<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999
REGISTRATION NO. 333-84045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
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
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
------------------------
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
RONALD G. PETTENGILL, JR. ROBERT L. BELAU
CHIEF EXECUTIVE OFFICER PRESIDENT
PREDICTIVE SYSTEMS, INC.
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. PETER B. TARR, ESQ.
BABAK YAGHMAIE, ESQ. JOSEPH E. MULLANEY III, ESQ.
BROBECK, PHLEGER & HARRISON LLP HALE AND DORR LLP
1633 BROADWAY, 47(TH) FLOOR 60 STATE STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02109
(212) 581-1600 (617) 526-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]
4,000,000 SHARES
COMMON STOCK
Predictive Systems, Inc. is offering 4,000,000 shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol "PRDS."
------------------------
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....................................... $ 18.00 $72,000,000
Underwriting Discounts and Commissions...................... $ 1.26 $ 5,040,000
Proceeds to Predictive...................................... $ 16.74 $66,960,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on November 1, 1999.
------------------------
ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS OCTOBER 27, 1999.
<PAGE>
[PREDICTIVE LOGO WITH PICTURE OF NETWORK CONSULTANTS
AND THE TEXT "BUSINESS-SAVVY NETWORK CONSULTANTS".]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL NOVEMBER 21, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Forward-Looking Statements; Market Data..................... 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 32
Management.................................................. 45
Certain Transactions........................................ 56
Principal Stockholders...................................... 59
Description of Capital Stock................................ 61
Shares Eligible for Future Sale............................. 64
Underwriting................................................ 66
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 68
Index to Financial Statements............................... F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS.
PREDICTIVE SYSTEMS, INC.
OUR BUSINESS
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. Using our
BusinessFirst methodology, we demonstrate the business value of technology
solutions in specific and measurable terms, thereby enabling our clients to
incorporate objective and quantifiable analysis into their technology investment
decisions. As a result, our clients can gain a clear understanding of the
benefits that they will derive from their network technology investments and a
measure of certainty regarding how their technology investments will be
translated into quantifiable improvements to their business processes.
OUR SERVICES
As an independent service provider, we provide our clients with unbiased
expertise that enables the design, implementation and management of optimal
technology solutions. We provide our services on either a project outsource or
collaborative consulting basis. Our project outsource services are primarily
based and measured against mutually agreed upon service offerings and provide
our clients with certainty of costs, delivery time and project scope. Our
collaborative consulting services enable our clients to utilize our extensive
expertise in order to extend their internal capabilities and to access our
methodologies.
In addition to these services, we have developed an innovative service model
through which we deliver our clients productized services, which are
pre-packaged service products. Our service products are characterized by
pre-defined service offerings that have a pre-defined set of service
deliverables, a pre-defined pricing model and are implemented using a
pre-defined methodology. In contrast to our project outsource and collaborative
consulting services which provide our clients with services that are customized
for, and therefore unique to, each engagement, our service products are
typically provided with little or no modification. We believe that this unique
approach to network services further differentiates us from our competitors.
Our consultants are organized into the following practice areas, which cover
the four cornerstones of network computing: network and systems management;
internetwork design and engineering; performance management; and information
security. This structure enables our consultants to gain in-depth expertise and
become intimately familiar with the best practices and methodologies identified
within each of those disciplines.
OUR MARKET
We believe we are well-positioned to capitalize on global trends impacting
communications technology, primarily the acceptance and growth of the Internet
and private intranets. As a result of these trends, the demand for network
consulting services has grown dramatically. International Data Corporation, a
market research organization, estimates that the worldwide market for these
services will grow from $12.1 billion in 1998 to $25.5 billion by 2003. Although
there are many third-party service providers attempting to address this growing
market, including network equipment vendors, systems integrators, value-added
resellers and network consulting companies, we believe that few have the
requisite focus and expertise to address the multi-faceted issues surrounding
today's complex networking environments.
4
<PAGE>
OUR STRATEGY
Our goal is to become the leading provider of services for the design,
performance, management and security of complex networks. To achieve this goal,
we intend to pursue the following strategies:
- continue to evolve our BusinessFirst methodology;
- expand and enhance our service product offerings;
- continue to attract and retain highly qualified consultants;
- further increase our industry expertise; and
- expand in existing and new geographic markets.
OUR CLIENTS
We provide our services to a broad range of clients in many industries,
including communications services, financial services, network technology and
professional services. Our clients include Allied Signal; Bear Stearns;
Bloomberg; British Telecom; Cisco Systems; UUNET, an MCI WorldCom company;
Pfizer and Qwest. These clients, in the aggregate, accounted for approximately
60.2% of our revenues for the six months ended June 30, 1999 and 55.0% of our
revenues for the year ended December 31, 1998.
RECENT DEVELOPMENTS
In September 1999, we completed the private placement of 1,242,000 shares of
our common stock to Cisco Systems, Inc. for $12.00 per share. In connection with
the investment, we have agreed to nominate a person designated by Cisco for
election to our Board of Directors so long as Cisco owns more than 750,000
shares of our common stock.
In September 1999, we also completed the private placement of 94,867 and
18,133 shares of our common stock to General Atlantic Partners 57, L.P. and GAP
Coinvestment Partners II, L.P., respectively, for $12.00 per share.
OUR HISTORY
We were organized as Predictive Holdings, Inc. in Delaware in February 1995.
In March 1999, in order to simplify our corporate organizational structure,
Predictive Holdings was merged into its wholly-owned subsidiary, Predictive
Systems, the surviving corporation.
Since our inception, we have expanded our service offerings, evolved our
technology expertise and developed the scope of our business to address the most
critical network technology needs of the broad client base we serve. We have
continued to grow our client base by expanding geographically, and we have
supported this client base by attracting and retaining talented professionals at
all levels. As of August 31, 1999, our employee base had grown to 349 full-time
employees.
Our principal executive offices are located at 145 Hudson Street, New York,
New York 10013. Our telephone number is (212) 219-4400. In addition, we maintain
offices in nine other locations: Atlanta, Georgia; Boston, Massachusetts;
Dallas, Texas; Florham Park, New Jersey; Herndon, Virginia; Pleasanton,
California; Santa Cruz, California; London, England; and Amsterdam, The
Netherlands.
------------------------
Except as otherwise noted, all information in this prospectus:
- reflects the automatic conversion of all of our outstanding shares of
series A convertible preferred stock into an aggregate of 6,512,316 shares
of our common stock on the closing of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
"PREDICTIVE SYSTEMS," "BUSINESSFIRST" and the Predictive logo are trademarks
of Predictive. All other trademarks and service marks used in this prospectus
are the property of their respective owners.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Predictive........... 4,000,000 shares
Common stock to be outstanding after this
offering................................... 22,542,280 shares
Use of proceeds.............................. For general corporate purposes, including
working capital. We may also use a portion of
the proceeds for acquisitions of
complementary businesses or technologies.
Please see "Use of Proceeds."
Proposed Nasdaq National Market symbol....... PRDS
</TABLE>
The number of shares outstanding after this offering is based on our shares
of common stock outstanding as of August 31, 1999 and gives effect to:
- the automatic conversion of all outstanding shares of series A convertible
preferred stock into 6,512,316 shares of our common stock on the closing
of this offering;
- the sale of 1,242,000 shares of our common stock to Cisco at $12.00 per
share subsequent to August 31, 1999; and
- the sale of 94,867 and 18,133 shares of our common stock to General
Atlantic Partners 57 and GAP Coinvestment Partners II, respectively, at
$12.00 per share subsequent to August 31, 1999.
This information excludes:
- 10,293,013 shares subject to options outstanding as of August 31, 1999 at
a weighted average exercise price of $1.87 per share;
- 2,706,987 additional shares reserved for issuance under our stock option
plan; and
- 750,000 additional shares available for issuance under our employee stock
purchase plan.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize the financial data for our business. You
should read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 8,106 $18,087 $25,923 $ 9,465 $22,566
Cost of revenues............................. 4,352 10,407 14,560 5,617 11,278
Gross profit................................. 3,754 7,680 11,363 3,848 11,288
Noncash compensation expense................. -- -- -- -- 10
Operating profit (loss)...................... 1,543 1,887 (822) (1,223) 180
Net income (loss)............................ $ 863 $ 1,011 $ (627) $ (737) $ (183)
======= ======= ======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic........................................ $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
Diluted...................................... $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic........................................ 4,269 4,382 6,015 4,634 8,971
Diluted...................................... 11,586 12,765 6,015 4,634 8,971
</TABLE>
The following table is a summary of our balance sheet at June 30, 1999. The
unaudited pro forma data give effect to the sale of 1,242,000, 94,867 and 18,133
shares of our common stock to Cisco, General Atlantic Partners 57 and GAP
Coinvestment Partners II, respectively, at $12.00 per share subsequent to June
30, 1999 and the application of the net proceeds therefrom. The pro forma as
adjusted data give effect to:
- the automatic conversion of 6,512,316 shares of our series A convertible
preferred stock into 6,512,316 shares of common stock on the closing of
the offering and the reissuance of treasury stock in connection with this
conversion; and
- the sale of 4,000,000 shares of common stock at an initial public offering
price of $18.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
------- ------- -------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 360 $15,870 $81,330
Working capital............................................. 11,802 27,312 92,772
Total assets................................................ 17,633 33,143 98,603
Total stockholders' equity.................................. 12,761 28,271 93,731
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS OR
FINANCIAL CONDITION WOULD LIKELY SUFFER. IN THIS CASE, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR LIMITED OPERATING HISTORY, PARTICULARLY IN LIGHT OF OUR RECENT GROWTH, MAKES
IT DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND TO PREDICT OUR FUTURE SUCCESS
We commenced operations in February 1995 and therefore have only a limited
operating history for you to evaluate our business. Because of our limited
operating history, recent growth and the fact that many of our competitors have
longer operating histories, we believe that the prediction of our future success
is difficult. You should evaluate our chances of financial and operational
success in light of the risks, uncertainties, expenses, delays and difficulties
associated with operating a new business, many of which are beyond our control.
You should not rely on our historical results of operations as indications of
future performance. The uncertainty of our future performance and the
uncertainties of our operating in a new and expanding market increase the risk
that the value of your investment will decline.
BECAUSE MOST OF OUR REVENUES ARE GENERATED FROM A SMALL NUMBER OF CLIENTS, OUR
REVENUES ARE DIFFICULT TO PREDICT AND THE LOSS OF ONE COULD SIGNIFICANTLY REDUCE
OUR REVENUES
During the six months ended June 30, 1999, each of Bear Stearns and Qwest
Communications accounted for 23.1% and 17.1%, respectively, of our revenues. Our
five largest clients accounted for 57.0% of our revenues for the six months
ended June 30, 1999. For the year ended December 31, 1998, our five largest
clients accounted for 54.9% of our revenues. If one of our major clients
discontinues or significantly reduces the use of our services, we may not
generate sufficient revenues to offset this loss of revenues and our net income
will decrease. In addition, the non-payment or late payment of amounts due from
a major client could adversely affect us.
OUR CLIENTS MAY TERMINATE THEIR CONTRACTS WITH US ON SHORT NOTICE
Our services are often delivered pursuant to short-term arrangements and
most clients can reduce or cancel their contracts for our services without
penalty and with little or short notice. If a major client or a number of small
clients terminate our contracts or significantly reduce or modify their business
relationships with us, we may not be able to replace the shortfall in revenues.
Consequently, you should not predict or anticipate our future revenues based
upon the number of clients we have currently or the number and size of our
existing projects.
OUR OPERATING RESULTS MAY VARY FROM QUARTER TO QUARTER IN FUTURE PERIODS, AND AS
A RESULT, WE MAY FAIL TO MEET THE EXPECTATIONS OF OUR INVESTORS AND ANALYSTS,
WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE
Our operating results have varied from quarter to quarter. Our operating
results may continue to vary as a result of a variety of factors. These factors
include:
- the loss of key employees;
- the development and introduction of new service offerings;
- reductions in our billing rates;
- the miscalculation of resources required to complete new or ongoing
projects;
8
<PAGE>
- the utilization of our workforce; and
- the timing and extent of training.
Many of these factors are beyond our control. Accordingly, you should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. In addition, our operating results may be
below the expectations of public market analysts or investors in some future
quarter. If this occurs, the price of our common stock is likely to decline.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM FIXED-PRICE PROJECTS, UNDER
WHICH WE ASSUME GREATER FINANCIAL RISK IF WE FAIL TO ACCURATELY ESTIMATE THE
COSTS OF THE PROJECTS
We derive a substantial portion of our revenues from fixed-price projects.
For the year ending December 31, 1998 and the six months ended June 30, 1999,
fixed-price projects accounted for 26.0% and 36.9% of our revenue, respectively.
We assume greater financial risks on a fixed-price project than on a
time-and-expense based project. If we miscalculate the resources or time we need
for these fixed-price projects, the costs of completing these projects may
exceed the price, which could result in a loss on the project and a decrease in
net income. Further, the average size of our contracts has increased in recent
quarters, resulting in a corresponding increase in our exposure to the financial
risks of fixed-price engagements. We recognize revenues from fixed-price
projects based on our estimate of the percentage of each project completed in a
reporting period. To the extent our estimates are inaccurate, the revenues and
operating profits, if any, that we report for periods during which we are
working on a fixed-price project may not accurately reflect the final results of
the project and we would be required to record an expense for these periods
equal to the amount by which our revenues were previously overstated.
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS WHICH COULD RESULT
IN GREATER THAN EXPECTED LOSSES
Our results of operations may experience seasonal fluctuations as businesses
typically spend less on network management services during the summer and
year-end vacation and holiday periods. Additionally, as a large number of our
employees take vacation during these periods, our utilization rates during these
periods tend to be lower, which reduces our margins and operating income.
Accordingly, we may report greater than expected losses for these periods.
OUR LONG SALES CYCLE MAKES OUR REVENUES DIFFICULT TO PREDICT AND COULD CAUSE OUR
QUARTERLY OPERATING RESULTS TO BE BELOW THE EXPECTATIONS OF PUBLIC MARKET
ANALYSTS AND INVESTORS
The timing of our revenues is difficult to predict because of the length and
variance of the time required to complete a sale. Before hiring us for a
project, our clients often undertake an extensive review process and may require
approval at various levels within their organization. Any delay due to a long
sales cycle could reduce our revenues for a quarter and cause our quarterly
operating results to be below the expectations of public market analysts or
investors. If this occurs, the price of our common is likely to decline.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO GROW OUR BUSINESS, WHICH WE MAY NOT
BE ABLE TO DO
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the success of our existing
and new service offerings and competing technological and market developments.
As a result, we may not be able to generate sufficient cash from our operations
to meet additional working capital requirements, support additional capital
expenditures or take advantage of acquisition opportunities. Accordingly, we may
need to raise additional capital in the future. Our ability to obtain additional
financing will be subject to a number of factors, including market conditions,
our operating performance and investor sentiment. These factors
9
<PAGE>
may make the timing, amount, terms and conditions of additional financing
unattractive for us. If we are unable to raise additional funds when needed, our
ability to operate and grow our business could be impeded.
RISKS RELATED TO OUR STRATEGY AND MARKET
WE MAY HAVE DIFFICULTY MANAGING OUR EXPANDING OPERATIONS, WHICH MAY HARM OUR
BUSINESS
A key part of our strategy is to grow our business, however, our rapid
growth has placed a significant strain on our managerial and operational
resources. From January 1, 1997 to August 31, 1999, our staff increased from
approximately 123 to approximately 349 employees. To manage our growth, we must
continue to improve our financial and management controls, reporting systems and
procedures, and expand and train our work force. We may not be able to do so
successfully.
WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED NETWORK SYSTEMS CONSULTANTS
WHICH COULD AFFECT OUR ABILITY TO COMPETE EFFECTIVELY
Our continued success depends on our ability to identify, hire, train and
retain highly qualified network management consultants. These individuals are in
high demand and we may not be able to attract and retain the number of highly
qualified consultants that we need. If we cannot retain, attract and hire the
necessary consultants, our ability to grow, complete existing projects and bid
for new projects will be adversely affected.
COMPETITION IN THE NETWORK CONSULTING INDUSTRY IS INTENSE, AND THEREFORE WE MAY
LOSE PROJECTS TO OUR COMPETITORS
Our market is intensely competitive, highly fragmented and subject to rapid
technological change. We expect competition to intensify and increase over time.
We may lose projects to our competitors, which could adversely affect our
business, results of operations and financial condition. In addition,
competition could result in lower billing rates and gross margins and could
require us to increase our spending on sales and marketing.
We face competition from systems integrators, value added resellers, local
and regional network services firms, telecommunications providers, and network
equipment and computer systems vendors. These competitors may be able to respond
more quickly to new or emerging technologies and changes in client requirements
or devote greater resources to the expansion of their market share.
Additionally, our competitors have in the past and may in the future form
alliances with various network equipment vendors that may give them an advantage
in implementing networks using that vendor's equipment.
We also compete with internal information technology departments of current
and potential clients. To the extent that current or potential clients decide to
satisfy their needs internally, our business will suffer.
IF WE ARE UNABLE TO INTEGRATE OUR RECENT ACQUISITION OF NETWORK RESOURCE
CONSULTANTS AND COMPANY B.V. AND ANY OTHER FUTURE ACQUISITIONS, OUR BUSINESS MAY
BE DISRUPTED
We recently acquired Network Resource Consultants and Company B.V., a
network consulting company based in The Netherlands. The integration of this and
other future acquisitions presents us with significant financial, managerial and
operational challenges. We may not be able to meet these challenges effectively.
To the extent our management is required to devote significant time and
attention to integrating the technology, operations and personnel of acquired
businesses, we may not be able to properly serve our current clients or attract
new clients. Any difficulties in integrating
10
<PAGE>
acquisitions could disrupt our ongoing business, distract our management and
employees, increase our expenses and otherwise adversely affect our business.
IF WE ARE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES, OUR GROWTH COULD BE
IMPEDED
A component of our growth strategy is the acquisition of, or investment in,
complementary businesses, technologies, services or products. Our ability to
identify and invest in suitable acquisition and investment candidates on
acceptable terms is crucial to this strategy. We may not be able to identify,
acquire or make investments in promising acquisition candidates on acceptable
terms. Moreover, in pursuing acquisition and investment opportunities, we may be
in competition with other companies having similar growth and investment
strategies. Competition for these acquisitions or investment targets could also
result in increased acquisition or investment prices and a diminished pool of
businesses, technologies, services or products available for acquisition or
investment.
OUR ACQUISITION STRATEGY COULD HAVE AN ADVERSE EFFECT ON CLIENT SATISFACTION AND
OUR OPERATING RESULTS
Acquisitions involve a number of risks, including:
- adverse effects on our reported operating results due to accounting
charges associated with acquisitions;
- increased expenses, including compensation expense resulting from newly
hired employees; and
- potential disputes with the sellers of acquired businesses, technologies,
services or products.
Client dissatisfaction or performance problems with an acquired business,
technology, service or product could also have a material adverse impact on our
reputation as a whole. In addition, any acquired business, technology, service
or product could significantly underperform relative to our expectations.
COMPETITION FOR EXPERIENCED PERSONNEL IS INTENSE AND OUR INABILITY TO RETAIN KEY
PERSONNEL COULD INTERRUPT OUR BUSINESS AND ADVERSELY AFFECT OUR GROWTH
Our future success depends, in significant part, upon the continued service
and performance of our senior management and other key personnel, in particular
Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer, and Robert
L. Belau, our President. Losing the services of any of these individuals would
impair our ability to effectively deliver our services and manage our company,
and to carry out our business plan. In addition, competition for qualified
personnel in the network consulting industry is intense and we may not be
successful in attracting and retaining these personnel. There may be only a
limited number of persons with the requisite skills to serve in these positions
and it may become increasingly difficult to hire these persons. Our business
will suffer if we encounter delays in hiring additional personnel.
OUR INTERNATIONAL EXPANSION EFFORTS, WHICH ARE A KEY PART OF OUR GROWTH
STRATEGY, MAY NOT BE SUCCESSFUL
We expect to expand our international operations and international sales and
marketing efforts. Recently, we commenced operations in England. In addition, in
August 1999, we acquired Network Resource Consultants and Company, a network
consulting company based in The Netherlands. We have had limited experience in
marketing, selling and distributing our services internationally. We may not be
able to maintain and expand our international operations or successfully market
our services internationally. Failure to do so may negatively affect our
business, as well as our ability to grow.
11
<PAGE>
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES
ASSOCIATED WITH OPERATING INTERNATIONALLY
Operating internationally may require us to modify the way we conduct our
business and deliver our services in these markets.
We anticipate that we will face the following challenges internationally:
- the burden and expense of complying with a wide variety of foreign laws
and regulatory requirements;
- potentially adverse tax consequences;
- longer payment cycles and problems in collecting accounts receivable;
- technology export and import restrictions or prohibitions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- cultural and language differences;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity during the summer months in
Europe.
If we do not appropriately anticipate changes and adapt our practices to
meet these challenges, our growth could be impeded and our results of operations
could suffer.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME LESS
COMPETITIVE AND OUR BUSINESS WILL SUFFER
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. As a result
of the complexities inherent in today's computing environments, we face
significant challenges in remaining abreast of such changes and product
introductions. If we cannot keep pace with these changes, we will not be able to
meet our clients' increasingly sophisticated network management needs and our
services will become less competitive.
Our future success will depend on our ability to:
- keep pace with continuing changes in industry standards, information
technology and client preferences;
- respond effectively to these changes; and
- develop new services or enhance our existing services.
We may be unable to develop and introduce new services or enhancements to
existing services in a timely manner or in response to changing market
conditions or client requirements.
IF THE USE OF LARGE-SCALE, COMPLEX NETWORKS DOES NOT CONTINUE TO GROW, WE MAY
NOT BE ABLE TO SUCCESSFULLY INCREASE OR MAINTAIN OUR CLIENT BASE AND REVENUES
To date, a majority of our revenues have been from network management
services related to large-scale, complex networks. We believe that we will
continue to derive a majority of our revenues from providing network design,
performance, management and security services. As a result, our future success
is highly dependent on the continued growth and acceptance of large-scale,
complex computer networks and the continued trend among our clients to use
third-party service providers. If the growth
12
<PAGE>
of the use of enterprise networks does not continue or declines, our business
may not grow and our revenues may decline.
IF THE INTERNET DOES NOT GROW AND CONTINUE TO DEVELOP AS A VIABLE BUSINESS TOOL,
DEMAND FOR OUR SERVICES AND OUR REVENUES MAY DECLINE
The growing demand for network management services has been driven in part
by the growth of the Internet. The Internet may not prove to be a viable
commercial marketplace because of:
- inadequate development of the necessary infrastructure;
- lack of development of complementary products (such as high speed modems
and high speed communication lines);
- implementation of competing technology;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; or
- governmental regulation.
Moreover, critical issues concerning the use of the Internet remain
unresolved and may affect the growth of the use of such technologies to solve
business problems. If the Internet fails to grow or grows more slowly as a
viable business tool than anticipated, there will be a significant decline in
the need for our services and our revenues will decline.
YEAR 2000 PROBLEMS PRESENT TECHNOLOGICAL RISKS WHICH MAY BE COSTLY TO CORRECT
AND WHICH MAY DISRUPT OUR BUSINESS
Year 2000 problems could cause us, or our clients, to experience operational
difficulties and incur expenses. Although we have received compliance
information from our material third-party vendors, we have not received
compliance information from all of our third-party vendors. In addition, it is
possible that our third-party vendors were mistaken in certifying that their
systems are Year 2000 compliant. Furthermore, we will not conduct an end-to-end
system test until October 1999. If we fail to fix our internal systems or to fix
or replace material third-party software, hardware or services on a timely
basis, we may suffer lost revenues, increased operating costs and other business
interruptions, any of which would materially and adversely affect us. Moreover,
if we fail to adequately address Year 2000 compliance issues, we may be subject
to claims of mismanagement and related litigation, which would be costly and
time-consuming to defend.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. If those entities fail to be
Year 2000 compliant, there may be a systemic failure beyond our control, such as
a prolonged Internet, telecommunications or electrical failure, which could
materially disrupt our ability to deliver our services.
RISKS RELATED TO INTELLECTUAL PROPERTY MATTERS AND POTENTIAL LEGAL LIABILITY
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. However, we do not have any patents or patent
applications pending and existing trade secret, trademark and copyright laws
afford us only limited protection. Despite our
13
<PAGE>
precautions, it may be possible for third parties to obtain and use our
intellectual property without our authorization. The laws of some foreign
countries are also uncertain or do not protect intellectual property rights to
the same extent as do the laws of the United States.
WE MAY NOT BE ABLE TO OBTAIN TRADEMARK PROTECTION FOR SOME OF OUR IMPORTANT
TRADEMARKS, WHICH WOULD SIGNIFICANTLY IMPAIR OUR ABILITY TO PREVENT OTHERS FROM
USING THOSE TRADEMARKS AND MAY REQUIRE US TO REPLACE THEM WITH NEW TRADEMARKS
The trademark offices in the United States and England have raised
objections to the registration of our "PREDICTIVE SYSTEMS," "BUSINESSFIRST" and
Predictive logo trademarks, including likelihood of confusion with pre-existing
trademarks and descriptiveness. We have responded to these objections and are
awaiting the trademark offices' decisions on our responses. We have not,
however, received any objections from third parties asserting likelihood of
confusion claims with respect to our trademarks. Nonetheless, we may not be able
to obtain trademark registrations in the United States or England, or both, for
one or more of these trademarks, in which case we will be unable to fully
enforce our statutory trademark rights against third parties for these
trademarks, and/or we must decide to replace such trademarks with new
trademarks.
WE MAY HAVE TO DEFEND AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WHICH
COULD BE EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR BUSINESS
We cannot be certain that our services, the finished products that we
deliver or materials provided to us by our clients for use in our finished
products do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. As a result, we may be
subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business. We may
incur substantial expenses in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against us may
result in substantial monetary liability or may materially disrupt the conduct
of our business.
BECAUSE OUR SERVICES ARE OFTEN CRITICAL TO OUR CLIENTS' OPERATIONS, WE MAY BE
SUBJECT TO SIGNIFICANT CLAIMS IF OUR SERVICES DO NOT MEET OUR CLIENTS
EXPECTATIONS
Many of our projects are critical to the operations of our clients'
businesses. If we cannot complete these projects to our clients' expectations,
we could materially harm our clients' operations. This could damage our
reputation, subject us to increased risk of litigation or result in our having
to provide additional services to a client at no charge. Although we carry
general liability insurance coverage, our insurance may not cover all potential
claims to which we are exposed or may not be adequate to indemnify us for all
liability that may be imposed.
RISKS RELATED TO THIS OFFERING
WE DO NOT HAVE A PLAN FOR THE USE OF THE NET PROCEEDS OF THIS OFFERING AND WILL
THEREFORE HAVE DISCRETION AS TO THE USE OF THESE PROCEEDS, WHICH WE MAY NOT USE
EFFECTIVELY
We have no plan with respect to the use of the net proceeds of this offering
and have not committed these proceeds to any particular purpose. Therefore, our
management will have significant flexibility in applying the net proceeds of
this offering and may use the proceeds in ways with which stockholders disagree.
We may not be able to invest these funds effectively.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
Following this offering, the market price of our common stock is likely to
be highly volatile and may fluctuate substantially. As a result, investors in
our common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects. In addition, the
14
<PAGE>
stock market has, from time to time, experienced significant price and volume
fluctuations that have affected the market prices for the securities of
technology companies. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
was often brought against that company. Many technology-related companies have
been subject to this type of litigation. We may also become involved in this
type of litigation. Litigation is often expensive and diverts management's
attention and resources.
WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS
MAY DIFFER FROM OTHER STOCKHOLDERS
Our directors, executive officers and affiliates currently beneficially own
approximately 79.5% of the outstanding shares of our common stock, and after the
offering will beneficially own approximately 67.0% of the outstanding shares of
our common stock. Accordingly, these stockholders will have significant
influence in determining the outcome of any corporate transaction or other
matter submitted to the stockholders for approval, including mergers,
acquisitions, consolidations and the sale of all or substantially all of our
assets, and also the power to prevent or cause a change in control. The
interests of these stockholders may differ from the interests of the other
stockholders.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. In addition, we have a
significant number of shares that are subject to outstanding options. The
exercise of these options and the subsequent sale of the underlying common stock
could cause a further decline in our stock price. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Provisions in our charter and bylaws may have the effect of delaying or
preventing a change of control or changes in our management that stockholders
consider favorable or beneficial. If a change of control or change in management
is delayed or prevented, the market price of our common stock could decline.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
pro forma net tangible book value per share as of June 30, 1999 of $1.62.
Accordingly, investors purchasing shares in this offering will suffer immediate
and substantial dilution of their investment. In addition, we had 10,293,013
shares subject to options outstanding as of August 31, 1999 at a weighted
average exercise price of $1.87 per share. The exercise of these options will
result in further dilution of the value of the shares purchased in this
offering.
15
<PAGE>
FORWARD-LOOKING STATEMENTS; MARKET DATA
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because these
forward looking-statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
This prospectus contains market data related to our business and the network
consulting and integration services industry. This market data includes
projections that are based on a number of assumptions. If these assumptions turn
out to be incorrect, actual results may differ from the projections based on
these assumptions. As a result, our markets may not grow at the rates projected
by these data, or at all. The failure of these markets to grow at these
projected rates may have a material adverse effect on our business, results of
operations and financial condition, and the market price of our common stock.
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common stock
offered by us are estimated to be $65.5 million, 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 $75.5 million.
The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock, and facilitate future
access to public markets. As of the date of this prospectus, we have not made
any specific expenditure plans with respect to the proceeds of this offering.
Accordingly, our management will have significant flexibility in applying the
net proceeds of this offering. We expect to use the net proceeds of this
offering for general corporate purposes, including working capital. A portion of
the net proceeds may also be used for the acquisition of complementary
businesses or technologies. We are not currently a party to any contracts,
letters of intent, commitments or agreements and are not currently engaged in
active negotiations, with respect to any acquisitions.
Pending such uses, we will invest the net proceeds of this offering in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not intend to pay cash dividends in the
foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to (1) the receipt of the net
proceeds from the sale of 1,242,000, 94,867, and 18,133 shares of our
common stock to Cisco, General Atlantic Partners 57 and GAP Coinvestment
Partners II, respectively, at $12.00 per share subsequent to June 30, 1999
and the application of the net proceeds therefrom, (2) the automatic
conversion of our series A convertible preferred stock into common stock,
and (3) the reissuance of treasury stock in connection with this
conversion; and
- on a pro forma as adjusted basis to reflect our sale of shares of common
stock at an initial public offering price of $18.00 per share, after
deducting underwriting discounts and commissions and the estimated
offering expenses payable by us. Please see "Use of Proceeds."
You should read this information together with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------
<S> <C> <C> <C>
PRO FORMA
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- ---------
<CAPTION>
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Long term debt.............................................. $ -- $ -- $ --
Stockholders' equity:
Convertible preferred stock, $.001 par value, 20,000,000
shares authorized, 6,512,316 issued and outstanding,
actual; 10,000,000 authorized, none issued and
outstanding, pro forma and pro forma as adjusted........ 7 -- --
Common stock, $.001 par value, 50,000,000 shares
authorized, 12,465,750 issued and 9,610,650 outstanding,
actual; (200,000,000 authorized, 17,477,966 issued and
outstanding, pro forma; 21,477,966 issued and
outstanding, pro forma as adjusted)..................... 12 17 21
Additional paid-in capital.................................. 20,308 27,421 92,877
Treasury stock.............................................. (8,399) -- --
Deferred compensation....................................... (295) (295) (295)
Retained earnings........................................... 1,144 1,144 1,144
Accumulated other comprehensive loss........................ (16) (16) (16)
------- ------- ---------
Total stockholders' equity................................ 12,761 28,271 93,731
------- ------- ---------
Total capitalization.................................... $12,761 $28,271 $ 93,731
======= ======= =========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 1999. It does not
include:
- 10,293,013 shares subject to options outstanding as of August 31, 1999 at
a weighted average exercise price of $1.87 per share;
- 2,706,987 additional shares reserved for issuance under our stock option
plan; and
- 750,000 additional shares available for issuance under our employee stock
purchase plan.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$28.3 million, or $1.62 per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of stock
outstanding at that date, assuming the receipt of the net proceeds from the sale
of 1,242,000, 94,867 and 18,133 shares of our common stock to Cisco, General
Atlantic Partners 57 and GAP Coinvestment Partners II, respectively, at
$12.00 per share, the conversion of all outstanding shares of our series A
convertible preferred stock into common stock and the reissuance of our treasury
stock in connection with this conversion. Dilution in net tangible book value
per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the net tangible book
value per share of common stock immediately after the completion of this
offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us, our pro forma net tangible book
value as of June 30, 1999 would have been $93.7 million, or $4.36 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.74 per share to existing stockholders and an immediate dilution of $13.64 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>
Initial public offering price per share..................... $18.00
Pro forma net tangible book value per share at June 30,
1999.................................................... $1.62
Pro forma increase attributable to new investors.......... 2.74
-----
Pro forma net tangible book value per share after this
offering.................................................. 4.36
-----
Pro forma dilution per share to new investors............... $13.64
=====
</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 initial public offering
price of $18.00 per share, before deducting the estimated underwriting discounts
and commissions and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 17,477,966 81.4% $27,133,111 27.4% $ 1.55
New investors............ 4,000,000 18.6 72,000,000 72.6 18.00
---------- ----- ----------- -----
Total................ 21,477,966 100.0% $99,133,111 100.0%
========== ===== =========== =====
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding as of June 30, 1999. As of August 31, 1999, there were options
outstanding to purchase a total of 10,293,013 shares of common stock with a
weighted average exercise price of $1.87 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
Please see "Capitalization."
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1997 and
1998 and the selected consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of June 30, 1999 and the
consolidated statements of operations for the six months ended June 30, 1998 and
1999 have been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated balance sheet data as of
December 31, 1996 has been derived from our consolidated audited financial
statements not included in this prospectus. The selected consolidated balance
sheet as of December 31, 1995 and the selected consolidated statement of
operations data for the period from February 10, 1995 (inception) to
December 31, 1995 are derived from our unaudited consolidated financial
statements not included in this prospectus.
The unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for the fair presentation of our consolidated
financial position and the consolidated results of operations for those periods.
Results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year or for any
future period.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes to those statements included elsewhere in this prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995 (INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
---------------- ------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1998 1999
----------- ----------- ---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Professional services............. $ 2,090 $ 6,819 $ 16,897 $ 23,858 $ 8,935 $ 21,278
Hardware and software sales....... 161 1,287 1,190 2,065 530 1,288
----------- ----------- ---------- ---------- ---------- ----------
Total revenues.................. 2,251 8,106 18,087 25,923 9,465 22,566
Cost of revenues:
Professional services............. 981 3,382 9,590 12,861 5,179 10,246
Hardware and software purchases... 161 970 817 1,699 438 1,032
----------- ----------- ---------- ---------- ---------- ----------
Total cost of revenues.......... 1,142 4,352 10,407 14,560 5,617 11,278
----------- ----------- ---------- ---------- ---------- ----------
Gross profit........................ 1,109 3,754 7,680 11,363 3,848 11,288
Expenses:
Sales and marketing............... 220 386 1,082 3,433 1,255 3,409
General and administrative........ 535 1,683 4,390 8,184 3,587 7,377
Depreciation and amortization..... 63 142 321 568 229 312
Noncash compensation expense...... -- -- -- -- -- 10
----------- ----------- ---------- ---------- ---------- ----------
Operating profit (loss)............. 291 1,543 1,887 (822) (1,223) 180
Other Income (Expense):
Interest income................... 5 31 27 58 13 70
Other income...................... -- 8 4 1 -- 37
Interest expense.................. -- -- (36) (324) (67) (109)
----------- ----------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes........ 296 1,582 1,882 (1,087) (1,277) (178)
Income tax provision (benefit)...... 146 719 871 (460) (540) 361
----------- ----------- ---------- ---------- ---------- ----------
Net income (loss)................... $ 150 $ 863 $ 1,011 $ (627) $ (737) $ (183)
=========== =========== ========== ========== ========== ==========
Net income (loss) per share:
Basic............................. $ 0.04 $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
=========== =========== ========== ========== ========== ==========
Diluted........................... $ 0.01 $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
=========== =========== ========== ========== ========== ==========
Weighted average common shares
outstanding:
Basic............................. 4,245 4,269 4,382 6,015 4,634 8,971
=========== =========== ========== ========== ========== ==========
Diluted........................... 10,396 11,586 12,765 6,015 4,634 8,971
=========== =========== ========== ========== ========== ==========
</TABLE>
Please see Note 3 to our consolidated financial statements for an
explanation of the number of shares used in per share computations. Upon the
closing of this offering, each share of our series A preferred stock will
convert into one share of our common stock. On a pro forma basis, basic and
diluted loss per share, had each share of our series A preferred stock been
immediately converted into common stock at the time of issuance, would have been
$(0.01) for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 JUNE 30, 1999
------ ------ ------- ------- -------
<CAPTION>
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 270 $ 638 $ 420 $ -- $ 360
Working capital............................................ 661 1,178 1,679 2,365 11,802
Total assets............................................... 1,180 3,629 6,870 13,677 17,633
Total stockholders' equity................................. 192 1,061 2,072 2,026 12,761
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Substantially all of our revenues are derived from professional services. We
provide network consulting services to our clients on either a project outsource
or collaborative consulting basis. We derive revenues from these services on
both a fixed-price, fixed-time basis and on a time-and-expense basis. We use our
BusinessFirst methodology to estimate and propose prices for our fixed-price
projects. The estimation process accounts for standard billing rates particular
to each project, the client's technology environment, the scope of the project,
and the project's timetable and overall technical complexity. A member of our
senior management team must approve all of our fixed-price proposals. For these
contracts, we recognize revenue using a percentage-of-completion method
primarily based on costs incurred. We make provisions for estimated losses on
uncompleted contracts on a contract-by-contract basis and recognize such
provisions in the period in which the losses are determined. Professional
services revenues for time-and-expense based projects are recognized as services
are performed. Any payments received in advance of services performed are
recorded as deferred revenue. Our clients are generally able to reduce or cancel
their use of our professional services without penalty and with little or no
notice. We also derive limited revenues from the sale of hardware and software.
We sell hardware and software only when specifically requested by a client. We
expect revenues from the sale of hardware and software to continue to decline on
a percentage basis.
Since we recognize professional services revenues only when our consultants
are engaged on client projects, the utilization of our consultants is important
in determining our operating results. In addition, a substantial majority of our
operating expenses, particularly personnel and related costs, depreciation and
rent, are relatively fixed in advance of any particular quarter. As a result,
any underutilization of our consultants may cause significant variations in our
operating results in any particular quarter and could result in losses for such
quarter. Factors which could cause underutilization include:
- the reduction in size, delay in commencement, interruption or termination
of one or more significant projects;
- the completion during a quarter of one or more significant projects;
- the miscalculation of resources required to complete new or ongoing
projects; and
- the timing and extent of training, weather related shut-downs, vacations
and holidays.
Our cost of revenues consist of costs associated with our professional
services and hardware and software purchases. Costs of revenues associated with
professional services include compensation and benefits for our consultants and
project-related travel expenses. Costs of hardware and software purchases
consist of acquisition costs of third-party hardware and software resold.
On August 12, 1999, we acquired Network Resource Consultants and Company for
an aggregate purchase price of approximately $4.3 million. The purchase price
was paid in the form of 1,062,814 shares of our common stock in exchange for all
of the outstanding capital stock of Network Resource Consultants and Company.
The acquisition was accounted for as a purchase and resulted in intangible
assets of approximately $4.3 million representing the excess purchase price over
the fair value of the net assets acquired. The intangible assets will be
amortized over a period of 5 years.
On September 16, 1999, we completed the sale of 1,242,000 shares of our
common stock to Cisco at $12.00 per share for net proceeds of approximately
$14.2 million.
22
<PAGE>
On September 22, 1999, we completed the sale of 94,867 and 18,133 shares of
our common stock to General Atlantic 57, and GAP Coinvestment Partners II,
respectively, at $12.00 per share for net proceeds of approximately $1.4
million.
We plan to continue to expand our operations by hiring additional
consultants and other employees, and adding new offices, systems and other
infrastructure. The resulting increase in operating expenses will have a
material adverse effect on our operating results if our revenues do not increase
to support such expenses. Based on all of the foregoing, we believe that our
quarterly revenue and operating results are likely to vary significantly in the
future and that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied on as indications of future
performance.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
Revenues:
Professional services.............................. 84.1% 93.4% 92.0% 94.4% 94.3%
Hardware and software sales........................ 15.9 6.6 8.0 5.6 5.7
------ ------ ------ ------ ------
Total revenues................................... 100.0 100.0 100.0 100.0 100.0
Costs of revenues:
Professional services.............................. 41.7 53.0 49.6 54.7 45.4
Hardware and software sales........................ 12.0 4.5 6.6 4.6 4.6
------ ------ ------ ------ ------
Total cost of revenues........................... 53.7 57.5 56.2 59.3 50.0
Gross Profit......................................... 46.3 42.5 43.8 40.7 50.0
Expenses:
Sales and marketing................................ 4.8 6.0 13.2 13.3 15.1
General and administrative......................... 20.8 24.3 31.6 37.9 32.7
Depreciation and amortization...................... 1.7 1.8 2.2 2.4 1.4
Noncash compensation expense....................... -- -- -- -- --
Operating profit (loss).............................. 19.0 10.4 (3.2) (12.9) 0.8
Other income (expense)............................... 0.5 -- (1.0) (0.6) --
------ ------ ------ ------ ------
Net income (loss) before income tax provision
(benefit).......................................... 19.5 10.4 (4.2) (13.5) 0.8
Income tax provision (benefit)....................... 8.9 4.8 (1.8) (5.7) 1.6
------ ------ ------ ------ ------
Net income (loss).................................... 10.6% 5.6% (2.4)% (7.8)% (0.8)%
====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUES. Substantially all of our revenues are derived from fees for
professional services. Revenues increased 138.4% from $9.5 million in the six
months ended June 30, 1998 to $22.6 million in the six months ended June 30,
1999. Revenues from professional services increased 138.1% from $8.9 million in
the six months ended June 30, 1998 to $21.3 million in the six months ended
June 30, 1999. This increase was primarily due to an increase in the number of
professional services projects and an increase in the size of the projects.
Revenues from hardware and software sales increased 142.8% from $530,000 in the
six months ended June 30, 1998 to $1.3 million in the six months ended June 30,
1999. During the six months ended June 30, 1999, each of Bear, Stearns & Co.
Inc. and Qwest Communications, Inc. accounted for 23.1% and 17.1%, respectively,
of our revenues. The number of our billable consultants increased from
approximately 120 at June 30, 1998 to approximately 190 at June 30, 1999.
Subsequent to June 30, 1999, we added an additional 14 billable consultants as a
result of our acquisition of Network Resource Consultants and Company, B.V.
GROSS PROFIT. Gross profit increased 193.3% from $3.8 million in the six
months ended June 30, 1998 to $11.3 million in the six months ended June 30,
1999. As a percentage of revenues, gross profit increased from 40.7% in the six
months ended June 30, 1998 to 50.0% in the six months ended June 30, 1999. This
increase in gross profit was due to efficiencies in completing fixed-price,
fixed-time projects, higher utilization rates and an increase in average billing
rates. Cost of revenues increased from $5.6 million in the six months ended
June 30, 1998 to $11.3 million in the six months ended June 30, 1999. This
increase in cost of revenues was due primarily to an increase in compensation
and benefits paid to consultants.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of compensation and benefits, travel expenses and promotional
expenses. Sales and marketing expenses increased 171.5% from $1.3 million in the
six months ended June 30, 1998 to $3.4 million in the six months ended June 30,
1999. As a percentage of revenues, sales and marketing expenses increased from
13.3% in the six months ended June 30, 1998 to 15.1% in the six months ended
June 30, 1999. This increase was primarily due to an increase of $1.6 million in
compensation and benefits paid due to the hiring of additional personnel and an
increase of $451,000 in commissions paid.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 105.7% from $3.6 million in the six months ended June 30, 1998 to
$7.4 million in the six months ended June 30, 1999. As a percentage of revenues,
general and administrative expense decreased from 37.9% in the six months ended
June 30, 1998 to 32.7% in the six months ended June 30, 1999. The increase in
absolute dollars was primarily due to an increase of $1.9 million in recruiting
and professional development and other administrative costs, an increase of
$1.1 million in compensation and benefits costs, and an increase of $790,000 in
facilities and equipment costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
36.1% from $229,000 in the six months ended June 30, 1998 to $312,000 in the six
months ended June 30, 1999. This increase was due to purchases of additional
equipment to support our growth.
NONCASH COMPENSATION EXPENSE. During the six months ended June 30, 1999, we
granted options to purchase shares of common stock at exercises prices that were
less than the fair market value of the underlying shares of common stock. This
will result in noncash compensation expense over the period that these specific
options vest. We estimate the expense will be approximately $48,000 for the year
ended December 31, 1999. During the six months ended June 30, 1999, we recorded
$9,875 of noncash compensation expense related to these options. The remaining
noncash compensation expense beyond 1999 is currently estimated to be $257,000.
OTHER INCOME (EXPENSE). Other expense decreased from $54,000 in the six
months ended June 30, 1998 to $3,000 in the six months ended June 30, 1999. This
decrease was primarily due to an increase
24
<PAGE>
in interest expense related to short term borrowings, offset by increased
interest income and other non-operating income.
INCOME TAXES. The income tax benefit was ($541,000) on pre-tax losses of
$1.3 million for the six months ended June 30, 1998. For the six months ended
June 30, 1999, the income tax expense was $361,000 on pre-tax income of
$178,000. The effective tax rate was 42.3% and 203.1% during the six months
ended June 30, 1998 and 1999, respectively. The increase in the effective tax
rates relates to the provision for a valuation allowance against net operating
losses of our English subsidiary.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Revenues increased 43.3% from $18.1 million in 1997 to
$25.9 million in 1998. Revenues from professional services increased 41.2% from
$16.9 million in 1997 to $23.9 million in 1998. This increase was primarily due
to an increase in the number of professional services projects and an increase
in the size of these projects. Revenues from hardware and software sales
increased 73.6% from $1.2 million in 1997 to $2.1 million in 1998. During 1998,
Bear, Stearns & Co. Inc. accounted for 21.0% of revenues. The number of our
billable consultants increased from approximately 98 at December 31, 1997 to
approximately 149 at December 31, 1998.
GROSS PROFIT. Gross profit increased 48.0% from $7.7 million in 1997 to
$11.4 million in 1998. As a percentage of revenues, gross profit increased from
42.5% in 1997 to 43.8% in 1998. This increase in gross profit was due to
efficiencies in completing fixed-price, fixed-time projects, partially offset by
lower utilization rates and a decrease in average billing rates. Cost of
revenues increased from $10.4 million in 1997 to $14.6 million in 1998. This
increase in cost of revenues was due primarily to an increase in compensation
and benefits paid to consultants.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 217.4%
from $1.1 million in 1997 to $3.4 million in 1998. As a percentage of revenues,
sales and marketing expenses increased from 6.0% in 1997 to 13.2% in 1998. This
increase was primarily due to an increase of $1.6 million in compensation and
benefits paid due to the hiring of additional personnel, an increase of $591,000
due to increased sales and marketing efforts, and an increase of $142,000 in
commissions paid because of the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 86.4% from $4.4 million in 1997 to $8.2 million in 1998. As a
percentage of revenues, general and administrative expense increased from 24.3%
in 1997 to 31.6% in 1998. This increase was due to an increase of $1.4 million
in recruiting and professional development and other administrative costs, an
increase of $1.3 million in compensation and benefits costs, and an increase of
$1.1 million in facilities and equipment costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
76.9% from $321,000 in 1997 to $568,000 in 1998. This increase was due to
purchases of additional equipment to support our growth.
OTHER INCOME (EXPENSE). Other expense increased from ($5,000) in 1997 to
($265,000) in 1998. This increase was primarily due to an increase in interest
expense related to an increase in short term borrowings.
INCOME TAXES. The income tax provision was $871,000 on pre-tax income of
$1.9 million in 1997. In 1998 the income tax benefit was ($460,000) on pre-tax
losses of $1.1 million. The effective tax rate was 46.3% and 42.3% for 1997 and
1998, respectively. The differences in the effective tax rate resulted from a
greater amount of non-tax deductible expenses during 1997.
25
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUES. Revenues increased 123.1% from $8.1 million in 1996 to
$18.1 million in 1997. Revenues from professional services increased 147.8% from
$6.8 million in 1996 to $16.9 million in 1997. Revenues from hardware and
software sales decreased 7.6% from $1.3 million in 1996 to $1.2 million in 1997.
The increase in professional services was primarily due to an increase in the
number of professional services projects and an increase in the size of these
projects. During 1997, each of Bear, Stearns & Co. Inc. and Unisys Corporation
accounted for 20.6% and 19.7% of revenues, respectively. The number of our
billable consultants increased from approximately 42 at December 31, 1996 to
approximately 98 at December 31, 1997.
GROSS PROFIT. Gross profit increased 104.6% from $3.8 million in 1996 to
$7.7 million in 1997. As a percentage of revenues, gross profit decreased from
46.3% in 1996 to 42.5% in 1997. The increase in gross profit in absolute dollars
was due to efficiencies in completing fixed-price, fixed-time projects, higher
utilization rates and an increase in average billing rates. Cost of revenues
increased from $4.4 million in 1996 to $10.4 million 1997. This increase in cost
of revenues was due primarily to an increase in compensation and benefits paid
to consultants.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 180.3%
from $386,000 in 1996 to $1.1 million in 1997. As a percentage of revenues,
sales and marketing expenses increased from 4.8% in 1996 to 6.0% in the 1997.
This increase was due primarily to an increase of $441,000 in compensation and
benefits paid due to the hiring of additional personnel, and an increase of
$126,000 in commissions paid because of the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 160.8% from $1.7 million in 1996 to $4.4 million in 1997. As a
percentage of revenues, general and administrative expense increased from 20.8%
1996 to 24.3% in 1997. This increase was primarily due to an increase of
$1.1 million in facilities and equipment costs, an increase of $883,000 in
recruiting and professional development and other administrative costs, and an
increase of $756,000 in compensation and benefits costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
125.8% from $142,000 in 1996 to $321,000 in 1997. This increase was due to
purchases of additional equipment to support our growth.
OTHER INCOME (EXPENSE). Other income (expense) decreased from $39,000 in
1996 to ($5,000) in 1997, due to an increase in interest expense as a result of
short term borrowings during 1997.
INCOME TAXES. The income tax provision was $719,000 on pre-tax income of
$1.6 million in 1996. In 1997, the income tax provision was $871,000 on pre-tax
income of $1.9 million. The effective tax rate was 45.4% and 46.3% in 1997 and
1998, respectively. The increase in the effective tax rate above the federal and
state statutory rates reflects certain non-tax deductible expenses.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the seven quarters in the period ended June 30, 1999 and the
percentage of our revenues represented by each item in the respective quarters.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with our
financial statements and notes. The unaudited results of operations for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
-------- --------- -------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services.................. $3,918 $3,798 $5,137 $6,702 $8,221 $9,887 $11,391
Hardware and software sales............ 406 78 452 233 1,302 478 810
------ ------ ------ ------ ------ ------ -------
Total revenues....................... 4,324 3,876 5,589 6,935 9,523 10,365 12,201
Cost of Revenues:
Professional services.................. 2,269 2,387 2,792 3,308 4,374 4,849 5,397
Hardware and software purchases........ 245 65 373 229 1,032 426 606
------ ------ ------ ------ ------ ------ -------
Total cost of revenues............... 2,514 2,452 3,165 3,537 5,406 5,275 6,003
------ ------ ------ ------ ------ ------ -------
Gross profit............................. 1,810 1,424 2,424 3,398 4,117 5,090 6,198
Expenses:
Selling and marketing.................. 372 484 771 1,032 1,146 1,589 1,820
General and administrative............. 1,303 1,722 1,865 2,231 2,366 3,469 3,908
Depreciation and amortization.......... 104 108 121 123 216 144 168
Noncash compensation expense........... -- -- -- -- -- 5 5
------ ------ ------ ------ ------ ------ -------
Operating profit (loss).................. 31 (890) (333) 12 389 (117) 297
Other income (expense)................... (14) (22) (32) (85) (126) (28) 26
------ ------ ------ ------ ------ ------ -------
Net income (loss) before income tax
provision (benefit).................... 17 (912) (365) (73) 263 (145) 323
Income tax provision (benefit)........... 8 (390) (150) 46 34 (49) 410
------ ------ ------ ------ ------ ------ -------
Net income (loss)........................ $ 9 $ (522) $ (215) $ (119) $ 229 $ (96) $ (87)
====== ====== ====== ====== ====== ====== =======
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services.................. 90.6% 98.0% 91.9% 96.6% 86.3% 95.4% 93.4%
Hardware and software sales............ 9.4 2.0 8.1 3.4 13.7 4.6 6.6
------ ------ ------ ------ ------ ------ -------
Total revenues....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of Revenues:
Professional services.................. 52.5 61.5 50.0 47.7 45.9 46.8 44.2
Hardware and software purchases........ 5.6 1.7 6.6 3.3 10.9 4.1 5.0
------ ------ ------ ------ ------ ------ -------
Total cost of revenues............... 58.1 63.2 56.6 51.0 56.8 50.9 49.2
------ ------ ------ ------ ------ ------ -------
Gross profit............................. 41.9 36.8 43.4 49.0 43.2 49.1 50.8
Expenses:
Selling and marketing.................. 8.6 12.5 13.8 14.9 12.0 15.3 14.9
General and administrative............. 30.2 44.5 33.4 32.1 24.8 33.5 32.0
Depreciation and amortization.......... 2.4 2.8 2.2 1.8 2.3 1.4 1.4
Noncash compensation expense........... -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ -------
Operating profit (loss).................. 0.7 (23.0) (6.0) 0.2 4.1 (1.1) 2.5
Other income (expense)................... (0.3) (0.5) (0.5) (1.3) (1.3) (0.3) 0.2
------ ------ ------ ------ ------ ------ -------
Net income (loss) before income tax
provision (benefit).................... 0.4 (23.5) (6.5) (1.1) 2.8 (1.4) 2.7
Income tax provision (benefit)........... 0.2 (10.1) (2.7) 0.6 0.4 (0.5) 3.4
------ ------ ------ ------ ------ ------ -------
Net income (loss)........................ 0.2% (13.4)% (3.8)% (1.7)% 2.4% (0.9)% (0.7)%
====== ====== ====== ====== ====== ====== =======
</TABLE>
27
<PAGE>
We have historically experienced significant quarterly fluctuations in our
revenues and results of operations and expect these fluctuations to continue.
Factors causing these variations include the number, timing, scope and
contractual terms of client projects, delays incurred in the performance of such
projects, accuracy of estimates of resources and time required to complete
ongoing projects, and general economic conditions. In addition, our future
revenues and operating results may fluctuate as a result of changes in pricing
in response to customer demand and competitive pressures, the ratio of
fixed-price contracts versus time-and-expense contracts and the timing of
collection of accounts receivable. A high percentage of our operating expenses,
particularly personnel and rent, are relatively fixed in advance of any
particular quarter. As a result, unanticipated variations in the number and
timing of our projects or in employee utilization rates may cause significant
variations in operating results in any particular quarter, and could result in
losses. Any significant shortfall of revenues in relation to our expectations,
any material reduction in utilization rates for our consultants, an
unanticipated termination of a major project, a client's decision not to pursue
a new project or proceed to succeeding stages of a current project, or the
completion during a quarter of several major customer projects could require us
to pay underutilized employees and have a material adverse effect on our
business, results of operations and financial condition.
Our quarterly operating results are also subject to certain seasonal
fluctuations. We have in the past recruited new consultants in the first and
second quarters who have not conducted billable services until later in the
year. Demand for our services may be lower in the fourth quarter due to reduced
activity during the holiday season and fewer working days for those customers
that curtail operations during this period. These and other seasonal factors may
contribute to fluctuations in our operating results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of equity
securities and cash flow from operations. As of June 30, 1999, we had
approximately $360,000 in cash and cash equivalents.
Cash used in operating activities increased from $960,000 for the six months
ended June 30, 1998 to $4.4 million for the six months ended June 30, 1999.
Significant uses of cash resulted from an increase in accounts receivable,
unbilled work in progress and a decrease in deferred income, partially offset by
a reduction in the net loss.
Cash (used in) provided by operating activities was ($3.7) million in 1998,
($1.2) million in 1997 and $678,000 in 1996. The increase in the use of cash
resulted from the net loss in 1998, an increase in accounts receivable and
unbilled work in progress during 1998 partially offset by an increase in
accounts payable and accrued expenses at December 31, 1998.
Cash provided by financing activities was $4.1 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 and
repurchase of treasury stock. 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.
28
<PAGE>
On September 16, 1999, we completed sale of 1,242,000 shares of our common
stock to Cisco at $12.00 per share for net proceeds of approximately $14.2
million.
On September 22, 1999, we completed the sale of 94,867 and 18,133 shares of
our common stock to General Atlantic Partners 57 and GAP Coinvestment Partners
II, respectively, at $12.00 per share for net proceeds of approximately $1.4
million.
We believe that our current cash and cash equivalents, together with cash
generated from operations, will be sufficient to meet our foreseeable working
capital needs for at least the next 12 months.
IMPACT OF THE YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, it is necessary to update the computer systems and/or software used by
many companies and governmental agencies to comply with Year 2000 requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant.
STATE OF READINESS. We are in the process of determining the Year 2000
readiness of our information technology systems, which include our hardware and
software, and our non-information technology systems, which include the
telephone systems and other office equipment we use internally. Our assessment
plan consists of the following steps:
- evaluating our date dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally-developed proprietary
software;
- contacting third-party vendors and licensors of material hardware,
software and services that we use;
- contacting vendors of material non-information technology systems that we
use;
- formulating repair or replacement requirements and implementing corrective
measures; and
- evaluating the need for, and preparing and implementing, if required, a
contingency plan.
To date, we have determined the following through our assessment:
- We have checked our internally developed software and systems for date
dependent code, and all material files and systems are Year 2000
compliant. We believe that the recently installed code is also Year 2000
compliant;
- We have contacted the vendors of material hardware and software components
of our information technology systems, and they have informed us that the
products we use are currently Year 2000 compliant;
- Commercial software, including financial reporting software, upon which we
depend is either Year 2000 compliant or will be upgraded to be compliant
in the normal course of business through upgrades or installation of
software patches;
- Substantially all hardware we use in our network operations and all of the
hardware we use in our office operations have been certified as Year 2000
compliant by its vendors;
- Our telephone system and mail systems are certified as Year 2000
compliant; and
- Our landlords and third-party advertising sales representative and
servicing organizations have not yet provided us with Year 2000 compliance
information.
While we have assessed the Year 2000 readiness of each of our material
internal systems, we will not conduct an end-to-end system test until October
1999. Accordingly, we cannot yet assess whether our internal system, as a whole,
is Year 2000 compliant. In addition, we will continue to attempt to
29
<PAGE>
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.
COSTS. We estimate that the total cost for our Year 2000 compliance efforts
will be approximately $250,000. Most of these expenses relate to the operating
costs associated with time spent by our employees in Year 2000 compliance
matters. If we encounter unexpected difficulties, or we are unable to obtain
compliance information from material third parties, we may need to spend
additional amounts to ensure that our systems are Year 2000 compliant.
RISKS. Although we have received compliance information from our material
third-party vendors, we have not received compliance information from all of our
third-party vendors. In addition, it is possible that our third-party vendors
were mistaken in certifying that their systems are Year 2000 compliant. In
addition, we will not conduct an end-to-end system test until October 1999. If
we fail to fix our internal systems or to fix or replace material third-party
software, hardware or services on a timely basis, we may suffer lost revenues,
increased operating costs and other business interruptions, any of which could
have a material adverse effect on our business, results of operations and
financial condition. Moreover, if we fail to adequately address Year 2000
compliance issues, we may be subject to claims of mismanagement and related
litigation, which would be costly and time-consuming to defend.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. If those entities fail to be
Year 2000 compliant, there may be a systemic failure beyond our control, such as
a prolonged Internet, telecommunications or electrical failure, which could have
a material adverse effect on our business, results of operations and financial
condition.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year
2000 assessment and have developed no contingency plans to address the
worst-case scenario that might occur if technologies we depend upon actually are
not Year 2000 compliant. We will take into account our Year 2000 simulation
testing results and the responses we receive from all third-party vendors and
service providers in determining the need for and nature and extent of any
contingency plans. We intend to develop any required contingency plan by the end
of October 1999.
FORWARD-LOOKING STATEMENTS
The Year 2000 discussion above is provided as a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and
contains forward-looking statements. These statements are based on management's
best current estimates, which were derived from a number of assumptions about
future events, including the continued availability of resources,
representations received form third parties and other factors. However, we
cannot assure you that these estimates will be achieved, and our actual results
could differ materially from those anticipated. Specific factors that might
cause material differences include:
- the ability to identify and remediate all relevant systems;
- results of Year 2000 testing;
- adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are our outsourcing service
providers, suppliers, and vendors;
- unanticipated system costs; and
- our ability to implement adequate contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related
30
<PAGE>
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.
31
<PAGE>
BUSINESS
OVERVIEW
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. Using our
BusinessFirst methodology, we demonstrate the business value of technology
solutions in specific and measurable terms, thereby enabling our clients to
incorporate objective and quantifiable analysis into their technology investment
decisions.
As an independent service provider, we provide our clients with unbiased
expertise that enable the design, implementation and management of optimal
technology solutions. We provide our services on either a project outsource or
collaborative consulting basis. Our project outsource services are based on and
measured against mutually agreed upon service offerings and provide our clients
with certainty of costs, delivery time and project scope. Our collaborative
consulting services enable our clients to utilize our extensive expertise in
order to extend their internal capabilities and to access our methodologies. In
addition to these services, we have developed an innovative service model
through which we deliver our clients packaged service products, otherwise
referred to as productized services. Our service products are characterized by
pre-defined service offerings that have pre-defined deliverables, a pre-defined
pricing model and are implemented using a pre-defined methodology. In contrast
to our project outsource and collaborative consulting services which provide our
clients with services that are customized for, and therefore unique to, each
engagement, our service products are typically provided with little or no
modification.
Our consultants are organized into the following practice areas, which cover
the four cornerstones of network computing: network and systems management;
internetwork design and engineering; performance management; and information
security. This structure enables our consultants to gain in-depth expertise and
become intimately familiar with the best practices and methodologies identified
within each of those disciplines.
INDUSTRY BACKGROUND
The effective communication and management of information has become
critical to success in today's competitive and rapidly changing global business
environment. Network infrastructures that once were viewed as sources of
competitive advantage are now being recognized as competitive necessities for
businesses in a broad range of industries. This shift is driven primarily by the
following factors:
- the migration from mainframe and client/server technologies to
Internet-based computing environments among most industries;
- the demand for real-time exchange of critical, time-sensitive information
within organizations and among their external constituents; and
- the widespread adoption of the Internet among consumers.
As a result of these factors, current and emerging network hardware and
software companies are rapidly developing sophisticated technologies for
business users to accommodate critical applications, such as electronic
commerce, supply chain management, web hosting, customer relationship management
and global marketing. In addition to business use of networks, consumers are
increasingly accessing networks, via the Internet, to communicate, store and
publish information, conduct retail transactions and access online sources of
entertainment. Business and consumer trends will continue to positively impact
the number of users who access, and the data traffic carried over, the Internet.
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The growth in network-dependent activities requires complex network
solutions that integrate a variety of systems and technologies from multiple
vendors. The rapid pace of change in networking technology has further increased
the complexity of designing and implementing these network solutions. As
competing hardware and software companies develop applications to more
effectively and efficiently manage increasing volumes of information, rapid
adoption of new technologies is required for businesses to remain competitive.
Accordingly, the demand for experienced professionals that can assist businesses
in designing, implementing, managing and monitoring complex network solutions
has increased dramatically.
As a result of demand for professionals with networking expertise, it has
become increasingly difficult for businesses to attract and retain dedicated
internal information technology resources. In response, many businesses are
focusing on their core competencies and outsourcing their network management
needs to third-party service providers. Consequently, the demand for network
consulting and integration services has grown dramatically. International Data
Corporation, a market research organization, estimates that the worldwide market
for these services will grow from $12.1 billion in 1998 to $25.5 billion by
2003. There are many third-party service providers, including network equipment
vendors, systems integrators, value-added resellers and network consulting
companies, seeking to capitalize on this growth.
However, we believe that few have the requisite focus and expertise to
address the complex, multi-faceted issues surrounding today's networks, and many
are limited by the fact that they:
- are primarily motivated by distributing their own products and often lack
the skills to implement multi-vendor solutions;
- are focused on traditional mainframe computing environments and derive a
large percentage of their revenue from reselling hardware and software
products; or
- only augment businesses' in-house capabilities with hourly rate-based
teams of technical personnel.
As a result, a significant opportunity exists for a service provider that
can offer businesses high-end consulting and technical expertise in the design,
implementation, management and security of complex networks.
THE PREDICTIVE SOLUTION
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. We believe that
our success to date has been largely attributable to the following key
characteristics of our service offerings:
QUANTIFIABLE BUSINESS ANALYSIS. Using our BusinessFirst methodology, we can
demonstrate the business value of technology solutions in specific and
measurable terms, thereby enabling our clients to incorporate objective and
quantifiable analysis into their technology investment decisions. We utilize
widely accepted principles of risk analysis and mitigation used by the insurance
and financial services industries to assess our client's technology environment.
We provide our clients with a detailed analysis of the financial benefit of a
project by quantifying factors such as business risks, total cost of ownership
and operational efficiency. As a result, our clients can gain a clear
understanding of the benefits that they will derive from their network
technology investments and a measure of certainty about how their technology
investments will be translated into quantifiable improvements to their business
processes.
FLEXIBLE AND INNOVATIVE SERVICE DELIVERY METHODOLOGIES. We provide our
clients with a flexible service delivery model that is designed to enhance their
ability to cost-effectively leverage our expertise.
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We are engaged by our clients in one of three ways: on a project outsource
basis, on a collaborative consulting basis or through the purchase of
pre-defined service offerings, otherwise known as service products. When engaged
on a project outsource basis, we work with our clients to mutually define a
fixed scope of work at the beginning of the project that is tailored to the
clients' specific needs and therefore, modified from engagement to engagement.
We then deliver the services for a fixed fee, in a fixed period of time with a
fixed set of deliverables. When engaged on a collaborative consulting basis, we
extend our clients' internal technical capabilities with our consultants. This
enables our clients to utilize our extensive expertise and to access our
methodologies while they retain overall responsibility for the project.
Collaborative consulting services are typically billed on a time and expense
basis, and typically do not entail fixed-cost, fixed-time or fixed-service
commitments. Our service products are pre-defined service offerings that we
believe address the needs that are common to many of our clients. These service
products are characterized by pre-defined deliverables, pre-defined pricing and
are provided with little or no modification.
IN-DEPTH NETWORK COMPUTING EXPERTISE. Our consultants are organized into
practice areas which cover the four cornerstones of network computing: network
and systems management; internetwork design and engineering; performance
management; and information security. This enables our consultants to gain
in-depth expertise and become intimately familiar with the best practices within
each of those disciplines. More importantly, it enables us to leverage the
knowledge base within each practice group to provide our clients with
cross-functional teams of consultants that are better equipped to address their
varying networking needs in a coordinated and efficient manner.
STRATEGY
Our goal is to become the leading provider of services for the design,
performance, management and security of complex networks. To achieve this goal,
we intend to pursue the following strategies:
CONTINUE TO EVOLVE OUR BUSINESSFIRST METHODOLOGY. The evolution and
enhancement of our BusinessFirst methodology is critical to our ability to
leverage and share knowledge across engagements and to further improve our
ability to deliver predictable, high-quality services to our clients on time and
on budget. We have a dedicated team of consultants that is focused on
continuously enhancing and refining our BusinessFirst methodology by
incorporating the best practices identified over numerous engagements. We
believe that this enables us to consistently deliver high-quality network
technology solutions.
EXPAND AND ENHANCE OUR SERVICE PRODUCT OFFERINGS. We intend to continue to
enhance and expand our innovative service product offerings. These service
offerings provide our clients with a pre-defined set of deliverables that
require minimal customization and are characterized by an objective and
quantifiable value proposition and return on investment justification. Moreover,
our service products enable us to increase our margin opportunities by improving
the efficiency of our sales and service delivery model. These products also
enable us to market and sell our services through indirect channels. For
example, we recently entered into an agreement with Cabletron under which
Cabletron has agreed to market and sell our service product offerings, which
will initially include our Information Security Requirements Analysis product
and will expand to other service product offerings. We intend to enter into
other strategic relationships which will enable us to further expand our market
penetration by leveraging our strategic partners' distribution channels to
market and sell these services.
CONTINUE TO ATTRACT AND RETAIN HIGHLY QUALIFIED CONSULTANTS. We intend to
continue to attract and retain highly qualified consultants by providing them
with a rich environment and culture to work in, and by offering them attractive
professional development and compensation opportunities. We generally recruit
consultants who have significant technical expertise and offer them the ability
to accelerate their career development by working with sophisticated
technologies in complex, multi-vendor environments. We have established a formal
training program, Predictive University, which is designed to improve the
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skills and productivity of our consultants. We intend to continue to build our
nationwide recruiting organization, promote our corporate culture with stated
values, and to invest heavily in the training and development of our
consultants.
FURTHER INCREASE OUR INDUSTRY EXPERTISE. We intend to continue to expand
the scope of our industry expertise in order to further penetrate the markets
which we serve. We believe our expertise in specific industries considerably
enhances our ability to help companies within those industries gain competitive
advantage by improving the performance and utility of their networks. We have
significant experience within the financial services, communication services,
and Internet and electronic commerce industries. In each of these markets, we
employ industry experts, pursue targeted sales and marketing opportunities and
develop industry-specific service offerings. We intend to expand into other
industries which we believe will be well suited to our services.
EXPAND IN EXISTING AND NEW GEOGRAPHIC MARKETS. We intend to expand our
presence in the geographic markets we currently serve and to enter new markets.
We believe that building a critical mass of highly-qualified consultants and
establishing a multi-national presence through both internal growth and
acquisitions will provide us with a substantial competitive advantage. We
recently acquired Network Resource Consultants and Company B.V. in The
Netherlands in order to further expand our European presence. We currently offer
our services through a network of nine offices located throughout the United
States and in London, England and Amsterdam, The Netherlands. We intend to
continue to pursue strategic acquisitions to gain access to new geographic
markets, additional talented professionals, and network management tools and
methodologies.
BUSINESSFIRST METHODOLOGY
BusinessFirst is a proprietary methodology that governs our organization and
client engagements. Our BusinessFirst methodology enables us to better
understand the business objectives that drive the need for technology solutions
and provide our clients with pre-defined services on a fixed-time, fixed-price
basis. We begin each engagement by helping our clients clarify their business
requirements in specific terms. We then undertake a thorough assessment of our
client's existing business processes and technology infrastructure. Based on
this assessment, we formulate an analysis of the requirements to translate their
technology investments into measurable business objectives. Once we formulate a
requirements analysis, we draw upon our broad expertise to design a solution
that leverages our clients' existing technology infrastructure to maximize their
return on investment. We believe that our BusinessFirst methodology bridges the
gap in the marketplace between management consulting firms and technical staff
augmentation services and enables us to translate business objectives into
leading-edge technology solutions.
SERVICES
Our consultants are organized into four practice areas. Although many of our
consultants are cross-skilled in a variety of technologies and many technologies
span multiple practice areas, each practice area represents an aspect of network
technology important enough to warrant specialization.
These practice areas are:
- network and systems management;
- internetwork design and engineering;
- performance management; and
- information security.
Our consultants have extensive experience with a wide variety of
technologies and vendors. For some clients, our consultants are involved in both
technology and vendor selection. Other clients have
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already selected the technology, vendor or both. Regardless, we offer our
clients a completely objective, vendor-neutral approach. Our knowledge of
advanced technologies and leading vendors is a significant part of our value
proposition to our clients.
NETWORK AND SYSTEMS MANAGEMENT. Our network and systems management practice
focuses on designing and implementing reliable and continuously available
management systems for large-scale, highly-complex networks. The fundamental
tenet of this practice area is that proactive management is an essential element
of any network design and engineering effort. Our network management consultants
develop systems and processes that are able to identify, isolate and resolve
network failures, sometimes before they occur.
The following table lists some of the services provided by our network and
systems management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
------- -----------
<S> <C>
Service Definition and Service Level Highlights a client's service level commitments and
Agreement Workshop assists in the development of a rational, long-term
plan for meeting and exceeding those commitments.
Rapid Restart Assessment Determines the readiness of a client's network
operations center and provides short-term and
long-term recommendations for addressing its
deficiencies.
Network Operation Center Architecture and Assists clients in evaluating and selecting network
Implementation and systems management technologies appropriate for
their network operations centers. Configures and
implements the selected technology and trains clients'
operations staff.
Process and Procedure Development Designs, implements and documents the processes and
procedures required to operate a network operations
center.
Automation, Correlation and Root Cause Automates repetitive management tasks associated with
Analysis Technology Development operating a network.
</TABLE>
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INTERNETWORK DESIGN AND ENGINEERING. Our internetwork design and
engineering practice focuses on designing and implementing network solutions in
support of our clients' strategic business initiatives. We have created a team
of seasoned professionals who use their specialized technical skills, real-world
industry experience and methodologies to solve the problems associated with
building and maintaining network foundations. With core competencies in the
areas of backbone technology, local area network switching, Internet Protocol,
or IP, management and design, asynchronous transfer mode, or ATM, and remote
access, our versatile team contributes both technical depth and breadth to
client engagements.
The following table lists some of the services provided by our internetwork
design and engineering practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
------- -----------
<S> <C>
Advanced Technology Planning and Migration Assists clients in planning and integrating advanced
technologies into their business-critical networks.
The services include technology briefings,
vendor/product selection, solution design and
integration planning and comprehensive testing.
Network Deployment Services Implements network technology into clients' existing
networks. Services include project management, vendor
coordination, technology installations and training.
Remote Access and Virtual Private Network Designs and deploys secure, high-performance remote
access and virtual private network solutions to allow
clients, their employees, supply-chain partners and
other business partners to access information
remotely.
Network Audit Services Audits clients' network infrastructure to evaluate its
design and performance, document the configuration,
analyze its compliance to prescribed standards and
develop an action plan to meet strategic objectives.
Internet Protocol Management Solutions Designs and implements Internet Protocol address
schemes required for a client to connect to the
Internet. The service also implements management
technologies to administer the Internet Protocol
addresses used within an organization.
</TABLE>
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PERFORMANCE MANAGEMENT. Our performance management practice leverages
proven methodologies and our extensive experience to help our clients optimize
their networks. We use sophisticated tools and techniques to gather, organize
and warehouse network performance data. This data may subsequently be used for a
number of related performance analysis applications, including capacity
planning, response time management and network simulation modeling. Consultants
in our performance management practice area are experts in applicable
technologies, including core competencies in remote monitoring, or RMON, data
warehousing and discrete event simulation modeling.
The following table lists some of the services provided by our performance
management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
------- -----------
<S> <C>
Network Baselining Collects data in order to establish a baseline of
network resource utilization. The baseline is then
used as a comparison against future trends.
Application Impact Analysis Analyzes how an application uses network resource to
predict response times that users will experience when
the application is deployed. Recommends improvements
that enable the application to maximize network
resources.
Network Usage-Based Billing Services Assists clients' transition from a flat-rate billing
model to a usage-based billing model for buying
network services.
Capacity Planning Assists clients in understanding the capacity and
network resource constraints that exist within their
network with sufficient advance warning to enable them
to add capacity before user performance is affected.
Response Time Management Monitors and analyzes end-user application response
times to ensure that they remain within the service
level commitments.
Network Simulation Modeling Models a network environment so that new configuration
and new application deployment scenarios can be
simulated before going into production.
</TABLE>
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INFORMATION SECURITY. Our information security practice is focused on
ensuring that the confidentiality, integrity and availability of our clients'
networks are protected. Our information security consultants have practical
experience with a wide array of advanced security technologies, as well as the
social and procedural aspects of security. By translating the complexities of
information security into understandable terms such as risks, costs and
benefits, we enable our clients to make clear and informed decisions about
protecting their information assets.
The following table lists some of the services provided by our information
security practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
------- -----------
<S> <C>
Information Security Requirements Analysis Assesses clients' physical security environment, the
technical controls for accessing information assets
and employee security awareness. Highlights
deficiencies and makes recommendations to migrate
clients to industry-specific best practices.
Asset and Risk Analysis Identifies critical assets, determines susceptibility
to risks and quantifies the impact of such risks.
Recommends a risk mitigation plan to prioritize
corrective actions.
Information Security Policy Development Assists customers to create a comprehensive
information security policy that clearly states
requirements for employee behavior, technical security
systems and the physical controls needed to protect
the client's information assets.
Security System Design and Implementation Designs and implements security systems using custom
configured products to enforce the specific
information security policy of each client.
Incident Response and Digital Forensics Provides critical response team services in the event
Services of a security breach. Restores the operational
integrity of the systems, maintains evidence, provides
forensic and investigative services and facilitates
changes to prevent a recurrence of the breach.
Information Security Assessments Verifies the implementation and effectiveness of
clients' security policies by reviewing and testing
their policies, employee awareness, perimeter security
and response team readiness.
</TABLE>
SERVICE PRODUCTS
Through our collective experience, we gain insights into the common needs of
our clients. When we determine that a need is both urgent and pervasive, we
standardize our services into a solution referred to as a service product. Our
service products are pre-defined service offerings that are replicable from one
project to another and have a pre-defined set of service deliverables, a
pre-defined pricing model and are implemented using a pre-defined methodology.
In contrast to our project outsource and collaborative consulting services which
provide our clients with services that are customized for, and therefore unique
to, each engagement, our service products are typically provided with little or
no modification.
Our service products offer a number of advantages as compared to custom
consulting engagements. These include:
- efficient delivery of our services over and over again using a replicable
methodology;
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- ability to gain broad market penetration because our productized services
are well-defined and can be more easily sold by our sales force and
through third-party sales channels;
- ability to more effectively articulate the business benefit of our
services based on observing the impact that our service products have for
other clients; and
- a more flexible pricing strategy that is based on the business benefit to
our clients and not the cost to deliver our services.
Our current service products include:
INFORMATION SECURITY REQUIREMENTS ANALYSIS. This service product is
designed to discover information security weaknesses in our clients' networks
and systems. It provides our clients with the ability to understand where they
are vulnerable to a security threat and both the likelihood and potential cost
of each threat. Our certified security experts assess a client's physical,
administrative and technical security. They then present a report to management
explaining how the security weaknesses that they have found could impact the
client's business and propose strategies for addressing these weaknesses.
NETWORK ASSESSMENT. This service product provides a cost-effective expert
analysis of a client's existing network environment. It provides a report that
helps the client to understand the performance and reliability characteristics
of its network and provides specific recommendations for improvements to the
network along with an analysis of the business benefits that can be achieved
through the recommended improvements.
APPLICATION IMPACT STUDY. This service product provides clients with the
information they need to understand how the deployment of a new application will
impact an existing network. Our consultants use a combination of sophisticated
analysis tools and methodologies to thoroughly understand how an application
uses network resources. They then issue a report on the application's
performance and its impact on the client's network. Clients can then determine
if they need to enhance their network in order to ensure that their critical
applications perform to their requirements.
NETWORK BILLING. This service product provides clients with a detailed
breakdown of who, how, why, when and where their network was used by their
employees so they can charge employees based on their actual network usage. Our
consultants implement the technology to collect the network usage statistics,
and advise our clients on the most appropriate pricing strategy to charge for
network usage. We then produce the bills that are passed on to the network
users.
ENTERPRISE MANAGEMENT ASSESSMENT. This service product provides an
evaluation of a client's current enterprise network management systems. Our
consultants analyze both a client's enterprise network management technology and
its service level agreements. They then provide the client with a tactical and
strategic roadmap that enables the client to implement network management
solutions that support the client's business objectives.
NETWORK MODELING. This service product allows clients to ask "what if"
questions about planned changes in their network before the changes are
implemented. Using a combination of sophisticated software tools and our own
methodology, we build a model of the network environment. We can then simulate
changes in the environment such as adding applications or changing equipment,
and observe the impact. Clients can then use this analysis to optimally plan
changes in their network.
YEAR 2000 COMPLIANCE ASSESSMENT. This service product identifies network
infrastructure that is at risk because of Year 2000 problems and the impact
these risks can have on a client's business. Our network systems engineers
analyze a client's network infrastructure devices and enterprise management
applications to determine the potential risk based on vendor specifications.
They then develop a plan for remediation to minimize the Year 2000 risk to a
client's business.
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CLIENTS
We provide professional network services to a variety of clients across a
broad range of vertical industries including:
<TABLE>
<S> <C> <C> <C>
COMMUNICATIONS FINANCIAL SERVICES NETWORK TECHNOLOGY OTHER
SERVICES Bear Stearns Analog Devices Allied Signal
Bell Atlantic Bloomberg Cabletron Houghton Mifflin
Bell South Cigna Cisco Mary Kay Cosmetics
British Telecom DLJdirect Data General Norfolk Southern
Cable & Wireless Deutsche Bank IBM Pepsi
Cignal Global Comm. First Union Lucent Technologies Pfizer
Enron Communications Fleet Bank Nortel Networks Siemens Energy
iBEAM Broadcasting ING Baring Furman Selz PROFESSIONAL SERVICES
ICG Netcom J.P. Morgan Law Plus
Intelsat Morgan Stanley Lockheed Martin
MCI WorldCom Pershing Unisys
Primus Telecom. State Street Bank
PSINet State Farm
Qwest S.W.I.F.T.
Teligent Union Bank of California
UUNet
</TABLE>
REPRESENTATIVE CLIENT CASE STUDIES
The following case studies are representative of some of the network
consulting services that we have provided to our clients.
UUNET. UUNET, the Internet services division of MCI WorldCom, is a global
leader in Internet communications solutions to businesses worldwide. UUNET has
built its reputation on providing high-quality services such as Internet access,
web hosting, remote access and other value-added networking services. To ensure
its ability to provide clients with the highest levels of service, UUNET
constructed one of the most rigorously-engineered and widely deployed
Internet-protocol networks in the world. UUNET currently offers service to more
that 70,000 businesses in 114 countries throughout North America, Europe and
Asia Pacific. UUNET selected us to develop its next-generation Internet-based
service offering, Virtual Private Networking.
Virtual Private Networks, or VPN's, provide secure, encrypted connections
over the public Internet that allow businesses to communicate privately without
having to build separate private networks. While UUNET's own network systems
engineers are among the most experienced in the world, they wanted an
independent assessment of their VPN system design. We worked with UUNET to
develop a comprehensive VPN solution, including network management, service
provisioning and fulfillment, and network security. We also worked successfully
with UUNET to ensure that the VPN was scalable across UUNET's global network,
both in terms of functionality, ease of deployment and ease of operation.
Finally, we helped develop and document the processes and procedures necessary
to efficiently operate the service.
The success of UUNET's VPN service has led to other collaborations with us,
including the development of UUNET's Internet-based fax service and branded
dial-up Internet access service.
BT SYNCORDIA SOLUTIONS. BT Syncordia Solutions, a division of British
Telecom, is Europe's second largest provider of managed and outsourced network
solutions. BT Syncordia manages the infrastructure of more than 27,000 clients
in 46 countries. BT Syncordia-managed networks carry a significant portion of
the commercial banking transactions in the United Kingdom. In order to meet
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the availability requirements of its customers, BT Syncordia turned to us to
help it design and build a world-class network operations center.
We used our Business First methodology and extensive technical experience to
design and build a network operations center for BT Syncordia. We integrated
sophisticated network management tools that could manage BT Syncordia's
multi-vendor network and easily incorporate changes due to increases in network
traffic, introduction of new services and increases in customer base. We also
instituted processes and procedures that enabled BT Syncordia's operations staff
to act rapidly to identify and resolve network performance issues.
UNION BANK OF CALIFORNIA. Union Bank of California has been a leader in the
development of on-line banking products and services. Its early entree into the
on-line banking arena has allowed it to effectively utilize the Internet to
conduct a significant amount of banking transactions each day. Critical to the
continued success and growth of Union Bank of California's on-line presence is
the security of its networks. Union Bank has turned to us to address its network
security requirements.
Even though Union Bank of California had designed and implemented
sophisticated security technology solutions, they enlisted our help to validate
its security program and to assist it in highlighting deficiencies or
vulnerabilities in its existing security program. We performed a thorough
assessment of their perimeter defenses, encryption strategy, authentication
techniques, and operational processes and procedures. Our efforts helped Union
Bank of California make necessary changes to their infrastructure, security
systems and operational policies that significantly improved the security of
their Internet banking and other on-line initiatives. We also created an ongoing
review process to ensure continued, optimal security.
SALES AND MARKETING
We have developed direct and indirect sales channels for the sale of our
services. To facilitate our direct sales effort we have developed the
infrastructure necessary to capture and track the major sales indicators through
the sales cycle. Additionally, a significant amount of time and effort has been
and will continue to be invested in the development of tools, training materials
and training for sales and technical personnel. Our service products have
provided us with an opportunity to develop strategic third-party relationships
with hardware, software service and telecommunications providers in order to
expand our sales channel. As a result, we are developing an indirect sales
channel through relationships with third-party strategic partners. We have
entered into an agreement with Cabletron under which Cabletron has agreed to
market and sell our service products. Cabletron will initially sell and market
our Information Security Requirements Analysis product, with an additional 3
products to be added over the term of the agreement. The products will be sold
by Cabletron and all projects will be carried out under Cabletron's name. We
will provide the services for each product for which we will be paid a
predetermined amount by Cabletron. In addition, we have agreed with Cabletron
not to offer or provide security services with certain competitors of Cabletron.
The term of the agreement is through July 30, 2001 and will renew automatically
for successive one year terms unless terminated by either of us. We intend to
pursue other agreements with strategic partners in order to further broaden the
indirect sales channel for our service products.
HUMAN RESOURCES
We seek to attract, train, retain and deliver the highest level of technical
talent. We believe that our proactive approach gives us a strong competitive
edge in the marketplace and a scalable, consistently high standard of service
delivery. As of August 31, 1999, we had 349 full-time employees.
RECRUITING. Our success is dependent in part on attracting and retaining
talented and motivated personnel at all levels. Accordingly, we invest
significant resources in our recruiting efforts. We have a proactive recruiting
philosophy and believe in a broad-based model for attracting candidates.
Generally, we hire technical consultants according to profiles that fit into one
of our four practice areas.
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CORPORATE CULTURE. Our corporate culture is shaped by our view of employees
as investors because they choose to invest their talents, skills, time and
energy into our organization. This mindset is critical to our ability to attract
and retain professional staff at a time when information technology
professionals are in high demand. We have instituted a very competitive benefits
package for all employees and have developed policies that ensure that we
continue to address our employees' professional development and satisfaction. We
strive to maintain our relaxed and supportive workplace despite our rapid growth
and expansion.
PROFESSIONAL DEVELOPMENT. We believe that our investment in our employees
must mirror our employees' investment in and commitment to us. Integral to this
goal is the establishment of a career development plan for each of our
employees, which is created and agreed upon by management and the employee. We
provide our consultants with the opportunity to obtain extensive subject matter
expertise in their practice area and to work in collaborative multi-discipline
projects. We have also established Predictive University, a training program
that leverages both our in-house captured knowledge programs, as well as
selected outside certification programs.
COMPENSATION. We believe that linking employee compensation to our success
through performance-based incentive programs encourages a high level of
involvement from each team member and increases our employee retention. We
provide a highly competitive compensation package that consists of a combination
of base salary, performance-based incentives and company stock options.
COMPETITION
The network management consulting industry is comprised of many
participants, is highly competitive and is subject to rapid technological
change. We face intense competition from systems integrators, value added
resellers, local and regional network services firms, telecommunications
providers, network equipment and computer systems vendors. Many of our
competitors have greater name recognition, longer operating histories, more
relationships with large and established clients and greater financial,
technical and managerial resources. Furthermore, we expect that our competitors
may in the future form alliances with other technology vendors, which may give
them an advantage in managing networks that use that vendor's equipment.
Most of our current clients and prospective clients have internal
information technology departments and could choose to satisfy their network
management needs through internal resources rather than by outsourcing them to
third-party service providers such as ourselves. The decision by clients or
prospective clients to rely on their own information technology departments
could have a material adverse affect on our business, results of operations and
financial condition. Moreover, as the domestic and global markets for
information technology services continue to grow, we expect to face stiff
competition from new entrants into the network management consulting industry.
We believe that the principal competitive factors in the network management
market are the ability to attract and retain qualified personnel, quality and
breadth of services offered, price and reliability of services provided and the
strength of client relationships. We believe we compete favorably with respect
to all of these factors. We believe we distinguish ourselves from our
competitors through our expertise in managing complex, multi-vendor networks and
our ability to provide clients with cost certainty and guaranteed deliverables.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. Despite our precautions, it may be possible
for third parties to obtain and use our intellectual property without our
authorization. Furthermore, the validity, enforceability and
43
<PAGE>
scope of protection of intellectual property in Internet-related industries is
uncertain and still evolving. The laws of some foreign countries do not protect
intellectual property to the same extent as do the laws of the United States.
We pursue the registration of our trademarks in the United States and
England. We may not be able to secure adequate protection of our trademarks in
the United States and other countries. We currently have applied for trademark
registrations in the United States and England for the PREDICTIVE SYSTEMS and
BUSINESSFIRST marks, and further, a trademark application in the United States
for the Predictive logo. The trademark offices in the United States and England
have raised preliminary objections to the registration of the trademarks
described above on a number of grounds, including likelihood of confusion with
pre-existing trademarks and descriptiveness. We have responded to these
objections and are awaiting the trademark offices' decisions on our responses.
We have not, however, received any objections from third parties asserting
likelihood of confusion claims with respect to our trademarks. Nonetheless, we
may not be able to obtain trademark registrations in the United States or
England, or both, for one or more of these trademarks, in which case we would be
unable to fully enforce our statutory trademark rights against third parties for
these trademarks, and/or we may decide to replace these trademarks with new
trademarks. This could have a material adverse effect on our business, financial
condition and results of operations. Effective trademark protection may not be
available in all the countries in which we conduct business. Policing
unauthorized use of our marks is also difficult and expensive. In addition, it
is possible that our competitors have adopted or will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion.
We cannot be certain that our services and the finished products that we
deliver do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. We may be subject to
legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. We may incur
substantial expenses in defending against these third-party infringement claims,
regardless of their merit. Successful infringement claims against us may result
in substantial monetary liability or may materially disrupt the conduct of our
business.
FACILITIES
Our principal executive offices are currently located in approximately
15,000 square feet of office space in New York, New York. Additionally, in
June 1999 we entered into an agreement to lease approximately 32,000 square feet
of office space in another facility in New York, New York, with an option for an
additional 32,000 square feet available by March 2001. We expect to move our
principal executive offices to the new facilities in February 2000. We also
lease office space in:
- Atlanta, Georgia;
- Boston, Massachusetts;
- Dallas, Texas;
- Florham Park, New Jersey;
- Herndon, Virginia;
- Pleasanton, California;
- Santa Cruz, California;
- London, England; and
- Amsterdam, The Netherlands.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
The following table sets forth our executive officers, directors and key
employees, their ages and the positions they hold:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Ronald G. Pettengill, Jr.................. 40 Chairman of the Board and Chief Executive
Officer
Robert L. Belau........................... 36 President and Director
Gerard E. Dorsey.......................... 52 Chief Financial Officer
Thomas R. Joseph.......................... 32 Vice President, General Manager North
America
Carl D. Humes............................. 33 Vice President, Global Operations
Gregory D. Nicastro....................... 39 Vice President, Strategic Services
Neeraj Sethi.............................. 36 Vice President, Finance
R. Kevin Holt............................. 45 Vice President, Human Resources
John Wright............................... 36 Managing Director, Europe
Gary N. Papilsky.......................... 28 Vice President and General Counsel
Peter L. Bloom (1)........................ 41 Director
Donald J. Duffy (1)....................... 32 Director
Braden R. Kelly (2)....................... 28 Director
Eric Meyer (2)............................ 38 Director
Inder Sidhu............................... 39 Director
William W. Wyman (2)...................... 61 Director
</TABLE>
- ------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
RONALD G. PETTENGILL, JR. co-founded Predictive in February 1995 and has
been Chairman of the Board and Chief Executive Officer since that time. Prior to
founding Predictive, Mr. Pettengill was Senior Vice President of Network
Operations at Allerion, Inc., a systems integration and network control center
design, operation and service delivery firm, from 1992 to 1995. From 1990 to
1992, Mr. Pettengill was the Director of Technical Services at Network
Management, Inc., which provided consulting services to assist Fortune 500
companies migrate from mainframe to network-based client/ server environments.
Prior to working at Network Management, Mr. Pettengill was the Network Manager
at Bear, Stearns & Co. Inc.
ROBERT L. BELAU co-founded Predictive in February 1995 and has been
President and a Director since that time. Prior to founding Predictive,
Mr. Belau was Director of Sales at Allerion, and also managed the definition,
productization and pricing of its network management outsourcing services, from
1993 to 1995. From 1987 to 1993, Mr. Belau was the Director of Sales at Network
Management. Mr. Belau is the step-brother of Eric Meyer, one of our directors.
GERARD E. DORSEY has been Chief Financial Officer since September 1999.
Prior to joining us, Mr. Dorsey was Senior Vice President-Finance, Chief
Financial Officer and Secretary of Intelligroup, Inc., a professional
information technology consulting services company, from 1995 to 1999. From 1991
to 1995, Mr. Dorsey was Senior Vice President-Finance and Chief Financial
Officer of Ariel Corporation, a data communications company. Prior to joining
Ariel Corporation, from 1991 until 1995, Mr. Dorsey was Chief Financial Officer
of Information Management Technologies Corporation, a printing and office
services outsourcing company. From 1987 until 1990, Mr. Dorsey was Treasurer of
Loral Corporation.
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<PAGE>
THOMAS R. JOSEPH has been Vice President, General Manager North America
since April 1999. Prior to that Mr. Joseph held various positions with us, most
recently as National Vice President of Business Development, from 1996 to 1999.
From 1994 to 1996, Mr. Joseph was a Global Accounts Manager at Metropolitan
Fiber Systems, a competitive access provider.
CARL D. HUMES has been Vice President, Global Operations since April 1999.
Prior to that
Mr. Humes served as Regional Vice President of Technical Services for our
Mid-Atlantic region since 1996. From 1995 to 1996, Mr. Humes was a consultant at
Booz-Allen & Hamilton, a strategic consulting firm. Prior to that, Mr. Humes was
an officer in the United States Navy, and served on a nuclear submarine and at
the White House Office of Emergency Operations.
GREGORY D. NICASTRO has been Vice President, Strategic Services since
April 1999. Prior to that, Mr. Nicastro served as Vice President of Marketing
since 1997. Prior to joining us, Mr. Nicastro founded ActingExec, a marketing
consulting firm, in 1995. From July 1995 to October 1995, Mr. Nicastro was
Director of Systems Marketing at 3Com Corporation. From 1988 to 1995,
Mr. Nicastro served as National Account Sales Manager at Sun Microsystems.
NEERAJ SETHI has been Vice President of Finance since 1995. Prior to joining
us, Mr. Sethi was Assistant Vice President for Global Expense Management at
Bankers Trust from 1992 to 1995. From 1989 to 1992, Mr. Sethi was Controller and
Financial Analyst at Network Management.
R. KEVIN HOLT has been Vice President of Human Resources since March 1999.
Prior to joining us, Mr. Holt was a Managing Partner at USWeb/CKS (formerly
USWeb). Prior to the merger of USWeb/CKS and Gray Peak Technologies, Mr. Holt
served as Vice President and Director of Recruiting at Gray Peak, a high-end
network solutions provider. From October 1995 until September 1997, Mr. Holt
served as the Eastern Division Recruiting Manager at Sprint-Paranet, a global
network solutions provider. Previously, Mr. Holt was the Founder and President
of Metropolitan Search, a contingency and retained search and consulting
company. Mr. Holt filed a petition for bankruptcy protection in 1994.
JOHN WRIGHT has been Managing Director, Europe since January 1999. Prior to
joining us, Mr. Wright founded Visia Management Consultants, a strategic
consulting company, in 1997. From 1996 to 1997, Mr. Wright served as Director,
Business Development at Global Village, a communications software firm. From
1987 to 1996, Mr. Wright served in various roles at Gandalf Digital
Communications, including, most recently, Director of Indirect Channels.
GARY N. PAPILSKY has been Vice President and General Counsel since October
1999. Prior to joining us, Mr. Papilsky was an attorney with Brobeck, Phleger &
Harrison LLP, a law firm specializing in emerging growth technology companies,
from 1998 to 1999. From 1996 to 1998, Mr. Papilsky was an attorney with the law
firm of Sonnenschein Nath & Rosenthal.
PETER L. BLOOM has been a director of Predictive since March 1999.
Mr. Bloom is a managing member of General Atlantic Partners, LLC, a private
equity firm that invests globally in software, services, Internet and related
information technology companies, and has been at General Atlantic since 1995.
From 1982 to 1995, Mr. Bloom served in various roles at Salomon Brothers,
including as Managing Director of Salomon's U.S. Technology Division. Mr. Bloom
is a Director of Bindview Development Corporation and a Special Advisor to the
Board of Directors of E*TRADE Group, Inc.
DONALD J. DUFFY has been a director of Predictive since its inception in
February 1995. Mr. Duffy is a co-founder of Meyer, Duffy & Associates, Inc., and
MD Ventures, firms that invest in early stage networking and Internet technology
companies. Mr. Duffy is a director of Bikers Dream Inc., a publicly traded
company. Mr. Duffy has been at Meyer, Duffy & Associates since 1994. From 1992
to 1994, Mr. Duffy was a Vice President at Oak Hall Capital Advisors, a money
management firm.
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<PAGE>
BRADEN R. KELLY has been a director of Predictive since June 1999.
Mr. Kelly is an associate at General Atlantic Partners, LLC, and has been with
General Atlantic since 1995. Mr. Kelly is a director of HEALTHvision, Inc., a
provider of comprehensive Internet solutions to the healthcare industry. From
1993 to 1994, Mr. Kelly served as a Financial Analyst at Morgan Stanley &
Company.
ERIC MEYER has been as a director of Predictive since its inception in
February 1995. Mr. Meyer is a co-founder of Meyer, Duffy & Associates and
MD Ventures, firms that invest in early stage networking and Internet technology
companies. Mr. Meyer has been at Meyer, Duffy & Associates since 1994. From 1992
to 1994 Mr. Meyer served as a Vice President at Oak Hall Capital Advisors.
Mr. Meyer is the step-brother of Robert L. Belau, our President and one of our
directors.
INDER SIDHU has been a director of Predictive since September 1999. Mr.
Sidhu has been the Vice President of Worldwide Professional Services at Cisco
since December 1998. From 1995 to 1998, Mr. Sidhu served in various executive
management positions in the Sales and Business Development organizations at
Cisco. From 1991 to 1995 Mr. Sidhu was a consultant at McKinsey & Company. Prior
to that, Mr. Sidhu led a network management group at 3Com Corporation.
WILLIAM W. WYMAN has been a director of Predictive since September 1999.
Since 1995, Mr. Wyman has been a business advisor and counselor on a broad range
of issues to a number of corporate chief executives of financial services,
information services, forest products and software companies. From 1984 to 1995,
Mr. Wyman was a partner at Oliver, Wyman & Company, a firm which specializes in
management consulting to large financial institutions and which he co-founded.
Mr. Wyman is a director of SS&C Technologies and U.S. Timberlands. He also
serves as a trustee of the Dartmouth Hitchcock Medical Center and on the Boards
of Advisors of The Sprout Group, a venture capital fund associated with
Donaldson, Lufkin & Jenrette, and Legend Capital, a leveraged buyout firm
associated with Castle Harlan Investments.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three year terms. Upon expiration of the term of a class of directors,
the directors in that class will be elected for three-year terms at the annual
meeting of stockholders in the year in which their term expires. Our board of
directors has resolved that Messrs. Pettengill, Belau and Duffy will be Class I
directors whose terms expire at the 2000 annual meeting of stockholders. Messrs.
Bloom, Meyer and Wyman will be Class II directors whose terms expire at the 2001
annual meeting of stockholders. Messrs. Kelly and Sidhu will be Class III
directors whose terms expire at the 2002 annual meeting of stockholders. These
provisions, when coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees.
BOARD COMMITTEES
The audit committee reports to the board of directors regarding the
appointment of our independent public accountants, the scope and results of our
annual audits, compliance with our accounting and financial policies and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. Meyer, Kelly
and Wyman who were appointed in May 1999, June 1999 and September 1999,
respectively. Prior to that time, the responsibilities of the audit committee
were handled by the entire board of directors.
The compensation committee reviews and makes recommendations to the board of
directors regarding our compensation policies and all forms of compensation to
be provided to our executive officers and directors. In addition, the
compensation committee reviews bonus and stock compensation arrangements for all
of our other employees. The members of the compensation committee are
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<PAGE>
Messrs. Duffy and Bloom, who were appointed in May 1999. Prior to that time, the
responsibilities of the audit committee were handled by the entire board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past
with the exception of the following:
- Messrs. Pettengill, Belau, Duffy and Meyer serve on the board of directors
of Tribeca Software, a network management software company, and
Messrs. Pettengill and Belau are executive officers of Tribeca. Please see
"Certain Transactions--Tribeca Software" for information about our
relationship with Tribeca.
- Messrs. Pettengill and Meyer serve on the board of directors of
Riversoft Ltd., a network management software company. We act as a
reseller for Riversoft's software. To date, our revenues from sales of
Riversoft's software have not been material.
- Our directors have engaged in various other transactions with us. For
information about these transactions please see "Certain
Transactions--Relationship with Cisco,--Sale of Common Stock,--Sales of
Series A Convertible Preferred Stock and Warrants,--Share Redemption,--
Meyer Duffy & Associates,--Loans to Officers and--Option Grants."
DIRECTOR COMPENSATION
We do not currently compensate our directors for attending meetings of the
board of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings. Each of Messrs. Bloom, Duffy, Kelly and Meyer
were granted options to purchase 25,000 shares of our common stock at a price of
$4.00 per share in May 1999. Messrs. Sidhu and Wyman were granted options to
purchase 25,000 shares of our common stock at a price of $11.05 per share in
September 1999. These options vest over a period of four years.
Under the automatic option grant program of the 1999 Stock Incentive Plan,
which is described below under "--1999 Stock Incentive Plan," each individual
who first joins the board of directors after the closing of this offering as a
non-employee member of the board of directors will also receive an option grant
for 25,000 shares of our common stock at the time of his or her commencement of
service on the board of directors. In addition, at each annual meeting of
stockholders, beginning with the 2001 annual meeting, each individual who is to
continue to serve as a non-employee member of the board of directors will
receive an option to purchase 2,500 shares of our common stock.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued during
the fiscal year ended December 31, 1998 to our Chief Executive Officer and to
each of our most highly compensated executive officers, other than the Chief
Executive Officer, whose salary and bonus for such fiscal year exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY $ BONUS $ OPTIONS COMPENSATION
- --------------------------- -------- -------- ----------------- ------------
<S> <C> <C> <C> <C>
Ronald G. Pettengill, Jr.................... $175,000 $ 50,000 60,000 $8,447(1)
Chief Executive Officer
Robert L. Belau............................. 175,000 50,000 60,000 8,899(1)
President
Thomas R. Joseph............................ 112,500 190,000 270,000 3,000(2)
Vice President, General Manager
North America
Carl D. Humes............................... 112,500 190,000 270,000 3,000(2)
Vice President, Global Operations
Gregory D. Nicastro......................... 140,000 14,000 -- --
Vice President, Strategic Services
Neeraj Sethi................................ 135,167 55,000 -- --
Vice President, Finance
</TABLE>
- ------------------------
(1) We paid a monthly car allowance and automobile insurance premiums for each
of Messrs. Pettengill and Belau during the year ended December 31, 1998.
(2) We paid a monthly car allowance effective July 1998 for each of
Messrs. Joseph and Humes during the year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to our Chief Executive Officer and to each of our most highly
compensated executive officers, other than the Chief Executive Officer, whose
salary and bonus for such fiscal year exceeded $100,000. We have never granted
any stock appreciation rights. The potential realizable value is calculated
based on the term of the option at its time of grant. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth. The percentage of total options granted to employees
in the last fiscal year is based on options to purchase an aggregate of
2,427,000 shares of common stock granted under our option plans. There was no
public market for our
49
<PAGE>
common stock as of December 31, 1998. Accordingly, the fair market value on
December 31, 1998 is assumed to be the initial public offering price of $18.00
per share.
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL AT ASSUMED ANNUAL RATES
SECURITIES OPTIONS EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE PER FOR OPTION TERM
OPTIONS EMPLOYEES SHARE EXPIRATION -----------------------------
NAME GRANTED IN 1998 ($) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr....... 60,000 2.5% $1.25 1/1/08 $1,600,434 $2,471,584
Robert L. Belau................ 60,000 2.5 1.25 1/1/08 1,600,434 2,471,584
Thomas R. Joseph............... 150,000 6.2 1.25 1/1/08 4,001,086 6,178,959
120,000 4.9 1.50 8/1/08 3,011,304 4,450,152
Carl D. Humes.................. 150,000 6.2 1.25 1/1/08 4,001,086 6,178,959
120,000 4.9 1.50 8/1/08 3,011,304 4,450,152
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the value realized
upon exercise of options during 1998 and the number and value of unexercised
options held by each of our named executive officers at December 31, 1998. There
was no public market for our common stock as of December 31, 1998. Accordingly,
the values set forth below have been calculated on the basis of the fair market
value on December 31, 1998 assuming this was equal to the initial public
offering price of $18.00 per share, less the applicable exercise price per
share, multiplied by the number of shares underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
<S> <C> <C> <C> <C> <C> <C>
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED FISCAL YEAR-END AT FISCAL YEAR-END
ON VALUE ----------------------- ------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- --------- ----------- --------- ----------- ----------- ----------
Ronald G. Pettengill, Jr..... 585,000 $10,432,305 780,000 -- $13,385,220 $ --
Robert L. Belau.............. 585,000 10,432,305 780,000 -- 13,385,220 --
Thomas R. Joseph............. -- -- 210,000 150,000 3,547,530 2,490,000
Carl D. Humes................ -- -- 210,000 150,000 3,510,000 2,490,000
Gregory D. Nicastro.......... -- -- -- 336,000 -- 5,628,000
Neeraj Sethi................. 135,000 2,407,455 90,000 90,000 1,520,010 1,507,500
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into executive employment agreements with Ronald G.
Pettengill, Jr., our Chairman and Chief Executive Officer, and Robert L. Belau,
our President. Each employment agreement provides for an initial annual base
salary of $200,000. Each employment agreement also provides for initial
performance based bonuses of $25,000 upon the closing of this offering and up to
an additional $50,000 upon the achievement of certain gross revenue thresholds
in the 1999 fiscal year. Under the agreements, each executive also received
options to purchase 100,000 shares of our common stock at a price of $4.00 per
share, which vest over 3 years. Additionally, each executive received options to
purchase an additional 100,000 shares of our common stock at a price of $4.00
per share which vest after 4 years. These additional options will vest
immediately upon the achievement of certain gross revenues thresholds.
Each employment agreement expires on May 11, 2002, subject to earlier
termination or extension. Each employment agreement provides that if
Messrs. Pettengill and Belau are terminated by us without cause or if they
terminate their employment agreements for good reason, they will be entitled to
their base salary and health coverage until the later of the expiration date of
their employment agreements
50
<PAGE>
or one year from the date of termination. Additionally, all stock options
granted to them will immediately vest.
Under the agreements, good reason includes:
- a material breach of the agreements by us;
- a material change in the executives duties and responsibilities;
- a change in the executive's reporting relationship;
- a relocation of our executive offices further than 75 miles from its
current location; or
- a change of control.
Each employment agreement prohibits Messrs. Pettengill and Belau from
competing with us, or soliciting our customers or employees, for a period of one
year from the date of their termination of employment.
We have also entered into an employment agreement with R. Kevin Holt, our
Vice President of Human Resources, John Wright, Managing Director Europe, and
Gerard E. Dorsey, our Chief Financial Officer. Mr. Holt's agreement provides for
an initial annual base salary of $130,000 and for an initial performance based
bonus of up to $120,000 upon the achievement of certain hiring goals, hiring
processes and marketing goals in the fiscal year ending December 31, 1999. Under
the agreement, Mr. Holt received options to purchase 130,000 shares of our
common stock at a price of $2.50 per share, which vest over four years.
Our employment agreement with Mr. Holt expires on January 23, 2001, subject
to earlier termination. Mr. Holt's agreement provides that if he is terminated
by us without cause or if he terminates his employment with us for good reason,
he will be entitled to receive his base salary until the earlier of six months
after the date of his termination or the date he accepts new employment. Under
the agreement, good reason includes:
- a reduction in Mr. Holt's base salary;
- a relocation of Mr. Holt's office further than 50 miles from his current
office; or
- a material reduction in job duties.
Our agreement prohibits Mr. Holt from competing with us, soliciting our
employees or permitting his name to be used in connection with a competing
business for a period of six months from the date of the termination of his
employment.
Our agreement with Mr. Wright provides for an initial base salary of
L71,200, approximately $114,000 at an exchange rate of 1.6, plus a bonus based
on our performance. Under the agreement, Mr. Wright received options to purchase
80,000 shares of our common stock at a price of $2.50 per share, which vest over
four years. We agreed to contribute an amount equal to 5% of Mr. Wright's base
salary to a pension plan. The employment agreement prohibits Mr. Wright from
competing with us and soliciting our employees for a period of 6 and 12 months,
respectively, from the termination of his employment. The agreement is in effect
until terminated by either party by giving at least 3 months notice to the other
party.
Our agreement with Mr. Dorsey provides for an initial base salary of
$210,000 and an annual bonus of up to a maximum of $75,000. Under the agreement,
Mr. Dorsey received options to purchase 175,000 shares of our common stock at a
price of $11.05 per share, which vest over 4 years. Our agreement further
provides that Mr. Dorsey will receive an automobile allowance of $650 per month.
The agreement prohibits Mr. Dorsey from competing with us and soliciting our
employees for a period
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<PAGE>
of one year from the termination of his employment. The agreement has an initial
term of three years, and renews automatically for successive one year periods
unless written notice is given by either party.
1999 STOCK INCENTIVE PLAN
The 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1998 Stock Option/Stock Issuance Plan and our 1998
California Stock Option/Stock Issuance Plan. The 1999 Plan became effective upon
its adoption by the board of directors on September 14, 1999. It will be
approved by the stockholders prior to the date of this offering.
6,655,600 shares of common stock have been authorized for issuance under the
1999 Plan. This share reserve consists of the shares which were available for
issuance under the predecessor plans on the effective date of the 1999 Plan plus
an additional increase of 2,345,597 shares. The share reserve will automatically
be increased on the first trading day of January each calendar year, beginning
in January 2001, by a number of shares equal to 1% of the total number of shares
of common stock outstanding on the last trading day of the immediately preceding
calendar year, but no such annual increase will exceed 500,000 shares. However,
in no event may any one participant in the 1999 Plan receive option grants or
direct stock issuances for more than 500,000 shares in the aggregate per
calendar year.
Outstanding options under the predecessor plans will be incorporated into
the 1999 Plan upon the date of this offering, and no further option grants will
be made under those plans. The incorporated options will continue to be governed
by their existing terms, unless our compensation committee extends one or more
features of the 1999 Plan to those options. However, except as otherwise noted
below, the outstanding options under the predecessor plans contain substantially
the same terms and conditions summarized below for the discretionary option
grant program under the 1999 Plan.
The 1999 Plan has five separate programs:
- the discretionary option grant program under which eligible individuals in
our employ or service (including officers, non-employee board members and
consultants) may be granted options to purchase shares of our common
stock;
- the stock issuance program under which these individuals may be issued
shares of our common stock directly, with the purchase of such shares or
as a bonus tied to the performance of services;
- the salary investment option grant program under which executive officers
and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special below-market stock option
grants;
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members; and
- the director fee option grant program under which non-employee board
members may elect to apply a portion of their retainer fee to the
acquisition of special below-market stock option grants.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the exercise or purchase price
for each such grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may
52
<PAGE>
participate in the salary investment option grant program in the event that
program is activated for one or more calendar years. Neither the compensation
committee nor the board will exercise any administrative discretion with respect
to option grants made under the salary investment option grant program or under
the automatic option grant or director fee option grant program for the non-
employee board members.
The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the compensation committee may allow a participant to pay
the option exercise price or direct issue price (and any associated withholding
taxes incurred in connection with the acquisition of shares) with a
full-recourse, interest-bearing promissory note.
In the event that we are acquired, whether by merger or asset sale or
board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent our repurchase rights with respect to those shares are to
be assigned to the successor corporation or otherwise continued in effect. The
compensation committee may grant options under the discretionary option grant
program which will accelerate in the acquisition even if the options are assumed
or which will accelerate if the optionee's service is subsequently terminated.
The compensation committee may grant options and issue shares which accelerate
in connection with a hostile change in control effected through a successful
tender offer for more than 50% of our outstanding voting stock or by proxy
contest for the election of board members) or the options and shares may
accelerate upon a subsequent termination of the individual's service.
Options currently outstanding under the plan may be assumed by the successor
corporation in an acquisition; such options are not by their terms subject to
acceleration at the time of an acquisition or a change in control or upon the
termination of the optionee's service following any such transaction.
Stock appreciation rights may be issued under the discretionary option grant
program which will provide the holders with the election to surrender their
outstanding options for an appreciation distribution from us equal to the fair
market value of the vested shares subject to the surrendered option less the
aggregate exercise price payable for such shares. This appreciation distribution
may be made in cash or in shares of our common stock. There are currently no
outstanding stock appreciation rights under the predecessor plans.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program (including options incorporated
from predecessor plans) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.
In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $5,000 nor more than $50,000. In
return, the individual will automatically be granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the option
shares on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the salary reduction amount. The option will become exercisable in a
series of 12 equal monthly installments over the
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<PAGE>
calendar year for which the salary reduction is to be in effect and will be
subject to full and immediate vesting in the event of an acquisition or change
in control.
Under the automatic option grant program, each individual who first joins
our board after the effective date of this offering as a non-employee board
member will automatically be granted an option for 25,000 shares of our common
stock at the time of his or her commencement of board service. In addition, on
the date of each annual stockholders meeting, beginning with the 2001 meeting,
each individual who has served as a non-employee board member since the last
annual stockholders meeting will receive an option grant to purchase
2,500 shares of our common stock. Each automatic grant will have an exercise
price equal to the fair market value per share of our common stock on the grant
date and will have a maximum term of 10 years, subject to earlier termination
following the optionee's cessation of board service. Each option will be
immediately exercisable, subject to our right to repurchase any unvested shares,
at the original exercise price, at the time of the board member's cessation of
service. The options will vest, and our repurchase right will lapse, with
respect to, the initial 25,000-share option grant in a series of four (4) equal
successive annual installments upon the optionee's completion of each year of
service over the four (4)-year period measured from the grant date. However,
each such outstanding option will immediately vest upon an acquisition or change
in control or the death or disability of the optionee while serving as a board
member. Each 2,500-share option grant will be fully vested on grant.
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically be made on the first trading day in
January in the year for which the non-employee board member would otherwise be
paid the cash retainer fee in the absence of his or her election. The option
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of our
common stock on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the portion of the retainer fee applied to that option. The option
will become exercisable in a series of twelve equal monthly installments over
the calendar year for which the election is in effect. However, the option will
become immediately exercisable for all the option shares upon the death or
disability of the optionee while serving as a board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, director fee option grant and
salary investment option grant programs and may be granted to one or more
officers as part of their option grants under the discretionary option grant
program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than 50%
of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the highest price per share of our common
stock paid in connection with the tender offer less the exercise price payable
for such share.
The board may amend or modify the 1999 Plan at any time, subject to any
required stockholder approval. The 1999 Plan will terminate no later than
September 14, 2009.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan was adopted by the board on September 14,
1999 and will be approved by the stockholders prior to the date of this
offering. The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow our
eligible employees and those of our participating subsidiaries to purchase
shares of our
54
<PAGE>
common stock, at semi-annual intervals, through periodic payroll deductions. A
total of 750,000 shares of our common stock will be issued under the plan.
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. The initial offering period will begin on the day
the underwriting agreement is executed in connection with this offering and will
end on the last business day in October 2001. The next offering period will
begin on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the plan
on any subsequent semi-annual entry date within that period.
A participant may contribute up to 10% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to the
purchase of shares on the participant's behalf on each semi-annual purchase date
(the last business day in January and July each year). The purchase price per
share will be 85% of the lower of the fair market value of our common stock on
the participant's entry date into the offering period or the fair market value
on the semi-annual purchase date. The first purchase date will occur on the last
business day in April 2000. In no event, however, may any participant purchase
more than 500 shares, nor may all participants in the aggregate purchase more
than 187,500 shares on any one semi-annual purchase date. Should the fair market
value of our common stock on any semi-annual purchase date be less than the fair
market value on the first day of the offering period, then the current offering
period will automatically end and a new offering period will begin, based on the
lower fair market value.
The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in October 2009.
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<PAGE>
CERTAIN TRANSACTIONS
RELATIONSHIP WITH CISCO
In September 1999, we sold 1,242,000 shares of our common stock to Cisco for
$12.00 per share. In connection with the investment, we have agreed to nominate
a person designated by Cisco to our Board of Directors so long as Cisco owns
more than 750,000 shares of our common stock. Additionally, we provide network
consulting services to Cisco pursuant to an existing agreement negotiated by the
parties in an arms-length transaction. This agreement expires in May 2003 and
governs the terms and conditions that apply to all consulting services performed
by us for Cisco and for customers of Cisco. This agreement provides that if we
give more favorable rates to another client we will inform Cisco and Cisco will
have the right to terminate this agreement. In fiscal 1998 and the six months
ended June 30, 1999, revenues from Cisco were $35,190 and $883,388,
respectively. Inder Sidhu, one of our directors, is the Vice President of
Worldwide Professional Services at Cisco.
SALE OF COMMON STOCK
In September 1999, we sold 94,867 and 18,133 shares of our common stock to
General Atlantic Partners 57 and GAP Coinvestment Partners II, respectively, for
$12.00 per share. Peter L. Bloom and Braden R. Kelly, our directors, are
respectively a managing member and an associate of General Atlantic Partners,
LLC. General Atlantic Partners, LLC is the general partner of General Atlantic
Partners 57 and the managing members of General Atlantic Partners, LLC are also
the general partners of GAP Coinvestment Partners II.
TRIBECA SOFTWARE
In March 1998, we made a pro rata distribution of all of the outstanding
shares of our former subsidiary, Tribeca Software, Inc., to our stockholders. Of
the 1,501,700 then outstanding shares of Tribeca, we distributed the following
amounts to our officers, directors and 5% stockholders and their affiliates:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME OF STOCKHOLDER OF TRIBECA
- ------------------- -------------
<S> <C>
Ronald G. Pettengill, Jr.................................... 234,000
Robert L. Belau............................................. 250,000
Belau Irrevocable Family Trust.............................. 10,000
Neeraj Sethi................................................ 13,000
Donald J. Duffy............................................. 25,000
Eric Meyer.................................................. 42,500
MD Strategic, L.P........................................... 85,000
PVII, L.P................................................... 32,000
Boyce Meyer Trust(1)........................................ 200,000
</TABLE>
- ------------------------
(1) Boyce Meyer was the father of Eric Meyer and the stepfather of Robert L.
Belau.
Subsequent to this transaction, Tribeca purchased from us, and we assigned
to Tribeca, network management software and other assets, including computer and
office equipment. As payment for these assets, Tribeca gave us a demand note in
the amount of $130,000, which accrued interest at 8% per annum. Additionally, we
gave Tribeca a $1,000,000 line of credit at an interest rate of 8% per annum. In
March 1999, Tribeca paid us the full amounts due under the demand note and line
of credit and the line of credit was terminated. The largest amount outstanding
under the line of credit was $988,800.
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<PAGE>
From March 1998 through June 1999, we performed payroll, accounting and
other administrative services for Tribeca for a fee of $7,000 per month.
Additionally, Tribeca leases office space and equipment from us for
approximately $12,000 per month. We also have an oral agreement with Tribeca to
purchase at a discount and resell its software. In 1998, sales of Tribeca's
software accounted for approximately $100,000 of our revenues. We believe that
these transactions were on terms that are no less favorable than those that
could be obtained from unaffiliated third parties.
Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer, Robert
L. Belau, our President, and Donald J. Duffy and Eric Meyer, our directors, are
directors of Tribeca and own shares of common stock of Tribeca. Additionally,
Messrs. Pettengill and Belau serve as executive officers of Tribeca.
SALE OF SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS
In March 1999, we sold 6,512,316 shares of series A convertible preferred
stock and warrants to purchase the number of shares of our common stock that
equals 15% of the number of shares registered in this offering, at the initial
public offering price, to six accredited investors for an aggregate purchase
price of approximately $18.6 million. General Atlantic Partners 54, L.P.
purchased 5,350,441 shares and GAP Coinvestment Partners II purchased 1,112,765
shares. Peter L. Bloom and Braden R. Kelly, our directors, are respectively a
managing member and an associate of General Atlantic Partners, LLC. General
Atlantic Partners, LLC is the general partner of General Atlantic Partners 54
and the managing members of General Atlantic Partners, LLC are also the general
partners of GAP Coinvestment Partners II. The purchase price for the series A
convertible preferred stock was $2.85 per share. On the closing of this
offering, the series A convertible preferred stock will automatically convert
into 6,512,316 shares of common stock. Under the terms of the warrants, a notice
of exercise was required to be sent within twenty business days of the initial
filing of this registration statement. As no notice of exercise was received
within this exercise period, the warrants have terminated and are no longer
exercisable.
SHARE REDEMPTION
As a condition of the March 1999 sale of series A convertible preferred
stock and warrants, we were required to repurchase approximately $8.4 million of
our common stock. Accordingly, we made an offer to each of our stockholders to
repurchase their shares at a price of $2.94 per share. Subsequently, in
March 1999, we repurchased a total of 2,855,100 shares of common stock from 31
of our stockholders who elected to sell shares for an aggregate purchase price
of approximately $8.4 million. Of these, we purchased the following amounts from
our officers, directors and 5% stockholders and their affiliates:
<TABLE>
<CAPTION>
NUMBER OF SHARES AGGREGATE
NAME OF STOCKHOLDER REDEEMED CONSIDERATION
- ------------------- ---------------- -------------
<S> <C> <C>
Ronald G. Pettengill, Jr.................................... 534,000 $1,570,850
Robert L. Belau............................................. 480,000 1,412,000
Neeraj Sethi................................................ 48,000 141,200
Donald J. Duffy............................................. 210,000 617,750
Eric Meyer.................................................. 282,000 829,550
MD Strategic, L.P........................................... 119,040 350,176
Predictive Ventures, L.P.................................... 300,000 882,500
PVII, L.P................................................... 33,060 97,251
</TABLE>
Eric Meyer and Donald J. Duffy, our directors, are general partners of MD
Strategic, Predictive Ventures and PVII.
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<PAGE>
MEYER, DUFFY & ASSOCIATES
We had an agreement with Meyer, Duffy & Associates, Inc. pursuant to which
Meyer Duffy & Associates provided us with consulting and advisory services
regarding capital raising and strategic partnerships. Eric Meyer and Donald J.
Duffy, our directors, serve as co-managing Directors of Meyer, Duffy &
Associates. We paid Meyer, Duffy & Associates a retainer fee of $5,000 per month
in connection with these services through March 31, 1999, the date that the
agreement terminated. Additionally, in August 1998, we loaned Meyer, Duffy &
Associates, L.P., in connection with the exercise of options, $300,000 at an
interest rate of 7% per annum. Meyer, Duffy & Associates, L.P. repaid this loan
in March 1999. Messrs. Meyer and Duffy are the general partners of Meyer, Duffy
& Associates, L.P.
LOANS TO OFFICERS
In August 1998, in connection with the exercise of options, we loaned each
of Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer and
Robert L. Belau, our President, $97,500 at an interest rate of 7% per annum.
Messrs. Pettengill and Belau repaid those loans in March 1999. In addition to
these loans, from time to time, we have advanced loans to Messrs. Pettengill and
Belau. As of December 31, 1998 the amounts outstanding under these advances for
Messrs. Pettengill and Belau was $15,000 and $13,402, respectively which
represents the largest amounts outstanding under these advances during fiscal
1998. There are currently no advances outstanding. We may in the future make
loans to our officers.
OPTION GRANTS
We granted each of Messrs. Bloom, Duffy, Kelly and Meyer, our non-employee
directors, options to purchase 25,000 shares of our common stock at a price of
$4.00 per share. We granted each of Messrs. Sidhu and Wyman, our non-employee
directors, options to purchase 25,000 shares of our common stock at a price of
$11.05 per share. Additionally, in 1999, we granted to Messrs. Pettengill,
Belau, Dorsey, Joseph, Humes, Holt, Sethi, Wright and Papilsky options to
purchase 200,000; 200,000; 175,000; 100,000; 60,000; 130,000; 70,000; 80,000 and
50,000, respectively. Please see "Management--Employment Agreements." For
additional information regarding the grant of stock options to executive
officers and directors, please see "Management--Director Compensation,"
"--Executive Compensation," "--1999 Stock Incentive Plan" and "Principal
Stockholders."
AGREEMENTS WITH UNDERWRITERS
We provide network consulting services to Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette and First Union Capital Markets Corp. pursuant to
agreements they have entered into with us. The terms of these agreements were
negotiated by the parties in arms-length transactions and were entered into
prior to our selection of the underwriters of this offering. In 1998, revenues
derived from Bear Stearns, Donaldson, Lufkin & Jenrette and its affiliates, and
First Union equalled $5.4 million, $162,689 and $50,000, respectively. For the
six months ended June 30, 1999, revenues derived from Bear Stearns and
Donaldson, Lufkin & Jenrette and its affiliates equalled $5.2 million and
$855,000, respectively. We may provide network consulting services to other
underwriters in this offering after the date of this prospectus.
We recently adopted a policy that all transactions with officers, directors,
5% stockholders and their affiliates be entered into only if they are approved
by a majority of the disinterested independent directors, are on terms no less
favorable to us than could be obtained from unaffiliated parties and are
reasonably expected to benefit us.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of September 30, 1999 and as adjusted to
reflect the sale of common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o Predictive Systems, Inc., 145 Hudson Street, New York, New
York 10013. Except as indicated by footnote, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options held by such persons that are exercisable within 60 days of
September 30, 1999, but excludes shares of common stock underlying options held
by any other person. Percentage of beneficial ownership is based on 18,790,080
shares of common stock outstanding as of September 30, 1999, assuming the
conversion of the series A preferred stock, and 22,790,080 shares of common
stock outstanding after completion of this offering. It assumes that the
underwriters' over-allotment option to purchase up to an additional 600,000
shares is not exercised.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
BENEFICIALLY OWNED
-------------------
<S> <C> <C> <C>
SHARES BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ---------------------------------------------------- ---------- ---- ----
Ronald G. Pettengill, Jr. (1)....................... 2,229,000 11.4% 9.5%
Robert L. Belau (2)................................. 2,655,000 13.6 11.4
Thomas R. Joseph (3)................................ 240,000 1.3 1.0
Carl D. Humes (3)................................... 240,000 1.3 1.0
Gregory D. Nicastro (4)............................. 84,000 * *
Neeraj Sethi (5).................................... 150,000 * *
Peter L. Bloom (6).................................. 6,880,006 36.6 30.2
Donald J. Duffy (7)................................. 2,631,900 13.9 11.5
Braden R. Kelly (8)................................. -- -- --
Eric Meyer (9)...................................... 3,114,900 16.4 13.6
Inder Sidhu (10).................................... 1,242,000 6.6 5.4
William W. Wyman (11)............................... -- -- --
Cisco Systems, Inc. (12)............................ 1,242,000 6.6 5.4
General Atlantic Partners, LLC (13)................. 6,880,006 36.6 30.2
Meyer Duffy and Associates, L.P (14)................ 1,800,000 9.6 7.9
All directors and executive officers as a group
(16 persons) (15)................................. 17,015,906 79.5 67.0
</TABLE>
- ------------------------
* Indicates less than one percent of the common stock.
(1) Includes (a) 780,000 shares issuable upon the exercise of currently
exercisable options and (b) 150,000 shares of common stock held by The Conor
G. Pettengill Trust and 150,000 shares held by The Julia G. Pettengill
Trust.
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<PAGE>
(2) Includes (a) 780,000 shares issuable upon the exercise of currently
exercisable options and (b) 126,000 shares of common stock held by The Belau
Family Trust.
(3) Includes (a) 220,000 shares issuable upon the exercise of currently
exercisable options and (b) 20,000 shares issuable upon the exercise of
currently exerciseable stock options held by The Joseph Family Trust.
Mr. Joseph disclaims beneficial ownership of the securities held by The
Joseph Family Trust.
(4) Includes 84,000 shares issuable upon the exercise of currently exercisable
options.
(5) Includes 120,000 shares issuable upon the exercise of currently exercisable
options.
(6) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54,
(b) 349,918 shares owned by General Atlantic Partners 57, and (c) 1,179,647
shares owned by GAP Coinvestment Partners II. The general partner of General
Atlantic Partners 54 and General Atlantic Partners 57 is General Atlantic
Partners, LLC and the managing members of General Atlantic Partners, LLC are
also the general partners of GAP Coinvestment Partners II. Peter L. Bloom is
a managing member of General Atlantic Partners, LLC. Mr. Bloom disclaims
beneficial ownership of these securities except to the extent of his
economic interest in General Atlantic Partners, LLC, and GAP Coinvestment
Partners II. The address of Mr. Bloom is c/o General Atlantic Partners, LLC,
3 Pickwick Plaza, Greenwich, Connecticut 06830.
(7) Includes (a) 180,000 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares of common stock held by MD
Strategic, L.P., (c) 1,800,000 shares of common stock held by Meyer, Duffy
and Associates, L.P., and (d) 140,940 shares of common stock held by PVII,
L.P. Mr. Duffy is a general partner of each of MD Strategic, L.P., Meyer,
Duffy & Associates, L.P. and PVII, L.P. Mr. Duffy disclaims beneficial
ownership of these securities except to the extent of his economic interest
in MD Strategic L.P., Meyer Duffy & Associates, L.P. and PVII, L.P. The
address of Mr. Duffy is c/o of Meyer, Duffy & Associates, Inc., 237 Park
Avenue, New York, New York 10017.
(8) Mr. Kelly is a limited partner of GAP Coinvestment Partners II. Mr. Kelly
disclaims beneficial ownership of the securities held by GAP Coinvestment
Partners II except to the extent of his economic interest in those
securities. The address of Mr. Kelly is c/o General Atlantic Partners, LLC,
3 Pickwick Plaza, Greenwich, Connecticut 06830.
(9) Includes (a) 180,000 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares of common stock held by MD
Strategic, L.P., (c) 1,800,000 shares of common stock held by Meyer, Duffy
and Associates, L.P., and (d) 140,940 shares of common stock held by PVII,
L.P. Mr. Meyer is a general partner of each of MD Strategies L.P., Meyer,
Duffy and Associates, L.P. and PVII, L.P. Mr. Meyer disclaims beneficial
ownership of these securities except to the extent of his economic interest
in MD Strategic L.P., Meyer Duffy & Associates, L.P. and PVII, L.P. The
address of Mr. Meyer is c/o Meyer, Duffy and Associates, Inc., 237 Park
Avenue, New York, NY 10017.
(10) Includes 1,242,000 shares of common stock owned by Cisco. Mr. Sidhu is the
Vice President of Worldwide Professional Services at Cisco. The address of
Mr. Sidhu is c/o Cisco Systems, Inc., 170 West Tasman Drive, San Jose,
California 95134-1706.
(11) The address of Mr. Wyman is 4 North Balch Street, Hanover, New Hampshire
03755.
(12) The address of Cisco is 170 West Tasman Drive, San Jose, California
95134-1706.
(13) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54,
(b) 349,918 shares owned by General Atlantic Partners 57, and (c) 1,179,647
shares owned by GAP Coinvestment Partners II. General Atlantic Partners, LLC
is the general partner of General Atlantic Partners 54 and General Atlantic
Partners 57 and the managing members of General Atlantic Partners, LLC are
also the general partners of GAP Coinvestment Partners II, therefore,
General Atlantic Partners, LLC may vote and dispose of the shares owned by
these entities. The address of General Atlantic Partners, LLC is 3 Pickwick
Plaza, Greenwich, Connecticut 06830.
(14) The address of Meyer, Duffy and Associates, L.P. is c/o Meyer, Duffy &
Associates, Inc., 237 Park Avenue, New York, New York 10017.
(15) Includes 2,604,000 shares of common stock issuable upon the exercise of
currently exercisable options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our amended and restated certificate of incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
200,000,000 shares of common stock, par value $.001 per share, and 10,000,000
shares of preferred stock, par value $.001 per share, the rights and preferences
of which may be established from time to time by our board of directors. As of
September 30, 1999, 12,277,764 shares of common stock were outstanding and
6,512,316 shares of series A convertible preferred stock convertible into the
same amount of shares of common stock were outstanding. As of September 30,
1999, we had 76 stockholders.
COMMON STOCK
Under our amended and restated certificate of incorporation, holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors. They do not have cumulative voting rights. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of our
common stock are entitled to receive ratably dividends, if any, as may be
declared by the board of directors out of legally available funds. In case of a
liquidation, dissolution or winding up of Predictive, the holders of common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after payment of all of our liabilities and any
preferred stock then outstanding. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. The rights, preferences
and privileges of holders of common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. After the closing of this offering, there will be no shares
of preferred stock outstanding.
PREFERRED STOCK
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences, powers,
rights and restrictions of different series of preferred stock may differ. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock. Such
issuance may also have the effect of delaying, deferring or preventing a change
in control of Predictive. We have no current plans to issue any shares of
preferred stock.
REGISTRATION RIGHTS
In March 1999, we entered into registration rights agreement with some of
our stockholders, including: General Atlantic Partners 54; GAP Coinvestment
Partners II; Ronald G. Pettengill, Jr., our Chief Executive Officer; Robert L.
Belau, our President; Eric Meyer and Donald Duffy, our directors; and Meyer,
Duffy and Associates. This agreement was amended in September 1999 to include
General Atlantic Partners 57. Under the terms of this agreement, as amended, at
any time after the first anniversary of the effective date of this offering,
each of General Atlantic Partners 54, General Atlantic Partners 57 and GAP
Coinvestment Partners II may, on two occasions only, require us to register for
sale all or any portion of the shares of common stock issuable upon conversion
of the preferred shares held by them. We are also obligated to register some
shares of common stock held by parties to the registration rights agreement if
they request to be included in the registration. In September 1999, we entered
into a separate registration rights agreement with Cisco Systems.
61
<PAGE>
Under each of these agreements, if we become eligible to file registration
statements on Form S-3, some parties to the registration rights agreements may
require us to file a registration statement on Form S-3 under the Securities Act
with respect to some shares of common stock held by them. We are also obligated
to register some shares of common stock held by parties to the registration
rights agreements if they request to be included in the registration. In
addition, holders of common stock who are parties to the registration rights
agreements will be entitled to require us to register some of their common stock
when we register stock of other stockholders. This type of registration right is
known as a "piggyback" registration right.
The foregoing registration rights are subject to certain conditions and
limitations, including:
- The right of the underwriters in any underwritten offering to limit the
number of shares of common stock held by stockholders with registration
rights to be included in any demand, S-3 or piggyback registration; and
- Our right to delay for up to 90 days the filing or effectiveness of a
registration statement pursuant to a demand for registration if the board
of directors of determines that the registration would not be in our best
interest at that time.
We are generally required to bear all of the expenses of all registrations,
except underwriting discounts and commissions. Registration of any of the shares
of common stock held by stockholders with registration rights would result in
those shares becoming freely tradable without restriction under the Securities
Act immediately after effectiveness of the registration. We have agreed to
indemnify the holders of registration rights in connection with demand, S-3 and
piggyback registration under the terms of our registration rights agreements.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BYLAWS
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, which are summarized in the following paragraphs,
may have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, when coupled with the
provision of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships or increase the size of the
board of directors, may delay a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
CUMULATIVE VOTING
Our amended and restated certificate of incorporation expressly denies
stockholders the right to cumulate votes in the election of directors.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation eliminates the ability
of stockholders to act by written consent. It further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors.
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<PAGE>
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be received
at our principal executive offices not less than 60 days nor more than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for a date that is
not within thirty (30) days before or after the anniversary date, in order to be
timely, notice from the stockholder must be received no later than the tenth day
following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. In the case of a
special meeting of stockholders called for the purpose of electing directors,
notice by the stockholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our amended and restated by-laws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual or
special meeting of stockholders or from making nominations for directors at
these meetings.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with the
amendment of provisions of our amended and restated certificate of incorporation
and amended and restated bylaws, including those provisions relating to the
classified board of directors and the ability of stockholders to call special
meetings.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with various
business combination transactions and the amendment of various provisions of our
amended and restated certificate of incorporation and amended and restated
bylaws, including those provisions relating to the classified board of
directors, action by written consent and special meetings by stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be American Stock
Transfer & Trust Company, New York, New York.
LISTING
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "PRDS."
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have on
the market price of the common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of the common stock and could impair our future ability to raise capital through
the sale of its equity securities.
Upon completion of this offering, we will have an aggregate of
22,790,080 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of the outstanding shares, the 4,000,000 shares sold in this offering
will be freely tradable, except that any shares held by our "affiliates," as
defined in Rule 144 promulgated under the Securities Act of 1933, may only be
sold in compliance with the limitations described below. The remaining
18,790,080 shares of common stock will be deemed "restricted securities" as
defined under Rule 144. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. Subject to the lock-up agreements described below and the
provisions of Rules 144, 144(k) and 701, these 18,790,080 shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- --------------------- ----
<C> <S>
649,000 After the date of this prospectus
1,050 After 90 days from the date of this prospectus
18,140,030 After 180 days from the date of this prospectus, subject,
in some cases, to volume limitations
</TABLE>
In general, under Rule 144, as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of (1) 1% of the
then outstanding shares of common stock (approximately 228,000 shares
immediately after this offering) or (2) the average weekly trading volume in the
common stock during the four calendar weeks preceding the date on which notice
of such sale is filed, subject to certain restrictions. In addition, a person
who is not deemed to have been an affiliate of Predictive at any time during the
90 days preceding a sale and who has beneficially owned the shares proposed to
be sold for at least two years would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above. To the extent
that shares were acquired from an affiliate of ours, that person's holding
period for the purpose of selling under Rule 144 commences on the date of
transfer from the affiliate. Notwithstanding the foregoing, to the extent the
shares were acquired through the cashless exercise of a stock option or a
warrant, that person's holding period for effecting a sale under Rule 144
commences on the date of the option or warrant grant. In general, under
Rule 701 of the Securities Act as currently in effect, any of our employees,
consultants or advisors who purchased our shares in connection with a
compensatory stock or option plan or other written agreement is eligible to
resell such shares after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions, including the
holding period in Rule 144.
As of the date of this prospectus, options to purchase a total of
10,111,463 shares of common stock are outstanding, of which 4,899,800 are
currently exercisable (without regard to the 180-day lock up period). Promptly
after the closing of this offering, we intend to file a registration statement
to register for resale all shares of common stock issued or issuable under its
1999 employee stock purchase plan and not otherwise freely transferable.
Accordingly, shares covered by that registration
64
<PAGE>
statement will be eligible for sale in the public markets, unless those options
are subject to vesting restrictions.
Our directors and officers and certain of our stockholders who hold
18,099,030 shares in the aggregate have agreed that they will not sell, directly
or indirectly, any shares of common stock (other than shares of common stock
purchased as part of the directed share program in connection with this
offering) without the prior written consent of BancBoston Robertson
Stephens Inc. for a period of 180 days from the date of this prospectus.
We have agreed not to sell or otherwise dispose of any shares of our common
stock during the 180 day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
option plan.
Following this offering, under certain circumstances and subject to certain
conditions, holders of 8,122,006 shares of our outstanding common stock will
have certain demand registration rights with respect to their shares of common
stock (subject to the 180-day lock-up arrangement described above) to require us
to register their shares of common stock under the Securities Act, and they will
have certain rights to participate in any future registration of securities by
us. Additionally, holders of 8,791,952 shares of our outstanding common stock
will have some rights to participate in any future registrations of securities
by us. See "Description of Capital Stock-Registration Rights."
65
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc.; Bear, Stearns & Co. Inc.; Donaldson, Lufkin
& Jenrette Securities Corporation and First Union Securities, Inc., have
severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
set forth opposite their names below. The underwriters are committed to purchase
and pay for all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc........................... 1,600,000
Bear, Stearns & Co. Inc..................................... 1,000,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,000,000
First Union Securities, Inc................................. 400,000
---------
Total................................................... 4,000,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $.76 per share, of which $.10 may be reallowed to other dealers. After
the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,000,000 shares offered by this prospectus. If purchased, the additional
shares will be sold by the underwriters on the same terms as those on which the
4,000,000 shares are being sold. We will be obligated, under this option, to
sell shares to the extent the option is exercised. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of the
4,000,000 shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid by us to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
SHARE OPTION OPTION
-------- -------------- --------------
<S> <C> <C> <C>
Initial public offering price..................... $18.00 $72,000,000 $82,800,000
Underwriting discounts and commissions............ 1.26 5,040,000 5,796,000
Proceeds, before expenses, to us.................. 16.74 66,960,000 77,004,000
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on November 1, 1999.
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.
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<PAGE>
FUTURE SALES. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period of 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of common stock, any options or warrants to purchase
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. There are no agreements
between the representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period. In addition, we have generally agreed that, during the 180-day
lock-up period, we will not, without the prior written consent of BancBoston
Robertson Stephens Inc., (a) consent to the disposition of any shares held by
stockholders prior to the expiration of the 180-day lock-up period or
(b) issue, sell, contract to sell or otherwise dispose of, any shares of common
stock, any options or warrants to purchase any shares of common stock, or any
securities convertible into, exercisable for or exchangeable for shares of
common stock, other than our sale of shares in the offering, our issuance of
common stock upon the exercise of currently outstanding options and warrants,
and our issuance of incentive awards under our stock incentive plan. Please see
"Shares Eligible for Future Sale."
INTERNET DISTRIBUTION. A limited number of shares will be made available to
the customers of E*TRADE Securities. E*TRADE will make a copy of the prospectus
in electronic format available on its Web site. E*TRADE will accept conditional
offers to purchase shares from all of its customers that complete and pass an
online eligibility profile. In the event that the demand for shares from the
customers of E*TRADE exceeds the amount of shares allocated to it, E*TRADE will
use a random allocation methodology to distribute shares in even lots of 100
shares per customer. These are no plans to direct shares to particular Internet
purchasers.
DIRECTED SHARES. We have requested that the underwriters reserve up to five
percent of the shares of common stock for sale at the initial public offering
price to directors, officers, employees and other individuals designated by us.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus will be determined through
negotiations between us and the representatives. Among the factors to be
considered in these negotiations are prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
STABILIZATION. The representatives have advised us that, under
Regulation M under the Securities Exchange Act, some participants in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf of
the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or purchase of
the common stock on behalf of the 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
67
<PAGE>
representatives in a syndicate covering transaction and has therefore not been
effectively placed by the underwriter or syndicate member. The representatives
have advised us that these transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
OTHER AGREEMENTS. BancBoston Robertson Stephens acted as placement agent in
connection with the sale of 1,242,000 shares of common stock to Cisco in
September 1999 and was paid customary fees.
We provide network consulting services to some of the underwriters. Please
see "Certain Transactions--Agreements with Underwriters."
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, New York, New York. The Brobeck investment fund
and attorneys at Brobeck hold in the aggregate 49,110 shares of series A
preferred stock, which will automatically convert into 49,110 shares of common
stock upon the closing of this offering. Various legal matters in connection
with this offering will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Predictive Systems, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
and the financial statements of Network Resource Consultants and Company B.V. as
of and for the year ended December 31, 1998, included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports thereto and
are included herein in reliance upon the authority of said firm as experts in
giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information with respect to Predictive and the common stock, reference
is made to the registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in Predictive files in the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Predictive's
Commission filings, including the registration statement, will also be available
to you on the Commission's Internet site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PREDICTIVE SYSTEMS, INC. PAGE
- ------------------------ --------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999 (Unaudited)............................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and the Six Months Ended
June 30, 1998 and 1999 (Unaudited)........................ F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1999 (Unaudited).................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and the Six Months Ended
June 30, 1998 and 1999 (Unaudited)........................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
<TABLE>
<CAPTION>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
- ---------------------------------------------
<S> <C>
Report of Independent Public Accountants.................... F-18
Balance Sheets as of December 31, 1998 and June 30, 1999
(Unaudited)............................................... F-19
Statements of Income for the Year Ended December 31, 1998
and the Six Months Ended June 30, 1998 and 1999
(Unaudited)............................................... F-20
Statements of Stockholders' (Deficit) Equity for the Year
Ended December 31, 1998 and the Six Months Ended June 30,
1999 (Unaudited).......................................... F-21
Statements of Cash Flows for the Year Ended December 31,
1998 and the Six Months Ended June 30, 1998 and 1999
(Unaudited)............................................... F-22
Notes to Financial Statements............................... F-23
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------
<S> <C>
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Six Months Ended June 30, 1999.......... F-28
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1998............ F-29
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 1999.............................................. F-30
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Predictive
Systems, Inc. (a Delaware corporation) (the "Company") and subsidiary as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Predictive Systems, Inc. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
F-2
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------ JUNE 30, JUNE 30,
1997 1998 1999 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 420,456 $ -- $ 359,911
Accounts receivable--net of allowance for doubtful
accounts of $79,613, $141,489 and $426,817,
respectively............................................ 4,197,870 8,806,184 13,220,569
Unbilled work in process.................................. 179,404 1,062,824 1,477,863
Notes receivable--employees............................... 53,371 55,100 50,461
Notes receivable--stockholders............................ -- 515,000 --
Due from related party.................................... -- 916,948 --
Prepaid income taxes...................................... 344,049 342,829 --
Other current assets...................................... 276,609 386,453 597,354
---------- ----------- -----------
Total current assets.................................... 5,471,759 12,085,338 15,706,158
PROPERTY AND EQUIPMENT--net of accumulated depreciation and
amortization of $485,510, $947,735 and $1,259,870,
respectively.............................................. 893,988 1,356,634 1,741,644
DEFERRED TAX ASSET.......................................... 237,322 -- --
OTHER ASSETS................................................ 267,314 235,047 185,074
---------- ----------- -----------
Total assets............................................ $6,870,383 $13,677,019 $17,632,876
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft............................................ $ 545,351 $ 475,610 $ --
Short-term borrowings..................................... 780,000 5,598,000 --
Accounts payable and accrued expenses..................... 654,378 2,803,686 3,297,868
Deferred income tax liability............................. 1,676,937 185,000 229,268
Deferred income........................................... 32,955 445,414 25,073
Dividends payable......................................... 26,250 61,250 --
Income taxes payable...................................... -- -- 201,511
Current portion of capital lease obligations.............. 76,982 151,027 150,511
---------- ----------- -----------
Total current liabilities............................... 3,792,853 9,719,987 3,904,231
---------- ----------- -----------
NONCURRENT LIABILITIES:
Deferred rent............................................. 23,306 70,957 52,177
Capital lease obligations................................. 282,013 446,018 398,927
Deferred income tax liability............................. -- 714,146 516,528
---------- ----------- -----------
Total liabilities....................................... 4,098,172 10,951,108 4,871,863
---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par
value, 5% cumulative, 4,200,000, 4,200,000 and 0 shares
issued and outstanding)................................... 700,000 700,000 -- --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 20,000,000
shares authorized, 0, 0 and 6,512,316 shares issued and
outstanding, none issued and outstanding on a pro forma
basis).................................................. -- -- 6,512 --
Common stock ($.001 par value, 50,000,000 shares
authorized, 4,408,200, 7,900,200 and 12,465,750 shares
issued and 4,408,200, 7,900,200 and 9,610,650 shares
outstanding, 16,122,966 shares issued and outstanding on
a pro forma basis)...................................... 4,408 7,900 12,466 16,123
Additional paid-in capital................................ 69,762 682,270 20,307,511 11,911,613
Treasury stock, 2,855,100 shares.......................... -- -- (8,398,753) --
Deferred compensation..................................... -- -- (294,750) (294,750)
Retained earnings......................................... 1,998,041 1,335,741 1,143,726 1,143,726
Accumulated other comprehensive loss...................... -- -- (15,699) (15,699)
---------- ----------- ----------- -----------
Total stockholders' equity.............................. 2,072,211 2,025,911 12,761,013 12,761,013
---------- ----------- ----------- -----------
Total liabilities and stockholders' equity.............. $6,870,383 $13,677,019 $17,632,876 $17,632,876
========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services.............. $6,818,678 $16,897,456 $23,857,780 $ 8,935,220 $21,278,287
Hardware and software sales........ 1,287,649 1,189,617 2,065,348 530,258 1,287,701
---------- ----------- ----------- ----------- -----------
Total revenues................... 8,106,327 18,087,073 25,923,128 9,465,478 22,565,988
COST OF REVENUES:
Professional services.............. 3,381,505 9,590,306 12,861,272 5,179,277 10,245,945
Hardware and software purchases.... 970,479 816,935 1,698,356 437,820 1,031,889
---------- ----------- ----------- ----------- -----------
Total cost of revenues........... 4,351,984 10,407,241 14,559,628 5,617,097 11,277,834
---------- ----------- ----------- ----------- -----------
Gross profit..................... 3,754,343 7,679,832 11,363,500 3,848,381 11,288,154
SALES AND MARKETING.................. 386,000 1,081,889 3,433,751 1,255,707 3,409,297
GENERAL AND ADMINISTRATIVE........... 1,683,574 4,390,476 8,184,486 3,586,811 7,376,425
DEPRECIATION AND AMORTIZATION........ 142,134 320,908 567,761 229,348 312,135
NONCASH COMPENSATION EXPENSE......... -- -- -- -- 9,875
---------- ----------- ----------- ----------- -----------
Operating profit (loss).......... 1,542,635 1,886,559 (822,498) (1,223,485) 180,422
OTHER INCOME (EXPENSE):
Interest income.................... 31,540 26,575 57,976 12,662 69,574
Other income....................... 7,613 3,849 1,555 35 36,882
Interest expense................... -- (35,545) (324,591) (66,629) (109,078)
---------- ----------- ----------- ----------- -----------
Income (loss) before income tax
provision (benefit)............ 1,581,788 1,881,438 (1,087,558) (1,277,417) 177,800
INCOME TAX PROVISION (BENEFIT)....... 718,678 870,504 (460,258) (540,880) 361,065
---------- ----------- ----------- ----------- -----------
Net income (loss)................ $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (183,265)
========== =========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE
BASIC.............................. $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
========== =========== =========== =========== ===========
DILUTED............................ $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC.............................. 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
========== =========== =========== =========== ===========
DILUTED............................ 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
========== =========== =========== =========== ===========
PRO FORMA NET LOSS PER SHARE--BASIC
AND DILUTED (unaudited)(Note 2).... $(0.01)
===========
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND DILUTED
(unaudited)(Note 2)................ 13,131,340
===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------- ---------------------- PAID-IN TREASURY DEFERRED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL STOCK COMPENSATION
--------- --------- ---------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... -- $ -- 4,269,000 $ 4,269 $ 37,901 $ -- --
Net income...................... -- -- -- -- -- -- --
Exercise of options............. -- -- 30,000 30 4,970 -- --
--------- ------- ---------- ------- ----------- ----------- ---------
Balance at December 31, 1996...... -- -- 4,299,000 4,299 42,871 -- --
Net income...................... -- -- -- -- -- -- --
Exercise of options............. -- -- 109,200 109 26,891 -- --
Preferred stock dividends....... -- -- -- -- -- -- --
--------- ------- ---------- ------- ----------- ----------- ---------
Balance at December 31, 1997...... -- -- 4,408,200 4,408 69,762 -- --
Net loss........................ -- -- -- -- -- -- --
Exercise of options............. -- -- 3,492,000 3,492 612,508 -- --
Preferred stock dividends....... -- -- -- -- -- -- --
--------- ------- ---------- ------- ----------- ----------- ---------
Balance at December 31, 1998...... -- -- 7,900,200 7,900 682,270 -- --
Net loss........................ -- -- -- -- -- -- --
Foreign currency translation
adjustment.................... -- -- -- -- -- -- --
Total comprehensive loss........
Preferred stock dividends....... -- -- -- -- -- -- --
Conversion of preferred to
common........................ -- -- 4,200,000 4,200 695,800 -- --
Issuance of preferred stock..... 6,512,316 6,512 -- -- 18,559,713 -- --
Exercise of options............. -- -- 365,550 366 65,103 -- --
Common stock repurchase to
treasury, 2,855,100 shares.... -- -- -- -- -- (8,398,753) --
Recognition of deferred
compensation.................. -- -- -- -- 304,625 -- (304,625)
Noncash compensation expense.... -- -- -- -- -- -- 9,875
--------- ------- ---------- ------- ----------- ----------- ---------
Balance at June 30, 1999
(unaudited)..................... 6,512,316 $ 6,512 12,465,750 $12,466 $20,307,511 $(8,398,753) $(294,750)
========= ======= ========== ======= =========== =========== =========
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS LOSS EQUITY
---------- -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995...... $ 150,247 $ -- $ 192,417
Net income...................... 863,110 -- 863,110
Exercise of options............. -- -- 5,000
---------- --------- -----------
Balance at December 31, 1996...... 1,013,357 -- 1,060,527
Net income...................... 1,010,934 -- 1,010,934
Exercise of options............. -- -- 27,000
Preferred stock dividends....... (26,250) -- (26,250)
---------- --------- -----------
Balance at December 31, 1997...... 1,998,041 -- 2,072,211
Net loss........................ (627,300) -- (627,300)
Exercise of options............. -- -- 616,000
Preferred stock dividends....... (35,000) -- (35,000)
---------- --------- -----------
Balance at December 31, 1998...... 1,335,741 -- 2,025,911
Net loss........................ (183,265) (183,265)
Foreign currency translation
adjustment.................... -- (15,699) (15,699)
-----------
Total comprehensive loss........ (198,964)
===========
Preferred stock dividends....... (8,750) -- (8,750)
Conversion of preferred to
common........................ -- -- 700,000
Issuance of preferred stock..... -- -- 18,566,225
Exercise of options............. -- -- 65,469
Common stock repurchase to
treasury, 2,855,100 shares.... -- -- (8,398,753)
Recognition of deferred
compensation.................. -- -- --
Noncash compensation expense.... -- -- 9,875
---------- --------- -----------
Balance at June 30, 1999
(unaudited)..................... $1,143,726 $ (15,699) $12,761,013
========== ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
----------- ----------- ------------ ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (183,265)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Noncash compensation expense......................... -- -- -- -- 9,875
Deferred income taxes................................ 463,229 838,572 (540,469) (540,880) (153,350)
Depreciation and amortization........................ 142,134 320,908 567,761 229,348 312,135
Provision for doubtful accounts...................... 20,840 99,308 102,196 76,680 285,328
(Increase) decrease in--
Accounts receivable................................ (1,197,039) (2,718,335) (4,710,510) (428,825) (4,699,713)
Unbilled work in process........................... (300,190) 204,978 (883,420) (27,773) (415,039)
Prepaid income taxes............................... (133,133) (210,916) 1,220 (781) 342,829
Other current assets............................... (190,084) (44,401) (215,378) 37,855 (210,901)
Other assets....................................... (77,851) (127,283) 32,267 (19,313) 49,973
Increase (decrease) in--
Accounts payable and accrued expenses.............. 575,628 (61,916) 2,149,308 458,886 494,182
Deferred income.................................... 494,948 (464,493) 412,459 (3,842) (420,341)
Deferred rent...................................... 16,462 (7,269) 47,651 (4,798) (18,780)
Income taxes payable............................... -- -- -- -- 201,511
----------- ----------- ------------ ----------- -----------
Net cash provided by (used in) operating
activities..................................... 678,054 (1,159,913) (3,664,215) (959,980) (4,405,556)
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to employees.................................. -- (57,151) (26,950) (10,206) (30,938)
Repayments from employees.............................. -- 3,780 25,221 -- 35,577
Payments to stockholders............................... -- -- (515,000) -- --
Repayments from stockholders........................... -- -- -- -- 515,000
Payments to related party.............................. -- -- (916,948) (424,633) (478,078)
Repayments from related party.......................... -- -- -- -- 1,395,026
Purchase of property and equipment..................... (315,189) (356,782) (686,823) (381,543) (744,752)
----------- ----------- ------------ ----------- -----------
Net cash used in investing activities............ (315,189) (410,153) (2,120,500) (816,382) 691,835
----------- ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares repurchased to treasury.................. -- -- -- -- (8,398,753)
Cash overdraft......................................... -- 545,351 (69,741) (221,054) (475,610)
Proceeds from short-term borrowings.................... -- 2,452,000 19,643,000 9,064,000 4,351,000
Repayments of short-term borrowings.................... -- (1,672,000) (14,825,000) (7,444,000) (9,949,000)
Payment of preferred dividends......................... -- -- -- -- (70,000)
Proceeds from sale of preferred stock.................. -- -- -- -- 18,566,225
Proceeds from exercise of stock options................ 5,000 27,000 616,000 101,000 65,469
----------- ----------- ------------ ----------- -----------
Net cash provided by financing activities........ 5,000 1,352,351 5,364,259 1,499,946 4,089,331
----------- ----------- ------------ ----------- -----------
Effects of exchange rates.............................. -- -- -- -- (15,699)
Net increase (decrease) in cash.................. 367,865 (217,715) (420,456) (276,416) 359,911
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,171 420,456 420,456 --
----------- ----------- ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,171 $ 420,456 $ -- $ 144,040 $ 359,911
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
=========== =========== ============ =========== ===========
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
=========== =========== ============ =========== ===========
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The financial statements and footnotes reflect the combined
operations and financial position of the Company and the Parent for all periods
presented.
The Company provides network consulting services for the design,
performance, management and securities of complex computing networks. Services
are currently provided through the Company's offices located throughout the
United States and its wholly-owned subsidiary in England which was formed in the
first quarter of 1999.
The Company is proposing an initial public offering of up to 4,600,000
shares of common stock including overallotment. See "Risk Factors" in the
accompanying prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS--
The accompanying consolidated balance sheet as of June 30, 1999 and
consolidated statements of operations, stockholders' equity and cash flows for
the six months ended June 30, 1998 and 1999 included herein have been prepared
by the Company and are unaudited. The information furnished in the unaudited
financial statements referred to above includes all adjustments which are, in
the opinion of management, necessary for a fair presentation of such financial
statements. The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION--
Revenue for time-and-material contracts are recognized as the services are
rendered. Revenues for fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting based on the ratio
of costs incurred to total estimated costs. Unbilled work in process represent
costs incurred and estimated earnings, production, and other client-reimbursable
costs. Included in unbilled work in process as of December 31, 1997 and 1998 and
June 30, 1999 is $39,580, $1,032,390 and $1,448,809 (unaudited), respectively,
related to fixed-price contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. The
Company acts as a reseller of certain hardware and software and sales revenue is
recognized when these products are shipped to the customer.
Deferred income represents prepayments from customers that are recorded as
liabilities for future services to be performed. Income is recognized upon
performance of these related services.
F-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS--
The Company considers all short-term marketable equity securities with a
maturity of three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT--
Computer equipment and office furniture are carried at their cost basis and
depreciated using the straight-line method over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the life of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred and major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives.
BUSINESS CONCENTRATIONS AND CREDIT RISK--
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, approximately 79% of sales were from
six customers. For the year ended December 31, 1997, approximately 60% of sales
were from four customers. For the year ended December 31, 1998, approximately
20% of sales were from one customer. The amounts due from these customers at
December 31, 1997 and 1998 were approximately $2,357,000 and $2,931,000,
respectively.
INCOME TAXES--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial statement and the tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. The Company converted from a cash basis to an accrual basis taxpayer on
January 1, 1998.
UNAUDITED PRO FORMA INFORMATION--
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of its
convertible preferred stock into common stock concurrent with the closing of the
Company's anticipated initial public offering. (See Note 7 for conversion terms)
The unaudited pro forma consolidated balance sheet as of June 30, 1999,
reflects the conversion of 6,512,316 shares of the convertible preferred stock
into 6,512,316 shares of common stock.
Pro forma loss per share is computed using the weighted average number of
common shares outstanding during the period assuming conversion of the
convertible preferred stock into common stock as of the date of issuance.
F-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME (LOSS) PER SHARE--
The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings per Share" ("SFAS 128"). Under the provisions of SFAS 128,
basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares outstanding. Diluted net income (loss) per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
outstanding.
ACCOUNTING FOR LONG-LIVED ASSETS--
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. The Company does not believe that any
such changes have taken place.
STOCK-BASED COMPENSATION--
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), and elected to continue the accounting
set forth in Accounting Principles Board No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and to provide the necessary pro forma disclosures as if
the fair value method had been applied (Note 7).
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amounts of cash and cash equivalents, accounts and other
receivables, and accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of outstanding borrowings
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS--
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15, 1997
and need not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
Company does not believe it operates in more than one segment. The chief
operating decision maker allocates resources and assesses the performance
associated with its business on a single-segment basis.
F-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
----------- ----------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss).............. $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (183,265)
Preferred stock dividends...... -- (26,250) (35,000) (17,500) (8,750)
----------- ----------- ---------- ---------- ----------
Numerator for basic earnings
per share--net income
(loss) available to common
stockholders............... 863,110 984,684 (662,300) (754,037) (192,015)
=========== =========== ========== ========== ==========
Effect of dilutive securities--
preferred stock dividend....... -- 26,250 -- -- --
----------- ----------- ---------- ---------- ----------
Numerator for diluted earnings
per share--net income (loss)
available to common
stockholders after assumed
conversions.................... $ 863,110 $ 1,010,934 $ (662,300) $ (754,037) $ (192,015)
=========== =========== ========== ========== ==========
Denominator--
Denominator for basic earnings
per share--weighted average
shares....................... 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
=========== =========== ========== ========== ==========
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred
stock........................ 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options....... 3,117,130 4,182,193 -- -- --
----------- ----------- ---------- ---------- ----------
Dilutive potential common
shares....................... 7,317,130 8,382,193 -- -- --
=========== =========== ========== ========== ==========
Denominator for diluted earnings
per share--adjusted weighted
average shares and assumed
conversions.................... 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
=========== =========== ========== ========== ==========
Basic earnings per share from net
income (loss).................. $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
=========== =========== ========== ========== ==========
Diluted earnings per share from
net income (loss).............. $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
=========== =========== ========== ========== ==========
</TABLE>
The following table summarizes the weighted average of securities
outstanding which are excluded from the loss per share calculation for the year
ended December 31, 1998 and the six months ended
F-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
June 30, 1998 and 1999, respectively. Preferred stock is reflected on an "if
converted" basis. See Note 7.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ---------------------
1998 1998 1999
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Mandatory redeemable convertible
preferred................................ 4,200,000 4,200,000 1,516,667
Convertible preferred...................... -- -- 4,160,646
Stock options.............................. 2,396,092 4,557,823 3,856,450
--------- --------- ---------
6,596,092 8,757,823 9,533,763
========= ========= =========
</TABLE>
(4) PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment....................... $ 646,026 $1,243,475 $1,812,587
Office furniture......................... 341,901 630,722 644,925
Leasehold improvements................... 391,571 430,172 544,002
---------- ---------- ----------
1,379,498 2,304,369 3,001,514
Less--Accumulated depreciation and
amortization........................... (485,510) (947,735) (1,259,870)
---------- ---------- ----------
$ 893,988 $1,356,634 $1,741,644
========== ========== ==========
</TABLE>
Depreciation and amortization expense aggregated $142,134, $320,908,
$567,761, $229,348 (unaudited) and $312,135 (unaudited), respectively, for the
years ending December 31, 1996, 1997 and 1998 and for the six months ended
June 30, 1998 and 1999.
(5) SHORT-TERM BORROWINGS:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts receivable,
as defined. At December 31, 1998, the balance outstanding on this demand loan
was $5,598,000 as the lender has informally extended the Company's ability to
borrow under this demand loan. The interest rate on the demand loan was 11.25%
at December 31, 1998. During the first quarter of 1999, the balance outstanding
on the demand loan was paid in full.
F-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) CAPITAL LEASE OBLIGATIONS:
The Company has entered into various leases for computer equipment, office
furniture, and leasehold improvements. These leases have been capitalized using
interest rates ranging from 7.88% to 18.83% and expire on various dates through
2003. Depreciation on the capitalized assets has been included in depreciation
expense in the accompanying statements of operations.
The future minimum lease payments required under the above mentioned capital
leases for the twelve months ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1999........................................................ $ 211,951
2000........................................................ 209,297
2001........................................................ 155,655
2002........................................................ 87,812
2003........................................................ 55,697
Less--Amount representing interest.......................... (123,367)
---------
Present value of net minimum lease payments................. 597,045
Less--Current portion....................................... (151,027)
---------
$ 446,018
=========
</TABLE>
(7) STOCKHOLDERS' EQUITY:
PREFERRED STOCK--
Since inception, the Company has issued two types of preferred stock. The
following is a discussion of each of these issuances--
In 1995, the Company issued 4,200,000 shares of mandatory redeemable
convertible preferred stock (the "1995 Preferred Shares") at a price of
$0.17 per share. The shares accrue dividends at 5% per year, commencing
March 1, 1997. Each share is convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. The shares
automatically convert upon successful completion of an initial public
offering yielding gross proceeds of at least $10.0 million and at an initial
public offering price of not less than $0.83 per share. Commencing March 1,
1998, the Company was able to redeem the 1995 Preferred Shares. Commencing
March 1, 2001, if not previously redeemed, the Company was required to
redeem the 1995 Preferred Shares in three equal annual installments.
During the quarter ended March 31, 1999, the holders of the 1995
Preferred Shares exercised their conversion rights and converted all
outstanding shares into 4,200,000 shares of common stock. In connection with
the conversion, the Company paid $70,000 of accumulated dividends on the
1995 Preferred Shares.
Subsequent to the conversion of the 1995 Preferred Shares, the Company
redeemed 2,855,100 shares of common stock at a purchase price of
approximately $2.94 per share.
On March 5, 1999, the Company sold 6,512,316 shares of convertible
preferred stock (the "1999 Preferred Shares") to General Atlantic Partners
54, L.P. (5,350,441 shares), GAP Coinvestment Partners II, LP (1,112,765
shares), and other investors (49,110 shares) resulting in net proceeds of
approximately $18,600,000. The 1999 Preferred Shares are convertible to
common shares on a 1 to 1 ratio at any time at the option of the holder,
subject to certain adjustments. The shares will automatically convert
(i) prior to the closing of the proposed initial public offering
F-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
yielding net proceeds of at least $25 million and resulting in a market
capitalization of at least $100 million or (ii) upon the conversion of at
least 67% of all 1999 Preferred Shares.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, L.P., warrants
were issued to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering at a price equal to the
initial price to the public. In order to exercise the warrants, a notice of
exercise must be delivered within 20 business days following the first
filing of the Company's registration statement on Form S-1. (See Note 12)
STOCK OPTIONS--
In 1998, the Company adopted its Stock Option/Stock Issuance Plans (the
"Option Plans"). Prior to this time, options issued were not issued in
connection with a plan. The Option Plans are each divided into two separate
equity programs, the Option Grant Program and the Stock Issuance Program. Under
the Option Grant Program, the Company may issue either incentive stock options
or nonqualified stock options. Under the Stock Issuance Program the Company may
issue shares of common stock either through the purchase of such shares or as a
bonus for services rendered. To date, no shares have been issued under the Stock
Issuance Programs. Awards under either program may be granted to such directors,
employees and consultants of the Company as the Board of Directors selects in
its discretion. As of December 31, 1998 a combined total of 2,084,908 shares of
common stock has been reserved for issuance under the two Option Plans.
A summary of the activity under the Option Grant Programs is as follows--
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------------------------------------------- JUNE 30, 1999
1996 1997 1998 (UNAUDITED)
-------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----- --------- ----- ---------- ----- --------- -----
Outstanding at beginning of
period............................ 4,386,000 $0.17 5,916,000 $0.33 9,471,600 $0.61 8,397,600 $1.02
Granted............................. 1,560,000 0.78 3,856,800 1.04 2,427,000 1.41 1,925,085 3.31
Exercised........................... (30,000) 0.17 (109,200) 0.25 (3,492,000) 0.18 (365,550) 0.18
Forfeited........................... -- -- (192,000) 0.83 (9,000) 0.83 (160,650) 1.05
--------- ----- --------- ----- ---------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $0.33 9,471,600 $0.61 8,397,600 $1.02 9,796,485 $1.50
========= ===== ========= ===== ========== ===== ========= =====
Options exercisable at end of
period............................ 3,588,000 $0.27 5,700,300 $0.42 4,586,250 $0.80 4,859,100 $0.89
========= ===== ========= ===== ========== ===== ========= =====
Weighted average fair value of
options granted during period..... $0.17 $0.23 $0.26 $0.62
</TABLE>
F-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE OPTIONS
OUTSTANDING AT REMAINING EXERCISABLE AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- --------------- -------------- ----------- --------------
<S> <C> <C> <C>
$0.17.................................. 789,000 6.20 years 789,000
0.50.................................. 240,000 7.00 years 240,000
0.83.................................. 3,040,800 7.83 years 2,557,800
1.25.................................. 2,788,800 8.61 years 912,450
1.50.................................. 1,539,000 9.59 years 87,000
--------- ---------
8,397,600 4,586,250
========= =========
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- JUNE 30,
1996 1997 1998 1999
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported................... $863,110 $1,010,934 $ (627,300) $(183,265)
Pro forma..................... 830,967 774,427 (1,006,406) (465,089)
Basic net income (loss) per
share:
As reported................... $ 0.20 $ 0.22 $ (0.11) $ (0.02)
Pro forma..................... $ 0.19 $ 0.18 $ (0.17) $ (0.05)
Diluted net income (loss) per
share:
As reported................... $ 0.07 $ 0.08 $ (0.11) $ (0.02)
Pro forma..................... $ 0.07 $ 0.06 $ (0.17) $ (0.05)
</TABLE>
F-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
DEFERRED COMPENSATION--
During 1999, the Company granted stock options with exercise prices which
were less than the fair market value of the underlying shares of common stock at
the date of grant. As a result, the Company has recorded deferred compensation
of $304,625. This amount will be recognized as noncash compensation expense over
the vesting period of the options (4 years).
(8) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 are as follows--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
-------- -------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision--
Federal............................... $185,521 $ 26,882 $ -- $ -- $ 399,865
State................................. 69,928 5,050 80,211 -- 114,550
-------- -------- --------- --------- ---------
255,449 31,932 80,211 -- 514,415
-------- -------- --------- --------- ---------
Deferred income tax provision
(benefit)--
Federal............................... 331,790 578,823 (407,182) (381,133) (131,082)
State................................. 131,439 259,749 (133,287) (159,747) (22,268)
-------- -------- --------- --------- ---------
463,229 838,572 (540,469) (540,880) (153,350)
-------- -------- --------- --------- ---------
$718,678 $870,504 $(460,258) $(540,880) $ 361,065
======== ======== ========= ========= =========
</TABLE>
The following table indicates the significant elements contributing to the
difference between the Federal statutory rate and the Company's effective tax
rate--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate...................... 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes net of Federal effect........... 6.6 6.6 (6.6) (6.6) 6.6
Valuation allowance......................... -- -- -- -- 139.0
Noncash compensation expense................ -- -- -- -- 10.7
Other....................................... 4.8 5.7 (1.7) (1.7) 12.8
------- ------- ------- ------- -------
45.4% 46.3% (42.3)% (42.3)% 203.1%
======= ======= ======= ======= =======
</TABLE>
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of
F-15
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES: (CONTINUED)
approximately $1,667,000. Other major components of the deferred tax assets and
(liabilities) as of December 31, 1997, 1998 and June 30, 1999 are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve....................... $ 32,486 $ 57,529 $ 173,544
Prepaid expenses....................... (66,407) -- --
Accounts receivable.................... (1,739,221) -- --
Unbilled receivables................... (72,946) -- --
Accounts payable and accrued
expenses............................. 255,872 -- --
Depreciation........................... 14,231 100,124 88,405
Section 481 A. adjustment.............. -- (1,249,974) (1,028,959)
Net operating loss carryforwards....... 227,732 174,474 260,000
Valuation allowance.................... -- -- (260,000)
Other, net............................. (91,362) 18,701 21,214
----------- ----------- -----------
Total deferred taxes, net.......... $(1,439,615) $ (899,146) $ (745,796)
=========== =========== ===========
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $580,000 and $390,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(9) RELATED PARTIES:
During 1998, the Company started a software development company which had
previously been consolidated with the Company. In March 1998, the software
development company was spun off through a pro rata distribution to shareholders
accounted for at historical cost. In connection with the spin-off the Company
sold certain assets with minimal book value to the software development company
and received a note for approximately $130,000 for the sale of certain software.
Additionally, the Company provided a $1,000,000 line of credit bearing interest
at 8%. As of December 31, 1998, $916,948 was due from this company.
(10) NOTES RECEIVABLE--STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options. The stockholders
signed notes payable to the Company in exchange for the loans which had interest
rates of 7%. All amounts due under these notes were paid in full subsequent to
December 31, 1998.
(11) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES--
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately six months to five years, with an
option to renew two of these leases for an additional five years. These leases
provide for minimum annual lease payments and additional
F-16
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
operating expense charges, as well as rent concessions for two locations, which
are being amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1999........................................................ $ 857,708
2000........................................................ 723,319
2001........................................................ 690,309
2002........................................................ 437,821
2003........................................................ 211,934
----------
Total minimum lease payments............................ $2,921,091
==========
</TABLE>
Rent expense was approximately $202,568, $457,825 and $736,120 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $284,300 (unaudited) and $527,118 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(12) SUBSEQUENT EVENTS: (UNAUDITED)
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V. ("NRCC") in a transaction accounted for as a purchase. In
connection with this acquisition, the Company exchanged 1,062,814 shares of its
common stock in exchange for all of the outstanding stock of NRCC. The Company
acquired net assets of approximately $88,000 and recorded intangible assets of
approximately $4.3 million which represent the excess of the purchase price over
the fair value of the assets acquired.
The warrants issued to General Atlantic Partners 54, L.P. and GAP
Coinvestment Partners II, L.P. to purchase shares of common stock equal to 15%
of the number of shares sold in the proposed initial public offering expired 20
business days after the first filing of this Form S-1.
On September 14, 1999, the Company sold 1,242,000 shares of its common stock
to Cisco Systems, Inc. at a price of $12.00 per share. In connection with this
transaction, the Company entered into an Investor's Rights Agreement with Cisco
Systems, Inc. pursuant to which the Company granted Cisco Systems, Inc. certain
registration rights.
On September 22, 1999, the Company sold 94,867 and 18,133 shares of its
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment Partners
II, L.P., respectively, at a price of $12.00 per share.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network Resource Consultants and Company B.V.:
We have audited the accompanying balance sheet of Network Resource
Consultants and Company B.V. (the "Company") as of December 31, 1998, and the
related statements of income, stockholders' (deficit) equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Network Resource Consultants
and Company B.V. as of December 31, 1998, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
August 13, 1999
F-18
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash.................................................... $ 32,432 $163,768
Accounts receivable--net of allowance for doubtful
accounts of $10,000 at December 31, 1998 and June 30,
1999 (unaudited)...................................... 465,347 322,149
Prepaid expenses and other current assets............... 175,021 83,771
--------- --------
Total current assets.................................. 672,800 569,688
FURNITURE, FIXTURES AND EQUIPMENT:
Leasehold improvements.................................. 12,390 103,450
Computer equipment...................................... 95,278 84,555
Office furniture........................................ 95,511 126,104
--------- --------
Total................................................. 203,179 314,109
Less--Accumulated depreciation.......................... (59,481) (95,651)
--------- --------
Total furniture, fixtures and equipment, net.......... 143,698 218,458
--------- --------
Total assets.......................................... $ 816,498 $788,146
========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable........................................ $ 117,253 $ 81,297
Accrued expenses and other current liabilities.......... 252,615 204,504
Due to shareholder...................................... 322,712 269,150
Deferred revenue........................................ 45,158 17,497
Income taxes payable.................................... 88,350 127,979
--------- --------
Total current liabilities............................. 826,088 700,427
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock $6.086 par value; authorized 20,000 shares;
issued and outstanding 5,714 shares at December 31,
1998 and June 30, 1999 (unaudited).................... 34,775 34,775
Additional paid-in capital.............................. 86,760 86,760
Accumulated deficit..................................... (168,622) (75,870)
Accumulated other comprehensive income.................. 37,497 42,054
--------- --------
Total stockholders' (deficit) equity.................. (9,590) 87,719
--------- --------
Total liabilities and stockholders' (deficit)
equity.............................................. $ 816,498 $788,146
========= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-19
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED -------------------
DECEMBER 31, 1998 1998 1999
----------------- -------- --------
<S> <C> <C> <C>
(UNAUDITED)
REVENUES:
Professional services................................. $1,657,427 $856,406 $963,065
Hardware and software sales........................... 231,498 33,593 36,460
---------- -------- --------
Total revenues.................................... 1,888,925 889,999 999,525
COST OF REVENUES:
Professional services................................. 903,204 468,012 532,868
Hardware and software purchases....................... 148,783 16,108 19,551
---------- -------- --------
Total cost of revenues............................ 1,051,987 484,120 552,419
---------- -------- --------
Gross profit...................................... 836,938 405,879 447,106
SALES AND MARKETING..................................... 26,261 11,141 1,438
GENERAL AND ADMINISTRATIVE.............................. 504,791 247,343 280,157
DEPRECIATION AND AMORTIZATION........................... 44,067 14,435 18,264
---------- -------- --------
Operating profit.................................. 261,819 132,960 147,247
OTHER INCOME (EXPENSE):
Interest income....................................... 8,431 -- 2,355
Other income (expense)................................ 5,070 (146) (132)
Interest expense...................................... (24,760) (9,881) (8,936)
---------- -------- --------
Income before income tax provision................ 250,560 122,933 140,534
INCOME TAX PROVISION.................................... 84,183 41,798 47,782
---------- -------- --------
Net income........................................ $ 166,377 $ 81,135 $ 92,752
========== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-20
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS'
-------------------- PAID-IN ACCUMULATED COMPREHENSIVE (DEFICIT)
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY
--------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998.. 4,000 $24,344 $ -- $(334,999) $ 53,236 $(257,419)
Common stock issued to
stockholder............. 1,714 10,431 86,760 -- -- 97,191
Net income................ -- -- -- 166,377 -- 166,377
Foreign currency
translation
adjustment.............. -- -- -- -- (15,739) (15,739)
---------
Total comprehensive
income.................. 150,638
--------- ------- ------- --------- -------- ---------
BALANCE, December 31,
1998.................... 5,714 34,775 86,760 (168,622) 37,497 (9,590)
Net income................ -- -- -- 92,752 -- 92,752
Foreign currency
translation
adjustment.............. -- -- -- -- 4,557 4,557
---------
Total comprehensive
income.................. 97,309
--------- ------- ------- --------- -------- ---------
BALANCE, June 30, 1999
(unaudited)............. 5,714 $34,775 $86,760 $ (75,870) $ 42,054 $ 87,719
========= ======= ======= ========= ======== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-21
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED -------------------------
DECEMBER 31, 1998 1998 1999
----------------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 166,377 $ 81,135 $ 92,752
Adjustments to reconcile net income to net cash
provided by operating activities-...............
Depreciation and amortization................... 44,067 14,435 18,264
(Increase) decrease in-
Accounts receivable........................... (158,335) (184,494) 143,198
Prepaid expenses and other current assets..... (124,216) (10,671) 91,251
(Decrease) increase in-
Accounts payable.............................. (87,938) 55,292 (35,957)
Accrued expenses and other current
liabilities................................. 157,681 43,824 (48,111)
Deferred revenue.............................. 39,310 (5,848) (27,661)
Income taxes payable.......................... 88,350 16,419 39,629
--------- --------- ---------
Net cash provided by operating activities... 125,296 10,092 273,365
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments to stockholder......................... (115,840) (39,225) (53,563)
Purchase of furniture, fixtures and equipment..... (134,721) (19,474) (93,023)
--------- --------- ---------
Net cash used in investing activities....... (250,561) (58,699) (146,586)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES--
Proceeds from sale of common stock................ 97,191 97,191 --
--------- --------- ---------
Effects of exchange rates......................... (15,739) (59,838) 4,557
Net (decrease) increase in cash............. (43,813) (11,254) 131,336
CASH, beginning of period........................... 76,245 76,245 32,432
--------- --------- ---------
CASH, end of period................................. $ 32,432 $ 64,991 $ 163,768
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-22
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS-
Network Resource Consultants and Company B.V. (the "Company" or "NRCC"), is
based in Veenendaal, the Netherlands. The Company is engaged in rendering
services for the design, implementation and operation of network management
systems.
UNAUDITED INTERIM FINANCIAL STATEMENTS-
The accompanying balance sheet as of June 30, 1999 and statements of income,
stockholders' (deficit) equity and cash flows for the six months ended June 30,
1998 and 1999 included herein have been prepared by the Company and are
unaudited. The information furnished in the unaudited financial statements
referred to above includes all adjustments which are, in the opinion of
management, necessary for a fair presentation of such financial statements. The
results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire fiscal year.
USE OF ESTIMATES-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION-
Revenues are recognized as services are rendered. Amounts billed to clients
in excess of revenues recognized to date are classified as deferred revenues. In
addition, the Company acts as a reseller of certain hardware and software and
sales revenue is recognized when these products are shipped to the customer.
FURNITURE, FIXTURES AND EQUIPMENT-
Furniture, fixtures and equipment are stated at cost, net of accumulated
depreciation and amortization. Furniture and equipment are depreciated on a
straight-line basis over estimated useful lives of three to ten years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the estimated useful life of the asset or the lease term.
ACCOUNTING FOR LONG-LIVED ASSETS-
The Company accounts for long-lived assets in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement establishes financial accounting and reporting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS No. 121 require,
among other things, that an entity review its long-lived assets and certain
related intangibles for impairment whenever changes in circumstances
F-23
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
indicate that the carrying amount of an asset may not be fully recoverable.
Management does not believe that any such changes have taken place.
INCOME TAXES-
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
basis for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets or liabilities of a
change in tax rates is recognized in the period that the tax change occurs.
COMPREHENSIVE INCOME-
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income relate to foreign currency translation adjustments.
FOREIGN CURRENCY TRANSLATION-
The Company's functional currency is the Dutch Guilder and the reporting
currency is the U.S. dollar. All assets and liabilities of the Company are
translated from its functional currency into its reporting currency at fiscal
year-end exchange rates. Income and expense items are translated at average
exchange rates prevailing during the fiscal year. The resulting translation
adjustments are recorded as a component of stockholders' (deficit) equity in the
accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS-
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments.
(2) RELATED PARTY TRANSACTIONS:
As of December 31, 1998 and June 30, 1999, the Company had $322,712 and
$269,150 (unaudited) outstanding to one of the Company's stockholders. The
interest rate on the loan was 6%. Subsequent to June 30, 1999, the loan was
settled in full.
F-24
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES:
The components of the Company's income tax provision are as follows-
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -------------------
1998 1998 1999
------------ -------- --------
<S> <C> <C> <C>
(UNAUDITED)
Income tax provision-
Current--International.................................... $84,183 $41,798 $47,782
Deferred--International................................... -- -- --
------- ------- -------
$84,183 $41,798 $47,782
======= ======= =======
</TABLE>
A reconciliation from the U.S. Federal statutory rate to the Company's
effective tax rate is as follows-
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ -------- --------
<S> <C> <C> <C>
(UNAUDITED)
U.S. Federal statutory tax rate............................. 34.0% 34.0% 34.0%
Netherlands tax rate adjustment............................. 1.0 1.0 1.0
Other....................................................... (1.4) (1.0) (1.0)
----- ------ ------
33.6% 34.0% 34.0%
===== ====== ======
</TABLE>
Deferred taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred taxes were not material as of December 31, 1998.
(4) STOCKHOLDERS' (DEFICIT) EQUITY:
In January 1998, the Company issued 1,714 shares of common stock at a price
of approximately $56.70 per share for total proceeds of approximately $97,191.
(5) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE COMMITMENTS-
The Company was committed under operating leases principally for office
space and equipment. Rent expense was $85,742 for the year ended December 31,
1998, and $39,311 and $46,883 for the six months ended June 30, 1998 and 1999
(unaudited), respectively.
F-25
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum payments under lease agreements are as follows-
<TABLE>
<S> <C>
Year ended December 31,
1999........................................................ $137,379
2000........................................................ 110,522
2001........................................................ 73,660
2002........................................................ 53,092
2003........................................................ 50,441
Thereafter.................................................. 8,408
</TABLE>
CONCENTRATIONS OF CREDIT RISK-
As of December 31, 1998 and June 30, 1999, the two largest customer
receivables represented 58% and 54% (unaudited), respectively, of total accounts
receivable.
(6) SUBSEQUENT EVENT:
Subsequent to year-end the Company was acquired by Predictive Systems, Inc.,
a network consulting company based in the United States.
F-26
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements for the six months ended June 30, 1999 and the fiscal year ended
December 31, 1998 have been derived from the application of pro forma
adjustments to the historical financial statements of Predictive Systems, Inc.
("Predictive") and Network Resource Consultants and Company B.V. ("NRCC"),
included elsewhere in this prospectus. The unaudited pro forma condensed
consolidated statement of operations information for the six months ended
June 30, 1999 and for the year ended December 31, 1998, gives effect to the
acquisition as if it had occurred on January 1, 1998. The unaudited pro forma
condensed consolidated balance sheet gives effect to the acquisition of NRCC as
if it had occurred on June 30, 1999.
The unaudited pro forma condensed consolidated financial statements do not
necessarily reflect what our actual financial results would have been had the
acquisition been completed on these dates, nor does it purport to be indicative
of future financial results.
The acquisition has been accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of the purchase price over the fair value of the net
assets acquired was approximately $4.3 million.
F-27
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ----------------------------
PREDICTIVE NRCC ADJUSTMENTS COMBINED
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Professional services..................... $21,278,287 $963,065 $ -- $22,241,352
Hardware and software sales............... 1,287,701 36,460 -- 1,324,161
----------- -------- ---------- -----------
Total revenues.......................... 22,565,988 999,525 -- 23,565,513
COST OF REVENUES:
Professional services..................... 10,245,945 532,868 -- 10,778,813
Hardware and software purchases........... 1,031,889 19,551 -- 1,051,440
----------- -------- ---------- -----------
Total cost of revenues.................. 11,277,834 552,419 -- 11,830,253
----------- -------- ---------- -----------
Gross profit............................ 11,288,154 447,106 -- 11,735,260
SALES AND MARKETING......................... 3,409,297 1,438 -- 3,410,735
GENERAL AND ADMINISTRATIVE.................. 7,376,425 280,157 -- 7,656,582
DEPRECIATION AND AMORTIZATION............... 312,135 18,264 426,354(1) 756,753
NONCASH COMPENSATION EXPENSE................ 9,875 -- 9,875
----------- -------- ---------- -----------
Operating profit (loss)................. 180,422 147,247 (426,354) (98,685)
OTHER INCOME (EXPENSE):
Interest income........................... 69,574 2,355 -- 71,929
Other income (expense).................... 36,882 (132) -- 36,750
Interest expense.......................... (109,078) (8,936) -- (118,014)
----------- -------- ---------- -----------
Income (loss) before income tax
provision............................. 177,800 140,534 (426,354) (108,020)
INCOME TAX PROVISION........................ 361,065 47,782 -- 408,847
----------- -------- ---------- -----------
Net (loss) income....................... $ (183,265) $ 92,752 $ (426,354) $ (516,867)
=========== ======== ========== ===========
NET LOSS PER SHARE--
BASIC AND DILUTED......................... $ (0.02) $ (0.05)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC
AND DILUTED............................... 8,970,694 1,062,814(2) 10,033,508
=========== ===========
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this statement.
F-28
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ -----------------------------
PREDICTIVE NRCC ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Professional services................... $23,857,780 $1,657,427 $ -- $25,515,207
Hardware and software sales............. 2,065,348 231,498 -- 2,296,846
----------- ---------- ---------- -----------
Total revenues.................. 25,923,128 1,888,925 -- 27,812,053
COST OF REVENUES:
Professional services................... 12,861,272 903,204 -- 13,764,476
Hardware and software purchases......... 1,698,356 148,783 -- 1,847,139
----------- ---------- ---------- -----------
Total cost of revenues.......... 14,559,628 1,051,987 -- 15,611,615
----------- ---------- ---------- -----------
Gross profit.................... 11,363,500 836,938 -- 12,200,438
SALES AND MARKETING....................... 3,433,751 26,261 -- 3,460,012
GENERAL AND ADMINISTRATIVE................ 8,184,486 504,791 -- 8,689,277
DEPRECIATION AND AMORTIZATION............. 567,761 44,067 852,707(1) 1,464,535
----------- ---------- ---------- -----------
Operating (loss) profit......... (822,498) 261,819 (852,707) (1,413,386)
OTHER INCOME (EXPENSE):
Interest income......................... 57,976 8,431 -- 66,407
Other income............................ 1,555 5,070 -- 6,625
Interest expense........................ (324,591) (24,760) -- (349,351)
----------- ---------- ---------- -----------
(Loss) income before income tax
(benefit) provision........... (1,087,558) 250,560 (852,707) (1,689,705)
INCOME TAX (BENEFIT) PROVISION............ (460,258) 84,183 -- (376,075)
----------- ---------- ---------- -----------
Net (loss) income............... $ (627,300) $ 166,377 $ (852,707) $(1,313,630)
=========== ========== ========== ===========
NET LOSS PER SHARE--
BASIC AND DILUTED....................... $ (0.11) $ (0.19)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING-
BASIC AND DILUTED....................... 6,015,433 1,062,814(2) 7,078,247
=========== ===========
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this statement.
F-29
<PAGE>
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ----------------------------
PREDICTIVE NRCC ADJUSTMENTS COMBINED
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 359,911 $163,768 $ -- $ 523,679
Accounts receivable, net.................. 13,220,569 322,149 -- 13,542,718
Prepaid expenses and other current
assets.................................. 2,125,678 83,771 -- 2,209,449
----------- -------- ---------- -----------
Total current assets.................... 15,706,158 569,688 -- 16,275,846
FURNITURE, FIXTURES AND EQUIPMENT, NET...... 1,741,644 218,458 -- 1,960,102
INTANGIBLES................................. -- -- 4,263,537 (3) 4,263,537
OTHER ASSETS................................ 185,074 -- -- 185,074
----------- -------- ---------- -----------
Total assets............................ $17,632,876 $788,146 $4,263,537 $22,684,559
=========== ======== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..... $ 3,297,868 $285,801 $ 100,000 (4) $ 3,683,669
Deferred income tax liability............. 229,268 -- -- 229,268
Deferred revenue.......................... 25,073 17,497 -- 42,570
Due to shareholder........................ -- 269,150 -- 269,150
Income taxes payable...................... 201,511 127,979 -- 329,490
Current portion of capital lease
obligations............................. 150,511 -- -- 150,511
----------- -------- ---------- -----------
Total current liabilities............... 3,904,231 700,427 100,000 4,704,658
Other long-term liabilities............... 967,632 -- -- 967,632
----------- -------- ---------- -----------
Total liabilities....................... 4,871,863 700,427 100,000 5,672,290
----------- -------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock............... $ 6,512 $ -- $ -- $ 6,512
Common stock.............................. 12,466 34,775 (33,712)(5) 13,529
Additional paid-in capital................ 20,307,511 86,760 4,163,433 (5) 24,557,704
Treasury stock............................ (8,398,753) -- -- (8,398,753)
Deferred compensation..................... (294,750) -- -- (294,750)
Retained earnings (deficit)............... 1,143,726 (75,870) 75,870 (5) 1,143,726
Accumulated other comprehensive (loss)
income.................................. (15,699) 42,054 (42,054)(5) (15,699)
----------- -------- ---------- -----------
Total stockholders' equity.............. 12,761,013 87,719 4,163,537 17,012,269
----------- -------- ---------- -----------
Total liabilities and stockholders'
equity................................ $17,632,876 $788,146 $4,263,537 $22,684,559
=========== ======== ========== ===========
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this balance sheet.
F-30
<PAGE>
PREDICTIVE SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated statements of operations have
been prepared to reflect the acquisition of NRCC as if this acquisition occurred
on January 1, 1998. The unaudited pro forma condensed consolidated balance sheet
was prepared to reflect the acquisition as of June 30, 1999. NRCC's historical
financial statements were derived from its books and records and reflect:
- the statement of operations of NRCC for the six month period from
January 1, 1999 to June 30, 1999;
- the statement of operations of NRCC for the 12 month period ended
December 31, 1998; and
- the balance sheet of NRCC as of June 30, 1999.
The acquisition has been accounted for under the purchase method of accounting.
The following is a summary of the adjustments reflected in the unaudited pro
forma condensed consolidated statements of operations:
1. Represents the amortization of the excess of the purchase price over
the net assets of NRCC acquired.
2. Represents the increase in the number of outstanding shares of common
stock to reflect the 1,062,814 shares issued to the stockholders of NRCC to
fund the purchase price.
The following is a summary of the adjustments reflected in the unaudited pro
forma condensed consolidated balance sheet:
3. Represents the preliminary estimates of the excess purchase price
over the net assets acquired as follows--
<TABLE>
<S> <C>
Purchase price (including $100,000 of transaction
expenses)................................................. $4,351,256
Net tangible assets acquired................................ 87,719
----------
Excess of purchase price over net tangible assets
acquired.................................................. $4,263,537
==========
</TABLE>
Predictive believes that all significant assets and liabilities have been
identified and, accordingly, that the final determination of the allocation of
the NRCC purchase price should not vary materially from the preliminary
estimate. Predictive anticipates finalizing the purchase price allocation upon
completing the preparation and review of the August 12, 1999 (acquisition date)
financial statements of NRCC.
The identifiable assets are being amortized over their estimated useful
lives. Intangible assets resulting from the excess of the purchase price over
the fair value of the net assets acquired, including workforce, customer lists
and goodwill, are being amortized over a period of 5 years.
Subsequent to the acquisition, Predictive will review the carrying values
assigned to the intangible assets to determine whether later events or
circumstances have occurred that indicate that the balance of the intangible
assets may be impaired. Predictive's principal considerations in determining the
impairment of the intangible assets will include the strategic benefit to
Predictive of the particular business as measured by expected undiscounted
future cash flows. Predictive is not aware of any events or circumstances which
would impair the intangible assets.
F-31
<PAGE>
PREDICTIVE SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Represents the amount of estimated cost for legal and accounting
services and other expenses associated with the acquisition.
5. Reflects the adjustments to stockholders' equity as follows:
<TABLE>
<S> <C>
COMMON STOCK:
Elimination of NRCC common stock............................ $ (34,775)
Issuance of common stock in connection with the acquisition
of NRCC.................................................... 1,063
----------
Subtotal.............................................. (33,712)
ADDITIONAL PAID-IN CAPITAL:
Elimination of NRCC additional paid-in capital.............. (86,760)
Additional paid-in capital from issuance of common stock in
connection with the acquisition of NRCC.................... 4,250,193
----------
Subtotal.............................................. 4,163,433
RETAINED EARNINGS (DEFICIT):
Elimination of NRCC retained deficit........................ 75,870
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Elimination of NRCC accumulated other comprehensive
income..................................................... (42,054)
----------
Total................................................. $4,163,537
==========
</TABLE>
F-32
<PAGE>
[PREDICTIVE LOGO WITH PICTURES OF NETWORK CONSULTANTS
AND THE TEXT
"THE PREDICTIVE SYSTEMS SOLUTION
IN-DEPTH NETWORK CONSULTING EXPERTISE
FLEXIBLE AND INNOVATIVE SERVICE DELIVERY
QUANTIFIABLE BUSINESS ANALYSIS
CROSS-INDUSTRY CLIENT BASE"]
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the issuance and distribution of the common stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 17,904
NASD filing fee............................................. 6,940
Nasdaq National Market listing fee.......................... 95,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 150,000
Printing and engraving...................................... 250,000
Blue sky fees and expenses (including legal fees)........... 12,500
Transfer Agent and Registrar fees and expenses.............. 15,000
Miscellaneous............................................... 452,656
----------
Total................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof (the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the
Registrant's directors shall not be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
Registrant has applied for liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise. The Certificate eliminates the personal liability
of directors to the fullest extent permitted by Section 102(b)(7) of the DGCL
and provides that the Registrant may fully indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding
II-1
<PAGE>
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities since January 1,
1996:
1. On March 5, 1999, the Registrant issued 6,512,316 shares of Series A
Convertible Preferred Stock for an aggregate amount of $18,565,225.44 in
a private placement to six accredited investors in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act.
2. On March 5, 1999, the Registrant issued warrants to purchase 15% of the
number of shares registered in its initial public offering at the initial
public offering price for an aggregate amount of $1,000 in a private
placement to two accredited investors in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
3. On August 12, 1999, the Registrant issued 1,062,814 shares of common
stock to two persons in exchange for all of the outstanding capital stock
of Network Resource Consultants and Company, B.V. in reliance upon the
exemption from registration provided by Section 4(2).
4. On September 16, 1999, the Registrant issued 1,242,000 shares of common
stock to Cisco Systems, Inc., an accredited investor, in a private
placement for an aggregate amount of $14,904,000 in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act.
5. On September 22, 1999, the Registrant issued 94,867 and 18,133 shares of
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment
Partners II, L.P., both accredited investors, in a private placement for
an aggregate amount of $1,356,000 in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
6. The Registrant from time to time has granted stock options to employees,
directors and consultants in reliance upon exemption from registration
pursuant to either (i) issuances to accredited investors in private
placements pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) issuances to employees, directors
and consultants for services pursuant to Rule 701 promulgated under the
Securities Act. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICES
--------- ------------
<S> <C> <C>
January 1, 1996 to December 31, 1996........................ 1,560,000 $0.50-$ 0.83
January 1, 1997 to December 31, 1997........................ 3,856,800 $0.83-$ 1.25
January 1, 1998 to December 31, 1998........................ 2,427,000 $1.25-$ 1.50
January 1, 1999 to present.................................. 2,980,363 $1.50-$11.05
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1.1+ Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2+ Form of amended and restated certificate of incorporation to
be in effect upon the closing of the offering.
3.3+ By-laws.
3.4+ Form of amended and restated by-laws to be in effect upon
the closing of this offering.
4.1+ Specimen common stock certificate.
4.2+ See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between
General Atlantic Partners 54, L.P. and the Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between
Gap Coinvestment Partners II, L.P. and the Registrant.
5.1+ Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Incentive Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.4+ Employment Agreement, dated May 11, 1999, by and between
Ronald Pettengill and the Registrant.
10.5+ Employment Agreement, dated May 11, 1999, by and between
Robert Belau and the Registrant.
10.6+ Employment Agreement, dated January 22, 1999, by and between
Kevin Holt and the Registrant.
10.7+ Registration Rights Agreement, dated March 5, 1999.
10.8+ Secured Promissory Note, dated August 31, 1998, in favor of
Brown Brothers Harriman & Co.
10.9+ Agreement of Lease, dated June 25, 1999, by and between the
Registrant and Polestar Fifth Property Associates LLC.
10.10+ Development and License Agreement, dated July 29, 1998, by
and between Bear, Stearns & Co. Inc. and the Registrant.
10.11+ Consulting Agreement, dated October 14, 1998, by and between
Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corporation and the Registrant.
10.12+ Consulting Services Agreement, dated October 15, 1998, by
and between First Union Corporation and the Registrant.
10.13+ Strategic Partnering Agreement, dated July 30, 1999, by and
between Cabletron Systems Inc. and the Registrant.
10.14+ Systems Integration Consulting Services Agreement, dated
May 21, 1998, by and between LCI International Telecom Corp.
dba Qwest Communications Corporation and the Registrant.
10.15+ Amendment No. 1 to Consulting Services Agreement dated
June 21, 1999, to Systems Integration Consulting Services
Agreement, dated May 21, 1998, by and between LCI
International Telecom Corp. dba Qwest Communications
Corporation and the Registrant.
10.16+ Stock and Warrant Purchase Agreement, dated March 5, 1999,
by and among General Atlantic Partners 54, L.P., GAP
Coinvestment Partners II, L.P., the Other Purchasers named
therein and the Registrant.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.17+ Service Agreement, dated January 1, 1999, by and between
John Wright and Predictive Limited.
10.18+ Common Stock Purchase Agreement, dated September 16, 1999,
by and between Cisco Systems, Inc. and the Registrant.
10.19+ Investor's Rights Agreement, dated September 16, 1999, by
and between Cisco Systems, Inc. and the Registrant.
10.20** Professional Services Subcontract, dated May 14, 1999, by
and between Cisco Systems, Inc. and the Registrant.
10.21+ Common Stock Purchase Agreement, dated September 22, 1999,
by and among General Atlantic Partners 57, L.P., GAP
Coinvestment Partners II, L.P. and the Registrant.
10.22+ Amendment No. 1 to the Registration Rights Agreement, dated
March 5, 1999, dated September 22, 1999.
10.23+ Employment Agreement, dated September 21, 1999 by and
between Gerard Dorsey and the Registrant.
10.24+ Amendment No. 1 to Common Stock Purchase Agreement, dated
September 27, 1999, by and between Cisco Systems, Inc. and
the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2+ Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
23.3 Consent of Arthur Andersen LLP.
24.1+ Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
** Confidential treatment has been requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Confidential portions of this Exhibit have been filed separately with the
Securities and Exchange Commission.
(b) Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or
497(h) under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective 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 27th day of
October, 1999.
<TABLE>
<S> <C> <C>
PREDICTIVE SYSTEMS, INC.
By: /s/ RONALD G. PETTENGILL, JR.
-----------------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- --------- -------- ----
<S> <C> <C>
Chief Executive Officer and October 27, 1999
/s/ RONALD G. PETTENGILL, JR. Chairman of the Board of
- ------------------------------------------- Directors (principal
Ronald G. Pettengill, Jr. executive officer)
* President and Director October 27, 1999
- -------------------------------------------
Robert L. Belau
/s/ GERARD E. DORSEY Chief Financial Officer October 27, 1999
- ------------------------------------------- (principal financial and
Gerard E. Dorsey accounting officer)
* Director October 27, 1999
- -------------------------------------------
Peter L. Bloom
* Director October 27, 1999
- -------------------------------------------
Donald J. Duffy
* Director October 27, 1999
- -------------------------------------------
Braden R. Kelly
* Director October 27, 1999
- -------------------------------------------
Eric Meyer
* Director October 27, 1999
- -------------------------------------------
Inder Sidhu
* Director October 27, 1999
- -------------------------------------------
William W. Wyman
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RONALD G. PETTENGILL, JR.
--------------------------------------
Ronald G. Pettengill, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of Predictive Systems, Inc. included in this
registration statement and have issued our report thereon dated May 12, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
S-1
<PAGE>
SCHEDULE II
PREDICTIVE SYSTEMS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts..................... $ 9 $ 21 $ -- $ 30
==== ==== ==== ====
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts..................... $ 30 $ 99 $(49) $ 80
==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts..................... $ 80 $102 $(41) $141
==== ==== ==== ====
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
1.1+ Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2+ Form of amended and restated certificate of incorporation to
be in effect upon the closing of the offering.
3.3+ By-laws.
3.4+ Form of amended and restated by-laws to be in effect upon
the closing of this offering.
4.1+ Specimen common stock certificate.
4.2+ See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between
General Atlantic Partners 54, L.P. and the Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between
Gap Coinvestment Partners II, L.P. and the Registrant.
5.1+ Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Incentive Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.4+ Employment Agreement, dated May 11, 1999, by and between
Ronald Pettengill and the Registrant.
10.5+ Employment Agreement, dated May 11, 1999, by and between
Robert Belau and the Registrant.
10.6+ Employment Agreement, dated January 22, 1999, by and between
Kevin Holt and the Registrant.
10.7+ Registration Rights Agreement, dated March 5, 1999.
10.8+ Secured Promissory Note, dated August 31, 1998, in favor of
Brown Brothers Harriman & Co.
10.9+ Agreement of Lease, dated June 25, 1999, by and between the
Registrant and Polestar Fifth Property Associates LLC.
10.10+ Development and License Agreement, dated July 29, 1998, by
and between Bear, Stearns & Co. Inc. and the Registrant.
10.11+ Consulting Agreement, dated October 14, 1998, by and between
Pershing Division of Donaldson, Lufkin & Jenrette Securities
Corporation and the Registrant.
10.12+ Consulting Services Agreement, dated October 15, 1998, by
and between First Union Corporation and the Registrant.
10.13+ Strategic Partnering Agreement, dated July 30, 1999, by and
between Cabletron Systems Inc. and the Registrant.
10.14+ Systems Integration Consulting Services Agreement, dated
May 21, 1998, by and between LCI International Telecom Corp.
dba Qwest Communications Corporation and the Registrant.
10.15+ Amendment No. 1 to Consulting Services Agreement dated
June 21, 1999, to Systems Integration Consulting Services
Agreement, dated May 21, 1998, by and between LCI
International Telecom Corp. dba Qwest Communications
Corporation and the Registrant.
10.16+ Stock and Warrant Purchase Agreement, dated March 5, 1999,
by and among General Atlantic Partners 54, L.P., GAP
Coinvestment Partners II, L.P., the Other Purchasers named
therein and the Registrant.
10.17+ Service Agreement, dated January 1, 1999, by and between
John Wright and Predictive Limited.
10.18+ Common Stock Purchase Agreement, dated September 16, 1999,
by and between Cisco Systems, Inc. and the Registrant.
10.19+ Investor's Rights Agreement, dated September 16, 1999, by
and between Cisco Systems, Inc. and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.20** Professional Services Subcontract, dated May 14, 1999, by
and between Cisco Systems, Inc. and the Registrant.
10.21+ Common Stock Purchase Agreement, dated September 22, 1999,
by and among General Atlantic Partners 57, L.P., GAP
Coinvestment Partners II, L.P. and the Registrant.
10.22+ Amendment No. 1 to the Registration Rights Agreement, dated
March 5, 1999, dated September 22, 1999.
10.23+ Employment Agreement, dated September 21, 1999 by and
between Gerard Dorsey and the Registrant.
10.24+ Amendment No. 1 to Common Stock Purchase Agreement, dated
September 27, 1999, by and between Cisco Systems, Inc. and
the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2+ Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
23.3 Consent of Arthur Andersen LLP.
24.1+ Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
** Confidential treatment has been requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
Confidential portions of this Exhibit have been filed separately with the
Securities and Exchange Commission.
<PAGE>
Exhibit 10.20
CISCO SYSTEMS
Cisco PSS Agreement Number ___________
Cisco PSS SOW Number ___________
Professional Services Subcontract (PSS)
Professional Services Subcontract Agreement ("Agreement") is made and
entered into between Cisco Systems, Inc., a California corporation, with offices
at 170 West Tasman Drive, San Jose, California 95134 ("Cisco"), and Predictive
Systems, Inc., a Delaware corporation, with its principal place of business at
145 Hudson Street, New York, New York 10013 ("Subcontractor").
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereto have caused this Agreement to be duly executed.
CISCO SYSTEMS, INC. PREDICTIVE SYSTEMS, INC.
By: /s/ Inder Sidhu By: /s/ Robert Belau
Name: Inder Sidhu Name: Robert Belau
Title: Vice President Title: President
WorldWide Professional Services
Date: 5/14/99 Date: 5/13/99
GENERAL TERMS AND CONDITIONS
In consideration of the mutual covenants and promises set forth below, the
parties agree as follows:
1. DEFINITIONS; RULES OF INTERPRETATION.
1.1. "Customer" means the entity with which Cisco has entered into a PSA (as
defined below) and which is the recipient of the Services and
Deliverables provided by Subcontractor pursuant to this Agreement and
an SOW. A Customer shall be identified in each Statement of Work issued
hereunder.
1.2. "Deliverables" means, with respect to each SOW, the items specified in
such SOW as deliverables.
1.3. "Effective Date" means the last date written on the first page of this
Agreement.
1.4. [Reserved].
1
<PAGE>
1.5. "Professional Services Agreement" or "PSA" means, with respect to each
SOW, the contract between Cisco and the Customer in connection with
which such SOW is issued to Subcontractor, as amended from time to
time.
1.6. "Results" means all works of authorship, copyrightable works and
inventions made, created, developed, conceived or reduced to practice
by Subcontractor, either alone or jointly with others, during the term
of this Agreement (i) in connection with the Services or Subcontractor
Work Product or (ii) which relate to any Cisco or Customer Confidential
Information (as defined in Section 3, Confidentiality, below).
1.7. "Services" means that portion of the services required under the PSA
which Subcontractor shall provide to Customer and/or Cisco as
subcontractor to Cisco and which are described in any SOW issued
pursuant to this Agreement.
1.8. "Software" means any Cisco software in object code form, which is
listed from time to time on Cisco price list(s) and made available for
license by Cisco, and any new releases (such as standard releases of
the Software which may include bug fixes and new features), updates to,
or upgrades thereof made available by Cisco to its Customers with or
without charge.
1.9. "Statement of Work" ("SOW") means each document agreed upon by Cisco
and Subcontractor which further specifies Services to be performed and
the Deliverables to be provided to Cisco or the Customer, and any other
performance requirements mutually agreed to between the parties. Each
SOW shall be issued substantially in the form shown in Exhibit A and
shall be incorporated herein in its entirety by reference.
1.10. "Subcontractor Work Product" means any and all items and information
delivered to Cisco or generated by Subcontractor or its
subcontractor(s) in the course of providing Services under this
Subcontract, whether in hard copy or electronic form, including all
Deliverables, works of authorship, programming tools, reports, designs,
analyses, source and object code, user or procedural manuals and other
supporting material, summaries, literature, test results,
recommendations, drawings and workpapers.
1.11. The following rules of interpretation shall apply to this Agreement and
each SOW:
1.11.1. The term "including" and its derivatives means "including,
without limitation" unless the context clearly states
otherwise.
1.11.2. Words importing persons include firms, associations, limited
liability companies, partnership, trusts, corporations and
other legal entities, including public bodies, as well as
natural persons.
1.11.3. Any headings preceding the text of the Articles and Sections
of this Agreement are solely for convenience or reference and
do not constitute a part of this Agreement, nor do they affect
the meaning, construction or effect of this Agreement.
2
<PAGE>
1.11.4. Words importing the singular shall include the plural and vice
versa. Words of the masculine gender shall be deemed to
include the correlative words of the feminine gender.
1.11.5. All references to a number of days mean calendar days, unless
expressly indicated otherwise.
1.11.6. All reference herein to the "Agreement" shall include the
appendices, exhibits and schedules to this Agreement,
including all SOWs.
1.11.7. The word "shall" when used in this Agreement is word of
mandate, construed as "must."
2. DUTIES OF SUBCONTRACTOR.
2.1. Subcontractor shall provide the Services and the Subcontractor Work
Product during the term of this Agreement in accordance with the terms
and conditions of this Agreement, any SOW and the PSA. Subcontractor
shall comply with all obligations of Cisco contained in the terms and
conditions of the PSA which are provided in writing to Subcontractor,
its agent or subcontractor prior to entering into the applicable SOW
that relate to the Services and the Subcontractor Work Product as if
Subcontractor were substituted for Cisco with respect to such terms and
conditions. Subcontractor shall not perform any act with respect to the
Services or the Subcontractor Work Product that Cisco is prohibited
from performing under the PSA which are provided in writing to
Subcontractor, its agent or subcontractor prior to entering into the
applicable SOW. Subcontractor shall not perform any act, or fail to
take any act, that would cause Cisco to be in breach of the PSA so long
as Subcontractor, its agent or subcontractor has been provided with the
applicable provisions of the PSA. Subcontractor will provide all
resources, facilities, management, labor, expertise, skills, tools and
equipment necessary for the performance of this Agreement and any SOW.
2.2. Subcontractor agrees that Cisco shall be the primary interface and
shall control all contractual communications with customers, and shall
direct and coordinate all activity with respect to this Agreement, any
SOW, and any PSA. If any communications are initiated by Customer
directly with Subcontractor concerning this Agreement, any SOW or a
PSA, then Subcontractor shall coordinate and communicate with Cisco
prior to answering such communications. This limitation does not
apply to routine Customer contracts necessary to perform onsite work
contemplated by a particular SOW. Subcontractor will provide to Cisco
all relevant operational information regarding the Services, will
participate in meetings with Customer and Cisco as requested by Cisco
and will take all reasonable action requested by Cisco to enable Cisco
to comply with the PSA.
2.3. Subcontractor shall:
(i) keep Cisco advised of the progress of the delivery of the
Services and the status of the Deliverables,
3
<PAGE>
(ii) permit any designated representative of Cisco periodically to
review the work of Subcontractor personnel performing Services
and preparing Deliverables,
(iii) timely perform the Services in a timely manner and provide the
Deliverables in accordance with each SOW, and
(iv) keep accurate records of work performed on each SOW, evidence
of which Subcontractor shall provide to Cisco upon Cisco's
request, consistent with Section 19.2 hereof.
2.4. Subcontractor shall comply with all reasonable instructions given by
Cisco in connection with performance of this Agreement or any SOW.
2.5. Subcontractor has obtained all licenses, permits and approvals required
by any federal, state or local licensing, regulatory, or other agency
for performance of the work required by this Agreement or any SOW.
2.6. Subcontractor's duties and responsibilities under this Agreement shall
not be subcontracted to any other person or entity, in whole or in
part, without prior written notice to and approval by Cisco and, if
required by the PSA, the Customer.
2.7. If Subcontractor's use of subcontractor(s), consultants or other third
parties is authorized under this Agreement or a particular SOW,
Subcontractor shall execute an agreement with such parties which
requires compliance with the terms of this Agreement and the SOW under
which work is subcontracted. Such agreement shall provide that (i)
Cisco shall have the right to enforce the provisions of such agreement
and (ii) Cisco's audit rights as provided for in Section 19.2 below
shall include access to records of Subcontractor's subcontractor(s) to
assess compliance with this provision.
3. CONFIDENTIALITY.
3.1. Subcontractor acknowledges that, in connection with this Agreement and
its relationship with Cisco, it may obtain information relating to
Cisco or Cisco's hardware, software, services or products which is of a
confidential and proprietary nature ("Confidential Information"). Such
Confidential Information may include, but is not limited to, trade
secrets, know-how, inventions, techniques, processes, programs,
schematics, software source documents, data, customer lists, financial
information, and sales and marketing plans or information which
Subcontractor knows or has reason to know is confidential, -
proprietary or trade secret information of Cisco, its affiliates and
suppliers. Subcontractor shall at all times, both during the term of
this Agreement and for a period of at least three (3) years after its
expiration or termination or the completion of the last SOW, whichever
is later, keep in trust and confidence all such Confidential
Information, and shall not use such Confidential Information other than
as expressly authorized by Cisco under this Agreement, nor shall
Subcontractor disclose any such Confidential Information to third
parties without Cisco's written consent. Subcontractor further agrees
to immediately return to Cisco all Confidential Information (including
copies thereof) in
4
<PAGE>
Subcontractor's possession, custody, or control upon expiration or
termination of this Agreement at any time and for any reason or the
completion of the last SOW, whichever is later. The obligations of
confidentiality shall not apply to information which (a) has entered
the public domain except where such entry is the result of
Subcontractor's breach of this Agreement or other applicable
confidentiality agreement; (b) prior to disclosure hereunder was
already rightfully in Subcontractor's possession under no obligation of
confidentiality; (c) subsequent to disclosure hereunder is obtained by
Subcontractor on a nonconfidential basis from a third party who has the
right to disclose such information to the Subcontractor; or (d) is
independently developed without restriction on disclosure and without
the use of any Confidential Information. Nothing contained in this
Section 3.1 shall prohibit Subcontractor from making disclosure of
Confidential Information to the extent (but only to the extent)
required by court order, provided that Subcontractor shall use its best
efforts to give Cisco at the earliest practicable time prior notice as
to the nature of the required disclosure or request for such
disclosure, whichever is earlier, so as to afford Cisco the maximum
possible opportunity to challenge the need for such disclosure; and
provided further that Subcontractor shall cooperate with Disco in
resisting such disclosure.
For purposes of this Agreement, Confidential Information of Cisco is
deemed to include (i) any information provided to Subcontractor which
Cisco is required to keep confidential pursuant to the terms of the PSA
and (ii) any Confidential Information of a Customer which Cisco or the
Customer may provide to Subcontractor in order to propose or perform
work in accordance with any SOW hereunder (collectively (i) and (ii)
are referred to herein as "Customer Confidential Information").
Subcontractor shall comply with the confidentiality provisions of the
PSA related to all Customer Confidential Information.
3.2. Neither party shall disclose, advertise, or publish the terms and
conditions of this Agreement or any SOW without the prior written
consent of the other party. Any press release or publication regarding
this Agreement or any SOW is subject to prior review and written
approval of the parties. Subcontractor shall not disclose the existence
of any relationship with Cisco without Cisco's prior written approval.
3.3. Notwithstanding anything in this Agreement to the contrary, neither
party shall use the other party's name, logo, trademarks, service
marks, or other proprietary symbols or designations (the "Marks")
without the prior consent of the other party. Subcontractor shall have
no claim or right in Cisco's Marks, including but not limited to
trademarks, service marks, or trade names owned, used or claimed now or
in the future by Cisco. Subcontractor shall not make any claim to
Cisco's Marks or lodge any filings with respect to Cisco's Marks or
marks confusingly similar to Cisco's Marks, whether on behalf of Cisco
or in its own name or interest, without the prior written consent of
Cisco.
4. SUBCONTRACTOR'S REPRESENTATIONS, WARRANTIES, AND COVENANTS.
Subcontractor represents, warrants and covenants as follows:
5
<PAGE>
4.1. Subcontractor's performance of this Agreement and all SOWs will not
breach any agreement Subcontractor has with another party and there is
no other contract or duty on Subcontractor's part now in existence that
is inconsistent with this Agreement. Subcontractor warrants to Cisco
that the performance of the services shall not cause Cisco to be in
breach of any representation, warranty, covenant or other obligation of
Cisco in the PSA which relate to the Services or the Subcontractor Work
Product. Subcontractor makes the same representations, warranties and
covenants to Cisco as Cisco makes to Customer pursuant to the PSA
(subject to the disclaimers and exclusions therein), which relate to
the Services or the Subcontractor Work Product; provided that
Subcontractor shall have been previously furnished with the relevant
portions of a copy thereof in accordance with Section 2.1.
4.2. Subcontractor, its employees and subcontractor(s), during the term of
the Agreement:
4.2.1. shall comply with all applicable state and local laws,
ordinances, codes, regulations, rules, policies and procedures
and all applicable federal laws, Presidential Executive
Orders, and government regulations, and the requirements of
any other public or private authority, respecting the
performance by Subcontractor of its duties and
responsibilities under this Agreement;
4.2.2. shall (i) have obtained all licenses, permits and approvals
required by any federal, state or local licensing, regulatory,
or other agency or authority for performance of the work
required by this Agreement or any SOW; (ii) maintain, in full
force and effect, all such licenses, permits, authorizations
and approvals during the Term of this Agreement and until all
the Subcontractor Work Product and Services have been accepted
pursuant to Article 8 of this Agreement or such later time as
Cisco may reasonably require (collectively, (i) and (ii) of
this Section 4.2.2 are referred to as "Authorizations"), (iii)
coordinate with Cisco to the extent necessary to obtain
Cisco's or Customer's cooperation in obtaining any
Authorizations, and (iv) inform Cisco immediately of the
expiration, termination, non-renewal, denial or revocation of
any Authorization;
4.2.3. shall not act in any fashion or take any action which will
render Cisco liable for a violation of the U.S. Foreign
Corrupt Practices Act, the provisions of which include a
prohibition against the offering, giving or promising to offer
or give, directly or indirectly, money or anything of value to
any non-U.S. official or a non-U.S. government, political
party or instrumentality thereof in order to assist
Subcontractor or Cisco in obtaining or retaining business;
4.2.4. shall not, directly or through a third party, remove, alter,
change or interface with the Subcontractor Work Product for
the purpose of preventing Cisco or the Customer from utilizing
the Subcontract Work Product; and
6
<PAGE>
4.2.5. shall take no action, nor fail to take any action, which
action or failure to act could result in Cisco's being in
violation of any law or regulation relating to the performance
of either party's obligations under this Agreement, including
the PSA and any SOW.
4.3. Subcontractor will use qualified individuals with suitable training,
experience, capabilities, skill and licenses to perform its obligations
under this Agreement and any SOW. Notwithstanding Subcontractor's
compliance with this provision, such individuals shall be subject to
approval by Cisco and, if required by the PSA, by Customer' and shall
be removed (and immediately replaced by Subcontractor with personnel
meet under requirements of this Section 4.3) at Cisco or Customer
request.
4.4. Subcontractor will perform this Agreement and any SOW hereunder in a
manner consistent with industry standards reasonably applied to the
performance of such work.
4.5. All Deliverables developed or supplied by Subcontractor hereunder shall
meet the requirements of Section 4.6 and
4.5.1. shall not contain any intentionally designed timer, clock,
counter or other limiting design, function or routine which
causes it to be erased, inoperable, or otherwise incapable of
being used fully in the manner for which it was designed after
the occurrence or lapse of any triggering event;
4.5.2. shall comply with the terms of Cisco's Year 2000 Compliance
Agreement, a copy of which shall be executed by Subcontractor
upon execution of this Agreement and appended hereto as
Exhibit B. and Subcontractor shall cause its subcontractor(s)
and any other third parties who may provide products or
services in support of Subcontractor's performance of this
Agreement or any SOW hereunder to execute and deliver to Cisco
the Year 2000 Compliance Agreement; and
4.5.3. if consistent with the requirements of this Agreement and any
SOW hereunder (including Year 2000 Compliance), shall be in
conformance with Subcontractor's published specifications or,
in the case of purchased software, the specifications of the
third party source.
4.6. The Services and Subcontractor Work Product provided hereunder shall:
4.6.1. be of good and marketable quality;
4.6.2. be free from all defects in design, materials, workmanship,
performance and title; and
4.6.3. meet the applicable specifications, drawings, samples,
descriptions and requirements specified in each SOW and this
Agreement and as required by the PSA.
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4.7. In the event of a breach of the warranties in this Section 4,
Subcontractor shall without charge and without delay repair, replace,
re-perform or modify the affected Services or Subcontractor Work
Product so as to promptly correct such breach or default. All
warranties shall survive inspection, acceptance and payment. Nothing in
this Section 4 shall be construed to limit any other rights or remedies
available to Cisco at law, in equity or otherwise.
4.8. Subcontractor has, or will obtain, confidentiality, non-disclosure,
assignment of rights and other appropriate agreements with its
employees, suppliers, consultants and subcontractor(s) sufficient to
protect Cisco confidential information and Customer Confidential
Information and sufficient to allow Subcontractor to provide Cisco with
the ownership, assignments and licenses required or otherwise provided
for in this Agreement and any SOW hereunder. Such agreements shall
contain terms and conditions no less restrictive than the terms and
conditions set forth in this Agreement and the applicable SOW.
4.9. Subcontractor shall ensure that its personnel and subcontractors, if
any, shall comply with Customer's requests, rules and regulations(i)
regarding conduct of Subcontractor's personnel, (ii) regarding security
at Customer sites or in connection with Customer's systems, and (iii)
regarding document retention. Unless otherwise agreed by Cisco,
Subcontractor's personnel will observe the working hours, working
rules, and holiday schedules of Customer while working on Customer's
premises.
5. INFRINGEMENT.
Other than the Customer Confidential Information obtained in
performance of any SOW, in performing the Services or preparing
Subcontractor Work Product, Subcontractor will not (i) use or bring
onto Cisco's or Customer's premises any confidential or proprietary
information of a third party except to the extent Subcontractor has the
right to use or bring onto Cisco's or Customer's premises such
information, (ii) infringe upon the intellectual property rights
(including, without limitation, patent, copyright, trademark or trade
secret rights) of a third party, or, (iii) disclose or provide to Cisco
or Customer or induce Cisco or Customer to use any confidential
information that belongs to anyone other than Subcontractor except to
the extent Subcontractor has the right to disclose and permit third
parties to use (as applicable) such information. Subcontractor agrees
to indemnify Cisco for any and all losses or liabilities, fines,
penalties and consequences, including attorneys fees, Cisco may incur
by reason of the alleged breach of this Subsection.
6. OWNERSHIP AND LICENSE.
6.1. SOW WORK PRODUCT OWNERSHIP; CISCO INTELLECTUAL PROPERTY. Cisco or
its assigns shall own all right, title and interest in all
intellectual property that is provided to Subcontractor by or on
behalf of Cisco or, subject to Section 6.2 and Section 6.3, which
Subcontractor uses under this Agreement or any SOW ("Cisco Owned
IP"). Subject to Sections 6.2 and 6.3, Subcontractor acknowledges
and agrees that Cisco or its assigns shall own, and Subcontractor
hereby assigns to Cisco, all intellectual property rights and other
proprietary rights in and to the Services and the Subcontractor Work
Product, and any other materials and information Subcontractor is
required to deliver to Cisco as part of this Agreement and any SOWs
issued hereunder, and any Results created as a result of performance
of this Agreement and any SOW hereunder (the "Developed IP"; the
Developed IP and the Cisco Owned IP are collectively referred to as
the "Cisco Intellectual Property"). Cisco shall own any derivatives,
improvements or modifications to the Subcontractor's intellectual
property developed, designed or discovered under this Agreement or
any SOW and Subcontractor hereby assigns all intellectual property
rights and other proprietary rights in such intellectual property to
Cisco. The intellectual property rights and proprietary rights
described in this Section 6.1 may include, but are not limited to,
all current and future worldwide patents and other patent rights,
utility models, copyrights, trade secrets, trademarks, inventions,
mask work rights, programs, program listings, procedures,
programming tools, documentation, reports and drawings, and the
related documentation or tangible expression thereof. Cisco shall
have the exclusive right to apply for or register any patents, mask
work rights, copyrights, and such other proprietary rights
protections with respect to the intellectual property rights
described in this Section 6.1. Subcontractor shall execute such
documents, render such assistance, and take such other actions as
Cisco may reasonably request, at Cisco's expense, to apply for,
register, perfect, confirm and protect Cisco's rights in any
intellectual property described in this Section 6.1. Without
limiting the foregoing, Cisco shall have the exclusive right to
commercialize, prepare and sell products based upon, sublicense,
prepare derivative works from, or otherwise use or exploit the
intellectual property rights granted to it under this Section 6.1.
6.2. OWNERSHIP BY SUBCONTRACTOR. Except as otherwise set forth below,
Subcontractor shall own or retain its rights in all right, title and
interest in Subcontractor intellectual property which is used in the
performance of this Agreement or any SOW hereunder that is wholly
developed and owned by or licensed to Subcontractor prior to the
Effective Date of this Agreement. Cisco grants to Subcontractor a
perpetual, irrevocable, worldwide, fully paid up, royalty-free,
non-exclusive, personal and nontransferable license to use
intellectual property which Subcontractor develops in the course of
performance of the Services and or otherwise develops after the
Effective Date which is discernible by, or disclosed or delivered
to, either Cisco or Customer. Notwithstanding the foregoing, Cisco
shall own all Deliverables pursuant to the provisions of Section 6.1
and the license rights set forth in this Section 6.2 shall not apply
to any such Deliverable (but such license shall apply to the
intellectual property therein).
6.3. SUBCONTRACTOR GRANT OF LICENSE. If any intellectual property used or
developed hereunder or any Services, Subcontractor Work Product or
Results are based on, or incorporate or are improvements or
derivatives of, or cannot reasonably be made, used, reproduced and
distributed without using or violating intellectual property rights,
the rights of which are not assigned or otherwise obtained by Cisco
hereunder, Subcontractor hereby grants to Cisco a perpetual,
irrevocable, worldwide, fully paid up, royalty-free, non-exclusive,
right and license, including the right to sublicense and to
authorize the granting of sublicenses, to exploit and exercise all
such technology and rights (including any modification, improvements
and derivatives thereof).
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6.4 WAIVER OF MORAL RIGHTS. Subject to Section 6.2, Subcontractor hereby
waives any and all moral rights, including without limitation any
right to identification of authorship or limitation on subsequent
modification that Subcontractor (or its employees, agents,
subcontractors or consultants) has or may have in the Services,
Subcontractor Work Product or Results, and in any other intellectual
property that is or becomes the property of Cisco under this Section.
6.5. CISCO AS ATTORNEY IN FACT. Subcontractor agrees that if Cisco is
unable because of Subcontractor's unavailability, dissolution or
incapacity, or for any other reason, to secure Subcontractor's
signature to apply for or pursue any application for any United
States or foreign patents or mask work or copyright registrations
covering the inventions assigned to Cisco above; then Subcontractor
hereby irrevocably designates and appoints Cisco and its duly
authorized officers and agents as Subcontractor's agent and attorney
in fact, to act for and in Subcontractor's behalf and stead to
execute and file any such applications and to do all other lawfully
permitted acts to further the prosecution and issuance of patents,
copyright and mask work registrations thereon with the same legal
force and effect as if executed by Subcontractor.
7. SOFTWARE LICENSE.
7.1. Subject to the terms of this Agreement, Cisco grants to Subcontractor a
nonexclusive and nontransferable license to use the Software specified
in the SOW in object code form and related documents (e.g. technical
specifications, manuals) for the sole purpose of providing Services and
preparing Subcontractor Work Product pursuant to such SOW. The license
granted herein shall be for use of the Software solely as provided in
this Section 7 and the SOW. Unless expressly authorized in a specific
SOW, this license shall extend only to Software to be integrated into
products delivered to and installed for Customer. EXCEPT AS EXPRESSLY
AUTHORIZED UNDER THIS AGREEMENT AND A SPECIFIC SOW, SUBCONTRACTOR SHALL
NOT (AND SHALL NOT PERMIT A THIRD PARTY TO): COPY, IN WHOLE OR IN PART,
SOFTWARE OR RELATED DOCUMENTS; USE THE SOFTWARE ON UNAUTHORIZED) OR
SECONDHAND CISCO EQUIPMENT; MAKE ERROR CORRECTIONS OR OTHERWISE MODIFY
THE SOFTWARE OR DOCUMENTS; DECOMPILE, DECRYPT, REVERSE ENGINEER,
DISASSEMBLE OR OTHERWISE REDUCE ALL OR ANY PORTION OF THE SOFTWARE TO
HUMAN-READABLE FORM; OR TRANSFER, SUBLICENSE, RENT, LEASE, DISTRIBUTE,
SELL, OR CREATE DERIVATIVE WORKS OF THE SOFTWARE OR DOCUMENTS.
7.2. Section 3 of this Agreement, Confidentiality, applies to the Software
licensed herein above. Subcontractor shall maintain and reproduce all
copyright and other proprietary notices on all copies, in any form, of
the Software in the same form and manner that such copyright and other
proprietary notices are included on the Software. Subcontractor agrees
that aspects of the Software and associated documentation, including
the specific design and structure of individual programs, constitute
trade secrets and/or copyrighted material of Cisco. Subcontractor shall
not disclose, provide, or otherwise make available such trade secrets
of copyrighted material in any form to any third party without the
prior written consent of Cisco. Subcontractor shall implement
reasonable security measures
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to protect such trade secrets and copyrighted material. Title to
Software and documentation shall remain solely with Cisco.
7.3. This license is effective until terminated either separately or upon
termination of this Agreement. Upon termination Subcontractor shall
destroy or return to Cisco all copies of Software and documents
relating thereto in its possession. If Subcontractor destroys licensed
materials, it shall certify in writing to Cisco that such destruction
has occurred. Termination of the license granted in this Section 7 is
automatic upon expiration or termination of this Agreement. Cisco also
may terminate this license upon written or oral notice to
Subcontractor, with or without prior notice. Subcontractor also may
terminate this license at any time by destroying all copies of Software
and documents relating thereto which are in Subcontractor's possession
and notifying Cisco of the termination. This license will terminate
immediately without notice from Cisco if Subcontractor fails to comply
with any provision of this license.
7.4. If any portion of this license section is found to be void or
unenforceable, the remaining provisions of this license shall remain in
full force and effect. This license constitutes the entire license
between the parties with respect to the use of Software.
7.5. Cisco's commercial software and commercial computer software
documentation is provided to United States Government agencies in
accordance with the terms of this software license, and per
subparagraph "(c)" of the "Commercial Computer Software-Restricted
Rights" clause at FAR 52.227-19 (June 1987). For DOD agencies, the
restrictions set forth in the "Technical Data-Commercial Items" clause
at DFARS 252.227-7015 (Nov 1995) shall also apply.
8. ACCEPTANCE.
For purposes of this Agreement, acceptance of the Services and
Subcontractor Work Product described in each SOW shall occur on the
date such Services and Subcontractor Work Product have met the
completion criteria specified in the Statement of Work to the
reasonable satisfaction of Cisco, as evidenced by issuance of written
confirmation of completion and acceptance by Cisco. Final acceptance of
Services or Subcontractor Work Product may, in Cisco's discretion, be
held in abeyance pending acceptance of same by the Customer.
9. FEES FOR SERVICES PERFORMED.
9.1. Subcontractor shall be paid the amounts determined in accordance with
this Section 9 and the SOW for the Services and Subcontractor Work
Product . Such payments shall be Subcontractor's sole compensation,
including travel and all other expenses, for its rendering of the
Services and preparation and delivery of the Subcontractor Work
Product, including the Subcontractor Work Product and Results required
to be delivered to Cisco under this Agreement and the applicable SOW.
9.2. Except as otherwise set forth in an applicable SOW, Subcontractor shall
determine the amount due for each category of resource listed in the
following chart by multiplying the
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hourly rate for each such category times the number of hours
(rounded to the nearest 1/10 of an hour) spent by such resource in
providing Services for the project specified in the SOW (the
"Project"). Subject to Subcontractor approval, additional discounts
may apply.
<TABLE>
<CAPTION>
DESCRIPTION OF QUALIFICATIONS,
RESOURCE CATEGORY RATE PER HOUR RESPONSIBILITIES AND TASKS
----------------- ------------- --------------------------
<S> <C> <C>
Project Manager US $250
Senior Project Engineer US $225
Project Engineer US $200
___________________ US$
___________________ US$
</TABLE>
9.3. Cisco shall notify Subcontractor in writing within 5 days following the
later of (i) completion of the Services and acceptance of the Services
and Deliverables by Cisco and Customer and (ii) final acceptance of the
Project by Customer. Subcontractor shall invoice Cisco at the address
set forth in the SOW for the Services provided with respect to the
Project in an amount determined in accordance with this Section 9 and
the SOW. Payment terms are thirty days from receipt of a correct
invoice. If Cisco shall send to Vendor payment for an invoice within
10 days of receipt of an invoice from Vendor, the amounts otherwise
due Subcontractor pursuant to such invoice shall be reduced by two
percent (2%) and payment of such reduced amount by Cisco shall
constitute payment in full of the invoiced amount.
9.4. Subcontractor represents and warrants to Cisco that the charges to
Cisco set forth in this Agreement are not and will not be less
favorable than those charged by Subcontractor for substantially
similar products and/or services in equal or lesser quantities and
on substantially similar terms, in the same practice area (as
identified from time to time on Subcontractor's web page) and the
same geographic area, when acting as a subcontractor for other
"backbone" equipment providers (such third-party charges being
sometimes referred to herein as "Comparable Third-Party Charges").
In the event that Subcontractor enters into an agreement with a
third party pursuant to which the Comparable Third-Party Charges
charged by Subcontractor are less than those charged to Cisco
hereunder in any material respect, then Subcontractor shall promptly
notify Cisco of such agreement, including the material terms
thereof. Cisco may within sixty (60) days after receiving such
notice elect to substitute the provisions governing consideration to
Subcontractor under such agreement for the consideration provisions
of this Agreement, provided, in such event, that Cisco shall be
required to assume in writing and perform all material terms
governing consideration and other obligations, and satisfy any
material conditions, to which such third party is subject under its
agreement with Subcontractor. The provisions so substituted and
terms and conditions so assumed by Cisco shall apply to all products
and services subsequently ordered by Cisco hereunder, PROVIDED, that
notwithstanding the foregoing provisions of this Section 9.4, in the
event that Cisco exercises the rights described in this Section,
Subcontractor shall have the right, exercisable by written notice to
Cisco given within sixty (60) days after receiving Cisco's notice
exercising its rights hereunder, to terminate this Agreement, in
which event Subcontractor shall comply with Section 14.4 hereof with
respect to any uncompleted SOW's and with Section 14.5 hereof.
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10. INDEPENDENT CONTRACTOR
Cisco and Subcontractor are independent contractors and have no power
or authority to bind the other or to create any obligation or
responsibility on behalf of the other. Under no circumstances shall any
employee of one party be deemed to be the employee of the other for any
purpose. Nothing herein shall be construed as implying a joint venture,
agency, employer-employee or partnership relationship between the
parties hereto. Subcontractor is solely responsible for all of its own
taxes, withholdings, and other similar statutory obligations related to
this Agreement and any SOW.
11. RELATIONSHIP TO THE PSA.
Selection of subcontractors to perform the work required under a
particular Customer PSA shall be in the sole discretion of Cisco, and
is, if required by the PSA, subject to Customer approval. Subcontractor
agrees that all its personnel who, pursuant to this Agreement, will be
on Cisco's or a Customer's premises shall have appropriate
authorization issued by Cisco and/or Customer prior to being accorded
access to such premises. Denial of access because of failure to comply
with either Cisco's or Customer's security procedures shall not be the
basis of a claim for breach, nor substantiate any other claim
whatsoever by Subcontractor.
12. CHANGES TO A SOW.
Cisco may at any time by written request make changes to a SOW,
provided such changes are within the general scope of the SOW, and
Subcontractor shall proceed without delay to evaluate requested changes
and notify Cisco promptly (but in all cases within twenty-four (24)
hours after receiving such request) of any objections to the requested
changes. Should any change to an SOW directly result in a change to the
time, place or cost of performance of the SOW, Subcontractor shall,
within the earlier of the time specified in such request or fifteen
(15) days of being directed to implement the change, notify Cisco that
there will be an impact to the SOW cost or schedule and describe such
impact. In the event the Parties reasonably determine such a change
increases or decreases the cost of, or the time required for,
performance of the Services or preparation of the Subcontractor Work
Product under any SOW, the Parties shall agree upon an equitable
adjustment to the SOW, including possible adjustment of prices or
delivery schedules. For changes requested by Cisco at Customer's
request or direction, such equitable adjustment shall be subject to
Customer's approval and funding.
13. TERM.
This Agreement will commence on the Effective Date and will continue in
effect for a period of four (4) years or for the period of any
incomplete SOW in existence on the expiration date, whichever is later,
unless amended to establish a later expiration date by
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<PAGE>
a written agreement signed by both parties, or until terminated as
provided in this Agreement.
14. TERMINATION.
14.1. Cisco may terminate this Agreement or any individual SOW at any
time, with or without cause, by giving ten (10) days written notice
to Subcontractor. In the event of a termination due to breach by
Subcontractor of this Agreement or any SOW, Cisco may, in its sole
discretion, offer Subcontractor the opportunity to cure within the
ten (10) day notice period. In the event of a termination or failure
to cure under this subsection, as of the tenth day after receipt of
notice of termination, Subcontractor shall immediately cease work on
the terminated matter(s), performing only efforts reasonably
necessary to wind down and preserve work that has been performed or
as specified in Section 14.4. In the event of a termination of this
Agreement, or any SOW, for any reason, Subcontractor shall be
obligated to deliver, and Cisco will be obligated to pay
Subcontractor for, only Services and Subcontractor Work Product
actually performed or prepared by Subcontractor prior to the date of
termination, and delivered to and accepted by Cisco (such acceptance
by Cisco to not be unreasonably withheld) and by Customer within a
reasonable time after the effective date of termination, consistent
with the payment terms in the SOW. Subcontractor shall also take all
actions required to protect and preserve new property in the
possession of Subcontractor in which Cisco or Customer has an
interest. Cisco may, upon notice to Subcontractor, deduct from the
amounts otherwise payable by Cisco to Subcontractor any undisputed
amounts payable by Subcontractor to Cisco.
14.2. Subcontractor may terminate this Agreement and/or any individual SOW
if Cisco breaches a material provision of this Agreement or any SOW
and fails to cure such breach within thirty (30) days of receipt of
written notice of the breach from Subcontractor.
14.3. Notwithstanding the foregoing, this Agreement and/or any SOW hereunder
may be terminated immediately by Cisco in the event of (i)
Subcontractor's breach of Subsection 2.5 (licenses and permits),
Section 3 (Confidentiality), Section 4 (Subcontractor's
Representations, Warranties and Covenants), Section 6 (Ownership and
License), Section 7 (Software License), or Subsection 19.10 (Export Law
Control), (ii) in the event of a sale of all or substantially all of
Subcontractor's assets, or transfer of a controlling interest in
Subcontractor to an unaffiliated third party or (iii) expiration or
termination of the PSA for any reason.
14.4. Notwithstanding the foregoing, upon termination of this Agreement for
any reason, Cisco reserves the right to determine whether to require
Subcontractor to complete any SOWs previously executed by Cisco and
Subcontractor. If completion is required by Cisco, Subcontractor shall
perform the relevant SOW(s) in conformance with their respective terms
and conditions, and this Agreement, including this termination section,
will continue to apply to that performance.
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14.5. Subcontractor shall, if requested by Cisco, take all reasonable steps
to achieve an orderly transition upon termination and shall, if
requested by Cisco, provide reasonable training for Cisco or third
party personnel and other support and assistance to ensure continuity
in the performance of the obligations set forth in the PSA. If the
efforts required are more than nominal transfers of residual materials
and information, Cisco will pay Subcontractor a reasonable fee for such
training and other services as may be mutually agreed by the parties;
provided, however that Subcontractor shall not refuse to provide such
training and other services prior to agreement by the parties with
respect to such fees.
14.6. Subcontractor and Cisco shall continue performing its obligations under
this Agreement while any dispute with Cisco is being resolved unless
and until this Agreement and all SOWs expire or terminate.
14.7. The rights and remedies of each party provided in this Section shall
not be exclusive and are in addition to other rights and remedies
provided at law, in equity or otherwise under this Agreement.
15. INDEMNIFICATION.
15.1. Subcontractor shall defend, indemnify and hold harmless Cisco, its
corporate affiliates and their officers, directors, employees and
agents and their successors and assigns, against and from any and all
claims, judgments, liabilities, losses, injuries, penalties, fines and
damages of every nature (including, without limitation, incidental
costs and expenses, reasonable attorney's fees, reasonable costs of
investigation and litigation, interest and penalties) to the extent
caused by the acts or failure to act of Subcontractor, its officers,
directors, employees, agents, consultants, subcontractors or vendors,
directly or indirectly arising out of or in conjunction with
Subcontractor's performance of this Agreement or related SOWs,
including without limitation failing to comply with any applicable law
or regulation or failing to obtain or maintain the validity of any
state, local or federal permit, license, or approval required for
performance of either party's obligations hereunder.
15.2. This indemnity protection includes any claims of infringement of
intellectual property rights and claims of use of confidential or
proprietary information of third parties, as provided in Section 5
hereof. In such cases, as for other indemnifiable actions,
Subcontractor will pay the costs of defense and settlement and any
costs and damages finally awarded by a court, arbitrator, mediator, or
the other decision making authority of competent jurisdiction against
Cisco. If such a claim is made or appears likely to be made,
Subcontractor may procure the right for Cisco to continue using the
allegedly infringing item, may modify the item or may replace it. If
use of the alleged infringing item by Cisco or a Customer is enjoined,
and Subcontractor determines that none of these alternatives is
reasonably available, Subcontractor will take back the infringing item
and refund its depreciated value, and replace the item or re-perform
the affected work with non-infringing items. The rights and remedies of
Cisco provided in this Section shall not be Cisco's exclusive remedy
and are in addition to all ocher rights and remedies of Cisco provided
at law, in equity or otherwise.
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<PAGE>
Subcontractor shall not settle any claims under this Section 15 without
Cisco's prior written consent. Cisco shall reasonably cooperate with
Subcontractor, at Subcontractor's expense, in the defense of any claims
under this Section 15.
16. CONSEQUENTIAL DAMAGES WAIVER
EXCEPT FOR LIABILITY ARISING OUT OF OR IN CONNECTION WITH
SUBCONTRACTOR'S BREACH OF SECTION 3 (CONFIDENTIALITY), SECTION 6
(OWNERSHIP AND LICENSE) ) OR SECTION 7 (SOFTWARE LICENSE) OR SECTION
8.10 (EXPORT LAW CONTROL) OR ANY OTHER BREACH OF CISCO'S PROPRIETARY
RIGHTS UNDER THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY OR ITS
SUPPLIERS BE LIABLE TO THE Old PARTY FOR ANY PUNITIVE, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS OR LOST DATA, OR ANY
OTHER INDIRECT DAMAGES AS A RESULT OF A BREACH OF THIS AGREEMENT EVEN
IF SUCH PARTY OR ITS SUPPLIERS HAVE BEEN INFORMED OF THE POSSIBILITY
THEREOF. Payments based on the indemnification obligations of
Subcontractor shall be considered direct damages and are not subject to
the foregoing waiver of consequential damages without regard to the
nature of the third party claim giving rise to the indemnification
obligation.
17. INSURANCE.
17.1. Subcontractor shall at all times during the term of this Agreement and
at its own expense provide and maintain, and shall require each
subcontractor (regardless of tier) to provide and maintain, in effect
those insurance policies and minimum limits of coverage as designated
below or such additional policies or higher amount as required (and
subject to any additional terms) as are required by the PSA, and any
other insurance required by an SOW or by law in any state where
Subcontractor or its subcontractor(s) (regardless of tier) provides
Services under this Agreement, in insurance companies with an A.M.
Best's Insurance Rating of A:VIII or better or otherwise acceptable to
Cisco, and will comply with all those requirements as stated herein. In
no way do these minimum requirements limit the liability assumed
elsewhere in this Agreement.
17.1.1. Workers' Compensation and Employers Liability Insurance.
Workers' Compensation insurance shall be provided as required
by any applicable law or regulation and, in accordance with
the provisions of the laws of the nation, state, territory or
province having jurisdiction over Subcontractor's employees.
Employers Liability insurance shall be provided in amounts not
less than $1,000,000. If there is an exposure to injury of
Subcontractor's employees under the US Longshoremen's and
Harbor Workers' Compensation Act, the Jones Act or under laws,
regulations or statutes applicable to maritime employees,
coverage shall be included for such injuries or claims.
17.1.2. General Liability Insurance. Subcontractor shall carry a
policy of Commercial General Liability or Public Liability
insurance covering all operations by or on behalf of
Subcontractor arising out of or connected with
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<PAGE>
this Agreement providing insurance for bodily injury liability
and property damage liability for the limits of liability
indicated below and including but not limited to coverage for:
o premises and operations
o products-completed operations
o contractual liability (including advertising and
personal injury) insuring the obligations assumed by
Subcontractor in this Agreement
o broad form property damage (including completed
operations) personal injury liability (with deletion
of the exclusion for liability assumed
o under contract)
o independent contractor's protective liability
The limits of liability shall not be less than:
$1,000,000 each occurrence combined single limit (for bodily
injury and property damage)
$2,000,000 general aggregate
17.1.3. AUTOMOBILE LIABILITY INSURANCE. Subcontractor shall carry
Business Automobile Liability insurance, including bodily
injury and property damage for all vehicles used in the
performance of Subcontractor's SOWs under this Agreement,
including but not limited to all owned, hired and non-owned
vehicles. The limits of liability shall be $1,000,000
combined single limit for each accident or whatever is
required by statute, whichever is greater.
17.1.4. ERRORS AND OMISSIONS LIABILITY INSURANCE (PROFESSIONAL
LIABILITY). Subcontractor shall provide evidence of insurance
for design and professional liability evidencing coverage with
a limit of not less than $2,000,000 per claim and $5,000,000
in the aggregate.
17.1.5. UMBRELLA LIABILITY AND/OR EXCESS LIABILITY INSURANCE.
Subcontractor shall carry Umbrella Liability and/or Excess
Liability insurance for not less than the following limits in
excess of the limits provided by the Subcontractor's
Employer's Liability, Commercial General Liability, and
Automobile Liability insurance policies. The Umbrella/Excess
policy shall not contain an exclusion for contractual
liability.
$5,000,000 each occurrence (combined single limit for bodily
injury and property damage)
$10,000,000 general aggregate
17.1.6. Subcontractor shall continue to maintain liability insurance
for the products-completed operations hazard and for the
errors and omissions hazard for three years following
completion of and acceptance of the Services and
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Subcontractor Work Product by Cisco. Subcontractor shall
furnish Certificates of Insurance annually to Cisco at the
beginning of each of these subsequent three years as evidence
of this required insurance.
17.1.7. Cisco, its officers, directors, employees and agents shall be
named as Additional Insureds for General Liability and
Excess/Umbrella liability policies above. The policy(s) shall
be endorsed to stipulate that Subcontractor's insurance shall
be primary insurance and that any other insurance maintained
by Cisco shall be excess only and non-contributing.
17.1.8. Certificates of Insurance shall be furnished by Subcontractor
to Cisco before work on any Services or Subcontractor Work
Product are commenced hereunder by Subcontractor and thirty
(30) days prior to policy renewal. The Certificates of
Insurance shall provide that there will be no cancellation or
non-renewal of coverage without thirty (30) days prior written
notice to Cisco. Copies of the endorsements required hereunder
shall be furnished with the certificates. If reasonably
requested by Cisco, a certified copy of the actual policy(s)
with appropriate endorsement(s) shall be provided to Cisco.
17.1.9. If Subcontractor does not comply with the insurance
requirements of this Section, Cisco may, at its option,
provide insurance coverage to protect Cisco and Subcontractor
and charge Subcontractor for the cost of that insurance. The
required insurance shall be subject to the approval of Cisco,
but any acceptance of insurance certificates by Cisco shall
not limit or relieve Subcontractor of the duties and
responsibilities assumed by it under this Agreement.
17.1.10. Except where prohibited by law, Subcontractor does hereby and
its insurers and its subcontractor(s), consultants, suppliers,
and agents (regardless of tier) and their respective insurers
do hereby, waive all rights of recovery or subrogation against
Cisco, its affiliates and their respective officers,
directors, employee, agents, and insurers. Subcontractor shall
cause its subcontractor(s), consultants, suppliers and agents
(regardless of tier) and their respective insurers to
acknowledge and agree to such waiver and shall provide Cisco
with a copy of such waiver.
17.1.11. Subcontractor shall obtain insurance or shall reimburse Cisco
or Customer, as appropriate, for loss or damage to any
Cisco-owned or Customer-owned property in the care, custody,
or control of Subcontractor, for all losses including, but not
limited to theft, loss, misappropriation or destruction caused
by Subcontractor, its employees, agents, members or
consultants whether intentional or through negligence.
17.1.12. In the event Subcontractor utilizes the services of
subcontractors of any type to perform the Services
contemplated hereunder, Subcontractor shall require from or
provide for all subcontractors the same minimum insurance
17
<PAGE>
requirements detailed above. Cisco reserves the right to
request copies of subcontractor certificates and/or certified
copies of insurance policies from Subcontractor when deemed
necessary.
18. INJUNCTIVE RELIEF.
The parties agree unauthorized use of Confidential Information,
Subcontractor Work Product, or any information contained therein could
irreparably diminish the value to Cisco of its trade secrets or
proprietary information such that Cisco will have no adequate remedy in
damages. Therefore, if Subcontractor breaches any of its
confidentiality obligations hereunder, Cisco shall be entitled to
equitable relief to protect its interests therein, including but not
limited to injunctive relief, as well as monetary damages.
19. GENERAL.
19.1. NOTICES. All notices intended for the parties shall be effective if
sent to their respective addresses set forth in the preamble to this
Agreement; if to Cisco, Attention: Senior Vice President, Customer
Advocacy; if to Subcontractor, Attention: Kimberly King. Notices
under this Agreement will be sufficient only if personally
delivered, delivered by a major commercial rapid delivery courier
service with next business day delivery and tracking capabilities
and costs prepaid, or mailed by prepaid certified or registered
mail, return receipt requested, to a party at its address first set
forth in this Agreement. If not received sooner, notices by mail
shall be deemed received three (3) days after deposit in the U.S.
mails.
19.2. AUDIT. Subcontractor shall maintain accurate records of all amounts
billable to and payments made by Cisco hereunder in accordance with
recognized accounting practices and the requirements of the PSA. Cisco
shall have the right to audit any and all records of Subcontractor
relating to this Agreement and any SOW hereunder, including all
documents related to Subcontractor's compliance with Sections 2.5, 2.9,
4.2 and employee timecards upon reasonable notice, during business
hours and with minimal disruption to Subcontractor's business.
Subcontractor agrees that such records will be available for audit by
Cisco or its agents during normal business hours upon reasonable
notice. Customer shall have the right to audit the records and
operations of Subcontractor in accordance with the applicable
provisions of the PSA; provided that Subcontractor is furnished with
the applicable portions of the PSA prior to entry into an SOW.
19.3. CHOICE OF LAW. The validity, interpretation, and performance of this
Agreement shall be controlled by and construed under the laws of the
State of California, United States of America, as if performed
wholly within the state and without giving effect to the principles
of conflicts of laws. The parties specifically disclaim the UN
Convention on Contracts for the International Sale of Goods.
19.4. NO WAIVER. No waiver of rights under this Agreement or any SOW
hereunder by either party shall constitute a subsequent waiver of this
or any other right under this Agreement or any SOW.
18
<PAGE>
19.5. ASSIGNMENT. Neither this Agreement nor any rights or obligations under
this Agreement (nor any SOW hereunder), other than monies due or to
become due, shall be assigned or otherwise transferred by Subcontractor
(by operation of law or otherwise) without the prior written consent of
Cisco. Cisco shall have the right to assign all or part of this
Agreement without Subcontractor's approval. This Agreement and any SOW
shall bind and inure to the benefit of the successors and permitted
assigns of the parties.
19.6. ILLEGALITY. In the event that any of the terms of this Agreement or any
SOW hereunder or the performance of any obligation by either party
thereunder becomes or is declared to be illegal by any court of
competent jurisdiction or other governmental body, such term(s) shall
be null and void and shall be deemed deleted from this Agreement or the
SOW. All remaining terms of this Agreement or the SOW shall remain in
full force and effect. Notwithstanding the foregoing, if this paragraph
becomes applicable and, as a result, the value of this Agreement or any
SOW is substantially impaired for either party, then the affected party
may terminate this Agreement or the SOW by written notice to the other.
19.7. ATTORNEYS' FEES. In any suit or proceeding between the parties redating
to this Agreement or any SOW hereunder, the prevailing party will have
the right to recover from the other its costs and reasonable fees and
expenses of attorneys, accountants, and other professionals incurred in
connection with the suit or proceeding, including costs, fees and
expenses upon appeal, separately from and in addition to any other
amount included in any judgment in its favor issued by a court or other
tribunal or decision maker of competent jurisdiction. This provision is
intended to be severable from the other provisions of this Agreement,
and shall survive and not be merged into any such judgment.
19.8. NO AGENCY. Neither party has the right or authority to, and shall not,
assume or create any obligation of any nature whatsoever on behalf of
the other party or bind the other party in any respect whatsoever.
19.9. SURVIVAL. Sections 3, 4, 5, 6, 14, 15, 16, 17.1.6, 17.1.10, 17.2, 18
and 19 shall survive termination or expiration of this Agreement.
19.10. EXPORT LAW CONTROL
19.10.1. Subcontractor hereby acknowledges that the Services,
Subcontractor Work Product, Results, Cisco products and
technology or direct products thereof (hereafter referred to
as "Products and Technology"), supplied by Cisco or used or
created by Subcontractor under this Agreement are subject to
export controls under the laws and regulations of the United
States (U.S.). Subcontractor shall comply with such laws and
regulations and agrees not to export, re-export or transfer
Products and Technology without first obtaining all required
U.S. government authorizations or licenses. Cisco and
Subcontractor each agree to provide the other such information
and assistance as may reasonably be required by the other in
connection with securing such authorizations or licenses, and
to take timely action to obtain all required support
documents.
19
<PAGE>
19.10.2. Subcontractor hereby certifies that none of the Products and
Technology supplied by Cisco or used or created by
Subcontractor under this Agreement will be exported,
re-exported, or otherwise transferred by Subcontractor:
(i) to a U.S. embargoed or highly restricted destination,
(15 United States Code of Federal Regulations ("CFR")
Part 746)
(ii) for use by or for any military end-user, or in any
military end-use located in or operating under the
authority of any country identified in Country Group
D1 under 15 CFR, Supplement No. 1 to Part 740, (15
CFR Part 740)
(iii) to, or made available by Subcontractor for use by or
for, any entity that is engaged in the design,
development, production, stockpile or use of nuclear,
biological or chemical weapons or missiles, (15 CFR
Part 744)
(iv) to parties on any of the U.S. Government's lists of
denied persons, (15 CFR Part 764)
without first obtaining all required U.S. Government authorizations or
licenses.
Subcontractor's obligation under this Section 19 shall survive the
expiration or termination of this Agreement. Subcontractor agrees to
maintain a record of exports, re-exports, and transfers of the Products
and Technology for five years and to forward within that time period
any required records to Cisco or, at Cisco's request, the U.S.
Government. Subcontractor agrees to permit audits by Cisco or the U.S.
Government as required under the regulations to ensure compliance with
this Agreement.
19.11. MISREPRESENTATION WARRANTY. Subcontractor hereby agrees to indemnify
Cisco for the cost of satisfying any warranties made by Subcontractor
to Customer in performance of this Agreement or any SOW hereunder, and
for any representation or misrepresentation regarding Cisco's
reputation or Cisco's products.
19.12. FORCE MAJEURE. Neither party shall be liable for any delay or failure
in performance due to acts of God, earthquake, flood, riots, fire,
epidemics, war or terrorism (a "Force Majeure Event"). Each party shall
immediately notify the other party of the occurrence of Force Majeure
Event affecting such party and shall use all reasonable efforts to !
recommence performance as soon as possible. The obligations and rights
of the excused party shall be extended on a day-to-day basis for the
time period equal to the period of the excusable delay.
19.13. ENTIRE AGREEMENT. This Agreement, together with the terms of the PSA
with which Subcontractor must comply pursuant to this Agreement and all
SOWs expressly incorporated herein, is the complete agreement between
the parties hereto concerning the subject matter of this Agreement and
replaces any prior oral or written communications between the parties,
and expressly supersedes that Professional Services Subcontract
Agreement between the parties dated November 24, 1998 and such
agreement shall be terminated as of the date hereof and be of no
further force or effect. There are no
20
<PAGE>
conditions, understandings, agreements, representations, or warranties,
expressed or implied, which are not specified herein. This Agreement
may only be modified by a written document executed by the parties
hereto.
19.14. NO THIRD PARTY BENEFICIARIES. Except as expressly set forth herein,
nothing expressed or referred to in this Agreement shall be construed
to give any person or entity other than the parties to this Agreement
any legal or equitable right, remedy, or claim under or with respect to
this Agreement or any provision of this Agreement. This Agreement and
all of its provisions and conditions are for the sole and exclusive
benefit of the parties to this Agreement.
21
<PAGE>
Exhibit 20(B)
EXHIBIT A
CISCO SYSTEMS
[LOGO](R)
- --------------------------------------------------------------------------------
PROFESSIONAL SERVICES SUBCONTRACT (PSS) STATEMENT OF WORK
- --------------------------------------------------------------------------------
This Statement of Work ("SOW") is made and entered into between Cisco Systems,
Inc., a California corporation, with offices at 170 West Tasman Drive, San Jose,
California 95134 ("Cisco") and ___________________________, a __________
corporation, with offices at ___________ ("Subcontractor"). This SOW is governed
by, incorporated into, and made part of the terms of the
___________________________ ("Agreement") signed between Cisco and
Subcontractor. All terms used and not otherwise defined shall have the meaning
given such terms in the Agreement.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have caused this SOW to be duly executed.
CISCO SYSTEMS INC. _________________________________________
By:________________________________ By:______________________________________
Name:______________________________ Name:____________________________________
Title:_____________________________ Title:___________________________________
Date:______________________________ Date:____________________________________
1. PROJECT SCOPE. This Statement of Work, together with the Services,
functions and responsibilities of Subcontractor set forth in the Agreement
shall define the scope of the Services and the Subcontractor Work Product
("Services") that Subcontractor shall provide under the terms of the
Agreement.
The name of the project (where applicable) is:_______________("Project").
2. SUBCONTRACTOR PERSONNEL.
3. SUBCONTRACTOR RESPONSIBILITIES.
4. CISCO'S RESPONSIBILITIES.
4.1 Cisco shall designate a person to whom all communications may be addressed
and who has the authority to act on all aspects of the Services. Such
person shall be identified below.
-22-
<PAGE>
4.1.1 Unless otherwise agreed to by the parties, Cisco shall use
reasonable efforts to respond within [two (2)] business days of
Subcontractor's request for documentation or information needed for
the Project.
5. SUBCONTRACTOR WORK PRODUCT. The following items shall be delivered as part
of the Project (the "Deliverables"):
6. DURATION OF WORK/SCHEDULE. Services shall commence on ____________ and be
completed no later than ________.
7. COMPLETION CRITERIA. The Project will be considered complete upon
submission of the Subcontractor Work Product to Cisco and Cisco's written
final acceptance thereof.
8. CHANGE MANAGEMENT PROCEDURES.
8.1 In the event it is necessary to change this SOW other than as provided in
Section 12 of the Agreement, the following procedure will be used:
8.1.1 A change request document ("Change Request") will be executed by the
parties describing the nature of the change, the reason for the
change, and the effect the change will have on the scope of work,
which may include changes to the Subcontractor Work Product. Parties
will determine the additional charges, if any.
8.1.2 A Change Request may be initiated by either party for any material
changes to an applicable SOW. The requesting party will review the
proposed change with the other party, and the appropriate authorized
representatives of the parties will sign a mutually acceptable
Change Request, indicating the acceptance of the changes by the
parties.
8.1.3 Upon execution of the Change Request, said Change Request will be
incorporated into and made a part of the applicable SOW.
8.2 Whenever there is a conflict between the terms and conditions set forth in
a Change Request and those set forth in the SOW or previous Change
Request, the terms and conditions of the most recent Change Request shall
prevail.
9. FEES AND PAYMENT.
9.1 The aggregate fee for the services described herein is not to exceed
US$__________. Invoices should be sent to: Cisco Systems, Inc., PO Box
641570, San Jose, CA 95164-1570, Attn: Accounts Payable with a copy to the
Cisco Primary Contact listed below.
9.2 The individuals who will provide Services pursuant to this SOW are listed
in the following chart (the "Project Staff"), along with the category of
each such individual for purposes of determining fees pursuant to Section
9 of the Agreement and the estimate hours which such individual will work
in providing Services. Except to the extent required on an emergency
basis, Subcontractor shall not replace or reassign a member of the Project
Staff without the prior written consent of Cisco.
-23-
<PAGE>
Individual Resource Category Estimated Hours
10. PRIMARY CONTACTS
_____________________________ __________________________________
Cisco Systems, Inc. __________________________________
170 West Tasman Drive __________________________________
San Jose, CA 95134 __________________________________
___________________(phone) __________________________________
___________________(fax) __________________________________
-24-
<PAGE>
EXHIBIT B
CISCO SYSTEMS
[LOGO](R)
- --------------------------------------------------------------------------------
PROFESSIONAL SERVICES SUBCONTRACT (PSS)
- --------------------------------------------------------------------------------
Cisco Systems, Inc.
Year 2000 Compliance Agreement
Cisco Compliance Agreement Number: ________
This YEAR 2000 COMPLIANCE AGREEMENT ("Agreement") is made and entered into as of
this 13th day of May, 1999, (the Effective Date) by and between Cisco Systems,
Inc., a California Corporation, with offices at 170 W, Tasman Drive, San Jose,
California 95134 ("Cisco") and Predictive Systems, Inc. a Delaware corporation,
with offices at 145 Hudson Street, New York, NY ("Primary Provider").
This Agreement assures Cisco that the Products purchased by Cisco from Provider
are compliant to all aspects of year 2000 processing and that Provider has a
year 2000 compliance program established to verify and support its Products and
internal processes.
1. DEFINITIONS
1.1 "Software Product(s)" shall mean any level of software including, but not
limited to, microcode, firmware, operating systems, application programs,
files and databases which may be provided by Provider.
1.2 "Product(s)" shall mean any materials, services, non-software products,
software products, or licensed products.
1.3 "Provider" shall mean any developer, vendor, supplier or other entity that
provides materials, services, non-software products, software products, or
licensed products to Cisco, including the Primary Provider.
1.4 "Four Digit Format" shall mean the format which represents all four digits
of the calendar year. The first two digits represent the century and the
last two digits represent the year within the century (e.g. "1996" is
represented as "1996").
1.5 "Leap Year" shall mean the year during which an extra day is added in the
calendar month, February. Leap Year occurs in all years divisible by 400
or evenly divisible by 4 and not evenly divisible by 100. For example,
1996 is a Leap Year since it is divisible by 4 and not evenly divisible by
100. The year 2000 is a Leap Year since it is divisible by 400.
-25-
<PAGE>
1.6 "Year 2000 Compliant" shall mean all calendar year representations used
within the Products which, when operated (including, but not limited to,
arithmetic, comparison and sorting operations) before, during and after
the actual calendar year 2000 AD shall not produce subsequent operations
and/or generate output which yield results in variance with the normal
course of operations of the Product or error conditions which are the
direct result of the use of a calendar year representation. Products will
process calendar dates (including, but not limited to, arithmetic,
comparison and sorting) using a Four Digit Year Format. Products will
correctly process calendar dates for Leap Year. Data which is processed by
Year 2000 Compliant Products will be compatible between Products which are
not Year 2000 Compliant. In addition, the Year 2000 Compliant Product
shall continue to be in compliance with the Product's specification and
will continue to perform its functionalities before, during and after the
year 2000.
2. REPRESENTATION AND WARRANTIES
Provider represents and warrants that Provider's Products that are supplied to
Cisco and Provider's internal processes, including, but not limited to,
Provider's manufacturing, purchasing and shipping processes ("Processes"), meet
the following Year 2000 standard:
2.1 General. Provider's Products and Processes shall:
(a) Adherence. Comply with the above listed year 2000 compliance
definition as stated in section 1.6.
(b) General Integrity. Products will accurately process date/time
calculations (including, but not limited to, calculating, comparing,
and sequencing) from, into and between the twentieth and
twenty-first centuries, between the years 1999 and 2000, and during
a Leap Year.
(c) Date Integrity. All manipulations of time-related data (dates,
duration, days of week, etc.) will produce desired results for all
valid date values within the application domain.
(d) Explicit Century. Date elements in interfaces and data storage
permit specifying century to eliminate date ambiguity.
(e) Implicit Century. For any date element represented without century,
correct century is unambiguous for all manipulations involving that
element.
(f) Interfacing. Year 2000 Compliant Products, when used in combination
with other year 2000 compliant products, shall accurately process
date/time provided that such other products properly exchange
date/time data with it.
2.2 Additional Provisions.
(a) The Product will (i) perform in accordance with the specifications
and related documentation provided by Provider (and will achieve any
function described therein), and (ii) be free from defects in
materials, workmanship or design even
-26-
<PAGE>
after any modifications to make such Product Year 2000 compliant.
Provider will promptly correct or replace (at its option) any
defective Product.
(b) Provider has established a year 2000 compliance program that
includes the year 2000 compliance verification of Product and
Processes, a recovery plan should year 2000 issues arise and has
verified the year 2000 compliance of Provider's suppliers.
(c) Any exceptions to the above are set forth below.
Exceptions: ____________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
3. AUDIT
Cisco has the right, at any time during the term of this Agreement and upon
reasonable notice, to review Provider's compliance program and Processes. Such
audit may include, but is not limited to, on-site testing procedures including
the possibility of a live demonstration, documentation, reports and verification
that Provider is obtaining proof of Year 2000 Compliance of Provider's
suppliers.
4. TERM
The Year 2000 Compliance warranty set forth herein shall begin as of the date of
the Product purchase agreement and shall continue into and through January 31,
2001.
5. GOVERNING LAW
The terms and conditions of the Agreement shall be governed by the laws of the
State of California. The parties agree to submit to the jurisdiction of the
state or federal court located in Santa Clara County, California.
6. ORDER OF PRECEDENCE
This Agreement shall be controlling over any additional, inconsistent or
conflicting terms of any purchase order, confirmation, invoice, acknowledgment,
release, acceptance or other written correspondence, even if accepted in writing
by both parties.
-27-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
CISCO SYSTEMS, INC. PROVIDER
Signature /s/ [ILLEGIBLE] Signature /s/ [ILLEGIBLE]
---------------------------- ---------------------------
Name (printed) Name (printed) Robert [ILLEGIBLE]
----------------------- ----------------------
Title Title President
-------------------------------- -------------------------------
Date Date 5/13/99
--------------------------------- --------------------------------
-28-
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
CISCO SYSTEMS
[LOGO](R)
Professional Services' Statement of Work
For
PREDICTIVE SYSTEMS
145 Hudson Street
Sixth Floor
New York, New York 10013
Master Agreement Number: PREDICTIVE SYSTEMS_1999_1
SOW Number: Predictive_SOW_1999_1000.doc
Revision Number: 003
- --------------------------------------------------------------------------------
Prepared by: [****] 1
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
CISCO SYSTEMS
[LOGO](R)
- --------------------------------------------------------------------------------
Statement of Work for Equipment Installation and Project Management Services
- --------------------------------------------------------------------------------
This Statement of Work ("SOW") for the development of the ZoomTown Network
Operating Center ("NOC") is made and entered into between between Cisco Systems
Inc., a California corporation, with offices at 170 West Tasman Drive, San Jose,
California 95134 ("Cisco") and Predictive Systems, Inc., Inc., a New York
corporation, with offices at 145 Hudson Street, Sixth Floor, New York, NY 10013
USA ("Subcontractor") as of the date last written below ("Effective Date").
This SOW is governed by, incorporated into, and made part of the Professional
Services Subcontract Agreement ("Agreement") between Cisco and Subcontractor.
The terms of this SOW is limited to the scope of this SOW and shall not be
applicable to any other SOWs which may be executed and attached to the
Agreement.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have caused this SOW to be duly executed.
CISCO SYSTEMS, INC. PREDICTIVE SYSTEMS, INC.
By: By:
--------------------------- -----------------------------
Name: Name:
------------------------- ---------------------------
Title: Title:
------------------------ --------------------------
Date: Date:
------------------------- ---------------------------
1. PROJECT SCOPE.
This Statement of Work defines the Services and the Deliverables that
Subcontractor shall provide to Cisco and Cisco's Customer under the terms
of the Agreement ("Services"). Services shall be provided during normal
hours of business (Monday through Friday, 8:00 a.m. to 5:00 p.m., local
time or as otherwise agreed to in a written schedule, excluding Cisco
observed holidays as outlined below for the 1999 calendar year).
- --------------------------------------------------------------------------------
Prepared by: [****] 2
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
Subcontractor will provide to Cisco's customer the appropriate number of project
engineers throughout both phases. These technical human resources will be
utilized to [****]. The services will be provided 40 hours per week at the
location specified in Section 1.1, during normal hours of business (Monday
through Friday, 8:00 a.m. to 5:00 p.m.), local time or as otherwise agreed to
in a written schedule, excluding Cisco observed holidays as outlined below
for the 1999 calendar year).
[****]
Cisco Systems' 1999 US Holiday Schedule
---------------------------------------
Monday, July 5, 1999 Day after July 4
Monday, September 6, 1999 Labor Day
Thursday, November 25, 1999 Thanksgiving Day
Friday, November 26, 1999 Day after Thanksgiving Day
Friday, December 24, 1999 Christmas Eve Day
Friday, December 31, 1999 New Year's Eve Day
- --------------------------------------------------------------------------------
Prepared by: [****] 3
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
Subcontractor shall provide Services (as described in Section 4 hereof)
for the following Customer site(s):
1.1 Location:
Primary Location: [****]
Address: [****]
Contact: [****]
Telephone Number: [****]
Fax Number: [****]
E-mail Address: [****]
2. SERVICES AND DELIVERABLES:
The following shall be delivered to Customer:
<TABLE>
<CAPTION>
PHASE ONE (1)
- --------------------------------------------------------------------------------
HRS PRODUCT CODE SERVICE DESCRIPTION HOURLY RATE EXTENDED COST
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
160 BS-PMSP-Milestone [****] $175 $28,000
- --------------------------------------------------------------------------------
240 BS-PMSP-Milestone [****] $175 $42,000
- --------------------------------------------------------------------------------
360 BS-PMSP-Milestone [****] $175 $63,000
- --------------------------------------------------------------------------------
80 BS-PMSP-Milestone [****] $175 $14,000
- --------------------------------------------------------------------------------
120 BS-PMSP-Milestone [****] $175 $21,000
- --------------------------------------------------------------------------------
Total $168,000
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PHASE ONE (1)
- --------------------------------------------------------------------------------
HRS PRODUCT CODE SERVICE DESCRIPTION HOURLY RATE EXTENDED COST
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
240 BS-PMSP-Milestone [****] $175 $42,000
- --------------------------------------------------------------------------------
480 BS-PMSP-Milestone [****] $175 $84,000
- --------------------------------------------------------------------------------
160 BS-PMSP-Milestone [****] $175 $28,000
- --------------------------------------------------------------------------------
240 BS-PMSP-Milestone [****] $175 $42,000
- --------------------------------------------------------------------------------
160 BS-PMSP-Milestone [****] $175 $28,000
- --------------------------------------------------------------------------------
160 BS-PMSP-Milestone [****] $175 $28,000
- --------------------------------------------------------------------------------
80 BS-PMSP-Milestone [****] $175 $14,000
- --------------------------------------------------------------------------------
Total $266,000
- --------------------------------------------------------------------------------
</TABLE>
3. DURATION OF WORK/SCHEDULE:
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 4
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
4. RESPONSIBILITIES OF THE PARTIES:
PROJECT PHASE(S) ONE AND TWO
4.1 Subcontractor(s) shall be responsible for the following:
4.1.1 Provide a point of contact for all support issues within the
scope of the project.
4.1.2 Attend regular meetings as agreed upon with the Cisco and
Cisco's customer in Cincinnati.
4.1.3 Ensure that all agreed upon project deliverables are completed
with a high degree of quality and meet Customer expectations.
4.1.4 Plan and manage Cisco contracted on-site activities and
resources.
4.1.5 Confirm project dates and times to Cisco Project Manager and
Cisco's customer.
[****]
4.5 Maintenance Procedures.
4.5.1 Determine and document NOC role in network and management
systems maintenance, under the current and enhanced EMS
before they occur.
- --------------------------------------------------------------------------------
Prepared by: [****] 5
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
4.7 External Interfaces.
4.7.1 [****]
4.7.2 Interface with Engineering.
4.7.3 [****]
4.7.4 Interface with Management.
4.7.5 Interface with end users.
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 6
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 7
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 8
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 9
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared By: [****] 10
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 11
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 12
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
- --------------------------------------------------------------------------------
Prepared by: [****] 13
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
[****]
4.38.2 Status Reports.
Subcontractor will provide a weekly status report in electronic format to the
Cisco's Project Manager. The report form will be brief, listing any items that
were completed that week and the open items for the next week. The purpose of
the reports is to provide weekly information on the status of the project and
any outstanding issues from the week. The reports will be available on Monday
morning.
- --------------------------------------------------------------------------------
Prepared by: [****] 14
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
4.38.3 Status Meetings.
Cisco Systems will hold weekly status meetings with its Customer and
Subcontractor on the overall project. The meeting should be held at the same
time and day every week (the time and day need to be determined). The meeting
will be to review any work that was performed by Cisco and the Subcontractor's
team and review the open items list of work that is scheduled for the next week.
This meeting will also provide a platform for reviewing any new issues or
additional project requirements.
4.39 Cisco shall be responsible for the following:
4.39.1 Designate a single point of contact to whom all Subcontractor
communications may be addressed and who has the authority to
act on all aspects of the services. Such person shall be
identified below. Such contact shall be available during
normal hours of business (Monday through Friday 8:00a.m. to
5:00 p.m., local time or as otherwise agreed to in a written
schedule within this SOW, excluding Cisco observed holidays
as indicated in Section 1).
4.39.2 Attend regular meetings as agreed upon with Subcontractor and
Customer. Provide and maintain project meeting notes with
assigned action items, resources and time scales.
4.39.3 Provide confirmation of the scheduled activity to the
Subcontractor's designated Project Manager within five (5)
business days from the installation date(s).
4.39.4 Notify Subcontractor's Project Manager of any schedule
changes within five (5) business days of any scheduled
activity.
4.39.5 Notify Subcontractor and end-users of installation dates and
times.
4.39.6 Provide client engineering specifications to Subcontractor's
Project Manager(s), if required.
4.39.7 Inform Subcontractor's Project Manager within forty-eight
(48) hours of Customer's confirmation by general carrier of
circuit installation dates.
4.39.8 Reimburse for all travel related expenses. Must be authorized
in advance by the Cisco Program Manager for services within
the scope of work.
5. SUBCONTRACTOR WORK PRODUCT:
[****]
- --------------------------------------------------------------------------------
Prepared By: [****] 15
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
6. CHANGE MANAGEMENT PROCEDURES.
It may become necessary to amend this SOW for reasons including, but not
limited to, the following:
6.1 Customer changes to the scope of work and/or specifications for the
Services or Deliverables;
6.2 Customer changes to the IP addressing scheme.
6.3 Non-availability of resources which are beyond either party's
control; or
6.4 Environmental or architectural impediments not previously
identified.
In the event it is necessary to change the Services and/or Deliverables
contemplated by this SOW the following procedure will be followed:
Either Cisco or Customer will prepare a document describing the nature of
the change, the reason for the change, and the effect of the change on the
scope of work, which may include changes to the project schedule, Services
and/or Deliverables. The parties will negotiate any price increase or
decrease as a result of the change.
7. INVOICING and PAYMENT.
Fees for services described herein shall be for the actual number of hours
performed per month with a completed Progress Update Schedule as specified in
Section 5. Invoices should be sent to: Cisco Systems, Inc., P.O. Box 641570, San
Jose, California 95164-1570, Attention: Accounts Payable with a copy to the
Cisco Primary Contact listed below.
Subcontractor work shall not commence without an approved Cisco Purchase
Order.
8. COMPLETION. Subcontractor shall insure that the proper Customer personnel are
scheduled to review each completed Service or Deliverable upon notification of
completion by Subcontractor. Customer shall indicate its acceptance of the
Service or Deliverable by signing the Completion Certificate within five (5)
days from presentation of the completed Service or Deliverable. Services and
Deliverables will be deemed accepted if Customer fails to respond within this
five (5) day period. If a Service or Deliverable is not complete for any reason,
Customer shall provide written notification to Cisco and document that fact on
the Completion Certificate. Subcontractor shall have ten (10) days after the
receipt of such notice to correct the error given it is within Subcontractor's
scope to do so. Such time period to correct the error may be extended by mutual
consent.
9. PRIMARY CONTACTS.
Datatec Contact: [****]
Telephone Number: [****]
Facsimile Number: [****]
E-mail address: [****]
- --------------------------------------------------------------------------------
Prepared By: [****] 16
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
CISCO SYSTEMS
[LOGO](R) APPENDIX A-1
Milestone Number: 001
SERVICE COMPLETION CERTIFICATE
Pursuant to the above referenced Statement of Work (collectively, the
"Agreement") between Cisco Systems, Inc. and the undersigned, the undersigned
hereby certifies, by the signature of an authorized representative, that the
Service described has been completed in a satisfactory manner on the date
indicated below:
[****] Date
----
[****]
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] August 27, 1999
Acknowledged and Agreed:
-----------------------------------
("Subcontractor")
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
- --------------------------------------------------------------------------------
Prepared by: [****] 17
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
CISCO SYSTEMS
[LOGO](R) APPENDIX A-2
Milestone Number: 002
SERVICE COMPLETION CERTIFICATE
Pursuant to the above referenced Statement of Work (collectively, the
"Agreement") between Cisco Systems, Inc. and the undersigned, the undersigned
hereby certifies, by the signature of an authorized representative, that the
Service described has been completed in a satisfactory manner on the date
indicated below:
[****] Date
----
[****]
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] September 27, 1999
Acknowledged and Agreed:
-----------------------------------
("Subcontractor")
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
- --------------------------------------------------------------------------------
Prepared by: [****] 18
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
CISCO SYSTEMS
[LOGO](R) APPENDIX A-3
Milestone Number: 003
SERVICE COMPLETION CERTIFICATE
Pursuant to the above referenced Statement of Work (collectively, the
"Agreement") between Cisco Systems, Inc. and the undersigned, the undersigned
hereby certifies, by the signature of an authorized representative, that the
Service described has been completed in a satisfactory manner on the date
indicated below:
[****] Date
----
[****]
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] October 27, 1999
Acknowledged and Agreed:
-----------------------------------
("Subcontractor")
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
- --------------------------------------------------------------------------------
Prepared By: [****] 19
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
SOW Tracking Number: Predictive_SOW_1999_1000.doc
Description: ZoomTown.com NOC
Revision Number: 003
Creation Date: 05/14/99
Revision Date: 08/13/99
Issue Date: 08/13/99
CISCO SYSTEMS
[LOGO](R) APPENDIX A-4
Milestone Number: 004
SERVICE COMPLETION CERTIFICATE
Pursuant to the above referenced Statement of Work (collectively, the
"Agreement") between Cisco Systems, Inc. and the undersigned, the undersigned
hereby certifies, by the signature of an authorized representative, that the
Service described has been completed in a satisfactory manner on the date
indicated below:
[****] Date
----
[****]
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] To be Determined
[****] November 27, 1999
Acknowledged and Agreed:
-----------------------------------
("Subcontractor")
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
- --------------------------------------------------------------------------------
Prepared by: [****] 20
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
Convergent Phase 2 Installation
Statement of Work for WAN Network Implementation Services
This Statement of Work ("SOW") is made and entered into between Cisco Systems,
Inc., a California corporation, with offices at 170 West Tasman Drive, San Jose,
California 95134 ("Cisco") and Predictive Systems, Inc., a Deleware corporation,
with offices at 145 Hudson Street, New York, NY 10013 ("Subcontractor") as of
the date last written below ("Effective Date").
This SOW is governed by, incorporated into, and made part of the Professional
Services Subcontract (PSS) agreement executed on May 14, 1999 ("Agreement")
between Cisco and Subcontractor. This SOW shall cover the responsibilities that
Subcontractor shall deliver to Convergent Communications Services, Inc.
(Customer) acting as a contractor for Cisco.
The terms of this SOW are limited to the scope of this SOW and shall not be
applicable to any other SOWs that may be executed and attached to the Agreement.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have caused this SOW to be duly executed.
CISCO SYSTEMS INC. PREDICTIVE SYSTEMS, INC.
By:________________________________ By:______________________________________
Name:______________________________ Name:____________________________________
Title:_____________________________ Title:___________________________________
Date:______________________________ Date:____________________________________
1 PROJECT SCOPE
This Statement of Work defines the Services and associated Deliverables
("Services") that Subcontractor shall provide to Customer under the terms
of the Agreement.
1.1 Primary Customer Location Information
Network Engineering Department: [****]
Address: [****]
Primary Contact: [****]
Primary Contact Phone Number: [****]
Primary Contact After Hours Phone Number: [****]
Primary Contact Pager Number: [****]
Secondary Contact: [****]
Secondary Contact Phone Number: [****]
Secondary Contact After Hours Phone Number: [****]
Secondary Contact Pager Number: [****]
1.2 Product Type, Installation Locations and Product Quantities
Subcontractor shall provide Services (as described in Section 4
hereof) for the indicated Cisco Products at the following Customer
EPOP locations:
[****]
1
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
[****]
For each of these same Customer locations, Subcontractor shall
provide Services for the following non-Cisco equipment:
Rack 2
[****]
Rack 3
[****]
If necessary, Customer shall provide services for the following
additional non-Cisco power equipment:
Rack 1
[****]
2 SERVICES AND DELIVERABLES
Subcontractor will invoice the following Services and Deliverables in
accordance with the payment schedule set forth in Section 10 herein. The
following Services and Deliverables shall be delivered to Customer:
2
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
2.1 Services
<TABLE>
<CAPTION>
WAN NETWORK IMPLEMENTATION SERVICES
- --------------------------------------------------------------------------------
Quantity Product Code Service Description Unit Cost Extended Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5 weeks WAN Project [****] $5,000 $25,000
Manager & Project
Engineer
- --------------------------------------------------------------------------------
8 each Conduct site survey [****] $1,000 $8,000
- --------------------------------------------------------------------------------
8 trips Travel Site Surveys, [****] $1,125 $9,000
and meetings
- --------------------------------------------------------------------------------
8 each Install EPOP [****] $2,500 $20,000
equipment
- --------------------------------------------------------------------------------
8 each Second person for [****] $1,625 $13,000
heavy installation
- --------------------------------------------------------------------------------
16 trips Travel installations [****] $1,250 $20,000
- --------------------------------------------------------------------------------
1 trip Attend acceptance [****] $2,000 $2,000
tests
- --------------------------------------------------------------------------------
8 each Document EPOP [****] $1,000 $8,000
installation
- --------------------------------------------------------------------------------
TOTAL $105,000
-------------
</TABLE>
2.2 Deliverables
2.2.1 Network Installation Project Plan Not separately priced
2.2.2 Network Design Review and Not separately priced
Recommendations
2.2.3 Installation Documentation Not separately priced
for all sites
3 SCHEDULE
[****]
3
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
4 RESPONSIBILITIES OF THE PARTIES
Project Management
4.1 Subcontractor shall be responsible for the following
4.1.1 Develop a Network Installation Project Plan.
4.1.2 Provide a Project Manager who will participate in regularly
scheduled meetings and manage the Subcontractor-related
efforts.
4.1.3 Schedule and manage all site surveys.
4.1.4 Schedule and manage all installation activities within the
scope of the project.
4.2 Customer shall be responsible for the following
4.2.1 Designate a single point of contact to whom all Cisco
communications may be addressed and who has the authority to
act on all aspects of the services. Such person shall be
identified below. Such contact shall be available during
normal hours of business (Monday through Friday 8:00am to
5:00pm local time, excluding Cisco observed holidays).
4.2.2 Unless otherwise agreed by the parties, ensure that Cisco's
request for information or documentation needed for the
Project is met within two (2) business days of Cisco's
request.
4.2.3 Provide confirmation of the scheduled activity to the Cisco
Project Manager within ten (10) business days of a scheduled
rollout.
4.2.4 Notify Cisco Project Manager of any schedule changes within
ten (10) business days of any scheduled activity. Scheduling
changes and/or cancellations made after this ten (10) day
window shall be subject to Cisco's then current cancellation
penalty charge.
4.2.5 Notify the Cisco Project Manager of any hardware and/or
software upgrade activity at least sixty (60) days prior to
the scheduled activity. Scheduling changes and/or
cancellations made within ten (10) days of the original
activity date shall be subject to Cisco's re-scheduling
charge of five percent (5%).
4.2.6 Any additional warehousing costs associated with delays due
to the Customer.
4.2.7 Insure Customer's own products covered under this agreement
against loss or damage during the staging process.
4.3 Cisco shall be responsible for the following
4.3.1 Provide a single point of contact for all support issues
within the scope of the project. Such person shall be
identified in Section 11 below.
Project Engineering
[****]
4
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
[****]
4.5 Customer shall be responsible for the following
4.5.1 Provide reasonable access to Customer sites and facilities,
including where applicable, computer equipment, telecom
equipment, facilities, workspace and telephone for Cisco's
use during the project.
4.5.2 Provide adequate secured storage areas on the Customer's site
for Cisco equipment for the duration of the project.
4.5.3 When requested by Cisco, provide network physical and logical
schematics to Cisco.
4.5.4 Document and implement Customer Provided Equipment (CPE)
configuration as needed to implement the Cisco equipment.
4.5.5 Provide IP addresses and subnet masks for the new products'
network ports.
4.5.6 Provide access to gateway routers and/or modems for out of
band access.
4.5.7 Install and verify the operation of all external
communications equipment not provided by Cisco.
4.5.8 Provide a phone line and a modem and/or Internet access to a
Cisco server for software and firmware downloads.
4.5.9 Execute and deliver the WAN Unit Completion Certificate
within fifteen (15) days of notification by Cisco that a job
is complete.
4.5.10 When requested by Cisco, provide Cisco a complete and
documented network architecture prior to service
commencement.
4.5.11 When requested by Cisco, provide the Customer's building
layout, including the floor plan, cabling and power location
for all applicable sites.
Installation
4.6 Subcontractor shall be responsible for the following
4.6.1 Uncrate and/or un-box Cisco-provided equipment
4.6.2 Conduct site surveys and equipment audits for completeness
and accuracy.
4.6.3 Inventory and inspect equipment.
5
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
4.6.4 Route and install cables.
4.6.5 Attach power cords and apply power.
4.6.6 Install, initially configure and test equipment in accordance
with the documentation provided by the customer.
4.6.6.1 Initially load and minimally configure any basic
software and firmware not installed during by
Customer during staging.
4.6.6.2 Configure administrative access to EPOP equipment to
allow remaining software-based network configuration
to be performed remotely.
4.6.6.3 Verify initial configuration and remote access by
testing connectivity to Customer NOC prior to leaving
each installation site.
4.6.7 Connect available customer facilities (telco circuits,
modems, dial-up lines and CPE).
4.6.8 Troubleshoot and replace initial hardware failures relating
to the installation.
4.6.9 Be present in Customer's NOC during project acceptance
testing.
4.7 Customer shall be responsible for the following
4.7.1 Prepare the installation site.
4.7.1.1 Ensure that proper environmental conditions are met.
4.7.1.2 Ensure that equipment racks are pre-installed at the
site.
4.7.1.3 Ensure that adequate power is available at the
equipment racks.
4.7.2 Ensure that telco demarcs/ PTT NTUs and circuit IDs are
clearly identified.
4.7.3 Ensure that any new telco circuits are installed and properly
tested prior to network installation.
4.7.4 Verify that all necessary cabling is delivered and available
prior to installation.
4.7.5 Identify a local site coordinator who is responsible for the
project for each location.
4.7.5.1 Customer site coordinator or another customer
technical installation representative shall be
on-site at the installation location during the
installation process.
4.7.6 Handle delivery of equipment not provided by Cisco.
4.7.6.1 Send only the required gear to each location.
4.7.7 Specify network topology and clearly identify connectivity
requirements.
4.7.8 Provide existing network synchronization and data timing
configuration.
4.7.9 Provide voice telephone line and number (near the Cisco
product) for the installer to contact Cisco headquarters
personnel.
4.7.10 Provide and verify interface specifications and requirements.
4.7.11 Verify all distance and interference limitations of interface
cables to be used at installation.
4.7.12 Provide access to proper grounding system.
4.7.13 Provide modem line and number (near the Cisco product) for
the installer to use if needed.
4.7.14 Provide earthquake bracing if required.
4.7.15 Provide proper security clearances and/or escorts as required
to access the site for equipment installation and
maintenance.
4.7.16 Provide any special safety equipment required for the site.
4.7.17 Provide staging services in [****] for all equipment
requiring such preparation.
4.7.17.1 Equipment assembly, if required.
4.7.17.2 Initially configure equipment, where possible.
4.7.17.3 Conduct burn-in and initial testing of equipment.
[****]
6
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
4.7.17.5 Enter configurations into the tag (label) switching
controllers.
4.7.17.6 Assemble all parts and equipment for each site to
facilitate shipping.
4.7.18 Provide a detailed equipment installation list for each site.
4.7.19 Wire all cross-connect and patch panels.
4.7.20 Provide timely support for initial verification of
configurations and remote access by testing connectivity to
Customer NOC before installation team leaves each site.
5 PURCHASE ORDER ISSUANCE
Customer shall place orders for the Services defined herein by issuing a
written Purchase Order signed by an authorized representative, indicating
the following:
5.1 Services required; by reference to project SOW and task/sites
5.2 Quantity
5.3 Price
5.4 Requested service date
5.5 Bill-to address
5.6 Service-to addresses
5.7 Primary site contacts
5.8 Tax exemption certificates, if applicable
All Purchase Orders issued for the Services identified in this SOW shall
reference the SOW and the Agreement. The terms and conditions of the SOW
and the Agreement prevail regardless of any conflicting terms on the
Purchase Order, other correspondence and any and all verbal
communications. All Purchase Orders must be approved and accepted by Cisco
at San Jose, CA. In the event of a conflict between the terms and
conditions of this SOW and those in the Agreement, the terms and
conditions of the Agreement shall prevail.
6 ASSUMPTIONS
This Statement of Work and the rates/ price were prepared based on the
following key assumptions ("Assumptions"). Any deviations from these
Assumptions that arise during the Project shall be managed through the
Change Management Procedure as specified below. Parties agree that any
changes in the Assumptions may result in an adjustment in the rates/
price.
6.1 All site preparation work and other Customer responsibility tasks
will be completed prior to the start date specified in Customer's
Purchase Order. Delays caused by the lack of completed site
preparation, or failure to meet any responsibilities as specified
above on the part of Customer, will be billed at Cisco's
then-current time and materials rates. Any additional costs incurred
by Customer as a result of delays shall be the sole responsibility
of the Customer.
6.2 This Agreement does not include hardware, software or maintenance
("Product"), which must be purchased separately.
6.3 Customer's network architecture design shall not change between the
date of Customer's execution of this SOW and the completion of all
Services contemplated hereunder.
6.4 Cisco requires a lead-time of three (3) days from acceptance of a
Purchase Order from Customer to begin work.
6.5 Cisco will require a schedule extension of thirty (30) days for any
personnel change requests made by Customer.
6.6 Union labor is not required.
7
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
6.6.1 Vendor certification for engineering work within incumbent
local exchange carrier (ILEC) central offices will not be
required.
6.7 Services not covered under this SOW:
6.7.1 Maintenance on Products.
6.7.2 Unless otherwise specified in Section 4 above, any
customization of, or labor to install, software.
6.7.3 Support or replacement of Product that is altered, modified,
mishandled, destroyed or damaged by natural causes or damaged
due to a negligent or willful act or omission by Customer or
use by Customer other than as specified in the applicable
Cisco-supplied documentation.
6.7.4 Services to resolve software or hardware problems resulting
from third party products or causes beyond Cisco's control.
6.7.5 Services for non-Cisco software installed on any Cisco
Product.
6.7.6 Any hardware upgrade required to run new or updated software.
7 CHANGE MANAGEMENT PROCEDURES
It may become necessary to amend this SOW for reasons including, but not
limited to, the following:
7.1 Customer changes to the scope of work and/or specifications for the
Services or Deliverables;
7.2 Customer changes to the IP
7.3 Non-availability of resources which are beyond either party's
control; or
7.4 Environmental or architectural impediments not previously
identified.
In the event it is necessary to change the Services and/or Deliverables
contemplated by this SOW, the following procedure will be followed:
Either Cisco, Subcontractor or Customer will prepare a document describing
the nature of the change, the reason for the change, and the effect of the
change on the scope of work, which may include changes to the project
schedule, Services and/or Deliverables. The parties will negotiate any
price increase or decrease as a result of the change.
8 DURATION OF WORK/SCHEDULE
A requested Service commencement date is to be included in Customer's
Purchase Order subject to confirmation by Subcontractor and Cisco.
9 COMPLETION
Customer shall insure that the proper personnel are scheduled to review
each completed Service or Deliverable upon notification of completion by
Subcontractor. Customer shall indicate its acceptance of the Service or
Deliverable by signing the WAN Unit Completion Certificate within fifteen
(15) days from presentation of the completed Service or Deliverable.
Services and Deliverables will be deemed accepted if Customer fails to
respond within this fifteen (15) day period. If a Service or Deliverable
is not complete for any reason, Customer shall provide written
notification to Subcontractor and document that fact on the WAN Unit
Completion Certificate. Subcontractor shall have ten (10) days after the
receipt of such notice to correct the error given it is within
Subcontractor's scope to do so. Such time period to correct the error may
be extended by mutual consent.
8
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
10 PAYMENT
[****]
11 PRIMARY CONTACTS
[****]
9
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment pursuant
to Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
CISCO SYSTEMS
[LOGO](R)
Cisco PSS Agreement Number
Cisco PSS SOW Number
- --------------------------------------------------------------------------------
[ILLEGIBLE]
- --------------------------------------------------------------------------------
This Statement of Work ("SOW") is made and entered into between Cisco Systems,
Inc., a California corporation, with offices at 170 West Tasman Drive, San Jose,
California 95134 ("Cisco") and Predictive Systems Inc., a Delaware corporation,
with offices at 20 Mansell Court Suite 200 Roswell GA 30078 ("Subcontractor").
This SOW is governed by, incorporated into, and made part of the terms of the
Professional Services Subcontract ("Agreement") signed between Cisco and
Subcontractor. All terms used and not otherwise defined shall have the meaning
given such terms in the Agreement. Prior to execution the SOW format may be
refined for continuity with the applicable PSA SOW.
1. PROJECT SCOPE.
Subcontractor will provide technical consulting resources to perform tasks
[****]
--------------------------------------------------------------------------
1. [****]
2. [****]
3. Work with Cisco and Customer to understand that sufficient network
capacity exists in the design based on stated performance objectives
and traffic volumes supplied by the Customer.
4. Work with customer and Cisco to determine configuration parameters
for Cisco equipment to [****] with Cisco and Customer input.
5. Develop and/or validate upgrade plan recommendations(s) if
applicable.
6. Assist with staging, installation, configuration and testing of
equipment.
7. Assist with troubleshooting and cutover of [****].
8. Document configuration parameters as requested by Cisco Project
Manager.
--------------------------------------------------------------------------
Project Locations: [****]
Customer Contact: [****]
Address: [****]
Telephone Number: [****]
Cisco Systems Confidential Page 1
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
2. RESOURCE DESCRIPTION and RATE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TE FEDERATED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ENGINEER # OF RATE/HOUR
LEVEL ENGINEERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 $140.00 340 $47,600
- --------------------------------------------------------------------------------
$20,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Strong knowledge and experience in the following: Design, implementation
and troubleshooting of DLSW networks using STUN and Serial Tunneling. EIGRP
and IGRP routing protocols. DLSW and Dial Backup using ISDN BRI interface's
- --------------------------------------------------------------------------------
</TABLE>
3. SCHEDULE.
[****]
4. COMPLETION. [****]
5. PAYMENT. Subcontract shall invoice Cisco monthly based actual Services
performed. A Cisco representative will approve weekly time cards. The
execution of the weekly time card shall signify acceptance of the
Service or Deliverable by Cisco. Subcontractor shall include copies of
executed time cards with each monthly invoice billing. All invoices
must list the total hours worked each month. In addition, each invoice
shall list the Cisco P.O. number which was issued to fund the
requirement. Payment by Cisco shall be due 30 days from receipt of a
complete and accurate invoice.
6. CHANGE MANAGEMENT PROCEDURES.
6.1 In the event it is necessary to change this SOW other than as
provided in Section 12 of the Agreement, the following procedure
will be used:
6.1.1 A change request document ("Change Request") will be executed
by the parties describing the nature of the change, the reason
for the change, and the effect the change will have on the
scope of work, which may include changes to the Subcontractor
Work Product. Parties will determine the additional charges,
if any.
6.1.2 Either party for any material changes to an applicable SOW may
initiate a Change Request. The requesting party will review
the proposed change with the other party, and the appropriate
authorized representatives of the parties will sign the Change
Request, indicating the acceptance of the changes by the
parties.
6.1.3 Upon execution of the Change Request, said Change Request will
be incorporated into and made a part of the applicable SOW.
6.2 Whenever there is a conflict between the terms and conditions set
forth in a Change Request and those set forth in the SOW or previous
Change Request, the terms and conditions of the most recent Change
Request shall prevail.
Cisco Systems Confidential Page 2
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
7. COORDINATORS. Subcontractor and Cisco shall designate individuals to whom
all Project communications shall be addressed and who have the authority
to act on all aspects of the Project.
Customer Contact: [****] Cisco Contact: [****]
Telephone Number: [****] Telephone Number: [****]
E-mail address: [****] E-mail address: [****]
BUSINESS APPROVAL:
The requirements as specified in this SOW have been reviewed and approved
by the responsible Cisco Business representative and are hereby approved
as acknowledged by the signature(s) below:
[****] [****]
--------------------------- -----------------------------------
The terms of this SOW are limited to the scope of this SOW and shall not be
applicable to any other SOW's which may be executed and attached to the
Agreement.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have caused this SOW to be duly executed.
CISCO SYSTEMS INC. PREDICTIVE SYSTEMS INC.
By: By: [****]
---------------------------- -------------------------------
Name: Name: [****]
-------------------------- -----------------------------
Title: Title: [****]
------------------------- ----------------------------
Date: Date: [****]
-------------------------- -----------------------------
Cisco Systems Confidential Page 3
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
CISCO SYSTEMS
[LOGO](R)
- --------------------------------------------------------------------------------
PROFESSIONAL SERVICES SUBCONTRACT (PSS) STATEMENT OF WORK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PREDICTIVE SYSTEMS SERVICES FOR THE NEMOURS FOUNDATION
- --------------------------------------------------------------------------------
This Statement of Work ("SOW") is made and entered into between Cisco Systems,
Inc., a California corporation, with offices at 170 West Tasman Drive, San Jose,
California 95134 ("Cisco") and Predictive Systems Inc., a Delaware corporation,
with offices at 20 Mansell Court Suite 200 Roswell Ga 30076 ("Subcontractor").
This SOW is governed by, incorporated into, and made part of the terms of the
Professional Services Subcontract ("Agreement") signed between Cisco and
Subcontractor. All terms used and not otherwise defined shall have the meaning
given such terms in the Agreement. Prior to execution the SOW format may be
refined for continuity with the applicable PSA SOW.
This SOW is governed by, incorporated into, and made part of the Professional
Services Agreement ("Agreement") between Cisco and Customer.
The terms of this SOW are limited to the scope of this SOW and shall not be
applicable to any other SOWs which may be executed and attached to the
Agreement.
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereto
have caused this SOW to be duly executed.
CISCO SYSTEMS INC. PREDICTIVE SYSTEMS
By: By: [****]
---------------------------- -------------------------------
Name: Name: [****]
-------------------------- -----------------------------
Title: Title: [****]
------------------------- ----------------------------
Date: Date: [****]
-------------------------- -----------------------------
1. PROJECT SCOPE. This Statement of Work defines the Services and the
Deliverables that Cisco shall provide to Customer under the terms of the
Agreement ("Services").
Predictive Systems shall provide Services (as described in Sections 2-4
hereof) for the following Customer location(s):
1.1 Location Information:
[****]
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
Product Type, Installation, Location and Product quantities
- ------------------------------------------------------------------
Equipment Type QTY Location
- -------------- --- --------
- ------------------------------------------------------------------
[****] [****] [****]
- ------------------------------------------------------------------
[****] [****] [****]
- ------------------------------------------------------------------
[****] [****] [****]
- ------------------------------------------------------------------
[****] [****] [****]
- ------------------------------------------------------------------
[****] [****] [****]
- ------------------------------------------------------------------
*Note: The equipment for Ft. Myers and Pensacola Florida has not been ordered
and will require a change request to this SOW for the installations.
2. DEFINITIONS.
2.1 "Deliverables" means all works of authorship, whether in hard copy
or electronic form, including but not limited to programs, program
listings, programming tools, designs, analyses, reports, manuals,
supporting materials, test results, test scripts, recommendations
and drawings to be provided by Predictive Systems to Customer
pursuant to the terms of this SOW issued hereunder.
2.2 "Minimum Configuration File" means the configuration which allows
Cisco equipment to be installed in the Customers network.
2.3 "Services" means the services provided by Predictive Systems as
defined in this SOW.
2.4 "Site Survey" means the service provided to visit a site for the
purpose of determining the sites' readiness for installation of the
Cisco equipment.
2.5 "Staging" refers to the assembly, configuration, and testing of
Cisco equipment at the Customer NOC facility prior to shipment to
the installation site.
2.6 "Installation" means the service provided to visit a site for the
purpose of installing the equipment and attaching the WAN, ISDN
and/or dial-up circuits to the equipment.
2.7 "Cutover" means the service provided to visit a site for the purpose
of connecting the customers' application(s) devices (e.g. PBX,
router, computer, video codec) to the equipment being installed in
this SOW.
2.8 "Project Plan" means documentation to track and schedule activities
relating to the project.
2.9 "NOC", Network Operations Center, means a Customer facility staffed
with skilled technicians capable of conducting acceptance testing
using certain computer applications to configure, monitor and
diagnose Cisco equipment.
2.10 "Business Day" means 8:00 am to 8:00 pm Monday through Friday local
time, excluding Cisco observed holidays.
3. Schedule.
The Services and Deliverables will be provided to Customer in accordance with
the following milestone schedule.
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
[****] [****] [****]
- -----------------------------------------------------------------------------
4. RESOURCE DESCRIPTION and RATE.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ACCOUNT NAME NEMOURS FOUNDATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PARTNER'S NAME ENGINEER # OF RATE/HOUR HOURS TOTAL COST
LEVEL ENGINEERS REQUIRED
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PREDICTIVE SYSTEMS 1 $125.00 300 $25,000.00
INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Skill Set: 1. Strong knowledge and experience in the following:
Staging, Configuration and Installation of the
Cisco IGX product, in addition strong Project
Management skills.
- --------------------------------------------------------------------------------
</TABLE>
5. RESPONSIBILITIES OF THE PARTIES:
Remote Project Management:
5.1 Predictive Systems shall be responsible for the following:
5.1.1 Provide a single point of contact for all support issues
within the scope of the project. Such remote designated
project manager shall be identified below.
5.1.2 Develop a Network Implementation Plan.
5.1.3 Participate in a regularly schedule customer meeting.
5.1.4 Schedule and manage all pre-site inspections.
5.1.5 Schedule and manage all hardware/software installations
within the scope of the project.
5.2 Customer shall be responsible for the following:
5.2.1 Designate a single point of contact to whom all
communications may be addressed and who has the authority to
act on all aspects of the services. Such person shall be
identified below. Such contact shall be available during
normal hours of business (Monday through Friday 8:00am to
5:00pm local time [9:00am to 5:30pm local time in Europe],
excluding Cisco observed holidays).
5.2.2 Unless otherwise agreed to by the parties, ensure that
request for information or documentation needed for the
Project is met within two (2) business days of Cisco's
request.
5.2.3 Provide confirmation of the scheduled activity to the Project
Engineer within ten (10) business days of a scheduled
roll-out.
5.2.4 Notify Project Engineer of any schedule changes within ten
(10) business days of any scheduled activity. Scheduling
changes and/or cancellations made after this ten (10) day
window may be subject to Cisco's cancellation/re-visit
charge.
5.2.5 Insure Customer's own products covered under this agreement
against loss or damage during the staging process.
Remote Project Engineering:
5.3 Predictive Systems shall be responsible for the following:
5.3.1 Provide review of Customer order for completeness and
accuracy and provide recommendations.
5.3.2 Identify hardware, software and firmware revisions required.
5.3.3 Provide configuration documentation.
5.3.4 Enable appropriate Cisco software licenses if necessary.
[****]
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
5.3.5 Provide remote technical support during normal hours of
business (Monday through Friday 8:00am to 5:00pm local time
[9:00am to 5:30pm local time in Europe], excluding Cisco
observed holidays). Services provided outside of normal hours
of business shall be at Cisco's then current time and
material rates.
5.3.6 Implement [****] application if ordered by Customer.
5.3.7 Assist in the application migration and network cut-over
during normal business hours.
5.4 Customer shall be responsible for the following:
5.4.1 Provide reasonable access to Customer sites and facilities,
including where applicable, computer equipment, telecom
equipment, facilities, work space and telephone for use
during the project.
5.4.2 Provide adequate secured storage areas on the Customer's site
for Cisco equipment for the duration of the project.
5.4.3 When requested, provide network physical and logical
schematics for exclusive use of the WAN project.
5.4.4 Document and implement Customer Provided Equipment (CPE)
configuration as needed to implement the Cisco equipment
5.4.5 Provide IP addresses and subnet masks for the new product's
network port.
5.4.6 [****]
5.4.7 Install and verify the operation of all external
communications equipment not provided by Cisco.
5.4.8 [****]
5.4.9 Execute and deliver the WAN Unite Completion Certificate to
primary contact in listed in section 12 within five (5) days
of notification that a job is complete.
5.4.10 When requested, provide a complete and documented network
architecture prior to service commencement.
5.4.11 When requested, provide the Customer's building layout,
including the floor plan, cabling and power location for all
applicable sites for exclusive use of the WAN project.
Installation:
5.5 Predictive Systems shall be responsible for the following:
5.5.1 Uncrate and/or un-box Cisco provided equipment
5.5.2 Conduct site surveys and equipment audits for completeness
and accuracy.
5.5.3 Inventory and inspect the equipment.
5.5.4 Where applicable, install new equipment associated with the
upgrade
5.5.5 Attach power cord and apply power to a designated Nemours
Foundation of Florida power source.
5.5.6 Route and install Cisco provided cables.
5.5.7 Install, configure and test the additional Cisco delivered
devices in accordance with the documentation provided.
5.5.8 Connect available customer facilities (telco circuits,
modems, dial-up lines and CPE).
5.5.9 Troubleshoot and replace hardware failures relating to the
installation.
5.5.10 Be present on-site when network is placed back in production.
5.5.11 Basic installation services apply during principle period of
maintenance and principle period of service during normal
business hours. (Monday through Friday 8:00am to 5:00pm local
time [9:00am to 5:30pm local time in Europe], excluding Cisco
observed holidays).
5.5.12 Basic Cutover services can be performed between the hours of
6:00 PM Friday evening to 7:00 AM Monday morning. Cost to
provide Cutover services for the equipment covered in this
SOW allows for 1 trip per site.
5.6 Customer shall be responsible for the following:
5.6.1 Prepare the installation site--in particular, ensure that
proper environmental conditions are met and adequate power is
available.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
5.6.2 Ensure that telco demarca/ PTT NTUs and circuit ids are
clearly identified and within 10 feet of Cisco equipment.
5.6.3 Ensure that any new telco circuits are installed and properly
tested prior to network installation.
5.6.4 Verify that all necessary cabling is delivered and installed
prior to installation.
5.6.5 Install all cables external to Cisco hardware.
5.6.6 Identify a local site coordinator who is responsible for the
project for each location.
5.6.7 Handle delivery, installation, and configuration of equipment
not provided by Cisco.
5.6.8 Specify network topology and clearly identify connectivity
requirements.
5.6.9 Provide existing network synchronization and data timing
configuration.
5.6.10 Provide voice-level loss plan and dialing plan if requested.
5.6.11 Provide voice telephone line and number (near the Cisco
product) for the installer to contact Cisco headquarters
personnel.
5.6.12 Provide and verify interface specifications and requirements.
5.6.13 Verify all distance and interference limitations of interface
cables to be used at installation.
5.6.14 Provide access to proper grounding system.
5.6.15 Provide modem line and number (near the Cisco product) for
the installer to use if needed.
5.6.16 Provide earthquake bracing if required.
5.6.17 Provide proper security clearances and/or escorts as required
to access the site for equipment installation and
maintenance.
5.6.18 Provide any special safety equipment if required for the
site.
6. DURATION OF WORK/SCHEDULE.
[****]
7. PAYMENT AND INVOICING.
The Services shall be invoiced and payable monthly based on work
performed.
Payment shall be due 30 days from date of invoice.
8. CHANGE MANAGEMENT PROCEDURES:
8.1 It may become necessary to amend this Statement of Work for reasons
including, but not limited to, the following:
8.1.1 Customer's changes to the scope of work and/or specifications
for the Deliverables,
8.1.2 Customer's changes to the Implementation Plan,
8.1.3 Non-availability of resources which are beyond either party's
control; and/or,
8.1.4 Environmental or architectural impediments not previously
identified.
8.2 In the event either party desires to change this Statement of Work,
the following procedures will apply:
8.2.1 The party requesting the change will deliver a change request
document ("Change Request") to the other party. The Change
Request will describe the nature of the change, the reason
for the change, and the effect the change will have on the
scope of work, which may include changes to the Deliverables,
and the schedule.
8.2.2 A Change Request may be initiated either by the customer or
by Cisco for any material changes to the SOW. The designated
Program/Project Manager of the requesting party will review
the proposed change with his/her counterpart. The parties
will evaluate the Change Request and negotiate in good faith
the changes to the Services and the additional charges, if
any, required to implement the Change Request. If both
parties agree to implement the Change Request, the
appropriate authorized representatives of the parties will
sign the Change Request, indicating the acceptance of the
changes by the parties.
8.2.3 Upon execution of the Change Request, said Change Request
will be incorporated into, and made a part of, this SOW.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
<PAGE>
Cisco Systems, Inc. Master Agreement Number:__________
CONFIDENTIAL Statement of Work Number:__________
Project Number:__________
8.3 Whenever there is a conflict between the terms and conditions set forth in
a fully executed Change Request and those set forth in the original SOW,
or previous fully executed Change Request, the terms and conditions of the
most recent fully executed Change Request shall prevail.
9. COMPLETION. Predictive Systems shall insure that the proper personnel are
scheduled to review each completed Service or Deliverable. Predictive
Systems shall have Customer indicate its acceptance of the Service or
Deliverable by signing the WAN Unit Completion Certificate within five (5)
business days from presentation of the completed Service or Deliverable.
If a Service of Deliverable is not complete for any reason, Predictive
Systems shall have Customer provide written notification to Cisco and
document that fact on the WAN Unit Completion Certificate. Predictive
Systems shall have ten (10) days after the receipt of such notice to
correct the error. Such time period to correct the error may be extended
by mutual consent.
11. PAYMENT AND INVOICING. The Services shall be invoiced and payable monthly
based on work performed. Payment shall be due 30 days from date of
invoice.
10. PAYMENT CONTACTS
Unless otherwise specified the primary contact for the Customer shall be:
[****]
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment pursuant to
Rule 406 under the Securities Act of 1933, as amended.
