<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999
REGISTRATION NO. 333-84045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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 16, 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................................................................................................... 30
Management................................................................................................. 42
Certain Transactions....................................................................................... 52
Principal Stockholders..................................................................................... 54
Description of Capital Stock............................................................................... 56
Shares Eligible for Future Sale............................................................................ 59
Underwriting............................................................................................... 61
Legal Matters.............................................................................................. 63
Experts.................................................................................................... 63
Where You Can Find More Information........................................................................ 63
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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<PAGE>
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
is a Managing Member of MD Ventures. Mr. Duffy is a director of Bikers Dream
Inc., a publicly traded company. Mr. Duffy has been at Meyer, Duffy & Associates
and MD Ventures 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 is a
Managing Member of MD Ventures. Mr. Meyer has been at Meyer, Duffy & Associates
and MD Ventures 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
49
<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
PV4, 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, in
connection with the exercise of options, $300,000 at an interest rate of 7% per
annum. Meyer, Duffy & Associates 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).............................................. 2,631,894 16.1
Braden R. Kelly (7).............................................. -- --
Eric Meyer (8)................................................... 3,114,894 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) 140,934 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."
DIRECT 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.
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.
(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.
II-3
<PAGE>
(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. 1 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 16th 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 16, 1999
JR. Chairman of the Board of
- ------------------------------ Directors (principal
Ronald G. Pettengill, Jr. executive officer)
* President and Director August 16, 1999
- ------------------------------
Robert L. Belau
/s/ NEERAJ SETHI Vice President, Finance August 16, 1999
- ------------------------------ (principal financial and
Neeraj Sethi accounting officer)
* Director August 16, 1999
- ------------------------------
Peter L. Bloom
* Director August 16, 1999
- ------------------------------
Donald J. Duffy
* Director August 16, 1999
- ------------------------------
Braden R. Kelly
* Director August 16, 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.
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.
<PAGE>
Exhibit 10.9
EXECUTION ORIGINAL
AGREEMENT OF LEASE
Between
POLESTAR FIFTH PROPERTY ASSOCIATES LLC
Landlord,
AND
PREDICTIVE SYSTEMS, INC.
Tenant.
Premises:
Entire Eleventh (11th) Floor
417 Fifth Avenue
New York, New York
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
<S> <C> <C> <C> <C>
1. BASIC LEASE TERMS....................................................1
A. DEFINITIONS........................................1
B. DEMISE.............................................2
C. TERM...............................................2
D. RENT...............................................2
E. RENT CREDIT........................................2
2. USE AND OCCUPANCY....................................................3
A. PERMITTED USES.....................................3
B. USE PROHIBITIONS...................................3
3. ALTERATIONS..........................................................3
A. ALTERATIONS WITHIN PREMISES........................3
B. RESTORATION OF PREMISES............................4
C. CHLOROFLUOROCARBONS................................4
D. SUBMISSION OF PLANS................................4
E. MECHANICS' LIENS; LABOR CONFLICTS..................5
4. REPAIRS..............................................................5
5. WINDOW CLEANING......................................................5
6. REQUIREMENTS OF LAW; FLOOR LOAD......................................6
A. REQUIREMENTS OF LAW................................6
B. FLOOR LOAD.........................................6
7. SUBORDINATION........................................................6
A. SUBORDINATION......................................6
B. ATTORNMENT.........................................7
C. NON-DISTURBANCE....................................7
8. RULES AND REGULATIONS................................................7
9. INSURANCE............................................................7
A. LIABILITY INSURANCE................................7
B. "ALL RISK"INSURANCE................................8
C. WAIVER OF SUBROGATION..............................8
D. LANDLORD'S INSURANCE...............................8
10. DESTRUCTION OF THE PREMISES; PROPERTY LOSS OR DAMAGE.................9
A. REPAIR OF DAMAGE...................................9
B. TERMINATION OPTION.................................9
C. REPAIR DELAYS.....................................10
D. PROVISION CONTROLLING.............................10
E. PROPERTY LOSS OR DAMAGE...........................10
11. CONDEMNATION........................................................10
A. CONDEMNATION......................................10
B. AWARD.............................................11
12. ASSIGNMENT AND SUBLETTING...........................................11
A. PROHIBITION WITHOUT CONSENT.......................11
B. NOTICE OF PROPOSED TRANSFER.......................11
C. LANDLORD'S OPTIONS................................11
D. TERMINATION BY LANDLORD...........................11
E. TAKEBACK BY LANDLORD..............................12
F. EFFECT OF TAKEBACK OR TERMINATION.................12
G. CONDITIONS FOR LANDLORD'S APPROVAL................12
H. FUTURE REQUESTS...................................14
I. SUBLEASE PROVISIONS...............................14
J. PROFITS FROM ASSIGNMENT OR SUBLETTING.............14
K. OTHER TRANSFERS...................................15
L. RELATED CORPORATION...............................15
M. ASSUMPTION BY ASSIGNEE............................15
N. LIABILITY OF TENANT...............................15
O. LISTINGS..........................................16
P. INTENTIONALLY DELETED.............................16
Q. RE-ENTRY BY LANDLORD..............................16
</TABLE>
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<TABLE>
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13. CONDITION OF THE PREMISES...........................................16
A. ACCEPTANCE BY TENANT..............................16
B. TENANT'S INITIAL ALTERATION.......................16
14. ACCESS TO PREMISES..................................................17
A. ACCESS BY LANDLORD................................17
B. OTHER LANDLORD PRIVILEGES.........................17
15. CERTIFICATE OF OCCUPANCY............................................18
16. LANDLORD'S LIABILITY................................................18
17. DEFAULT.............................................................18
A. EVENTS OF DEFAULT; CONDITIONS OF LIMITATION.......18
B. EFFECT OF BANKRUPTCY..............................19
C. CONDITIONAL LIMITATION............................19
18. REMEDIES AND DAMAGES................................................19
A. LANDLORD'S REMEDIES...............................19
B. DAMAGES...........................................20
C. LEGAL FEES........................................21
19. FEES AND EXPENSES...................................................21
A. CURING TENANT'S DEFAULTS..........................21
B. LATE CHARGES......................................21
20. NO REPRESENTATIONS BY LANDLORD......................................21
21. END OF TERM.........................................................22
A. SURRENDER OF PREMISES.............................22
B. HOLDOVER BY TENANT................................22
22. QUIET ENJOYMENT.....................................................22
23. FAILURE TO GIVE POSSESSION..........................................22
24. NO WAIVER...........................................................23
A. NO EXTENSION......................................23
B. NO SURRENDER......................................23
C. NO WAIVER.........................................23
D. APPLICATION OF PAYMENT............................23
E. ENTIRE AGREEMENT..................................24
25. WAIVER OF TRIAL BY JURY.............................................24
26. INABILITY TO PERFORM................................................24
27. BILLS AND NOTICES...................................................24
28. ESCALATION..........................................................25
A. DEFINED TERMS.....................................25
B. ESCALATION........................................26
C. PAYMENT OF ESCALATIONS............................26
D. ADJUSTMENTS.......................................27
E. TAX INCENTIVE PROGRAMS............................28
29. SERVICES............................................................28
A. ELEVATOR..........................................28
B. HEATING...........................................28
C. COOLING...........................................28
D. AFTER HOURS AND ADDITIONAL SERVICES...............29
E. CLEANING..........................................29
F. SPRINKLER SYSTEM..................................29
G. WATER.............................................29
H. ELECTRICITY SERVICE...............................30
I. INTERRUPTION OF SERVICES..........................31
J. DESK ATTENDANTS...................................31
30. PARTNERSHIP TENANT..................................................31
A. PARTNERSHIP TENANTS...............................31
B. LIMITED LIABILITY ENTITY..........................32
</TABLE>
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<TABLE>
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31. VAULT SPACE.........................................................32
32. SECURITY DEPOSIT....................................................32
A. DEPOSIT OF SECURITY...............................32
B. LETTER OF CREDIT..................................33
C. REDUCTION IN SECURITY DEPOSIT.....................33
33. CAPTIONS............................................................33
34. ADDITIONAL DEFINITIONS..............................................34
A. OFFICE............................................34
B. REENTRY...........................................34
C. RENT..............................................34
D. BUSINESS DAY......................................34
35. PARTIES BOUND.......................................................34
36. BROKER..............................................................34
37. INDEMNITY...........................................................34
38. ADJACENT EXCAVATION SHORING.........................................35
39. MISCELLANEOUS.......................................................35
A. NO OFFER..........................................35
B. CERTIFICATES......................................35
C. DIRECTORY LISTINGS................................35
D. SIGNAGE...........................................35
E. CONSENTS AND APPROVALS............................36
F. GOVERNING LAW.....................................36
G. FINANCIAL STATEMENTS..............................36
H. SIGNATORIES.......................................36
40. HAZARDOUS SUBSTANCES................................................36
41. TENANT'S RIGHT OF FIRST OFFER. ....................................36
A. EXPANSION SPACE...................................37
B. TERMS OF EXERCISE OF ANY OFFER....................37
C. FAILURE TO DELIVER EXPANSION SPACE................37
D. AS IS.............................................37
E. RIGHTS PERSONAL...................................37
F. DEFINED TERMS.....................................37
G. DETERMINATION OF FAIR MARKET VALUE................38
42. PENTHOUSE SPACE.....................................................38
A. INCLUSION OF PENTHOUSE SPACE......................38
B. MODIFICATION TO LEASE.............................38
C. ACCEPTANCE OF EXPANSION SPACE.....................39
D. FAILURE TO GIVE POSSESSION........................39
E. PENTHOUSE TERRACE.................................39
</TABLE>
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<TABLE>
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Exhibit 1 Floor Plan of Premises
Exhibit 2 Form Letter of Credit
Exhibit 3 Penthouse Space
Exhibit 4 Cleaning Specifications
Exhibit 5 List of Expiration Dates of 10th Floor Leases
Schedule A Rules and Regulations
Schedule B Tenant's Initial Alteration
Schedule C Landlord's Post-Commencement Work
Schedule D Landlord's Pre-Commencement Work
Schedule E Requirements for "Certificates of Final Approval"
Schedule F Tenant Alteration Work and New Construction
Conditions and Requirements
</TABLE>
<PAGE>
THIS AGREEMENT OF LEASE (this "Lease"), made as of this ____ day of June, 1999
by and between POLESTAR FIFTH PROPERTY ASSOCIATES LLC, a Delaware limited
liability company, having an office c/o New Rock Realty Management LLC, 420
Lexington Avenue, Suite 900, New York, New York 10170 ("Landlord") and
PREDICTIVE SYSTEMS, INC., a Delaware corporation, having an office at 145 Hudson
Street, New York, New York 10013 ("Tenant").
1. BASIC LEASE TERMS.
A. DEFINITIONS. The following definitions contained in this subsection
A of this Article 1 shall have the meanings hereinafter set forth used
throughout this Lease and the Exhibits and Schedules (if any) annexed hereto and
made a part hereof.
(i) "Base Labor Year" shall mean the calendar year 1999.
(ii) "Base Tax Year" shall mean the Tax Year (as defined
in Article 28 hereof) 1999/2000.
(iii) "Broker" shall mean collectively New Rock Realty
Management LLC, Cushman & Wakefield, Inc. and Newmark
& Company Real Estate, Inc.
(iv) "Building" the building known as 417 Fifth Avenue,
County, City and State of New York, together with all
appurtenant rights granted to Landlord, as lessee
under the Master Lease (as hereinafter defined).
(v) "Commencement Date" shall mean the date of
substantial completion of Landlord's Pre-Commencement
Work (as hereinafter defined).
(vi) "Expiration Date" shall mean the last day of the
month in which the tenth (10th) anniversary of the
Rent Commencement Date shall occur.
(vii) "Labor Rate Factor" shall mean 29,460.
(viii) "Labor Rate Multiple" shall mean one (1).
(ix) "Landlord's Post-Commencement Work" shall mean the
work and installations at the Premises as set forth
in Schedule C annexed hereto and made a part hereof.
(x) "Landlord's Pre-Commencement Work" shall mean the
work and installations at the Premises as set forth
in Schedule D annexed hereto and made a part hereof.
(xi) "Master Lease" shall mean that certain lease dated on
or about February 9, 1998 between 417 FS Realty LLC,
as lessor and Landlord, as lessee, as such lease has
been and may be modified and amended from time to
time.
(xii) "Permitted Uses" shall mean executive and general
offices in connection with Tenant's business and
sales of the named Tenant's systems and services via
telephone.
(xiii) "Premises" shall mean the entire eleventh (11th)
floor in the Building, as more particularly shown on
Exhibit 1 annexed hereto and made a part hereof.
(xiv) "Real Property" shall mean the Building together with
the plot of land upon which such building stands.
(xv) "Rent" shall mean:
(a) for the period commencing on the
Commencement Date through and including the
day immediately preceding the date on which
the third (3rd) anniversary of the
Commencement Date shall occur, Nine Hundred
Forty-Two Thousand Seven Hundred Twenty
Thousand and 00/100 ($942,720.00) Dollars
per annum, payable in equal monthly
installments of Seventy-Eight Thousand Five
Hundred Sixty and 00/100 ($78,560.00)
Dollars each; and
<PAGE>
(b) for the period commencing on the date on
which the third (3rd) anniversary of the
Commencement Date shall occur through and
including the day immediately preceding the
date on which the seventh (7th) anniversary
of the Commencement Date shall occur, One
Million Sixty Thousand Five Hundred Sixty
and 00/100 ($1,060,560.00) Dollars per
annum, payable in equal monthly installments
of Eighty-Eight Thousand Three Hundred
Eighty and 00/100 ($88,380.00) Dollars each;
and
(c) for the period commencing on the date on
which the seventh (7th) anniversary of the
Commencement Date shall occur through and
including the Expiration Date, One Million
One Hundred Sixty-Three Thousand Six Hundred
Seventy and 00/100 ($1,163,670.00) Dollars
per annum, payable in equal monthly
installments of Ninety-Six Thousand Nine
Hundred Seventy-Two and 50/100 ($96,972.50)
Dollars each.
(xvi) "Rent Commencement Date" shall mean the date which is
two hundred seventy (270) days following the
Commencement Date, subject to the provisions of
subsection E below.
(xvii) "Security Deposit" shall mean the sum of
$1,060,560.00.
(xvii) "Tenant's Initial Alteration" shall mean the work and
installations at the Premises as set forth in
Schedule B annexed hereto and made a part hereof.
(xviii) "Tenant's Proportionate Share" shall mean eight and
thirty-five hundredths percent (8.35%), based upon
the agreement of the parties that the Premises
consists of 29,460 rentable square feet. Landlord
represents that for all leases currently being
executed by Landlord named herein, the proportionate
share for all tenants under all such leases is
computed by (a) dividing the number of rentable
square feet deemed to be in the applicable premises
by 352,656 which is the number of rentable square
feet deemed to be in the Building and then
(b) rounding the thousandths decimal place, if any,
of the quotient arrived at in clause (a) above
upwards or downwards to the nearest hundredths
decimal place.
Notwithstanding anything to the contrary contained in this
subsection A of this Article 1, Articles 1 through 42 of this Lease shall
control the rights and obligations of the parties hereto.
B. DEMISE. Subject to and upon the terms and conditions of this Lease,
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the
Premises.
C. TERM. This Lease shall be for a term (the "Term") which commences on
the Commencement Date and ends on the Expiration Date, unless sooner terminated
pursuant to any of the terms, covenants or conditions of this Lease or
pursuant to law. Within ten (10) business days of Landlord's request,
Tenant and Landlord shall join in the execution of an agreement stipulating
the Commencement Date, the Rent Commencement Date and the Expiration Date
of this Lease.
D. RENT. Commencing as of the Commencement Date (subject to the terms
of Subsection E below), and continuing throughout the Term, Tenant shall pay
Landlord the annual Rent set forth in Subsection A of this Article 1, payable
without demand, on or in advance of the first day of each month in equal monthly
installments, in lawful money (legal tender for public or private debts) of the
United States of America, at the office of Landlord or such other place as
Landlord may designate in writing from time to time without any set-off, offset,
abatement or deduction, except as may be expressly set forth herein, except that
Tenant shall pay the first (1st) monthly installment upon Tenant's execution of
this Lease. If the Rent Commencement Date occurs on a date other than the first
day of a calendar month, Tenant shall pay to Landlord on or before the first day
of the next month the monthly installment of Rent for such partial month on a
pro rata basis (based on the actual number of days in the commencement month),
and the first month's rent paid by Tenant as described above shall be applied to
the first full calendar month of the Term for which Rent shall be due and
payable. Such payment, together with the sum paid by Tenant as first month's
Rent upon the execution of this Lease, shall constitute payment of the Rent for
the period from the Commencement Date to and including the last day of the next
succeeding calendar month.
E. RENT CREDIT. Notwithstanding anything to the contrary hereinabove
set forth,
<PAGE>
provided this Lease is in full force and effect and Tenant is not in default
under this Lease beyond the expiration of any applicable grace or cure period,
Tenant shall be entitled to a credit against the Rent for the two hundred
seventy (270) day period commencing on the Commencement Date and ending on the
day immediately preceding the Rent Commencement Date in the aggregate amount of
$707,040.00, which credit shall be applied against the Rent in nine (9) equal
monthly installments of $78,560.00 each.
2. USE AND OCCUPANCY.
A. PERMITTED USES. Tenant shall use and occupy the Premises for the
Permitted Uses, and for no other purpose.
B. USE PROHIBITIONS. Anything contained herein to the contrary
notwithstanding, Tenant shall not use the Premises or any part thereof, or
permit the Premises or any part thereof to be used, (i) for the business of
photographic, multilith or multigraph reproductions or offset printing, (ii) as
an employment agency, labor union office, physician's or dentist's office or for
the rendition of any other diagnostic or therapeutic services, dance or music
studio, school (except for the training of employees of Tenant), (iii) for a
public stenographer or typist, (iv) for a telephone or telegraph agency,
telephone or secretarial service for the public at large, (v) for a messenger
service for the public at large, (vi) gambling or gaming activities, obscene or
pornographic purposes or any sort of commercial sex establishment, (vii) for the
possession, storage, manufacture or sale of alcohol, drugs or narcotics, (viii)
for the offices or business of any federal, state or municipal agency or any
agency of any foreign government or (ix) for a security or guard service, or any
other business for which Landlord would not normally rent space for. If any
provision of this Lease permits, in whole or in part, use involving fabrication
of any product or assembly of components of any product or the sale of any
product or service, such use is only permitted to the extent lawful under the
present certificate of occupancy for the Building and under laws, ordinances,
regulations, rules and orders of any governmental body having jurisdiction over
the Premises, from time to time in effect. The provisions of this Article shall
be binding upon Tenant's successors, assigns, subtenants and licensees and shall
not be waived by any consent to an assignment or subletting or otherwise except
by written instrument expressly referring to this Article. Nothing in this
subsection B shall preclude Tenant from using any part of the Premises for
photographic, multilith or multigraph reproductions in connection with, either
directly or indirectly, its own business and/or activities.
3. ALTERATIONS.
A. ALTERATIONS WITHIN PREMISES. Tenant shall not make or perform or
permit the making or performance of, any alterations, installations,
improvements, additions or other physical changes in or about the Premises
("Alterations") without Landlord's prior consent. Subject to the prior written
consent of Landlord, which consent shall not be unreasonably withheld, delayed
or conditioned, and to the provisions of this Article, Tenant, at Tenant's
expense, may make Alterations in or to the interior of the Premises which are
nonstructural, do not affect the Building's mechanical, electrical, plumbing,
Class E or other Building systems or the structural integrity of the Building,
do not affect any part of the Building other than the Premises, do not affect
any service required to be furnished by Landlord to Tenant or to any other
tenant or occupant of the Building, do not reduce the value or utility of the
Building and which are performed only by contractors and mechanics first
reasonably approved by Landlord and in compliance with all applicable laws.
Notwithstanding the foregoing, Tenant may, without Landlord's consent, perform
alterations of a purely cosmetic or decorative nature (e.g., painting or the
installation of wall covering or carpeting) (collectively "Cosmetic
Alterations") provided that (i) the estimated cost of the labor and materials
for such Alterations in any one instance (or in a series of instances
effectuating a single alteration plan) does not exceed $30,000.00, (ii) such
Alterations are performed by contractors reasonably acceptable to Landlord,
(iii) Landlord shall have received, at least ten (10) days prior to the
commencement of such Alterations, notice of the Alterations to be performed, the
identity of the contractors performing such Alterations (together with
certificates of insurance required to be maintained by such contractors) and
copies of drawings, plans and specifications prepared with respect to such
Alterations, if any, and (d) the terms and provisions of this Lease regarding
Alterations are otherwise fully complied with. Tenant shall not perform work
which would (i) require changes to the structural components of the Building or
the exterior design of the Building, (ii) require any material modification to
the Building's mechanical, electrical, plumbing installations or other Building
installations outside the Premises, (iii) not be in compliance with all
applicable laws, rules, regulations and requirements of any governmental
department having jurisdiction over the Building and/or the construction of the
Premises, including but not limited to, the Americans with Disabilities Act of
1990, or (iv) be incompatible with the Certificate of Occupancy for the
Building. Subject to the terms of Article 6 hereof, any changes required by any
governmental department resulting from Tenant's Alterations in or with respect
to the Premises shall be performed at
<PAGE>
Tenant's sole cost. All Alterations shall be done at Tenant's expense and at
such times and in such manner as Landlord may from time to time reasonably
designate pursuant to the conditions for Alterations prescribed by Landlord for
the Premises. A copy of the current construction conditions and requirements for
tenant alteration work and new construction is annexed hereto as Schedule F and
made a part hereof.
B. RESTORATION OF PREMISES. All furniture, furnishings and movable
fixtures and removable partitions installed by Tenant must be removed from the
Premises by Tenant, at Tenant's expense, prior to the Expiration Date. All
Alterations in and to the Premises which may be made by Landlord or Tenant prior
to and during the Term, or any renewal thereof, shall become the property of
Landlord upon the Expiration Date or earlier end of the Term or any renewal
thereof, and shall not be removed from the Premises by Tenant unless Landlord,
at Landlord's option by notice to Tenant prior to the Expiration Date, elects to
have them removed from the Premises by Tenant, in which event the same shall be
removed from the Premises by Tenant, at Tenant's expense, on or prior to the
Expiration Date. In the event Landlord elects to have Tenant remove such
Alterations, Tenant shall repair and restore in a good and workmanlike manner to
Building standard original condition (reasonable wear and tear excepted) any
damage to the Premises or the Building caused by such removal. Notwithstanding
the foregoing, Tenant may, at the time of its initial submission of plans and
specifications showing proposed Alterations to Landlord for Landlord's review
and approval, request in writing that Landlord waive its right to compel Tenant
to remove the Alterations identified on such plans and specifications. If
Landlord waives such right to compel Tenant to remove such Alterations, in whole
or in part, Landlord shall notify Tenant at the time of the approval of such
plans and specifications of those Alterations which Tenant may be required to
remove in accordance with the terms of this Article prior to the expiration of
the Term or upon the occurrence of a termination of this Lease and Tenant shall,
upon the expiration of the Term or upon such termination, unless instructed
otherwise by Landlord, be required to remove only such Alterations specified in
Landlord's notice. Notwithstanding anything to the contrary contained herein,
Landlord hereby agrees to waive Tenant's restoration obligation with respect to
any Alterations that are customary in nature for office installations and which
shall not cause Landlord to incur extraordinary demolition expenses at the end
of the Term hereof (by means of illustration only, customary office
installations shall mean built-in bookcases and kitchen pantry, but not an
internal staircase or raised flooring). Any of such Alterations or other
property except for cash or cash equivalents not so removed by Tenant at or
prior to the Expiration Date or earlier termination of the Term shall become the
property of Landlord, but nothing herein shall be deemed to relieve Tenant of
responsibility for the cost of removal of any such Alterations or other property
which Tenant is obligated to remove hereunder. Notwithstanding the foregoing,
Tenant may, at the time that Tenant submits plans for any Alterations including
Tenant's Initial Alterations for Landlord's approval, request that Landlord
waive Tenant's obligation to remove such Alterations at the end of the Term.
C. CHLOROFLUOROCARBONS. Anything contained herein to the contrary
notwithstanding, in the event Landlord shall elect to have Tenant repair or
remove any mechanical or other equipment installed by or on behalf of Tenant
within the Premises containing chlorofluorocarbons ("CFC's"), the repair or
removal of such equipment, as the case may be, shall conform with all
requirements of law and industry practices. Additionally, any such repair or
removal shall be done by contractors reasonably approved by Landlord and subject
to the procedures to which Landlord's consent shall have previously been
obtained. Tenant shall indemnify and hold Landlord harmless from any liability
or damages resulting from any contamination within the Building, as a result of
the repair or removal of any of the aforesaid equipment containing CFC's by
Tenant.
D. SUBMISSION OF PLANS. Prior to making any Alterations, Tenant (i)
shall submit to Landlord or to a consultant appointed by Landlord ("Landlord's
Consultant") detailed plans and specifications (including layout, architectural,
mechanical, electrical, plumbing, Class E sprinkler and structural drawings
stamped by a professional engineer or architect licensed in the State of New
York) for each proposed Alteration and shall not commence any such Alteration
without first obtaining Landlord's approval of such plans and specifications,
which approval shall be granted or withheld in accordance with the terms of
Subsection A hereof, (ii) shall pay to Landlord all reasonable out-of-pocket
costs and expenses incurred by Landlord (including the cost of Landlord's
Consultant) in connection with Landlord's review of Tenant's plans and
specifications, (iii) shall, at its expense, obtain all permits, approvals and
certificates required by any governmental or quasi-governmental bodies, and (iv)
shall furnish to Landlord evidence that Tenant, and Tenant's contractors and
subcontractors engaged in connection with such Alterations, are carrying such
insurance as Landlord may require, as more particularly set forth in Schedule F
annexed hereto and made a part hereof. Upon completion of such Alteration,
Tenant, at Tenant's expense, shall obtain certificates of final approval of such
Alteration, including the "as-built" or marked drawings showing such
Alterations, required by any governmental or quasi-governmental bodies and shall
furnish Landlord with copies thereof. All Alterations shall be made and
performed in accordance with the Rules and Regulations (hereinafter defined) and
in accordance with the Americans with Disabilities
<PAGE>
Act of 1990, including but not limited to the accessibility provisions thereof;
all materials and equipment to be incorporated in the Premises as a result of
all Alterations shall be new and first quality; no such materials or equipment
shall be subject to any lien, encumbrance, chattel mortgage or title retention
or security agreement. In the event any Alterations are performed by Landlord's
designated contractor or any entity which is an affiliate of Landlord or any
general partner or managing member of Landlord, the failure by Tenant to pay the
cost of such Alterations within ten (10) business days after rendition of a bill
therefor and notice and a reasonable opportunity to cure shall be deemed a
material default under this Lease. Landlord's approval of Tenant's plans,
specifications and working drawings for Alterations shall create no
responsibility or liability on the part of Landlord with respect to their
completeness, design, sufficiency or compliance with all applicable laws, rules
or regulations of governmental agencies or authorities.
E. MECHANICS' LIENS; LABOR CONFLICTS. Any mechanic's lien filed against
the Premises, or the Real Property, for work claimed to have been done for, or
materials claimed to have been furnished to, Tenant, shall be discharged by
Tenant within thirty (30) days thereafter, at Tenant's expense, by payment or
filing the bond required by law. Tenant shall not, at any time prior to or
during the Term, directly or indirectly employ, or permit the employment of, any
contractor, service provider, mechanic or laborer in the Premises, whether in
connection with any Alterations, cleaning services or otherwise, if, in
Landlord's sole but reasonable discretion, such employment will interfere or
cause any conflict with other contractors, service providers, mechanics, or
laborers engaged in the construction, cleaning, maintenance or operation of the
Building by Landlord, Tenant or others. In the event of any such interference or
conflict, Tenant, upon demand of Landlord, shall cause all contractors, service
providers, mechanics or laborers causing such interference or conflict to leave
the Building immediately.
4. REPAIRS. Landlord shall maintain and repair the public portions of
the Building, both exterior and interior, all Building systems and the
restrooms on the eleventh (11th) floor, all in a manner consistent with
comparable office buildings in the general proximity of the Building, except
for repairs and maintenance required to be performed by Tenant in accordance
with the terms of this Lease. Tenant shall, throughout the Term, take good
care of the Premises and the fixtures and appurtenances therein and at
Tenant's sole cost and expense, make all nonstructural repairs thereto as and
when needed to preserve them in good working order and condition, reasonable
wear and tear and damage for which Tenant is not responsible under the terms
of this Lease excepted. Tenant shall pay Landlord for all replacements to the
lamps, tubes, ballasts and starters in the lighting fixtures installed in the
Premises. Notwithstanding the foregoing and subject to the terms of Article
9C hereof, all damage or injury to the Premises or to any other part of the
Building, or to its fixtures, equipment and appurtenances, whether requiring
structural or nonstructural repairs, caused by or resulting from the
carelessness, omission, neglect or improper conduct of, or Alterations made
by, or any work, labor, service or equipment done for or supplied to, Tenant
or any subtenant, or the installation, use or operation of any property or
equipment by Tenant or any of Tenant's subtenants, agents, employees,
invitees or licensees, shall be repaired promptly by Tenant, at its sole cost
and expense, to the reasonable satisfaction of Landlord. Subject to the terms
of Article 9C hereof, Tenant also shall repair all damage to the Building and
the Premises caused by the moving of Tenant's fixtures, furniture or
equipment by or on behalf of Tenant, Tenant's subtenants, agents, employees,
invitees or licensees. All the aforesaid repairs shall be of quality and
class equal to the original work or construction and shall be made in
accordance with the provisions of Article 3 hereof. If Tenant fails after ten
(10) days notice to proceed with due diligence to make repairs required to be
made by Tenant hereunder, or if Landlord elects to make any repairs in or to
the Building or the facilities and systems thereof for which Tenant is
responsible, the same may be made by Landlord, at the expense of Tenant, and
the expenses thereof incurred by Landlord shall be collectible by Landlord as
additional rent promptly after rendition of a bill or statement therefor.
Tenant shall give Landlord prompt notice of any defective condition in the
Premises for which Landlord may be responsible hereunder. Except as expressly
provided in Articles 10 and 29 hereof, there shall be no allowance to Tenant
for a diminution of rental value and no liability on the part of Landlord by
reason of inconvenience, annoyance or injury to business arising from
Landlord, Tenant or others making, or failing to make, any repairs,
alterations, additions or improvements in or to any portion of the Building,
or the Premises, or in or to fixtures, appurtenances, or equipment thereof.
If the Premises be or become infested with vermin, Tenant, at Tenant's
expense, shall cause the same to be exterminated from time to time to the
reasonable satisfaction of Landlord and shall employ such exterminators and
such exterminating company or companies as shall be reasonably approved by
Landlord. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were designed or
constructed, and no sweepings, rubbish, rags, acids or other substances shall
be deposited therein. If at any time any windows of the Premises are
temporarily closed, darkened or bricked-up if required by law or related to
any construction upon property adjacent to the Real Property, Landlord shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not
be entitled to any compensation therefor nor abatement of Rent nor shall the
same release
<PAGE>
Tenant from its obligations hereunder nor constitute an eviction. If at any time
the windows of the Premises are temporarily closed, darkened or bricked-up, as
aforesaid, then, unless Tenant is required pursuant to this Lease to perform the
repairs, maintenance, alterations or improvements, or to comply with any law
which resulted in such windows being closed, darkened or bricked-up, Landlord
shall perform such repairs, maintenance, alterations or improvements with
reasonable diligence and otherwise take such action as may be reasonably
necessary to minimize the period during which such windows are temporarily
closed, darkened or bricked-up, but the foregoing shall not require Landlord to
engage overtime or premium-pay labor.
5. WINDOW CLEANING. Tenant shall not clean, nor require, permit, suffer
or allow any window in the Premises to be cleaned, from the outside in
violation of Section 202 of the Labor Law, or any other applicable law, or of
the rules of the Board of Standards and Appeals, or of any other board or
body having or asserting jurisdiction.
6. REQUIREMENTS OF LAW; FLOOR LOAD.
A. REQUIREMENTS OF LAW. Tenant, at Tenant's sole expense, shall
promptly comply with all present and future laws, statutes, orders, directives
and regulations of federal, state, county, city and municipal authorities,
departments, bureaus, boards, agencies, commissions and other sub-divisions
thereof, and of any official thereof and any other governmental and quasi-public
authority and all rules, orders, regulations or requirements of the New York
Board of Fire Underwriters, or any other similar body which shall now or
hereafter impose any violation, order or duty (collectively, the "Legal
Requirements" and individually, a "Legal Requirement") upon Landlord or Tenant
with respect to the Premises as a result of Tenant's particular use or
occupation or the alteration thereof by Tenant (as opposed to Tenant's "mere"
office use). Tenant shall not be responsible for complying with any Legal
Requirement that requires modifications to the Building outside of the Premises
unless compliance with such Legal Requirement is necessitated by or in
connection with an act or omission of Tenant or any person or entity acting by
or on behalf of Tenant, including, without limitation, any Alteration by Tenant
or any of its subtenants or Tenant's or any of its subtenants' particular manner
of use of the Premises (as opposed to Tenant's "mere" office use). Tenant shall
not do or permit to be done any act or thing upon the Premises which is contrary
to and will invalidate or be in conflict with any public liability, fire or
other policies of insurance at any time carried by or for the benefit of
Landlord with respect to the Building and fixtures and property therein, or
which shall or might subject Landlord to any liability or responsibility to any
person or for property damage. Tenant shall not do, or permit anything to be
done in or upon the Premises, or bring or keep anything therein, except as now
or hereafter permitted by the New York City Fire Department, New York Board of
Fire Underwriters, New York Fire Insurance Rating Organization or other
authority having jurisdiction and then only in such quantity and manner as not
to increase the insurance rate applicable to the Building, or use the Premises
in a manner which shall increase the rate of fire insurance on the Building or
on property located therein, over that in similar type buildings or in effect
prior to this Lease. If by reason of Tenant's failure to comply with the
provisions of this Article, the fire insurance rate shall at the beginning of
this Lease or at any time thereafter be higher than it otherwise would be, then
Tenant shall reimburse Landlord, as additional rent hereunder, for that part of
all fire insurance premiums thereafter paid by Landlord which shall have been
charged because of such failure of use by Tenant, and shall make such
reimbursement upon the first day of the month following such outlay by Landlord.
In any action or proceeding wherein Landlord and Tenant are parties, a schedule
or "make up" of rates for the Building or the Premises issued by the New York
Fire Insurance Rating Organization, or other body fixing such fire insurance
rates, shall be conclusive evidence of the facts therein stated and of the
several items and charges in the fire insurance rates then applicable to the
Premises. Any work or installations made or performed by or on behalf of Tenant
or any person claiming through or under Tenant pursuant to this Article shall be
made in conformity with, and subject to the provisions of, Article 3 hereof.
B. FLOOR LOAD. Tenant shall not place a load upon any floor of the
Premises exceeding the floor load per square foot area which such floor was
designed to carry and which is allowed by law. Landlord reserves the right to
prescribe the weight and position of all safes, business machines and heavy
equipment and installations such that the same are placed and maintained by
Tenant, at Tenant's expense, in settings sufficient in Landlord's reasonable
judgment to absorb and prevent vibration, noise and annoyance. Tenant shall not
move any safe, heavy machinery, heavy equipment, freight, bulky matter or
fixtures into or out of the Building without Landlord's prior consent, which
consent shall not be unreasonably withheld, conditioned or delayed, and payment
to Landlord of Landlord's actual out-of-pocket costs paid to third parties in
connection therewith. If such safe, machinery, equipment, freight, bulky matter
or fixtures requires special handling that would require a rigger, Tenant agrees
to employ only persons holding a Master Rigger's License to do said work, and
that all work in connection therewith shall comply with the Administrative Code
<PAGE>
of the City of New York and all other laws and regulations applicable thereto,
and shall be done during such hours as Landlord may reasonably designate.
7. SUBORDINATION.
A. SUBORDINATION. This Lease is subject and subordinate to the Master
Lease and to each and every ground or underlying lease of the Real Property or
the Building hereafter made by Landlord (collectively, the "Superior Leases")
and to each and every trust indenture and mortgage (collectively the
"Mortgages") which may now or hereafter affect the Real Property, the Building
or any such Superior Lease and the leasehold interest created thereby, and to
all renewals, extensions, supplements, amendments, modifications,
consolidations, and replacements thereof or thereto, substitutions therefor and
advances made thereunder. This clause shall be self-operative and no further
instrument of subordination shall be required to make the interest of any lessor
under a Superior Lease, or trustee or mortgagee of a Mortgage superior to the
interest of Tenant hereunder. In confirmation of such subordination, however,
Tenant shall execute promptly any certificate that Landlord may reasonably
request. If the date of expiration of any Superior Lease shall be the same day
as the Expiration Date, the Term shall end and expire twelve (12) hours prior to
the expiration of the Superior Lease. Tenant covenants and agrees that, except
as expressly provided herein, Tenant shall not do anything that would constitute
a default under any Superior Lease or Mortgage, or omit to do anything that
Tenant is obligated to do under the terms of this Lease so as to cause Landlord
to be in default under any of the foregoing. If, at any time Landlord's
obligations as lessee under the Master Lease require Landlord to modify any of
its obligations under, or any of the terms of, this Lease or if, in connection
with the financing of the Real Property, the Building or the interest of the
lessee under any Superior Lease, any lending institution shall request
reasonable modifications of this Lease, provided such modifications do not
materially increase the obligations or materially and adversely affect or
materially diminish the rights of Tenant under this Lease, Tenant covenants to
make such modifications.
B. ATTORNMENT. If at any time prior to the expiration of the Term, any
Mortgage shall be foreclosed or any Superior Lease shall terminate or be
terminated for any reason, Tenant agrees, at the election and upon demand of any
owner of the Real Property or the Building, or the lessor under any such
Superior Lease, or of any mortgagee in possession of the Real Property or the
Building, to attorn, from time to time, to any such owner, lessor or mortgagee,
upon the then executory terms and conditions of this Lease, for the remainder of
the term originally demised in this Lease, provided that such owner, lessor or
mortgagee, as the case may be, or receiver caused to be appointed by any of the
foregoing, shall not then be entitled to possession of the Premises. The
provisions of this subsection B shall inure to the benefit of any such owner,
lessor or mortgagee, shall apply notwithstanding that, as a matter of law, this
Lease may terminate upon the termination of any such Superior Lease, and shall
be self-operative upon any such demand, and no further instrument shall be
required to give effect to said provisions. Tenant, however, upon demand of any
such owner, lessor or mortgagee, agrees to execute, from time to time,
instruments in confirmation of the foregoing provisions of this subsection B,
reasonably satisfactory to any such owner, lessor or mortgagee and Tenant
acknowledging such attornment and setting forth the terms and conditions of its
tenancy. Nothing contained in this subsection B shall be construed to impair any
right otherwise exercisable by any such owner, lessor or mortgagee.
C. NON-DISTURBANCE. Landlord agrees that it shall obtain from the
holder of the first Mortgage currently encumbering the Real Property, a
subordination, non-disturbance and attornment agreement in favor of Tenant in
the form generally used by the holder of such first Mortgage within thirty (30)
days following Tenant's execution and delivery of the same and in addition,
Landlord shall use reasonable efforts to obtain from the future holder of any
Mortgage, a subordination, non-disturbance and attornment agreement in the form
generally used by such holder; it being expressly understood and agreed that the
failure to obtain any such future subordination, non-disturbance and attornment
agreement shall in no way relieve Tenant of any of its obligations hereunder or
affect the subordination of this Lease as provided herein. Landlord further
agrees that it shall obtain from the lessor of the existing Superior Lease of
the Real Property a recognition, non-disturbance and attornment agreement in
favor of Tenant in the form generally used by such lessor within thirty (30)
days following Tenant's execution and delivery of the same. Landlord shall not
be required to expend any sums or incur any fees in connection with obtaining
any subordination, non-disturbance and attornment agreement unless Tenant shall
pay such sums to Landlord in advance and Landlord shall not be required to seek
any alternative financing arrangements if the holder of any future Mortgage is
unwilling to grant non-disturbance protection to Tenant.
8. RULES AND REGULATIONS. Tenant and Tenant's employees, agents,
visitors and licensees shall observe faithfully, and comply strictly with,
the Rules and Regulations annexed hereto and
<PAGE>
made a part hereof as Schedule A and such other and further reasonable Rules and
Regulations as Landlord or Landlord's agents may from time to time adopt
(collectively, the "Rules and Regulations") on such notice to be given as
Landlord may elect; provided that no new Rules and Regulations shall materially
increase Tenant's costs of operating its business in the Premises . Nothing in
this Lease contained shall be construed to impose upon Landlord any duty or
obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, against any other tenant and Landlord shall not
be liable to Tenant for violation of the same by any other tenant, its
employees, agents, visitors or licensees but Landlord shall not enforce the
Rules and Regulation in a discriminatory manner against Tenant.
9. INSURANCE.
A. LIABILITY INSURANCE. Tenant shall obtain at its own expense and keep
in full force and effect during the Term, a policy of commercial general
liability insurance (including, without limitation, insurance covering Tenant's
contractual liability under this Lease), under which Tenant is named as the
insured, and Landlord, Landlord's managing agent, the present and any future
mortgagee of the Real Property or the Building and/or such other designees
specified by Landlord from time to time, are named as additional insureds. Such
policy shall contain a provision that no act or omission of Tenant shall affect
or limit the obligation of the insurance company to pay the amount of any loss
sustained. Such policy shall also contain a provision which provides the
insurance company will not cancel or refuse to renew the policy, or change in
any material way the nature or extent of the coverage provided by such policy,
without first giving Landlord at least thirty (30) days written notice by
certified mail, return receipt requested, which notice shall contain the policy
number and the names of the insureds and policy holder. The minimum limits of
liability shall be a combined single limit with respect to each occurrence in an
amount of not less than $5,000,000 for injury (or death) and damage to property
or such greater amount as Landlord may, from time to time, reasonably require.
Tenant shall also maintain at its own expense during the Term a policy of
workers' compensation insurance providing statutory benefits for Tenant's
employees and employer's liability. Tenant shall provide to Landlord upon
execution of this Lease and at least thirty (30) days prior to the termination
of any existing policy, a certificate evidencing the effectiveness of the
insurance policies required to be maintained hereunder which shall include the
named insured, additional insured, carrier, policy number, limits of liability,
effective date, the name of the insurance agent and its telephone number. Tenant
shall provide Landlord with a complete copy of any such policy upon written
request of Landlord. Tenant shall have no right to obtain any of the insurance
required hereunder pursuant to a blanket policy covering other properties unless
the blanket policy contains an endorsement that names Landlord, Landlord's
managing agent and/or designees specified by Landlord from time to time, as
additional insureds, references the Premises, and guarantees a minimum limit
available for the Premises equal to the amount of insurance required to be
maintained hereunder. Each policy required hereunder shall contain a clause that
the policy and the coverage evidenced thereby shall be primary with respect to
any policies carried by Landlord, and that any coverage carried by Landlord
shall be excess insurance. The limits of the insurance required under this
subsection shall not limit the liability of Tenant under this Lease. All
insurance required to be carried by Tenant pursuant to the terms of this Lease
shall be effected under valid and enforceable policies issued by reputable and
independent insurers permitted to do business in the State of New York, and
rated in Best's Insurance Guide, or any successor thereto (or if there be none,
an organization having a national reputation) as having a general policyholder
rating of "A-" and a financial rating of at least "10". In the event that Tenant
fails to continuously maintain insurance as required by this subsection,
Landlord may, at its option and without relieving Tenant of any obligation
hereunder, order such insurance and pay for the same at the expense of Tenant.
In such event, Tenant shall repay the amount expended by Landlord, with interest
thereon at the rate set forth in subsection B of Article 19 hereof, promptly
following Landlord's written demand therefor.
B. "ALL RISK" INSURANCE. Tenant shall also maintain at its own expense
during the Term a policy against fire and other casualty on an "all risk" form
covering all furniture, fixtures, equipment, personal property and inventory of
Tenant located in the Premises sufficient to provide 100% full replacement value
of such items, which policy shall otherwise comply with the provisions of
subsections A and C of this Article 9. On any such policy, Tenant shall name
Landlord as a loss payee, as its interest may appear.
C. WAIVER OF SUBROGATION. The parties hereto shall procure an
appropriate clause in, or endorsement on, any "all-risk" property insurance
covering the Premises and the Building, including its respective Alterations,
construction and other improvements as well as personal property, fixtures,
furniture, inventory and equipment located thereon or therein, pursuant to which
the insurance companies waive subrogation or consent to a waiver of right of
recovery, and each party hereby agrees that it will not make any claim against
or seek to recover from the other or the partners, directors, officers,
shareholders or employees of such party for any loss or damage to its
<PAGE>
property or the property of others resulting from fire or other hazards covered
by such "all-risk" property insurance policies to the extent that such loss or
damage is actually recoverable under such policies exclusive of any deductibles.
Such waiver will not apply should any loss or damage result from one of the
parties' gross negligence or willful misconduct. If the payment of an additional
premium is required for the inclusion of such waiver of subrogation provision,
each party shall advise the other of the amount of any such additional premiums
and the other party shall pay the same. It is expressly understood and agreed
that Landlord will not carry insurance on Tenant's fixtures, furnishings,
equipment, personal property or inventory located in the Premises or insurance
against interruption of Tenant's business.
D. LANDLORD'S INSURANCE. Landlord agrees to maintain and keep in full
force and effect throughout the Term hereof, standard fire and extended coverage
policy, insuring the Building against fire and other causes included on an "all
risk" form sufficient to provide 100% full replacement value of the Building
(exclusive of foundations) or such lesser amount as will avoid co-insurance
provided, however, if (i) such insurance coverage ceases to be available or (ii)
the cost of such insurance increases so that owners of similar properties in New
York County, New York generally cease to carry such insurance, Landlord shall
maintain such insurance coverage as is customarily maintained by owners of
similar properties in New York County, New York.
10. DESTRUCTION OF THE PREMISES; PROPERTY LOSS OR DAMAGE.
A. REPAIR OF DAMAGE. If the Premises or any part thereof shall be
damaged by fire or other casualty, Tenant shall give prompt notice thereof to
Landlord and this Lease shall continue in full force and effect except as
hereinafter set forth. If the Premises shall be damaged by fire or other
casualty, then the Premises shall be repaired and restored to its condition
preceding the damage in accordance with the provisions of this Article 10 as
promptly as reasonably practicable. Whenever in this Article 10 reference is
made to restoration of the Premises, (i) Tenant's obligation shall be as to all
property within the Premises including Tenant's furniture, fixtures, equipment
and other personal property, of which shall be restored and replaced at Tenant's
sole cost and expense and (ii) Landlord's obligation, if any, shall be as to the
shell, which constitutes the structure of the Building, the mechanical,
electrical, plumbing, air-conditioning and other building-wide systems up to the
point of connection into the Premises and any other leasehold improvements
existing in the Premises on the date of such damage; provided, however, at
Landlord's sole discretion, Landlord may elect to have Tenant restore and any
and all Alterations, construction or other improvements made to the Premises by
or on behalf of Tenant, in which event Landlord shall make all insurance
proceeds received by Landlord for the same made available to Tenant in
accordance with the provisions of subsection IV of Schedule B hereof, as if such
proceeds were Landlord's Contribution (as defined in Schedule B). Subject to the
terms of this Subsection A, Landlord shall have no liability to Tenant, and
Tenant shall not be entitled to terminate this Lease, if such repairs and
restoration are not in fact completed within Landlord's estimated time period,
so long as Landlord shall have proceeded with reasonable due diligence. The Rent
until such repairs shall be made shall be reduced in the proportion which the
area of the part of the Premises which is not usable by Tenant bears to the
total area of the Premises; provided, however, should Tenant reoccupy a portion
of the Premises for the conduct of its business prior to the date such repairs
are made, the Rent shall be reinstated with respect to such reoccupied portion
of the Premises and shall be payable by Tenant from the date of such occupancy.
In the event Landlord elects to have Tenant restore the Premises,
notwithstanding the foregoing to the contrary, the Rent shall be reduced during
Tenant's restoration of the Premises but in no event for more than three (3)
months following the date Landlord substantially completes its repair and
restoration to the shell and other building-wide systems. Within sixty (60) days
after notice to Landlord of damage to the Premises or any part thereof by fire
or other casualty, Landlord shall deliver to Tenant an estimate prepared by a
reputable contractor selected by Landlord setting forth such contractor's
estimate as to the reasonable time required to repair such damage. If the
estimated time period exceeds ten (10) months, Tenant may elect to terminate
this Lease by notice to Landlord given not later than fifteen (15) days
following the delivery of such estimate to Tenant. If Tenant elects to terminate
this Lease, the Term of this Lease shall expire upon the thirtieth (30th) day
after notice of such election is given by Tenant and Tenant shall vacate the
Premises and surrender the same to Landlord and the Rent and additional rent
shall be terminated from and after the effective date of such termination. If
Tenant shall not so elect to terminate this Lease, but Landlord shall thereafter
fail to substantially complete the restoration of the Premises on or before the
estimated restoration date for any reason whatsoever, other than a force majeure
event or any other cause beyond the reasonable control of Landlord, Tenant shall
have the right to terminate this Lease by giving notice to Landlord not later
than five (5) days following the estimated restoration date and if Landlord
shall fail to so complete such restoration within five (5) days following
Landlord's receipt of Tenant's termination notice (subject to delays caused by
force majeure events or any similar cause beyond the reasonable control of
Landlord), this Lease shall be deemed canceled and terminated as of the date of
the giving of such termination notice as if such date were the Expiration Date.
If Landlord
<PAGE>
elects to have Tenant restore the Premises in accordance with the provisions of
this subsection A, Tenant's right to terminate this Lease pursuant to the
immediately preceding sentence shall only be applicable if Landlord fails to
timely complete its repair and restoration of the shell and other building-wide
systems.
B. TERMINATION OPTION. Anything in subsection A of this Article 10 to
the contrary notwithstanding, if the Premises are totally damaged or are
rendered wholly untenantable, or if the Building shall be so damaged by fire or
other casualty that, in Landlord's sole but reasonable opinion, either
substantial alteration, demolition or reconstruction of the Building shall be
required (whether or not the Premises shall have been damaged or rendered
untenantable), or if the Building, after its proposed repair, alteration or
restoration, shall not be economically viable as an office building, then in any
of such events, Landlord, at Landlord's option, may, not later than sixty (60)
days following the damage, give Tenant a notice in writing terminating this
Lease; provided that if the Premises are not substantially damaged or rendered
untenantable, Landlord may not terminate this Lease unless Landlord shall elect
to terminate leases affecting at least thirty percent (30%) of the rentable
office area of the Building (excluding any rentable area occupied by Landlord or
its affiliates). In addition, (i) if any damage shall occur to the Premises or
the Building during the last year of the Term, Landlord or Tenant shall have the
option to terminate this Lease by thirty (30) days prior written notice to the
other and (ii) Landlord shall not be obligated to repair or restore the Premises
or the Building if a holder of a mortgage or underlying leasehold applies
proceeds of insurance to the loan or lease payment balance, and the remaining
proceeds, if any, available to Landlord are insufficient to pay for such repair
or restoration. If Landlord elects to terminate this Lease, the Term shall
expire upon the date set forth in such notice, and Tenant shall vacate the
Premises and surrender the same to Landlord without prejudice however, to
Landlord's rights and remedies against Tenant under this Lease in effect prior
to such termination and any Rent owing shall be paid up to such date and any
payments of Rent made by Tenant which were on account of any period subsequent
to such date shall be returned to Tenant. Upon the termination of this Lease
under the conditions provided for in the next preceding sentence, Tenant's
liability for Rent thereafter accruing shall cease as of the day following such
damage.
C. REPAIR DELAYS. Landlord shall not be liable for reasonably
unavoidable delays which may arise by reason of the claim adjustment with any
insurance company on the part of Landlord and/or Tenant, and for reasonably
unavoidable delays on account of "labor troubles" or any other force majeure
event.
D. PROVISION CONTROLLING. The parties agree that this Article 10
constitutes an express agreement governing any case of damage or destruction of
the Premises or the Building by fire or other casualty, and that Section 227 of
the Real Property Law of the State of New York, which provides for such
contingency in the absence of an express agreement, and any other law of like
import now or hereafter in force shall have no application in any such case.
E. PROPERTY LOSS OR DAMAGE. Any Building employee to whom any property
shall be entrusted by or on behalf of Tenant shall be deemed to be acting as
Tenant's agent with respect to such property and neither Landlord nor its agents
shall be liable for any damage to property of Tenant or of others entrusted to
employees of the Building, nor for the loss of or damage to any property of
Tenant by theft or otherwise, subject to the terms of Article 9C hereof. Neither
Landlord nor its agents shall be liable for any injury or damage to persons or
property or interruption of Tenant's business resulting from fire, explosion,
falling plaster, steam, gas, electricity, water, rain or snow or leaks from any
part of the Building or from the pipes, appliances or plumbing works or from the
roof, street or subsurface or from any other place or by dampness or by any
other cause of whatsoever nature; nor shall Landlord or its agents be liable for
any such damage caused by other tenants or persons in the Building or caused by
construction of any private, public or quasi-public work; nor shall Landlord be
liable for any latent defect in the Premises or in the Building, except as
expressly set forth herein. Anything in this Article 10 to the contrary
notwithstanding, nothing in this Lease shall be construed to relieve Landlord
from responsibility directly to Tenant for any loss or damage caused directly to
Tenant wholly or in part by the negligence or willful misconduct of Landlord.
Nothing in the foregoing sentence shall affect any right of Landlord to the
indemnity from Tenant to which Landlord may be entitled under Article 37 hereof
in order to recoup for payments made to compensate for losses of third parties.
11. CONDEMNATION.
A. CONDEMNATION. If the whole of the Real Property, the Building or the
Premises shall be acquired or condemned for any public or quasi-public use or
purpose, this Lease and the Term shall end as of the date of the vesting of
title with the same effect as if said date were the Expiration Date. If only a
part of the Real Property shall be so acquired or condemned then,
<PAGE>
(i) except as hereinafter provided in this subsection A, this Lease and the Term
shall continue in force and effect but, if a part of the Premises is included in
the part of the Real Property so acquired or condemned, from and after the date
of the vesting of title, the Rent, Tenant's Proportionate Share and the Labor
Rate Factor shall be reduced in the proportion which the area of the part of the
Premises so acquired or condemned bears to the total area of the Premises
immediately prior to such acquisition or condemnation and Tenant's Proportionate
Share shall be redetermined based on the proportion in which the ratio between
the rentable area of the Premises remaining after such acquisition or
condemnation bears to the rentable area of the Building remaining after such
acquisition or condemnation, (ii) whether or not the Premises shall be affected
thereby, Landlord, at Landlord's option, may give to Tenant, within sixty (60)
days next following the date upon which Landlord shall have received notice of
vesting of title, a thirty (30) days notice of termination of this Lease if
Landlord shall elect to terminate leases affecting at least thirty percent (30%)
of the rentable office area of the Building (excluding any rentable area leased
by Landlord or its affiliates); and (iii) if the part of the Real Property so
acquired or condemned shall contain more than thirty percent (30%) of the total
area of the Premises immediately prior to such acquisition or condemnation, or
if, by reason of such acquisition or condemnation, Tenant no longer has
reasonable means of access to the Premises, Tenant, at Tenant's option, may give
to Landlord, within sixty (60) days next following the date upon which Tenant
shall have received notice of vesting of title, a thirty (30) days notice of
termination of this Lease. If any such thirty (30) days notice of termination is
given by Landlord or Tenant, this Lease and the Term shall come to an end and
expire upon the expiration of said thirty (30) days with the same effect as if
the date of expiration of said thirty (30) days were the Expiration Date. If a
part of the Premises shall be so acquired or condemned and this Lease and the
Term shall not be terminated pursuant to the foregoing provisions of this
subsection A, Landlord, at Landlord's expense, shall restore that part of the
Premises not so acquired or condemned to a self-contained rental unit inclusive
of Landlord's Pre-Commencement Work and Landlord's Post-Commencement Work, to
the extent reasonably practicable. In the event of any termination of this Lease
and the Term pursuant to the provisions of this subsection A, the Rent and
additional rent for escalations of Rent shall terminate as of the date of sooner
termination and any prepaid portion of Rent for any period after such date shall
be refunded by Landlord to Tenant.
B. AWARD. In the event of any such acquisition or condemnation of all
or any part of the Real Property, Landlord shall be entitled to receive the
entire award for any such acquisition or condemnation, Tenant shall have no
claim against Landlord or the condemning authority for the value of any
unexpired portion of the Term and Tenant hereby expressly assigns to Landlord
all of its right in and to any such award. Nothing contained in this subsection
B shall be deemed to prevent Tenant from making a claim in any condemnation
proceedings for the then value of any furniture, furnishings and fixtures
installed by and at the sole expense of Tenant and included in such taking and
for relocation expenses and business interruption as a result of such taking,
provided that such award shall not reduce the amount of the award otherwise
payable to Landlord.
12. ASSIGNMENT AND SUBLETTING.
A. PROHIBITION WITHOUT CONSENT. Tenant expressly covenants that it
shall not (i) assign or otherwise transfer this Lease or the term and estate
hereby granted, (ii) mortgage, pledge or encumber this Lease or the Premises or
any part thereof in any manner by reason of any act or omission on the part of
Tenant, (iii) sublet the Premises or any part thereof or permit the Premises or
any part thereof to be used or occupied by others (whether for desk space,
mailing privileges or otherwise) or (iv) advertise, or authorize a broker to
advertise the Premises for assignment or subletting, without obtaining the prior
written consent of Landlord in each instance, which consent shall be granted or
withheld in accordance with the terms of this Article 12. If this Lease be
assigned, or if the Premises or any part thereof be sublet or occupied by
anybody other than Tenant, Landlord may, after default by Tenant, collect rent
from the assignee, subtenant or occupant, and apply the net amount collected to
the Rent herein reserved, but no assignment, underletting, occupancy or
collection shall be deemed a waiver of the provisions hereof, the acceptance of
the assignee, undertenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. The consent by Landlord to an assignment or underletting shall not in
any way be construed to relieve Tenant from obtaining the express consent in
writing of Landlord to any further assignment or underletting. In no event shall
any permitted subtenant assign or encumber its sublease or further sublet all or
any portion of its sublet space, or otherwise suffer or permit the sublet space
or any part thereof to be used or occupied by others, without Landlord's prior
written consent in each instance. Any assignment, sublease, mortgage, pledge,
encumbrance or transfer in contravention of the provisions of this Article 12
shall be void.
B. NOTICE OF PROPOSED TRANSFER. If Tenant shall at any time or times
during the Term desire to assign this Lease or sublet all or part of the
Premises (excluding any assignment or subletting to a related corporation
pursuant to subsection L of this Article 12), Tenant shall give
<PAGE>
notice thereof to Landlord, which notice shall be accompanied by (i) a conformed
or photostatic copy of the proposed assignment or sublease, the effective or
commencement date of which shall be not less than thirty (30) nor more than one
hundred and eighty (180) days after the giving of such notice, (ii) a statement
setting forth in reasonable detail the identity of the proposed assignee or
subtenant, the nature of its business and its proposed use of the Premises,
(iii) current financial information with respect to the proposed assignee or
subtenant, including, without limitation, its most recent financial report or
other financial information reasonably requested by Landlord, (iv) an agreement
by Tenant to indemnify Landlord against liability resulting from any claims that
may be made against Landlord by the proposed assignee or subtenant or by any
brokers or other persons claiming a commission or similar compensation in
connection with the proposed assignment or sublease and (v) in the case of a
sublease, such additional information related to the proposed subtenant as
Landlord shall reasonably request, if any.
C. LANDLORD'S OPTIONS. Except for a permitted transfer of the nature
described in subsections K and L of this Article 12, the notice containing all
of the information set forth in Subsection B of this Article 12 above shall be
deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's
designee) may, at its option, (a) sublease such space (hereinafter called the
"Leaseback Space") from Tenant upon the terms and conditions hereinafter set
forth (if the proposed transaction is a sublease of all or part of the
Premises), or (b) terminate this Lease (if the proposed transaction is an
assignment or a sublease of all or substantially all of the Premises). Said
options may be exercised by Landlord by notice to Tenant at any time within
thirty (30) days after the aforesaid notice has been given by Tenant to
Landlord; and during such thirty (30) day period Tenant shall not assign this
Lease nor sublet such space to any person or entity.
D. TERMINATION BY LANDLORD. If Landlord exercises its option to
terminate this Lease in the case where Tenant desires either to assign this
Lease or sublet all or substantially all of the Premises (excluding any
assignment or subletting to a related corporation pursuant to subsection L of
this Article 12 or a permitted transfer of the nature described in subsection K
of this Article 12), then this Lease shall end and expire on the date that such
assignment or sublet was to be effective or commence, as the case may be, and
the Rent and additional rent due hereunder shall be paid and apportioned to such
date. Furthermore, if Landlord exercises its option to terminate this Lease
pursuant to subsection C of this Article 12, Landlord shall be free to and shall
have no liability to Tenant if Landlord should lease the Premises (or any part
thereof) to Tenant's prospective assignee or subtenant.
E. TAKEBACK BY LANDLORD. If Landlord exercises its option to sublet the
Leaseback Space, such sublease to Landlord or its designee (as subtenant) shall
be at the rentals set forth in the proposed sublease, and shall be for the same
term as that of the proposed subletting, and such sublease:
(i) shall be expressly subject to all of the covenants,
agreements, terms, provisions and conditions of this Lease except such as are
irrelevant or inapplicable, and except as otherwise expressly set forth to the
contrary in this Article 12;
(ii) shall be upon the same terms and conditions as those
contained in the proposed sublease, except such as are irrelevant or
inapplicable and except as otherwise expressly set forth to the contrary in this
Article 12;
(iii) shall give the subtenant the unqualified and
unrestricted right, without Tenant's permission, to assign such sublease or any
interest therein and/or to sublet the space covered by such sublease or any part
or parts of such space and to make any and all changes, alterations and
improvements in the space covered by such sublease, and if the proposed sublease
will result in all or substantially all of the Premises being sublet, grant
Landlord or its designee the option to extend the term of such sublease for the
balance of the term of this Lease less one (1) day;
(iv) shall provide that any assignee or further subtenant of
Landlord or its designee, may, at the election of Landlord, be permitted to make
alterations, decorations and installations in such space or any part thereof and
shall also provide in substance that any such alterations, decorations and
installations in such space therein made by any assignee or subtenant of
Landlord or its designee may be removed, in whole or in part, by such assignee
or subtenant, at its option, prior to or upon the expiration or other
termination of such sublease provided that such assignee or subtenant, at its
expense, shall repair any damage and injury to such space so sublet caused by
such removal; and
(v) shall also provide that (a) the parties to such sublease
expressly negate any intention that any estate created under such sublease be
merged with any other estate held by
<PAGE>
either of said parties, (b) any assignment or subletting by Landlord or its
designee (as the subtenant) may be for any purpose or purposes that Landlord, in
Landlord's uncontrolled discretion, shall deem suitable or appropriate, (c)
Tenant, at Tenant's expense, shall and will at all times provide and permit
reasonably appropriate means of ingress to and egress from such space so sublet
by Tenant to Landlord or its designee, (d) Landlord, at Tenant's expense, may
make such alterations as may be required or deemed necessary by Landlord to
physically separate the subleased space from the balance of the Premises and to
comply with any legal or insurance requirements relating to such separation, and
(e) that at the expiration of the term of such sublease, Tenant will accept the
space covered by such sublease in its then existing condition, subject to the
obligations of the subtenant to make such repairs thereto as may be necessary to
preserve the premises demised by such sublease in good order and condition.
F. EFFECT OF TAKEBACK OR TERMINATION. If Landlord exercises its option
to sublet the Leaseback Space, (i) Landlord shall indemnify and save Tenant
harmless from all obligations under this Lease as to the Leaseback Space during
the period of time it is so sublet to Landlord; (ii) performance by Landlord, or
its designee, under a sublease of the Leaseback Space shall be deemed
performance by Tenant of any similar obligation under this Lease and any default
under any such sublease shall not give rise to a default under a similar
obligation contained in this Lease nor shall Tenant be liable for any default
under this Lease or deemed to be in default hereunder if such default is
occasioned by or arises from any act or omission of the tenant under such
sublease or is occasioned by or arises from any act or omission of any occupant
holding under or pursuant to any such sublease; and (iii) Tenant shall have no
obligation, at the expiration or earlier termination of the Term, to remove any
alteration, installation or improvement made in the Leaseback Space by Landlord
(or its designee); In addition, if required by applicable law in connection with
any termination of this Lease, or subletting of all or any portion of the
Leaseback Space to Landlord or its designee, Tenant shall complete, swear to and
file any questionnaires, tax returns, affidavits or other documentation which
may be required to be filed with the appropriate governmental agency in
connection with any other tax which may now or hereafter be in effect. Tenant
further agrees to pay any amounts which may be assessed in connection with any
of such taxes and to indemnify Landlord against and to hold Landlord harmless
from any claims for payment of such taxes as a result of such transactions.
G. CONDITIONS FOR LANDLORD'S APPROVAL.In the event Landlord does not
exercise either of the options provided to it pursuant to subsection C of this
Article 12 and provided that Tenant is not in default of any of Tenant's
obligations under this Lease (after notice and the expiration of any applicable
grace period) as of the time of Landlord's consent, and as of the effective date
of the proposed assignment or commencement date of the proposed sublease,
Landlord's consent (which must be in writing and form reasonably satisfactory to
Landlord) to the proposed assignment or sublease shall not be unreasonably
withheld, conditioned or delayed, provided and upon condition that:
(i) Tenant shall have complied with the provisions of
subsection B of this Article 12 and Landlord shall not have exercised any of its
options under subsection C of this Article 12 within the time permitted
therefor;
(ii) In Landlord's reasonable judgment the proposed
assignee or subtenant is engaged in a business or activity, and the Premises, or
the relevant part thereof, will be used in a manner, which (a) is in keeping
with the then standards of the Building, (b) is limited to the use of the
Premises as general and executive offices, and (c) will not violate any negative
covenant as to use contained in any other lease of office space in the Building;
(iii) The proposed assignee or subtenant is a reputable
party of good character and with sufficient financial worth considering the
responsibility involved, and Landlord has been furnished with reasonable proof
thereof;
(iv) Neither (a) the proposed assignee or subtenant nor
(b) any person which, directly or indirectly, controls, is controlled by or is
under common control with, the proposed assignee or subtenant, is then an
occupant of any part of the Building, if Landlord has any space available or
becoming available for lease in the Building within two (2) months following
Landlord's receipt of notice of the proposed assignment or sublease;
(v) The proposed assignee or subtenant is not a person
with whom Landlord is or has been, within the preceding six (6) month period,
negotiating to lease space in the Building if Landlord has any space available
or becoming available for lease in the Building;
(vi) The form of the proposed sublease or instrument of
assignment (a) shall be in form reasonably satisfactory to Landlord, and (b)
shall comply with the applicable provisions of this Article 12;
<PAGE>
(vii) There shall not be more than three (3) subtenants
(including Landlord or its designee) of the Premises;
(viii) Intentionally Deleted;
(ix) Upon receipt of a bill therefor, Tenant shall
reimburse Landlord for the reasonable out-of-pocket costs that are actually
incurred by Landlord in connection with said assignment or sublease (excluding
any permitted sublease or assignment to a related corporation), including
without limitation, the costs of making investigations as to the acceptability
of the proposed assignee or subtenant, and reasonable legal costs incurred by
Landlord in connection with the granting of any requested consent;
(x) The proposed occupancy shall not, in Landlord's
reasonable opinion, increase the office cleaning requirements or the Building's
operating or other expenses or impose an extra burden upon services to be
supplied by Landlord to Tenant other than to a de minimus extent;
(xi) The proposed assignee or subtenant or its business
shall not be subject to compliance with additional requirements of law
(including related regulations) beyond those requirements which are applicable
to the named Tenant herein; and
(xii) The proposed subtenant or assignee shall not be
entitled, directly or indirectly, to diplomatic or sovereign immunity and shall
be subject to the service of process in, and the jurisdiction of the courts of
New York State.
Except for any subletting by Tenant to Landlord or its designee
pursuant to the provisions of this Article 12, each subletting pursuant to this
subsection G of this Article 12 shall be subject to all of the covenants,
agreements, terms, provisions and conditions contained in this Lease.
Notwithstanding any such subletting to Landlord or any such subletting to any
other subtenant and/or acceptance of Rent or additional rent by Landlord from
any subtenant, Tenant shall and will remain fully liable for the payment of the
Rent and additional rent due and to become due hereunder and for the performance
of all the covenants, agreements, terms, provisions and conditions contained in
this Lease on the part of Tenant to be performed and all acts and omissions of
any licensee or subtenant or anyone claiming under or through any subtenant
which shall be in violation of any of the obligations of this Lease shall be
deemed to be a violation by Tenant. Tenant further agrees that notwithstanding
any such subletting, no other and further subletting of the Premises by Tenant
or any person claiming through or under Tenant shall or will be made except upon
compliance with and subject to the provisions of this Article 12. If Landlord
shall decline to give its consent to any proposed assignment or sublease, or if
Landlord shall exercise either of its options under subsection C of this Article
12, Tenant shall indemnify, defend and hold harmless Landlord against and from
any and all loss, liability, damages, costs, and expenses (including reasonable
counsel fees) resulting from any claims that may be made against Landlord by the
proposed assignee or subtenant or by any brokers or other persons claiming a
commission or similar compensation in connection with the proposed assignment or
sublease.
H. FUTURE REQUESTS. In the event that (i) Landlord fails to exercise
either of its options under subsection C of this Article 12 and consents to a
proposed assignment or sublease, and (ii) Tenant fails to execute and deliver
the assignment or sublease to which Landlord consented within ninety (90) days
after the giving of such consent, then, Tenant shall again comply with all of
the provisions and conditions of subsection B of this Article 12 before
assigning this Lease or subletting all or part of the Premises.
I. SUBLEASE PROVISIONS. With respect to each and every sublease or
subletting authorized by Landlord under the provisions of this Lease, it is
further agreed that:
(i) No subletting shall be for a term ending later than
one (1) day prior to the Expiration Date of this Lease;
(ii) No sublease shall be delivered, and no subtenant
shall take possession of the Premises or any part thereof, until an executed
counterpart of such sublease has been delivered to Landlord;
(iii) Each sublease shall provide that it is subject and
subordinate to this Lease and to the matters to which this Lease is or shall be
subordinate, and that in the event of termination, re-entry or dispossession by
Landlord under this Lease Landlord may, at its option, take over all of the
right, title and interest of Tenant, as sublessor, under such sublease, and such
subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then
executory provisions of such sublease, except that Landlord shall not (a) be
liable for any previous act or omission of
<PAGE>
Tenant under such sublease, (b) be subject to any counterclaim, offset or
defense, not expressly provided in such sublease, which theretofore accrued to
such subtenant against Tenant, or (c) be bound by any previous modification of
such sublease or by any previous prepayment of more than one (1) month's Rent.
The provisions of this Article 12 shall be self-operative and no further
instrument shall be required to give effect to this provision.
(iv) If any laws, orders, rules or regulations of any
applicable governmental authority require that any Hazardous Substances,
including, without limitation, asbestos, contained in or about the Premises to
be sublet (the "Sublet Space") be dealt with in any particular manner in
connection with any alteration of the Sublet Space, then it shall be the
subtenant's obligation, at the subtenant's expense, to deal with such Hazardous
Substances in accordance with all such laws, orders, rules and regulations
(unless Landlord elects to deal with such Hazardous Substances itself, in which
event, the subtenant shall reimburse Landlord for all of Landlord's costs and
expenses in connection therewith within ten (10) days next following the
rendition of a statement therefor).
J. PROFITS FROM ASSIGNMENT OR SUBLETTING. If Landlord shall give its
consent to any assignment of this Lease or to any sublease or if Tenant shall
enter into any other assignment or sublease permitted hereunder, Tenant shall in
consideration therefor, pay to Landlord, as additional rent:
(i) in the case of an assignment, an amount equal to
fifty percent (50%) of all sums and other considerations paid to Tenant by the
assignee for or by reason of such assignment (including, but not limited to,
sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment,
furniture, furnishings or other personal property, less, in the case of a sale
thereof, the then net unamortized or undepreciated cost thereof determined on
the basis of Tenant's federal income tax returns) less all expenses reasonably
and actually incurred by Tenant on account of brokerage commissions, tenant
improvements, advertising costs, commercially reasonable tenant concessions and
legal fees in connection with such assignment , provided that Tenant shall
submit to Landlord a receipt evidencing the payment of such expenses (or other
proof of payment as Landlord shall reasonably require); and
(ii) in the case of a sublease, fifty percent (50%) of
any rents, additional charges or other consideration payable under the sublease
on a per square foot basis to Tenant by the subtenant which is in excess of the
Rent and additional rent accruing during the term of the sublease in respect of
the subleased space (at the rate per square foot payable by Tenant hereunder)
pursuant to the terms hereof (including, but not limited to, sums paid for the
sale or rental of Tenant's fixtures, leasehold improvements, equipment,
furniture or other personal property, less, in the case of the sale thereof, the
then net unamortized or undepreciated cost thereof determined on the basis of
Tenant's federal income tax returns), less all expenses reasonably and actually
incurred by Tenant on account of brokerage commissions, tenant improvements,
advertising costs, commercially reasonable tenant concessions and legal fees and
the cost of demising the premises so sublet in connection with such sublease ,
provided that Tenant shall submit to Landlord a receipt evidencing the payment
of such expenses (or other proof of payment as Landlord shall reasonably
require). The sums payable under this subsection J(ii) of this Article 12 shall
be paid to Landlord as and when payable by the subtenant to Tenant.
K. OTHER TRANSFERS. (i) If Tenant is a corporation other than a
corporation whose stock is listed and traded on a nationally recognized stock
exchange (hereinafter referred to as a "public corporation"), the provisions of
subsection A of this Article 12 shall apply to a transfer (by one or more
transfers) of a majority of the stock of Tenant as if such transfer of a
majority of the stock of Tenant were an assignment of this Lease; but said
provisions shall not apply to transactions with a corporation into or with which
Tenant is merged or consolidated or to which substantially all of Tenant's
assets are transferred, provided that such merger, consolidation or transfer of
assets is for a valid business purpose and not principally for the purpose of
transferring the leasehold estate created hereby, and provided further, that in
any of such events (a) the successor to Tenant has a net worth computed in
accordance with generally accepted accounting principles equal to or greater
than Fifty Million and 00/100 ($50,000,000.00) Dollars and (b) proof
satisfactory to Landlord of such net worth shall have been delivered to Landlord
at least ten (10) days prior to the effective date of any such transaction.
(ii) If Tenant is a partnership, the provisions of
subsection A of this Article 12 shall apply to a transfer (by one or more
transfers) of a majority interest in the partnership, as if such transfer were
an assignment of this Lease.
(iii) If Tenant is a subdivision, authority, body, agency,
instrumentality or other entity created and/or controlled pursuant to the laws
of the State of New York or any city, town or village of such state or of
federal government ("Governmental Entity"), the provisions of
<PAGE>
subsection A of this Article 12 shall apply to a transfer (by one or more
transfers) of any of Tenant's rights to use and occupy the Premises, to any
other Governmental Entity, as if such transfer of the right of use and occupancy
were an assignment of this Lease; but said provisions shall not apply to a
transfer of any of Tenant's rights in and to the Premises to any Governmental
Entity which shall replace or succeed to substantially similar public functions,
responsibilities and areas of authority as Tenant, provided that in any of such
events the successor Governmental Entity (a) shall utilize the Premises in a
manner substantially similar to Tenant, and (b) shall not utilize the Premises
in any manner which, in Landlord's judgment, would impair the reputation of the
Building as a first-class office building.
L. RELATED CORPORATION. Notwithstanding anything to the contrary
contained herein, Tenant may, without Landlord's consent, but after at least
fifteen (15) days prior notice to Landlord and submission to Landlord of any
information reasonably requested by Landlord with respect to any related
corporation (as hereinafter defined), permit any corporations or other business
entities (but not including Governmental Entities) which control, are controlled
by, or are under common control with Tenant (herein referred to as "related
corporation") to sublet all or part of the Premises or to take an assignment of
this Lease for any of the purposes permitted to Tenant, subject however to
compliance with Tenant's obligations under this Lease. Such subletting shall not
be deemed to vest in any such related corporation any right or interest in this
Lease or the Premises nor shall it relieve, release, impair or discharge any of
Tenant's obligations hereunder. For the purposes hereof, "control" shall be
deemed to mean ownership of not less than fifty percent (50%) of all of the
voting stock of such corporation or not less than fifty percent (50%) of all of
the legal and equitable interest in any other business entities. Upon Tenant's
written request, Landlord agrees to keep the existence of any such assignment or
sublease to a related corporation confidential (excluding Landlord's employees,
agents, attorneys and accountants), except as may otherwise be required by law
or pursuant to court order. Landlord hereby grants its consent to a subletting
of a portion of the Premises to Tribeca Software.
M. ASSUMPTION BY ASSIGNEE. Any assignment or transfer, whether made
with Landlord's consent pursuant to subsection A of this Article 12 or without
Landlord's consent pursuant to subsection K of this Article 12, shall be made
only if, and shall not be effective until, the assignee shall execute,
acknowledge and deliver to Landlord an agreement in form and substance
reasonably satisfactory to Landlord whereby the assignee shall assume the
obligations of this Lease and agree to be bound by all of the terms, conditions,
covenants and provisions hereof on the part of Tenant to be performed or
observed and whereby the assignee shall agree that the provisions in subsection
A of this Article 12 shall, notwithstanding such assignment or transfer,
continue to be binding upon it in respect of all future assignments and
transfers. The original named Tenant covenants that, notwithstanding any
assignment or transfer, whether or not in violation of the provisions of this
Lease, and notwithstanding the acceptance of Rent and/or additional rent by
Landlord from an assignee, transferee or any other party, the original named
Tenant shall remain fully liable for the payment of the Rent and additional rent
and for the other obligations of this Lease on the part of Tenant to be
performed or observed.
N. LIABILITY OF TENANT. The joint and several liability of Tenant and
any immediate or remote successor in interest of Tenant and the due performance
of the obligations of this Lease on Tenant's part to be performed or observed
shall not be discharged, released or impaired in any respect by any agreement or
stipulation made by Landlord extending the time, or modifying any of the
obligations, of this Lease, or by any waiver or failure of Landlord to enforce
any of the obligations of this Lease.
O. LISTINGS. The listing of any name other than that of Tenant, whether
on the doors of the Premises or the Building directory, or otherwise, shall not
operate to vest any right or interest in this Lease or in the Premises, nor
shall it be deemed to be the consent of Landlord to any assignment or transfer
of this Lease or to any sublease of the Premises or to the use or occupancy
thereof by others. Any such listing shall constitute a privilege extended by
Landlord, revocable at Landlord's will by notice to Tenant.
P. INTENTIONALLY DELETED.
Q. RE-ENTRY BY LANDLORD. If Landlord shall recover or come into
possession of the Premises before the date herein fixed for the termination of
this Lease, Landlord shall have the right, at its option, to take over any and
all subleases or sublettings of the Premises or any part thereof made by Tenant
and to succeed to all the rights of said subleases and sublettings or such of
them as it may elect to take over. Tenant hereby expressly assigns and transfers
to Landlord such of the subleases and sublettings as Landlord may elect to take
over at the time of such recovery of possession, such assignment and transfer
not to be effective until the termination of this Lease or re-entry by Landlord
hereunder or if Landlord shall otherwise succeed to Tenant's estate in the
Premises, at which time Tenant shall upon request of Landlord, execute,
acknowledge
<PAGE>
and deliver to Landlord such further instruments of assignment and transfer as
may be necessary to vest in Landlord the then existing subleases and
sublettings. Every subletting hereunder is subject to the condition and by its
acceptance of and entry into a sublease, each subtenant thereunder shall be
deemed conclusively to have thereby agreed from and after the termination of
this Lease or re-entry by Landlord hereunder of or if Landlord shall otherwise
succeed to Tenant's estate in the Premises, that such subtenant shall waive any
right to surrender possession or to terminate the sublease and, at Landlord's
election, such subtenant shall be bound to Landlord for the balance of the term
of such sublease and shall attorn to and recognize Landlord, as its landlord,
under all of the then executory terms of such sublease, except that Landlord
shall not (i) be liable for any previous act, omission or negligence of Tenant
under such sublease, (ii) be subject to any counterclaim, defense or offset not
expressly provided for in such sublease, which theretofore accrued to such
subtenant against Tenant, (iii) be bound by any previous modification or
amendment of such sublease or by any previous prepayment of more than one (1)
month's rent and additional rent which shall be payable as provided in the
sublease, (iv) be obligated to repair the subleased space or the Building or any
part thereof, in the event of total or substantial total damage beyond such
repair as can reasonably be accomplished from the net proceeds of insurance
actually made available to Landlord, (v) be obligated to repair the subleased
space or the Building or any part thereof, in the event of partial condemnation
beyond such repair as can reasonably be accomplished from the net proceeds of
any award actually made available to Landlord as consequential damages allocable
to the part of the subleased space or the Building not taken or (vi) be
obligated to perform any work in the subleased space of the Building or to
prepare them for occupancy beyond Landlord's obligations under this Lease, and
the subtenant shall execute and deliver to Landlord any instruments Landlord may
reasonably request to evidence and confirm such attornment. Each subtenant or
licensee of Tenant shall be deemed automatically upon and as a condition of
occupying or using the Premises or any part thereof, to have given a waiver of
the type described in and to the extent and upon the conditions set forth in
this Article 12.
13. CONDITION OF THE PREMISES.
A. ACCEPTANCE BY TENANT. Tenant has examined the Premises and agrees to
accept possession of the Premises in the condition and state of repair which
shall exist on the date hereof "as is" (subject to latent defects identified in
writing by Tenant within six (6) months after the Commencement Date) and further
agrees that Landlord shall have no obligation to perform any work or make any
installations in order to prepare the Premises for Tenant's occupancy other than
Landlord's Pre-Commencement Work and Landlord's Post-Commencement Work
(collectively, "Landlord's Work"). The taking of possession of the Premises by
Tenant shall be conclusive evidence as against Tenant that, at the time such
possession was so taken, the Premises and the Building were in good and
satisfactory condition (subject to latent defects identified in writing by
Tenant within six (6) months after the Commencement Date) and that Landlord's
Pre-Commencement Work was substantially completed.
B. TENANT'S INITIAL ALTERATION. Tenant agrees to perform, or to cause
contractors reasonably approved by Landlord to perform, Tenant's Initial
Alteration described in Schedule B annexed hereto in accordance with the terms,
conditions and provisions thereof, and in accordance with all other terms,
conditions and provisions contained in this Lease, including, without
limitation, Schedules E and F annexed hereto. All of the terms, covenants and
conditions of Schedules E and F are incorporated in this Lease as if fully set
forth at length herein.
14. ACCESS TO PREMISES.
A. ACCESS BY LANDLORD. Tenant shall permit Landlord, Landlord's agents
and public utilities servicing the Building to erect, use, maintain and replace,
concealed ducts, pipes and conduits in and through the Premises. To the extent
reasonably practicable, any pipes, ducts or conduits installed in or through the
Premises pursuant to this Article 14 shall be concealed behind, beneath or
within partitioning, columns, ceilings or floors located or to be located in the
Premises. Landlord, Landlord's agents and/or affiliates, and the holder of any
Mortgage shall each have the right to enter the Premises at all reasonable times
upon reasonable prior notice (other than in event of an emergency), which notice
may be oral or by telephone, to (i) examine the same, (ii) to show them to
prospective purchasers, mortgagees or lessees of the Building or space therein,
(iii) to make such repairs, replacements, alterations, improvements or additions
as Landlord may deem necessary or desirable to the Premises or to any other
portion of the Building or which Landlord may elect to perform ten (10) days
after notice (except in the event of an emergency) to Tenant of Tenant's failure
to make repairs or perform any work which Tenant is obligated to perform under
this Lease, (iv) for the purpose of complying with laws, regulations or other
requirements of government authorities and (v) to perform "Remedial Work" (as
defined in Article 40 hereof) after the failure of
<PAGE>
Tenant to perform the same in accordance with the terms of this Lease. Landlord
shall be allowed, during the progress of any work in and about the Premises, to
take all necessary material and equipment into and upon the Premises and to
store them within the Premises without the same constituting an eviction or
constructive eviction of Tenant in whole or in part and the Rent shall in nowise
abate while any decorations, repairs, replacements, alterations, improvements or
additions are being made, by reason of loss or interruption of business of
Tenant or otherwise, except as otherwise expressly set forth herein; it being
understood and agreed that Landlord shall (w) cause any debris or refuse to be
removed from the work area in the Premises at the end of each day, (x) cause all
areas of the Premises adversely affected by Landlord's activities to be cleaned
upon completion of such work (y) remove all tools, equipment and other material
relating to such work from the Premises upon completion of such work, and (z)
not use the Premises for the staging of work to be performed by Landlord in any
other part of the Building. Notwithstanding anything to the contrary contained
above, Landlord shall not enter the Premises at times other than normal business
hours unless accompanied by an authorized representative of Tenant (provided
that Tenant shall make such representative available upon not more than two (2)
hours prior notice) or unless required in the event of an emergency. During the
one (1) year prior to the Expiration Date or the expiration of any renewal or
extended term, Landlord may exhibit the Premises to prospective tenants thereof
upon reasonable prior notice (other than in event of an emergency), which notice
may be oral or by telephone. If Tenant shall not be personally present to open
and permit an entry into the Premises, at any time, when for any reason an entry
therein shall be necessary or permissible hereunder (subject to the terms of
this Article 14), Landlord or Landlord's agents may enter the same by a master
key, or may forcibly enter the same (in event of an emergency only), without
rendering Landlord or such agents liable therefor (if during such entry Landlord
or Landlord's agents shall accord reasonable care to Tenant's property), and
without in any manner affecting the obligations and covenants of this Lease.
Nothing herein contained, however, shall be deemed or construed to impose upon
Landlord any obligation, responsibility or liability whatsoever, for the care,
supervision or repair of the Building or any part thereof, other than as herein
provided. Any entry upon the Premises by Landlord or its agents pursuant to this
Article 14 shall be effected in a manner intended to minimize interference with
the conduct of Tenant's business in the Premises (without any requirement that
Landlord utilize overtime or premium-pay labor unless Tenant pays for such
overtime or premium-pay costs in advance).
B. OTHER LANDLORD PRIVILEGES.Landlord shall have the right at any time,
without the same constituting an actual or constructive eviction and without
incurring any liability to Tenant therefor, to change the arrangement and/or
location of entrances or passageways, doors and doorways, corridors, elevators,
stairs, toilets or other public parts of the Building and to change the name,
number or designation by which the Building is commonly known, provided that any
such change does not materially and adversely (i) reduce or prevent access to
the Building or the Premises or (ii) reduce the rentable area of the Premises.
Tenant acknowledges that Landlord may (but shall have no obligation to) perform
repairs, improvements, alterations and/or substantial renovation work in and to
the public parts of the Building and the mechanical and other systems serving
the Building (which work may include improvements to the lobby and facade of the
Building, which may require that scaffolding and/or a sidewalk bridge be placed
in front of the Building, and the replacement of window glass, requiring access
to the same from within the Premises). Landlord shall incur no liability to
Tenant, nor shall Tenant be entitled to any abatement of Rent on account of any
noise, vibration or other disturbance to Tenant's business at the Premises
(provided that Tenant is not denied access thereto) which shall arise out of the
performance by Landlord or other tenants of the aforesaid repairs, alterations,
additions, improvements, alterations and renovations of the Building or any part
thereof and Tenant hereby agrees, except as expressly set forth herein, to
release Landlord of and from any claims (including without limitation, claims
arising by reason of loss or interruption of business) of every kind and nature
whatsoever arising under or in connection therewith. Tenant understands and
agrees that all parts (except surfaces facing the interior of the Premises) of
all walls, windows and doors bounding the Premises (including exterior Building
walls, core corridor walls, doors and entrances), all balconies, terraces and
roofs adjacent to the Premises, all space in or adjacent to the Premises used
for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms,
heating, air cooling, plumbing and other mechanical facilities, service closets
and other Building facilities are not part of the Premises, and Landlord shall
have the use thereof, as well as access thereto through the Premises, at
reasonable times (other than in event of an emergency) for the purposes of
operation, maintenance, alteration and repair. Landlord, throughout the Term,
shall have free access to any and all mechanical installations of Landlord,
including but not limited to air-cooling, fan, ventilating, machine rooms and
electrical closets Any entry upon the Premises by Landlord or its agents
pursuant to this Article 14 shall be effected after reasonable notice to Tenant
(which notice may be oral or by telephone) except in the case of an emergency
and in a manner intended to minimize material interference with the conduct of
Tenant's business in the Premises (without any requirement that Landlord utilize
overtime or premium-pay labor unless Tenant pays for such overtime or
premium-pay costs in advance).
<PAGE>
15. CERTIFICATE OF OCCUPANCY. Landlord hereby represents to Tenant that
as of the date hereof, there is no certificate of occupancy issued for the
Premises or for the Building by the City or State of New York.
16. LANDLORD'S LIABILITY. The obligations of Landlord under this Lease
shall not be binding upon Landlord named herein after the sale, conveyance,
assignment or transfer by such Landlord (or upon any subsequent landlord
after the sale, conveyance, assignment or transfer by such subsequent
landlord) of its interest in the Building or the Real Property, as the case
may be, in respect of the period thereafter occurring and in the event of any
such sale, conveyance, assignment or transfer, Landlord shall be and hereby
is entirely freed and relieved of all covenants and obligations of Landlord
hereunder thereafter to be performed, and it shall be deemed and construed
without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, grantee, assignee or
other transferee that such purchaser, grantee, assignee or other transferee
has assumed and agreed to carry out any and all covenants and obligations of
Landlord hereunder. Neither the shareholders, members, directors or officers
of Landlord, if Landlord is a corporation, nor the partners comprising
Landlord (nor any of the shareholders, members, directors or officers of such
partners), if Landlord is a partnership (collectively, the "Parties"), shall
be liable for the performance of Landlord's obligations under this Lease.
Tenant shall look solely to Landlord to enforce Landlord's obligations
hereunder and shall not seek any damages against any of the Parties. The
liability of Landlord for Landlord's obligations under this Lease shall not
exceed and shall be limited to Landlord's interest in the Building and the
Real Property and the rents, issues and profits thereof actually received by
Landlord and Tenant shall not look to or attach any other property or assets
of Landlord or the property or assets of any of the Parties in seeking either
to enforce Landlord's obligations under this Lease or to satisfy a judgment
for Landlord's failure to perform such obligations. In no event shall
Landlord (or any of the officers, trustees, directors, partners,
beneficiaries, joint ventures, members, stockholders or other principals or
representatives and the like, disclosed or undisclosed, thereof) ever be
liable for incidental or consequential damages.
17. DEFAULT.
A. EVENTS OF DEFAULT; CONDITIONS OF LIMITATION. This Lease and the term
and estate hereby granted are subject to the limitations that upon the
occurrence, at any time prior to or during the Term, of any one or more of the
following events (referred to as "Events of Default"):
(i) if Tenant shall default in the payment when due of any
installment of Rent or in the payment when due of any additional rent, and such
default shall continue for a period of ten (10) days after notice by Landlord to
Tenant of such default; or
(ii) if Tenant shall default in the observance or performance
of any term, covenant or condition of this Lease on Tenant's part to be observed
or performed (other than the covenants for the payment of Rent and additional
rent) and Tenant shall fail to remedy such default within thirty (30) days after
notice by Landlord to Tenant of such default, or if such default is of such a
nature that it cannot be completely remedied within said period of thirty (30)
days and Tenant shall not commence within said period of thirty (30) days, or
shall not thereafter diligently prosecute to completion all steps necessary to
remedy such default; or
(iii) if Tenant shall default in the observance or performance
of any term, covenant or condition on Tenant's part to be observed or performed
under any other lease with Landlord or Landlord's predecessor in interest of
space in the Building and such default shall continue beyond any grace period
set forth in such other lease for the remedying of such default; or
(iv) intentionally deleted; or
(v) if Tenant's interest in this Lease shall devolve upon or
pass to any person, whether by operation of law or otherwise, except as may be
expressly permitted under Article 12 hereof; or
(vi) if this Lease shall be rejected underss.235 of Title 11
of the U.S. Bankruptcy Code; or
(vii) if any execution or attachment shall be issued against
Tenant or any of Tenant's property pursuant to which the Premises shall be taken
or occupied or attempted to be taken or occupied;
<PAGE>
then, in any of said cases, at any time prior to or during the Term, of any one
or more of such Events of Default, Landlord, at any time thereafter, at
Landlord's option, may give to Tenant a five (5) days notice of termination of
this Lease and, in the event such notice is given, this Lease and the Term shall
come to an end and expire (whether or not the Term shall have commenced) upon
the expiration of said five (5) days with the same effect as if the date of
expiration of said five (5) days were the Expiration Date, but Tenant shall
remain liable for damages as provided in Article 18 hereof.
B. EFFECT OF BANKRUPTCY. Anything elsewhere in this Lease to the
contrary notwithstanding, this Lease may be canceled by Landlord by sending of a
written notice to Tenant within a reasonable time after the happening of any one
or more of the following events: (i) the commencement of a case in bankruptcy or
under the laws of any state naming Tenant as the debtor; or (ii) the making by
Tenant of any assignment or any other arrangement for the benefit of creditors
under any state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the Premises but shall forthwith quit and surrender
the Premises. If this Lease shall have been assigned in accordance with its
terms, the provisions of this Article 17 shall be applicable to any of the
persons or entities primarily or secondarily liable for Tenant's obligations
under this Lease. It is stipulated and agreed that in the event of the
termination of this Lease pursuant to this subsection, Landlord shall forthwith,
notwithstanding any other provisions of this Lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount determined in
accordance with Subsection B(i)(c) of Article 18 of this Lease.
C. CONDITIONAL LIMITATION. If Tenant shall default beyond any
applicable notice and grace periods in the payment of Rent or additional rent
hereunder more than twice in any twelve (12) month period during the Term
hereof, nothing contained in this Article 17 shall be deemed to require Landlord
to give the notices herein provided for prior to the commencement of a summary
proceeding for non-payment of rent or a plenary action for recovery of rent on
account of any default in the payment of the same, it being intended that such
notices are for the sole purpose of creating a conditional limitation hereunder
pursuant to which this Lease shall terminate and if Tenant thereafter remains in
possession after such termination, Tenant shall do so as a holdover tenant.
18. REMEDIES AND DAMAGES.
A. LANDLORD'S REMEDIES. (i) If Tenant shall default in the payment when
due of any installment of Rent or in the payment when due of any additional rent
beyond the expiration of any applicable grace or cure period, or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the Premises shall be taken or occupied or attempted to be
taken or occupied by someone other than Tenant, or if Tenant shall fail to move
into or take possession of the Premises within thirty (30) days after the
Commencement Date, or if this Lease and the Term shall expire and come to an end
as provided in Article 17:
(a) Landlord and its agents and servants may
immediately, or at any time after such default or after the date upon which this
Lease and the Term shall expire and come to an end, re-enter the Premises or any
part thereof, either by summary proceedings, or by any other applicable action
or proceeding, (without being liable to indictment, prosecution or damages
therefor), and may repossess the Premises and dispossess Tenant and any other
persons from the Premises and remove any and all of their property and effects
from the Premises; and
(b) Landlord, at Landlord's option, may relet the
whole or any part or parts of the Premises from time to time, either in the name
of Landlord or otherwise, to such tenant or tenants, for such term or terms
ending before, on or after the Expiration Date, at such rental or rentals and
upon such other conditions, which may include concessions and free rent periods,
as Landlord, in its sole discretion, may determine. Landlord shall have no
obligation to relet the Premises or any part thereof and shall in no event be
liable for refusal or failure to relet the Premises or any part thereof, or, in
the event of any such reletting, for refusal or failure to collect any rent due
upon any such reletting, and no such refusal or failure shall operate to relieve
Tenant of any liability under this Lease or otherwise to affect any such
liability; Landlord, at Landlord's option, may make such repairs, replacements,
alterations, additions, improvements, decorations and other physical changes in
and to the Premises as Landlord, in its sole discretion, considers advisable or
necessary in connection with any such reletting or proposed reletting, without
relieving Tenant of any liability under this Lease or otherwise affecting any
such liability.
(ii) Except as expressly set forth herein, Tenant hereby
waives the service of any notice of intention to re-enter or to institute legal
proceedings to that end which may otherwise be required to be given under any
present or future law. Tenant, on its own behalf and on behalf of
<PAGE>
all persons claiming through or under Tenant, including all creditors, does
further hereby waive any and all rights which Tenant and all such persons might
otherwise have under any present or future law to redeem the Premises, or to
re-enter or repossess the Premises, or to restore the operation of this Lease,
after (a) Tenant shall have been dispossessed by a judgment or by warrant of any
court or judge, or (b) any re-entry by Landlord, or (c) any expiration or
termination of this Lease and the Term, whether such dispossess, re-entry,
expiration or termination shall be by operation of law or pursuant to the
provisions of this Lease. The words "re-enter", "re-entry" and "re-entered" as
used in this Lease shall not be deemed to be restricted to their technical legal
meanings. In the event of a breach or threatened breach by Tenant, or any
persons claiming through or under Tenant, of any term, covenant or condition of
this Lease on Tenant's part to be observed or performed, Landlord shall have the
right to enjoin such breach and the right to invoke any other remedy allowed by
law or in equity as if re-entry, summary proceedings and other special remedies
were not provided in this Lease for such breach. The right to invoke the
remedies hereinbefore set forth are cumulative and shall not preclude Landlord
from invoking any other remedy allowed at law or in equity.
B. DAMAGES. (i) If this Lease and the Term shall expire and come to an
end as provided in Article 17, or by or under any summary proceeding or any
other action or proceeding, or if Landlord shall re-enter the Premises as
provided in subsection A of this Article 18, or by or under any summary
proceeding or any other action or proceeding, then, in any of said events:
(a) Tenant shall pay to Landlord all Rent, additional
rent and other charges payable under this Lease by Tenant to Landlord to the
date upon which this Lease and the Term shall have expired and come to an end or
to the date of re-entry upon the Premises by Landlord, as the case may be;
(b) Tenant also shall be liable for and shall pay to
Landlord, as damages, any deficiency (referred to as "Deficiency") between the
Rent reserved in this Lease for the period which otherwise would have
constituted the unexpired portion of the Term and the net amount, if any, of
rents collected under any reletting effected pursuant to the provisions of
subsection A(i) of this Article 18 for any part of such period (first deducting
from the rents collected under any such reletting all of Landlord's expenses in
connection with the termination of this Lease, or Landlord's reentry upon the
Premises and with such reletting including, but not limited to, all repossession
costs, brokerage commissions, advertising, legal expenses, attorneys' fees and
disbursements, alteration costs and other expenses of preparing the Premises for
such reletting); any such Deficiency shall be paid in monthly installments by
Tenant on the days specified in this Lease for payment of installments of Rent,
Landlord shall be entitled to recover from Tenant each monthly Deficiency as the
same shall arise, and no suit to collect the amount of the Deficiency for any
month shall prejudice Landlord's right to collect the Deficiency for any
subsequent month by a similar proceeding; and
(c) whether or not Landlord shall have collected any
monthly Deficiencies as aforesaid, Landlord shall be entitled to recover from
Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further
Deficiencies as and for liquidated and agreed final damages, a sum equal to the
present value (discounted at a rate of six percent (6%) per annum) of the amount
by which the Rent reserved in this Lease for the period which otherwise would
have constituted the unexpired portion of the Term exceeds the then fair and
reasonable rental value of the Premises for the same period, less the aggregate
amount of Deficiencies theretofore collected by Landlord pursuant to the
provisions of subsection B(1)(b) of this Article 18 for the same period; if,
before presentation of proof of such liquidated damages to any court, commission
or tribunal, the Premises, or any part thereof, shall have been relet by
Landlord for the period which otherwise would have constituted the unexpired
portion of the Term, or any part thereof, the amount of rent reserved upon such
reletting shall be deemed, prima facie, to be the fair and reasonable rental
value for the part or the whole of the Premises so relet during the term of the
reletting.
(ii) If the Premises, or any part thereof, shall be relet
together with other space in the Building, the rents collected or reserved under
any such reletting and the expenses of any such reletting shall be equitably
apportioned for the purposes of this subsection B. Tenant shall in no event be
entitled to any rents collected or payable under any reletting, whether or not
such rents shall exceed the Rent reserved in this Lease. Solely for the purposes
of this Article, the term "Rent" as used in subsection B(i) of this Article 18
shall mean the Rent in effect immediately prior to the date upon which this
Lease and the Term shall have expired and come to an end, or the date of
re-entry upon the Premises by Landlord, as the case may be, adjusted to reflect
any increase or decrease pursuant to the provisions of Article 28 hereof for the
Comparison Year (as defined in said Article 28) immediately preceding such
event. Nothing contained in Article 17 or this Article 18 shall be deemed to
limit or preclude the recovery by Landlord from Tenant of the maximum amount
allowed to be obtained as damages by any statute or rule of law, or of any sums
or damages to which Landlord may be entitled in addition to the damages set
forth in subsection B(i) of this
<PAGE>
Article 18.
C. LEGAL FEES. (i) Tenant hereby agrees to pay, as additional rent, all
reasonable attorneys' fees and disbursements (and all other court costs or
expenses of legal proceedings) which Landlord may incur or pay out by reason of,
or in connection with:
(a) any action or proceeding by Landlord to terminate
this Lease in which Landlord shall prevail; and
(b) any default by Tenant in the observance or
performance of any obligation under this Lease (including, but not limited to,
matters involving payment of rent and additional rent, computation of
escalations, alterations or other Tenant's work and subletting or assignment),
which continues after applicable notice and grace periods, whether or not
Landlord commences any action or proceeding against Tenant.
(ii) Tenant's obligations under this subsection C of Article
18 shall survive the expiration of the Term hereof or any earlier termination of
this Lease. This provision is intended to supplement (and not to limit) other
provisions of this Lease pertaining to indemnities and/or attorneys' fees.
19. FEES AND EXPENSES.
A. CURING TENANT'S DEFAULTS. If Tenant shall default in the observance
or performance of any term or covenant on Tenant's part to be observed or
performed under or by virtue of any of the terms or provisions in any Article of
this Lease, after the giving of notice (if required) and upon the expiration of
any applicable grace period (except in an emergency), Landlord may immediately
or at any time thereafter and without notice perform the same for the account of
Tenant. If Landlord makes any expenditures or incurs any obligations for the
payment of money in connection with any such default by Tenant or the cure
thereof including, but not limited to, any damages or fines or any reasonable
attorneys' fees and disbursements in instituting, prosecuting or defending any
action or proceeding, such sums paid or obligations incurred with interest and
costs shall be deemed to be additional rent hereunder and shall be paid by
Tenant to Landlord within thirty (30) days of rendition of any bill or statement
to Tenant therefor. If the Term hereof shall have expired at the time Landlord
sustains or incurs such expenditures, such sums shall be recoverable by
Landlord, as damages.
B. LATE CHARGES. If Tenant shall fail to make payment of any
installment of Rent payable pursuant to Article 1 hereof or any additional rent
payable pursuant to Article 28 hereof within ten (10) days after the date when
such payment is due, or if Tenant shall fail to make payment of any other sum or
charge payable hereunder within ten (10) days following Landlord's notice of
Tenant's failure to timely pay the same, Tenant shall pay to Landlord, in
addition to such installment of Rent or such additional rent, as the case may
be, as a late charge and as additional rent, a sum based on a rate equal to the
lesser of (i) four percent (4%) per annum above the then current prime rate
charged by Citibank, N.A. or its successor and (ii) the maximum rate permitted
by applicable law, of the amount unpaid computed from the date such payment was
due to and including the date of payment, but in no event shall interest be
computed and payable for less than a full calendar month. Tenant acknowledges
and agrees that, except as otherwise expressly provided herein, if Tenant fails
to dispute any item of additional rent within ten (10) days of receipt of a bill
or notice therefor, Tenant shall be deemed to have waived its right to dispute
the same.
20. NO REPRESENTATIONS BY LANDLORD. Landlord or Landlord's agents have
made no representations or promises with respect to the Building, the Real
Property, the Premises, Taxes (as defined in Article 28 hereof) or any other
matter or thing affecting or related to the Premises, except as herein
expressly set forth and no rights, easements or licenses are acquired by
Tenant by implication or otherwise except as expressly set forth herein.
21. END OF TERM.
A. SURRENDER OF PREMISES. Upon the expiration or other termination of
the Term, Tenant shall quit and surrender to Landlord the Premises, broom clean,
in good order and condition, ordinary wear and tear and damage for which Tenant
is not responsible under the terms of this Lease excepted, and Tenant shall
remove all Alterations and property subject to and in accordance with the terms
of Article 3 hereof. Tenant's obligation to observe or perform this covenant
shall survive the expiration or sooner termination of the Term. If the last day
of the Term or any renewal thereof falls on Saturday or Sunday this Lease shall
expire on the business day immediately
<PAGE>
preceding.
B. HOLDOVER BY TENANT. The parties recognize and agree that the damage
to Landlord resulting from any failure by Tenant to timely surrender possession
of the Premises as aforesaid will be substantial, will exceed the amount of the
monthly installments of the Rent theretofore payable hereunder, and will be
impossible to accurately measure. Tenant therefore agrees that if possession of
the Premises is not surrendered to Landlord within twenty-four (24) hours after
the Expiration Date or sooner termination of the Term, in addition to any other
rights or remedy Landlord may have hereunder or at law, Tenant shall pay to
Landlord for each month and for each portion of any month during which Tenant
holds over in the Premises after the Expiration Date or sooner termination of
this Lease, a sum equal to (i) in respect of the first (1st) month of any
holdover, one hundred twenty-five (125%) percent of the aggregate of that
portion of the Rent and the additional rent which was payable under this Lease
during the last month of the Term, and (ii) in respect of any holdover beyond
the first (1st) month, two hundred (200%) percent of the aggregate of that
portion of the Rent and the additional rent which was payable under this Lease
during the last month of the Term. Nothing herein contained shall be deemed to
permit Tenant to retain possession of the Premises after the Expiration Date or
sooner termination of this Lease and no acceptance by Landlord of payments from
Tenant after the Expiration Date or sooner termination of the Term shall be
deemed to be other than on account of the amount to be paid by Tenant in
accordance with the provisions of this Article 21, which provisions shall
survive the Expiration Date or sooner termination of this Lease. If Tenant shall
hold-over or remain in possession of any portion of the Premises more than
ninety (90) days beyond the Expiration Date of this Lease, notwithstanding the
acceptance of any Rent and additional rent paid by Tenant pursuant to the
preceding provisions, Tenant shall be subject not only to summary proceeding and
all damages related thereto, but also to any damages arising out of lost
opportunities (and/or new leases) by Landlord to re-let the Premises (or any
part thereof). All damages to Landlord by reason of such holding over by Tenant
may be the subject of a separate action and need not be asserted by Landlord in
any summary proceedings against Tenant.
22. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon
Tenant paying the Rent and additional rent and observing and performing all
the terms, covenants and conditions on Tenant's part to be observed and
performed, Tenant may peaceably and quietly enjoy the Premises, subject,
nevertheless, to the terms and conditions of this Lease including, but not
limited to, Article 16 hereof and to all Superior Leases and Mortgages.
23. FAILURE TO GIVE POSSESSION. Tenant waives any right to rescind this
Lease under Section 223-a of the New York Real Property Law or any successor
statute of similar import then in force and further waives the right to
recover any damages which may result from Landlord's failure to deliver
possession of the Premises on the date set forth in Article 1 hereof for the
commencement of the Term for any reason whatsoever, including, but not
limited to, the failure of the present tenant of the Premises to vacate and
surrender the Premises to Landlord. If Landlord shall be unable to give
possession of the Premises on such date, and provided Tenant is not
responsible for such inability to give possession, the Rent reserved and
covenanted to be paid herein shall not commence until the possession of the
Premises is given or the Premises are available for occupancy by Tenant, and
no such failure to give possession on such date shall in any way affect the
validity of this Lease or the obligations of Tenant hereunder or give rise to
any claim for damages by Tenant or claim for rescission of this Lease, nor
shall same be construed in anyway to extend the Term. If permission is given
to Tenant to enter into the possession of the Premises or to occupy premises
other than the Premises prior to the Commencement Date, Tenant covenants and
agrees that such occupancy shall be deemed to be under all the terms,
covenants, conditions and provisions of this Lease, including the covenant to
pay Rent. Notwithstanding anything to the contrary hereinabove set forth, if
Landlord shall fail to deliver possession of the Premises to Tenant with the
Pre-Commencement Work substantially completed (other than as a result of
Tenant's Delay, as hereinafter defined) on or before July 15, 1999, then in
no event and under no circumstances shall Landlord be liable for any of
Tenant's costs or expenses; it being agreed that unless such failure is a
result of Tenant's Delay or a force majeure event, the Rent first coming due
and payable hereunder shall be abated as follows (a) for every day occurring
between July 15th and July 31, 1999 (or such earlier date on which Landlord
delivers possession of the Premises to Tenant), the Rent first coming due and
payable shall be partially abated by fifty (50%) percent on a day-for-day
basis; (b) for each day occurring between August 1st and August 31, 1999 (or
such earlier date on which possession of the Premises shall be delivered to
Tenant), the Rent first coming due and payable shall be abated on a
day-for-day basis; and (c) for each day beyond September 1, 1999 that
Landlord fails to deliver possession of the Premises to Tenant, the Rent
first coming due and payable shall be abated by two (2) days for each day
that Landlord fails to deliver possession beyond September 1, 1999. By means
of illustration only, if Landlord fails to deliver possession until October
1, 1999, Tenant shall receive a rent abatement in the aggregate amount of Two
<PAGE>
Hundred Fifty-Six Thousand Nine Hundred Eighty-Seven and 61/100 ($256,987.61)
Dollars determined as follows: (i) for the period from July 15, 199 through July
31, 1999, fifty (50%) percent of Two Thousand Five Hundred Eighty-Two and 79/100
($2,582.79) Dollars per diem for seventeen (17) days, or Twenty-One Thousand
Nine Hundred Fifty-Three and 72/100 ($21,953.72) Dollars, (ii) for the period
from August 1, 1999 through August 31, 1999, one hundred (100%) percent of Two
Thousand Five Hundred Eighty-Two and 79/100 ($2,582.79) Dollars per diem for
thirty-one (31) days, or Eighty Thousand Sixty-Six and 49/100 ($80,066.49)
Dollars and (iii) for the period from September 1, 1999 through September 30,
1999, two hundred (200%) percent of Two Thousand Five Hundred Eighty-Two and
79/100 ($2,582.79) per diem for thirty (30) days, or One Hundred Fifty-Four
Thousand Nine Hundred Sixty-Seven and 40/100 ($154,967.40) Dollars, which
aggregate amount shall be applied toward the Rent first coming due and payable
under the Lease. The foregoing abatement of the Rent shall be Tenant's sole
remedy for Landlord's failure to deliver possession. As used herein, the term
"Tenant's Delay" shall mean a delay caused by or in connection with an act or
omission of Tenant or any person or entity acting by or on behalf of Tenant and
the term "force majeure event" shall mean any occurrence beyond the reasonable
control of Landlord.
24. NO WAIVER.
A. NO EXTENSION. If there be any agreement between Landlord and Tenant
providing for the cancellation of this Lease upon certain provisions or
contingencies and/or an agreement for the renewal hereof at the expiration of
the Term, the right to such renewal or the execution of a renewal agreement
between Landlord and Tenant prior to the expiration of the Term shall not be
considered an extension thereof or a vested right in Tenant to such further
term, so as to prevent Landlord from canceling this Lease in accordance with the
terms hereof or applicable law and any such extension thereof during the
remainder of the original Term; such right to cancel this Lease in accordance
with the terms hereof, if and when so exercised by Landlord, shall cancel and
terminate this Lease and any such renewal or extension previously entered into
between Landlord and Tenant or the right of Tenant to any such renewal or
extension; any right herein contained on the part of Landlord to cancel this
Lease shall continue during any extension or renewal hereof; any option on the
part of Tenant herein contained for an extension or renewal hereof shall not be
deemed to give Tenant any option for a further extension beyond the first
renewal or extended term.
B. NO SURRENDER. No act or thing done by Landlord or Landlord's agents
during the Term shall be deemed an acceptance of a surrender of the Premises,
and no agreement to accept such surrender shall be valid unless in writing
signed by Landlord. No employee of Landlord or of Landlord's agents shall have
any power to accept the keys of the Premises prior to the termination of this
Lease. The delivery of keys to any employee of Landlord or of Landlord's agents
shall not operate as a termination of this Lease or a surrender of the Premises.
In the event Tenant at any time desires to have Landlord sublet the Premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive said
keys for such purpose without releasing Tenant from any of the obligations under
this Lease, and Tenant hereby relieves Landlord of any liability for loss of or
damage to any of Tenant's effects in connection with such subletting.
C. NO WAIVER. The failure of Landlord or Tenant to seek redress for
violation of, or to insist upon the strict performance of, any covenant or
condition of this Lease or any of the Rules and Regulations set forth or
hereafter adopted by Landlord, shall not prevent a subsequent act which would
have originally constituted a violation from having all force and effect of an
original violation. The receipt by Landlord or payment by Tenant of Rent with
knowledge of the breach of any covenant of this Lease shall not be deemed a
waiver of such breach. The failure of Landlord to enforce any of the Rules and
Regulations set forth, or hereafter adopted, against Tenant and/or any other
tenant in the Building shall not be deemed a waiver of any such Rules and
Regulations. No provision of this Lease shall be deemed to have been waived by
either party hereto unless such waiver be in writing signed by such party.
D. APPLICATION OF PAYMENT. No payment by Tenant or receipt by Landlord
of a lesser amount than the monthly Rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated Rent, or as Landlord may elect
to apply same, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as Rent be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such Rent or pursue any other remedy in this
Lease provided.
E. ENTIRE AGREEMENT. This Lease contains the entire agreement between
the parties and all prior negotiations and agreements are merged in this Lease.
Any executory agreement hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of it in whole or in part unless such
executory agreement is in writing and signed by the party against whom
<PAGE>
enforcement of the change, modification, discharge or abandonment is sought.
25. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between
Landlord and Tenant that the respective parties hereto shall and they hereby
do waive trial by jury in any action, proceeding or counterclaim brought by
either of the parties hereto against the other on any matters whatsoever
arising out of or in any way connected with this Lease, the relationship of
Landlord and Tenant, Tenant's use or occupancy of the Premises, any claim of
injury or damage, or for the enforcement of any remedy under any statute,
emergency or otherwise. It is further mutually agreed that in the event
Landlord commences any summary proceeding (whether for nonpayment of rent or
because Tenant continues in possession of the Premises after the expiration
or termination of the Term), Tenant will not interpose any counterclaim
(except for mandatory or compulsory counterclaims) of whatever nature or
description in any such proceeding.
26. INABILITY TO PERFORM. This Lease and the obligation of Tenant to pay
Rent and additional rent hereunder and perform all of the other covenants and
agreements hereunder on the part of Tenant to be performed shall in nowise be
affected, impaired or excused because Landlord is unable to fulfill any of
its obligations under this Lease expressly or impliedly to be performed by
Landlord or because Landlord is unable to make, or is delayed in making any
repairs, additions, alterations, improvements or decorations or is unable to
supply or is delayed in supplying any equipment or fixtures if Landlord is
prevented or delayed from so doing by reason of strikes or labor troubles or
by accident or by any cause whatsoever reasonably beyond Landlord's control,
including but not limited to, laws, governmental preemption in connection
with a National Emergency or by reason of any rule, order or regulation of
any federal, state, county or municipal authority or any department or
subdivision thereof or any government agency or by reason of the conditions
of supply and demand which have been or are affected by war or other
emergency (all such delays are hereinafter collectively referred to as
"Unavoidable Delays"). Tenant's failure to perform any act under this Lease,
other than Tenant's obligation to pay Rent and additional rent hereunder,
shall not constitute a default under this Lease if Tenant was prevented from
performing any such obligation as a result of any Unavoidable Delay.
27. BILLS AND NOTICES. Except as otherwise expressly provided in this
Lease, any bills, statements, notices, demands, requests or other
communications given or required to be given under this Lease shall be deemed
sufficiently given or rendered if in writing, sent by registered or certified
mail (return receipt requested) addressed as follows or to such other address
as either Landlord or Tenant may designate as its new address for such
purpose by notice given to the others in accordance with the provisions of
this Article 27:
<TABLE>
<S> <C>
If to Landlord: Polestar Fifth Property Associates LLC
c/o New Rock Realty Management LLC
420 Lexington Avenue
New York, New York 10170
with a copy to: Younkins & Schecter LLP
420 Lexington Avenue , Suite 2050
New York, New York 10170
If to Tenant: Predictive Systems, Inc.
417 Fifth Avenue
New York, New York 10016
with a copy to: Hutton Ingram Yuzek Gainen Carroll & Bertolotti
250 Park Avenue
New York, New York 10177
Attn: Shene O'Neill, Esq.
</TABLE>
or at any place where Tenant or any agent or employee of Tenant may be found if
mailed subsequent to Tenant's vacating, deserting, abandoning or surrendering
the Premises. Tenant hereby acknowledges and agrees that any such bill,
statement, demand, notice, request or other communication may be given by
Landlord's agent on behalf of Landlord. Any such bill, statement, demand,
notice, request or other communication shall be deemed to have been rendered or
given three (3) days after the date when it shall have been mailed as provided
in this Article 27. Notwithstanding anything contained in this Article 27 to the
contrary, bills and statements issued by Landlord may be sent by the method(s)
set forth hereinabove, without copies to any other party. This notice provision
has been specifically negotiated between the parties hereto.
<PAGE>
28. ESCALATION.
A. DEFINED TERMS. In a determination of any increase in the Rent
under the provisions of this Article 28, Landlord and Tenant agree as follows:
(i) "Taxes" shall mean the aggregate amount of real estate
taxes and any special or other assessments (exclusive of penalties and interest
thereon) imposed upon the Real Property (exclusive of any additions to the
rentable floor area of the Building made after the date of this Lease) and real
estate taxes or assessments imposed in connection with the receipt of income or
rents from the Building to the extent that same shall be in lieu of all or a
portion of the aforesaid taxes or assessments, or additions or increases thereof
(including, without limitation, (i) assessments made upon or with respect to any
"air rights", (ii) assessments made in connection with any business improvement
district and (iii) any assessments levied after the date of this Lease for
public benefits to the Real Property or the Building (excluding an amount equal
to the assessments payable in whole or in part during or for the Base Tax Year
(as defined in Article 1 of this Lease)) which assessments, if payable in
installments, shall be deemed payable in the maximum number of permissible
installments and there shall be included in real estate taxes for each
Comparison Year in which such installments may be paid, the installments of such
assessment so becoming payable during such Comparison Year (in the manner in
which such taxes and assessments are imposed as of the date hereof); provided,
that if because of any change in the taxation of real estate, any other tax or
assessment (including, without limitation, any occupancy, gross receipts,
rental, income, franchise, transit or other tax) is imposed upon Landlord or the
owner of the Real Property or the Building, or the occupancy, rents or income
therefrom, in substitution for or in addition to, any of the foregoing Taxes,
such other tax or assessment shall be deemed part of the Taxes. Except as set
forth herein, Taxes shall not include the payment of any income, profit, gift,
estate, succession, franchise or transfer tax. With respect to any Comparison
Year (hereinafter defined) all expenses, including attorneys' fees and
disbursements, experts' and other witnesses' fees, incurred in contesting the
validity or amount of any Taxes or in obtaining a refund of Taxes shall be
considered as part of the Taxes for such year.
(ii) "Assessed Valuation" shall mean the amount for which the
Real Property is assessed pursuant to applicable provisions of the New York City
Charter and of the Administrative Code of the City of New York for the purpose
of imposition of Taxes.
(iii) "Tax Year" shall mean the period July 1 through June 30
(or such other period as hereinafter may be duly adopted by the City of New York
as its fiscal year for real estate tax purposes).
(iv) "Base Taxes" shall mean the Taxes payable for the Base
Tax Year.
(v) "Comparison Year" shall mean (a) with respect to Taxes,
any Tax Year subsequent to the Base Tax Year and (b) with respect to Labor Rates
(hereinafter defined) any calendar year subsequent to the Base Labor Year
(hereinafter defined) for any part or all of which there is an increase in the
Rent pursuant to subsection B of this Article 28.
(vi) "R.A.B." shall mean the Realty Advisory Board On Labor
Relations, Incorporated, or its successor.
(vii) "Local 32B-32J" shall mean Local 32B-32J of the Building
Service Employees International Union, AFL-CIO, or its successor.
(viii) "Class A Office Buildings" shall mean office buildings
in the same class or category as the Building under any agreement between R.A.B.
and Local 32B-32J, regardless of the designation given to such office buildings
in any such agreement.
(ix) "Labor Rates" shall mean a sum equal to the regular
hourly wage rate required to be paid to Others (hereinafter defined) employed in
Class A Office Buildings pursuant to any agreement between R.A.B. and Local
32B-32J; provided, however, that if, as of October 1st of any Comparison Year,
any such agreement shall require Others in Class A Office Buildings to be
regularly employed on days or during hours when overtime or other premium pay
rates are in effect pursuant to such agreement, then the term "regular hourly
wage rate", as used in this subsection A(ix) shall mean the average hourly wage
rate for the hours in a calendar week during which Others are required to be
regularly employed; and provided, further, that if no such agreement is in
effect as of October 1st of any Comparison Year with respect to Others, then the
term "regular hourly wage rate", as used in this subsection A(ix) shall mean the
regular hourly wage rate actually paid to Others employed in the Building by
Landlord or by an independent contractor engaged by Landlord;
<PAGE>
and provided, further, the term "regular hourly wage rate" in all events shall
include the monetary value or cost of all payments and benefits of any kind,
(including, but not limited to, those payable directly to taxing authorities or
others on account of the employment) and all welfare and pension benefits and
payments of any kind paid or given pursuant to such agreement, but shall
specifically exclude fringe employee benefits.
(x) "Others" shall mean that classification of employee
engaged in the general maintenance and operation of Class A Office Buildings
most nearly comparable to the classification now applicable to "others" in the
current agreement between R.A.B. and Local 32B-32J.
(xii) "Base Labor Rates" shall mean the Labor Rates in effect
for the Base Labor Year.
(xiii) "Landlord's Statement" shall mean an instrument or
instruments containing a comparison of any increase or decrease in the Rent for
the preceding Comparison Year pursuant to the provisions of this Article 28.
B. ESCALATION. (i) If the Taxes payable for any Comparison Year (any
part or all of which falls within the Term) shall represent an increase above
the Base Taxes, then the Rent for such Comparison Year and continuing thereafter
until a new Landlord's Statement is rendered to Tenant, shall be increased by
Tenant's Proportionate Share of such increase. The Taxes shall be initially
computed on the basis of the Assessed Valuation in effect at the time Landlord's
Statement is rendered (as the Taxes may have been settled or finally adjudicated
prior to such time) regardless of any then pending application, proceeding or
appeal respecting the reduction of any such Assessed Valuation, but shall be
subject to subsequent adjustment as provided in subsection D(i)(a) of this
Article 28.
(ii) If the Labor Rates in effect for any Comparison Year (any
part or all of which falls within the Term) shall be greater than the Base Labor
Rates, then the Rent for such Comparison Year, and continuing thereafter until a
new Landlord's Statement is rendered to Tenant, shall be increased by a sum
equal to the Labor Rate Factor multiplied by the Labor Rate Multiple multiplied
by the number of cents (inclusive of any fractions of a cent) of such increase.
(iii) Notwithstanding anything to the contrary contained in
this Lease, there shall be no escalations in the Rent payable pursuant to this
Article 28 prior to the Rent Commencement Date.
C. PAYMENT OF ESCALATIONS. (i) At any time prior to, during or after
any Comparison Year Landlord shall render to Tenant, either in accordance with
the provisions of Article 27 hereof or by personal delivery at the Premises, a
Landlord's Statement or Statements showing separately or together (a) a
comparison of the Taxes payable for the Comparison Year with the Base Taxes, (b)
a comparison of the Labor Rates for the Comparison Year with the Base Labor
Rates, and (c) the amount of the increase in the Rent resulting from each of
such comparisons. Landlord's failure to render a Landlord's Statement and/or
receive payments with respect thereto during or with respect to any Comparison
Year shall not prejudice Landlord's right to render a Landlord's Statement
and/or receive payments with respect thereto during or with respect to any
subsequent Comparison Year, and shall not eliminate or reduce Tenant's
obligation to pay increases in the Rent pursuant to this Article 28 for such
Comparison Year. Landlord may also at any time and from time to time, furnish to
Tenant a revised Landlord's Statement or Statements showing separately or
together (a) a comparison of the Taxes payable for the Comparison Year with the
Base Taxes and (b) a comparison of the Labor Rates for the Comparison Year with
the Base Labor Rates; provided, however, each Landlord's Statement shall be
rendered within one (1) year of the Comparison Year to which it pertains.
(ii) (a) Tenant's obligations with respect to increases in
Labor Rates shall be payable by Tenant on the first day of the month following
the furnishing to Tenant of a Landlord's Statement with respect to Labor Rates
in an amount equal to one-twelfth (1/12th) of such increase in the Rent
multiplied by the number of months (and any fraction thereof) of the Term then
elapsed since the commencement of the Comparison Year for which the increase is
applicable, together with a sum equal to one-twelfth (1/12th) of such increase
with respect to the month following the furnishing to Tenant of a Landlord's
Statement; and thereafter, commencing with the next succeeding monthly
installment of Rent and continuing monthly thereafter until rendition of the
next succeeding Landlord's Statement, the monthly installments of Rent shall be
increased by an amount equal to one-twelfth (1/12th) of such increase. Any
increase in the Rent shall be collectible by Landlord in the same manner as
Rent.
(b) With respect to an increase in the Rent
resulting from an increase in the
<PAGE>
Taxes for any Comparison Year above the Base Taxes, Tenant shall pay to
Landlord a sum equal to one-twelfth (1/12th) of such increase on the first
day of each calendar month. If Landlord's Statement shall be furnished to
Tenant after the commencement of the Comparison Year to which it relates,
then (1) until Landlord's Statement is rendered for such Comparison Year,
Tenant shall pay Tenant's Proportionate Share of Taxes for such Comparison
Year in monthly installments, as described above, based upon the last prior
Landlord's Statement rendered to Tenant with respect to Taxes, and (2) Tenant
shall, within thirty (30) days after Landlord's Statement is furnished to
Tenant, pay to Landlord an amount equal to any underpayment of the
installments of Taxes theretofore paid by Tenant for such Comparison Year
and, in the event of an overpayment by Tenant, Landlord shall permit Tenant
to credit against subsequent payments under this subsection (C)(ii)(b) of
this Article 28 the amount of such overpayment, unless the Term shall have
expired or the amount of the overpayment by Tenant is in excess of all rent
due and payable by Tenant hereunder for the immediately following two (2)
months, in which case Tenant shall receive a refund. If during the Term of
this Lease, Taxes are required to be paid (either to the appropriate taxing
authorities or as tax escrow payments to a mortgagee or ground lessor) in
full or in semi-annual, quarterly, or other installments, on any other date
or dates than as presently required, then, at Landlord's option, Tenant's
Proportionate Share with respect to Taxes shall be correspondingly
accelerated or revised so that Tenant's Proportionate Share is due at least
thirty (30) days prior to the date payments are due to the taxing authorities
or the superior mortgagee or ground lessor, as the case may be. The benefit
of any discount for any early payment or prepayment of Taxes shall accrue
solely to the benefit of Landlord, and such discount shall not be subtracted
from Tenant's Proportionate Share of such Taxes.
(c) Following each Landlord's Statement, a
reconciliation shall be made as follows: Tenant shall be debited with any
increase in the Rent shown on such Landlord's Statement and credited with the
aggregate, if any, paid by Tenant on account in accordance with the
provisions of subsection C(ii)(a) or C(ii)(b) for the Comparison Year in
question; Tenant shall pay any net debit balance to Landlord within fifteen
(15) days next following rendition by Landlord, either in accordance with the
provisions of Article 27 hereof or by personal delivery to the Premises, of
an invoice for such net debit balance (provided, however, that if the amount
thereof exceeds $25,000.00 then Tenant may pay such net debit balance in
three (3) equal monthly installments over the immediately succeeding three
(3) month period); any net credit balance shall be applied against the next
accruing monthly installment of Rent , unless the Term shall have expired or
the amount of the overpayment by Tenant is in excess of all rent due and
payable by Tenant hereunder for the immediately following two (2) months, in
which case Tenant shall receive a refund.
D. ADJUSTMENTS. (i) (a) In the event that, after a Landlord's Statement
has been sent to Tenant, an Assessed Valuation which had been utilized in
computing the Taxes for a Comparison Year is reduced (as a result of settlement,
final determination of legal proceedings or otherwise), and as a result thereof
a refund of Taxes is actually received by or on behalf of Landlord, then,
promptly after receipt of such refund, Landlord shall send Tenant a statement
adjusting the Taxes for such Comparison Year (taking into account the expenses
mentioned in the last sentence of subsection A(i) of this Article 28) and
setting forth Tenant's Proportionate Share of such refund and Tenant shall be
entitled to receive such Share by way of a credit against the Rent next becoming
due after the sending of such Statement, or if the Term hereof has expired,
Landlord shall reimburse such balance to Tenant within sixty (60) days following
Landlord's determination of the amount thereof, less any sums Tenant owes
Landlord for Rent, additional rent or other charges hereunder; provided,
however, that Tenant's Share of such refund shall be limited to the amount, if
any, which Tenant had theretofore paid to Landlord as increased Rent for such
Comparison Year on the basis of the Assessed Valuation before it had been
reduced.
(b) In the event that, after a Landlord's Statement
has been sent to Tenant, the Assessed Valuation which had been utilized in
computing the Base Taxes is reduced (as a result of settlement, final
determination of legal proceedings or otherwise) then, and in such event: (1)
the Base Taxes shall be retroactively adjusted to reflect such reduction, (2)
the monthly installment of Rent shall be increased accordingly and (3) all
retroactive additional rent resulting from such retroactive adjustment shall be
forthwith payable when billed by Landlord. Landlord promptly shall send to
Tenant a statement setting forth the basis for such retroactive adjustment and
additional rent payments.
(ii) Any Landlord's Statement sent to Tenant shall be
conclusively binding upon Tenant unless, within ninety (90) days after such
statement is sent, Tenant shall (a) pay to Landlord the amount set forth in such
statement, without prejudice to Tenant's right to dispute the same, and (b) send
a written notice to Landlord objecting to such statement and specifying the
particular respects in which such statement is claimed to be incorrect. If such
notice is sent, the parties recognize the unavailability of Landlord's books and
records because of the confidential nature thereof an hence agree that either
party may refer the decision of the issues raised to a reputable independent
firm of certified public accountants selected by Landlord and the decision of
<PAGE>
such accountants shall be conclusively binding upon the parties. The fees and
expenses involved in such decision shall be borne by Landlord if the amount
payable by Tenant pursuant to Landlord's Statement exceeded the amount actually
payable as determined by the independent firm of certified accountants by more
than five (5%) percent, otherwise Tenant shall pay all such fees and expenses as
additional rent. It expressly understood that such accounting firm shall not be
permitted to divulge any information observed from reviewing Landlord's books
and records to Tenant or any other third party.
(iii) Anything in this Article 28 to the contrary
notwithstanding, under no circumstances shall the rent payable under this Lease
be less than the then annual base Rent set forth in Article 1 hereof.
(iv) The expiration or termination of this Lease during any
Comparison Year for any part or all of which there is an increase or decrease in
the Rent under this Article shall not affect the rights or obligations of the
parties hereto respecting such increase or decrease and any Landlord's Statement
relating to such increase or decrease may, on a pro rata basis, be sent to
Tenant subsequent to, and all such rights and obligations shall survive, any
such expiration or termination. Any payments due under such Landlord's Statement
shall be payable within twenty (20) days after such statement is sent to Tenant.
E. TAX INCENTIVE PROGRAMS. In the event Tenant applies for any tax
incentive programs offered by the City or State of New York, Landlord agrees to
reasonably cooperate with Tenant in the completion and submission of any
applications therefor, provided Tenant reimburses Landlord for Landlord's costs
and expenses incurred in connection therewith within twenty (20) days following
receipt of evidence thereof.
29. SERVICES.
A. ELEVATOR. Landlord shall provide passenger elevator facilities on
business days from 8:00 A.M. to 6:00 P.M. and shall have one passenger elevator
in the bank of elevators servicing the Premises available at all other times.
Landlord shall provide freight elevator services on an "as available" basis for
incidental use by Tenant from 8:00 A.M. through 12:00 Noon and from 1:00 P.M.
through 5:00 P.M. on business days only. Any extended use may be arranged with
Landlord's prior consent and Tenant shall pay as additional rent all building
standard charges therefor. The rate for such extended use, as of the date
hereof, is Ninety and 00/100 ($90.00) per hour (four (4) hour minimum), which
rate is subject to change from time to time throughout the Term (provided such
rate increase is not applied in a discriminatory manner against Tenant). Tenant
shall have access to the Building twenty-four (24) hours a day, seven (7) days a
week. Notwithstanding the foregoing, Tenant may use one (1) freight elevator for
up to fifty (50) hours in at least four (4) consecutive hour increments for
Tenant's initial move into the Premises and during Tenant's Initial Alteration
at no charge provided that (i) Tenant shall have previously requested Landlord's
approval of Tenant's use of the freight elevator on such date and Landlord shall
have approved the same, (ii) Tenant shall not, at any time prior to or during
the Term, directly or indirectly, employ or permit the employment of any laborer
in connection therewith if, in Landlord's sole discretion, such employment will
interfere or cause conflict with other contractors, mechanics or laborers
engaged in the construction, maintenance or operation of all or any part of the
Building, (iii) Tenant shall have previously furnished to Landlord evidence of
the insurance required to be obtained and maintained by Tenant pursuant to
Article 9 hereof, and (iv) such move shall be effectuated at a time satisfactory
to Landlord. Tenant's use of the freight elevator beyond such fifty (50) hour
period shall be at the standard rates then fixed by Landlord.
B. HEATING. Landlord shall furnish heat to the Premises when and as
required by law, on business days from 8:00 A.M. to 6:00 P.M. Landlord shall not
be responsible for the adequacy, design or capacity of the heating distribution
system if the normal operation of the heat distribution system serving the
Building shall fail to provide heat at reasonable temperatures or any reasonable
volumes or velocities in any parts of the Premises by reason of any
rearrangement of partitioning or other Alterations made or performed by or on
behalf of Tenant or any person claiming through or under Tenant.
C. COOLING. Tenant shall have the privilege of using the air-cooling
system to be installed in the Premises, as part of Tenant's Initial Alteration,
which system Tenant agrees to maintain and repair at its own cost and expense.
Tenant shall accept such air-cooling system in its "as-is" condition. Tenant
shall enter into service maintenance agreements for the service and maintenance
of the air-cooling system with a contractor approved by Landlord, which approval
shall not be unreasonably withheld. Tenant shall cause periodic service and
maintenance to be performed on the air-cooling system and shall provide Landlord
with copies of service and
<PAGE>
maintenance records. Tenant shall not alter, modify or replace such air-cooling
system, or any part thereof, without Landlord's consent, which shall not be
unreasonably withheld. Anything in this subsection C to the contrary
notwithstanding, Landlord shall not be responsible if the normal operation of
the air-cooling system shall fail to provide cooled air at reasonable
temperatures, pressures or degrees of humidity or any reasonable volumes or
velocities in any parts of the Premises by reason of (i) human occupancy factors
and any machinery or equipment installed by or on behalf of Tenant or any person
claiming through or under Tenant, having an electrical load in excess of the
average electrical load for the air-cooling system as designed or (ii) any
rearrangement of partitioning or other Alterations made or performed by or on
behalf of Tenant or any person claiming through or under Tenant. Tenant agrees
to keep and cause to be kept closed all of the windows in the Premises whenever
the air-cooling system is in operation and agrees to lower and close the blinds
when necessary because of the sun's position whenever the air-cooling system is
in operation. Tenant at all times agrees to cooperate fully with Landlord and to
abide by the regulations and requirements which Landlord may prescribe for the
proper functioning and protection of the air-cooling system. Subject to the
terms of Article 14 hereof, Landlord, throughout the Term, shall have free
access to any and all mechanical installations of Landlord, including but not
limited to air-cooling, fan, ventilating, machine rooms and electrical closets.
Tenant shall pay for the cost of the electrical energy consumed by the
air-cooling system in accordance with the provisions of Article 29, subsection
H, hereof. In the event Landlord or Tenant installs a water-cooled air cooling
system in the Premises, and if Tenant requests that condenser water for such
system shall be supplied by Landlord, (x) Tenant shall pay to Landlord, annually
within ten (10) business days after receipt of an invoice therefor, a sum equal
to Three Hundred Fifty and 00/100 ($350.00) Dollars per ton of air conditioning
capacity to compensate Landlord for the cost of supplying condenser water for
the air-cooling system (which annual charge shall increase to $400 per ton from
and after the fifth (5th) anniversary of the Commencement Date) and (y) Tenant
shall pay to Landlord upon the execution and delivery of this Lease by Tenant, a
"tap-in" charge in the amount of $2,000.00 to compensate Landlord for making
such condenser water available to Tenant.
D. AFTER HOURS AND ADDITIONAL SERVICES. The Rent does not include any
charge to Tenant for the furnishing of any additional passenger elevator
facilities, any freight elevator facilities (other than as contemplated in
Article 29 subsection A) or for the service of heat to the Premises during
periods other than the hours and days set forth in sections A and B of this
Article 29 for the furnishing and distributing of such facilities or services
(referred to as "Overtime Periods"). Accordingly, if Landlord shall furnish any
(i) freight elevator facilities, except as provided in subsection A of this
Article 29, or (ii) heat to the Premises during Overtime Periods, then Tenant
shall pay Landlord additional rent for such facilities or services at the
standard rates then fixed by the Landlord for the Building or, if no such rates
are then fixed, at reasonable rates. Neither the facilities nor the services
referred to in this Article 29 subsection D shall be furnished to Tenant or the
Premises if Landlord has not received advance notice from Tenant specifying the
particular facilities or services requested by Tenant at least by 10:00 A.M. on
the date on which the facilities or services are to be furnished (or by 10:00
A.M. on Fridays for services requested on weekends); or if Tenant is in default
under or in breach of any of the terms, covenants or conditions of this Lease;
or if Landlord shall determine, in its sole and exclusive discretion, that such
facilities or services are requested in connection with, or the use thereof
shall create or aid in a default under or a breach of any term, covenant or
condition of this Lease. All of the facilities and services referred to in this
Article 29 subsection D are conveniences and are not and shall not be deemed to
be appurtenances to the Premises, and the failure of Landlord to furnish any or
all of such facilities or services shall not constitute or give rise to any
claim of an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of Rent (except as may be expressly set
forth herein), or relieve Tenant from any of its obligations under this Lease,
or impose any liability upon Landlord or its agents by reason of inconvenience
or annoyance to Tenant, or injury to or interruption of Tenant's business or
otherwise.
E. CLEANING. Landlord, at Landlord's expense, shall cause the Premises
to be kept clean in building standard manner. Tenant shall, however, have the
option in its sole discretion to clean or independently contract for the
cleaning of the Premises at Tenant's sole expense, without any adjustment in the
Rent, provided that such cleaning is done in a manner reasonably satisfactory to
Landlord and no one other than persons reasonably approved by Landlord shall be
permitted to enter the Premises or the Building for such purpose. Tenant shall
pay to Landlord, as additional rent, the cost of removal of any of Tenant's
refuse and rubbish from the Premises and the Building to the extent that the
same exceeds the refuse and rubbish usually attendant upon the use of such
Premises as offices, which cost shall be payable within thirty (30) days after
rendition of Landlord's bill therefor. A copy of the current cleaning
specifications are annexed hereto as Exhibit 4, which cleaning specifications
are subject to change from time to time during the Term hereof, provided such
changes do not materially diminish the cleaning services provided on the date
hereof.
F. SPRINKLER SYSTEM. If there now is or shall be installed in the
Building a "sprinkler
<PAGE>
system", and such system or any of its appliances shall be damaged or injured or
not in proper working order by reason of any act or omission of Tenant, Tenant's
agents, servants, employees, licensees or visitors, Tenant shall forthwith
restore the same to good working condition at its own expense; and if the New
York Board of Fire Underwriters or the New York Fire Insurance Rating
Organization or any bureau, department or official of the state or city
government, shall require or recommend that any changes, modifications,
alterations or additional sprinkler heads or other equipment be made or supplied
by reason of Tenant's particular use of the Premises (as opposed to the mere
office use) or the acts or omissions or Alterations of Tenant or any person or
entity acting by or on behalf of Tenant, or the location of the partitions,
trade fixtures, or other contents of the Premises, Tenant shall, at Tenant's
expense, promptly make and supply such changes, modifications, alterations,
additional sprinkler heads or other equipment.
G. WATER. Landlord shall provide hot and cold water for ordinary
drinking, cleaning and lavatory purposes, but if Tenant requires, uses or
consumes water for any other purposes or in unusual quantities (of which fact
Landlord shall be the sole but reasonable judge), Landlord may install a water
meter at Tenant's expense and thereby measure Tenant's water consumption for all
purposes. In such event (i) Tenant shall keep said meter and installation
equipment in good working order and repair at Tenant's own cost and expense;
(ii) Tenant agrees to pay for water consumed, as shown on said meter thirty (30)
days after bills are rendered as additional rent; and (iii) Tenant covenants and
agrees to pay the sewer rent, charge or any other tax, rent, levy or charge
which now or hereafter is assessed, imposed or shall become a lien upon the
Premises or the realty of which they are part pursuant to law, order or
regulation made or issued in connection with any such metered use, consumption,
maintenance or supply of water, water system, or sewage or sewage connection or
system.
H. ELECTRICITY SERVICE. (i) Landlord shall redistribute up to six (6)
watts of connected electrical load per rentable square foot of space deemed to
be in the Premises (based upon Tenant's demonstrated need therefor) for the
servicing of the lighting fixtures and electrical receptacles within the
Premises, exclusive, however, of any air-cooling equipment located in, or
exclusively servicing, the Premises. Notwithstanding the foregoing to the
contrary, Landlord shall install any additional feeders or risers necessary to
provide Tenant with an additional two (2) watts of connected electrical load per
rentable square foot deemed to be contained in the Premises to the extent Tenant
demonstrates, to Landlord's reasonable satisfaction, a need therefor, and Tenant
shall reimburse Landlord for all actual third-party, out-of-pocket expenses
incurred by Landlord in connection therewith, plus eight (8%) percent of the
aggregate sum of such expenses for Landlord's administrative fee. Landlord's
designated agent shall install a submeter to measure Tenant's consumption of
electrical energy in the Premises. Tenant shall pay Landlord for any and all
reasonable costs incurred in connection with the installation of such submeter
upon the submission by Landlord of a bill for such costs. The cost of
electricity utilized by Tenant shall be paid for by Tenant to Landlord as
additional rent and shall be calculated at the then rate paid by Landlord to the
public utility company serving the Premises for such submetered electrical
energy, plus (a) Landlord's charge for overhead and supervision in the amount of
eight percent (8%) of the total electric bill and (b) any taxes or other charges
in connection therewith. If any tax shall be imposed upon Landlord's receipts
from the sale or resale of electrical energy to Tenant, the pro rata share
applicable to the electrical energy service received by Tenant shall be passed
on to, included in the bill of, and paid by Tenant if and to the extent
permitted by law. Landlord shall bill Tenant, monthly, for the cost of its
consumption of electricity in the Premises and Tenant shall pay the amount
thereof at the time of payment of each installment of Rent. If either the
quantity or character of electrical services is changed by the public utility or
other company supplying electrical service to the Building or is no longer
available or suitable for Tenant's requirements, no such change, unavailability
or unsuitability shall constitute an actual or constructive eviction, in whole
or in part, or entitle Tenant to any abatement or diminution of rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord, or its agents, by reason of inconvenience or annoyance to Tenant,
or injury to or interruption of Tenant's business, or otherwise.
(ii) If Tenant requires additional electrical energy beyond
the wattage specified above for any reason whatsoever, including without
limitation, the use of additional business machines, office equipment or other
appliances in the Premises which utilize electrical energy, Tenant shall request
such additional electrical energy from Landlord in each instance. If Landlord
agrees to provide the same, any additional feeders or risers which are required
to supply Tenant's additional electrical requirements, and all other equipment
proper and necessary in connection with such feeders or risers, shall be
installed by Landlord upon Tenant's request, at the sole cost and expense of
Tenant (including without limitation, a connection fee of Three Hundred Fifty
and 00/100 ($350.00) Dollars per kilovolt ampere), provided that, in Landlord's
reasonable judgment, such additional feeders or riders are necessary and are
permissible under applicable laws and insurance regulations and the installation
of such feeders or risers will not cause permanent damage
<PAGE>
or injury to the Building or the Premises or cause or create a dangerous or
hazardous condition or entail excessive or unreasonable alterations or interfere
with or disturb other tenants or occupants of the Building. Tenant covenants
that at no time shall the use of electrical energy in the Premises exceed the
capacity of the existing feeders or wiring installations then serving the
Premises or provide Tenant with greater than six (6) watts of connected
electrical load per rentable square foot deemed to be in the Premises. Tenant
shall not make or perform, or permit the making or performance of, any
Alterations to wiring installations or other electrical facilities in or serving
the Premises without the prior consent of Landlord in each instance and without
paying Landlord's reasonable out-of-pocket charges (if any) therefor. Any such
Alterations, additions or consent by Landlord shall be subject to the provisions
of this Lease including, but not limited to, the provisions of Article 3 hereof.
(iii) Landlord reserves the right to discontinue furnishing
electricity to Tenant in the Premises on not less than sixty (60) days notice to
Tenant in the event (a) Landlord is compelled to do so by law or by the utility
company servicing the Building or (b) Landlord discontinues such service to at
least thirty percent (30%) of the office tenants located in the Building. If
Landlord exercises such right to discontinue, or is compelled to discontinue
furnishing electricity to Tenant, this Lease shall continue in full force and
effect and shall be unaffected thereby, except only that from and after the
effective date of such discontinuance, Landlord shall not be obligated to
furnish electricity to Tenant. If Landlord so discontinues furnishing
electricity to Tenant, Tenant shall arrange to obtain electricity directly from
the public utility or other company servicing the Building. Landlord shall
cooperate with Tenant in connection with Tenant's efforts to obtain direct
electric service (provided Landlord shall not be required to incur any expense
in connection therewith if Landlord is compelled to discontinue furnishing
electricity to Tenant by law or by the utility company servicing the Building).
Such electricity may be furnished to Tenant by means of the then existing
electrical facilities serving the Premises to the extent that the same are
available, suitable and safe for such purposes. All meters and all additional
panel boards, feeders, risers, wiring and other conductors and equipment which
may be required to obtain electricity, of substantially the same quantity,
quality and character, shall be installed by Landlord at (x) Tenant's sole cost
and expense, in the event Landlord is compelled to or required to discontinue
furnishing electricity to Tenant, or (y) Landlord's sole cost and expense, in
the event Landlord voluntarily discontinues furnishing electricity to Tenant.
Landlord shall not voluntarily discontinue furnishing electricity to Tenant
until Tenant is able to receive electricity directly from the public utility or
other company servicing the Building.
(iv) Landlord shall not be liable to Tenant in any way for any
interruption, curtailment or failure or defect in the supply or character of
electricity furnished to the Premises by reason of any requirement, act or
omission of any public utility or other company servicing the Building with
electricity or for any other reason except Landlord's negligence or willful
misconduct.
I. INTERRUPTION OF SERVICES. Landlord reserves the right to stop
service of the heating, air conditioning/ventilation, the elevator, electrical,
plumbing or other mechanical systems or facilities in the Building and cleaning
services when necessary, by reason of accident or emergency, or for repairs,
additions, alterations, replacements or improvements in the reasonable judgment
of Landlord desirable or necessary to be made, until said repairs, additions,
alterations, replacements or improvements shall have been completed. Landlord
shall have no responsibility or liability for interruption, curtailment or
failure to supply heat, cooled or outside air, elevator, plumbing, electricity
or cleaning when prevented by exercising its right to stop service or by
strikes, labor troubles or accidents or by any cause whatsoever reasonably
beyond Landlord's control, or by failure of independent contractors to perform
or by laws, orders, rules or regulations of any federal, state, county or
municipal authority (including, without limitation, regulations may require the
removal of CFC's as well as the alteration or replacement of equipment utilizing
CFC's), or failure of suitable fuel supply, or inability by exercise of
reasonable diligence to obtain suitable fuel or by reason of governmental
preemption in connection with a National Emergency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency. The exercise of such right or such failure by Landlord shall not
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any compensation or to any abatement or diminution of Rent, or relieve
Tenant from any of its obligations under this Lease, or impose any liability
upon Landlord or its agents by reason of inconvenience or annoyance to Tenant,
or injury to or interruption of Tenant's business, or otherwise. Notwithstanding
anything to the contrary contained in this Lease, if Landlord fails to take such
measures as may be reasonable under the circumstances to restore an "essential"
service or services (which, for the purposes of this subsection I, shall be
deemed to mean passenger elevator service (a minimum of one (1) elevator),
electricity and heat required to be furnished by Landlord pursuant to the terms
of this Lease within fifteen (15) consecutive business days after Tenant has
notified Landlord that such service has ceased (a "Substantial Services
Failure"), which failure renders the entire Premises unusable and as a result
thereof Tenant ceases to conduct business therein, provided and upon the
condition that this Lease is in full force and effect and Tenant is not
<PAGE>
in default hereunder beyond the expiration of any applicable notice and grace
periods, the Rent and additional rent shall be abated throughout the duration of
the curtailment beyond the aforesaid fifteen (15) day business period (as
extended due to force majeure events). In the event Landlord is unable to cure a
Substantial Services Failure because of a force majeure event including, without
limitation, the acts or omissions of Tenant or any of Tenant's agents, employees
or contractors, then the fifteen (15) business day period shall be extended one
(1) day for each day of such force majeure event. Notwithstanding the foregoing
remedy, Landlord agrees to diligently pursue the restoration of interrupted
services. In no event shall Tenant be entitled to claim a constructive eviction
from the Premises or a breach of lease by Landlord unless Tenant shall first
have notified Landlord in writing of the condition or conditions giving rise
thereto, and, if the complaints are justified, unless Landlord shall have
failed, within the fifteen (15) business day period provided for above, to
remedy, or commence and proceed with due diligence to remedy, such condition or
conditions, all subject to force majeure events.
J. DESK ATTENDANTS. Landlord agrees to provide a desk attendant at the
Fifth Avenue entrance to the Building Mondays through Fridays from 8:00 a.m. to
5:00 p.m. and at the 38th Street entrance to the Building Mondays through
Fridays from 8:00 a.m. to 6:00 p.m. and on Saturdays and Sundays from 8:00 a.m.
to 4:00 p.m.; provided, however, Landlord reserves the right to provide
electronic security and/or other means of limited access to the Building in lieu
thereof at any time (and from time to time) during the Term hereof, as is
customarily provided in comparable buildings in midtown Manhattan.
30. PARTNERSHIP TENANT.
A. PARTNERSHIP TENANTS. If Tenant's interest in this Lease shall be
assigned to a partnership (or to two (2) or more persons, individually and as
co-partners of a partnership) pursuant to Article 12 (any such partnership and
such persons are referred to in this Article 30 as a "Partnership Tenant"), the
following provisions of this Article 30 shall apply to such Partnership Tenant:
(i) the liability of each of the parties comprising a Partnership Tenant shall
be joint and several, and (ii) each of the parties comprising a Partnership
Tenant hereby consents in advance to, and agrees to be bound by, any written
instrument which may hereafter be executed, changing, modifying or discharging
this Lease, in whole or in part, or surrendering all or any part of the Premises
to Landlord, and by any notices, demands, requests or other communications which
may hereafter be given by a Partnership Tenant or by any of the parties
comprising a Partnership Tenant, and (iii) any bills, statements, notices,
demands, requests or other communications given or rendered to a Partnership
Tenant and to all such parties shall be binding upon a Partnership Tenant and
all such parties, and (iv) if a Partnership Tenant shall admit new general
partners, all of such new general partners shall, by their admission to a
Partnership Tenant, be deemed to have assumed performance of all of the terms,
covenants and conditions of this Lease on Tenant's part to be observed and
performed, and (v) a Partnership Tenant shall give prompt notice to Landlord of
the admission of any such new partners, and upon demand of Landlord, shall cause
each such new partner to execute and deliver to Landlord an agreement in form
satisfactory to Landlord, wherein each such new partner shall assume performance
of all the terms, covenants and conditions of this Lease on Tenant's part to be
observed and performed (but neither Landlord's failure to request any such
agreement nor the failure of any such new partner to execute or deliver any such
agreement to Landlord shall vitiate the provisions of subdivision (iv) of
subsection A of this Article 30).
B. LIMITED LIABILITY ENTITY. Notwithstanding anything to the contrary
contained herein, if Tenant is a limited or general partnership (or is comprised
of two (2) or more persons, individually or as co-partners), the change or
conversion of Tenant to (i) a limited liability company, (ii) a limited
liability partnership, or (iii) any other entity which possesses the
characteristics of limited liability (any such limited liability company,
limited liability partnership or entity is collectively referred to as a
"Limited Liability Successor Entity"), shall be prohibited unless the prior
written consent of Landlord is obtained, which consent may be withheld in
Landlord's sole discretion. Notwithstanding the foregoing, Landlord agrees not
to unreasonably withhold or delay such consent provided that:
(a) The Limited Liability Successor Entity succeeds to all or
substantially all of Tenant's business and assets;
(b) The Limited Liability Successor Entity shall have a net
worth, determined in accordance with generally accepted accounting principles,
consistently applied, of not less than the greater of the net worth of Tenant on
(1) the date of execution of this Lease, or (2) the day immediately preceding
the proposed effective date of such conversion;
(c) Tenant is not in default of any of the terms, covenants or
conditions of this
<PAGE>
Lease on the proposed effective date of such conversion;
(d) Tenant shall cause each general partner of Tenant to
execute and deliver to Landlord an agreement, in form and substance satisfactory
to Landlord, wherein each such general partner agrees to remain personally
liable for all of the terms, covenants and conditions of this Lease that are to
be observed and performed by the Limited Liability Successor Entity; and
(e) Tenant shall reimburse Landlord within ten (10) business
days following demand by Landlord for any and all reasonable costs and expenses
that may be incurred by Landlord in connection with said conversion of Tenant to
a Limited Liability Successor Entity, including, without limitation, any
attorney's fees and disbursements.
31. VAULT SPACE. Any vaults, vault space or other space outside the
boundaries of the Real Property, notwithstanding anything contained in this
Lease or indicated on any sketch, blueprint or plan are not included in the
Premises. Landlord makes no representation as to the location of the
boundaries of the Real Property. All vaults and vault space and all other
space outside the boundaries of the Real Property which Tenant may be
permitted to use or occupy is to be used or occupied under a revocable
license, and if any such license shall be revoked, or if the amount of such
space shall be diminished or required by any Federal, State or Municipal
authority or by any public utility company, such revocation, diminution or
requisition shall not constitute an actual or constructive eviction, in whole
or in part, or entitle Tenant to any abatement or diminution of rent, or
relieve Tenant from any of its obligations under this Lease, or impose any
liability upon Landlord. Any fee, tax or charge imposed by any governmental
authority for any such vaults, vault space or other space shall be paid by
Tenant.
32. SECURITY DEPOSIT.
A. DEPOSIT OF SECURITY. Tenant shall deposit with Landlord on the
signing of this Lease the Security Deposit (as defined in Article 1 of this
Lease) as security for the faithful performance and observance by Tenant of the
terms, conditions and provisions of this Lease, including without limitation the
surrender of possession of the Premises to Landlord herein provided. It is
agreed that in the event Tenant defaults in respect of any of the terms,
provisions and conditions of this Lease, including, but not limited to, the
payment of Rent and additional rent and such default continues beyond the
expiration of any applicable notice or cure period, Landlord may apply or retain
the whole or any part of the Security Deposit so deposited to the extent
required for the payment of any Rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Landlord may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this Lease, including but not limited to, any
damages or deficiency in the reletting of the Premises, whether such damages or
deficiency accrue or accrues before or after summary proceedings or other
reentry by Landlord. If Landlord applies or retains any part of the Security
Deposit so deposited, Tenant, within five (5) days after notice from Landlord,
shall deposit with Landlord the amount so applied or retained so that Landlord
shall have the full Security Deposit on hand at all times during the Term. The
failure by Tenant to deposit such additional amount within the foregoing time
period shall be deemed a material default pursuant to Article 17 of this Lease.
If Tenant shall fully and faithfully comply with all of the terms, provisions,
covenants and conditions of this Lease, the Security Deposit shall be returned
to Tenant after the Expiration Date and after delivery of the entire possession
of the Premises to Landlord. In the event of a sale of the Real Property or the
Building or leasing of the Building, Landlord shall have the right to transfer
the Security Deposit to the vendee or lessee and Landlord shall thereupon be
released by Tenant from all liability for the return of the Security Deposit;
and Tenant agrees to look solely to the new Landlord for the return of the
Security Deposit; and it is agreed that the provisions hereof shall apply to
every transfer or assignment made of the Security Deposit to a new Landlord.
Tenant further covenants that it will not assign or encumber or attempt to
assign or encumber the Security Deposit and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
B. LETTER OF CREDIT. In lieu of a cash deposit by Tenant for the
Security Deposit, Tenant may deposit with Landlord a clean, irrevocable and
unconditional letter of credit ("Letter of Credit") issued by and drawn upon any
commercial bank reasonably acceptable to Landlord with offices for banking
purposes in the City of New York and having a net worth of not less than One
Hundred Million ($100,000,000) Dollars, which letter of credit shall be in the
amount of $1,060,560.00 in the form annexed hereto as Exhibit 2. At any time
that Tenant is in default under this Lease beyond any applicable notice and
grace period, Landlord shall have the right to draw down the entire credit and
apply the proceeds or any part thereof in accordance with the provisions of this
Article 32. Landlord shall also have the right to draw down the entire amount of
<PAGE>
the credit in the event that Landlord fails to receive a replacement Letter of
Credit on or prior to the thirtieth (30th) day preceding the expiration date
thereof. If Landlord shall have drawn down the Letter of Credit and applied all
or a portion thereof in accordance with the terms of this Article 32, then
Tenant shall deposit with Landlord, within three (3) days after notice from
Landlord, a sufficient amount of cash to bring the balance of the cash held by
Landlord under this Article 32 to the amount of the Security Deposit. The
failure by Tenant to deposit such additional amount within the foregoing time
period shall be deemed a material default pursuant to Article 17 of this Lease.
C. REDUCTION IN SECURITY DEPOSIT. Provided this Lease shall be in full
force and effect and Tenant shall not be in default hereunder beyond the giving
of notice and the expiration of applicable cure periods and Tenant shall have
made payments of Rent and additional rent in a timely fashion for five (5) years
following the Rent Commencement Date, the Security Deposit shall be reduced by
the amount of $353,520.00 on the first day of the month in which each of the
third (3rd) and fifth (5th) anniversaries of the Rent Commencement Date shall
occur (each a "Substitution Date"). In addition, in the event the net worth of
Tenant increases to Fifty Million and 00/100 ($50,000,000.00) Dollars or more at
any time from and after the first (1st) anniversary of the Rent Commencement
Date but prior to the second Substitution Date and satisfactory evidence thereof
is delivered to Landlord, the Security Deposit shall be reduced to the amount of
Three Hundred Fifty-Three Thousand Five Hundred Twenty and 00/100 ($353,520.00)
Dollars and there shall be no further reductions in the Security Deposit
pursuant to the provisions of the immediately preceding sentence; provided,
however, if Tenant's net worth thereafter decreases to an amount less than Fifty
Million and 00/100 ($50,000,000.00) Dollars, Tenant shall immediately pay to
Landlord an amount such that Landlord is holding a Security Deposit in the
amount that Landlord would otherwise have been holding had the provisions of the
immediately preceding sentence applied. In the event Tenant shall have deposited
with Landlord a Letter of Credit, Landlord shall accept a substitute Letter of
Credit in the reduced amount of the Security Deposit on each Substitution Date
and shall thereupon return to Tenant the original Letter of Credit then being
held by Landlord.
33. CAPTIONS. The captions are inserted only as a matter of convenience
and for reference and in no way define, limit or describe the scope of this
Lease nor the intent of any provision thereof.
34. ADDITIONAL DEFINITIONS.
A. OFFICE. The term "office" or "offices", wherever used in this Lease,
shall not be construed to mean premises used as a store or stores, for the sale
or display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing.
B. REENTRY. The words "reenter" and "reentry" as used in this Lease are
not restricted to their technical legal meaning.
C. RENT. The term "rent" as used in this Lease shall mean and be deemed
to include Rent, any increases in Rent, all additional rent and any other sums
payable hereunder.
D. BUSINESS DAY. The term "business days" as used in this Lease shall
exclude Saturdays, Sundays and all days observed by the State of New York or
Federal Government as legal holidays and union holidays for those unions that
materially affect the delivery of services in the Building.
35. PARTIES BOUND. The covenants, conditions and agreements contained in
this Lease shall bind and inure to the benefit of Landlord and Tenant and
their respective heirs, distributees, executors, administrators, successors,
and, except as otherwise provided in this Lease, their assigns.
36. BROKER. Each party hereto represents and warrants to the other that
such party has dealt directly with (and only with), the Broker (as defined in
Article 1 herein) as broker in connection with this Lease, and that insofar
as such party knows no other broker negotiated this Lease or is entitled to
any commission in connection therewith; and each party covenants and agrees
to pay, hold harmless and indemnify the other party from and against any and
all cost, expense (including reasonable attorney's fees) or liability for any
compensation, commissions or charges claimed by any broker or agent, other
than the Broker, with respect to this Lease or the negotiations thereof,
arising from such party's acts, conduct or conversations. The execution and
delivery of this Lease by Landlord shall be conclusive evidence that Landlord
has relied upon the foregoing representation
<PAGE>
and warranty.
37. INDEMNITY. Tenant shall not do or permit any act or thing to be done
upon the Premises which may subject Landlord to any liability or
responsibility for injury, damages to persons or property or to any liability
by reason of any violation of law or of any legal requirement of public
authority, but shall exercise such control over the Premises as to fully
protect Landlord against any such liability. Tenant agrees to indemnify and
save harmless Landlord from and against all liabilities, obligations,
damages, penalties, claims, costs and expenses, including reasonable attorney
fees, incurred or arising from (i) any act, omission or negligence of Tenant,
its contractors, licensees, agents, employees, invitees or visitors,
including any claims arising from any act, omission or negligence of Landlord
and Tenant (except to the extent that Landlord is determined by a court of
competent jurisdiction to be comparatively negligent), (ii) any accident,
injury or damage whatsoever caused to any person or to the property of any
person and occurring during the Term in or about the Premises, (iii) any
accident, injury or damage to any person, entity or property, occurring
outside of the Premises but anywhere within or about the Real Property, where
such accident, injury or damage results or is claimed to have resulted from
an act or omission of Tenant or Tenant's agents, employees, invitees or
visitors, including any claims arising from any act, omission or negligence
of Landlord and Tenant (to the extent that Landlord is determined by a court
of competent jurisdiction to be comparatively negligent), (iv) any breach,
violation or nonperformance of any covenant, condition or agreement in this
Lease set forth and contained on the part of Tenant to be fulfilled, kept,
observed and performed and (v) Tenant, or any of Tenant's contractors,
licensees, agents, employees, invitees or visitors causing or permitting any
Hazardous Substance (as hereinafter defined) to be brought upon, kept or used
in or about the Premises or the Real Property or any seepage, escape or
release of such Hazardous Substances. The term "Hazardous Substances" shall
mean, collectively, (a) asbestos and polychlorinated biphenyls and (b)
hazardous or toxic materials, wastes and substances which are defined,
determined and identified as such pursuant to any law. Tenant's liability
under this Lease extends to the acts and omissions of any subtenant and any
contractor, licensee, agent, employee, invitee or visitor of any subtenant;
provided, however, Tenant shall not be liable to the extent costs are due to
negligence or willful misconduct of Landlord, or Landlord's employees or
agents acting within the scope of their authority. As used herein and in all
other provisions in this Lease containing indemnities made for the benefit of
Landlord, the term "Landlord" shall mean the Landlord herein named and its
managing agent and their respective parent companies and/or corporations,
their respective controlled, associated, affiliated and subsidiary companies
and/or corporations and their respective members, officers, partners, agents,
consultants, servants, employees, successors and assigns. This indemnity and
hold harmless agreement shall include indemnity from and against any and all
liability, fines, suits, demands, costs and expenses of any kind or nature
incurred in or in connection with any such claim or proceeding brought
thereon, and the defense thereof.
38. ADJACENT EXCAVATION SHORING. If an excavation shall be made upon
land adjacent to the Premises, or shall be authorized to be made, Tenant upon
reasonable advance oral or telephonic notice (other than in event of an
emergency) shall afford to the person causing or authorized to cause such
excavation, license to enter upon the Premises for the purpose of doing such
work as said person shall deem necessary to preserve the wall or the Building
from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Landlord, or diminution or
abatement of Rent.
39. MISCELLANEOUS.
A. NO OFFER. This Lease is offered for signature by Tenant and it is
understood that this Lease shall not be binding upon Landlord and Tenant unless
and until Landlord and Tenant shall have executed and delivered a fully executed
copy of this Lease to the other.
B. CERTIFICATES. (i) From time to time, within ten (10) business days
next following request by Landlord or the mortgagee of a Mortgage, Tenant shall
deliver to Landlord or such mortgagee, as the case may be, a written statement
executed and acknowledged by Tenant, in form reasonably satisfactory to Landlord
or satisfactory to such mortgagee, (i) stating that this Lease is then in full
force and effect and has not been modified (or if modified, setting forth all
modifications), (ii) setting forth the date to which the Rent, additional rent
and other charges hereunder have been paid, together with the amount of fixed
base monthly Rent then payable, (iii) stating whether or not, to the best
knowledge of Tenant, Landlord is in default under this Lease, and, if Landlord
is in default, setting forth the specific nature of all such defaults, (iv)
stating the amount of the security deposit under this Lease, (v) stating whether
there are any subleases affecting the Premises, (vi) stating the address of
Tenant to which all notices and communications under the Lease shall be sent,
(vii) stating the Commencement Date and the Expiration Date, and (viii) as to
any other matters reasonably requested by Landlord or other matters requested by
such
<PAGE>
mortgagee. Tenant acknowledges that any statement delivered pursuant to this
subsection B may be relied upon by any purchaser or owner of the Real Property
or the Building, or Landlord's interest in the Real Property or the Building or
any Superior Lease, or by any mortgagee of a Mortgage, or by any assignee of any
mortgagee of a Mortgage, or by any lessor under any Superior Lease.
(ii) From time to time, within ten (10) business days next
following Tenant's request, Landlord shall deliver to Tenant a written statement
executed and acknowledged by Landlord, in form reasonably satisfactory to
Tenant, (a) stating if and to the extent that this Lease is then in full force
and effect and has not been modified (or if modified, setting forth all
modifications), (b) setting forth the date to which the Rent, additional rent
and other charges hereunder have been paid, together with the amount of fixed
base monthly Rent then payable, (c) stating whether or not, to the best of
knowledge of Landlord, Tenant is in default under this Lease and, if Tenant is
in default, setting forth the specific nature of all such defaults, (d) stating
the amount of the security deposit under this Lease, (e) stating the address of
Landlord to which all notices and communications under the Lease shall be sent,
the Commencement Date and the Expiration Date, and (f) as to any other matters
reasonably requested by Tenant.
C. DIRECTORY LISTINGS. Landlord agrees to provide Tenant, at Landlord's
sole cost and expense, with Tenant's Proportionate Share of listings on the
directory in the lobby of the Building, which may include a listing for Tribeca
Software.
D. SIGNAGE. Tenant shall not exhibit, inscribe, paint or affix any
sign, advertisement, notice or other lettering on any portion of the Building or
the outside of the Premises without the prior written consent of Landlord in
each instance; provided, however, Tenant may install a small plaque at the 37th
Street entrance to the Building at a location, and of size, color, design and
manner of installation approved by Landlord, which plaque may identify Tribeca
Software or any other permitted subtenant, as well as Tenant. A plan of all
signage or other lettering proposed to be exhibited, inscribed, painted or
affixed on the entry door(s) to the Premises shall be prepared by Tenant in
conformity with building standard signage requirements (if any) and submitted to
Landlord for Landlord's consent, which consent shall not be unreasonably
withheld, conditioned or delayed. Upon the granting of Landlord's consent,
Tenant may install such signage at Tenant's sole cost and expense. Upon
installation of any such signage or other lettering, such signage or lettering
shall not be removed, changed or otherwise modified in any way without
Landlord's prior written approval, which approval shall be granted or denied in
accordance with the provisions of this subparagraph D. Any signage,
advertisement, notice or other lettering which shall be exhibited, inscribed,
painted or affixed by or on behalf of Tenant in violation of the provisions of
this section may be removed by Landlord and the cost of any such removal shall
be paid by Tenant as additional rent. Tenant shall not exhibit, inscribe, paint
or affix on any part of the Premises or the Building visible to the general
public any signage or lettering including the words "temporary" or "personnel".
E. CONSENTS AND APPROVALS. All references in this Lease to the consent
or approval of Landlord shall be deemed to mean the written consent of Landlord
or the written approval of Landlord and no consent or approval of Landlord shall
be effective for any purpose unless such consent or approval is set forth in a
written instrument executed by Landlord. Wherever in this Lease Landlord's
consent or approval is required, if Landlord shall delay or refuse such consent
or approval, Tenant in no event shall be entitled to make, nor shall Tenant
make, any claim, and Tenant hereby waives any claim for money damages (nor shall
Tenant claim any money damages by way of set-off, counterclaim or defense) based
upon any claim or assertion by Tenant that Landlord unreasonably withheld or
unreasonably delayed its consent or approval. Tenant's sole remedy shall be an
action or proceeding to enforce any such provision, for specific performance,
injunction or declaratory judgment. If a party delivers a written request for
the other party's consent, and the other party fails to respond within the time
period specifically provided by the terms of this Lease or, if no specific time
period is so provided, within ten (10) business days thereafter, then the other
party's consent shall be deemed withheld.
F. GOVERNING LAW. This Lease shall be deemed to have been made in New
York County, New York, and shall be construed in accordance with the laws of New
York. All actions or proceedings relating, directly or indirectly, to this Lease
shall be litigated only in courts located within the County of New York.
Landlord and Tenant, any guarantor of the performance of Tenant's obligations
hereunder and their respective successors and assigns, hereby subject themselves
to the jurisdiction of any state or federal court located with such county, and
shall be subject to service provided that the terms, provisions and conditions
of Article 27 are adhered to.
G. FINANCIAL STATEMENTS. Tenant shall furnish Landlord annually
throughout the Term, within ninety (90) days following the end of Tenant's
fiscal year (or within ten (10) business days
<PAGE>
after Landlord's request therefor) but in no event more frequently than once
annually unless Tenant's financial situation shall change or Landlord shall have
a valid business reason for requesting such financial statement, an updated,
current financial statement of Tenant, Tenant's general partners and any
guarantors of this Lease, which statement shall be audited (if available).
H. SIGNATORIES. If more than one person executed this Lease as Tenant,
each of them understands and hereby agrees that the obligations of each of them
under this Lease are and shall be joint and several, that the term "Tenant" as
used in this Lease shall mean and include each of them jointly and severally and
that the act of or notice from, or notice or refund to, or the signature of, any
one or more of them, with respect to the tenancy and/or this Lease, including,
but not limited to, any renewal, extension, expiration, termination or
modification of this Lease, shall be binding upon each and all of the persons
executing this Lease as Tenant with the same force and effect as if each and all
of them had so acted or so given or received such notice or refund or so signed.
40. HAZARDOUS SUBSTANCES. Tenant shall not permit the presence,
handling, use, storage or transportation of Hazardous Substances in or about
the Premises or the Building and Tenant shall, at its sole cost and expense,
perform any and all Remedial Work arising from, growing out of or related to
any breach of the foregoing covenant by Tenant. The term "Remedial Work"
shall mean all investigation, monitoring, restoration, abatement,
detoxification, containment, handling, treatment, removal, storage,
decontamination, clean-up, transport, disposal or other ameliorative work or
response action undertaken in connection with (a) any "Environmental Laws"
(as hereinafter defined), (b) any order of any governmental authority having
jurisdiction over the Premises and/or the Building, or (c) any final
judgment, consent decree, settlement or compromise with respect to any
"Hazardous Substances Claims" (as hereinafter defined). The term "Hazardous
Substances Claims" shall mean any and all enforcement, clean-up, removal,
remedial or other governmental or regulatory actions, agreements or orders
threatened in writing, instituted or completed pursuant to any Environmental
Laws and any and all other actions, proceedings, claims, written demands or
causes of action, whether meritorious or not (including, without limitation,
third party claims for contribution, indemnity, personal injury or real or
personal property damage), that, in each case, relate to, arise from or are
based, in whole or in part, on the occurrence or alleged occurrence of any
violation or alleged violation of or responsibility under any applicable
Environmental Law relating to the Premises and/or the Building or to the
ownership, use, occupation or operation thereof. The term "Environmental
Laws" shall mean any and all present and future federal, state and local laws
(whether under common law, statute, ordinance, rule, regulation or
otherwise), court or administrative orders or decrees, requirements of
permits issued with respect thereto, and other requirements of governmental
authorities having jurisdiction over the Premises and/or the Building
relating to protection of the environment, to public health and safety or any
Hazardous Substances (including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (" CERCLA"),
42 U.S.C. ss.ss. 9601, et seq., as heretofore or hereafter amended from time
to time).
41. TENANT'S RIGHT OF FIRST OFFER.
A. EXPANSION SPACE. If any portion of the tenth (10th) floor of the
Building comprised of more than 5,000 rentable square feet (each, an "Expansion
Space") shall become Available Space (as hereinafter defined) at any time during
the Term, then provided and upon the condition that at all times within the
immediately preceding twelve (12) month period this Lease shall be in full force
and effect and Tenant shall not be in default hereunder beyond the expiration of
any applicable grace or cure period, and Tenant, Tribeca Software and any
related corporation shall, in the aggregate, be physically occupying at least
ninety percent (90%) of the Premises, then only on the first two (2) occasions
on which each Expansion Space becomes Available Space, Landlord shall offer such
Expansion Space to Tenant before offering the same to any party other than an
Interested Party (as hereinafter defined), by notice to Tenant (the "Offer") and
the terms and conditions of Subsections B, C, D, E and F of this Article 41
shall apply with respect thereto. Attached hereto as Exhibit 5 and made a part
hereof is a list set forth the expiration dates of the existing leases covering
space on the tenth (10th) floor of the Building.
B. TERMS OF EXERCISE OF ANY OFFER. Any Offer shall contain the terms
upon which Landlord acting in good faith is willing to lease the Expansion Space
in question to Tenant, which terms shall reflect the Fair Market Value (as
hereinafter defined) of the Expansion Space in question for the proposed term.
Tenant shall have the right, exercisable by notice to Landlord within twenty
(20) days of receipt by Tenant of an Offer, time being of the essence, to lease
the Expansion Space specified in such Offer upon the terms and conditions
contained therein, in which event Landlord and Tenant shall enter into an
amendment of this Lease reasonably acceptable to Landlord and
<PAGE>
Tenant to provide for (i) the inclusion of such Expansion Space in the Premises,
(ii) an increase in the Rent by an amount equal to that specified in such Offer
and (iii) a modification of the definition of "Tenant's Proportionate Share" to
accurately represent the percentage that the rentable area of the Premises,
together with the rentable area of such Expansion Space, bears to the total
rentable area of the Building. In all other respects, the terms and conditions
contained in this Lease (including escalations) shall remain unmodified. In the
event that Tenant fails to exercise its right as aforesaid within twenty (20)
days of the date of receipt of the Offer, Tenant shall be deemed to have waived
its rights under this Article with respect to the Expansion Space in question,
Landlord shall have the absolute right to lease the Expansion Space in question
or any part thereof to any other person or entity and Tenant shall have no
further rights with respect to the Expansion Space; provided, however, if such
Expansion Space again becomes Available Space during the Term hereof, Tenant
shall have a second opportunity to Lease such space in accordance with the
terms, conditions and provisions of this Article 41; provided, however, any
second offer delivered to Tenant for an Expansion Space shall be expressly
subject and subordinate to the rights granted to any other tenants or occupants
to such space. Furthermore, in the event Tenant delivers Landlord notice within
twenty (20) days of Tenant's receipt of an Offer that Tenant disputes Landlord's
determination of the Fair Market Value, the same shall be determined in
accordance with subsection G of this Article 41. In the event that Tenant shall
have exercised its right as aforesaid but Landlord and Tenant fail to mutually
execute an amendment of this Lease as aforesaid within twenty (20) days from the
date of receipt of such Offer, the Expansion Space in question shall be deemed
to be included within the Premises without such written amendment upon the
terms, conditions and provisions contained in this Lease, except as otherwise
set forth in such Offer.
C. FAILURE TO DELIVER EXPANSION SPACE. In the event that Tenant shall
have exercised its option to lease an Expansion Space specified in an Offer and
Landlord shall thereafter fail to deliver all or any portion of such Expansion
Space on or before the date(s) upon which Landlord anticipates such space could
be delivered to Tenant, then in such event, this Lease and the provisions of
this Article 41 shall not be effected and Landlord shall not be subject to any
liability therefor. Notwithstanding the foregoing however, if Landlord is unable
to deliver possession of all or any portion of the Expansion Space due to a
holdover by the existing tenant, Landlord agrees to use reasonable efforts to
obtain possession of the Expansion Space. For the purpose of this Article 41,
the term "reasonable efforts" shall mean that Landlord shall promptly commence
and diligently prosecute a holdover proceeding against the existing tenant to
the extent it is reasonable to do so under the circumstances.
D. AS IS. Tenant agrees to accept the Expansion Space in question
vacant, demised, broom-clean and in its then "as is" condition and understands
and agrees that Landlord shall perform no work and incur no cost or expense in
connection with the preparation of any Expansion Space for Tenant's occupancy.
E. RIGHTS PERSONAL. The right of first offer described hereinabove is
personal to the Tenant named herein and shall not be available to any person or
entity other than the Tenant named herein including without limitation, any
permitted subtenant, successor or assign of the Tenant named herein.
F. DEFINED TERMS. As used herein, the following terms shall have the
following meanings:
(i) "Available Space" as used herein shall mean vacant space
which is (a) available for leasing to tenants and (b) has previously
been leased to and occupied by a tenant or tenants other than Tenant;
it being understood that Available Space shall include space which is
or is reasonably anticipated to become vacant but shall not include
space which is reasonably anticipated to become vacant but does not
actually become vacant;
(ii) "Interested Party" shall mean the existing tenant or
occupant in any such space or any other then existing person or entity
having any preexisting rights in such space; and
(iii) "Fair Market Value" shall mean the rental rates for
premises then being leased in other first class office buildings in
Midtown, Manhattan for general office use similar in size,
configuration, location, floor, floor plate, quality, age, available
parking and service to the space then constituting the Expansion Space
and shall reflect the terms then being offered as part of a
"competitive leasing package," recognizing all relevant facts and
circumstances, including, but not limited to, the term, size of the
transaction, the prevailing rents, formulas and bases for escalation
payments and the economic value of rent abatements, tenant improvement
contributions and other concessions, and shall take into
<PAGE>
account any brokerage commissions payable in connection with such
lease.
G. DETERMINATION OF FAIR MARKET VALUE. (i) In the event Tenant timely
sends Landlord notice that Tenant disputes Landlord's determination of Fair
Market Value, Landlord and Tenant shall attempt in good faith to agree upon the
Fair Market Rental taking into consideration the factors set forth in subsection
A hereof. In the event Landlord and Tenant cannot reach agreement within ten
(10) business days after the date the parties commence discussions regarding the
same, Landlord and Tenant shall each within ten (10) business days thereafter
select a reputable qualified, licensed real estate broker having an office in
New York County and familiar with the rentals then being charged in the Building
and in comparable buildings (respectively, "Landlord's Broker" and "Tenant's
Broker"), who shall confer promptly after their selection by Landlord and Tenant
and shall use their best efforts to agree upon the Fair Market Value. If
Landlord's Broker and Tenant's Broker cannot reach agreement within fifteen (15)
business days after the date such brokers have been selected, then, within ten
(10) business days thereafter, they shall designate a third reputable, licensed
real estate broker having an office in New York County (the "Independent
Broker"). Upon the failure of Landlord's Broker and Tenant's Broker to agree
upon the designation of the Independent Broker, then the Independent Broker
shall be appointed by a Justice of the Supreme Court of the State of New York
upon ten (10) business days notice, or by any other court in New York County
having jurisdiction and exercising functions similar to those exercised by the
Supreme Court of the State of New York. Concurrently with such appointment,
Landlord's Broker and Tenant's Broker shall each submit a letter to the
Independent Broker, with a copy to Landlord and Tenant, setting forth such
broker's estimate of the Fair Market Value (respectively, "Landlord's Broker's
Letter" and "Tenant's Broker's Letter").
(ii) The Independent Broker shall conduct such investigations and
hearings as he/she may deem appropriate and shall, within fifteen (15) business
days after the date of his/her designation, choose either the rental set forth
in Landlord's Broker's Letter or Tenant's Broker's Letter and such choice shall
be binding upon Landlord and Tenant. Landlord and Tenant shall each pay the fees
and expenses of its respective broker. The fees and expenses of the Independent
Broker shall be shared equally by Landlord and Tenant.
42. PENTHOUSE SPACE.
A. INCLUSION OF PENTHOUSE SPACE. Landlord and Tenant acknowledge that
Tenant desires to lease certain penthouse premises, deemed to consist of 1,200
rentable square feet, as more particularly shown hatched on Exhibit 3 annexed
hereto and made a part hereof (the "Penthouse Space"). Landlord and Tenant
further acknowledge that the Expansion Space is currently leased by Landlord to
the existing tenant thereof (the "Existing PH Lease") for a term expiring on
March 31, 2001. Upon the expiration or earlier termination of the Existing PH
Lease and provided and upon the condition that this Lease shall be in full force
and effect and Tenant shall not be in default hereunder beyond the expiration of
any applicable grace or cure period, Landlord shall notify Tenant of such
availability and Tenant shall lease the Penthouse Space for a term commencing on
the date Landlord delivers possession of the Penthouse Space to Tenant (the
"Penthouse Space Commencement Date") and ending on the Expiration Date.
B. MODIFICATION TO LEASE. From and after the Penthouse Space
Commencement Date, Article 1 of this Lease shall be deemed modified as follows:
(i) the "Premises", shall be deemed to include the Expansion
Space;
(ii) the "Rent", as defined in clause (iii) of subparagraph A
of Article 1, shall be deemed increased by the amount of Forty-Eight Thousand
and 00/100 ($48,000.00) Dollars per annum through the Term of this Lease
(provided, however, if this Lease remains in full force and effect and Tenant is
not in default hereunder after receipt of notice thereof and the expiration of
any applicable cure period, the Rent payable with respect to the Penthouse Space
only shall be abated for the one hundred eighty (180) day period immediately
following the Penthouse Space Commencement Date);
(iii) "Base Tax Year" and "Base Labor Year", as defined in
clauses (ii) and (i) of subparagraph A of Article 1, shall mean the Tax Year and
the calendar year, respectively, in which the Penthouse Space Commencement Date
occurs.
(iv) "Tenant's Proportionate Share", as defined in clause
(xviii) of subparagraph A of Article 1 hereof, shall be deemed to mean eight and
sixty-nine hundredths percent (8.69%).
The terms and conditions contained in this Lease shall be applicable with
respect to the Penthouse Space, except to the extent inapplicable or except as
otherwise set forth in a written amendment
<PAGE>
of this Lease to be entered into by the parties hereto within thirty (30) days
from the date Landlord notifies Tenant that the Penthouse Space has become
available, which amendment shall confirm the inclusion of the Penthouse Space in
the Premises and the applicable modifications to this Lease to be made pursuant
to this Article 42. In the event Landlord and Tenant fail to mutually execute an
amendment of this Lease as aforesaid within thirty (30) days from the date
Landlord notifies Tenant that the Penthouse Space has become available, the
Penthouse Space shall be deemed to be included within the Premises without such
written amendment upon the terms, conditions and provisions contained in this
Lease, except to the extent inapplicable.
C. ACCEPTANCE OF EXPANSION SPACE. Tenant agrees to accept the Penthouse
Space vacant, broom clean, demised and otherwise "as is" and understands and
agrees that Landlord shall perform no work and incur no cost or expense in
connection with the preparation of the Penthouse Space for Tenant's occupancy;
provided, however, Landlord agrees to provide Tenant with a Form ACP-5 with
respect to the Penthouse Space.
D. FAILURE TO GIVE POSSESSION. In the event the Penthouse Space does
not become available or if Landlord shall fail to deliver all or any portion of
such Penthouse Space on or before the date upon which Landlord anticipates such
space could be delivered to Tenant, then in such event, this Lease and the
provisions of this Article 42 shall not be effected and Landlord shall not be
subject to any liability therefor. Notwithstanding the foregoing however, if
Landlord is unable to deliver possession of all or any portion of the Penthouse
Space due to a holdover by the existing tenant, Landlord agrees to use its
"reasonable efforts" (as defined in Article 41) to obtain possession of the
Penthouse Space.
E. PENTHOUSE TERRACE. Subject to Landlord's prior approval thereof
(which approval Landlord may withhold or deny in the exercise of its sole and
absolute discretion), from after the Penthouse Commencement Date, Tenant shall
have the right, at its sole cost and expense, to construct temporary structures
(e.g., an awning) on the area of the roof immediately surrounding the Penthouse
Space (the "Penthouse Terrace"), provided that (i) Tenant complies with the
provisions of Article 3 hereof, (ii) Tenant submits to Landlord or Landlord's
Consultant detailed plans and specifications in form and substance reasonably
satisfactory to Landlord in its reasonable discretion, (iii) neither the
construction, use or maintenance of any such temporary structure nor Tenant's
use of the Penthouse Terrace violates any law, rule, order or regulation of any
governmental authority having jurisdiction over the Building or the Premises,
(iv) Tenant pays to Landlord all reasonable third-party, out-of-pocket costs and
expenses of Landlord incurred in connection with its review of Tenant's plans,
and (v) Tenant indemnifies, defends and holds Landlord harmless from and against
any and all loss, cost, liability and expense arising out of or in connection
with Tenant's construction, use and maintenance of any such temporary
structures, or arising out of or in connection with the use of the Penthouse
Terrace. Tenant acknowledges that the Penthouse Terrace is not part of the
premises demised under this Lease, that Tenant has no interest or estate in the
Penthouse Terrace, and that Tenant's use of the same shall be pursuant to a
license granted by Landlord that can be terminated or revoked by Landlord at any
time (a) if Tenant's use of the Penthouse Terrace or any structure constructed
thereon by Tenant violates any law, rule, order or regulation of any
governmental authority having jurisdiction over the Premises or the Building,
including, without limitation, any applicable zoning laws, or (b) if Tenant is
in default of any term, provision or condition of this Lease on Tenant's part to
be observed or performed after
<PAGE>
receipt of notice thereof and the expiration of any applicable cure period. At
Landlord's request, Tenant agrees to engage Landlord's designated contractor to
construct the Penthouse Terrace, provided the cost thereof is commercially
reasonable and/or competitive.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
POLESTAR FIFTH PROPERTY ASSOCIATES LLC, Landlord
By: New Rock Realty Management LLC,
a New York limited liability company,
its authorized agent
By: NR Realty LLC,
a New York limited liability company,
its sole member
By:
----------------------------------------------
Gary M. Tischler, Vice President
PREDICTIVE SYSTEMS, INC., Tenant
By:
-------------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
- ------------------------
Tenant's Tax I.D. Number
<PAGE>
EXHIBIT 1
Floor Plan of Premises
<PAGE>
EXHIBIT 2
Form of Letter of Credit
[BANK LETTERHEAD]
POLESTAR FIFTH PROPERTY ASSOCIATES LLC
c/o New Rock Realty Management LLC
420 Lexington Avenue
New York, New York 10170
PW Real Estate Investments, Inc.
c/o Paine Weber Real Estate Securities, Inc.
1285 Avenue of the Americas
New York, New York 10019
Re: Irrevocable Clean Letter of Credit
By order of our client, _____, we hereby open our clean irrevocable Letter of
Credit No. in your favor for an amount not to exceed in the aggregate $ Dollars
effective immediately.
Funds under this credit are available to you against your sight draft on us
mentioning thereon our Credit No. ___.
This Letter of Credit shall expire sixteen (16) months from the date hereof;
provided, however, that it is a condition of this Letter of Credit that it shall
be deemed automatically extended, from time to time, without amendment, for one
year from the expiry date hereof and from each and every future expiry date,
unless at least thirty (30) days prior to any expiry date we shall notify you by
registered or certified mail (return receipt requested) that we elect not to
consider this Letter of Credit renewed for any such additional period. In no
event, however, shall this Letter of Credit be extended beyond [INSERT DATE
WHICH IS NOT LESS THAN THIRTY (30) DAYS BEYOND THE FINAL EXPIRATION DATE OF THE
LEASE].
Upon receipt of such notice, but on or before the then expiration date, you may
draw the full amount hereunder by means of your sight draft drawn on us,
accompanied by your written statement purportedly signed by one of your
authorized representatives reading as follows: "We are in receipt of written
notice from you of your election not to renew your Letter of Credit No. _____,
and we have not received an acceptable replacement Letter of Credit as of the
date of our drawings."
This Letter of Credit is transferable without any fees or charges and
may be transferred one or more times upon receipt of your written instructions.
[Insert standard provision for the right to transfer the letter of credit in
accordance with the Uniform Customs and Practice for Documentary Credits
referred to below.]
We hereby agree with you that all drafts drawn with the terms of this
Letter of Credit will be duly honored upon presentment and delivery to our
office at on or prior to the expiry date, or as the same may from time to time
be extended.
Except as otherwise specified herein, this Letter of Credit is subject
to the Uniform Customs and Practice for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500.
Very truly yours,
[Name of Bank]
By:
<PAGE>
EXHIBIT 3
Penthouse Space
<PAGE>
EXHIBIT 4
Cleaning Specifications
<PAGE>
EXHIBIT 5
List of Expiration Dates of 10th Floor Leases
<PAGE>
SCHEDULE A
RULES AND REGULATIONS
I. The rights of each tenant in the Building to the entrances,
corridors and elevators of the Building are limited to
ingress to and egress from such tenant's premises and no
tenant shall use, or permit the use of the entrances,
corridors, or elevators for any other purpose. No tenant
shall invite to its premises, or permit the visit of persons
in such numbers or under such conditions as to interfere
with the use and enjoyment of any of the plazas, entrances,
corridors, elevators and other facilities of the Building by
other tenants. No tenant shall encumber or obstruct, or
permit the encumbrances or obstruction of any of the
sidewalks, plazas, entrances, corridors, elevators, fire
exits or stairways of the Building. Landlord reserves the
right to control and operate the public portions of the
Building, the public facilities, as well as facilities
furnished for the common use of the tenants, in such manner
as Landlord deems best for the benefit of the tenants
generally.
II. Landlord may refuse admission to the Building outside of
ordinary business hours to any person not known to the
watchman in charge or not having a pass issued by Landlord
or not properly identified, and may require all persons
admitted to or leaving the Building outside of ordinary
business hours to register. Tenants' employees, agents and
visitors shall be permitted to enter and leave the Building
whenever appropriate arrangements have been previously made
between Landlord and the tenant with respect thereto. Each
tenant shall be responsible for all persons for whom it
requests such permission and shall be liable to Landlord for
all acts of such persons. Any person whose presence in the
Building at any time shall, in the judgment of Landlord, be
prejudicial to the safety, character, reputation or
interests of the Building or its tenants may be denied
access to the Building or may be ejected therefrom. In case
of invasion, riot, public excitement or other commotion
Landlord may prevent all access to the Building during the
continuance of the same, by closing the doors or otherwise,
for the safety of the tenants and protection of property in
the Building. Landlord may require any person leaving the
Building with any package or other object to exhibit a pass
from the tenant from whose premises the package or object is
being removed, but the establishment and enforcement of such
requirement shall not impose any responsibility on Landlord
for the protection of any tenant against the removal of
property from the premises of tenant. Landlord shall, in no
way, be liable unless and to the extent directly caused by
Landlord's negligence to any tenant for damages or loss
arising from the admission, exclusion or ejection of any
person to or from a tenant's premises or the Building under
the provisions of this rule.
III. No tenant shall obtain or accept for use in its premises
ice, drinking water, towels, barbering, boot blacking, floor
polishing, lighting maintenance, cleaning or other similar
services from any persons not authorized by Landlord in
writing to furnish such services. Such services shall be
furnished only at such hours, in such places within the
tenant's premises and under such regulation as may be fixed
by Landlord.
IV. No window or other air-conditioning units shall be installed
by any tenant, and only such window coverings as are
supplied or permitted by Landlord shall be used in a
tenant's premises.
V. There shall not be used in any space, nor in the public
halls of the Building, either by any tenant, jobber or
others in the delivery or receipt of merchandise, any hand
trucks, except those equipped with rubber tires and side
guards.
VI. All entrance doors in each tenant's premises shall be left
locked when the tenant's premises are not in use. Entrance
doors shall not be left open at any time. All windows in
each tenant's premises shall be kept closed at all times and
all blinds therein above the ground floor shall be lowered
when and as reasonably required because of the position of
the sun, during the operation of the air-conditioning system
to cool or ventilate the tenant's premises.
VII. No noise, including the playing of any musical instruments,
radio or television, which, in the judgment of Landlord,
might disturb other tenants in the Building, shall be made
or permitted by any tenant. No dangerous, inflammable,
combustible or explosive object, material or fluid shall be
brought into the Building by any tenant or with the
permission of any tenant.
<PAGE>
A - 2
VIII. Each tenant shall be required to use Landlord's designated
locksmith and may only install such locks and other security
devices as Landlord reasonably approves. Each tenant shall
furnish Landlord with keys to its respective premises so
that Landlord may have access thereto for the purposes set
forth in the Lease. No additional locks or bolts of any kind
shall be placed upon any of the doors or windows in any
tenant's premises without Landlord's consent, which consent
shall not be unreasonably withheld, conditioned or delayed,
and no lock on any door therein shall be changed or altered
in any respect. Duplicate keys for a tenant's premises and
toilet rooms shall be procured only from Landlord, which may
make a reasonable charge therefore. Upon the termination of
a tenant's lease, all keys of the tenant's premises and
toilet rooms shall be delivered to Landlord.
IX. Each tenant, shall, at its expense, provide artificial light
in the premises for Landlord's agents, contractors and
employees while performing janitorial or other cleaning
services and making repairs or alterations in said premises.
X. No tenant shall install or permit to be installed more than
three (3) vending machines in any tenant's premises and such
machines shall be solely for the purpose of dispensing food
products and beverages for consumption by Tenant's employees
and guests.
XI. No animals or birds, bicycles, mopeds or vehicles of any
kind shall be kept in or about the Building or permitted
therein.
XII. No furniture, office equipment, packages or merchandise will
be received in the Building or carried up or down in the
elevator, except between such hours as shall be designated
by Landlord. Landlord shall prescribe the charge for freight
elevator use and the method and manner in which any
merchandise, heavy furniture, equipment or safes shall be
brought in or taken out of the Building, and also the hours
at which such moving shall be done. No furniture, office
equipment, merchandise, large packages or parcels shall be
moved or transported in the passenger elevators at any time.
XIII. All electrical fixtures hung in offices or spaces along the
perimeter of any tenant's Premises must be fluorescent, of a
quality, type, design and bulb color approved by Landlord
unless the prior consent of Landlord has been obtained for
other lamping.
XIV. The exterior windows and doors that reflect or admit light
and air into any premises or the halls, passageways or other
public places in the Building, shall not be covered or
obstructed by any tenant, nor shall any articles be placed
on the windowsills.
XV. Canvassing, soliciting and peddling in the Building is
prohibited and each tenant shall cooperate to prevent same.
XVI. No tenant shall do any cooking, conduct any restaurant,
luncheonette or cafeteria for the sale or service of food or
beverages to its employees or to others, except as expressly
approved in writing by Landlord. In addition, no tenant
shall cause or permit any odors of cooking or other
processes or any unusual or objectionable odors to emanate
from the premises. The foregoing shall not preclude tenant
from having food or beverages delivered to the premises or
from warming food in a microwave or toaster- oven, provided
that except as expressly set forth herein or as otherwise
agreed to by Landlord, no cooking or food preparation shall
be carried out at the premises.
XVII. No tenant shall generate, store, handle, discharge or
otherwise deal with any Hazardous Substances on or about the
Real Property, other than chemicals generally used in
standard office equipment and for standard office cleaning
purposes; provided that any such chemicals shall be
delivered, stored, used and disposed of in full compliance
with all applicable laws, regulations, ordinances and orders
of any governmental body claiming to have jurisdiction over
the premises.
<PAGE>
SCHEDULE B
TENANT'S INITIAL ALTERATION
I. Tenant shall perform or cause the performance of Alterations in and
to the Premises to prepare same for Tenant's initial occupancy thereof
("Tenant's Initial Alteration"). All Alterations to be performed by Tenant shall
be, at a minimum, of a quality and standard equivalent to the standards for
construction set by Landlord, from time to time, for the Building, and shall be
subject to the prior approval of Landlord, which approval shall be granted or
withheld in accordance with Article 3 hereof. Tenant shall submit to Landlord
or, at Landlord's direction, Landlord's Consultant, complete and detailed
architectural, mechanical and engineering plans and specifications prepared by
an architect or engineer licensed in the State of New York and reasonably
approved by Landlord, which plans and specifications shall be stamped and
certified by such architect or engineer, showing Tenant's Initial Alteration,
which plans and specifications shall be prepared by Tenant, at Tenant's own cost
and expense. Tenant's plans and specifications shall include all information
necessary to reflect Tenant's requirements for the design and installation of
any air-cooling equipment, ductwork, heating, electrical, plumbing and other
mechanical systems and all work necessary to connect any non-standard facilities
to the Building's base mechanical, electrical and structural systems. Tenant's
submission shall include not less than three (3) sets of sepias and five (5)
sets of black and white prints.
II. Tenant shall not perform work which would (a) require changes to
structural components of the Building or the exterior design of the Building,
(b) require any material modification to the Building's mechanical installations
or other Building installations outside the Premises, (c) not be in compliance
with all applicable laws, rules, regulations and requirements of any
governmental department having jurisdiction over the Building and/or the
construction of the Premises, including but not limited to, the Americans with
Disabilities Act of 1990, or (d) be incompatible with the Certificate of
Occupancy for the Building. Any changes required by any governmental department
affecting the construction of the Premises shall be performed at Tenant's sole
cost.
III. At the time that Tenant submits its plans and specifications to
Landlord for Landlord's approval, such plans and specifications must be
transmitted to Landlord with a cover letter stating that "the enclosed plans and
specifications are being transmitted to Landlord for its review and approval
pursuant to the terms of the Lease." Landlord or Landlord's Consultant shall
respond to Tenant's request for approval of any plans and specifications
described in Paragraph I above within ten (10) business days following the
submission of such plans and specifications prepared in accordance with the
terms hereof. In the event Landlord or Landlord's Consultant shall disapprove of
all or a portion of any of Tenant's plans and specifications, such disapproval
shall be set forth in writing and shall include the reasons therefor in
reasonable detail, in which event Tenant shall revise such plans and
specifications and resubmit same to Landlord within five (5) business days
thereafter, time being of the essence. Landlord or Landlord's Consultant shall
respond to Tenant's request for consent of any such revised plans within five
(5) business days following resubmission. The approval of plans and
specifications by Landlord or Landlord's Consultant (hereinafter referred to as
the "Final Plans") together with Tenant's satisfactory compliance with the
requirements set forth in items (1) through (4) of Schedule E annexed to this
Lease, shall be deemed an authorization for Tenant to proceed with Tenant's
Initial Alteration, which shall be performed in accordance with the provisions
of Article 3 and Schedule F of this Lease. Tenant shall reimburse Landlord for
all reasonable actual third party out-of-pocket fees incurred by Landlord in
connection with Tenant's Initial Alteration. Neither the recommendation or
designation of an architect or engineer nor the approval of the final plans and
specifications by Landlord or Landlord's Consultant shall be deemed to create
any liability on the part of Landlord with respect to the design or
specifications set forth in the Final Plans.
IV. Landlord agrees to reimburse Tenant for the cost of Tenant's
Initial Alteration, as approved by Landlord or Landlord's Consultant and made
by Tenant within twelve (12) months of the Commencement Date to the extent of
the lesser of (i) $1,251,100.00 or (ii) the actual cost to Tenant for
Tenant's Initial Alteration ("Landlord's Contribution"). In addition,
Landlord agrees to reimburse Tenant for the cost incurred by Tenant to
"box-in" the columns within the Premises, at an agreed upon cost of $250.00
per column, which aggregate cost shall be deemed added to, and shall be
payable to Tenant as if such cost were part of, Landlord's Contribution. Up
to ten (10%) percent of Landlord's Contribution may be applied by Tenant
towards the architectural, engineering and filing fees incurred by Tenant in
connection with Tenant's Initial Alteration. Provided this Lease is in full
force and effect and Tenant is not in default hereunder beyond the expiration
or any applicable grace or cure period,
<PAGE>
B - 2
Landlord's Contribution shall be paid by progress payments as follows: on or
before the first (1st) day of each calendar month, Tenant may submit to each of
Landlord and Landlord's Consultant an application and certificate for payment
(standard AIA Form G702) for that portion of Tenant's Initial Alteration
previously completed, which application and certificate for payment must be
accompanied by (a) all information and documents required thereunder and (b) a
partial lien waiver executed by the general contractor (the "General
Contractor") and its subcontractors employed in connection with Tenant's Initial
Alteration covering work previously paid for out of prior progress payments.
Provided Landlord's architect verifies in writing that the work described in any
such application and certificate for payment has been completed in accordance
with the Final Plans, Landlord, on or about the thirtieth (30th) day of such
calendar month shall remit to Tenant ninety percent (90%) of the amount so
requisitioned by Tenant or such other amount as is approved by Landlord, based
on the portion of Tenant's Initial Alteration which has been completed, with ten
(10%) percent to be retained until final payment of Landlord's Contribution is
due pursuant to the terms of this Subsection IV. Provided this Lease is in full
force and effect and Tenant is not in default hereunder beyond the expiration of
any applicable grace or cure period, Landlord shall pay the balance of
Landlord's Contribution to Tenant within thirty (30) days of submission by
Tenant of (a) paid receipts (or such other proof of payment as Landlord shall
reasonably require) for work done in connection with Tenant's Initial
Alteration, (b) a written statement from Tenant's architect or engineer that the
work described on any such invoices has been completed in accordance with the
Final Plans, (c) a lien waiver executed by the general contractor employed by
Tenant in connection with Tenant's Initial Alteration, (d) proof reasonably
satisfactory to Landlord that Tenant has complied with all of the conditions set
forth in this Schedule B (as applicable), which shall include, without
limitation, submission of all of the items described on Schedule F annexed
hereto and made a part hereof and (e) two (2) complete sets of "as-built" Final
Plans.
<PAGE>
SCHEDULE C
Landlord's Pre-Commencement Work
Landlord agrees, at its sole cost and expense and without charge to
Tenant, to do the following work in the Premises, which work shall not be
considered part of the work subject to Landlord's Contribution as set forth in
Section IV of Schedule B hereof, all of which shall be of design, capacity,
finish and color of the building standard adopted by Landlord for the Building
(herein called "Building Standard"):
A. Demolish the existing improvements in the Premises in
accordance with demolition specifications to be delivered by
Tenant and reviewed and approved by Landlord in accordance
with the terms of this Lease (such approval not to be
unreasonably withheld), including the removal of any
asbestos-containing vinyl floor tile located therein, and
cause the Premises to be in broom clean condition.
B. Flash patch the floors of the Premises, as required.
5. Provide an ACP-5 to Tenant for the Premises following the
demolition of the existing improvements therein.
<PAGE>
SCHEDULE D
Landlord's Post-Commencement Work
I. Landlord agrees, at its sole cost and expense and without charge to Tenant,
to do the following work in the Premises, which work shall not be considered
part of the work subject to Landlord's Contribution as set forth in Section IV
of Schedule B hereof, all of which shall be of design, capacity, finish and
color of the Building Standard:
A. Cause all exterior windows in the Premises to be double-
glazed thermopane windows no later than October 1, 1999.
3. Provide one (1) electricity disconnect point to the eleventh
(11th) floor of the Building no later than August 1, 1999.
C. Install new water-tight clear glass in the two (2) existing
skylights in the Premises on the 37th street side of the
Building no later than August 1, 1999, which skylights shall
be maintained and repaired by Landlord throughout the Term
hereof, unless such maintenance or repair is necessitated by
the negligence or willful misconduct of Tenant or Tenant's
agents, employees or contractors. Upon Tenant's written
request and at Tenant's sole cost and expense, Landlord
agrees to install skylights in the other two (2) existing
roof penetration areas, provided the installation, repair
and maintenance of the same shall be at Tenant's sole cost
and expense.
7. Promptly following Landlord's receipt of Tenant's electrical
drawings, identify one (1) connection point on the Building
Class E System for connection of Tenant's devices by Tenant;
it being understood and agreed that Tenant shall make all
connections thereto as part of Tenant's Initial Alteration
and such connections shall be supervised by the Building's
fire alarm vendor at Tenant's sole cost.
II. Landlord shall perform Landlord's Post-Commencement Work simultaneously with
Tenant's Initial Alteration. Tenant shall not interfere (other than to a de
minimis extent) with the performance of Landlord's Post-Commencement Work and
shall coordinate Tenant's Initial Alteration so that it does not interfere with
the performance of Landlord's Post-Commencement Work.
III. Landlord and Tenant acknowledge that the Post-Commencement Work involves
the procurement of long lead items and, accordingly, may be performed after
Tenant has taken possession of the Premises. Landlord and Tenant shall cooperate
to mutually determine when such work will be commenced. However, once the
Post-Commencement Work begins, Landlord shall have the right to complete the
Post-Commencement Work on a continuous, uninterrupted schedule without Tenant
interference. Tenant acknowledges that the Post-Commencement Work shall be
performed at such times, including normal business hours, and in such a manner
as Landlord shall reasonably determine, provided that Landlord agrees to perform
such work in a manner intended to minimize material inconvenience to Tenant.
Tenant agrees (i) to cooperate with Landlord or Landlord's agent during the
performance of such work, including, but not limited to, the temporary removal
and relocation of Tenant's fixtures, equipment and other personalty by Tenant,
to the extent reasonably necessary, and (ii) to release Landlord from all
losses, costs, damages and expenses incurred as a result of such work, unless
any such loss, cost, damage or expense arises from Landlord's negligence or
wilful misconduct. Landlord acknowledges that it will be engaging union labor to
install the windows and to perform the electrical and Class E System work.
<PAGE>
SCHEDULE E
REQUIREMENTS FOR
"CERTIFICATES OF FINAL APPROVAL"
1. All required Building Department Forms must be properly filled out and
completed by the approved architect/engineer of record or Building
Department expediter, as required.
2. All forms are to be submitted to Landlord for Landlord's review and
signature prior to submission of final plans and forms to the New York
City Building Department, as required.
3. All pertinent forms and filed plans are to be stamped and sealed by a
licensed architect and/or professional engineer, as required. All
controlled inspections are to be performed by the architect/engineer of
record unless approved otherwise by Landlord.
4. A copy of all approved forms, permits and approved Building Department
plans (stamped and signed by the New York City Building Department) are
to be submitted to the building office prior to start of work.
5. Copies of all completed inspection reports and NYC Building Department
sign-offs are to be submitted to the building office immediately
following completion of construction, as required.
6. All claims, violations or discrepancies with improperly filed plans,
applications, or improperly completed work shall become the sole
responsibility of the applicant to resolve, as required.
7. All changes to previously approved plans and applications must be filed
under an amended application, as required. Landlord reserves the right
to withhold approvals to proceed with changes until associated plans
are properly filed with the New York City Building Department, as
required.
8. The architect/engineer of record accepts full responsibility for any
and all discrepancies or violations which arise out of non-compliance
with all local laws and building codes having jurisdiction over the
work.
9. Landlord reserves the right to reject any and all work requests and new
work applications that are not properly filed or accompanied by
approved plans and building permits.
10. All ACP's and asbestos inspections must be conducted by a licensed and
fully qualified asbestos inspection agency approved by Landlord.
These forms must be furnished by the Architect/ Engineer of
record or Building Department expediter (filing agency) and approved by the
Landlord prior to submitting all plans and forms to the New York City Building
Department for final approval.
These forms must be furnished in order for Tenant to receive
"Landlord's Contribution."
<TABLE>
<CAPTION>
FORM DESCRIPTION
---- -----------
<S> <C> <C> <C>
________ * PW-1 Building Notice Application (Plan work
approval application)
________ * PW-1B Plumbing/Mechanical Equipment
Application and Inspection Report
________ * PW-1 Statement Form B
________ * TR-1 Amendment Controlled Inspection
Report
________ PW-2 Building Permit Form (All Disciplines)
________ B Form 708 Building Permit "Card"
________ * TR-1 Certification of Completed Inspection and
Certified Completion Letter by
Architect/Engineer of record or Building
Department expediter
________ PW-3 Cost Affidavit Form
</TABLE>
<PAGE>
E - 2
<TABLE>
<S> <C> <C> <C>
________ PW-4 Equipment Use Application Form
________* PW-6 Revised Certificate of Occupancy for change
in use (if applicable)
________ Form ACP7 New York City Department of
or Environmental Protection Asbestos
Form ACP5 Inspection Report as prepared by a
licensed and approved asbestos inspection
agency
Building Department Equipment Use Permits
for all new HVAC equipment installed under
this application
Revised Certificate of Occupancy for change
in use (if applicable)
</TABLE>
* These items must be PERFORATED (with the date and New York City
Building Department Stamp) to signify New York City Building Department
Approval. All forms must bear proper approvals and sign-offs prior to
authorization given by Landlord to proceed with the work.
<PAGE>
SCHEDULE F
TENANT ALTERATION WORK AND NEW CONSTRUCTION
CONDITIONS AND REQUIREMENTS
1. No Alterations are permitted to commence until original CERTIFICATES OF
INSURANCE required from Tenant's general contractor (the "General
Contractor") and all subcontractors complying with the attached
requirements are on file with the Building office.
2. All New York City Building Department applications with assigned BN#
and PERMITS must be on file with the Building office PRIOR to starting
work. A copy of the building permit must also be posted on the job site
by the General Contractor. The General Contractor shall make all
arrangements with Landlord's expediter for final inspections and
sign-offs prior to substantial completion.
3. The General Contractor shall comply with all Federal, State and local
laws, building codes, OSHA requirements, and all laws having
jurisdiction over the performance and handling of the Alterations.
4. The existing "Class E" fire alarm system (including all wiring and
controls), if any, must be maintained at all times. Any additions or
alterations to the existing system shall be coordinated with the
Building office as required. All final tie-in work is to be performed
by Landlord's fire alarm vendor and coordinated by the General
Contractor. All costs for the tie-ins are reimbursable to Landlord by
Tenant.
5. All wood used, whether temporary or not, such as blocking, form work,
doors, frames, etc. shall be fire rated in accordance with the New York
City Building and Fire Code requirements governing this work.
6. Building standby personnel (i.e. Building operating engineer and/or
elevator operator), required for all construction will be at Landlord's
discretion. Freight elevators used for overtime deliveries must be
scheduled in writing with Landlord at least 24 hours in advance, as
required. All costs associated are reimbursable to Landlord by Tenant.
7. The General Contractor shall comply with the Rules and Regulations of
the Building elevators and the manner of handling materials, equipment
and debris to avoid conflict and interference with Building operations.
All bulk deliveries or removals will be made prior to 8:00 a.m. and
after 5:00 p.m. or on weekends, as required.
8. No exterior hoisting will be permitted. All products or materials
specified are to be assembled on-site, and delivered to the site in
such a manner so as to allow unobstructed passage through the
Building's freight elevator, lobbies, corridors, etc. The General
Contractor will be responsible for protection of all finished spaces,
as required.
9. All construction personnel must use the freight elevator at all times.
Any and all tradesman found riding the passenger elevators without
prior approval from Landlord will be escorted out of the Building and
not be allowed re-entry without written approval from the Building
office.
10. During the performance of Alterations other than Cosmetic Alterations,
Tenant's construction supervisor or job superintendent must be present
on the job site at all times.
11. During the performance of Alterations, all demolition work shall be
performed after 6:00 p.m. during the week or on weekends. This would
include carting or rubbish removal as well as performing any operations
that would disturb other Building tenants or other occupants (drilling,
chopping, grinding, recircuiting, etc.).
12. No conduits or cutouts are permitted to be installed in the floor slab
without prior written approval from Landlord. Landlord reserves the
right to restrict locations of such items to areas that will not
interfere with the Building's framing system or components. No conduits
or cutouts are permitted outside of Tenant's Premises.
13. Plumbing connections to Building supply, waste and vent lines are to be
performed after normal working hours, and coordinated with the Building
manager, and are to include the following minimum requirements:
A. Separate shutoff valves for all new hot and/or cold water
supply lines (including associated access doors).
<PAGE>
F - 3
B. Patch and repair of existing construction on floor below,
immediately following completion of plumbing work (to be
performed after normal working hours, as required).
14. The General Contractor must coordinate all work to occur in public
spaces, core areas and other tenant occupied spaces with Landlord, and
perform all such work after normal working hours (to include associated
patch and repair work). The General Contractor shall provide all
required protection of existing finishes within the affected area(s).
15. The General Contractor must perform all floor coring, drilling or
trenching after normal business hours, and obtain Landlord's permission
and approval of same prior to performing such work.
16. Convector mounted outlets and associated conduits, wiring, boxes, etc.,
shall be located and installed in areas where they will not hinder the
operation or maintenance of existing fan coil units or prevent removal
or replacement of access panels or removable covers.
17. The General Contractor shall be responsible for all final tests,
inspections and approvals associated with all modifications, deletions
or additions to Building Class "E" systems and equipment.
18. Recircuiting of existing power/lighting panels and circuits affecting
Building and/or tenant operations are to be performed after normal
business hours and coordinated with the Building office in advance, as
required.
19. All burning and welding to be performed in occupied or finished areas
shall be performed after normal business hours and coordinated with the
Building office in advance, as required. Proper ventilation of the work
area will be required in order to perform this work.
20. The General Contractor shall provide Landlord's managing agent and the
Building office with all approved submittal and closeout documents as
well as all required final inspections and Building Department
sign-offs just prior to or immediately following completion of
construction.
21. Any and all Alterations to the Building sprinkler system (including
draining of system) are to be performed after normal business hours and
coordinated with the Building office, as required. All costs associated
with the shut down, drain and refill of the sprinkler system are
reimbursable to Landlord.
22. The General Contractor shall be responsible for any and all daily
cleanup required to keep the job site clean throughout the entire
course of the Alterations. No debris shall be allowed to accumulate in
any public spaces.
23. The General Contractor shall be responsible for proper protection of
all existing finishes and construction for Alterations to be performed
in common Building areas. All Alterations to be performed in occupied
areas outside of the Premises shall be performed after normal business
hours and coordinated with the Building office, as required.
24. The General Contractor shall perform any and all hoisting associated
with the Alterations after normal business hours. The General
Contractor will obtain all required permits and insurance to perform
work of this nature. The General Contractor shall specify hoisting
methods and provide all required permits and insurance to Landlord's
managing agent and the Building office prior to commencement of
Alterations.
25. Union labor shall be used by all contractors and subcontractors
performing any and all Alterations within the Building. All contractors
and subcontractors shall perform all work in a professional manner, and
shall work in close harmony with one another as well as with the
Building management and maintenance personnel.
26. The General Contractor shall forward complete copies of all approved
contractor submittal, and Building and Fire Department sign-offs and
Statement of Responsibility forms, to the Building office immediately
following completion of construction.
INSURANCE REQUIREMENTS
LIABILITY LIMITATIONS
<PAGE>
A. Comprehensive or Commercial General Liability Insurance written on an
occurrence basis, to afford protection of $5,000,000 combined single
limit for personal injury, bodily injury and/or death and Broad Form
property damage arising out of any one occurrence; and which insurance
shall include coverage for premises-operations (including explosion,
collapse and underground coverage), elevators, contractual liability,
owner's and contractor's protective liability, and completed operations
liability.
B. Comprehensive Auto Liability Insurance covering the use of all owned,
non-owned and hired vehicles providing bodily injury and property
damage coverage, all on a per occurrence basis, at a combined single
limit of $1,000,000.
C. Worker's Compensation Insurance providing statutory benefits for
contractor's employees and Employer's Liability Coverage in an amount
not less than $100,000/$500,000/$100,000.
D. Property coverage damage to or loss of use of contractor's equipment.
CERTIFICATE HOLDER
- ------------------
Polestar Fifth Property Associates LLC
c/o New Rock Realty Management LLC
420 Lexington Avenue
New York, New York 10170
ADDITIONAL INSUREDS
- -------------------
417 FS Realty LLC
c/o Prince Management Corp.
498 Seventh Avenue
New York, New York 10036
Polestar Fifth Property Associates LLC
c/o New Rock Realty Management LLC
420 Lexington Avenue
New York, New York 10170
Polestar Fifth Funding LLC
c/o NorthStar Capital Partners LLC
527 Madison Avenue
New York, New York 10022
Polestar Fifth Optionee LLC
c/o NorthStar Capital Partners LLC
527 Madison Avenue
New York, New York 10022
Polestar Fifth Holding LLC
c/o NorthStar Capital Partners LLC
527 Madison Avenue
New York, New York 10022
PW Real Estate Investments Inc.
c/o Paine Weber Real Estate Securities, Inc.
1285 Sixth Avenue, 19th Floor
New York, New York 10019
Emmes Asset Management Corp.
420 Lexington Avenue
New York, New York 10170
New Rock Realty Management LLC
420 Lexington Avenue
New York, New York 10170
In addition to listing each of the Additional Insured parties, as noted above,
the Certificate of Insurance, general liability form, shall state that "The
General Aggregate limit applies separately to each project."
<PAGE>
The name and address of the Additional Insureds shall appear on the Certificate
of Insurance. The insurance agent's address and telephone number is also
required.
<PAGE>
vi
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
<S> <C>
Alterations.............................................................3
Assessed Valuation.....................................................25
Available Space........................................................37
Base Labor Rates.......................................................26
Base Labor Year.....................................................1, 39
Base Tax Year.......................................................1, 39
Base Taxes.............................................................25
Broker..................................................................1
Building................................................................1
Building Standard...................................................C - 3
business days..........................................................34
CERCLA.................................................................36
CFC.....................................................................4
Class A Office Buildings...............................................25
Commencement Date.......................................................1
Comparison Year........................................................25
Cosmetic Alterations....................................................3
Deficiency.............................................................20
Environmental Laws.....................................................36
Events of Default......................................................18
Existing PH Lease......................................................38
Expiration Date.........................................................1
Fair Market Value......................................................38
Final Plans.........................................................B - 1
force majeure event....................................................23
General Contractor..................................................B - 2
Governmental Entity....................................................15
Hazardous Substances...................................................34
Hazardous Substances Claims............................................36
Independent Broker.....................................................38
Interested Party.......................................................38
Labor Rate Factor.......................................................1
Labor Rate Multiple.....................................................1
Labor Rates............................................................25
Landlord................................................................1
Landlord's Broker......................................................38
Landlord's Broker's Letter.............................................38
Landlord's Consultant...................................................4
Landlord's Contribution.............................................B - 1
Landlord's Statement...................................................26
Landlord's Work........................................................16
Leaseback Space........................................................11
Letter of Credit.......................................................33
Limited Liability Successor Entity.....................................32
Mortgages...............................................................6
Offer..................................................................37
office(s)..............................................................34
Others.................................................................26
Overtime Periods.......................................................29
Parties................................................................18
Partnership Tenant.....................................................31
Penthouse Space........................................................38
Penthouse Space Commencement Date......................................38
Permitted Uses..........................................................1
Premises................................................................1
R.A.B..................................................................25
Real Property...........................................................1
reasonable efforts.....................................................37
reenter/reentry........................................................34
related corporation....................................................15
Remedial Work..........................................................36
Rent....................................................................1
Rent Commencement Date..................................................2
Rules and Regulations...................................................7
Security Deposit........................................................2
Sublet Space...........................................................14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Substantial Services Failure...........................................31
Substitution Date......................................................33
Superior Leases.........................................................6
Tax Year...............................................................25
Taxes..................................................................25
Tenant..................................................................1
Tenant's Broker........................................................38
Tenant's Broker's Letter...............................................38
Tenant's Initial Alteration......................................2, B - 1
Tenant's Proportionate Share............................................2
Unavoidable Delays.....................................................24
</TABLE>
<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 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> (475,610)
<SECURITIES> 0
<RECEIVABLES> 11,497,545
<ALLOWANCES> 141,489
<INVENTORY> 0
<CURRENT-ASSETS> 12,085,338
<PP&E> 2,304,369
<DEPRECIATION> 947,735
<TOTAL-ASSETS> 13,677,019
<CURRENT-LIABILITIES> 9,719,987
<BONDS> 5,598,000
700,000
0
<COMMON> 7,900
<OTHER-SE> 2,018,011
<TOTAL-LIABILITY-AND-EQUITY> 13,677,019
<SALES> 2,065,348
<TOTAL-REVENUES> 25,923,128
<CGS> 1,698,356
<TOTAL-COSTS> 14,559,628
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 102,196
<INTEREST-EXPENSE> 324,591
<INCOME-PRETAX> (1,087,558)
<INCOME-TAX> (460,258)
<INCOME-CONTINUING> (627,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (627,300)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
