
Directors of E*TRADE Securities, Inc.
DONALD J. DUFFY has been a director of Predictive since its inception in
February 1995. Mr. Duffy is a co-founder of Meyer, Duffy & Associates, Inc., and
MD Ventures, firms that invest in early stage networking and internet technology
companies. Mr. Duffy is a director of Bikers Dream Inc., a publicly traded
company. Mr. Duffy has been at Meyer, Duffy & Associates since 1994. From 1992
to 1994, Mr. Duffy was a Vice President at Oak Hall Capital Advisors, a money
management firm.
BRADEN R. KELLY has been a director of Predictive since June 1999. Mr. Kelly
is an associate at General Atlantic Partners, LLC, and has been with General
Atlantic since 1995. Mr. Kelly is a director of HEALTHvision, Inc., a provider
of comprehensive Internet solutions to the healthcare industry. From 1993 to
1994, Mr. Kelly served as a Financial Analyst at Morgan Stanley & Company.
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. 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.
CLASSIFIED BOARD OF DIRECTORS
Prior to the completion of the offering, our board of directors will be
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 with its own nominees.
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<PAGE>
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 audit committee currently consists of Messrs. Meyer and
Kelly.
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 current members of the compensation committee are
Messrs. Duffy and Bloom. 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 Messrs. Pettengill,
Belau, Duffy and Meyer serving on the Board of Directors of Tribeca Software,
Inc. and Messrs. Pettengill and Meyer serving on the Board of Directors of
Riversoft Ltd.
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.
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 commence of
service on the board of directors. In addition, at each annual meeting of
stockholders, beginning with the 2001 annual meeting, each individual who is to
continue to serve as a non-employee member of the board of directors will
receive an option to purchase 2,500 shares of our common stock.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued during
the fiscal year ended December 31, 1998 to our Chief Executive Officer and to
each of our most highly compensated executive officers, other than the Chief
Executive Officer, whose salary and bonus for such fiscal year exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
---------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY $ BONUS $ OPTIONS COMPENSATION
- ------------------------------------------------------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Ronald G. Pettengill, Jr............................... $ 175,000 $ 50,000 60,000 $ 8,447(1)
Chief Executive Officer
Robert L. Belau........................................ 175,000 50,000 60,000 8,899(1)
President
Thomas R. Joseph....................................... 112,500 190,000 270,000 3,000(2)
Vice President of North America
Carl D. Humes.......................................... 112,500 190,000 270,000 3,000(2)
Vice President, Technical Services
Gregory D. Nicastro.................................... 140,000 14,000 -- --
Vice President, Strategic Services
Neeraj Sethi........................................... 135,167 55,000 -- --
Vice President, Finance
</TABLE>
- ------------------------
(1) We paid a monthly car allowance and automobile insurance premiums for each
of Messrs. Pettengill and Belau during the year ended December 31, 1998.
(2) We paid a monthly car allowance effective July 1998 for each of Messrs.
Joseph and Humes during the year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to our Chief Executive Officer and to each of our most highly
compensated executive officers, other than the Chief Executive Officer, whose
salary and bonus for such fiscal year exceeded $100,000. We have never granted
any stock appreciation rights. The potential realizable value is calculated
based on the term of the option at its time of grant. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth. The percentage of total
46
<PAGE>
options granted to employees in the last fiscal year is based on options to
purchase an aggregate of shares of common stock granted under our option
plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION ----------------------
NAME GRANTED IN 1998 SHARE ($) DATE 5% 10%
- ------------------------------------------- ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr................... 60,000 2.5% $ 1.25 1/1/08 $ 47,167 $ 119,531
Robert L. Belau............................ 60,000 2.5 1.25 1/1/08 47,167 119,531
Thomas R. Joseph........................... 150,000 6.2 1.25 1/1/08 117,918 298,827
120,000 4.9 1.50 8/1/08 113,201 286,874
Carl D. Humes.............................. 150,000 6.2 1.25 1/1/08 117,918 298,827
120,000 4.9 1.50 8/1/08 113,201 286,874
</TABLE>
- ------------------------
(1) There was no public market for this common stock on December 31, 1998. The
fair market value on December 31, 1998 was determined by the board of
directors to be $1.50 per share.
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 trading market for the 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 as determined by our board of directors
of $1.50 per share, less the applicable exercise price per share, multiplied by
the number of shares underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
<S> <C> <C> <C> <C> <C> <C>
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ---------- ----------- ------------- ----------- -------------
Ronald G. Pettengill, Jr................. 585,000 $ 779,805 780,000 -- $ 515,220 --
Robert L. Belau.......................... 585,000 779,805 780,000 -- 515,220 --
Thomas R. Joseph......................... -- -- 210,000 150,000 82,530 $ 15,000
Carl D. Humes............................ -- -- 210,000 150,000 82,530 15,000
Gregory D. Nicastro...................... -- -- -- 336,000 -- 84,000
Neeraj Sethi............................. 135,000 179,955 90,000 90,000 35,010 22,500
</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
47
<PAGE>
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 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. This 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 4 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.
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 , 1999. It will be
approved by the stockholders prior to the date of this offering.
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 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
shares. However, in no event may any one participant in the 1999 Plan
48
<PAGE>
receive option grants or direct stock issuances for more than 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 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
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<PAGE>
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 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 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
50
<PAGE>
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 of modify the 1999 Plan at any time, subject to any
required stockholder approval. The 1999 Plan will terminate no later than
, 2009.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan was adopted by the board on ,
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 common stock, at semi-annual intervals, through periodic payroll
deductions. A total of 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 % 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
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<PAGE>
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 shares, nor may all participants in the
aggregate purchase more than 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
TRIBECA SOFTWARE
In March 1998, we distributed all of the outstanding shares of our former
subsidiary, Tribeca Software, Inc., to our stockholders. As part of this
transaction, Tribeca purchased from us, and we assigned to Tribeca, network
management software and other assets. 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. During 1999, Tribeca paid us the full amounts due under
the demand note and line of credit and the line of credit was terminated.
We have in the past performed administrative and other services for Tribeca
for which we did not receive any payment. Additionally, Tribeca leases office
space and equipment from us for approximately $12,000 per month. We also act as
a reseller for Tribeca's software. In 1998, sales of Tribeca's software
accounted for approximately $100,000 of our revenues.
Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer, Robert
L. Belau, our President, and Donald 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 PREFERRED STOCK AND WARRANTS
In March 1999, we sold 6,512,316 shares of series A convertible preferred
stock and warrants to purchase 15% of the number of shares registered in this
offering at the initial public offering price to a number of investors for an
aggregate purchase price of approximately $18.6 million. General Atlantic
Partners 54, L.P., one of our 5% stockholders, purchased 5,350,441 shares. On
the closing of this offering, the series A convertible preferred stock will
automatically convert into 6,512,316 shares of common stock.
SHARE REDEMPTION
In March 1999, we made an offer to redeem a number of shares from our
stockholders. Subsequently, we redeemed a total of 2,855,100 shares of common
stock from a number of stockholders 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 Duffy, each, a director of ours, are general partners
of MD Strategic, PV4 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 provides us with consulting and advisory services. Eric
Meyer and Donald Duffy, each one of 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. 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.
LOAN 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. There are
currently no advances outstanding.
OPTION GRANTS
We granted each of our non-employee directors options to purchase 25,000
shares of our common stock at a price of $4.00 per share. Additionally, in 1999,
we granted to Messrs. Pettengill, Belau and Holt options to purchase 200,000,
200,000 and 130,000, 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 parties in arms-length transactions and were entered into prior to
our selection of the underwriters of this offering. In fiscal 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.
It is our current 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 June 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 June 30,
1999, but excludes shares of common stock underlying options held by any other
person. Percentage of beneficial ownership is based on 16,122,966 shares of
common stock outstanding as of June 30, 1999, and shares of common stock
outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
BENEFICIALLY OWNED
----------------------------
<S> <C> <C> <C>
SHARES BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ----------------------------------------------------------------- ------------------------ ----------- ---------------
Ronald G. Pettengill, Jr. (2).................................... 2,229,000 13.1% %
Robert L. Belau (3).............................................. 2,655,000 15.7
Thomas R. Joseph (4)............................................. 240,000 1.5
Carl D. Humes (4)................................................ 240,000 1.5
Gregory D. Nicastro (5).......................................... 84,000 *
Neeraj Sethi (6)................................................. 150,000 *
Peter L. Bloom (7)............................................... 6,463,206 40.1
Donald J. Duffy (8).............................................. 2,631,900 16.1
Braden R. Kelly (7).............................................. -- --
Eric Meyer (8)................................................... 3,114,900 19.1
General Atlantic Partners LLC (7)................................ 6,463,206 40.1
Meyer Duffy and Associates, L.P (9).............................. 1,800,000 11.2
All directors and executive officers as a group (12 persons)
(10)........................................................... 15,356,100 82.0
</TABLE>
- ------------------------
* Indicates less than one percent of the common stock.
(1) Assumes that the underwriters' over-allotment option to purchase up to an
additional shares from Predictive is not exercised.
(2) 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.
55
<PAGE>
(3) 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.
(4) Includes 240,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of June 30, 1999.
(5) Includes 84,000 shares issuable upon the exercise of stock options which are
exercisable within 60 days of June 30, 1999.
(6) Includes 120,000 shares issuable upon the exercise of stock options which
are exercisable within 60 days of June 30, 1999.
(7) Includes 5,350,441 shares owned by General Atlantic Partners 54, L.P. and
1,112,765 shares owned by GAP Coinvestment Partners II, L.P. General
Atlantic Partners 54 and GAP Coinvestment Partners also hold warrants to
purchase 15% of the number of shares to be sold in this offering at the
initial public offering price. The general partner of General Atlantic
Partners 54 is General Atlantic Partners, LLC and the managing members of
General Atlantic Partners are also the general partners of GAP Coinvestment
Partners. Peter L. Bloom is a managing member of General Atlantic Partners
and Braden R. Kelly is an associate of General Atlantic Partners. Each of
Messrs. Bloom and Kelly disclaim beneficial ownership of these securities
except to the extent of his pecuniary interest. The address of Messrs.
Bloom, Kelly and General Atlantic Partners is c/o General Atlantic Partners,
3 Pickwick Plaza, Greenwich, Connecticut 06830.
(8) 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. Messrs. Duffy and Meyer are the general partners of each of MD
Strategic, L.P., Meyer, Duffy Associates, L.P. and PVII, L.P. Each of
Messrs. Duffy and Meyer disclaim beneficial ownership of these securities
except to the extent of his pecuniary interest. The address of Messrs. Duffy
and Meyer is c/o of Meyer, Duffy & Associates, Inc., 237 Park Avenue, New
York, New York 10017.
(9) The address of Meyer, Duffy and Associates, L.P. is c/o of Meyer, Duffy &
Associates, Inc., 237 Park Avenue, New York, New York 10017
(10) Includes 2,604,000 shares of common stock issuable upon the exercise of
stock options which are exercisable within 60 days of June 30, 1999
56
<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
June 30, 1999, 9,610,650 shares of common stock were outstanding. As of June 30,
1999, we had 63 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 a registration rights agreement with some of
our stockholders, including: General Atlantic Partners; Ronald G. Pettengill,
Jr., our Chief Executive Officer; Robert L. Belau, our President; Eric Meyer and
Donald Duffy, each, one of our directors; and Meyer, Duffy and Associates.
Under the terms of the agreement, at any time after the first anniversary of
the effective date of this offering, each of General Atlantic Partners and GAP
Coinvestment Partners 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. Further, if we become eligible
to file registration statements on Form S-3, some parties to the registration
rights agreement 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
57
<PAGE>
register some shares of common stock held by parties to the registration rights
agreement if they request to be included in the registration. In addition,
holders of common stock who are parties to the registration rights agreement
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 amended and restated registration
rights agreement.
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.
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.
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
58
<PAGE>
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.
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 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 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 16,122,966 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, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- ------------------------------------------------------------------------
<S> <C>
After the date of this prospectus
After 90 days from the date of this prospectus
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 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
shares of common stock are outstanding, of which 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
60
<PAGE>
and not otherwise freely transferable. Accordingly, shares covered by that
registration 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
shares and options 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 6,463,206 shares of our outstanding common stock will
have certain demand registration rights with respect to their shares of common
stock (subject, in certain cases, 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 7,413,900 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."
61
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin
& Jenrette Securities Corporation and First Union Capital Markets Corp., have
severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
set forth opposite their names below. The underwriters are committed to purchase
and pay for all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
Bear, Stearns & Co. Inc..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
First Union Capital Markets Corp.................................................
----------
Total........................................................................
----------
----------
</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 additional shares of common stock at the same price per
share as we will receive for the 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 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
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
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 $ . 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."
DIRECTED SHARES. We have requested that the underwriters reserve up to ten
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
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. We provide network consulting services to some of the
underwriters. Please see "Certain Transactions--Agreements with Underwriters."
63
<PAGE>
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, and 1,000 shares of common stock.
Various legal matters in connection with this offering will be passed upon for
the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Predictive Systems, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information with respect to Predictive and the common stock, reference
is made to the registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in Predictive files in the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Predictive's
Commission filings, including the registration statement, will also be available
to you on the Commission's Internet site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
64
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED AND SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HISTORICAL PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited)................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1998 and 1999 (Unaudited).......................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1999 (Unaudited)........................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1998 and 1999 (Unaudited).......................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Supplemental Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited).... SF-1
Supplemental Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999 (Unaudited).................................................. SF-2
Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997
and 1998 and the Six Months Ended June 30, 1999 (Unaudited).............................................. SF-3
Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999 (Unaudited).................................................. SF-4
Notes to Supplemental Consolidated Financial Statements.................................................... SF-5
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements included herein have been adjusted to give effect
to the increase in the authorized number of common shares to 200,000,000 and to
decrease the authorized number of preferred shares to 10,000,000. We expect to
be in a position to render the following report upon the effectiveness of such
events assuming that from May 12, 1999 to the effective date of such events, no
other events will have occurred that would effect the financial statements or
the notes thereto.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
To Predictive Systems, Inc.:
We have audited the accompanying balance sheets of Predictive Systems, Inc.
(a Delaware corporation) (the "Company") as of December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Predictive Systems, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
We have also made a similar audit of the accompanying supplemental balance
sheets of Predictive Systems, Inc. at December 31, 1997 and 1998, and the
related supplemental statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. The
supplemental statements give retroactive effect to the merger with Network
Resource Consultants and Company B.V. on August 12, 1999, which has been
accounted for as a pooling of interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
F-2
<PAGE>
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the financial position of Predictive
Systems, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, after giving retroactive effect to the merger with Network
Resource Consultants and the Company B.V. as described in Note 1, all in
conformity with generally accepted accounting principles.
F-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
<S> <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 obligation................................... 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 obligation...................................................... 282,013 446,018 398,927
Deferred income tax liability................................................. -- 714,146 516,528
---------- ----------- -----------
Total liabilities........................................................... 4,098,172 10,951,108 4,871,863
---------- ----------- -----------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par value, 5%
cumulative, 4,200,000, 4,200,000 and 0 shares issued and outstanding)......... 700,000 700,000 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 10,000,000 shares authorized, 0,
0 and 6,512,316 shares issued and outstanding).............................. -- -- 6,512
Common stock ($.001 par value, 200,000,000 shares authorized, 4,408,200,
7,900,200 and 12,465,750 shares issued and 4,408,200, 7,900,200 and
9,610,650 shares outstanding)............................................... 4,408 7,900 12,466
Additional paid-in capital.................................................... 69,762 682,270 20,002,886
Treasury stock, 2,855,100 shares.............................................. -- -- (8,398,753 )
Retained earnings............................................................. 1,998,041 1,335,741 1,153,601
Accumulated other comprehensive loss.......................................... -- -- (15,699 )
---------- ----------- -----------
Total stockholders' equity.................................................. 2,072,211 2,025,911 12,761,013
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $6,870,383 $13,677,019 $17,632,876
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------ ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services.................. $ 6,818,678 $ 16,897,456 $ 23,857,780 $ 8,935,220 $ 21,278,287
Hardware and software sales............ 1,287,649 1,189,617 2,065,348 530,258 1,287,701
------------ ------------- ------------- ------------- -------------
Total revenues....................... 8,106,327 18,087,073 25,923,128 9,465,478 22,565,988
COST OF REVENUES:
Professional services.................. 3,381,505 9,590,306 12,861,272 5,179,277 10,245,945
Hardware and software purchases........ 970,479 816,935 1,698,356 437,820 1,031,889
------------ ------------- ------------- ------------- -------------
Total cost of revenues............... 4,351,984 10,407,241 14,559,628 5,617,097 11,277,834
------------ ------------- ------------- ------------- -------------
Gross profit......................... 3,754,343 7,679,832 11,363,500 3,848,381 11,288,154
SALES AND MARKETING...................... 386,000 1,081,889 3,433,751 1,255,707 3,409,297
GENERAL AND ADMINISTRATIVE............... 1,683,574 4,390,476 8,184,486 3,586,811 7,376,425
DEPRECIATION AND AMORTIZATION............ 142,134 320,908 567,761 229,348 312,135
------------ ------------- ------------- ------------- -------------
Operating profit (loss).............. 1,542,635 1,886,559 (822,498) (1,223,485) 190,297
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) 187,675
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) $ (173,390)
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
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
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ----------- --------- ----------- ----------
<S> <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........ -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at June 30, 1999 (unaudited)........................... 6,512,316 $ 6,512 12,465,750 $ 12,466 $20,002,886
--------- ----------- --------- ----------- ----------
--------- ----------- --------- ----------- ----------
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK EARNINGS LOSS EQUITY
---------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................... $ -- $ 150,247 $ -- $ 192,417
Net income................................................... -- 863,110 -- 863,110
Exercise of options.......................................... -- -- -- 5,000
---------- --------- -------------- ------------
Balance at December 31, 1996................................... -- 1,013,357 -- 1,060,527
Net income................................................... -- 1,010,934 -- 1,010,934
Exercise of options.......................................... -- -- -- 27,000
Preferred stock dividends.................................... -- (26,250) -- (26,250)
---------- --------- -------------- ------------
Balance at December 31, 1997................................... -- 1,998,041 -- 2,072,211
Net loss..................................................... -- (627,300) -- (627,300)
Exercise of options.......................................... -- -- -- 616,000
Preferred stock dividends.................................... -- (35,000) -- (35,000)
---------- --------- -------------- ------------
Balance at December 31, 1998................................... -- 1,335,741 -- 2,025,911
Net loss..................................................... -- (173,390) (173,390)
Foreign currency translation adjustment...................... -- -- (15,699) (15,699)
------------
Total comprehensive loss..................................... (189,089)
------------
------------
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) -- -- (8,398,753)
---------- --------- -------------- ------------
Balance at June 30, 1999 (unaudited)........................... $(8,398,753) $1,153,601 $ (15,699) $12,761,013
---------- --------- -------------- ------------
---------- --------- -------------- ------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 863,110 $1,010,934 $ (627,300) $ (736,537) $ (173,390)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
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............................... 0 0 0 0 201,511
---------- ---------- ----------- ---------- ----------
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:
Common shares repurchased to treasury.................. -- -- -- -- (8,398,753)
(Payments to) repayments from employees, net........... -- (53,371) (1,729) (10,206) 4,639
(Payments to) repayments from stockholders, net........ -- -- (515,000) -- 515,000
(Payments to) repayments from related party, net....... -- -- (916,948) (424,633) 916,948
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) (7,706,918)
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
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 12,488,084
---------- ---------- ----------- ---------- ----------
Effects of exchange rates.............................. 0 0 0 0 (15,699)
Net increase (decrease) in cash.................. 367,865 (217,715) (420,456) (276,416) 359,911
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,171 420,456 420,456 --
---------- ---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,171 $ 420,456 $ -- $ 144,040 $ 359,911
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The financial statements and footnotes reflect the combined
operations and financial position of the Company and the Parent for all periods
presented.
The Company provides network consulting services for the design,
performance, management and securities of complex business-critical computing
network. Services are currently provided through the Company's offices located
throughout the United States and its wholly-owned subsidiary in England which
was formed in the first quarter of 1999.
The Company is proposing an initial public offering of up to
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. 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.
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.
F-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT--
Computer equipment and office furniture are carried at their cost basis and
depreciated using the straight-line method over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the life of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred and major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives.
BUSINESS CONCENTRATIONS AND CREDIT RISK--
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, approximately 79% of sales were from
six customers. For the year ended December 31, 1997, approximately 60% of sales
were from four customers. For the year ended December 31, 1998, approximately
20% of sales were from one customer. The amounts due from these customers at
December 31, 1997 and 1998 were approximately $2,357,000 and $2,931,000,
respectively.
INCOME TAXES--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company converted from a cash basis to an accrual basis taxpayer on January 1,
1998.
NET INCOME (LOSS) PER SHARE--
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding. Diluted net income (loss) per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
outstanding.
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
F-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which 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. The Company does not
expect the adoption of this standard to have a material effect on the Company's
results of consolidated operations, financial position or cash flows.
F-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss)...................... $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (173,390)
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) (182,140)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
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) $ (182,140)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Denominator--
Denominator for basic earnings per
share--weighted average shares....... 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred stock....... 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options............... 3,117,130 4,182,193 -- -- --
------------- ------------- ------------ ------------ ------------
Dilutive potential common shares....... 7,317,130 8,382,193 -- -- --
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Denominator for diluted earnings per
share--adjusted weighted average shares
and assumed conversions................ 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Basic earnings per share from net income
(loss)................................. $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Diluted earnings per share from net
income (loss).......................... $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>
The following table summarizes the weighted average of securities
outstanding which are excluded from the loss per share calculation for the year
ended December 31, 1998 and the six months ended
F-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
June 30, 1998 and 1999, respectively. Preferred stock is reflected on an "if
converted" basis. See Note 7.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Mandatory redeemable convertible preferred............ 4,200,000 4,200,000 1,563,333
Convertible preferred................................. -- -- 4,160,646
Stock options......................................... 2,396,092 4,557,823 3,856,450
------------ ---------- ----------
6,596,092 8,757,823 9,580,429
------------ ---------- ----------
------------ ---------- ----------
</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) DEBT:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts receivable,
as defined. At December 31, 1998, the balance outstanding on this demand loan
was $5,598,000 as the lender has informally extended the Company's ability to
borrow under this demand loan. The interest rate on the demand loan was 11.25%
at December 31, 1998. During the first quarter of 1999, the balance outstanding
on the demand loan was paid in full.
F-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) CAPITAL LEASE OBLIGATIONS:
The Company has entered into various leases for computer equipment, office
furniture, and leasehold improvements. These leases have been capitalized using
interest rates ranging from 7.88% to 18.83% and expire on various dates through
2003. Depreciation on the capitalized assets has been included in depreciation
expense in the accompanying statements of operations.
The future minimum lease payments required under the above mentioned capital
leases for the twelve months ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1999............................................................................. $ 211,951
2000............................................................................. 209,297
2001............................................................................. 155,655
2002............................................................................. 87,812
2003............................................................................. 55,697
Less--Amount representing interest............................................... (123,367)
-----------
Present value of net minimum lease payments...................................... 597,045
Less--Current portion............................................................ (151,027)
-----------
$ 446,018
-----------
-----------
</TABLE>
(7) STOCKHOLDERS' EQUITY:
PREFERRED STOCK--
Since inception, the Company has issued two types of preferred stock. The
following is a discussion of each of these issuances--
In 1995, the Company issued 4,200,000 shares of mandatory redeemable
convertible preferred stock (the "1995 Preferred Shares") at a price of
$0.17 per share. The shares accrue dividends at 5% per year, commencing
March 1, 1997. Each share is convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. The shares
automatically convert upon successful completion of an initial public
offering yielding gross proceeds of at least $10.0 million and at an initial
public offering price of not less than $0.83 per share. Commencing March 1,
1998, the Company was able to redeem the 1995 Preferred Shares. Commencing
March 1, 2001, if not previously redeemed, the Company was required to
redeem the 1995 Preferred Shares in three equal annual installments.
During the quarter ended March 31, 1999, the holders of the 1995
Preferred Shares exercised their conversion rights and converted all
outstanding shares into 4,200,000 shares of common stock. In connection with
the conversion, the Company paid $70,000 of accumulated dividends on the
1995 Preferred Shares.
Subsequent to the conversion of the 1995 Preferred Shares, the Company
redeemed 2,855,100 shares of common stock at a purchase price of
approximately $2.94 per share.
On March 5, 1999, the Company sold 6,512,316 shares of convertible
preferred stock (the "1999 Preferred Shares") to General Atlantic Partners
54, L.P. (5,350,441 shares), GAP Coinvestment Partners II, LP (1,112,765
shares), and other investors (49,110 shares) resulting in net proceeds of
approximately $18,600,000. The 1999 Preferred Shares are convertible to
common shares on a 1 to 1 ratio at any time at the option of the holder,
subject to certain adjustments. The shares will automatically convert (i)
prior to the closing of the proposed initial public offering
F-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
yielding net proceeds of at least $25 million and resulting in a market
capitalization of at least $100 million or (ii) upon the conversion of at
least 67% of all 1999 Preferred Shares.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, 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.
The Company will record the value of these warrants, as determined by
using the Black-Scholes model, as a dividend to these shareholders. The
dividend will decrease equity but will have no effect on reported net income
(loss). The dividend will be recorded at the time of the initial public
offering as the actual value of the warrants cannot be determined until that
date.
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. A combined total of 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 2,000,835 3.27
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 (112,650) 0.92
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02 9,920,235 $ 1.51
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Options exercisable at end of
period............................ 3,588,000 $ 0.27 5,700,300 $ 0.42 4,586,250 $ 0.80 4,859,100 $ 0.89
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted during period..... $ 0.17 $ 0.23 $ 0.26 $ 0.62
</TABLE>
F-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- ------------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$0.17............................................ 789,000 6.20 years 789,000
0.50............................................ 240,000 7.00 years 240,000
0.83............................................ 3,040,800 7.83 years 2,557,800
1.25............................................ 2,788,800 8.61 years 912,450
1.50............................................ 1,539,000 9.59 years 87,000
-------------- -------------
8,397,600 4,586,250
-------------- -------------
-------------- -------------
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1996 1997 1998 1999
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported.......................... $ 863,110 $ 1,010,934 $ (627,300) $ (173,390)
Pro forma............................ 830,967 774,427 (1,006,406) (455,214)
Basic net income (loss) per share:
As reported.......................... $ 0.20 $ 0.22 $ (0.11) $ (0.02)
Pro forma............................ $ 0.19 $ 0.18 $ (0.17) $ (0.05)
Diluted net income (loss) per share:
As reported.......................... $ 0.07 $ 0.08 $ (0.11) $ (0.02)
Pro forma............................ $ 0.07 $ 0.06 $ (0.17) $ (0.05)
</TABLE>
F-15
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
Other.................................................. 4.8 5.7 (1.7) (1.7) 12.8
--------- --------- --------- --------- ---------
45.4% 46.3% (42.3)% (42.3)% 192.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of
F-16
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES: (CONTINUED)
approximately $1,667,000. Other major components of the deferred tax assets and
(liabilities) as of December 31, 1997, 1998 and June 30, 1999 are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve................................. $ 32,486 $ 57,529 $ 173,544
Prepaid expenses................................. (66,407) -- --
Accounts receivable.............................. (1,739,221) -- --
Unbilled receivables............................. (72,946) -- --
Accounts payable and accrued expenses............ 255,872 -- --
Depreciation..................................... 14,231 100,124 88,405
Section 481 A. adjustment........................ -- (1,249,974) (1,028,959)
Net operating loss carryforwards................. 227,732 174,474 260,000
Valuation allowance.............................. -- -- (260,000)
Other, net....................................... (91,362) 18,701 21,214
------------- ------------- -------------
Total deferred taxes, net.................... $ (1,439,615) $ (899,146) $ (745,796)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $580,000 and $390,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(9) RELATED PARTIES:
During 1998, the Company started a software development company which had
previously been consolidated with the Company. In March 1998, the software
development company was spun off through a distribution of all of its
outstanding shares to the Company's stockholders. In connection with the
spin-off the Company sold certain assets to the software development company for
approximately $130,000 and provided a $1,000,000 line of credit bearing interest
at 8%. As of December 31, 1998, $916,948 was due from this company.
(10) NOTES RECEIVABLE--STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options. The stockholders
signed notes payable to the Company in exchange for the loans which had interest
rates of 7%. All amounts due under these notes were paid in full subsequent to
December 31, 1998.
(11) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES--
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately six months to five years, with an
option to renew two of these leases for an additional five years. These leases
provide for minimum annual lease payments and additional
F-17
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
operating expense charges, as well as rent concessions for two locations, which
are being amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 857,708
2000............................................................................ 723,319
2001............................................................................ 690,309
2002............................................................................ 437,821
2003............................................................................ 211,934
------------
Total minimum lease payments................................................ $ 2,921,091
------------
------------
</TABLE>
Rent expense was approximately $202,568, $457,825 and $736,120 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $284,300 (unaudited) and $527,118 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(12) SUBSEQUENT EVENT:
Subsequent to year-end the Company amended and restated its certificate of
incorporation to increase its authorized common stock to 200,000,000 shares and
decrease its authorized preferred stock to 10,000,000 shares.
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V., ("NRCC") in a transaction accounted for as a pooling of interests.
In connection with this acquisition, the Company exchanged 1,062,814 shares of
its common stock in exchange for all of the outstanding stock of NRCC.
F-18
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 500,556 $ 32,432 $ 523,679
Accounts receivable--net of allowance for doubtful accounts of $79,613,
$151,489 and $436,817, respectively......................................... 4,520,396 9,271,531 13,548,697
Unbilled work in process...................................................... 179,404 1,062,824 1,477,863
Notes receivable--employees................................................... 53,371 55,100 50,461
Notes receivable--stockholders................................................ -- 515,000 --
Due from related party........................................................ -- 916,948 --
Prepaid income taxes.......................................................... 344,049 342,829 --
Other current assets.......................................................... 329,981 561,474 658,000
---------- ----------- -----------
Total current assets........................................................ 5,927,757 12,758,138 16,258,700
PROPERTY AND EQUIPMENT--net of accumulated depreciation and amortization of
$485,511, $1,007,210 and $1,355,521, respectively............................. 949,712 1,500,333 1,960,102
DEFERRED TAX ASSET.............................................................. 351,222 -- --
OTHER ASSETS.................................................................... 267,314 235,047 185,074
---------- ----------- -----------
Total assets................................................................ $7,496,005 $14,493,518 $18,403,876
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................ $ 545,351 $ 475,610 $ --
Short-term borrowings......................................................... 780,000 5,624,043 15,881
Due to shareholders........................................................... 460,714 349,178 292,274
Accounts payable and accrued expenses......................................... 969,670 3,121,046 3,520,003
Deferred income tax liability................................................. 1,676,937 185,000 229,268
Deferred income............................................................... 39,099 490,572 62,121
Dividends payable............................................................. 26,250 61,250 --
Income taxes payable.......................................................... -- 4,166 211,498
Current portion of capital lease obligation................................... 76,981 151,027 150,511
---------- ----------- -----------
Total current liabilities................................................... 4,575,002 10,461,892 4,481,556
---------- ----------- -----------
NONCURRENT LIABILITIES:
Deferred rent................................................................. 23,306 70,957 52,177
Capital lease obligation...................................................... 282,013 446,018 398,927
Deferred income tax liability................................................. -- 684,430 516,528
---------- ----------- -----------
Total liabilities........................................................... 4,880,321 11,663,297 5,449,188
---------- ----------- -----------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par value, 5%
cumulative, 4,200,000, 4,200,000 and 0 shares issued and outstanding)......... 700,000 700,000 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 10,000,000 shares authorized, 0,
0 and 6,512,316 shares issued and outstanding).............................. -- -- 6,512
Common stock ($.001 par value, 200,000,000 shares authorized, 5,152,170,
8,963,014 and 13,528,564 shares issued and 5,152,170, 8,963,014 and
10,673,464 shares outstanding).............................................. 5,152 8,963 13,529
Additional paid-in capital.................................................... 93,354 802,734 20,123,350
Treasury stock, 2,855,100 shares.............................................. -- -- (8,398,753 )
Retained earnings............................................................. 1,776,942 1,281,019 1,191,631
Accumulated other comprehensive income........................................ 40,236 37,505 18,419
---------- ----------- -----------
Total stockholders' equity.................................................. 1,915,684 2,130,221 12,954,688
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $7,496,005 $14,493,518 $18,403,876
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated balance sheets.
SF-1
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services................. $ 6,959,193 $ 17,914,486 $ 25,515,207 $ 9,791,626 $ 22,241,353
Hardware and software sales........... 1,287,649 1,442,414 2,296,846 563,851 1,324,161
------------- ------------- ------------- ------------- -------------
Total revenues...................... 8,246,842 19,356,900 27,812,053 10,355,477 23,565,514
COST OF REVENUES:
Professional services................. 3,502,566 10,387,304 13,764,476 5,647,289 10,778,814
Hardware and software purchases....... 970,479 954,958 1,847,139 453,928 1,051,440
------------- ------------- ------------- ------------- -------------
Total cost of revenues.............. 4,473,045 11,342,262 15,611,615 6,101,217 11,830,254
------------- ------------- ------------- ------------- -------------
Gross profit........................ 3,773,797 8,014,638 12,200,438 4,254,260 11,735,260
SALES AND MARKETING..................... 418,332 1,116,973 3,460,012 1,266,848 3,410,735
GENERAL AND ADMINISTRATIVE.............. 1,896,870 4,733,922 8,689,277 3,834,154 7,656,582
DEPRECIATION AND AMORTIZATION........... 150,706 339,256 611,828 243,783 330,399
------------- ------------- ------------- ------------- -------------
Operating profit (loss)............. 1,307,889 1,824,487 (560,679) (1,090,525) 337,544
OTHER INCOME (EXPENSE):
Interest income....................... 31,535 26,575 66,407 12,662 71,929
Other income (expense)................ 7,613 3,849 6,625 (111) 36,750
Interest expense...................... (11,884) (61,837) (349,350) (76,510) (118,014)
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax
provision (benefit)............... 1,335,153 1,793,074 (836,997) (1,154,484) 328,209
INCOME TAX PROVISION (BENEFIT).......... 634,822 840,460 (376,074) (499,082) 408,847
------------- ------------- ------------- ------------- -------------
Net income (loss)................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (80,638)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS) PER SHARE
BASIC................................. $ 0.14 $ 0.18 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DILUTED............................... $ 0.06 $ 0.07 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC................................. 4,919,974 5,126,387 7,075,000 5,684,315 10,033,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DILUTED............................... 12,237,104 13,508,580 7,075,000 5,684,315 10,033,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-2
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................................... -- $ -- 4,269,000 $ 4,269 $ 37,901
Net income................................................... -- -- -- -- --
Foreign currency translation adjustment......................
Total comprehensive income................................... -- -- -- -- --
Issuance of common stock..................................... -- -- 743,970 744 23,592
Exercise of options.......................................... -- -- 30,000 30 4,970
--------- ----------- --------- ----------- ----------
Balance at December 31, 1996................................... -- -- 5,042,970 5,043 66,463
Net income................................................... -- -- -- -- --
Foreign currency translation adjustment......................
Total comprehensive income...................................
Exercise of options.......................................... -- -- 109,200 109 26,891
Preferred stock dividends.................................... -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at December 31, 1997................................... -- -- 5,152,170 5,152 93,354
Net loss..................................................... -- -- -- -- --
Foreign currency translation adjustment......................
Total comprehensive loss.....................................
Issuance of common stock..................................... -- -- 318,844 319 96,872
Exercise of options.......................................... -- -- 3,492,000 3,492 612,508
Preferred stock dividends.................................... -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at December 31, 1998................................... -- -- 8,963,014 8,963 802,734
Net loss..................................................... -- -- -- -- --
Foreign currency translation adjustment...................... -- -- -- -- --
Total comprehensive loss.....................................
Preferred stock dividends.................................... -- -- -- -- --
Conversion of preferred to common............................ -- -- 4,200,000 4,200 695,800
Issuance of preferred stock.................................. 6,512,316 6,512 -- -- 18,559,713
Exercise of options.......................................... -- -- 365,550 366 65,103
Common stock repurchase to treasury, 2,855,100 shares........ -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at June 30, 1999 (unaudited)........................... 6,512,316 $ 6,512 13,528,564 $ 13,529 $20,123,350
--------- ----------- --------- ----------- ----------
--------- ----------- --------- ----------- ----------
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK EARNINGS INCOME (LOSS) EQUITY
---------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................... $ -- $ 150,247 $ -- $ 192,417
Net income................................................... -- 700,331 -- 700,331
Foreign currency translation adjustment...................... 4,973 4,973
-------------- ------------
Total comprehensive income................................... -- -- 705,304
------------
------------
Issuance of common stock..................................... -- -- 24,336
Exercise of options.......................................... -- -- -- 5,000
---------- --------- -------------- ------------
Balance at December 31, 1996................................... -- 850,578 4,973 927,057
Net income................................................... -- 952,614 -- 952,614
Foreign currency translation adjustment...................... 35,263 35,263
------------
Total comprehensive income................................... 987,877
------------
------------
Exercise of options.......................................... -- -- -- 27,000
Preferred stock dividends.................................... -- (26,250) -- (26,250)
---------- --------- -------------- ------------
Balance at December 31, 1997................................... -- 1,776,942 40,236 1,915,684
Net loss..................................................... -- (460,923) -- (460,923)
Foreign currency translation adjustment...................... (2,731) (2,731)
------------
Total comprehensive loss..................................... (463,654)
------------
------------
Issuance of common stock..................................... -- -- 97,191
Exercise of options.......................................... -- -- -- 616,000
Preferred stock dividends.................................... -- (35,000) -- (35,000)
---------- --------- -------------- ------------
Balance at December 31, 1998................................... -- 1,281,019 37,505 2,130,221
Net loss..................................................... -- (80,638) (80,638)
Foreign currency translation adjustment...................... -- -- (19,086) (19,086)
------------
Total comprehensive loss..................................... (99,724)
------------
------------
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) -- -- (8,398,753)
---------- --------- -------------- ------------
Balance at June 30, 1999 (unaudited)........................... $(8,398,753) $1,191,631 $ 18,419 $12,954,688
---------- --------- -------------- ------------
---------- --------- -------------- ------------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (80,638)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Deferred income taxes................................ 379,373 808,528 (456,285) (542,258) (123,634)
Depreciation and amortization........................ 150,706 339,256 611,828 243,783 330,399
Provision for doubtful accounts...................... 20,840 99,308 102,196 55,110 285,328
(Increase) decrease in--
Accounts receivable................................ (1,270,247) (2,967,653) (4,853,331) (576,235) (4,562,493)
Unbilled work in process........................... (300,190) 204,978 (883,420) (27,773) (415,039)
Prepaid income taxes............................... (133,133) (210,916) 1,220 42,076 342,829
Other current assets............................... (195,753) (92,104) (231,493) (44,749) (96,526)
Other assets....................................... (66,191) (114,784) 32,267 (19,313) 49,973
Increase (decrease) in--
Accounts payable and accrued expenses.............. 632,203 196,801 2,151,376 545,381 398,957
Deferred income.................................... 494,948 (458,349) 451,473 (9,986) (428,451)
Deferred rent...................................... 16,462 (7,269) 47,651 (4,798) (18,780)
Income taxes payable............................... -- -- 4,166 270 207,332
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 429,349 (1,249,590) (3,483,275) (993,894) (4,110,743)
CASH FLOWS FROM INVESTING ACTIVITIES:
Common shares repurchased to treasury.................. -- -- -- -- (8,398,753)
(Payments to) repayments from employees, net........... -- (53,371) (1,729) (10,206) 4,639
(Payments to) repayments from stockholders, net........ 17,353 443,361 (626,535) (58,932) 458,095
(Payments to) repayments from related party, net....... -- -- (916,948) (424,633) 916,948
Purchase of property and equipment..................... (384,476) (394,299) (924,399) (398,336) (837,775)
---------- ---------- ----------- ---------- ----------
Net cash used in investing activities............ (367,123) (4,309) (2,469,611) (892,107) (7,856,846)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft......................................... -- 545,351 (69,741) (221,054) (475,610)
Proceeds from short-term borrowings.................... 271,524 2,452,000 4,844,043 -- --
Repayments of short-term borrowings.................... -- (1,943,524) -- 1,620,000 (5,608,162)
Payment of preferred dividends......................... -- -- -- -- (70,000)
Proceeds from sale of preferred stock.................. -- -- -- -- 18,566,225
Proceeds from sale of common stock..................... 24,336 -- 97,191 97,191 --
Proceeds from exercise of stock options................ 5,000 27,000 616,000 95,990 65,469
---------- ---------- ----------- ---------- ----------
Net cash provided by financing activities........ 300,860 1,080,827 5,487,493 1,592,127 12,477,922
---------- ---------- ----------- ---------- ----------
Effects of exchange rates.............................. 4,973 35,263 (2,731) 2,351 (19,086)
Net increase (decrease) in cash.................. 368,059 (137,809) (468,124) (291,523) 491,247
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,365 500,556 500,556 32,432
---------- ---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,365 $ 500,556 $ 32,432 $ 209,033 $ 523,679
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The supplemental financial statements and footnotes reflect the
combined operations and financial position of the Company and the Parent for all
periods presented.
The Company provides network consulting services for the design,
performance, management and securities of complex business-critical computing
network. Services are currently provided through the Company's offices located
throughout the United States and its wholly-owned subsidiary in England which
was formed in the first quarter of 1999.
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V., ("NRCC") in a transaction accounted for as a pooling of interests.
In connection with this acquisition, the Company exchanged 1,062,814 shares of
its common stock in exchange for all of the outstanding stock of NRCC. The
accompanying supplemental financial statements have been restated to reflect the
merger for all periods presented.
The Company is proposing an initial public offering of up to
shares of common stock including overallotment. See "Risk Factors" in the
accompanying prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS--
The accompanying supplemental consolidated balance sheet as of June 30, 1999
and supplemental consolidated statements of operations, stockholders' equity and
cash flows for the six months ended June 30, 1998 and 1999 included herein have
been prepared by the Company and are unaudited. The information furnished in the
unaudited supplemental financial statements referred to above includes all
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION--
Revenue for time-and-material contracts are recognized as the services are
rendered. Revenues for fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting based on the ratio
of costs incurred to total estimated costs. Unbilled work in process represent
costs incurred and estimated earnings, production, and other client-reimbursable
costs. 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.
SF-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL 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.
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"
SF-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
("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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which 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. The Company does not
expect the adoption of this standard to have a material effect on the Company's
results of consolidated operations, financial position or cash flows.
SF-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS No. 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------ ------------ -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss).................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (80,638)
Preferred stock dividends............ -- (26,250) (35,000) (17,500) (8,750)
------------- ------------- ------------ ------------ -------------
Numerator for basic earnings per
share--net income (loss)
available to common
stockholders..................... 700,331 926,364 (495,923) (672,902) (89,388)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Effect of dilutive securities--
preferred stock dividend............. -- 26,250 -- -- --
------------- ------------- ------------ ------------ -------------
Numerator for diluted earnings per
share--net income (loss) available to
common stockholders after assumed
conversions.......................... $ 700,331 $ 952,614 $ (495,923) $ (672,902) $ (89,388)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Denominator--
Denominator for basic earnings per
share--weighted average shares..... 4,919,974 5,126,387 7,075,000 5,684,315 10,033,508
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred stock..... 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options............. 3,117,130 4,182,193 -- -- --
------------- ------------- ------------ ------------ -------------
Dilutive potential common shares..... 7,317,130 8,382,193 -- -- --
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions....... 12,237,104 13,508,580 7,075,000 5,684,315 10,033,508
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Basic earnings per share from net
income (loss)........................ $ 0.14 $ 0.18 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Diluted earnings per share from net
income (loss)........................ $ 0.06 $ 0.07 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
</TABLE>
The following table summarizes the weighted average of securities
outstanding which are excluded from the loss per share calculation for the year
ended December 31, 1998 and the six months ended
SF-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
June 30, 1998 and 1999, respectively. Preferred stock is reflected on an "if
converted" basis. See Note 7.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Mandatory redeemable convertible preferred............ 4,200,000 4,200,000 1,563,333
Convertible preferred................................. -- -- 4,160,646
Stock options......................................... 2,396,092 4,557,823 3,856,450
------------ ---------- ----------
6,596,092 8,757,823 9,580,429
------------ ---------- ----------
------------ ---------- ----------
</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 $ 1,338,750 $ 1,897,142
Office furniture.................................... 383,949 726,231 771,029
Leasehold improvements.............................. 405,248 442,562 647,452
------------ ------------ ------------
1,435,223 2,507,543 3,315,623
Less--Accumulated depreciation and amortization..... 485,511 1,007,210 1,355,521
------------ ------------ ------------
$ 949,712 $ 1,500,333 $ 1,960,102
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Depreciation and amortization expense aggregated $150,706, $339,256,
$611,828, $243,783 (unaudited) and $330,399 (unaudited), respectively, for the
years ending December 31, 1996, 1997 and 1998 and for the six months ended June
30, 1998 and 1999.
(5) DEBT:
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.
SF-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL 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
SF-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL 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, 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.
The Company will record the value of these warrants, as determined by
using the Black-Scholes model, as a dividend to these shareholders. The
dividend will decrease equity but will have no effect on reported net income
(loss). The dividend will be recorded at the time of the initial public
offering as the actual value of the warrants cannot be determined until that
date.
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. A combined total of shares of common stock has been
reserved for issuance under the two Option Plans.
A summary of the activity under the Option Grant Programs is as follows--
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30, 1999
1996 1997 1998 (UNAUDITED)
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Outstanding at beginning of
period............................ 4,386,000 $ 0.17 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02
Granted............................. 1,560,000 0.78 3,856,800 1.04 2,427,000 1.41 2,000,835 3.27
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 (112,650) 0.92
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02 9,920,235 $ 1.51
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Options exercisable at end of
period............................ 3,588,000 $ 0.27 5,700,300 $ 0.42 4,586,250 $ 0.80 4,859,100 $ 0.89
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted during period..... $ 0.17 $ 0.23 $ 0.26 $ 0.62
</TABLE>
SF-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- ------------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$0.17............................................ 789,000 6.20 years 789,000
0.50............................................ 240,000 7.00 years 240,000
0.83............................................ 3,040,800 7.83 years 2,557,800
1.25............................................ 2,788,800 8.61 years 912,450
1.50............................................ 1,539,000 9.59 years 87,000
-------------- -------------
8,397,600 4,586,250
-------------- -------------
-------------- -------------
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1996 1997 1998 1999
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported.......................... $ 700,331 $ 952,614 $ (460,923) $ (80,638)
Pro forma............................ 668,188 716,107 (840,029) (362,463)
Basic net income (loss) per share:
As reported.......................... $ 0.14 $ 0.18 $ (0.07) $ (0.01)
Pro forma............................ $ 0.14 $ 0.13 $ (0.12) $ (0.04)
Diluted net income (loss) per share:
As reported.......................... $ 0.06 $ 0.07 $ (0.07) $ (0.01)
Pro forma............................ $ 0.06 $ 0.05 $ (0.12) $ (0.04)
</TABLE>
SF-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 are as follows--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision--
Federal......................................... $ 185,521 $ 26,882 $ -- $ -- $ 399,865
State........................................... 69,928 5,050 80,211 -- 114,550
Foreign......................................... -- -- -- 43,176 18,066
---------- ---------- ----------- ----------- -----------
255,449 31,932 80,211 43,176 532,481
---------- ---------- ----------- ----------- -----------
Deferred income tax provision (benefit)--
Federal......................................... 331,790 578,823 (407,182) (381,133) (131,082)
State........................................... 131,439 259,749 (133,287) (159,747) (22,268)
Foreign......................................... (83,856) (30,044) 84,184 (1,378) 29,716
---------- ---------- ----------- ----------- -----------
379,373 808,528 (456,285) (542,258) (123,634)
---------- ---------- ----------- ----------- -----------
$ 634,822 $ 840,460 $ (376,074) $ (499,082) $ 408,847
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The following table indicates the significant elements contributing to the
difference between the Federal statutory rate and the Company's effective tax
rate--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate....................................... 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes net of Federal effect............................ 6.6 6.6 (6.6) (6.6) 6.6
Valuation allowance.......................................... -- -- -- -- 79.2
Other........................................................ 6.9 6.3 (4.3) (2.6) 4.8
--------- --------- --------- --------- ---------
47.5% 46.9% (44.9)% (43.2)% 124.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SF-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES: (CONTINUED)
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of approximately $1,667,000. Other major
components of the deferred tax assets and (liabilities) as of December 31, 1997,
1998 and June 30, 1999 (unaudited) are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve................................. $ 32,486 $ 57,529 $ 173,544
Prepaid expenses................................. (66,407) -- --
Accounts receivable.............................. (1,739,221) -- --
Unbilled receivables............................. (72,946) -- --
Accounts payable and accrued expenses............ 255,872 -- --
Depreciation..................................... 14,231 100,124 88,405
Section 481 A. adjustment........................ -- (1,249,974) (1,028,959)
Net operating loss carryforwards................. 341,632 204,190 260,000
Valuation allowance.............................. -- -- (260,000)
Other, net....................................... (91,362) 18,701 21,214
------------- ------------- -------------
Total deferred taxes, net.................... $ (1,325,715) $ (869,430) $ (745,796)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $725,000 and $475,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(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 distribution of all of its
outstanding shares to the Company's stockholders. In connection with the
spin-off the Company sold certain assets to the software development company for
approximately $130,000 and 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) TRANSACTIONS WITH STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options which is included in
Notes receivable--stockholders, in the accompanying December 31, 1998 balance
sheet. The stockholders signed notes payable to the Company in exchange for the
loans which had interest rates of 7%. All amounts due under these notes were
paid in full subsequent to December 31, 1998.
Certain stockholders of the Company provided the Company with loans bearing
interest at rates ranging from 6% to 6.5%. The loans were provided on an
unsecured basis and are due on demand. Amounts outstanding under these
arrangements were $460,714, $349,178 and $292,274 as of December 31, 1997 and
1998 and June 30, 1999 (unaudited).
SF-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 operating expense
charges, as well as rent concessions for two locations, which are being
amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 995,087
2000............................................................................ 883,841
2001............................................................................ 763,969
2002............................................................................ 490,913
2003............................................................................ 262,375
Thereafter...................................................................... 8,408
------------
Total minimum lease payments................................................ $ 3,404,593
------------
------------
</TABLE>
Rent expense was approximately $206,223, $481,515 and $759,332 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $396,279 (unaudited) and $548,154 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(12) SUBSEQUENT EVENT:
Subsequent to year-end the Company amended and restated its certificate of
incorporation to increase its authorized common stock to 200,000,000 shares and
decrease its authorized preferred stock to 10,000,000 shares.
SF-15
<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.............................................................. $ 14,456
NASD filing fee................................................................... 5,700
Nasdaq National Market listing fee................................................
Legal fees and expenses...........................................................
Accounting fees and expenses......................................................
Printing and engraving............................................................
Blue sky fees and expenses (including legal fees)................................. 12,500
Transfer Agent and Registrar fees and expenses.................................... 15,000
Miscellaneous.....................................................................
----------
Total......................................................................... $
----------
----------
</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.
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.
3. 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) Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) 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..................................................
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
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.
10.4+ 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.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
24.1 Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
** Confidential treatment to be 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.
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 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 31st day of August, 1999.
PREDICTIVE SYSTEMS, INC.
By: /s/ RONALD G. PETTENGILL, JR.
-----------------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities indicated.
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
/s/ RONALD G. PETTENGILL, Chief Executive Officer and August 31, 1999
JR. Chairman of the Board of
- ------------------------------ Directors (principal
Ronald G. Pettengill, Jr. executive officer)
* President and Director August 31, 1999
- ------------------------------
Robert L. Belau
/s/ NEERAJ SETHI Vice President, Finance August 31, 1999
- ------------------------------ (principal financial and
Neeraj Sethi accounting officer)
* Director August 31, 1999
- ------------------------------
Peter L. Bloom
* Director August 31, 1999
- ------------------------------
Donald J. Duffy
* Director August 31, 1999
- ------------------------------
Braden R. Kelly
* Director August 31, 1999
- ------------------------------
Eric Meyer
<TABLE>
<S> <C> <C> <C>
*By: /s/ RONALD G. PETTENGILL,
JR.
-------------------------
Ronald G. Pettengill, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of Predictive Systems, Inc. included in this
registration statement and have issued our report thereon dated May 12, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
S-1
<PAGE>
SCHEDULE II
PREDICTIVE SYSTEMS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.................................. $ 9 $ 21 $ -- $ 30
----- ----- ----- -----
----- ----- ----- -----
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.................................. $ 30 $ 99 $ (49) $ 80
----- ----- ----- -----
----- ----- ----- -----
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.................................. $ 80 $ 102 $ (41) $ 141
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2* Form of amended and restated certificate of incorporation to be in effect upon the closing of the
offering.
3.3+ By-laws.
3.4* Form of amended and restated by-laws to be in effect upon the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-laws of the
Registrant defining the rights of holders of Common Stock of the Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between General Atlantic Partners 54, L.P. and the
Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between Gap Coinvestment Partners II, L.P. and the
Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* 1999 Stock Incentive Plan.
10.4+ 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.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
** Confidential treatment to be 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>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT PURSUANT TO 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
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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 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
5
<PAGE>
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
6
<PAGE>
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
8
<PAGE>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT PURSUANT TO 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. [****].
(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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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<PAGE>
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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<PAGE>
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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<PAGE>
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 [****] 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
[****] 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
[****] 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
[****] 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
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
5
<PAGE>
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
6
<PAGE>
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), [****].
(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
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
8
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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
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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 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 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
12
<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>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT PURSUANT TO 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 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 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 [****] 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 [****]
after written notices specifying the default is given to the
defaulting party, or, with respect to those defaults that cannot
reasonably be cured within [****] if the defaulting party fails to
provide in writing within [****] 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
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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 [****].
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.
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT PURSUANT TO 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 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 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 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 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 [****] 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 [****].
4.3 [****].
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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
8
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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 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) [****] 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 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 [****].
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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
11
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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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
12
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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
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provisions shall be extended by one day for each day such violation
continues subsequent to the entry of such order.
14
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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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
15
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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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
16
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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 [****] 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.
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
18
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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 [****].
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 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 [****].
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.
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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>
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR CERTAIN PORTIONS OF THIS
EXHIBIT PURSUANT TO 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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
4
<PAGE>
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.
CONFIDENTIAL
5
<PAGE>
(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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
CONFIDENTIAL
6
<PAGE>
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 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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
7
<PAGE>
(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 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 - [****]
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 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 [****].
(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 pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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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
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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) [****]
**** Represents material which has been redacted pursuant to a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933,
as amended.
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(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 10.15
AMENDMENT NO. 1
TO
CONSULTING SERVICES AGREEMENT
("AGREEMENT")
This Amendment No. 1 is made this 21st day of June, 1999, pursuant to the
Systems Integration Consulting Services Agreement, effective date May 21, 1998,
by and between LCI International Telecom Corp. dba Qwest Communications
Corporation as Successor in Interest to LCI International Management Services,
Inc. ("Qwest") with offices at 4250 North Fairfax Drive, Arlington, VA 22203,
and Predictive Systems, Inc. ("Contractor") having a place of business at 620
Herndon Parkway, Suite 360, Herndon, VA 20170. The terms of this Amendment shall
prevail over any inconsistent terms contained in the Agreement.
ARTICLE 3 - TERM
This Article is amended to read.
THIS AGREEMENT SHALL HAVE AN EFFECTIVE DATE OF MAY 21, 1998, AND SHALL REMAIN IN
FULL FORCE AND EFFECT UNTIL DECEMBER 31, 1999, AND SHALL BE RENEWED
AUTOMATICALLY ON A MONTH TO MONTH BASIS, UNLESS TERMINATED PURSUANT TO THE
ARTICLE ENTITLED "TERMINATION."
All other terms and conditions of the Consulting Services Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, each of the Parties hereto has caused this Amendment to be
duly executed as of the date and year first written above.
LCI INTERNATIONAL TELECOM CORP. DBA QWEST PREDICTIVE SYSTEMS, INC.
COMMUNICATIONS CORPORATION AS SUCCESSOR IN
INTEREST TO LCI INTERNATIONAL MANAGEMENT
SERVICES, INC.
/s/ John P. Poli /s/ Mark L. Farrar
- ------------------------------------------ ---------------------------
Signature Signature
John P. Poli Mark L. Farrar
- ------------------------------------------ ---------------------------
Name Name
Vice President Regional Vice President
- ------------------------------------------ ---------------------------
Title Title
July 2, 1999 29 June, 1999
- ------------------------------------------ ---------------------------
Date Date
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 12, 1999 for Predictive Systems, Inc. included in or made a
part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
August 31, 1999
