<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1999
REGISTRATION NO. 333-84045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------------------
PREDICTIVE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 13-3808483
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
--------------------------
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
RONALD G. PETTENGILL, JR. ROBERT L. BELAU
CHIEF EXECUTIVE OFFICER PRESIDENT
PREDICTIVE SYSTEMS, INC.
145 HUDSON STREET
NEW YORK, NEW YORK 10013
(212) 219-4400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. PETER B. TARR, ESQ.
BABAK YAGHMAIE, ESQ. JOSEPH E. MULLANEY III, ESQ.
BROBECK, PHLEGER & HARRISON LLP HALE AND DORR LLP
1633 BROADWAY, 47(TH) FLOOR 60 STATE STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02109
(212) 581-1600 (617) 526-6000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE (3)
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share........... 4,600,000 shares $14.00 $64,400,000 $17,904
</TABLE>
(1) Includes 600,000 shares which the underwriters have the option to purchase
to cover overallotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(3) $14,456 previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1999.
[LOGO]
4,000,000 SHARES
COMMON STOCK
Predictive Systems, Inc. is offering 4,000,000 shares of its common stock.
This is our initial public offering, and no public market currently exists for
our shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "PRDS." We anticipate
that the initial public offering price will be between $12.00 and $14.00 per
share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- -------------
<S> <C> <C>
Public Offering Price.............................................................. $ $
Underwriting Discounts and Commissions............................................. $ $
Proceeds to Predictive............................................................. $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION CAPITAL MARKETS CORP.
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
[PREDICTIVE LOGO WITH PICTURE OF NETWORK CONSULTANTS
AND THE TEXT "BUSINESS-SAVVY NETWORK CONSULTANTS".]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 8
Forward-Looking Statements................................................................................. 15
Use of Proceeds............................................................................................ 16
Dividend Policy............................................................................................ 16
Capitalization............................................................................................. 17
Dilution................................................................................................... 18
Selected Consolidated Financial Data....................................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 21
Business................................................................................................... 30
Management................................................................................................. 43
Certain Transactions....................................................................................... 53
Principal Stockholders..................................................................................... 56
Description of Capital Stock............................................................................... 58
Shares Eligible for Future Sale............................................................................ 61
Underwriting............................................................................................... 63
Legal Matters.............................................................................................. 65
Experts.................................................................................................... 65
Where You Can Find More Information........................................................................ 65
Index to Consolidated and Supplemental Financial Statements................................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS.
PREDICTIVE SYSTEMS, INC.
OUR BUSINESS
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. Using our
BusinessFirst methodology, we demonstrate the business value of technology
solutions in specific and measurable terms, thereby enabling our clients to
incorporate objective and quantifiable analysis into their technology investment
decisions. As a result, our clients can gain a clear understanding of the
benefits that they will derive from their network technology investments and a
measure of certainty regarding how their technology investments will be
translated into quantifiable improvements to their business processes.
OUR SERVICES
As an independent service provider, we provide our clients with unbiased and
vendor-neutral expertise that enables the design, implementation and management
of optimal technology solutions. We provide our services on either a project
outsource or collaborative consulting basis. Our project outsource services are
primarily based and measured against mutually agreed upon deliverables and
provide our clients with certainty of costs, delivery time and project scope.
Our collaborative consulting services enable our clients to utilize our
extensive expertise in order to extend their internal capabilities and to access
our methodologies.
In addition to these services, we have developed an innovative service model
through which we deliver our clients packaged service products, or productized
services. Our productized services 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
productized services 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
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 productized service offerings;
- continue to attract and retain highly qualified consultants;
- further increase our industry expertise; and
- expand in existing and new geographic markets.
OUR CLIENTS
We provide our services to a broad range of clients in many industries,
including communications services, financial services, network technology and
professional services. Our clients include Allied Signal, Bear Stearns,
Bloomberg, British Telecom, Cisco Systems, Lucent Technologies, Nortel Networks,
Pfizer and Qwest. These clients, in the aggregate, accounted for approximately
58.8% of our revenues for the six months ended June 30, 1999 and 52.7% of our
revenues for the year ended December 31, 1998.
RECENT DEVELOPMENTS
In September 1999, we completed the private placement of 1,378,052 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.
OUR HISTORY
We were organized as Predictive Holdings, Inc. in Delaware in February 1995.
In March 1999, in order to simplify our corporate organizational structure,
Predictive Holdings was merged into its wholly-owned subsidiary, Predictive
Systems, the surviving corporation.
Since our inception, we have expanded our service offerings, evolved our
technology expertise and developed the scope of our business to address the most
critical network technology needs of the broad client base we serve. We have
continued to grow our client base by expanding geographically, and we have
supported this client base by attracting and retaining talented professionals at
all levels. As of August 31, 1999, our employee base had grown to 349 full-time
employees.
Our principal executive offices are located at 145 Hudson Street, New York,
New York 10013. Our telephone number is (212) 219-4400. In addition, we maintain
offices in nine other locations: Atlanta, Georgia; Boston, Massachusetts;
Dallas, Texas; Florham Park, New Jersey; Herndon, Virginia; Pleasanton,
California; Santa Cruz, California; London, England; and Amsterdam, The
Netherlands.
------------------------
Except as otherwise noted, all information in this prospectus:
- reflects the automatic conversion of all of our outstanding shares of
series A convertible preferred stock into an aggregate of 6,512,316 shares
of our common stock on the closing of this offering; and
- assumes no exercise of the underwriters' over-allotment option.
"PREDICTIVE SYSTEMS," "BUSINESSFIRST" and the Predictive logo are trademarks
of Predictive. All other trademarks and service marks used in this prospectus
are the property of their respective owners.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Predictive........... 4,000,000 shares
Common stock to be outstanding after this 22,565,332 shares
offering...................................
Use of proceeds.............................. For general corporate purposes, including
working capital. We may also use a portion of
the proceeds for acquisitions of
complementary businesses or technologies.
Please see "Use of Proceeds."
Proposed Nasdaq National Market symbol....... PRDS
</TABLE>
The number of shares outstanding after this offering is based on our shares
of common stock outstanding as of August 31, 1999 and gives effect to the
automatic conversion of all outstanding shares of series A convertible preferred
stock into 6,512,316 shares of our common stock on the closing of this offering
and the sale of 1,378,052 shares of our common stock to Cisco at $12.00 per
share subsequent to August 31, 1999. This information excludes:
- 10,373,763 shares subject to options outstanding as of August 31, 1999 at
a weighted average exercise price of $1.89 per share;
- 2,626,237 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
Operating profit (loss).................................. 1,543 1,887 (822) (1,223) 190
Net income (loss)........................................ $ 863 $ 1,011 $ (627) $ (737) $ (173)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE:
Basic.................................................... $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
Diluted.................................................. 0.07 0.08 (0.11) (0.16) (0.02)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic.................................................... 4,269 4,382 6,015 4,634 8,971
Diluted.................................................. 11,586 12,765 6,015 4,634 8,971
</TABLE>
The following table is a summary of our balance sheet at June 30, 1999. The
pro forma data give effect to the sale of 1,378,052 shares of our common stock
to Cisco Systems at $12.00 per share subsequent to June 30, 1999 and the
application of the net proceeds therefrom. The pro forma as adjusted data give
effect to:
- the automatic conversion of 6,512,316 shares of our series A convertible
preferred stock into 6,512,316 shares of common stock on the closing of
the offering and the reissuance of treasury stock in connection with this
conversion; and
- the sale of 4,000,000 shares of common stock at an assumed initial public
offering price of $13.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
<S> <C> <C> <C>
PRO FORMA PRO FORMA
ACTUAL ----------- AS ADJUSTED
--------- -----------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 360 $ 16,897 $ 63,757
Working capital.............................................................. 11,802 28,339 75,199
Total assets................................................................. 17,633 34,170 81,030
Total stockholders' equity................................................... 12,761 29,298 76,158
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS OR
FINANCIAL CONDITION WOULD LIKELY SUFFER. IN THIS CASE, THE MARKET PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR LIMITED OPERATING HISTORY MAKES 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, 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 REVENUE IS GENERATED FROM A SMALL NUMBER OF CLIENTS, OUR
REVENUES ARE DIFFICULT TO PREDICT AND THE LOSS OF ONE COULD SIGNIFICANTLY REDUCE
OUR REVENUES
During the six months ended June 30, 1999, each of Bear Stearns and Qwest
Communications accounted for 23.1% and 17.1%, respectively, of our revenues. Our
five largest clients accounted for 57.0% of our revenues for the six months
ended June 30, 1999. For the year ended December 31, 1998, our five largest
clients accounted for 54.9% of our revenues. If one of our major clients
discontinues or significantly reduces the use of our services, our revenues will
likely decrease and our business, results of operations and financial condition
could materially suffer. In addition, the non-payment or late payment of amounts
due from a major client could 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, our results of operations will be materially adversely
affected. Consequently, you should not predict or anticipate our future revenue
based upon the number of clients we have currently or the number and size of our
existing projects.
OUR OPERATING RESULTS MAY 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 PROJECT
We derive a substantial portion of our revenues from fixed-price projects.
For the year ending December 31, 1998 and the six months ended June 30, 1999,
fixed-price projects accounted for 26.0% and 36.9% of our revenue, respectively.
We assume greater financial risks on a fixed-price project than on a
time-and-expense based project. If we miscalculate the resources or time we need
for these fixed-price projects, the costs of completing these projects may
exceed the price, which could result in a loss on the project and materially
adversely affect our operating results. Further, the average size of our
contracts has increased in recent quarters, resulting in a corresponding
increase in our exposure to the financial risks of fixed-price engagements. We
recognize revenues from fixed-price projects based on our estimate of the
percentage of each project completed in a reporting period. To the extent our
estimates are inaccurate, the revenues and operating profits, if any, that we
report for periods during which we are working on a fixed-price project may not
accurately reflect the final results of the project and we would be required to
record an expense for these periods equal to the amount by which our revenues
were previously overstated.
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL FACTORS
Our results of operations may experience seasonal fluctuations as businesses
typically spend less on network management services during the summer and
year-end vacation and holiday periods. Additionally, as a large number of our
employees take vacation during these periods, our utilization rates during these
periods tend to be lower, which adversely affects our margins and results of
operations.
OUR LONG SALES CYCLE MAKES OUR REVENUE DIFFICULT TO PREDICT
The timing of our revenues is difficult to predict because of the length and
variance of the time required to complete a sale. Before hiring us for a
project, our clients often undertake an extensive review process and may require
approval at various levels within their organization. Any delay due to a long
sales cycle could have a material adverse affect on our results of operations.
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 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.
9
<PAGE>
RISKS RELATED TO OUR STRATEGY AND MARKET
WE MAY HAVE DIFFICULTY MANAGING OUR EXPANDING OPERATIONS, WHICH MAY HARM OUR
BUSINESS
A key part of our strategy is to grow our business, however, our rapid
growth has placed a significant strain on our managerial and operational
resources. From January 1, 1997 to 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
BE UNABLE TO COMPETE EFFECTIVELY
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. Many of these competitors have:
- longer operating histories;
- greater name recognition;
- larger established client relationships; and
- significantly greater financial, technical and personnel resources.
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 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
10
<PAGE>
attention to integrating the technology, operations and personnel of acquired
businesses, we may not be able to properly serve our current clients or attract
new clients. Any difficulties in integrating acquisitions could disrupt our
ongoing business, distract our management and employees, increase our expenses
and otherwise adversely affect our business.
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 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 MAY NOT BE SUCCESSFUL
We expect to expand our international operations and international sales and
marketing efforts. Recently, we commenced operations in England. In addition, in
August 1999, we acquired Network Resource Consultants and Company, B.V., a
network consulting company based in The Netherlands. We have had limited
experience in marketing, selling and distributing our services internationally.
We may not be able to maintain and expand our international operations or
successfully market our services internationally. Failure to do so may
negatively affect our business, as well as our ability to grow.
11
<PAGE>
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES
ASSOCIATED WITH OPERATING INTERNATIONALLY
Operating internationally may require us to modify the way we conduct our
business and deliver our services in these markets.
We anticipate that we will face the following challenges internationally:
- the burden and expense of complying with a wide variety of foreign laws
and regulatory requirements;
- potentially adverse tax consequences;
- longer payment cycles and problems in collecting accounts receivable;
- technology export and import restrictions or prohibitions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- cultural and language differences;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity during the summer months in
Europe.
If we do not appropriately anticipate changes and adapt our practices to
meet these challenges, our business, results of operations and financial
condition could materially 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.
THE MARKET FOR OUR SERVICES DEPENDS ON THE CONTINUED GROWTH OF LARGE-SCALE,
COMPLEX NETWORKS
To date, a majority of our revenues have been from network management
services related to large-scale, complex networks. We believe that we will
continue to derive a majority of our revenues from providing network design,
performance, management and security services. As a result, our future success
is highly dependent on the continued growth and acceptance of large-scale,
complex computer networks and the continued trend among our clients to use
third-party service providers. If the growth of the use of enterprise networks
does not continue or declines, our business could materially suffer.
12
<PAGE>
WE ARE DEPENDENT ON THE INTERNET GROWING AND CONTINUING TO DEVELOP AS A VIABLE
BUSINESS TOOL
The growing demand for network management services has been driven in part
by the growth of the Internet. The Internet may not prove to be a viable
commercial marketplace because of:
- inadequate development of the necessary infrastructure;
- lack of development of complementary products (such as high speed modems
and high speed communication lines);
- implementation of competing technology;
- 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 business would be materially adversely
affected.
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. 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 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 have
a material adverse effect on our business.
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 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.
13
<PAGE>
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 WILL HAVE DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS OFFERING, WHICH WE
MAY NOT USE EFFECTIVELY
Our management will have significant flexibility in applying the net
proceeds of this offering and may use the proceeds in ways with which
stockholders disagree. We may not be able to invest these funds effectively.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY
Following this offering, the market price of our common stock is likely to
be highly volatile and may fluctuate substantially. As a result, investors in
our common stock may experience a decrease in the value of their common stock
regardless of our operating performance or prospects. In addition, the stock
market has, from time to time, experienced significant price and volume
fluctuations that have affected the market prices for the securities of
technology companies. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
was often brought against that company. Many technology-related companies have
been subject to this type of litigation. We may also become involved in this
type of litigation. Litigation is often expensive and diverts management's
attention and resources.
14
<PAGE>
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 72.5% of the outstanding shares of our common stock, and after the
offering will beneficially own approximately 61.0% 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 $1.67.
Accordingly, investors purchasing shares in this offering will suffer immediate
and substantial dilution of their investment. In addition, we had 10,373,763
shares subject to options outstanding as of August 31, 1999 at a weighted
average exercise price of $1.89 per share. The exercise of these options will
result in further dilution of the value of the shares purchased in this
offering.
FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because these
forward looking-statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.
15
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common stock
offered by us are estimated to be $46.9 million, assuming an initial public
offering price of $13.00 per share, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be $54.1 million.
The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock, and facilitate future
access to public markets. We expect to use the net proceeds of this offering for
general corporate purposes, including working capital. A portion of the net
proceeds may also be used for the acquisition of complementary businesses or
technologies. We are not currently a party to any contracts, letters of intent,
commitments or agreements and are not currently engaged in active negotiations,
with respect to any acquisitions. Pending such uses, we will invest the net
proceeds of this offering in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. As a result, we do not intend to pay cash dividends in the
foreseeable future.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to (1) the sale of 1,378,052
shares of our common stock to Cisco at $12.00 per share subsequent to June
30, 1999 and the application of the net proceeds therefrom, (2) the
automatic conversion of our series A convertible preferred stock into
common stock, and (3) the reissuance of treasury stock in connection with
this conversion; and
- on a pro forma as adjusted basis to reflect our sale of shares of common
stock at an assumed initial public offering price of $13.00 per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us. Please see "Use of Proceeds."
You should read this information together with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------------------------------
<S> <C> <C> <C>
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
--------- ----------- -------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long term debt.............................................................. $ -- $ -- $ --
Stockholders' equity:
Convertible preferred stock, $.001 par value, 20,000,000 shares
authorized, 6,512,316 issued and outstanding, actual; 10,000,000
authorized, none issued and outstanding, pro forma and pro forma as
adjusted................................................................ 7 -- --
Common stock, $.001 par value, 50,000,000 shares authorized, 12,465,750
issued and 9,610,650 outstanding, actual; (200,000,000 authorized,
17,501,018 issued and outstanding, pro forma; 21,501,018 issued and
outstanding, pro forma as adjusted)..................................... 12 18 22
Additional paid-in capital.................................................. 20,003 28,142 74,998
Treasury stock.............................................................. (8,399) -- --
Retained earnings........................................................... 1,154 1,154 1,154
Accumulated other comprehensive loss........................................ (16) (16) (16)
--------- ----------- -------------
Total stockholders' equity................................................ 12,761 29,298 76,158
--------- ----------- -------------
Total capitalization.................................................... $ 12,761 $ 29,298 $ 76,158
--------- ----------- -------------
--------- ----------- -------------
</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:
- 10,373,763 shares subject to options outstanding as of August 31, 1999 at
a weighted average exercise price of $1.89 per share;
- 2,626,237 additional shares reserved for issuance under our stock option
plan; and
- 750,000 additional shares available for issuance under our employee stock
purchase plan.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$29.3 million, or $1.67 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 sale of 1,378,052 shares of our common
stock to Cisco 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 $76.2 million, or $3.54 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.87 per share to existing stockholders and an immediate dilution of $9.46 per
share to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 13.00
Pro forma net tangible book value per share at June 30, 1999............... $ 1.67
Pro forma increase attributable to new investors........................... 1.87
---------
Pro forma net tangible book value per share after this offering.............. $ 3.54
---------
Pro forma dilution per share to new investors................................ $ 9.46
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the number of shares of common stock purchased from us,
the aggregate cash consideration paid to us and the average price per share paid
by existing stockholders and new investors purchasing shares of common stock in
this offering. The calculation below is based on an assumed initial public
offering price of $13.00 per share, before deducting the estimated underwriting
discounts and commissions and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 17,501,018 81.4% $ 28,159,735 35.1% $ 1.61
New investors.................. 4,000,000 18.6 52,000,000 64.9 13.00
------------ ----- ------------- -----
Total...................... 21,501,018 100.0% $ 80,159,735 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</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 10,373,763 shares of common stock with a
weighted average exercise price of $1.89 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
Please see "Capitalization."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1997 and
1998 and the selected consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of June 30, 1999 and the
consolidated statements of operations for the six months ended June 30, 1998 and
1999 have been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated balance sheet data as of
December 31, 1996 has been derived from our consolidated audited financial
statements not included in this prospectus. The selected consolidated balance
sheet as of December 31, 1995 and the selected consolidated statement of
operations data for the period from February 10, 1995 (inception) to December
31, 1995 are derived from our unaudited consolidated financial statements not
included in this prospectus.
The unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for the fair presentation of our consolidated
financial position and the consolidated results of operations for those periods.
Results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the entire year or for any
future period.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes to those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1998 1999
--------------- ---------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
(UNAUDITED) DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Professional services............. $ 2,090 $ 6,819 $ 16,897 $ 23,858 $ 8,935 $ 21,278
Hardware and software sales....... 161 1,287 1,190 2,065 530 1,288
--------------- ---------- --------- --------- --------- ---------
2,251 8,106 18,087 25,923 9,465 22,566
Cost of Revenues:
Professional services............. 981 3,382 9,590 12,861 5,179 10,246
Hardware and software purchases... 161 970 817 1,699 438 1,032
--------------- ---------- --------- --------- --------- ---------
Total cost of revenues............ 1,142 4,352 10,407 14,560 5,617 11,278
--------------- ---------- --------- --------- --------- ---------
Gross profit...................... 1,109 3,754 7,680 11,363 3,848 11,288
Sales and marketing................. 220 386 1,082 3,433 1,255 3,409
General and administrative.......... 535 1,683 4,390 8,184 3,587 7,377
Depreciation and amortization....... 63 142 321 568 229 312
--------------- ---------- --------- --------- --------- ---------
Operating profit (loss)........... 291 1,543 1,887 (822) (1,223) 190
Other Income (Expense):
Interest income................... 5 31 27 58 13 70
Other income...................... -- 8 4 1 -- 37
Interest expense.................. -- -- (36) (324) (67) (109)
--------------- ---------- --------- --------- --------- ---------
Income (loss) before provision
(benefit) for income taxes...... 296 1,582 1,882 (1,087) (1,277) (188)
Income tax provision (benefit)...... 146 719 871 (460) (540) 361
--------------- ---------- --------- --------- --------- ---------
Net income (loss)................. $ 150 $ 863 $ 1,011 $ (627) $ (737) $ (173)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) SIX MONTHS ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------------- --------------------
1995 1996 1997 1998 1998 1999
--------------- ---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
(UNAUDITED) DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) per share:
Basic............................. $ 0.04 $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Diluted........................... $ 0.01 $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Weighted average common shares
outstanding:
Basic............................. 4,245 4,269 4,382 6,015 4,634 8,971
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
Diluted........................... 10,396 11,586 12,765 6,015 4,634 8,971
--------------- ---------- --------- --------- --------- ---------
--------------- ---------- --------- --------- --------- ---------
</TABLE>
Please see note 3 to our consolidated financial statements for an
explanation of the number of shares used in per share computations. Upon the
closing of this offering, each share of our series A preferred stock will
convert into one share of our common stock. On a pro forma basis, basic and
diluted loss per share, had each share of our series A preferred stock been
immediately converted into common stock at the time of issuance, would have been
$(0.01) for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 JUNE 30, 1999
------------- --------- --------- --------- -------------
<CAPTION>
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 270 $ 638 $ 420 $ -- $ 360
Working capital............................................ 661 1,178 1,679 2,365 11,802
Total assets............................................... 1,180 3,629 6,870 13,677 17,633
Total stockholders' equity................................. 192 1,061 2,072 2,026 12,761
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Substantially all of our revenues are derived from professional services. We
provide network consulting services to our clients on both a fixed-price,
fixed-time basis and on a time-and-expense basis. We use our BusinessFirst
methodology to estimate and propose prices for our fixed-price projects. The
estimation process accounts for standard billing rates particular to each
project, the client's technology environment, the scope of the project, and the
project's timetable and overall technical complexity. A member of our senior
management team must approve all of our fixed-price proposals. For these
contracts, we recognize revenue using a percentage-of-completion method
primarily based on costs incurred. We make provisions for estimated losses on
uncompleted contracts on a contract-by-contract basis and recognize such
provisions in the period in which the losses are determined. Professional
services revenues for time-and-expense based projects are recognized as services
are performed. Any payments received in advance of services performed are
recorded as deferred revenue. Our clients are generally able to reduce or cancel
their use of our professional services without penalty and with little or no
notice. We also derive limited revenues from the sale of hardware and software.
We sell hardware and software only when specifically requested by a client. We
expect revenues from the sale of hardware and software to continue to decline on
a percentage basis.
Since we recognize professional services revenues only when our consultants
are engaged on client projects, the utilization of our consultants is important
in determining our operating results. In addition, a substantial majority of our
operating expenses, particularly personnel and related costs, depreciation and
rent, are relatively fixed in advance of any particular quarter. As a result,
any underutilization of our consultants may cause significant variations in our
operating results in any particular quarter and could result in losses for such
quarter. Factors which could cause underutilization include:
- the reduction in size, delay in commencement, interruption or termination
of one or more significant projects;
- the completion during a quarter of one or more significant projects;
- the miscalculation of resources required to complete new or ongoing
projects; and
- the timing and extent of training, weather related shut-downs, vacations
and holidays.
On August 12, 1999, we acquired Network Resource Consultants and Company,
B.V. in for an aggregate purchase price of approximately $4.8 million. The
purchase price was paid in the form of 1,062,814 shares of our common stock in
exchange for all of the outstanding capital stock of Network Resource
Consultants and Company. The acquisition was accounted for as a pooling of
interests. Supplemental financial statements reflecting our combined results
with those of Network Resource Consultants and Company as of December 31, 1997
and 1998 and June 30, 1999 (unaudited) and the years ended December 31, 1996,
1997 and 1998 and the six months ended June 30, 1998 and 1999 (unaudited) are
included elsewhere in this prospectus. The acquisition of Network Resource
Consultants and Company resulted in an increase in revenue and gross profit of
less than 10% for all restated periods presented. The operating profit (loss)
increased (decreased) by ($235,000), ($62,000), ($262,000), ($133,000)
(unaudited) and $147,000 (unaudited) for the years ended December 31, 1996, 1997
and 1998, and the six months ended June 30, 1998 and 1999, respectively. Net
income (loss) increased (decreased) by ($163,000), ($58,000), ($166,000),
($81,000) (unaudited) and ($93,000) (unaudited) for the years ended December 31,
1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999,
respectively. You should read the discussion herein in conjunction with the
21
<PAGE>
supplemental financial statements reflecting our combined results with those of
Network Resource Consultants and Company, B.V. included elsewhere in this
prospectus.
On September 16, 1999, we completed the sale of 1,378,052 shares of our
common stock to Cisco at $12.00 per share for net proceeds of approximately
$16.5 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
Operating income (loss)........................................... 19.0 10.4 (3.2) (12.9) 0.8
Other income (expense)............................................ 0.5 0.0 (1.0) (0.6) 0.0
--------- --------- --------- ----------- -----------
Net income (loss) before income tax provision (benefit)........... 19.5 10.4 (4.2) (13.5) 0.8
Income tax provision (benefit).................................... 8.9 4.8 (1.8) (5.7) 1.6
--------- --------- --------- ----------- -----------
Net income (loss)................................................. 10.6% 5.6% (2.4)% (7.8)% (0.8)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUES. Substantially all of our revenues are derived from fees for
professional services. Revenues increased 138.4% from $9.5 million in the six
months ended June 30, 1998 to $22.6 million in the six months ended June 30,
1999. Revenues from professional services increased 138.1% from $8.9 million in
the six months ended June 30, 1998 to $21.3 million in the six months ended June
30, 1999. Revenues from hardware and software sales increased 142.8% from
$530,000 in the six months ended June 30, 1998 to $1.3 million in the six months
ended June 30, 1999. This increase was primarily
22
<PAGE>
due to an increase in the number of professional services projects and an
increase in the size of these projects. During the six months ended June 30,
1999, each of Bear, Stearns & Co. Inc. and Qwest Communications, Inc. accounted
for 23.1% and 17.1%, respectively, of our revenues. The number of our billable
consultants increased from approximately 120 at June 30, 1998 to approximately
190 at June 30, 1999. Subsequent to June 30, 1999, we added an additional 14
billable consultants as a result of our acquisition of Network Resource
Consultants and Company, B.V.
GROSS PROFIT. Gross profit increased 193.3% from $3.8 million in the six
months ended June 30, 1998 to $11.3 million in the six months ended June 30,
1999. As a percentage of revenues, gross profit increased from 40.7% in the six
months ended June 30, 1998 to 50.0% in the six months ended June 30, 1999. Cost
of revenues increased from $5.6 million in the six months ended June 30, 1998 to
$11.3 million in the six months ended June 30, 1999. This increase in gross
profit was due to efficiencies in completing fixed-price, fixed-time projects,
higher utilization rates and an increase in average billing rates.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of compensation and benefits, travel expenses and promotional
expenses. Sales and marketing expenses increased 171.5% from $1.3 million in the
six months ended June 30, 1998 to $3.4 million in the six months ended June 30,
1999. As a percentage of revenues, sales and marketing expenses increased from
13.3% in the six months ended June 30, 1998 to 15.1% in the six months ended
June 30, 1999. This increase was due to increased sales and marketing efforts,
hiring of additional personnel and an increase in commissions paid.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 105.7% from $3.6 million in the six months ended June 30, 1998 to $7.4
million in the six months ended June 30, 1999. As a percentage of revenues,
general and administrative expense decreased from 37.9% in the six months ended
June 30, 1998 to 32.7% in the six months ended June 30, 1999. The increase in
absolute dollars was due to an increase in our facilities and equipment,
compensation and benefits, recruiting and professional development, and other
administrative costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
36.1% from $229,000 in the six months ended June 30, 1998 to $312,000 in the six
months ended June 30, 1999. This increase was due to purchases of additional
equipment to support our growth.
OTHER INCOME (EXPENSE). Other expense decreased from $54,000 in the six
months ended June 30, 1998 to $2,000 in the six months ended June 30, 1999. This
decrease was primarily due to an increase in interest expense related to short
term borrowings, offset by increased interest income and other non-operating
income.
INCOME TAXES. The income tax benefit was ($540,000) on pre-tax losses of
$1.3 million for the six months ended June 30, 1998. For the six months ended
June 30, 1999, the income tax expense was $361,000 on pre-tax income of
$188,000. The effective tax rate was 42.3% and 192.4% during the six months
ended June 30, 1998 and 1999, respectively. The increase in the effective tax
rates relates to the provision for a valuation allowance against net operating
losses of our English subsidiary.
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Revenues increased 43.3% from $18.1 million in 1997 to $25.9
million in 1998. Revenues from professional services increased 41.2% from $16.9
million in 1997 to $23.9 million in 1998. Revenues from hardware and software
sales increased 73.6% from $1.2 million in 1997 to $2.1 million in 1998. This
increase was primarily due to an increase in the number of professional services
projects and an increase in the size of these projects. During 1998, Bear,
Stearns & Co. Inc. accounted for 21.0% of revenues. The number of our billable
consultants increased from approximately 98 at December 31, 1997 to
approximately 149 at December 31, 1998.
23
<PAGE>
GROSS PROFIT. Gross profit increased 48.0% from $7.7 million in 1997 to
$11.4 million in 1998. As a percentage of revenues, gross profit increased from
42.5% in 1997 to 43.8% in 1998. Cost of revenues increased from $10.4 million in
1997 to $14.6 million in 1998. This increase in gross profit was due to
efficiencies in completing fixed-price, fixed-time projects, higher utilization
rates and an increase in average billing rates.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 217.4%
from $1.1 million in 1997 to $3.4 million in 1998. As a percentage of revenues,
sales and marketing expenses increased from 6.0% in 1997 to 13.2% in 1998. This
increase was due to increased sales and marketing efforts, hiring of additional
personnel and commissions paid because of the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 86.4% from $4.4 million in 1997 to $8.2 million in 1998. As a
percentage of revenues, general and administrative expense increased from 24.3%
in 1997 to 31.6% in 1998. This increase was due to an increase in facilities and
equipment, compensation and benefits, recruiting and professional development,
and other administrative costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
76.9% from $321,000 in 1997 to $568,000 in 1998. This increase was due to
purchases of additional equipment to support our growth.
OTHER INCOME (EXPENSE). Other expense increased from ($5,000) in 1997 to
($265,000) in 1998. This increase was primarily due to an increase in interest
expense related to an increase in short term borrowings.
INCOME TAXES. The income tax provision was $871,000 on pre-tax income of
$1.9 million in 1997. In 1998 the income tax benefit was ($460,000) on pre-tax
losses of $1.1 million. The effective tax rate was 46.3% and 42.3% for 1997 and
1998, respectively. The differences in the effective tax rate resulted from a
greater amount of non-tax deductible expenses during 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUES. Revenues increased 123.1% from $8.1 million in 1996 to $18.1
million in 1997. Revenues from professional services increased 147.8% from $6.8
million in 1996 to $16.9 million in 1997. Revenues from hardware and software
sales decreased 7.6% from $1.3 million in 1996 to $1.2 million in 1997. The
increase in professional services was primarily due to an increase in the number
of professional services projects and an increase in the size of these projects.
During 1997, each of Bear, Stearns & Co. Inc. and Unisys Corporation accounted
for 20.6% and 19.7% of revenues, respectively. The number of our billable
consultants increased from approximately 42 at December 31, 1996 to
approximately 98 at December 31, 1997.
GROSS PROFIT. Gross profit increased 104.6% from $3.8 million in 1996 to
$7.7 million in 1997. As a percentage of revenues, gross profit decreased from
46.3% in 1996 to 42.5% in 1997. Cost of revenues increased from $4.4 million in
1996 to $10.4 million 1997. This increase in gross profit was due to
efficiencies in completing fixed-price, fixed-time projects, higher utilization
rates and an increase in average billing rates.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 180.3%
from $386,000 in 1996 to $1.1 million in 1997. As a percentage of revenues,
sales and marketing expenses increased from 4.8% in 1996 to 6.0% in the 1997.
This increase sales and marketing efforts, hiring of additional personnel was
due to increased commissions paid because of the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 160.8% from $1.7 million in 1996 to $4.4 million in 1997. As a
percentage of revenues, general and administrative expense increased from 20.8%
1996 to 24.3% in 1997. This increase was due to an increase in facilities
24
<PAGE>
and equipment, compensation and benefits, recruiting and professional
development, and other administrative 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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for each of the seven quarters in the period ended June 30, 1999 and the
percentage of our revenues represented by each item in the respective quarters.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to
present fairly the unaudited quarterly results when read in conjunction with our
financial statements and notes. The unaudited results of operations for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
-------- --------- -------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Professional services............ $3,918 $3,798 $5,137 $6,702 $8,221 $9,887 $11,391
Hardware and software sales...... 406 78 452 233 1,302 478 810
-------- --------- -------- --------- -------- --------- ---------
Total revenues................. 4,324 3,876 5,589 6,935 9,523 10,365 12,201
Cost of Revenues:
Professional services............ 2,269 2,387 2,792 3,308 4,374 4,849 5,397
Hardware and software
purchases...................... 245 65 373 229 1,032 426 606
-------- --------- -------- --------- -------- --------- ---------
Total cost of revenues......... 2,514 2,452 3,165 3,537 5,406 5,275 6,003
-------- --------- -------- --------- -------- --------- ---------
Gross profit....................... 1,810 1,424 2,424 3,398 4,117 5,090 6,198
Expenses:
Selling and marketing............ 372 484 771 1,032 1,146 1,589 1,820
General and administrative....... 1,303 1,722 1,865 2,231 2,366 3,469 3,908
Depreciation and amortization.... 104 108 121 123 216 144 168
-------- --------- -------- --------- -------- --------- ---------
Operating profit (loss)............ 31 (890) (333) 12 389 (112) 302
Other income (expense)............. (14) (22) (32) (85) (126) (28) 26
-------- --------- -------- --------- -------- --------- ---------
Net income (loss) before income
tax provision (benefit)........ 17 (912) (365) (73) 263 (140) 328
Income tax provision (benefit)... 8 (390) (150) 46 34 (49) 410
-------- --------- -------- --------- -------- --------- ---------
Net income (loss)................ $ 9 $ (522) $ (215) $ (119) $ 229 $ (91) $ (82)
-------- --------- -------- --------- -------- --------- ---------
-------- --------- -------- --------- -------- --------- ---------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
-------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------------------
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
-------- --------- -------- --------- -------- --------- ---------
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>
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.
26
<PAGE>
Cash used in operating activities increased from $960,000 for the six months
ended June 30, 1998 to $4.4 million for the six months ended June 30, 1999.
Significant uses of cash resulted from an increase in accounts receivable,
unbilled work in progress and a decrease in deferred income, partially offset by
a reduction in the net loss.
Cash (used in) provided by operating activities was ($3.7) million in 1998,
($1.2) million in 1997 and $678,000 in 1996. The increase in the use of cash
resulted from the net loss in 1998, an increase in accounts receivable and
unbilled work in progress during 1998 partially offset by an increase in
accounts payable and accrued expenses at December 31, 1998.
Cash provided by financing activities was $12.5 million for the six months
ended June 30, 1999, $5.4 million for 1998, $1.4 million for 1997 and $5,000 for
1996. Cash provided by financing activities for the six months ended June 30,
1999 resulted from the proceeds of $18.6 million related to the sale of
preferred stock offset partially by the repayment of short-term borrowings. Cash
provided by financing activities for 1998 and 1997 resulted from short-term
borrowings.
Our capital expenditures were $745,000 for the six months ended June 30,
1999, $687,000 for 1998, $357,000 for 1997 and $315,000 for 1996. Capital
expenditures were made to purchase computer equipment and office furniture and
for leasehold improvements.
We have a demand loan facility, secured by a lien on all of our assets,
under which we may borrow up to the lesser of $5.0 million or 80.0% of our
accounts receivable. Amounts outstanding under the facility bear interest at a
rate of 11.25% per annum. At June 30, 1999, there were no amounts outstanding
under the facility.
On September 16, 1999, we completed sale of 1,378,052 shares of our common
stock to Cisco at $12.00 per share for net proceeds of approximately $16.5
million.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our working
capital needs for at least the next 12 months.
IMPACT OF THE YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, it is necessary to update the computer systems and/or software used by
many companies and governmental agencies to comply with Year 2000 requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant.
STATE OF READINESS. We are in the process of determining the Year 2000
readiness of our information technology systems, which include our hardware and
software, and our non-information technology systems, which include the
telephone systems and other office equipment we use internally. Our assessment
plan consists of the following steps:
- evaluating our date dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally-developed proprietary
software;
- contacting third-party vendors and licensors of material hardware,
software and services that we use;
- contacting vendors of material non-information technology systems that we
use;
- formulating repair or replacement requirements and implementing corrective
measures; and
- evaluating the need for, and preparing and implementing, if required, a
contingency plan.
27
<PAGE>
To date, we have determined the following through our assessment:
- We have checked our internally developed software and systems for date
dependent code, and all material files and systems are Year 2000
compliant. We believe that the recently installed code is also Year 2000
compliant;
- We have contacted the vendors of material hardware and software components
of our information technology systems, and they have informed us that the
products we use are currently Year 2000 compliant;
- Commercial software, including financial reporting software, upon which we
depend is either Year 2000 compliant or will be upgraded to be compliant
in the normal course of business through upgrades or installation of
software patches;
- Substantially all hardware we use in our network operations and all of the
hardware we use in our office operations have been certified as Year 2000
compliant by its vendors;
- Our telephone system and mail systems are certified as Year 2000
compliant; and
- Our landlords and third-party advertising sales representative and
servicing organizations have not yet provided us with Year 2000 compliance
information.
While we have assessed the Year 2000 readiness of each of our material
internal systems, we will not conduct an end-to-end system test until August
1999. Accordingly, we cannot yet assess whether our internal system, as a whole,
is Year 2000 compliant. In addition, we will continue to attempt to obtain
verification from all remaining distributors, suppliers and vendors that their
systems are Year 2000 compliant. We intend to complete our assessment, and the
replacement or remediation of any non-Year 2000 compliant technologies, by the
end of the third quarter of 1999.
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
28
<PAGE>
providers in determining the need for and nature and extent of any contingency
plans. We intend to develop any required contingency plan by the end of October
1999.
FORWARD-LOOKING STATEMENTS
The Year 2000 discussion above is provided as a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and
contains forward-looking statements. These statements are based on management's
best current estimates, which were derived from a number of assumptions about
future events, including the continued availability of resources,
representations received form third parties and other factors. However, we
cannot assure you that these estimates will be achieved, and our actual results
could differ materially from those anticipated. Specific factors that might
cause material differences include:
- the ability to identify and remediate all relevant systems;
- results of Year 2000 testing;
- adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are our outsourcing service
providers, suppliers, and vendors;
- unanticipated system costs; and
- our ability to implement adequate contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standard Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to 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.
29
<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 and
measured against mutually agreed upon deliverables and provide our clients with
certainty of costs, delivery time and project scope. Our collaborative
consulting services enable our clients to utilize our extensive expertise in
order to extend their internal capabilities and to access our methodologies. In
addition to these services, we have developed an innovative service model
through which we deliver our clients packaged service products, or productized
services. Our productized services 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
productized services 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.
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
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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 estimates that the worldwide market will grow for these services
from $12.1 billion in 1998 to $25.5 billion by 2003. There are many third-party
service providers, including network equipment vendors, systems integrators,
value-added resellers and network consulting companies, seeking to capitalize on
this growth.
However, 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. 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 productized services. When engaged on a project outsource
basis, we work with our clients to mutually
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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-deliverable commitments. Our productized services are pre-defined service
offerings that we believe address the needs that are common to many of our
clients. These productized services 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 PRODUCTIZED SERVICE OFFERINGS. We intend to continue
to enhance and expand our innovative productized service offerings. These
service offerings provide our clients with a pre-defined set of deliverables
that require minimal customization and are characterized by an objective and
quantifiable value proposition and return on investment justification. Moreover,
our productized services enable us to increase our margin opportunities by
improving the efficiency of our sales and service delivery model. These products
also enable us to market and sell our services through indirect channels. For
example, we recently entered into an agreement with Cabletron under which
Cabletron has agreed to market and sell our productized service offerings, which
will initially include our Information Security Requirements Analysis product
and will expand to other productized service offerings. We intend to enter into
other strategic relationships which will enable us to further expand our market
penetration by leveraging our strategic partners' distribution channels to
market and sell these services.
CONTINUE TO ATTRACT AND RETAIN HIGHLY QUALIFIED CONSULTANTS. We intend to
continue to attract and retain highly qualified consultants by providing them
with a rich environment and culture to work in, and by offering them attractive
professional development and compensation opportunities. We generally recruit
consultants 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 skills
and productivity of our consultants. We intend to continue to build our
nationwide recruiting
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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 deliverables on a fixed-time,
fixed-price basis. We begin each engagement by helping our clients clarify their
business requirements in specific terms. We then undertake a thorough assessment
of our client's existing business processes and technology infrastructure. Based
on this assessment, we formulate an analysis of the requirements to translate
their technology investments into measurable business objectives. Once we
formulate a requirements analysis, we draw upon our broad, vendor-neutral
expertise to design a solution that leverages our clients' existing technology
infrastructure to maximize their return on investment. We believe that our
BusinessFirst methodology bridges the gap in the marketplace between management
consulting firms and technical staff augmentation services and enables us to
translate business objectives into leading-edge technology solutions.
SERVICES
Our consultants are organized into four practice areas. Although many of our
consultants are cross-skilled in a variety of technologies and many technologies
span multiple practice areas, each practice area represents an aspect of network
technology important enough to warrant specialization.
These practice areas are:
- network and systems management;
- internetwork design and engineering;
- performance management; and
- information security.
Our consultants have extensive experience with a wide variety of
technologies and vendors. For some clients, our consultants are involved in both
technology and vendor selection. Other clients have already selected the
technology, vendor or both. Regardless, we offer our clients a completely
objective,
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vendor-neutral approach. Our knowledge of advanced technologies and leading
vendors is a significant part of our value proposition to our clients.
NETWORK AND SYSTEMS MANAGEMENT. Our network and systems management practice
focuses on designing and implementing reliable and continuously available
management systems for large-scale, highly-complex networks. The fundamental
tenet of this practice area is that proactive management is an essential element
of any network design and engineering effort. Our network management consultants
develop systems and processes that are able to identify, isolate and resolve
network failures, sometimes before they occur.
The following table lists some of the services provided by our network and
systems management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Service Definition and Service Level Highlights a client's service level commitments and assists in the
Agreement Workshop development of a rational, long-term plan for meeting and exceeding
those commitments.
Rapid Restart Assessment Determines the readiness of a client's network operations center and
provides short-term and long-term recommendations for addressing its
deficiencies.
Network Operation Center Architecture and Assists clients in evaluating and selecting network and systems
Implementation management technologies appropriate for their network operations
centers. Configures and implements the selected technology and
trains clients' operations staff.
Process and Procedure Development Designs, implements and documents the processes and procedures
required to operate a network operations center.
Automation, Correlation and Root Cause Automates repetitive management tasks associated with operating a
Analysis Technology Development network.
</TABLE>
INTERNETWORK DESIGN AND ENGINEERING. Our internetwork design and
engineering practice focuses on designing and implementing network solutions in
support of our clients' strategic business initiatives. We have created a team
of seasoned professionals who use their specialized technical skills, real-world
industry experience and methodologies to solve the problems associated with
building and maintaining network foundations. With core competencies in the
areas of backbone technology, local area network switching, Internet Protocol,
or IP, management and design, asynchronous transfer mode, or ATM, and remote
access, our versatile team contributes both technical depth and breadth to
client engagements.
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The following table lists some of the services provided by our internetwork
design and engineering practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Advanced Technology Planning and Migration Assists clients in planning and integrating advanced technologies
into their business-critical networks. The services include
technology briefings, vendor/product selection, solution design and
integration planning and comprehensive testing.
Network Deployment Services Implements network technology into clients' existing networks.
Services include project management, vendor coordination, technology
installations and training.
Remote Access and Virtual Private Network Designs and deploys secure, high-performance remote access and
virtual private network solutions to allow clients, their employees,
supply-chain partners and other business partners to access
information remotely.
Network Audit Services Audits clients' network infrastructure to evaluate its design and
performance, document the configuration, analyze its compliance to
prescribed standards and develop an action plan to meet strategic
objectives.
Internet Protocol Management Solutions Designs and implements Internet Protocol address schemes required
for a client to connect to the Internet. The service also implements
management technologies to administer the Internet Protocol
addresses used within an organization.
</TABLE>
PERFORMANCE MANAGEMENT. Our performance management practice leverages
proven methodologies and our extensive experience to help our clients optimize
their networks. We use sophisticated tools and techniques to gather, organize
and warehouse network performance data. This data may subsequently be used for a
number of related performance analysis applications, including capacity
planning, response time management and network simulation modeling. Consultants
in our performance management practice area are experts in applicable
technologies, including core competencies in remote monitoring, or RMON, data
warehousing and discrete event simulation modeling.
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<PAGE>
The following table lists some of the services provided by our performance
management practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Network Baselining Collects data in order to establish a baseline of network resource
utilization. The baseline is then used as a comparison against
future trends.
Application Impact Analysis Analyzes how an application uses network resource to predict
response times that users will experience when the application is
deployed. Recommends improvements that enable the application to
maximize network resources.
Network Usage-Based Billing Services Assists clients' transition from a flat-rate billing model to a
usage-based billing model for buying network services.
Capacity Planning Assists clients in understanding the capacity and network resource
constraints that exist within their network with sufficient advance
warning to enable them to add capacity before user performance is
affected.
Response Time Management Monitors and analyzes end-user application response times to ensure
that they remain within the service level commitments.
Network Simulation Modeling Models a network environment so that new configuration and new
application deployment scenarios can be simulated before going into
production.
</TABLE>
INFORMATION SECURITY. Our information security practice is focused on
ensuring that the confidentiality, integrity and availability of our clients'
networks are protected. Our information security consultants have practical
experience with a wide array of advanced security technologies, as well as the
social and procedural aspects of security. By translating the complexities of
information security into understandable terms such as risks, costs and
benefits, we enable our clients to make clear and informed decisions about
protecting their information assets.
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The following table lists some of the services provided by our information
security practice area:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Information Security Requirements Analysis Assesses clients' physical security environment, the technical
controls for accessing information assets and employee security
awareness. Highlights deficiencies and makes recommendations to
migrate clients to industry-specific best practices.
Asset and Risk Analysis Identifies critical assets, determines susceptibility to risks and
quantifies the impact of such risks. Recommends a risk mitigation
plan to prioritize corrective actions.
Information Security Policy Development Assists customers to create a comprehensive information security
policy that clearly states requirements for employee behavior,
technical security systems and the physical controls needed to
protect the client's information assets.
Security System Design and Implementation Designs and implements security systems using custom configured
products to enforce the specific information security policy of each
client.
Incident Response and Digital Forensics Provides critical response team services in the event of a security
Services breach. Restores the operational integrity of the systems, maintains
evidence, provides forensic and investigative services and
facilitates changes to prevent a recurrence of the breach.
Information Security Assessments Verifies the implementation and effectiveness of clients' security
policies by reviewing and testing their policies, employee
awareness, perimeter security and response team readiness.
</TABLE>
PRODUCTIZED SERVICES
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 productized service,
in other words, a service offering that is productized and replicable from one
project to another. Our productized services 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 productized services are typically provided with little or no
modification.
Our productized services offer a number of advantages as compared to custom
consulting engagements. These include:
- efficient delivery of our services over and over again using a replicable
methodology;
- ability to gain broad market penetration because our productized services
are well-defined and can be more easily sold by our sales force and
through third-party sales channels;
- ability to more effectively articulate the business benefit of our
services based on observing the impact that our productized services have
for other clients; and
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- a more flexible pricing strategy that is based on the business benefit to
our clients and not the cost to deliver our services.
Our current productized services 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 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 Systems 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 SWIFT
Teligent Union Bank of
UUNet California
</TABLE>
SALES AND MARKETING
We have developed direct and indirect sales channels for the sale of our
services. To facilitate our direct sales effort we have developed the
infrastructure necessary to capture and track the major sales indicators through
the sales cycle. Additionally, a significant amount of time and effort has been
and will continue to be invested in the development of tools, training materials
and training for sales and technical personnel. Our productized services have
provided us with an opportunity to develop strategic third-party relationships
with hardware, software service and telecommunications providers in order to
expand our sales channel. As a result, we are developing an indirect sales
channel through relationships with third-party strategic partners. We have
entered into an agreement with Cabletron under which Cabletron has agreed to
market and sell our productized services. Cabletron will initially sell and
market our Information Security Requirements Analysis product, with an
additional 3 products to be added over the term of the agreement. The products
will be sold by Cabletron. We will provide the services for each product for
which we will be paid a predetermined amount by Cabletron. The term of the
agreement is through July 30, 2001 and will renew automatically for successive
one year terms unless terminated by either of us. We intend to pursue similar
agreements with other strategic partners in order to broaden our indirect sales
channel.
HUMAN RESOURCES
We seek to attract, train, retain and deliver the highest level of technical
talent. We believe that our proactive approach gives us a strong competitive
edge in the marketplace and a scalable, consistently high standard of service
delivery. As of August 31, 1999, we had 349 full-time employees.
RECRUITING. Our success is dependent in part on attracting and retaining
talented and motivated personnel at all levels. Accordingly, we invest
significant resources in our recruiting efforts. We have a proactive recruiting
philosophy and believe in a broad-based model for attracting candidates.
Generally, we hire technical consultants according to profiles that fit into one
of our four practice areas.
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CORPORATE CULTURE. Our corporate culture is shaped by our view of employees
as investors because they choose to invest their talents, skills, time and
energy into our organization. This mindset is critical to our ability to attract
and retain professional staff at a time when information technology
professionals are in high demand. We have instituted a very competitive benefits
package for all employees and have developed policies that ensure that we
continue to address our employees' professional development and satisfaction. We
strive to maintain our relaxed and supportive workplace despite our rapid growth
and expansion.
PROFESSIONAL DEVELOPMENT. We believe that our investment in our employees
must mirror our employees' investment in and commitment to us. Integral to this
goal is the establishment of a career development plan for each of our
employees, which is created and agreed upon by management and the employee. We
provide our consultants with the opportunity to obtain extensive subject matter
expertise in their practice area and to work in collaborative multi-discipline
projects. We have also established Predictive University, a training program
that leverages both our in-house captured knowledge programs, as well as
selected outside certification programs.
COMPENSATION. We believe that linking employee compensation to our success
through performance-based incentive programs encourages a high level of
involvement from each team member and increases our employee retention. We
provide a highly competitive compensation package that consists of a combination
of base salary, performance-based incentives and company stock options.
COMPETITION
The network management consulting industry is comprised of many
participants, is highly competitive and is subject to rapid technological
change. We face intense competition from systems integrators, value added
resellers, local and regional network services firms, telecommunications
providers, network equipment and computer systems vendors. Many of our
competitors have greater name recognition, longer operating histories, more
relationships with large and established clients and greater financial,
technical and managerial resources. Furthermore, we expect that our competitors
may in the future form alliances with other technology vendors, which may give
them an advantage in managing networks that use that vendor's equipment.
Most of our current clients and prospective clients have internal
information technology departments and could choose to satisfy their network
management needs through internal resources rather than by outsourcing them to
third-party service providers such as ourselves. The decision by clients or
prospective clients to rely on their own information technology departments
could have a material adverse affect on our business, results of operations and
financial condition. Moreover, as the domestic and global markets for
information technology services continue to grow, we expect to face stiff
competition from new entrants into the network management consulting industry.
We believe that the principal competitive factors in the network management
market are the ability to attract and retain qualified personnel, quality and
breadth of services offered, price and reliability of services provided and the
strength of client relationships. We believe we compete favorably with respect
to all of these factors. We believe we distinguish ourselves from our
competitors through our expertise in managing complex, multi-vendor networks and
our ability to provide clients with cost certainty and guaranteed deliverables.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. Despite our precautions, it may be possible
for third parties to obtain and
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use our intellectual property without our authorization. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
We pursue the registration of our trademarks in the United States and
England. We may not be able to secure adequate protection of our trademarks in
the United States and other countries. We currently have applied for trademark
registrations in the United States and England for the PREDICTIVE SYSTEMS and
BUSINESSFIRST marks, and further, a trademark application in the United States
for the Predictive logo. The trademark offices in the United States and England
have raised preliminary objections to the registration of the trademarks
described above on a number of grounds, including likelihood of confusion with
pre-existing trademarks and descriptiveness. We have responded to these
objections and are awaiting the trademark offices' decisions on our responses.
We have not, however, received any objections from third parties asserting
likelihood of confusion claims with respect to our trademarks. Nonetheless, we
may not be able to obtain trademark registrations in the United States or
England, or both, for one or more of these trademarks, in which case we would be
unable to fully enforce our statutory trademark rights against third parties for
these trademarks, and/or we may decide to replace these trademarks with new
trademarks. This could have a material adverse effect on our business, financial
condition and results of operations. Effective trademark protection may not be
available in all the countries in which we conduct business. Policing
unauthorized use of our marks is also difficult and expensive. In addition, it
is possible that our competitors have adopted or will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion.
We cannot be certain that our services and the finished products that we
deliver do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. We may be subject to
legal proceedings and claims from time to time relating to the intellectual
property of others in the ordinary course of our business. We may incur
substantial expenses in defending against these third-party infringement claims,
regardless of their merit. Successful infringement claims against us may result
in substantial monetary liability or may materially disrupt the conduct of our
business.
FACILITIES
Our principal executive offices are currently located in approximately
15,000 square feet of office space in New York, New York. Additionally, in June
1999 we entered into an agreement to lease approximately 32,000 square feet of
office space in another facility in New York, New York, with an option for an
additional 32,000 square feet available by March 2001. We expect to move our
principal executive offices to the new facilities in December 1999. We also
lease office space in:
- Atlanta, Georgia;
- Boston, Massachusetts;
- Dallas, Texas;
- Florham Park, New Jersey;
- Herndon, Virginia;
- Pleasanton, California;
- Santa Cruz, California;
- London, England; and
- Amsterdam, The Netherlands.
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We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
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MANAGEMENT
The following table sets forth our executive officers, directors and key
employees, their ages and the positions they hold:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ronald G. Pettengill, Jr............................. 40 Chairman of the Board and Chief Executive Officer
Robert L. Belau...................................... 36 President and Director
Thomas R. Joseph..................................... 32 Vice President, General Manager North America
Carl D. Humes........................................ 33 Vice President, Global Operations
Gregory D. Nicastro.................................. 39 Vice President, Strategic Services
Neeraj Sethi......................................... 36 Vice President, Finance
R. Kevin Holt........................................ 45 Vice President, Human Resources
John Wright.......................................... 36 Managing Director, Europe
Peter L. Bloom (1)................................... 41 Director
Donald J. Duffy (1).................................. 32 Director
Braden R. Kelly (2).................................. 28 Director
Eric Meyer (2)....................................... 38 Director
</TABLE>
- ------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
RONALD G. PETTENGILL, JR. co-founded Predictive in February 1995 and has
been Chairman of the Board and Chief Executive Officer since that time. Prior to
founding Predictive, Mr. Pettengill was Senior Vice President of Network
Operations at Allerion, Inc., a systems integration and network control center
design, operation and service delivery firm, from 1992 to 1995. From 1990 to
1992, Mr. Pettengill was the Director of Technical Services at Network
Management, Inc., which provided consulting services to assist Fortune 500
companies migrate from mainframe to network-based client/ server environments.
Prior to working at Network Management, Mr. Pettengill was the Network Manager
at Bear, Stearns & Co. Inc.
ROBERT L. BELAU co-founded Predictive in February 1995 and has been
President and a Director since that time. Prior to founding Predictive, Mr.
Belau was Director of Sales at Allerion, and also managed the definition,
productization and pricing of its network management outsourcing services, from
1993 to 1995. From 1987 to 1993, Mr. Belau was the Director of Sales at Network
Management. Mr. Belau is the step-brother of Eric Meyer, one of our directors.
THOMAS R. JOSEPH has been Vice President, General Manager North America
since April 1999. Prior to that he held various positions with us, most recently
as National Vice President of Business Development, from 1996 to 1999. From 1994
to 1996, Mr. Joseph was a Global Accounts Manager at Metropolitan Fiber Systems,
a competitive access provider.
CARL D. HUMES has been Vice President, Global Operations since April 1999.
Prior to that he served as Region Vice President of Technical Services for our
Mid-Atlantic region since 1996. From 1995 to 1996, Mr. Humes was a consultant at
Booz-Allen & Hamilton, a strategic consulting firm. Prior to that, Mr. Humes was
an officer in the United States Navy, and served on a nuclear submarine and at
the White House Office of Emergency Operations.
GREGORY D. NICASTRO has been Vice President, Strategic Services since April
1999. Prior to that, Mr. Nicastro served as Vice President of Marketing since
1997. Prior to joining us, Mr. Nicastro founded ActingExec, a marketing
consulting firm, in 1995. From July 1995 to October 1995,
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Mr. Nicastro was Director of Systems Marketing at 3Com Corporation. From 1988 to
1995, Mr. Nicastro served as National Account Sales Manager at Sun Microsystems.
NEERAJ SETHI has been Vice President of Finance since 1995. Prior to joining
us, Mr. Sethi was Assistant Vice President for Global Expense Management at
Bankers Trust from 1992 to 1995. From 1989 to 1992, Mr. Sethi was Controller and
Financial Analyst at Network Management.
R. KEVIN HOLT has been Vice President of Human Resources since March 1999.
Prior to joining us, Mr. Holt was a Managing Partner at USWeb/CKS (formerly
USWeb). Prior to the merger of USWeb/ CKS and Gray Peak Technologies, Mr. Holt
served as Vice President and Director of Recruiting at Gray Peak, a high-end
network solutions provider. From October 1995 until September 1997, Mr. Holt
served as the Eastern Division Recruiting Manager at Sprint-Paranet, a global
network solutions provider. Previously, Mr. Holt was the Founder and President
of Metropolitan Search, a contingency and retained search and consulting
company. Mr. Holt filed a petition for bankruptcy protection in 1994.
JOHN WRIGHT has been Managing Director, Europe since January 1999. Prior to
joining us, Mr. Wright founded Visia Management Consultants, a strategic
consulting company, in 1997. From 1996 to 1997, Mr. Wright served as Director,
Business Development at Global Village, a communications software firm. From
1987 to 1996, Mr. Wright served in various roles at Gandalf Digital
Communications, including, most recently, Director of Indirect Channels.
PETER L. BLOOM has been a director of Predictive since March 1999. Mr. Bloom
is a managing member of General Atlantic Partners, LLC, a private equity firm
that invests globally in software, services, Internet and related information
technology companies, and has been at General Atlantic since 1995. From 1982 to
1995, Mr. Bloom served in various roles at Salomon Brothers, including as
Managing Director of Salomon's U.S. Technology Division. Mr. Bloom is a Director
of Bindview Development Corporation and a Special Advisor to the Board of
Directors of E*TRADE Securities, Inc.
DONALD J. DUFFY has been a director of Predictive since its inception in
February 1995. Mr. Duffy is a co-founder of Meyer, Duffy & Associates, Inc., and
MD Ventures, firms that invest in early stage networking and Internet technology
companies. Mr. Duffy is a director of Bikers Dream Inc., a publicly traded
company. Mr. Duffy has been at Meyer, Duffy & Associates since 1994. From 1992
to 1994, Mr. Duffy was a Vice President at Oak Hall Capital Advisors, a money
management firm.
BRADEN R. KELLY has been a director of Predictive since June 1999. Mr. Kelly
is an associate at General Atlantic Partners, LLC, and has been with General
Atlantic since 1995. Mr. Kelly is a director of HEALTHvision, Inc., a provider
of comprehensive Internet solutions to the healthcare industry. From 1993 to
1994, Mr. Kelly served as a Financial Analyst at Morgan Stanley & Company.
ERIC MEYER has been as a director of Predictive since its inception in
February 1995. Mr. Meyer is a co-founder of Meyer, Duffy & Associates and MD
Ventures, 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.
CLASSIFIED BOARD OF DIRECTORS
Prior to the completion of the offering, our board of directors will be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the board of directors will be elected each
year. These provisions, when coupled with the provision of our amended and
restated certificate of incorporation authorizing the board of directors to fill
vacant directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors
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<PAGE>
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 and
Kelly, who were appointed in May 1999 and June 1999, respectively. Prior to that
time, the responsibilities of the audit committee were handled by the entire
board of directors.
The compensation committee reviews and makes recommendations to the board of
directors regarding our compensation policies and all forms of compensation to
be provided to our executive officers and directors. In addition, the
compensation committee reviews bonus and stock compensation arrangements for all
of our other employees. The members of the compensation committee are Messrs.
Duffy and Bloom, who were appointed in May 1999. Prior to that time, the
responsibilities of the audit committee were handled by the entire board of
directors.
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--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 common stock at a price of
$4.00 per share in May 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 commence of
service on the board of directors. In addition, at each annual meeting of
stockholders, beginning with the 2001 annual meeting, each individual who is to
continue to serve as a non-employee member of the board of directors will
receive an option to purchase 2,500 shares of our common stock.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued during
the fiscal year ended December 31, 1998 to our Chief Executive Officer and to
each of our most highly compensated executive officers, other than the Chief
Executive Officer, whose salary and bonus for such fiscal year exceeded
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
---------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY $ BONUS $ OPTIONS COMPENSATION
- ------------------------------------------------------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Ronald G. Pettengill, Jr............................... $ 175,000 $ 50,000 60,000 $ 8,447(1)
Chief Executive Officer
Robert L. Belau........................................ 175,000 50,000 60,000 8,899(1)
President
Thomas R. Joseph....................................... 112,500 190,000 270,000 3,000(2)
Vice President of North America
Carl D. Humes.......................................... 112,500 190,000 270,000 3,000(2)
Vice President, Technical Services
Gregory D. Nicastro.................................... 140,000 14,000 -- --
Vice President, Strategic Services
Neeraj Sethi........................................... 135,167 55,000 -- --
Vice President, Finance
</TABLE>
- ------------------------
(1) We paid a monthly car allowance and automobile insurance premiums for each
of Messrs. Pettengill and Belau during the year ended December 31, 1998.
(2) We paid a monthly car allowance effective July 1998 for each of Messrs.
Joseph and Humes during the year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to our Chief Executive Officer and to each of our most highly
compensated executive officers, other than the Chief Executive Officer, whose
salary and bonus for such fiscal year exceeded $100,000. We have never granted
any stock appreciation rights. The potential realizable value is calculated
based on the term of the option at its time of grant. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth. The percentage of total options granted to employees
in the last fiscal year is based on options to purchase an aggregate of
2,427,000 shares of common stock granted under our option plans. There was no
public market for our
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<PAGE>
common stock as of December 31, 1998. Accordingly, the fair market value on
December 31, 1998 is assumed to be the initial public offering price of $13.00
per share.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION --------------------------
NAME GRANTED IN 1998 SHARE ($) DATE 5% 10%
- --------------------------------------- ----------- ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr............... 60,000 2.5% $ 1.25 1/1/08 $ 1,135,036 $ 1,764,199
Robert L. Belau........................ 60,000 2.5 1.25 1/1/08 1,135,036 1,764,199
Thomas R. Joseph....................... 150,000 6.2 1.25 1/1/08 2,837,590 4,410,498
120,000 4.9 1.50 8/1/08 2,124,830 3,163,999
Carl D. Humes.......................... 150,000 6.2 1.25 1/1/08 2,837,590 4,410,498
120,000 4.9 1.50 8/1/08 2,124,830 3,163,999
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the value realized
upon exercise of options during 1998 and the number and value of unexercised
options held by each of our named executive officers at December 31, 1998. There
was no public market for our common stock as of December 31, 1998. Accordingly,
the values set forth below have been calculated on the basis of the fair market
value on December 31, 1998 assuming this was equal to the assumed initial public
offering price of $13.00 per share, less the applicable exercise price per
share, multiplied by the number of shares underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
<S> <C> <C> <C> <C> <C> <C>
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ------------ ----------- ------------- ------------ -------------
Ronald G. Pettengill, Jr.............. 585,000 $ 7,507,305 780,000 -- $ 9,485,220 --
Robert L. Belau....................... 585,000 7,507,305 780,000 -- 9,485,220 --
Thomas R. Joseph...................... -- -- 210,000 150,000 2,497,530 $ 1,740,000
Carl D. Humes......................... -- -- 210,000 150,000 2,460,000 1,740,000
Gregory D. Nicastro................... -- -- -- 336,000 -- 3,948,000
Neeraj Sethi.......................... 135,000 1,732,455 90,000 90,000 1,070,010 1,057,500
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into executive employment agreements with Ronald G.
Pettengill, Jr., our Chairman and Chief Executive Officer, and Robert L. Belau,
our President. Each employment agreement provides for an initial annual base
salary of $200,000. Each employment agreement also provides for initial
performance based bonuses of $25,000 upon the closing of this offering and up to
an additional $50,000 upon the achievement of certain gross revenue thresholds
in the 1999 fiscal year. Under the agreements, each executive also received
options to purchase 100,000 shares of our common stock at a price of $4.00 per
share, which vest over 3 years. Additionally, each executive received options to
purchase an additional 100,000 shares of our common stock at a price of $4.00
per share which vest after 4 years. These additional options will vest
immediately upon the achievement of certain gross revenues thresholds.
Each employment agreement expires on May 11, 2002, subject to earlier
termination or extension. Each employment agreement provides that if Messrs.
Pettengill and Belau are terminated by us without cause or if they terminate
their employment agreements for good reason, they will be entitled to their base
salary and health coverage until the later of the expiration date of their
employment agreements
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<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 and John Wright, Managing Director Europe. 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 4 years.
Our employment agreement with Mr. Holt expires on January 23, 2001, subject
to earlier termination. Mr. Holt's agreement provides that if he is terminated
by us without cause or if he terminates his employment with us for good reason,
he will be entitled to receive his base salary until the earlier of six months
after the date of his termination or the date he accepts new employment. Under
the agreement, good reason includes:
- a reduction in Mr. Holt's base salary;
- a relocation of Mr. Holt's office further than 50 miles from his current
office; or
- a material reduction in job duties.
Our agreement prohibits Mr. Holt from competing with us, soliciting our
employees or permitting his name to be used in connection with a competing
business for a period of six months from the date of the termination of his
employment.
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
4 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.
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.
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<PAGE>
6,665,600 shares of common stock have been authorized for issuance under the
1999 Plan. This share reserve consists of the shares which were available for
issuance under the predecessor plans on the effective date of the 1999 Plan plus
an additional increase of 2,345,597 shares. The share reserve will automatically
be increased on the first trading day of January each calendar year, beginning
in January 2001, by a number of shares equal to 1% of the total number of shares
of common stock outstanding on the last trading day of the immediately preceding
calendar year, but no such annual increase will exceed 500,000 shares. However,
in no event may any one participant in the 1999 Plan receive option grants or
direct stock issuances for more than 500,000 shares in the aggregate per
calendar year.
Outstanding options under the predecessor plans will be incorporated into
the 1999 Plan upon the date of this offering, and no further option grants will
be made under those plans. The incorporated options will continue to be governed
by their existing terms, unless our compensation committee extends one or more
features of the 1999 Plan to those options. However, except as otherwise noted
below, the outstanding options under the predecessor plans contain substantially
the same terms and conditions summarized below for the discretionary option
grant program under the 1999 Plan.
The 1999 Plan has five separate programs:
- the discretionary option grant program under which eligible individuals in
our employ or service (including officers, non-employee board members and
consultants) may be granted options to purchase shares of our common
stock;
- the stock issuance program under which these individuals may be issued
shares of our common stock directly, with the purchase of such shares or
as a bonus tied to the performance of services;
- the salary investment option grant program under which executive officers
and other highly compensated employees may elect to apply a portion of
their base salary to the acquisition of special below-market stock option
grants;
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members; and
- the director fee option grant program under which non-employee board
members may elect to apply a portion of their retainer fee to the
acquisition of special below-market stock option grants.
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the exercise or purchase price
for each such grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may 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
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<PAGE>
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 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
50
<PAGE>
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 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.
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<PAGE>
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 SYSTEMS
In September 1999, we sold 1,378,052 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 existing agreements, previously entered
into in an arms-length transaction. In fiscal 1998 and the six months ended June
30, 1999, revenues from Cisco were $35,190 and $883,388, respectively.
TRIBECA SOFTWARE
In March 1998, we made a pro rata distribution of all of the outstanding
shares of our former subsidiary, Tribeca Software, Inc., to our stockholders. Of
the 1,501,700 then outstanding shares of Tribeca, we distributed the following
amounts to our officers, directors and 5% stockholders and their affiliates:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF STOCKHOLDER OF TRIBECA
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
Ronald G. Pettengill, Jr........................................................................ 234,000
Robert L. Belau................................................................................. 250,000
Belau Irrevocable Family Trust.................................................................. 10,000
Neeraj Sethi.................................................................................... 13,000
Donald J. Duffy................................................................................. 25,000
Eric Meyer...................................................................................... 42,500
MD Strategic, L.P............................................................................... 85,000
PVII, L.P....................................................................................... 32,000
Boyce Meyer Trust(1)............................................................................ 200,000
</TABLE>
- ------------------------
(1) Boyce Meyer was the father of Eric Meyer and the stepfather of Robert
Belau.
Subsequent to this transaction, Tribeca purchased from us, and we assigned
to Tribeca, network management software and other assets. As payment for these
assets, Tribeca gave us a demand note in the amount of $130,000, which accrued
interest at 8% per annum. Additionally, we gave Tribeca a $1,000,000 line of
credit at an interest rate of 8% per annum. In March 1999, Tribeca paid us the
full amounts due under the demand note and line of credit and the line of credit
was terminated. The largest amount outstanding under the line of credit was
$988,800.
From March 1998 through June 1999, we performed payroll, accounting and
other administrative services for Tribeca for a fee of $7,000 per month.
Additionally, Tribeca leases office space and equipment from us for
approximately $12,000 per month. We also have an oral agreement with Tribeca to
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.
53
<PAGE>
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, L.P. 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, L.P. and the managing members of General Atlantic Partners LLC are
also the general partners of GAP Coinvestment Partners, L.P. 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. 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, each, a director of ours, are general
partners of MD Strategic, Predictive Ventures and PVII.
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, each one of our directors, serve as co-managing Directors of Meyer, Duffy
& Associates. We paid Meyer, Duffy & Associates a retainer fee of $5,000 per
month in connection with these services through March 31, 1999, 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.
54
<PAGE>
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 our non-employee directors options to purchase 25,000
shares of our common stock at a price of $4.00 per share. Additionally, in 1999,
we granted to Messrs. Pettengill, Belau and Holt options to purchase 200,000,
200,000 and 130,000, respectively. Please see "Management-- Employment
Agreements." For additional information regarding the grant of stock options to
executive officers and directors, please see "Management--Director
Compensation," "--Executive Compensation," "--1999 Stock Incentive Plan" and
"Principal Stockholders."
AGREEMENTS WITH UNDERWRITERS
We provide network consulting services to Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette and First Union Capital Markets Corp. pursuant to
agreements they have entered into with us. The terms of these agreements were
negotiated by 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.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of September 16, 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
16, 1999, but excludes shares of common stock underlying options held by any
other person. Percentage of beneficial ownership is based on 18,565,332 shares
of common stock outstanding as of September 16, 1999, assuming the conversion of
the series A preferred stock, and 22,565,332 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 11.5% 9.5%
Robert L. Belau (2).............................................. 2,655,000 13.7 11.4
Thomas R. Joseph (3)............................................. 240,000 1.3 1.1
Carl D. Humes (3)................................................ 240,000 1.3 1.1
Gregory D. Nicastro (4).......................................... 84,000 * *
Neeraj Sethi (5)................................................. 150,000 * *
Peter L. Bloom (6)............................................... 6,463,206 34.8 28.6
Donald J. Duffy (7).............................................. 2,631,900 14.0 11.6
Braden R. Kelly (8).............................................. -- -- --
Eric Meyer (9)................................................... 3,114,900 16.6 13.7
Cisco Systems, Inc. (10)......................................... 1,378,052 7.4 6.1
General Atlantic Partners LLC (11)............................... 6,463,206 34.8 28.6
Meyer Duffy and Associates, L.P (12)............................. 1,800,000 9.7 8.0
All directors and executive officers as a group
(12 persons) (13).............................................. 15,356,106 72.5 61.0
</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.
56
<PAGE>
(2) Includes (a) 780,000 shares issuable upon the exercise of currently
exercisable options and (b) 126,000 shares of common stock held by The Belau
Family Trust.
(3) Includes 240,000 shares issuable upon the exercise of currently exercisable
options.
(4) Includes 84,000 shares issuable upon the exercise of currently exercisable
options.
(5) Includes 120,000 shares issuable upon the exercise of currently exercisable
options.
(6) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54, L.P.,
and (b) 1,112,765 shares owned by GAP Coinvestment Partners II, L.P. The
general partner of General Atlantic Partners 54 is General Atlantic Partners
LLC and the managing members of General Atlantic Partners LLC are also the
general partners of GAP Coinvestment Partners II, L.P. 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, General Atlantic
Partners 54, L.P. and GAP Coinvestment Partners, L.P. The address of Mr.
Bloom and General Atlantic Partners LLC is c/o General Atlantic Partners, 3
Pickwick Plaza, Greenwich, Connecticut 06830.
(7) Includes (a) 180,000 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares of common stock held by MD
Strategic, L.P., (c) 1,800,000 shares of common stock held by Meyer, Duffy
and Associates, L.P. and (d) 140,940 shares of common stock held by PVII,
L.P. Mr. Duffy is a general partner of each of MD Strategic, L.P., Meyer,
Duffy & Associates, L.P. and PVII, L.P. Mr. Duffy disclaims beneficial
ownership of these securities except to the extent of his economic interest
in MD Strategic L.P., Meyer Duffy & Associates, L.P. and PVII, L.P. The
address of Mr. Duffy is c/o of Meyer, Duffy & Associates, Inc., 237 Park
Avenue, New York, New York 10017.
(8) The address of Mr. Kelly is c/o General Atlantic Partners, 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) The address of Cisco Systems, Inc. is 170 West Tasman Drive, San Jose,
California 95134-1706.
(11) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54, L.P.,
and (b) 1,112,765 shares owned by GAP Coinvestment Partners II, L.P. General
Atlantic Partners LLC is the general partner of General Atlantic Partners
54, L.P. and the managing members of General Atlantic Partners LLC are also
the general partners of GAP Coinvestment Partners, L.P. The address of
General Atlantic Partners LLC is 3 Pickwick Plaza, Greenwich, Connecticut
06830.
(12) The address of Meyer, Duffy and Associates, L.P. is c/o Meyer, Duffy &
Associates, Inc., 237 Park Avenue, New York, New York 10017.
(13) Includes 2,604,000 shares of common stock issuable upon the exercise of
currently exercisable options.
57
<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 16, 1999, 18,565,332 shares of common stock were outstanding. As of
September 16, 1999, we had 71 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 an amended and restated registration rights
agreement with some of our stockholders, including: General Atlantic Partners;
Ronald G. Pettengill, Jr., our Chief Executive Officer; Robert L. Belau, our
President; Eric Meyer and Donald Duffy, each, one of our directors; and Meyer,
Duffy and Associates. Under the terms of this agreement, at any time after the
first anniversary of the effective date of this offering, each of General
Atlantic Partners and GAP Coinvestment Partners may, on two occasions only,
require us to register for sale all or any portion of the shares of common stock
issuable upon conversion of the preferred shares held by them. We are also
obligated to register some shares of common stock held by parties to the
registration rights agreement if they request to be included in the
registration. In September 1999, we entered into a separate registration rights
agreement with Cisco Systems.
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
58
<PAGE>
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.
59
<PAGE>
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be received
at our principal executive offices not less than 60 days nor more than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for a date that is
not within thirty (30) days before or after the anniversary date, in order to be
timely, notice from the stockholder must be received no later than the tenth day
following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. In the case of a
special meeting of stockholders called for the purpose of electing directors,
notice by the stockholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our amended and restated by-laws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual or
special meeting of stockholders or from making nominations for directors at
these meetings.
AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with the
amendment of provisions of our amended and restated certificate of incorporation
and amended and restated bylaws, including those provisions relating to the
classified board of directors and the ability of stockholders to call special
meetings.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes supermajority vote requirements in connection with various
business combination transactions and the amendment of various provisions of our
amended and restated certificate of incorporation and amended and restated
bylaws, including those provisions relating to the classified board of
directors, action by written consent and special meetings by stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock will be American Stock
Transfer & Trust Company, New York, New York.
LISTING
We have applied to list our common stock on the Nasdaq National Market under
the trading symbol "PRDS."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have on
the market price of the common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could adversely affect the market price
of the common stock and could impair our future ability to raise capital through
the sale of its equity securities.
Upon completion of this offering, we will have an aggregate of 22,565,332
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 18,565,332 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 18,565,332 shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- ------------------------------------------------------------------------
<S> <C>
After the date of this prospectus
After 90 days from the date of this prospectus
After 180 days from the date of this prospectus (subject, in some
cases), to volume limitations
</TABLE>
In general, under Rule 144, as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of (1) 1% of the
then outstanding shares of common stock (approximately 226,000 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 10,373,763
shares of common stock are outstanding, of which 5,146,600 are currently
exercisable (without regard to the 180-day lock up period). Promptly after the
closing of this offering, we intend to file a registration statement to register
for resale all shares of common stock issued or issuable under its 1999 employee
stock purchase plan and not otherwise freely transferable. Accordingly, shares
covered by that registration
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<PAGE>
statement will be eligible for sale in the public markets, unless those options
are subject to vesting restrictions.
Our directors and officers and certain of our stockholders who hold
shares and options in the aggregate have agreed that they will not sell,
directly or indirectly, any shares of common stock (other than shares of common
stock purchased as part of the directed share program in connection with this
offering) without the prior written consent of BancBoston Robertson Stephens
Inc. for a period of 180 days from the date of this prospectus.
We have agreed not to sell or otherwise dispose of any shares of our common
stock during the 180 day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under our stock
option plan.
Following this offering, under certain circumstances and subject to certain
conditions, holders of 6,463,206 shares of our outstanding common stock will
have certain demand registration rights with respect to their shares of common
stock (subject, in certain cases, to the 180-day lock-up arrangement described
above) to require us to register their shares of common stock under the
Securities Act, and they will have certain rights to participate in any future
registration of securities by us. Additionally, holders of 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."
62
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin
& Jenrette Securities Corporation and First Union Capital Markets Corp., have
severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common stock
set forth opposite their names below. The underwriters are committed to purchase
and pay for all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BancBoston Robertson Stephens Inc................................................
Bear, Stearns & Co. Inc..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
First Union Capital Markets Corp.................................................
----------
Total........................................................................ 4,000,000
----------
----------
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers.
After the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No reduction in
this price will change the amount of proceeds to be received by us as indicated
on the cover page of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,000,000 shares offered by this prospectus. If purchased, the additional
shares will be sold by the underwriters on the same terms as those on which the
4,000,000 shares are being sold. We will be obligated, under this option, to
sell shares to the extent the option is exercised. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of the
4,000,000 shares of common stock offered by this prospectus.
The following table shows the per share and total underwriting discounts and
commissions to be paid by us to the underwriters. This information is presented
assuming either no exercise or full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
SHARE OPTION OPTION
--------- ----------------- -----------------
<S> <C> <C> <C>
Assumed public offering price........................... $ $ $
Underwriting discounts and commissions..................
Proceeds, before expenses, to us........................
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on , 1999.
63
<PAGE>
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of representation
and warranties contained in the underwriting agreement.
FUTURE SALES. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period of 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of common stock, any options or warrants to purchase
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements. There are no agreements
between the representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the 180-day
lock-up period. In addition, we have generally agreed that, during the 180-day
lock-up period, we will not, without the prior written consent of BancBoston
Robertson Stephens Inc., (a) consent to the disposition of any shares held by
stockholders prior to the expiration of the 180-day lock-up period or (b) issue,
sell, contract to sell or otherwise dispose of, any shares of common stock, any
options or warrants to purchase any shares of common stock, or any securities
convertible into, exercisable for or exchangeable for shares of common stock,
other than our sale of shares in the offering, our issuance of common stock upon
the exercise of currently outstanding options and warrants, and our issuance of
incentive awards under our stock incentive plan. Please see "Shares Eligible for
Future Sale."
DIRECTED SHARES. We have requested that the underwriters reserve up to 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
representatives in a syndicate covering transaction and has therefore not been
effectively placed by the underwriter or syndicate member. The representatives
have advised us that these transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
OTHER AGREEMENTS. We provide network consulting services to some of the
underwriters. Please see "Certain Transactions--Agreements with Underwriters."
64
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, New York, New York. The Brobeck investment fund
and attorneys at Brobeck hold in the aggregate 49,110 shares of series A
preferred stock, which will automatically convert into 49,110 shares of common
stock upon the closing of this offering, and 1,000 shares of common stock.
Various legal matters in connection with this offering will be passed upon for
the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Predictive Systems, Inc. as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information with respect to Predictive and the common stock, reference
is made to the registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in Predictive files in the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Predictive's
Commission filings, including the registration statement, will also be available
to you on the Commission's Internet site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
65
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED AND SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HISTORICAL PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited)................. F-4
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1998 and 1999 (Unaudited).......................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1999 (Unaudited)........................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Six
Months Ended June 30, 1998 and 1999 (Unaudited).......................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Supplemental Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (Unaudited).... SF-1
Supplemental Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999 (Unaudited).................................................. SF-2
Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1997
and 1998 and the Six Months Ended June 30, 1999 (Unaudited).............................................. SF-3
Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and
the Six Months Ended June 30, 1998 and 1999 (Unaudited).................................................. SF-4
Notes to Supplemental Consolidated Financial Statements.................................................... SF-5
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The financial statements included herein have been adjusted to give effect
to the increase in the authorized number of common shares to 200,000,000 and to
decrease the authorized number of preferred shares to 10,000,000. We expect to
be in a position to render the following report upon the effectiveness of such
events assuming that from May 12, 1999 to the effective date of such events, no
other events will have occurred that would effect the financial statements or
the notes thereto.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
To Predictive Systems, Inc.:
We have audited the accompanying balance sheets of Predictive Systems, Inc.
(a Delaware corporation) (the "Company") as of December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Predictive Systems, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
We have also made a similar audit of the accompanying supplemental balance
sheets of Predictive Systems, Inc. at December 31, 1997 and 1998, and the
related supplemental statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. The
supplemental statements give retroactive effect to the merger with Network
Resource Consultants and Company B.V. on August 12, 1999, which has been
accounted for as a pooling of interests as described in Note 1. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
F-2
<PAGE>
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the financial position of Predictive
Systems, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, after giving retroactive effect to the merger with Network
Resource Consultants and the Company B.V. as described in Note 1, all in
conformity with generally accepted accounting principles.
F-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 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 obligation................................... 76,982 151,027 150,511
---------- ----------- -----------
Total current liabilities................................................... 3,792,853 9,719,987 3,904,231
---------- ----------- -----------
NONCURRENT LIABILITIES:
Deferred rent................................................................. 23,306 70,957 52,177
Capital lease obligation...................................................... 282,013 446,018 398,927
Deferred income tax liability................................................. -- 714,146 516,528
---------- ----------- -----------
Total liabilities........................................................... 4,098,172 10,951,108 4,871,863
---------- ----------- -----------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par value, 5%
cumulative, 4,200,000, 4,200,000 and 0 shares issued and outstanding)......... 700,000 700,000 -- --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 10,000,000 shares authorized, 0,
0 and 6,512,316 shares issued and outstanding, none issued and outstanding
on a pro forma basis)....................................................... -- -- 6,512 --
Common stock ($.001 par value, 200,000,000 shares authorized, 4,408,200,
7,900,200 and 12,465,750 shares issued and 4,408,200, 7,900,200 and
9,610,650 shares outstanding, 16,122,966 shares issued and outstanding on a
pro forma basis)............................................................ 4,408 7,900 12,466 16,123
Additional paid-in capital.................................................... 69,762 682,270 20,002,886 11,606,988
Treasury stock, 2,855,100 shares.............................................. -- -- (8,398,753 ) --
Retained earnings............................................................. 1,998,041 1,335,741 1,153,601 1,153,601
Accumulated other comprehensive loss.......................................... -- -- (15,699 ) (15,699)
---------- ----------- ----------- ----------
Total stockholders' equity.................................................. 2,072,211 2,025,911 12,761,013 12,761,013
---------- ----------- ----------- ----------
Total liabilities and stockholders' equity.................................. $6,870,383 $13,677,019 $17,632,876 $17,632,876
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services..................... $ 6,818,678 $ 16,897,456 $ 23,857,780 $ 8,935,220 $ 21,278,287
Hardware and software sales............... 1,287,649 1,189,617 2,065,348 530,258 1,287,701
----------- ------------ ------------ ------------ ------------
Total revenues.......................... 8,106,327 18,087,073 25,923,128 9,465,478 22,565,988
COST OF REVENUES:
Professional services..................... 3,381,505 9,590,306 12,861,272 5,179,277 10,245,945
Hardware and software purchases........... 970,479 816,935 1,698,356 437,820 1,031,889
----------- ------------ ------------ ------------ ------------
Total cost of revenues.................. 4,351,984 10,407,241 14,559,628 5,617,097 11,277,834
----------- ------------ ------------ ------------ ------------
Gross profit............................ 3,754,343 7,679,832 11,363,500 3,848,381 11,288,154
SALES AND MARKETING......................... 386,000 1,081,889 3,433,751 1,255,707 3,409,297
GENERAL AND ADMINISTRATIVE.................. 1,683,574 4,390,476 8,184,486 3,586,811 7,376,425
DEPRECIATION AND AMORTIZATION............... 142,134 320,908 567,761 229,348 312,135
----------- ------------ ------------ ------------ ------------
Operating profit (loss)................. 1,542,635 1,886,559 (822,498) (1,223,485) 190,297
OTHER INCOME (EXPENSE):
Interest income........................... 31,540 26,575 57,976 12,662 69,574
Other income.............................. 7,613 3,849 1,555 35 36,882
Interest expense.......................... -- (35,545) (324,591) (66,629) (109,078)
----------- ------------ ------------ ------------ ------------
Income (loss) before income tax
provision (benefit)................... 1,581,788 1,881,438 (1,087,558) (1,277,417) 187,675
INCOME TAX PROVISION (BENEFIT).............. 718,678 870,504 (460,258) (540,880) 361,065
----------- ------------ ------------ ------------ ------------
Net income (loss)....................... $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (173,390)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE
BASIC..................................... $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
DILUTED................................... $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC..................................... 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
DILUTED................................... 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
PRO FORMA NET LOSS PER SHARE--BASIC AND
DILUTED (unaudited)(Note 2)............... $(0.01)
------------
------------
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND DILUTED
(unaudited)(Note 2)....................... 13,131,340
------------
------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................................... -- $ -- 4,269,000 $ 4,269 $ 37,901
Net income................................................... -- -- -- -- --
Exercise of options.......................................... -- -- 30,000 30 4,970
--------- ----------- --------- ----------- ----------
Balance at December 31, 1996................................... -- -- 4,299,000 4,299 42,871
Net income................................................... -- -- -- -- --
Exercise of options.......................................... -- -- 109,200 109 26,891
Preferred stock dividends.................................... -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at December 31, 1997................................... -- -- 4,408,200 4,408 69,762
Net loss..................................................... -- -- -- -- --
Exercise of options.......................................... -- -- 3,492,000 3,492 612,508
Preferred stock dividends.................................... -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at December 31, 1998................................... -- -- 7,900,200 7,900 682,270
Net loss..................................................... -- -- -- -- --
Foreign currency translation adjustment...................... -- -- -- -- --
Total comprehensive loss.....................................
Preferred stock dividends.................................... -- -- -- -- --
Conversion of preferred to common............................ -- -- 4,200,000 4,200 695,800
Issuance of preferred stock.................................. 6,512,316 6,512 -- -- 18,559,713
Exercise of options.......................................... -- -- 365,550 366 65,103
Common stock repurchase to treasury, 2,855,100 shares........ -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at June 30, 1999 (unaudited)........................... 6,512,316 $ 6,512 12,465,750 $ 12,466 $20,002,886
--------- ----------- --------- ----------- ----------
--------- ----------- --------- ----------- ----------
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK EARNINGS LOSS EQUITY
---------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................... $ -- $ 150,247 $ -- $ 192,417
Net income................................................... -- 863,110 -- 863,110
Exercise of options.......................................... -- -- -- 5,000
---------- --------- -------------- ------------
Balance at December 31, 1996................................... -- 1,013,357 -- 1,060,527
Net income................................................... -- 1,010,934 -- 1,010,934
Exercise of options.......................................... -- -- -- 27,000
Preferred stock dividends.................................... -- (26,250) -- (26,250)
---------- --------- -------------- ------------
Balance at December 31, 1997................................... -- 1,998,041 -- 2,072,211
Net loss..................................................... -- (627,300) -- (627,300)
Exercise of options.......................................... -- -- -- 616,000
Preferred stock dividends.................................... -- (35,000) -- (35,000)
---------- --------- -------------- ------------
Balance at December 31, 1998................................... -- 1,335,741 -- 2,025,911
Net loss..................................................... -- (173,390) (173,390)
Foreign currency translation adjustment...................... -- -- (15,699) (15,699)
------------
Total comprehensive loss..................................... (189,089)
------------
------------
Preferred stock dividends.................................... -- (8,750) -- (8,750)
Conversion of preferred to common............................ -- -- -- 700,000
Issuance of preferred stock.................................. -- -- -- 18,566,225
Exercise of options.......................................... -- -- -- 65,469
Common stock repurchase to treasury, 2,855,100 shares........ (8,398,753) -- -- (8,398,753)
---------- --------- -------------- ------------
Balance at June 30, 1999 (unaudited)........................... $(8,398,753) $1,153,601 $ (15,699) $12,761,013
---------- --------- -------------- ------------
---------- --------- -------------- ------------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 863,110 $1,010,934 $ (627,300) $ (736,537) $ (173,390)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Deferred income taxes................................ 463,229 838,572 (540,469) (540,880) (153,350)
Depreciation and amortization........................ 142,134 320,908 567,761 229,348 312,135
Provision for doubtful accounts...................... 20,840 99,308 102,196 76,680 285,328
(Increase) decrease in--
Accounts receivable................................ (1,197,039) (2,718,335) (4,710,510) (428,825) (4,699,713)
Unbilled work in process........................... (300,190) 204,978 (883,420) (27,773) (415,039)
Prepaid income taxes............................... (133,133) (210,916) 1,220 (781) 342,829
Other current assets............................... (190,084) (44,401) (215,378) 37,855 (210,901)
Other assets....................................... (77,851) (127,283) 32,267 (19,313) 49,973
Increase (decrease) in--
Accounts payable and accrued expenses.............. 575,628 (61,916) 2,149,308 458,886 494,182
Deferred income.................................... 494,948 (464,493) 412,459 (3,842) (420,341)
Deferred rent...................................... 16,462 (7,269) 47,651 (4,798) (18,780)
Income taxes payable............................... 0 0 0 0 201,511
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 678,054 (1,159,913) (3,664,215) (959,980) (4,405,556)
---------- ---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
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.............................. 0 0 0 0 (15,699)
Net increase (decrease) in cash.................. 367,865 (217,715) (420,456) (276,416) 359,911
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,171 420,456 420,456 --
---------- ---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,171 $ 420,456 $ -- $ 144,040 $ 359,911
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The financial statements and footnotes reflect the combined
operations and financial position of the Company and the Parent for all periods
presented.
The Company provides network consulting services for the design,
performance, management and securities of complex business-critical computing
network. Services are currently provided through the Company's offices located
throughout the United States and its wholly-owned subsidiary in England which
was formed in the first quarter of 1999.
The Company is proposing an initial public offering of up to 4,600,000
shares of common stock including overallotment. See "Risk Factors" in the
accompanying prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS--
The accompanying consolidated balance sheet as of June 30, 1999 and
consolidated statements of operations, stockholders' equity and cash flows for
the six months ended June 30, 1998 and 1999 included herein have been prepared
by the Company and are unaudited. The information furnished in the unaudited
financial statements referred to above includes all adjustments which are, in
the opinion of management, necessary for a fair presentation of such financial
statements. The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION--
Revenue for time-and-material contracts are recognized as the services are
rendered. Revenues for fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting based on the ratio
of costs incurred to total estimated costs. Unbilled work in process represent
costs incurred and estimated earnings, production, and other client-reimbursable
costs. Included in unbilled work in process as of December 31, 1997 and 1998 and
June 30, 1999 is $39,580, $1,032,390 and $1,448,809 (unaudited), respectively,
related to fixed-price contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. The
Company acts as a reseller of certain hardware and software and sales revenue is
recognized when these products are shipped to the customer.
Deferred income represents prepayments from customers that are recorded as
liabilities for future services to be performed. Income is recognized upon
performance of these related services.
F-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS--
The Company considers all short-term marketable equity securities with a
maturity of three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT--
Computer equipment and office furniture are carried at their cost basis and
depreciated using the straight-line method over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the life of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred and major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives.
BUSINESS CONCENTRATIONS AND CREDIT RISK--
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, approximately 79% of sales were from
six customers. For the year ended December 31, 1997, approximately 60% of sales
were from four customers. For the year ended December 31, 1998, approximately
20% of sales were from one customer. The amounts due from these customers at
December 31, 1997 and 1998 were approximately $2,357,000 and $2,931,000,
respectively.
INCOME TAXES--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company converted from a cash basis to an accrual basis taxpayer on January 1,
1998.
UNAUDITED PRO FORMA INFORMATION--
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of its
convertible preferred stock into common stock concurrent with the closing of the
Company's anticipated initial public offering. (See Note 7 for conversion terms)
The unaudited pro forma consolidated balance sheet as of June 30, 1999,
reflects the conversion of 6,512,316 shares of the convertible preferred stock
into 6,512,316 shares of common stock.
Pro forma loss per share is computed using the weighted average number of
common shares outstanding during the period assuming conversion of the
convertible preferred stock into common stock as of the date of issuance.
F-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME (LOSS) PER SHARE--
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding. Diluted net income (loss) per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
outstanding.
ACCOUNTING FOR LONG-LIVED ASSETS--
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. The Company does not believe that any
such changes have taken place.
STOCK-BASED COMPENSATION--
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), and elected to continue the accounting
set forth in Accounting Principles Board No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and to provide the necessary pro forma disclosures as if
the fair value method had been applied (Note 7).
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amounts of cash and cash equivalents, accounts and other
receivables, and accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of outstanding borrowings
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS--
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15, 1997
and need not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
Company does not believe it operates in more than one segment. The chief
operating decision maker allocates resources and assesses the performance
associated with its business on a single-segment basis.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. The Company does not
expect
F-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the adoption of this standard to have a material effect on the Company's results
of consolidated operations, financial position or cash flows.
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------ ------------ ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss)...................... $ 863,110 $ 1,010,934 $ (627,300) $ (736,537) $ (173,390)
Preferred stock dividends.............. -- (26,250) (35,000) (17,500) (8,750)
------------- ------------- ------------ ------------ ------------
Numerator for basic earnings per
share--net income (loss) available
to common stockholders............. 863,110 984,684 (662,300) (754,037) (182,140)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Effect of dilutive securities-- preferred
stock dividend......................... -- 26,250 -- -- --
------------- ------------- ------------ ------------ ------------
Numerator for diluted earnings per
share--net income (loss) available to
common stockholders after assumed
conversions............................ $ 863,110 $ 1,010,934 $ (662,300) $ (754,037) $ (182,140)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Denominator--
Denominator for basic earnings per
share--weighted average shares....... 4,269,000 4,382,417 6,015,433 4,633,900 8,970,694
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred stock....... 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options............... 3,117,130 4,182,193 -- -- --
------------- ------------- ------------ ------------ ------------
Dilutive potential common shares....... 7,317,130 8,382,193 -- -- --
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Denominator for diluted earnings per
share--adjusted weighted average shares
and assumed conversions................ 11,586,130 12,764,610 6,015,433 4,633,900 8,970,694
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Basic earnings per share from net income
(loss)................................. $ 0.20 $ 0.22 $ (0.11) $ (0.16) $ (0.02)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
Diluted earnings per share from net
income (loss).......................... $ 0.07 $ 0.08 $ (0.11) $ (0.16) $ (0.02)
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>
F-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
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 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) DEBT:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts receivable,
as defined. At December 31, 1998, the balance outstanding on this demand loan
was $5,598,000 as the lender has informally extended the Company's ability to
borrow under this demand loan. The interest rate on the demand loan was 11.25%
at December 31, 1998. During the first quarter of 1999, the balance outstanding
on the demand loan was paid in full.
F-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) CAPITAL LEASE OBLIGATIONS:
The Company has entered into various leases for computer equipment, office
furniture, and leasehold improvements. These leases have been capitalized using
interest rates ranging from 7.88% to 18.83% and expire on various dates through
2003. Depreciation on the capitalized assets has been included in depreciation
expense in the accompanying statements of operations.
The future minimum lease payments required under the above mentioned capital
leases for the twelve months ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1999............................................................................. $ 211,951
2000............................................................................. 209,297
2001............................................................................. 155,655
2002............................................................................. 87,812
2003............................................................................. 55,697
Less--Amount representing interest............................................... (123,367)
-----------
Present value of net minimum lease payments...................................... 597,045
Less--Current portion............................................................ (151,027)
-----------
$ 446,018
-----------
-----------
</TABLE>
(7) STOCKHOLDERS' EQUITY:
PREFERRED STOCK--
Since inception, the Company has issued two types of preferred stock. The
following is a discussion of each of these issuances--
In 1995, the Company issued 4,200,000 shares of mandatory redeemable
convertible preferred stock (the "1995 Preferred Shares") at a price of
$0.17 per share. The shares accrue dividends at 5% per year, commencing
March 1, 1997. Each share is convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. The shares
automatically convert upon successful completion of an initial public
offering yielding gross proceeds of at least $10.0 million and at an initial
public offering price of not less than $0.83 per share. Commencing March 1,
1998, the Company was able to redeem the 1995 Preferred Shares. Commencing
March 1, 2001, if not previously redeemed, the Company was required to
redeem the 1995 Preferred Shares in three equal annual installments.
During the quarter ended March 31, 1999, the holders of the 1995
Preferred Shares exercised their conversion rights and converted all
outstanding shares into 4,200,000 shares of common stock. In connection with
the conversion, the Company paid $70,000 of accumulated dividends on the
1995 Preferred Shares.
Subsequent to the conversion of the 1995 Preferred Shares, the Company
redeemed 2,855,100 shares of common stock at a purchase price of
approximately $2.94 per share.
On March 5, 1999, the Company sold 6,512,316 shares of convertible
preferred stock (the "1999 Preferred Shares") to General Atlantic Partners
54, L.P. (5,350,441 shares), GAP Coinvestment Partners II, LP (1,112,765
shares), and other investors (49,110 shares) resulting in net proceeds of
approximately $18,600,000. The 1999 Preferred Shares are convertible to
common shares on a 1 to 1 ratio at any time at the option of the holder,
subject to certain adjustments. The shares will automatically convert (i)
prior to the closing of the proposed initial public offering
F-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
yielding net proceeds of at least $25 million and resulting in a market
capitalization of at least $100 million or (ii) upon the conversion of at
least 67% of all 1999 Preferred Shares.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, warrants were
issued to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering at a price equal to the
initial price to the public. In order to exercise the warrants, a notice of
exercise must be delivered within 20 business days following the first
filing of the Company's registration statement on Form S-1. (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 2,005,835 3.27
Exercised........................... (30,000) 0.17 (109,200) 0.25 (3,492,000) 0.18 (365,550) 0.18
Forfeited........................... -- -- (192,000) 0.83 (9,000) 0.83 (160,650) 1.05
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02 9,877,235 $ 1.51
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Options exercisable at end of
period............................ 3,588,000 $ 0.27 5,700,300 $ 0.42 4,586,250 $ 0.80 4,859,100 $ 0.89
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted during period..... $ 0.17 $ 0.23 $ 0.26 $ 0.62
</TABLE>
F-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- ------------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$0.17............................................ 789,000 6.20 years 789,000
0.50............................................ 240,000 7.00 years 240,000
0.83............................................ 3,040,800 7.83 years 2,557,800
1.25............................................ 2,788,800 8.61 years 912,450
1.50............................................ 1,539,000 9.59 years 87,000
-------------- -------------
8,397,600 4,586,250
-------------- -------------
-------------- -------------
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1996 1997 1998 1999
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported.......................... $ 863,110 $ 1,010,934 $ (627,300) $ (173,390)
Pro forma............................ 830,967 774,427 (1,006,406) (455,214)
Basic net income (loss) per share:
As reported.......................... $ 0.20 $ 0.22 $ (0.11) $ (0.02)
Pro forma............................ $ 0.19 $ 0.18 $ (0.17) $ (0.05)
Diluted net income (loss) per share:
As reported.......................... $ 0.07 $ 0.08 $ (0.11) $ (0.02)
Pro forma............................ $ 0.07 $ 0.06 $ (0.17) $ (0.05)
</TABLE>
F-15
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 are as follows--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision--
Federal......................................... $ 185,521 $ 26,882 $ -- $ -- $ 399,865
State........................................... 69,928 5,050 80,211 -- 114,550
---------- ---------- ----------- ----------- -----------
255,449 31,932 80,211 -- 514,415
---------- ---------- ----------- ----------- -----------
Deferred income tax provision (benefit)--
Federal......................................... 331,790 578,823 (407,182) (381,133) (131,082)
State........................................... 131,439 259,749 (133,287) (159,747) (22,268)
---------- ---------- ----------- ----------- -----------
463,229 838,572 (540,469) (540,880) (153,350)
---------- ---------- ----------- ----------- -----------
$ 718,678 $ 870,504 $ (460,258) $ (540,880) $ 361,065
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The following table indicates the significant elements contributing to the
difference between the Federal statutory rate and the Company's effective tax
rate--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate................................. 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes net of Federal effect...................... 6.6 6.6 (6.6) (6.6) 6.6
Valuation allowance.................................... -- -- -- -- 139.0
Other.................................................. 4.8 5.7 (1.7) (1.7) 12.8
--------- --------- --------- --------- ---------
45.4% 46.3% (42.3)% (42.3)% 192.4%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of
F-16
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES: (CONTINUED)
approximately $1,667,000. Other major components of the deferred tax assets and
(liabilities) as of December 31, 1997, 1998 and June 30, 1999 are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve................................. $ 32,486 $ 57,529 $ 173,544
Prepaid expenses................................. (66,407) -- --
Accounts receivable.............................. (1,739,221) -- --
Unbilled receivables............................. (72,946) -- --
Accounts payable and accrued expenses............ 255,872 -- --
Depreciation..................................... 14,231 100,124 88,405
Section 481 A. adjustment........................ -- (1,249,974) (1,028,959)
Net operating loss carryforwards................. 227,732 174,474 260,000
Valuation allowance.............................. -- -- (260,000)
Other, net....................................... (91,362) 18,701 21,214
------------- ------------- -------------
Total deferred taxes, net.................... $ (1,439,615) $ (899,146) $ (745,796)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $580,000 and $390,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(9) RELATED PARTIES:
During 1998, the Company started a software development company which had
previously been consolidated with the Company. In March 1998, the software
development company was spun off through a pro rata distribution to shareholders
accounted for at historical cost. In connection with the spin-off the Company
sold certain assets with minimal book value to the software development company
and received a note for approximately $130,000 for the sale of certain software.
Additionally, the Company provided a $1,000,000 line of credit bearing interest
at 8%. As of December 31, 1998, $916,948 was due from this company.
(10) NOTES RECEIVABLE--STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options. The stockholders
signed notes payable to the Company in exchange for the loans which had interest
rates of 7%. All amounts due under these notes were paid in full subsequent to
December 31, 1998.
(11) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES--
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately six months to five years, with an
option to renew two of these leases for an additional five years. These leases
provide for minimum annual lease payments and additional
F-17
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES: (CONTINUED)
operating expense charges, as well as rent concessions for two locations, which
are being amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 857,708
2000............................................................................ 723,319
2001............................................................................ 690,309
2002............................................................................ 437,821
2003............................................................................ 211,934
------------
Total minimum lease payments................................................ $ 2,921,091
------------
------------
</TABLE>
Rent expense was approximately $202,568, $457,825 and $736,120 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $284,300 (unaudited) and $527,118 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(12) SUBSEQUENT EVENTS: (UNAUDITED)
Subsequent to year-end the Company amended and restated its certificate of
incorporation to increase its authorized common stock to 200,000,000 shares and
decrease its authorized preferred stock to 10,000,000 shares.
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V., ("NRCC") in a transaction accounted for as a pooling of interests.
In connection with this acquisition, the Company exchanged 1,062,814 shares of
its common stock in exchange for all of the outstanding stock of NRCC.
The warrants issued to General Atlantic Partners 54 L.P. and GAP
Coinvestments to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering expired 20 days after the
first filing of this Form S-1.
On September 14, 1999, the Company sold 1,378,052 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.
F-18
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 500,556 $ 32,432 $ 523,679
Accounts receivable--net of allowance for doubtful accounts of $79,613,
$151,489 and $436,817, respectively......................................... 4,520,396 9,271,531 13,548,697
Unbilled work in process...................................................... 179,404 1,062,824 1,477,863
Notes receivable--employees................................................... 53,371 55,100 50,461
Notes receivable--stockholders................................................ -- 515,000 --
Due from related party........................................................ -- 916,948 --
Prepaid income taxes.......................................................... 344,049 342,829 --
Other current assets.......................................................... 329,981 561,474 658,000
---------- ----------- -----------
Total current assets........................................................ 5,927,757 12,758,138 16,258,700
PROPERTY AND EQUIPMENT--net of accumulated depreciation and amortization of
$485,511, $1,007,210 and $1,355,521, respectively............................. 949,712 1,500,333 1,960,102
DEFERRED TAX ASSET.............................................................. 351,222 -- --
OTHER ASSETS.................................................................... 267,314 235,047 185,074
---------- ----------- -----------
Total assets................................................................ $7,496,005 $14,493,518 $18,403,876
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft................................................................ $ 545,351 $ 475,610 $ --
Short-term borrowings......................................................... 780,000 5,624,043 15,881
Due to shareholders........................................................... 460,714 349,178 292,274
Accounts payable and accrued expenses......................................... 969,670 3,121,046 3,520,003
Deferred income tax liability................................................. 1,676,937 185,000 229,268
Deferred income............................................................... 39,099 490,572 62,121
Dividends payable............................................................. 26,250 61,250 --
Income taxes payable.......................................................... -- 4,166 211,498
Current portion of capital lease obligation................................... 76,981 151,027 150,511
---------- ----------- -----------
Total current liabilities................................................... 4,575,002 10,461,892 4,481,556
---------- ----------- -----------
NONCURRENT LIABILITIES:
Deferred rent................................................................. 23,306 70,957 52,177
Capital lease obligation...................................................... 282,013 446,018 398,927
Deferred income tax liability................................................. -- 684,430 516,528
---------- ----------- -----------
Total liabilities........................................................... 4,880,321 11,663,297 5,449,188
---------- ----------- -----------
MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK ($.001 par value, 5%
cumulative, 4,200,000, 4,200,000 and 0 shares issued and outstanding)......... 700,000 700,000 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock ($.001 par value, 10,000,000 shares authorized, 0,
0 and 6,512,316 shares issued and outstanding).............................. -- -- 6,512
Common stock ($.001 par value, 200,000,000 shares authorized, 5,152,170,
8,963,014 and 13,528,564 shares issued and 5,152,170, 8,963,014 and
10,673,464 shares outstanding).............................................. 5,152 8,963 13,529
Additional paid-in capital.................................................... 93,354 802,734 20,123,350
Treasury stock, 2,855,100 shares.............................................. -- -- (8,398,753 )
Retained earnings............................................................. 1,776,942 1,281,019 1,191,631
Accumulated other comprehensive income........................................ 40,236 37,505 18,419
---------- ----------- -----------
Total stockholders' equity.................................................. 1,915,684 2,130,221 12,954,688
---------- ----------- -----------
Total liabilities and stockholders' equity.................................. $7,496,005 $14,493,518 $18,403,876
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated balance sheets.
SF-1
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Professional services................. $ 6,959,193 $ 17,914,486 $ 25,515,207 $ 9,791,626 $ 22,241,353
Hardware and software sales........... 1,287,649 1,442,414 2,296,846 563,851 1,324,161
------------- ------------- ------------- ------------- -------------
Total revenues...................... 8,246,842 19,356,900 27,812,053 10,355,477 23,565,514
COST OF REVENUES:
Professional services................. 3,502,566 10,387,304 13,764,476 5,647,289 10,778,814
Hardware and software purchases....... 970,479 954,958 1,847,139 453,928 1,051,440
------------- ------------- ------------- ------------- -------------
Total cost of revenues.............. 4,473,045 11,342,262 15,611,615 6,101,217 11,830,254
------------- ------------- ------------- ------------- -------------
Gross profit........................ 3,773,797 8,014,638 12,200,438 4,254,260 11,735,260
SALES AND MARKETING..................... 418,332 1,116,973 3,460,012 1,266,848 3,410,735
GENERAL AND ADMINISTRATIVE.............. 1,896,870 4,733,922 8,689,277 3,834,154 7,656,582
DEPRECIATION AND AMORTIZATION........... 150,706 339,256 611,828 243,783 330,399
------------- ------------- ------------- ------------- -------------
Operating profit (loss)............. 1,307,889 1,824,487 (560,679) (1,090,525) 337,544
OTHER INCOME (EXPENSE):
Interest income....................... 31,535 26,575 66,407 12,662 71,929
Other income (expense)................ 7,613 3,849 6,625 (111) 36,750
Interest expense...................... (11,884) (61,837) (349,350) (76,510) (118,014)
------------- ------------- ------------- ------------- -------------
Income (loss) before income tax
provision (benefit)............... 1,335,153 1,793,074 (836,997) (1,154,484) 328,209
INCOME TAX PROVISION (BENEFIT).......... 634,822 840,460 (376,074) (499,082) 408,847
------------- ------------- ------------- ------------- -------------
Net income (loss)................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (80,638)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS) PER SHARE
BASIC................................. $ 0.14 $ 0.18 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DILUTED............................... $ 0.06 $ 0.07 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING--
BASIC................................. 4,919,974 5,126,387 7,075,000 5,684,315 10,033,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
DILUTED............................... 12,237,104 13,508,580 7,075,000 5,684,315 10,033,508
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-2
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
--------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................................... -- $ -- 4,269,000 $ 4,269 $ 37,901
Net income................................................... -- -- -- -- --
Foreign currency translation adjustment...................... -- -- -- -- --
Total comprehensive income...................................
Issuance of common stock..................................... -- -- 743,970 744 23,592
Exercise of options.......................................... -- -- 30,000 30 4,970
--------- ----------- --------- ----------- ----------
Balance at December 31, 1996................................... -- -- 5,042,970 5,043 66,463
Net income................................................... -- -- -- -- --
Foreign currency translation adjustment...................... -- -- -- -- --
Total comprehensive income...................................
Exercise of options.......................................... -- -- 109,200 109 26,891
Preferred stock dividends.................................... -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at December 31, 1997................................... -- -- 5,152,170 5,152 93,354
Net loss..................................................... -- -- -- -- --
Foreign currency translation adjustment...................... -- -- -- -- --
Total comprehensive loss.....................................
Issuance of common stock..................................... -- -- 318,844 319 96,872
Exercise of options.......................................... -- -- 3,492,000 3,492 612,508
Preferred stock dividends.................................... -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at December 31, 1998................................... -- -- 8,963,014 8,963 802,734
Net loss..................................................... -- -- -- -- --
Foreign currency translation adjustment...................... -- -- -- -- --
Total comprehensive loss.....................................
Preferred stock dividends.................................... -- -- -- -- --
Conversion of preferred to common............................ -- -- 4,200,000 4,200 695,800
Issuance of preferred stock.................................. 6,512,316 6,512 -- -- 18,559,713
Exercise of options.......................................... -- -- 365,550 366 65,103
Common stock repurchase to treasury, 2,855,100 shares........ -- -- -- -- --
--------- ----------- --------- ----------- ----------
Balance at June 30, 1999 (unaudited)........................... 6,512,316 $ 6,512 13,528,564 $ 13,529 $20,123,350
--------- ----------- --------- ----------- ----------
--------- ----------- --------- ----------- ----------
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK EARNINGS INCOME (LOSS) EQUITY
---------- --------- -------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................................... $ -- $ 150,247 $ -- $ 192,417
Net income................................................... -- 700,331 -- 700,331
Foreign currency translation adjustment...................... -- -- 4,973 4,973
------------
Total comprehensive income................................... 705,304
------------
------------
Issuance of common stock..................................... -- -- -- 24,336
Exercise of options.......................................... -- -- -- 5,000
---------- --------- -------------- ------------
Balance at December 31, 1996................................... -- 850,578 4,973 927,057
Net income................................................... -- 952,614 -- 952,614
Foreign currency translation adjustment...................... -- -- 35,263 35,263
------------
Total comprehensive income................................... 987,877
------------
------------
Exercise of options.......................................... -- -- -- 27,000
Preferred stock dividends.................................... -- (26,250) -- (26,250)
---------- --------- -------------- ------------
Balance at December 31, 1997................................... -- 1,776,942 40,236 1,915,684
Net loss..................................................... -- (460,923) -- (460,923)
Foreign currency translation adjustment...................... -- -- (2,731) (2,731)
------------
Total comprehensive loss..................................... (463,654)
------------
------------
Issuance of common stock..................................... -- -- -- 97,191
Exercise of options.......................................... -- -- -- 616,000
Preferred stock dividends.................................... -- (35,000) -- (35,000)
---------- --------- -------------- ------------
Balance at December 31, 1998................................... -- 1,281,019 37,505 2,130,221
Net loss..................................................... -- (80,638) (80,638)
Foreign currency translation adjustment...................... -- -- (19,086) (19,086)
------------
Total comprehensive loss..................................... (99,724)
------------
------------
Preferred stock dividends.................................... -- (8,750) -- (8,750)
Conversion of preferred to common............................ -- -- -- 700,000
Issuance of preferred stock.................................. -- -- -- 18,566,225
Exercise of options.......................................... -- -- -- 65,469
Common stock repurchase to treasury, 2,855,100 shares........ (8,398,753) -- -- (8,398,753)
---------- --------- -------------- ------------
Balance at June 30, 1999 (unaudited)........................... $(8,398,753) $1,191,631 $ 18,419 $12,954,688
---------- --------- -------------- ------------
---------- --------- -------------- ------------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (80,638)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Deferred income taxes................................ 379,373 808,528 (456,285) (542,258) (123,634)
Depreciation and amortization........................ 150,706 339,256 611,828 243,783 330,399
Provision for doubtful accounts...................... 20,840 99,308 102,196 55,110 285,328
(Increase) decrease in--
Accounts receivable................................ (1,270,247) (2,967,653) (4,853,331) (576,235) (4,562,493)
Unbilled work in process........................... (300,190) 204,978 (883,420) (27,773) (415,039)
Prepaid income taxes............................... (133,133) (210,916) 1,220 42,076 342,829
Other current assets............................... (195,753) (92,104) (231,493) (44,749) (96,526)
Other assets....................................... (66,191) (114,784) 32,267 (19,313) 49,973
Increase (decrease) in--
Accounts payable and accrued expenses.............. 632,203 196,801 2,151,376 545,381 398,957
Deferred income.................................... 494,948 (458,349) 451,473 (9,986) (428,451)
Deferred rent...................................... 16,462 (7,269) 47,651 (4,798) (18,780)
Income taxes payable............................... -- -- 4,166 270 207,332
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities..................................... 429,349 (1,249,590) (3,483,275) (993,894) (4,110,743)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to employees.................................. -- (57,151) (26,950) (10,206) (30,938)
Repayments from employees.............................. -- 3,780 25,221 -- 35,577
Payments to stockholders............................... -- -- (626,535) (58,932) (56,905)
Repayments from stockholders........................... 17,353 443,361 -- -- 515,000
Payments to related party.............................. -- -- (916,948) (424,633) (478,078)
Repayments from related party.......................... -- -- -- -- 1,395,026
Purchase of property and equipment..................... (384,476) (394,299) (924,399) (398,336) (837,775)
---------- ---------- ----------- ---------- ----------
Net cash used in investing activities............ (367,123) (4,309) (2,469,611) (892,107) 541,907
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares repurchased to treasury.................. -- -- -- -- (8,398,753)
Cash overdraft......................................... -- 545,351 (69,741) (221,054) (475,610)
Proceeds from short-term borrowings.................... 271,524 2,452,000 4,844,043 -- --
Repayments of short-term borrowings.................... -- (1,943,524) -- 1,620,000 (5,608,162)
Payment of preferred dividends......................... -- -- -- -- (70,000)
Proceeds from sale of preferred stock.................. -- -- -- -- 18,566,225
Proceeds from sale of common stock..................... 24,336 -- 97,191 97,191 --
Proceeds from exercise of stock options................ 5,000 27,000 616,000 95,990 65,469
---------- ---------- ----------- ---------- ----------
Net cash provided by financing activities........ 300,860 1,080,827 5,487,493 1,592,127 4,079,169
---------- ---------- ----------- ---------- ----------
Effects of exchange rates.............................. 4,973 35,263 (2,731) 2,351 (19,086)
Net increase (decrease) in cash.................. 368,059 (137,809) (468,124) (291,523) 491,247
CASH AND CASH EQUIVALENTS, beginning of period........... 270,306 638,365 500,556 500,556 32,432
---------- ---------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period................. $ 638,365 $ 500,556 $ 32,432 $ 209,033 $ 523,679
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest............................................. $ 366 $ 35,545 $ 262,539 $ 66,628 $ 157,838
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Taxes................................................ $ 409,683 $ 260,000 $ -- $ -- $ 23,693
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Borrowings under capital leases........................ $ 334,759 $ 335,669 $ 238,050 $ -- $ --
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
Dividends declared on mandatory redeemable convertible
preferred stock...................................... $ -- $ 26,250 $ 35,000 $ 17,500 $ 8,750
---------- ---------- ----------- ---------- ----------
---------- ---------- ----------- ---------- ----------
</TABLE>
The accompanying notes to supplemental consolidated financial statements are an
integral part of these supplemental consolidated statements.
SF-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws of
the State of Delaware on February 10, 1995. The Company was formerly 100% owned
by Predictive Holdings, Inc. (the "Parent"). During the first quarter of 1999
the Parent was merged with and into the Company and the Parent was concurrently
dissolved. The supplemental financial statements and footnotes reflect the
combined operations and financial position of the Company and the Parent for all
periods presented.
The Company provides network consulting services for the design,
performance, management and securities of complex business-critical computing
network. Services are currently provided through the Company's offices located
throughout the United States and its wholly-owned subsidiary in England which
was formed in the first quarter of 1999.
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V., ("NRCC") in a transaction accounted for as a pooling of interests.
In connection with this acquisition, the Company exchanged 1,062,814 shares of
its common stock in exchange for all of the outstanding stock of NRCC. The
accompanying supplemental financial statements have been restated to reflect the
merger for all periods presented.
The Company is proposing an initial public offering of up to 4,600,000
shares of common stock including overallotment. See "Risk Factors" in the
accompanying prospectus.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL STATEMENTS--
The accompanying supplemental consolidated balance sheet as of June 30, 1999
and supplemental consolidated statements of operations, stockholders' equity and
cash flows for the six months ended June 30, 1998 and 1999 included herein have
been prepared by the Company and are unaudited. The information furnished in the
unaudited supplemental financial statements referred to above includes all
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE AND COST RECOGNITION--
Revenue for time-and-material contracts are recognized as the services are
rendered. Revenues for fixed-price contracts are recognized as services are
rendered on the percentage-of-completion method of accounting based on the ratio
of costs incurred to total estimated costs. Unbilled work in process represent
costs incurred and estimated earnings, production, and other client-reimbursable
costs. Included in unbilled work in process as of December 31, 1997 and 1998 and
June 30, 1999 is $39,580, $1,032,390 and $1,448,809 (unaudited), respectively,
related to fixed-price contracts. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. The
Company acts as a reseller of certain hardware and software and sales revenue is
recognized when these products are shipped to the customer.
SF-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Deferred income represents prepayments from customers that are recorded as
liabilities for future services to be performed. Income is recognized upon
performance of these related services.
CASH EQUIVALENTS--
The Company considers all short-term marketable equity securities with a
maturity of three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT--
Computer equipment and office furniture are carried at their cost basis and
depreciated using the straight-line method over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful lives or the life of the lease. Expenditures
for maintenance and repairs are charged to operations as incurred and major
expenditures for renewals and betterments are capitalized and depreciated over
their useful lives.
BUSINESS CONCENTRATIONS AND CREDIT RISK--
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, approximately 79% of sales were from
six customers. For the year ended December 31, 1997, approximately 60% of sales
were from four customers. For the year ended December 31, 1998, approximately
20% of sales were from one customer. The amounts due from these customers at
December 31, 1997 and 1998 were approximately $2,357,000 and $2,931,000,
respectively.
INCOME TAXES--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement and the tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company converted from a cash basis to an accrual basis taxpayer on January 1,
1998.
NET INCOME (LOSS) PER SHARE--
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares outstanding. Diluted net income (loss) per
common share ("Diluted EPS") is computed by dividing net income (loss) by the
weighted average number of common shares and dilutive common share equivalents
outstanding.
SF-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS--
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. The Company does not believe that any
such changes have taken place.
STOCK-BASED COMPENSATION--
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), and elected to continue the accounting
set forth in Accounting Principles Board No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and to provide the necessary pro forma disclosures as if
the fair value method had been applied (Note 7).
FAIR VALUE OF FINANCIAL INSTRUMENTS--
The carrying amounts of cash and cash equivalents, accounts and other
receivables, and accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of outstanding borrowings
approximate fair value.
NEW ACCOUNTING PRONOUNCEMENTS--
In June 1997, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15, 1997
and need not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
Company does not believe it operates in more than one segment. The chief
operating decision maker allocates resources and assesses the performance
associated with its business on a single-segment basis.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities", which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
quarters of fiscal years beginning after June 15, 1999. The Company does not
expect the adoption of this standard to have a material effect on the Company's
results of consolidated operations, financial position or cash flows.
SF-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE:
As discussed in Note 2, net income (loss) per share is calculated in
accordance with SFAS No. 128. The following table reconciles the numerator and
denominator for the calculation--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ---------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------ ------------ -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator--
Net income (loss).................... $ 700,331 $ 952,614 $ (460,923) $ (655,402) $ (80,638)
Preferred stock dividends............ -- (26,250) (35,000) (17,500) (8,750)
------------- ------------- ------------ ------------ -------------
Numerator for basic earnings per
share--net income (loss)
available to common
stockholders..................... 700,331 926,364 (495,923) (672,902) (89,388)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Effect of dilutive securities--
preferred stock dividend............. -- 26,250 -- -- --
------------- ------------- ------------ ------------ -------------
Numerator for diluted earnings per
share--net income (loss) available to
common stockholders after assumed
conversions.......................... $ 700,331 $ 952,614 $ (495,923) $ (672,902) $ (89,388)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Denominator--
Denominator for basic earnings per
share--weighted average shares..... 4,919,974 5,126,387 7,075,000 5,684,315 10,033,508
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Effect of dilutive securities--
Incremental shares for assumed
conversions of preferred stock..... 4,200,000 4,200,000 -- -- --
Incremental shares for assumed
conversions of options............. 3,117,130 4,182,193 -- -- --
------------- ------------- ------------ ------------ -------------
Dilutive potential common shares..... 7,317,130 8,382,193 -- -- --
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversions....... 12,237,104 13,508,580 7,075,000 5,684,315 10,033,508
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Basic earnings per share from net
income (loss)........................ $ 0.14 $ 0.18 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
Diluted earnings per share from net
income (loss)........................ $ 0.06 $ 0.07 $ (0.07) $ (0.12) $ (0.01)
------------- ------------- ------------ ------------ -------------
------------- ------------- ------------ ------------ -------------
</TABLE>
The following table summarizes the weighted average of securities
outstanding which are excluded from the loss per share calculation for the year
ended December 31, 1998 and the six months ended
SF-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET INCOME (LOSS) PER SHARE: (CONTINUED)
June 30, 1998 and 1999, respectively. Preferred stock is reflected on an "if
converted" basis. See Note 7.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Mandatory redeemable convertible preferred............ 4,200,000 4,200,000 1,516,667
Convertible preferred................................. -- -- 4,160,646
Stock options......................................... 2,396,092 4,557,823 3,856,450
------------ ---------- ----------
6,596,092 8,757,823 9,533,763
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
(4) BUSINESS COMBINATIONS:
On August 12, 1999, the Company acquired NRCC in a transaction accounted for
as a pooling of interests. NRCC provides consulting services to help companies
manage the performance of their networks and communications systems.
The following table summarizes results of the Company and NRCC as standalone
entities for the year ended December 31, 1998 and the six months ended June 30,
1999 (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -----------------
<S> <C> <C>
Predictive Systems, Inc
Revenues.................................................................. $ 25,923,128 $ 22,565,988
Net loss.................................................................. (627,300) (173,390)
NRCC
Revenues.................................................................. $ 1,888,925 $ 999,526
Net income................................................................ 166,377 92,752
</TABLE>
(5) PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment.................................. $ 646,026 $ 1,338,750 $ 1,897,142
Office furniture.................................... 383,949 726,231 771,029
Leasehold improvements.............................. 405,248 442,562 647,452
------------ ------------ ------------
1,435,223 2,507,543 3,315,623
Less--Accumulated depreciation and amortization..... 485,511 1,007,210 1,355,521
------------ ------------ ------------
$ 949,712 $ 1,500,333 $ 1,960,102
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Depreciation and amortization expense aggregated $150,706, $339,256,
$611,828, $243,783 (unaudited) and $330,399 (unaudited), respectively, for the
years ending December 31, 1996, 1997 and 1998 and for the six months ended June
30, 1998 and 1999.
SF-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts receivable,
as defined. At December 31, 1998, the balance outstanding on this demand loan
was $5,598,000 as the lender has informally extended the Company's ability to
borrow under this demand loan. The interest rate on the demand loan was 11.25%
at December 31, 1998. During the first quarter of 1999, the balance outstanding
on the demand loan was paid in full.
(7) CAPITAL LEASE OBLIGATIONS:
The Company has entered into various leases for computer equipment, office
furniture, and leasehold improvements. These leases have been capitalized using
interest rates ranging from 7.88% to 18.83% and expire on various dates through
2003. Depreciation on the capitalized assets has been included in depreciation
expense in the accompanying statements of operations.
The future minimum lease payments required under the above mentioned capital
leases for the twelve months ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1999............................................................................. $ 211,951
2000............................................................................. 209,297
2001............................................................................. 155,655
2002............................................................................. 87,812
2003............................................................................. 55,697
Less--Amount representing interest............................................... (123,367)
-----------
Present value of net minimum lease payments...................................... 597,045
Less--Current portion............................................................ (151,027)
-----------
$ 446,018
-----------
-----------
</TABLE>
(8) STOCKHOLDERS' EQUITY:
PREFERRED STOCK--
Since inception, the Company has issued two types of preferred stock. The
following is a discussion of each of these issuances--
In 1995, the Company issued 4,200,000 shares of mandatory redeemable
convertible preferred stock (the "1995 Preferred Shares") at a price of
$0.17 per share. The shares accrue dividends at 5% per year, commencing
March 1, 1997. Each share is convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. The shares
automatically convert upon successful completion of an initial public
offering yielding gross proceeds of at least $10.0 million and at an initial
public offering price of not less than $0.83 per share. Commencing March 1,
1998, the Company was able to redeem the 1995 Preferred Shares. Commencing
March 1, 2001, if not previously redeemed, the Company was required to
redeem the 1995 Preferred Shares in three equal annual installments.
During the quarter ended March 31, 1999, the holders of the 1995
Preferred Shares exercised their conversion rights and converted all
outstanding shares into 4,200,000 shares of common stock. In connection with
the conversion, the Company paid $70,000 of accumulated dividends on the
1995 Preferred Shares.
Subsequent to the conversion of the 1995 Preferred Shares, the Company
redeemed 2,855,100 shares of common stock at a purchase price of
approximately $2.94 per share.
On March 5, 1999, the Company sold 6,512,316 shares of convertible
preferred stock (the "1999 Preferred Shares") to General Atlantic Partners
54, L.P. (5,350,441 shares), GAP Coinvestment Partners II, LP (1,112,765
shares), and other investors (49,110 shares) resulting in
SF-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY: (CONTINUED)
net proceeds of approximately $18,600,000. The 1999 Preferred Shares are
convertible to common shares on a 1 to 1 ratio at any time at the option of
the holder, subject to certain adjustments. The shares will automatically
convert (i) prior to the closing of the proposed initial public offering
yielding net proceeds of at least $25 million and resulting in a market
capitalization of at least $100 million or (ii) upon the conversion of at
least 67% of all 1999 Preferred Shares.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, warrants were
issued to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering at a price equal to the
initial price to the public. In order to exercise the warrants, a notice of
exercise must be delivered within 20 business days following the first
filing of the Company's registration statement on Form S-1. (See Note 13)
STOCK OPTIONS--
In 1998, the Company adopted its Stock Option/Stock Issuance Plans (the
"Option Plans"). Prior to this time, options issued were not issued in
connection with a plan. The Option Plans are each divided into two separate
equity programs, the Option Grant Program and the Stock Issuance Program. Under
the Option Grant Program, the Company may issue either incentive stock options
or nonqualified stock options. Under the Stock Issuance Program the Company may
issue shares of common stock either through the purchase of such shares or as a
bonus for services rendered. To date, no shares have been issued under the Stock
Issuance Programs. Awards under either program may be granted to such directors,
employees and consultants of the Company as the Board of Directors selects in
its discretion. As of December 31, 1998 a combined total of 2,084,908 shares of
common stock has been reserved for issuance under the two Option Plans.
A summary of the activity under the Option Grant Programs is as follows--
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30, 1999
1996 1997 1998 (UNAUDITED)
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Outstanding at beginning of
period............................ 4,386,000 $ 0.17 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02
Granted............................. 1,560,000 0.78 3,856,800 1.04 2,427,000 1.41 2,005,835 3.27
Exercised........................... (30,000) 0.17 (109,200) 0.25 (3,492,000) 0.18 (365,550) 0.18
Forfeited........................... -- -- (192,000) 0.83 (9,000) 0.83 (160,650) 1.05
--------- ----- --------- ----- --------- ----- --------- -----
Outstanding at end of period........ 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02 9,877,235 $ 1.51
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Options exercisable at end of
period............................ 3,588,000 $ 0.27 5,700,300 $ 0.42 4,586,250 $ 0.80 4,859,100 $ 0.89
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
Weighted average fair value of
options granted during period..... $ 0.17 $ 0.23 $ 0.26 $ 0.62
</TABLE>
SF-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998--
<TABLE>
<CAPTION>
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 1998 LIFE 1998
- ------------------------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$0.17............................................ 789,000 6.20 years 789,000
0.50............................................ 240,000 7.00 years 240,000
0.83............................................ 3,040,800 7.83 years 2,557,800
1.25............................................ 2,788,800 8.61 years 912,450
1.50............................................ 1,539,000 9.59 years 87,000
-------------- -------------
8,397,600 4,586,250
-------------- -------------
-------------- -------------
</TABLE>
The Company has elected to follow APB 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for Option
Plans. Had the determination of compensation costs been based on the fair value
at the grant dates for awards under the Option Plans, consistent with the method
of SFAS 123, the Company's income (loss) and basic and diluted income (loss) per
share would have been reduced to the following pro forma amounts--
The fair value of all of our option grants is estimated on the date of grant
using the Black-Scholes model with the following weighted-average assumptions
used for grants in 1996, 1997, 1998 and the six months ended June 30, 1999--
- weighted-average risk free interest rates of 6.29%, 6.28%, 5.51% and 5.36%
(unaudited), respectively;
- expected dividend yields of 0%;
- expected lives of 4 years; and
- expected volatility of 0%.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1996 1997 1998 1999
---------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported.......................... $ 700,331 $ 952,614 $ (460,923) $ (80,638)
Pro forma............................ 668,188 716,107 (840,029) (362,463)
Basic net income (loss) per share:
As reported.......................... $ 0.14 $ 0.18 $ (0.07) $ (0.01)
Pro forma............................ $ 0.14 $ 0.13 $ (0.12) $ (0.04)
Diluted net income (loss) per share:
As reported.......................... $ 0.06 $ 0.07 $ (0.07) $ (0.01)
Pro forma............................ $ 0.06 $ 0.05 $ (0.12) $ (0.04)
</TABLE>
SF-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for the
years ended December 31, 1996, 1997 and 1998 and the six months ended June 30,
1998 and 1999 are as follows--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current income tax provision--
Federal......................................... $ 185,521 $ 26,882 $ -- $ -- $ 399,865
State........................................... 69,928 5,050 80,211 -- 114,550
Foreign......................................... -- -- -- 43,176 18,066
---------- ---------- ----------- ----------- -----------
255,449 31,932 80,211 43,176 532,481
---------- ---------- ----------- ----------- -----------
Deferred income tax provision (benefit)--
Federal......................................... 331,790 578,823 (407,182) (381,133) (131,082)
State........................................... 131,439 259,749 (133,287) (159,747) (22,268)
Foreign......................................... (83,856) (30,044) 84,184 (1,378) 29,716
---------- ---------- ----------- ----------- -----------
379,373 808,528 (456,285) (542,258) (123,634)
---------- ---------- ----------- ----------- -----------
$ 634,822 $ 840,460 $ (376,074) $ (499,082) $ 408,847
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The following table indicates the significant elements contributing to the
difference between the Federal statutory rate and the Company's effective tax
rate--
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory rate....................................... 34.0% 34.0% (34.0)% (34.0)% 34.0%
State taxes net of Federal effect............................ 6.6 6.6 (6.6) (6.6) 6.6
Valuation allowance.......................................... -- -- -- -- 79.2
Other........................................................ 6.9 6.3 (4.3) (2.6) 4.8
--------- --------- --------- --------- ---------
47.5% 46.9% (44.9)% (43.2)% 124.6%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SF-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES: (CONTINUED)
On January 1, 1998, the Company converted from a cash basis to an accrual
basis taxpayer. The conversion from the cash basis to accrual basis required the
recognition of a deferred tax liability of approximately $1,667,000. Other major
components of the deferred tax assets and (liabilities) as of December 31, 1997,
1998 and June 30, 1999 (unaudited) are as follows--
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bad debt reserve................................. $ 32,486 $ 57,529 $ 173,544
Prepaid expenses................................. (66,407) -- --
Accounts receivable.............................. (1,739,221) -- --
Unbilled receivables............................. (72,946) -- --
Accounts payable and accrued expenses............ 255,872 -- --
Depreciation..................................... 14,231 100,124 88,405
Section 481 A. adjustment........................ -- (1,249,974) (1,028,959)
Net operating loss carryforwards................. 341,632 204,190 260,000
Valuation allowance.............................. -- -- (260,000)
Other, net....................................... (91,362) 18,701 21,214
------------- ------------- -------------
Total deferred taxes, net.................... $ (1,325,715) $ (869,430) $ (745,796)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1997 and 1998, the Company had available net operating loss
carryforwards of approximately $725,000 and $475,000 to reduce future period's
taxable income. These loss carryforwards begin to expire in 2012.
During the six months ended June 30, 1999, the Company's newly formed
subsidiary in England incurred net operating losses, which have been fully
reserved for by a valuation allowance as it cannot be determined that the
realization of these net operating losses is more likely than not.
(10) RELATED PARTIES:
During 1998, the Company started a software development company which had
previously been consolidated with the Company. In March 1998, the software
development company was spun off through a pro rata distribution to shareholders
accounted for at historical cost. In connection with the spin-off the Company
sold certain assets with minimal book value to the software development company
and received a note for approximately $130,000 for the sale of certain software.
Additionally, the Company provided a $1,000,000 line of credit bearing interest
at 8%. As of December 31, 1998, $916,948 was due from this company.
(11) TRANSACTIONS WITH STOCKHOLDERS:
In August 1998, the Company loaned certain stockholders approximately
$515,000 in connection with the exercise of stock options which is included in
Notes receivable--stockholders, in the accompanying December 31, 1998 balance
sheet. The stockholders signed notes payable to the Company in exchange for the
loans which had interest rates of 7%. All amounts due under these notes were
paid in full subsequent to December 31, 1998.
Certain stockholders of the Company provided the Company with loans bearing
interest at rates ranging from 6% to 6.5%. The loans were provided on an
unsecured basis and are due on demand. Amounts outstanding under these
arrangements were $460,714, $349,178 and $292,274 as of December 31, 1997 and
1998 and June 30, 1999 (unaudited).
SF-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES--
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately six months to five years, with an
option to renew two of these leases for an additional five years. These leases
provide for minimum annual lease payments and additional operating expense
charges, as well as rent concessions for two locations, which are being
amortized over five years, the term of the lease.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows--
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------
<S> <C>
1999............................................................................ $ 995,087
2000............................................................................ 883,841
2001............................................................................ 763,969
2002............................................................................ 490,913
2003............................................................................ 262,375
Thereafter...................................................................... 8,408
------------
Total minimum lease payments................................................ $ 3,404,593
------------
------------
</TABLE>
Rent expense was approximately $206,223, $481,515 and $759,332 for the years
ended December 31, 1996, 1997 and 1998, respectively. Rent expense totaled
approximately $396,279 (unaudited) and $548,154 (unaudited) for the six months
ended June 30, 1998 and 1999, respectively.
PENSION PLAN--
The Company has a 401(k) plan with discretionary matching contributions for
its employees. The Company did not make any contributions to the 401(k) plan
during 1996, 1997 or 1998.
LITIGATION--
The Company is involved, from time to time, in legal proceedings incurred in
the normal course of business. In the opinion of management and its counsel,
none of these proceedings would have a material effect on the financial position
or results of operations of the Company.
(13) SUBSEQUENT EVENTS: (UNAUDITED)
Subsequent to year-end the Company amended and restated its certificate of
incorporation to increase its authorized common stock to 200,000,000 shares and
decrease its authorized preferred stock to 10,000,000 shares.
The warrants issued to General Atlantic Partners 54 L.P. and GAP
Coinvestments to purchase shares of common stock equal to 15% of the number of
shares sold in the proposed initial public offering expired 20 days after the
first filing of this Form S-1.
On September 14, 1999, the Company sold 1,378,052 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.
SF-15
<PAGE>
[PREDICTIVE LOGO WITH PICTURES OF NETWORK CONSULTANTS
AND THE TEXT
"THE PREDICTIVE SYSTEMS SOLUTION
IN-DEPTH NETWORK CONSULTING EXPERTISE--our consultants are experts in the four
cornerstones of network computing: internetwork design and engineering, network
and systems management, performance management, and information security.
FLEXIBLE AND INNOVATIVE SERVICE DELIVERY--we provide our clients with a service
model that is designed to control costs and leverage our experience.
QUANTIFIABLE BUSINESS ANALYSIS--using our proprietary methodology,
BusinessFirst, we can demonstrate the value of our technology solutions in
specific and measurable terms.
CROSS-INDUSTRY CLIENT BASE--we provide professional network services to a
variety of clients across a broad range of industries, including communications
services, financial services network technology and professional services."]
<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.............................................. 59,000
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................................................................... 488,656
------------
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 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 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 1,378,052 shares of common
stock to Cisco Systems, Inc. for an aggregate amount of $16,536,624 in
reliance upon the exemption from registration provided by Section 4(2) of
the Securities Act.
5. The Registrant from time to time has granted stock options to employees,
directors and consultants in reliance upon exemption from registration
pursuant to either (i) Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), or (ii) Rule 701 promulgated under the
Securities Act. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICES
---------- --------------
<S> <C> <C>
January 1, 1996 to December 31, 1996....................................... 1,560,000 $ 0.50-$ 0.83
January 1, 1997 to December 31, 1997....................................... 3,856,800 $ 0.83-$ 1.25
January 1, 1998 to December 31, 1998....................................... 2,427,000 $ 1.25-$ 1.50
January 1, 1999 to present................................................. 2,805,363 $ 1.50-$10.20
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2* Form of amended and restated certificate of incorporation to be in effect upon the closing of the
offering.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
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 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.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
24.1 Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
** Confidential treatment 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 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 sixteenth day of September, 1999.
PREDICTIVE SYSTEMS, INC.
By: /s/ RONALD G. PETTENGILL, JR.
-----------------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities indicated.
SIGNATURE TITLE(S) DATE
- ------------------------------ --------------------------- -------------------
/s/ RONALD G. PETTENGILL, Chief Executive Officer and September 16, 1999
JR. Chairman of the Board of
- ------------------------------ Directors (principal
Ronald G. Pettengill, Jr. executive officer)
* President and Director September 16, 1999
- ------------------------------
Robert L. Belau
/s/ NEERAJ SETHI Vice President, Finance September 16, 1999
- ------------------------------ (principal financial and
Neeraj Sethi accounting officer)
* Director September 16, 1999
- ------------------------------
Peter L. Bloom
* Director September 16, 1999
- ------------------------------
Donald J. Duffy
* Director September 16, 1999
- ------------------------------
Braden R. Kelly
* Director September 16, 1999
- ------------------------------
Eric Meyer
<TABLE>
<S> <C> <C> <C>
*By: /s/ RONALD G. PETTENGILL,
JR.
-------------------------
Ronald G. Pettengill, Jr.
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.
We have audited in accordance with generally accepted auditing standards,
the financial statements of Predictive Systems, Inc. included in this
registration statement and have issued our report thereon dated May 12, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
May 12, 1999
S-1
<PAGE>
SCHEDULE II
PREDICTIVE SYSTEMS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.................................. $ 9 $ 21 $ -- $ 30
----- ----- ----- -----
----- ----- ----- -----
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.................................. $ 30 $ 99 $ (49) $ 80
----- ----- ----- -----
----- ----- ----- -----
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.................................. $ 80 $ 102 $ (41) $ 141
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of underwriting agreement.
3.1+ Certificate of incorporation.
3.2* Form of amended and restated certificate of incorporation to be in effect upon the closing of the
offering.
3.3+ By-laws.
3.4* Form of amended and restated by-laws to be in effect upon the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and By-laws of
the Registrant defining the rights of holders of Common Stock of the Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between General Atlantic Partners 54, L.P. and the
Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between Gap Coinvestment Partners II, L.P. and the
Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 1999 Stock Incentive Plan.
10.2 1999 Employee 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.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1 Powers of attorney (please see Signature Page).
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
<PAGE>
+ 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 10.1
PREDICTIVE SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
------------------
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the interests of
Predictive Systems, Inc., a Delaware corporation, by providing eligible persons
with the opportunity to acquire a proprietary interest, or otherwise increase
their proprietary interest, in the Corporation as an incentive for them to
remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary
invested each year in special options,
(iii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any
Parent or Subsidiary),
(iv) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive options at
periodic intervals to purchase shares of Common Stock; and
(v) the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of
their annual retainer fee otherwise payable in cash applied to a
special option grant.
B. The provisions of Articles One and Seven shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary Option
Grant and Stock Issuance Programs shall be administered by the Board unless
otherwise determined by the Board. Beginning with the Section 12 Registration
Date, the following provisions shall govern the administration of the Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part
to the Primary Committee.
(ii) Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested
in the Primary Committee or a Secondary Committee, or the Board may
retain the power to administer those programs with respect to all such
persons.
(iii) Administration of the Automatic Option Grant Program
shall be self-executing in accordance with the terms of that program.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations,
to construe and interpret the provisions of the Plan and the awards
thereunder and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards
are to be made, the number of shares to be covered by each such award,
the vesting schedule (if any) applicable to the award, the status of a
granted option as either an Incentive Option or a Non-Statutory Option
and the maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with
the consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
2
<PAGE>
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to participate in
the Automatic Option Grant and Director Fee Option Grant Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed Six
Million Six Hundred Fifty-Five Thousand Six Hundred (6,655,600) shares. Such
authorized share reserve consists of (i) the number of shares which remain
available for issuance, as of the Section 12 Registration Date, under the
Predecessor Plans, including the shares subject to the outstanding options to be
incorporated into the Plan and the additional shares which would otherwise be
available for future grant, plus (ii) an increase of Two Million Three Hundred
Forty-Five Thousand, Five Hundred Ninety Seven (2,345,597) shares authorized by
the Board subject to stockholder approval prior to the Section 12 Registration
Date.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 2001 calendar year, by an
amount equal to one percent (1%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no event
shall such annual increase exceed Five Hundred Thousand (500,000) shares.
3
<PAGE>
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than Five Hundred Thousand (500,000) shares of Common Stock in the
aggregate per calendar year, beginning with the 1999 calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent options
or direct stock issuances under the Plan. However, should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance. Shares of Common Stock
underlying one or more stock appreciation rights exercised under the Plan shall
NOT be available for subsequent issuance.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities by which the share reserve is
to increase each calendar year pursuant to the automatic share increase
provisions of the Plan, (iii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year, (iv) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (v) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan and (vi) the
number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plans. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
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ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant and may be less than, equal to or
greater than the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section II of Article Seven and
the documents evidencing the option, be payable in one or more of the following
forms:
(i) in cash or check made payable to the Corporation;
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise
Date, or
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-approved brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise
and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
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C. CESSATION OF SERVICE.
1. The following provisions shall govern the exercise of any options
outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or
her Beneficiary.
(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate
and cease to be outstanding to the extent the option is not otherwise
at that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate
immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding:
(i) to extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service to
such period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to
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repurchase, at the exercise price paid per share, any or all of those unvested
shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, to the
extent permitted by the Plan Administrator, be assigned in whole or in part
during the Optionee's lifetime (i) as a gift to one or more members of the
Optionee's immediate family, to a trust in which Optionee and/or one or more
such family members hold more than fifty percent (50%) of the beneficial
interest or to an entity in which more than fifty percent (50%) of the voting
interests are owned by one or more such family members or (ii) pursuant to a
domestic relations order. The terms applicable to the assigned portion shall be
the same as those in effect for the option immediately prior to such assignment
and shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall NOT be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. EXERCISE PRICE. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
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III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but not
otherwise fully-vested shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all of the shares of Common Stock at the time subject to that
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. Each option outstanding
at the time of the Change in Control shall terminate as provided in Section
III.C. of this Article Two.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in Control, all
outstanding options shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in Control
shall be appropriately adjusted, immediately after such Change in Control, to
apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Change in Control had the option been
exercised immediately prior to such Change in Control. Appropriate adjustments
to reflect such Change in Control shall also be made to (i) the exercise price
payable per share under each outstanding option, PROVIDED the aggregate exercise
price payable for such securities shall remain the same, (ii) the maximum number
and/or class of securities available for issuance over the remaining term of the
Plan and (iii) the maximum number and/or class of securities for which any one
person may be granted options, separately exercisable stock appreciation rights
and direct stock issuances under the Plan per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those options are assumed or otherwise continued in full force
and effect pursuant to the terms of the Change in Control. Any such option shall
accordingly become exercisable, immediately prior to the effective date of such
Change in Control, for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of
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Common Stock. In addition, the Plan Administrator may at any time provide that
one or more of the Corporation's repurchase rights shall not be assignable in
connection with such Change in Control and shall terminate upon the consummation
of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
options do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the EARLIER of (i) the expiration of
the option term or (ii) the expiration of the one (1) year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may at any time provide that one or more of the Corporation's
repurchase rights shall immediately terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee's Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.
H. The portion of any Incentive Option accelerated in connection with a
Change in Control or Hostile Take Over shall remain exercisable as an Incentive
Option only to the extent the applicable One Hundred Thousand Dollar ($100,000)
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
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ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
--------------------------------------
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment Option Grant
Program for one or more calendar years beginning after the Underwriting Date and
select the Section 16 Insiders and other highly compensated Employees eligible
to participate in the Salary Investment Option Grant Program for each such
calendar year. Each selected individual who elects to participate in the Salary
Investment Option Grant Program must, prior to the start of each calendar year
of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than Five Thousand Dollars
($5,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary
Committee shall have complete discretion to determine whether to approve the
filed authorization in whole or in part. To the extent the Primary Committee
approves the authorization, the individual who filed that authorization shall be
granted an option under the Salary Investment Grant Program on the first trading
day in January for the calendar year for which the salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; PROVIDED, however,
that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall be payable in one or more of the alternative forms authorized
under the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the dollar amount of the approved reduction in the
Optionee's base salary for the calendar year, and
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<PAGE>
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in
a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.
D. CESSATION OF SERVICE. Each option outstanding at the time of the
Optionee's cessation of Service shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the EARLIER of (i) the expiration of the option term or (ii) the
expiration of the three (3)-year period following the Optionee's cessation of
Service. To the extent the option is held by the Optionee at the time of his or
her death, the option may be exercised by his or her Beneficiary. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while the
Optionee remains in Service, each outstanding option shall automatically
accelerate so that each such option shall, immediately prior to the effective
date of the Change in Control or Hostile Take-Over, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such option accelerated in connection
with a Change in Control shall terminate upon the Change in Control, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. Each option which is assumed in connection with a Change in Control
shall be appropriately adjusted to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such Change in
Control had the option been exercised immediately prior to such Change in
Control. Appropriate adjustments shall also be made to the exercise price
payable per share under each outstanding option, PROVIDED the aggregate exercise
price payable for such securities shall remain the same.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding options. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Option Surrender Value of the shares of Common Stock at the time subject to each
surrendered option (whether or not the Optionee is otherwise at the time vested
in those shares) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
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IV. REMAINING TERMS
The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
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ARTICLE FOUR
STOCK ISSUANCE PROGRAM
----------------------
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening options.
Shares of Common Stock may also be issued under the Stock Issuance Program
pursuant to share right awards which entitle the recipients to receive those
shares upon the attainment of designated performance goals or Service
requirements. Each such award shall be evidenced by one or more documents which
comply with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share of Common Stock subject to direct
issuance shall be fixed by the Plan Administrator and may be less than, equal to
or greater than the Fair Market Value per share of Common Stock on the issue
date.
2. Subject to the provisions of Section II of Article Seven, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent
or Subsidiary).
B. VESTING/ISSUANCE PROVISIONS.
1. The Plan Administrator may issue shares of Common Stock which are
fully and immediately vested upon issuance or which are to vest in one or more
installments over the Participant's period of Service or upon attainment of
specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to
the issued shares of Common Stock, whether or not the Participant's interest in
those shares is
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<PAGE>
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding one
or more unvested shares of Common Stock, or should the performance objectives
not be attained with respect to one or more such unvested shares of Common
Stock, then those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further stockholder rights with
respect to those shares. To the extent the surrendered shares were previously
issued to the Participant for consideration paid in cash or cash equivalent
(including the Participant's purchase-money indebtedness), the Corporation shall
repay to the Participant the cash consideration paid for the surrendered shares
and shall cancel the unpaid principal balance of any outstanding purchase-money
note of the Participant attributable to the surrendered shares.
5. The Plan Administrator may waive the surrender and cancellation of
one or more unvested shares of Common Stock (or other assets attributable
thereto) which would otherwise occur upon the cessation of the Participant's
Service or the non-attainment of the performance objectives applicable to those
shares. Such waiver shall result in the immediate vesting of the Participant's
interest in the shares of Common Stock as to which the waiver applies. Such
waiver may be effected at any time, whether before or after the Participant's
cessation of Service or the attainment or non-attainment of the applicable
performance objectives.
6. Outstanding share right awards shall automatically terminate, and no
shares of Common Stock shall actually be issued in satisfaction of those awards,
if the performance goals or Service requirements established for such awards are
not attained. The Plan Administrator, however, shall have the authority to issue
shares of Common Stock in satisfaction of one or more outstanding share right
awards as to which the designated performance goals or Service requirements are
not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a designated period (not to
exceed eighteen (18) months) following the effective date of any Change in
Control or Hostile Take-Over in which those repurchase rights are assigned to
the successor corporation (or parent thereof) or otherwise continue in full
force and effect.
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III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held in
escrow by the Corporation until the Participant's interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.
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ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
------------------------------
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates specified below:
1. Each individual who is first elected or appointed as a non-employee
Board member at any time after the Underwriting Date shall automatically be
granted, on the date of such initial election or appointment, a Non-Statutory
Option to purchase Twenty-Five Thousand (25,000) shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation (or any Parent or Subsidiary).
2. On the date of each Annual Stockholders Meeting beginning with the
2000 Annual Stockholder Meeting, each individual who is to continue to serve as
a non-employee Board member shall automatically be granted a Non-Statutory
Option to purchase Two Thousand Five Hundred (2,500) shares of Common Stock.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the initial 25,000 share option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. Each initial 25,000-share
option shall vest, and the Corporation's repurchase right shall lapse, in a
series of four (4) successive equal annual installments over the Optionee's
period of continued service as a Board member, with the first such installment
to vest upon the Optionee's completion of one (1) year of Board service measured
from the option grant date. Each annual 2,500-share option shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
one (1) year of Board service measured from the option grant date.
E. CESSATION OF BOARD SERVICE. The following provisions shall govern
the exercise of any options outstanding at the time of the Optionee's cessation
of Board service:
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(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for
a twelve (12)-month period following the date of such cessation of
Board service, but in no event shall such option be exercisable after
the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or
her Beneficiary.
(iii) Following the Optionee's cessation of Board service, the
option may not be exercised in the aggregate for more than the number
of shares for which the option was exercisable on the date of such
cessation of Board service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding for any and all shares for which
the option is not otherwise at that time exercisable.
(iv) However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of
those shares as fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control or Hostile
Take-Over, became fully exercisable for all of the shares of Common Stock at the
time subject to such option and maybe exercised for all or any of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. All outstanding repurchase rights shall automatically terminate and
the shares of Common Stock subject to those terminated rights shall immediately
vest in full, in the event of any Change in Control or Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding options. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Option Surrender Value of the shares of Common Stock at the time subject to each
surrendered option (whether or not the option is otherwise at the time
exercisable for those shares) over (ii) the aggregate exercise price payable for
such shares. Such
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cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation.
D. Each option which is assumed in connection with a Change in Control
shall be appropriately adjusted to apply to the number and class of securities
which would have been issuable to the Optionee in consummation of such Change in
Control had the option been exercised immediately prior to such Change in
Control. Appropriate adjustments shall also be made to the exercise price
payable per share under each outstanding option, PROVIDED the aggregate exercise
price payable for such securities shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for options made under
the Discretionary Option Grant Program.
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ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
---------------------------------
I. OPTION GRANTS
The Board may implement the Director Fee Option Grant Program as of the
first day of any calendar year beginning after the Underwriting Date. Upon such
implementation of the Program, each non-employee Board member may elect to apply
all or any portion of the annual retainer fee otherwise payable in cash for his
or her service on the Board to the acquisition of a special option grant under
this Director Fee Option Grant Program. Such election must be filed with the
Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the election is to be in effect. Each non-employee Board member
who files such a timely election with respect to the annul retainer fee shall
automatically be granted an option under this Director Fee Option Grant Program
on the first trading day in January in the calendar year for which that fee
would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall become immediately due upon exercise of the
option and shall be payable in one or more of the alternative forms authorized
under the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in
a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of
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each month of Board service during the calendar year in which the option is
granted. Each option shall have a maximum term of ten (10) years measured from
the option grant date.
D. CESSATION OF BOARD SERVICE. Should the Optionee cease Board service
for any reason (other than death or Permanent Disability) while holding one or
more options, then each such option shall remain exercisable, for any or all of
the shares for which the option is exercisable at the time of such cessation of
Board service, until the EARLIER of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of such cessation of Board service. However, each option held by the
Optionee at the time of such cessation of Board service shall immediately
terminate and cease to remain outstanding with respect to any and all shares of
Common Stock for which the option is not otherwise at that time exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee shall immediately become exercisable for all the shares of
Common Stock at the time subject to that option, and the option may be exercised
for any or all of those shares as fully-vested shares until the EARLIER of (i)
the expiration of the ten (10)-year option term or (ii) the expiration of the
three (3)-year period measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but
while holding one or more options, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Board service (less any shares subsequently purchased by
Optionee prior to death), by the Optionee's Beneficiary. Such right of exercise
shall lapse, and the option shall terminate, upon the EARLIER of (i) the
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over while the
Optionee remains in Board service, each outstanding option held by such Optionee
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Change in Control or Hostile Take-Over, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise expressly continued in full force and effect pursuant to the terms of
the Change in Control. Each such option accelerated in connection with a Hostile
Take-Over shall remain exercisable until the expiration or sooner termination of
the option term.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding options. The Optionee shall in return be entitled to a cash
distribution from the Corporation in an amount equal to the excess of (i) the
Option Surrender Value of the shares of Common Stock at the time subject to each
surrendered option (whether or not the Optionee is otherwise at the time
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vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
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ARTICLE SEVEN
MISCELLANEOUS
-------------
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the Corporation
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one or
more installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock upon
the exercise of options or the issuance or vesting of such shares under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Withholding Taxes incurred by such holders in connection with the
exercise of their options or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following formats:
STOCK WITHHOLDING: The election to have the Corporation withhold, from
the shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.
STOCK DELIVERY: The election to deliver to the Corporation, at the time
the Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such holder (other than in connection with
the option exercise or share vesting triggering the Withholding Taxes) with an
aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed
one hundred percent (100%)) designated by the holder.
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IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately upon the Plan Effective
Date. However, the Salary Investment Option Grant and Director Fee Option Grant
Programs shall not be implemented until such time as the Primary Committee or
the Board may deem appropriate. Options may be granted under the Discretionary
Option Grant Program at any time on or after the Plan Effective Date. However,
no options granted under the Plan may be exercised, and no shares shall be
issued under the Plan, until the Plan is approved by the Corporation's
stockholders. If such stockholder approval is not obtained within twelve (12)
months after the Plan Effective Date, then all options previously granted under
this Plan shall terminate and cease to be outstanding, and no further options
shall be granted and no shares shall be issued under the Plan.
B. The Plan shall serve as the successor to the Predecessor Plans, and
no further options or direct stock issuances shall be made under the Predecessor
Plans after the Section 12 Registration Date. All options outstanding under the
Predecessor Plans on the Section 12 Registration Date shall be incorporated into
the Plan at that time and shall be treated as outstanding options under the
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of the Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Changes in
Control, may, in the Plan Administrator's discretion, be extended to one or more
options incorporated from the Predecessor Plans which do not otherwise contain
such provisions.
D. The Plan shall terminate upon the EARLIEST of (i) September 13,
2009, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in
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excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held in
escrow until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such stockholder approval is not obtained within twelve (12) months
after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.
B. BENEFICIARY shall mean, in the event the Plan Administrator
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such person's
rights under any outstanding awards held by him or her at the time of death. In
the absence of such designation or procedure, the Beneficiary shall be the
personal representative of the estate of the Optionee or Participant or the
person or persons to whom the award is transferred by will or the laws of
descent and distribution.
C. BOARD shall mean the Corporation's Board of Directors.
D. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, UNLESS securities representing more than
fifty percent (50%) of the total combined voting power of the voting
securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the
same proportion, by the persons who beneficially owned the
Corporation's outstanding voting securities immediately prior to such
transaction,
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
recommends such stockholders accept.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. COMMON STOCK shall mean the Corporation's common stock.
G. CORPORATION shall mean Predictive Systems, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Predictive Systems, Inc. which shall by appropriate
action adopt the Plan.
H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the director fee option
grant program in effect under the Plan.
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I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is to be sold in the
initial public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any options made prior to the
Underwriting Date, the Fair Market Value shall be determined by the
Plan Administrator, after taking into account such factors as it deems
appropriate.
M. HOSTILE TAKE-OVER shall mean:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, or
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(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation or Parent or
Subsidiary employing the individual which materially reduces his or her
duties and responsibilities or the level of management to which he or
she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without
the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such
person, whether by omission or commission, which adversely affects the business
or affairs of the Corporation (or any Parent or Subsidiary) in a material
manner. This shall not limit the grounds for the dismissal or discharge of any
person in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
S. OPTION SURRENDER VALUE shall mean the Fair Market Value per share of
Common Stock on the date the option is surrendered to the Corporation or, in the
event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of Common Stock paid by the tender offeror in effecting
such Hostile Take-Over, if greater. However, if the surrendered option is an
Incentive Option, the Option Surrender Value shall not exceed the Fair Market
Value per share.
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T. OPTIONEE shall mean any person to whom an option is granted under
the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as set
forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible persons,
to the extent such entity is carrying out its administrative functions under
those programs with respect to the persons under its jurisdiction. However, the
Primary Committee shall have the plenary authority to make all factual
determinations and to construe and interpret any and all ambiguities under the
Plan to the extent such authority is not otherwise expressly delegated to any
other Plan Administrator.
Z. PLAN EFFECTIVE DATE shall mean September 14, 1999, the date on which
the Plan was adopted by the Board.
AA. PREDECESSOR PLANS shall mean the Corporation's pre-existing 1998
Stock Option/Stock Issuance Plan and the 1998 California Stock Option/Stock
Issuance Plan in effect immediately prior to the Plan Effective Date hereunder.
BB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program with
respect to all eligible individuals.
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CC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment grant program in effect under the Plan.
DD. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
EE. SECTION 12 REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) of the 1934 Act.
FF. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
GG. SERVICE shall mean the performance of services for the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance. HH. STOCK EXCHANGE shall mean
either the American Stock Exchange or the New York Stock Exchange.
II. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
JJ. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
KK. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
LL. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
MM. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
NN. WITHHOLDING TAXES shall mean the Federal, state and local income
and employment withholding tax liabilities to which the holder of Non-Statutory
Options or unvested shares of Common Stock may become subject in connection with
the exercise of those options or the vesting of those shares.
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EXHIBIT 10.2
PREDICTIVE SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
I. PURPOSE OF THE PLAN
This 1999 Employee Stock Purchase Plan is intended to promote
the interests of Predictive Systems, Inc., a Delaware corporation, by providing
eligible employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to
such terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret
and construe any provision of the Plan and to adopt such rules and regulations
for administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued in the aggregate under the Plan and the International Plan
shall not exceed Seven Hundred Fifty Thousand (750,000) shares.
B. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to the maximum number and class of securities issuable
in the aggregate under the Plan and the International Plan, (ii) the maximum
number and class of securities purchasable per Participant and in the aggregate
on any one Purchase Date and (iii) the number and class of securities and the
price per share in effect under each outstanding purchase right in order to
prevent the dilution or enlargement of benefits thereunder.
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive offering periods until such time as (i)
the maximum number of shares of Common Stock available for issuance under the
Plan shall have been purchased or (ii) the Plan shall have been sooner
terminated.
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B. Each offering period shall be of such duration (not to
exceed twenty-four (24) months) as determined by the Plan Administrator prior to
the start date of such offering period. However, the initial offering period
shall commence at the Effective Time and terminate on the last business day in
October 2001. Subsequent offering periods shall commence as designated by the
Plan Administrator.
C. Each offering period shall be comprised of a series of one
or more successive Purchase Intervals. Purchase Intervals shall run from the
first business day in May each year to the last business day in October of the
same year and from the first business day in November each year to the last
business day in April of the following year. However, the first Purchase
Interval in effect under the initial offering period shall commence at the
Effective Time and terminate on the last business day in April 2000.
D. Should the Fair Market Value per share of Common Stock on
any Purchase Date within an offering period be less than the Fair Market Value
per share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start
date of an offering period under the Plan may enter that offering period on such
start date or on any subsequent Semi-Annual Entry Date within that offering
period, provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee
after the start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be
designated his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering
period, the Eligible Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a stock purchase agreement and a payroll
deduction authorization) and file such forms with the Plan Administrator (or its
designate) on or before his or her scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for
purposes of acquiring shares of Common Stock during an offering period may be
any multiple of one percent (1%) of the Cash Earnings paid to the Participant
during each Purchase Interval within that offering period, up to a maximum of
ten percent (10%). The deduction rate so authorized shall continue
2
<PAGE>
in effect throughout the offering period, except to the extent such rate is
changed in accordance with the following guidelines:
(i) The Participant may, at any time during the
offering period, reduce his or her rate of payroll deduction to become
effective as soon as possible after filing the appropriate form with
the Plan Administrator. The Participant may not, however, effect more
than one (1) such reduction per Purchase Interval.
(ii) The Participant may, prior to the commencement
of any new Purchase Interval within the offering period, increase the
rate of his or her payroll deduction by filing the appropriate form
with the Plan Administrator. The new rate (which may not exceed the ten
percent (10%) maximum) shall become effective on the start date of the
first Purchase Interval following the filing of such form.
B. Payroll deductions shall begin on the first pay day
following the Participant's Entry Date into the offering period and shall
(unless sooner terminated by the Participant) continue through the pay day
ending with or immediately prior to the last day of that offering period. The
amounts so collected shall be credited to the Participant's book account under
the Plan, but no interest shall be paid on the balance from time to time
outstanding in such account. The amounts collected from the Participant shall
not be required to be held in any segregated account or trust fund and may be
commingled with the general assets of the Corporation and used for general
corporate purposes.
C. Payroll deductions shall automatically cease upon the
termination of the Participant's purchase right in accordance with the
provisions of the Plan.
D. The Participant's acquisition of Common Stock under the
Plan on any Purchase Date shall neither limit nor require the Participant's
acquisition of Common Stock on any subsequent Purchase Date, whether within the
same or a different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a
separate purchase right for each offering period in which he or she
participates. The purchase right shall be granted on the Participant's Entry
Date into the offering period and shall provide the Participant with the right
to purchase shares of Common Stock, in a series of successive installments over
the remainder of such offering period, upon the terms set forth below. The
Participant shall execute a stock purchase agreement embodying such terms and
such other provisions (not inconsistent with the Plan) as the Plan Administrator
may deem advisable.
Under no circumstances shall purchase rights be granted under
the Plan to any Eligible Employee if such individual would, immediately after
the grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
3
<PAGE>
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall
be automatically exercised in installments on each successive Purchase Date
within the offering period, and shares of Common Stock shall accordingly be
purchased on behalf of each Participant (other than Participants whose payroll
deductions have previously been refunded pursuant to the Termination of Purchase
Right provisions below) on each such Purchase Date. The purchase shall be
effected by applying the Participant's payroll deductions for the Purchase
Interval ending on such Purchase Date to the purchase of whole shares of Common
Stock at the purchase price in effect for the Participant for that Purchase
Date.
C. PURCHASE PRICE. The purchase price per share at which
Common Stock will be purchased on the Participant's behalf on each Purchase Date
within the offering period shall be equal to eighty-five percent (85%) of the
LOWER of (i) the Fair Market Value per share of Common Stock on the
Participant's Entry Date into that offering period or (ii) the Fair Market Value
per share of Common Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of
Common Stock purchasable by a Participant on each Purchase Date during the
offering period shall be the number of whole shares obtained by dividing the
amount collected from the Participant through payroll deductions during the
Purchase Interval ending with that Purchase Date by the purchase price in effect
for the Participant for that Purchase Date. However, the maximum number of
shares of Common Stock purchasable per Participant on any one Purchase Date
shall not exceed Five Hundred (500) shares, subject to periodic adjustments in
the event of certain changes in the Corporation's capitalization. In addition,
the maximum number of shares of Common Stock purchasable in the aggregate by all
Participants on any one Purchase Date under the Plan and the International Plan
shall not exceed One Hundred Eighty Seven Thousand Five Hundred (187,500)
shares, subject to periodic adjustments in the event of certain changes in the
corporation's capitalization.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not
applied to the purchase of shares of Common Stock on any Purchase Date because
they are not sufficient to purchase a whole share of Common Stock shall be held
for the purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions
shall govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the next
scheduled Purchase Date in the offering period, terminate his or her
outstanding purchase right by filing the appropriate form with the Plan
Administrator (or its designate), and no further payroll deductions
shall be collected from the Participant with respect to the terminated
purchase right. Any payroll deductions collected during the Purchase
Interval in which such termination occurs shall, at the Participant's
election, be immediately refunded or held for the purchase of shares on
the next Purchase Date. If no such election is made at the time such
purchase right is
4
<PAGE>
terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the
offering period for which the terminated purchase right was granted. In
order to resume participation in any subsequent offering period, such
individual must re-enroll in the Plan (by making a timely filing of the
prescribed enrollment forms) on or before his or her scheduled Entry
Date into that offering period.
(iii) Should the Participant cease to remain an
Eligible Employee for any reason (including death, disability or change
in status) while his or her purchase right remains outstanding, then
that purchase right shall immediately terminate, and all of the
Participant's payroll deductions for the Purchase Interval in which the
purchase right so terminates shall be immediately refunded. However,
should the Participant cease to remain in active service by reason of
an approved unpaid leave of absence, then the Participant shall have
the right, exercisable up until the last business day of the Purchase
Interval in which such leave commences, to (a) withdraw all the payroll
deductions collected to date on his or her behalf for that Purchase
Interval or (b) have such funds held for the purchase of shares on his
or her behalf on the next scheduled Purchase Date. In no event,
however, shall any further payroll deductions be collected on the
Participant's behalf during such leave. Upon the Participant's return
to active service (i) within ninety (90) days following the
commencement of such leave or, (ii) prior to the expiration of any
longer period for which such Participant's right to reemployment with
the Corporation is guaranteed by either statute or contract, his or her
payroll deductions under the Plan shall automatically resume at the
rate in effect at the time the leave began. However, should the
Participant's leave of absence exceed ninety (90) days and his or her
re-employment rights not be guaranteed by either statute or contract,
then the Participant's status as an Eligible Employee will be deemed to
terminate on the ninety-first (91st) day of that leave, and such
Participant's purchase right for the offering period in which that
leave began shall thereupon terminate. An individual who returns to
active employment following such a leave shall be treated as a new
Employee for purposes of the Plan and must, in order to resume
participation in the Plan, re-enroll in the Plan (by making a timely
filing of the prescribed enrollment forms) on or before his or her
scheduled Entry Date into the offering period.
G. CHANGE OF CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change of Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change of Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the LOWER of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change of Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change of Control. However, the
applicable limitation on the number of shares of
5
<PAGE>
Common Stock purchasable by all Participants in the aggregate shall not apply to
any such purchase.
The Corporation shall use its best efforts to provide at least
ten (10)-days prior written notice of the occurrence of any Change of Control,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change of Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of
shares of Common Stock to be purchased pursuant to outstanding purchase rights
on any particular date exceed the number of shares then available for issuance
under the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only
by the Participant and shall not be assignable or transferable by the
Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to
acquire Common Stock pursuant to any purchase right outstanding under this Plan
if and to the extent such accrual, when aggregated with (i) rights to purchase
Common Stock accrued under any other purchase right granted under this Plan and
(ii) similar rights accrued under other employee stock purchase plans (within
the meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would otherwise permit such Participant to purchase more than Twenty-Five
Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate
Affiliate (determined on the basis of the Fair Market Value per share on the
date or dates such rights are granted) for each calendar year such rights are at
any time outstanding.
B. For purposes of applying such accrual limitations to the
purchase rights granted under the Plan, the following provisions shall be in
effect:
(i) The right to acquire Common Stock under each
outstanding purchase right shall accrue in a series of installments on
each successive Purchase Date during the offering period on which such
right remains outstanding.
(ii) No right to acquire Common Stock under any
outstanding purchase right shall accrue to the extent the Participant
has already accrued in the same calendar year the right to acquire
Common Stock under one (1) or more other purchase rights at a rate
equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock
(determined on the basis of the Fair Market Value per
6
<PAGE>
share on the date or dates of grant) for each calendar year such rights
were at any time outstanding.
C. If by reason of such accrual limitations, any purchase
right of a Participant does not accrue for a particular Purchase Interval, then
the payroll deductions which the Participant made during that Purchase Interval
with respect to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions
of this Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on September 14, 1999
and shall become effective at the Effective Time, PROVIDED no purchase rights
granted under the Plan shall be exercised, and no shares of Common Stock shall
be issued hereunder, until (i) the Plan shall have been approved by the
stockholders of the Corporation and (ii) the Corporation shall have complied
with all applicable requirements of the 1933 Act (including the registration of
the shares of Common Stock issuable under the Plan on a Form S-8 registration
statement filed with the Securities and Exchange Commission), all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is listed for trading and all other
applicable requirements established by law or regulation. In the event such
stockholder approval is not obtained, or such compliance is not effected, within
twelve (12) months after the date on which the Plan is adopted by the Board, the
Plan shall terminate and have no further force or effect, and all sums collected
from Participants during the initial offering period hereunder shall be
refunded.
B. Unless sooner terminated by the Board, the Plan shall
terminate upon the EARLIEST of (i) the last business day in October 2009, (ii)
the date on which all shares available for issuance under the Plan shall have
been sold pursuant to purchase rights exercised under the Plan or (iii) the date
on which all purchase rights are exercised in connection with a Corporate
Transaction. No further purchase rights shall be granted or exercised, and no
further payroll deductions shall be collected, under the Plan following such
termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan
at any time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
7
<PAGE>
B. In no event may the Board effect any of the following
amendments or revisions to the Plan without the approval of the Corporation's
stockholders: (i) increase the number of shares of Common Stock issuable under
the Plan, except for permissible adjustments in the event of certain changes in
the Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any
right to continue in the employ of the Corporation or any Corporate Affiliate
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any Corporate Affiliate employing such
person) or of the Participant, which rights are hereby expressly reserved by
each, to terminate such person's employment at any time for any reason, with or
without cause.
B. All costs and expenses incurred in the administration of
the Plan shall be paid by the Corporation; however, each Plan Participant shall
bear all costs and expenses incurred by such individual in the sale or other
disposition of any shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of
the State of New York without regard to that State's conflict-of-laws rules.
8
<PAGE>
SCHEDULE A
CORPORATIONS PARTICIPATING IN
1999 EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
Predictive Systems, Inc.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CASH EARNINGS shall mean the (i) base salary payable to a
Participant by one or more Participating Corporations during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, commissions, current profit-sharing
distributions and other incentive-type payments. Such Cash Earnings shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall NOT include any contributions (other than Code Section
401(k) or Code Section 125 contributions) made on the Participant's behalf by
the Corporation or any Corporate Affiliate to any employee benefit or welfare
plan now or hereafter established.
C. CHANGE OF CONTROL shall mean a change of ownership of the
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all
or substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by or is
under common control with the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders.
D. CODE shall mean the Internal Revenue Code of 1986, as
amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE AFFILIATE shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
A-1
<PAGE>
G. CORPORATION shall mean Predictive Systems, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Predictive Systems, Inc. which shall by appropriate
action adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the
Underwriting Agreement is executed. Any Corporate Affiliate which becomes a
Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by
a Participating Corporation on a basis under which he or she is regularly
expected to render more than twenty (20) hours of service per week for more than
five (5) months per calendar year for earnings considered wages under Code
Section 3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first
commences participation in the offering period in effect under the Plan. The
earliest Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If there
is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of the initial offering period
which begins at the Effective Time, the Fair Market Value shall be
deemed to be equal to the price per share at which the Common Stock is
sold in the initial public offering pursuant to the Underwriting
Agreement.
L. INTERNATIONAL PLAN shall mean the Corporation's
International Employee Stock Purchase Plan
M. 1933 ACT shall mean the Securities Act of 1933, as amended.
A-2
<PAGE>
N. PARTICIPANT shall mean any Eligible Employee of a
Participating Corporation who is actively participating in the Plan.
O. PARTICIPATING CORPORATION shall mean the Corporation and
such Corporate Affiliate or Affiliates as may be authorized from time to time by
the Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
P. PLAN shall mean the Corporation's 1999 Employee Stock
Purchase Plan, as set forth in this document.
Q. PLAN ADMINISTRATOR shall mean the committee of two (2) or
more Board members appointed by the Board to administer the Plan.
R. PURCHASE DATE shall mean the last business day of each
Purchase Interval. The initial Purchase Date shall be April 28, 2000.
S. PURCHASE INTERVAL shall mean each successive six (6)-month
period within the offering period at the end of which there shall be purchased
shares of Common Stock on behalf of each Participant.
T. SEMI-ANNUAL ENTRY DATE shall mean the first business day in
May and November each year on which an Eligible Employee may first enter an
offering period.
U. STOCK EXCHANGE shall mean either the American Stock
Exchange or the New York Stock Exchange.
V. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the Corporation's
initial public offering of its Common Stock.
A-3
<PAGE>
<PAGE>
Exhibit 10.16
Execution Copy
STOCK AND WARRANT PURCHASE AGREEMENT
among
PREDICTIVE SYSTEMS, INC.,
GENERAL ATLANTIC PARTNERS 54, L.P.,
GAP COINVESTMENT PARTNERS II, L.P.
and
the OTHER PURCHASERS named herein.
------------------------------
Dated: March 5, 1999
------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
ARTICLE 1 DEFINITIONS 1
1.1 Definitions............................................................................1
1.2 Accounting Terms; Financial Statements.................................................8
ARTICLE 2 PURCHASE AND SALE OF PREFERRED
STOCK AND WARRANTS.....................................................................9
2.1 Purchase and Sale of Preferred Stock...................................................9
2.2 Purchase and Sale of Warrants..........................................................9
2.3 Certificate of Incorporation...........................................................9
2.4 Use of Proceeds........................................................................9
2.5 Closing................................................................................9
2.6 Fully Diluted Ownership...............................................................10
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................................10
3.1 Corporate Existence and Power.........................................................10
3.2 Authorization; No Contravention.......................................................10
3.3 Governmental Authorization; Third Party Consents......................................11
3.4 Binding Effect........................................................................11
3.5 Litigation............................................................................11
3.6 Compliance with Laws..................................................................11
3.7 Capitalization........................................................................12
3.8 No Default or Breach; Contractual Obligations.........................................13
3.9 Title to Properties...................................................................13
3.10 FIRPTA................................................................................13
3.11 Financial Statements..................................................................14
3.12 Taxes.................................................................................14
3.13 No Material Adverse Change; Ordinary Course of Business...............................15
3.14 Investment Company....................................................................15
3.15 Private Offering......................................................................15
3.16 Labor Relations.......................................................................15
3.17 Employee Benefit Plans................................................................15
3.18 Title to Assets.......................................................................16
3.19 Liabilities...........................................................................16
3.20 Intellectual Property.................................................................16
3.21 Year 2000 Compliance..................................................................18
3.22 Network Redundancy and Computer Back-Up...............................................18
3.23 Privacy of Customer Information.......................................................19
3.24 Potential Conflicts of Interest.......................................................19
3.25 Trade Relations.......................................................................19
3.26 Outstanding Borrowing.................................................................20
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
3.27 Insurance.............................................................................20
3.28 Environmental Matters.................................................................20
3.29 Broker's, Finder's or Similar Fees....................................................20
3.30 Disclosure............................................................................20
3.31 Tribeca...............................................................................20
ARTICLE 4 REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS.....................................................................21
4.1 Existence and Power...................................................................21
4.2 Authorization; No Contravention.......................................................21
4.3 Governmental Authorization; Third Party Consents......................................21
4.4 Binding Effect........................................................................21
4.5 Purchase for Own Account..............................................................22
4.6 Restricted Securities.................................................................23
4.7 Broker's, Finder's or Similar Fees....................................................23
ARTICLE 5 CONDITIONS TO THE OBLIGATION OF
THE PURCHASERS TO CLOSE...............................................................23
5.1 Representations and Warranties........................................................23
5.2 Compliance with this Agreement........................................................23
5.3 Officer's Certificate.................................................................23
5.4 Secretary's Certificate...............................................................24
5.5 Filing of Certificate of Incorporation................................................24
5.6 Documents.............................................................................24
5.7 Stockholders Agreement................................................................24
5.8 Registration Rights Agreement.........................................................24
5.9 Warrants..............................................................................24
5.10 Opinion of Counsel....................................................................24
5.11 Purchased Shares......................................................................25
5.12 Consents and Approvals................................................................25
5.13 No Material Judgment or Order.........................................................25
5.14 No Litigation.........................................................................25
5.15 Budgets...............................................................................25
5.16 Indebtedness..........................................................................25
5.17 Related Transactions..................................................................26
ARTICLE 6 CONDITIONS TO THE OBLIGATION
OF THE COMPANY TO CLOSE...............................................................26
6.1 Representations and Warranties........................................................26
6.2 Compliance with this Agreement........................................................26
6.3 Stockholders Agreement................................................................26
6.4 Registration Rights Agreement.........................................................26
6.5 No Material Judgment or Order.........................................................26
6.6 Payment of Purchase Price.............................................................27
ARTICLE 7 INDEMNIFICATION.......................................................................27
7.1 Indemnification by the Company........................................................27
7.2 Notification..........................................................................28
ARTICLE 8 AFFIRMATIVE COVENANTS.................................................................29
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
8.1 Preservation of Existence.............................................................29
8.2 Financial Statements and Other Information............................................30
8.3 Annual Budget.........................................................................30
8.4 Reservation of Common Stock...........................................................31
8.5 Insurance.............................................................................31
8.6 Books and Records.....................................................................31
8.7 Back-ups of Computer Software.........................................................31
8.8 Inspection............................................................................31
8.9 Cancellation of Notes.................................................................32
8.10 Share Repurchase......................................................................32
8.11 Stockholders Agreement................................................................32
8.12 Registration Rights Agreement.........................................................32
8.13 Tribeca...............................................................................32
ARTICLE 9 TERMINATION OF AGREEMENT..............................................................32
9.1 Termination...........................................................................32
9.2 Survival..............................................................................33
ARTICLE 10 MISCELLANEOUS.........................................................................33
10.1 Survival of Representations and Warranties............................................33
10.2 Notices...............................................................................34
10.3 Successors and Assigns; Third Party Beneficiaries.....................................35
10.4 Amendment and Waiver..................................................................35
10.5 Counterparts..........................................................................35
10.6 Headings..............................................................................36
10.7 GOVERNING LAW.........................................................................36
10.8 Severability..........................................................................36
10.9 Entire Agreement......................................................................36
10.10 Fees..................................................................................36
10.11 Publicity.............................................................................36
10.12 Further Assurances....................................................................37
</TABLE>
<PAGE>
EXHIBITS
A-1 Certificate of Incorporation
A-2 By-laws
B Form of Stockholders Agreement
C Form of Registration Rights Agreement
D Form of Opinion of Brobeck, Phleger & Harrison LLP
E Form of Warrant
F Disclosure Schedule
SCHEDULES
<TABLE>
<S> <C>
I. Other Purchasers
II. Group A Stockholders
2.1 Purchased Shares and Purchase Price
2.4 Share Repurchase
3.3 Governmental Authorizations; Third Party Consents
3.5 Litigation
3.7(a) List of Stockholders and Capital Stock and Stock Equivalents
3.8 Defaults or Breaches of Contractual Obligations; Contractual Obligations
3.12 Taxes
3.13 No Material Adverse Change; Ordinary Course of Business
3.17 Employee Benefit Plans
3.18 Title to Assets of the Company
3.19 Liabilities
3.20(a)(ii) Intellectual Property Owned by the Company or the Subsidiary
and Applications therefor
3.20(a)(iii) Intellectual Property Licenses under which the Company or the Subsidiary
is a Licensor or Licensee
3.20(a)(iv) Infringements of the Company or the Subsidiary
3.20(a)(v) Intellectual Property Litigation
3.20(b) Infringement or Violations of Intellectual Property Rights
3.20(d) License Agreements which require a Material Royalty Payment
3.24 Potential Conflicts of Interest
3.22 Network Redundancy and Computer Back-up
3.26 Outstanding Borrowing
3.27 Insurance
3.31 Tribeca
</TABLE>
<PAGE>
STOCK AND WARRANT PURCHASE AGREEMENT
STOCK AND WARRANT PURCHASE AGREEMENT, dated March 5, 1999 (the
"Agreement"), among Predictive Systems, Inc., a Delaware corporation (the
"Company"), General Atlantic Partners 54, L.P., a Delaware limited partnership
("GAP LP"), GAP Coinvestment Partners II, L.P., a Delaware limited partnership
("GAP Coinvestment" and, together with GAP LP, the "GAP Purchasers"), and the
Persons listed on SCHEDULE I to this Agreement (together, the "Other Purchasers"
and, together with the GAP Purchasers, the "Purchasers").
WHEREAS, upon the terms and conditions set forth in this
Agreement, the Company proposes to issue and sell to (a) GAP LP (i) at a
purchase price per share of $2.850787, for an aggregate purchase price of
$15,252,971.15, an aggregate of 5,350,441 shares of Series A Convertible
Preferred Stock, par value $.001 per share, of the Company (the "Preferred
Stock") and (ii) for an aggregate purchase price of $827.83, a warrant (the "GAP
LP Warrant") to purchase, subject to the terms and conditions thereof, certain
shares of common stock, par value $.001 per share, of the Company ("Common
Stock") upon the closing of the Company's Initial Public Offering (as
hereinafter defined), containing the terms and conditions set forth in the form
of warrant attached hereto as Exhibit E, (b) GAP Coinvestment (i) at a purchase
price per share of $2.850787, for an aggregate purchase price of $3,172,252.15,
an aggregate of 1,112,765 shares of Preferred Stock and (ii) for an aggregate
purchase price of $172.17, a warrant (the "GAPCO Warrant" and, together with the
GAP LP Warrant, the "Warrants") to purchase, subject to the terms and conditions
thereof, certain shares of Common Stock upon the closing of the Company's
Initial Public Offering, containing the terms and conditions set forth in the
form of warrant attached hereto as Exhibit E and (c) the Other Purchasers (i) at
a purchase price per share of $2.850787, for an aggregate purchase price of
$140,002.14, an aggregate of 49,110 shares of Preferred Stock; and
WHEREAS, each share of Preferred Stock is convertible (subject
to adjustment) into one share of Common Stock.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:
"AFFILIATE" shall mean any Person who is an "affiliate" as
defined in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act. In addition, the
<PAGE>
following shall be deemed to be Affiliates of GAP LP: (a) GAP LLC, the members
of GAP LLC and the limited partners of GAP LP; (b) any Affiliate of the limited
partners of GAP LP; and (c) any limited liability company or partnership a
majority of whose members or partners, as the case may be, are members, former
members, consultants or key employees of GAP LLC. In addition, GAP LP and GAP
Coinvestment shall be deemed to be Affiliates of one another.
"AGREEMENT" means this Agreement as the same may be amended,
supplemented or modified in accordance with the terms hereof.
"ASSETS" has the meaning set forth in Section 3.18 of this
Agreement.
"BOARD OF DIRECTORS" means the Board of Directors of the
Company.
"BUSINESS DAY" means any day other than a Saturday, Sunday or
other day on which commercial banks in the State of New York are authorized or
required by law or executive order to close.
"BY-LAWS" means the by-laws of the Company in effect on the
Closing Date substantially in the form attached hereto as EXHIBIT A-2, as the
same may be amended from time to time.
"CAPITAL LEASE OBLIGATIONS" of any Person shall mean, as of
the date of determination, the obligations of such Person to pay rent or other
amounts under any lease (or other arrangement conveying the right to use) of
real or personal property, or a combination thereof, which obligations are
required to be classified and accounted for as capital leases on a balance sheet
of such Person under GAAP and, for the purposes of this Agreement, the amount of
such obligations at any time shall be the capitalized amount thereof at such
time determined in accordance with GAAP consistently applied.
"CERTIFICATE OF INCORPORATION" means the Amended and Restated
Certificate of Incorporation of the Company substantially in the form attached
hereto as EXHIBIT A-1, as the same may be amended from time to time.
"CLAIMS" has the meaning set forth in Section 3.5 of this
Agreement.
"CLOSING" has the meaning set forth in Section 2.5 of this
Agreement.
"CLOSING DATE" has the meaning set forth in Section 2.5 of
this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended, or
any successor statute thereto.
"COMMISSION" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.
<PAGE>
"COMMON STOCK" has the meaning set forth in the recitals to
this Agreement.
"COMPANY" has the meaning set forth in the recitals to this
Agreement.
"CONDITION OF THE COMPANY" means the assets, business,
properties, operations or financial condition of the Company and its
Subsidiaries, taken as a whole.
"CONTINGENT OBLIGATION" means, as applied to any Person, any
direct or indirect liability of that Person with respect to any Indebtedness,
lease, dividend, guaranty, letter of credit or other obligation, contractual or
otherwise (the "PRIMARY OBLIGATION") of another Person (the "PRIMARY OBLIGOR"),
whether or not contingent, (a) to purchase, repurchase or otherwise acquire such
primary obligations or any property constituting direct or indirect security
therefor, or (b) to advance or provide funds (i) for the payment or discharge of
any such primary obligation, or (ii) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, or (c) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the owner of any such
primary obligation against loss or failure or inability to perform in respect
thereof. The amount of any Contingent Obligation shall be deemed to be an amount
equal to the stated or determinable amount of the primary obligation in respect
of which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof.
"CONTRACTUAL OBLIGATIONS" means as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other instrument to
which such Person is a party or by which it or any of its property is bound.
"COPYRIGHTS" means any foreign or United States copyright
registrations and applications for registration thereof, and any non-registered
copyrights.
"DEFINED BENEFIT PLAN" means a defined benefit plan within the
meaning of Section 3(35) of ERISA or Section 414(j) of the Code, whether funded
or unfunded, qualified or nonqualified (whether or not subject to ERISA or the
Code).
"DISCLOSURE SCHEDULE" has the meaning set forth in Article 3
of this Agreement.
"ENVIRONMENTAL LAWS" means federal, state, local and foreign
laws, principles of common law, civil law, regulations and codes, as well as
orders, decrees, judgments or injunctions issued, promulgated, approved or
entered thereunder relating to pollution, protection of the environment or
public health and safety.
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA AFFILIATE" means any Person that is treated as a single
employer with the Company or any of its Subsidiaries under Section 414(b), (c),
(m) or (o) of the Code.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission thereunder.
"FINANCIAL STATEMENTS" has the meaning set forth in Section
3.11 of this Agreement.
"GAAP" means generally accepted accounting principles in
effect from time to time in the United States.
"GAP COINVESTMENT" has the meaning set forth in the recitals
to this Agreement.
"GAPCO WARRANT" has the meaning set forth in the recitals to
this Agreement.
"GAP LLC" means General Atlantic Partners, LLC, a Delaware
limited liability company and the general partner of GAP LP, and any successor
to such entity.
"GAP LP" has the meaning set forth in the recitals to this
Agreement.
"GAP LP WARRANT" has the meaning set forth in the recitals to
this Agreement.
"GAP PURCHASED SHARES" has the meaning set forth in Section
2.1 of this Agreement.
"GAP PURCHASERS" has the meaning set forth in the preamble to
this Agreement.
"GOVERNMENTAL AUTHORITY" means the government of any nation,
state, city, locality or other political subdivision thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
owned or controlled, through stock or capital ownership or otherwise, by any of
the foregoing.
"GRANTED OPTIONS" has the meaning set forth in Section 3.7 of
this Agreement.
"GROUP A STOCKHOLDERS" has the meaning set forth in Section
8.11 of this
<PAGE>
Agreement.
"INDEBTEDNESS" means, as to any Person, (a) all obligations of
such Person for borrowed money (including, without limitation, reimbursement and
all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured), (b) all obligations of such
Person evidenced by notes, bonds, debentures or similar instruments, (c) all
obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable and accrued commercial or trade
liabilities arising in the ordinary course of business, (d) all interest rate
and currency swaps, caps, collars and similar agreements or hedging devices
under which payments are obligated to be made by such Person, whether
periodically or upon the happening of a contingency, (e) all indebtedness
created or arising under any conditional sale or other title retention agreement
with respect to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event of default
are limited to repossession or sale of such property), (f) all obligations of
such Person under leases which have been or should be, in accordance with GAAP,
recorded as capital leases, (g) all indebtedness secured by any Lien (other than
Liens in favor of lessors under leases other than leases included in clause (f))
on any property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is
non-recourse to the credit of that Person, and (h) any Contingent Obligation of
such Person.
"INDEMNIFIED PARTY" has the meaning set forth in Section 7.1
of this Agreement.
"INDEMNIFYING PARTY" has the meaning set forth in Section 7.1
of this Agreement.
"INITIAL PUBLIC OFFERING" means the initial public offering of
the shares of Common Stock of the Company (or any successor in interest thereto)
pursuant to an effective registration statement filed under the Securities Act.
"INTELLECTUAL PROPERTY" has the meaning set forth in Section
3.20 of this Agreement.
"INTERNET ASSETS" means any internet domain names and other
computer user identifiers and any rights in and to sites on the worldwide web,
including rights in and to any text, graphics, audio and video files and html or
other code incorporated in such sites.
"LIABILITIES" has the meaning set forth in Section 3.19 of
this Agreement.
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority, right or other security interest or preferential arrangement of any
kind or nature whatsoever (excluding preferred stock and equity related
preferences), including, without limitation, those
<PAGE>
created by, arising under or evidenced by any conditional sale or other title
retention agreement, the interest of a lessor under a Capital Lease Obligation,
or any financing lease having substantially the same economic effect as any of
the foregoing.
"MATERIAL CONTRACTUAL OBLIGATION" has the meaning set forth in
Section 3.8 of this Agreement.
"NOTES" has the meaning set forth in Section 8.9 of this
Agreement.
"NOTE HOLDERS" has the meaning set forth in Section 8.9 of
this Agreement.
"ORDERS" has the meaning set forth in Section 3.2 of this
Agreement.
"OTHER PURCHASED SHARES" has the meaning set forth in Section
2.1 of this Agreement.
"OTHER PURCHASERS" has the meaning set forth in the preamble
to this Agreement.
"PATENTS" means any foreign or United States patents and
patent applications, including any divisions, continuations,
continuations-in-part, substitutions or reissues thereof, whether or not patents
are issued on such applications and whether or not such applications are
modified, withdrawn or resubmitted.
"PERMITS" has the meaning set forth in Section 3.6(b)(i) of
this Agreement.
"PERSON" means any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, limited liability company, Governmental Authority or other entity of
any kind, and shall include any successor (by merger or otherwise) of such
entity.
"PLANS" has the meaning set forth in Section 3.17 of this
Agreement.
"PREDICTIVE HOLDINGS" has the meaning set forth in Section
5.17 of this Agreement.
"PREFERRED STOCK" has the meaning set forth in the recitals to
this Agreement.
"PURCHASED SHARES" has the meaning set forth in Section 2.1 of
this Agreement.
"PURCHASERS" has the meaning set forth in the recitals to this
Agreement.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
<PAGE>
Agreement substantially in the form attached hereto as EXHIBIT C.
"REGULATIONS" means the Treasury Regulations promulgated under
the Code.
"REQUIREMENTS OF LAW" means, as to any Person, any law,
statute, treaty, rule, regulation, right, privilege, qualification, license or
franchise or determination of an arbitrator or a court or other Governmental
Authority or stock exchange, in each case applicable or binding upon such Person
or any of its property or to which such Person or any of its property is subject
or pertaining to any or all of the transactions contemplated or referred to
herein.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission thereunder.
"SHARE REPURCHASE" has the meaning set forth in Section 2.4 of
this Agreement.
"SOFTWARE" means any computer software programs, source code,
object code, data and documentation, including, without limitation, any computer
software programs that incorporate and run the Company's pricing models,
formulae and algorithms.
"STOCK EQUIVALENTS" means any security or obligation which is
by its terms convertible into or exchangeable for shares of common stock or
other capital stock or securities of the Company, and any option, warrant or
other subscription or purchase right with respect to common stock or such other
capital stock or securities.
"STOCKHOLDERS" means Ronald Pettengill, Robert Belau, the
Other Purchasers, Eric Meyer, Donald Duffy, Barry Belau, Hope Meyer, MD
Strategic, L.P., and Meyer, Duffy & Associates, L.P.
"STOCKHOLDERS AGREEMENT" means the Stockholders Agreement
substantially in the form attached hereto as EXHIBIT B.
"SUBSIDIARY" means, as of the relevant date of determination,
with respect to any Person, a corporation or other Person of which 50% or more
of the voting power of the outstanding voting equity securities is held,
directly or indirectly, by such Person. Unless otherwise qualified, or the
context otherwise requires, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of
the Company.
"TAXES" has the meaning set forth in Section 3.12 of this
Agreement.
"TRADE SECRETS" means any trade secrets, research records,
processes, procedures, manufacturing formulae, technical know-how, technology,
blue prints,
<PAGE>
designs, plans, inventions (whether patentable and whether reduced to practice),
invention disclosures and improvements thereto.
"TRADEMARKS" means any foreign or United States trademarks,
service marks, trade dress, trade names, brand names, designs and logos,
corporate names, product or service identifiers, whether registered or
unregistered, and all registrations and applications for registration thereof.
"TRANSACTION DOCUMENTS" means collectively, this Agreement,
the Certificate of Incorporation, the Warrants, the Stockholders Agreement and
the Registration Rights Agreement.
"TRIBECA" has the meaning set forth in Section 3.31 of this
Agreement.
"WARRANT SHARES" has the meaning set forth in Section 2.2 of
this Agreement.
"WARRANTS" has the meaning set forth in the recitals to this
Agreement.
1.2 ACCOUNTING TERMS; FINANCIAL STATEMENTS. All accounting
terms used herein not expressly defined in this Agreement shall have the
respective meanings given to them in accordance with sound accounting practice.
The term "sound accounting practice" shall mean such accounting practice as, in
the opinion of the independent certified public accountants retained by the
Company, conforms at the time to GAAP applied on a consistent basis except for
changes with which such accountants concur.
ARTICLE 2
PURCHASE AND SALE OF
PREFERRED STOCK AND WARRANTS
2.1 PURCHASE AND SALE OF PREFERRED STOCK. Subject to the terms
and conditions herein set forth, the Company agrees to issue and sell to each of
the Purchasers, and each of the Purchasers agrees that it will purchase from the
Company, on the Closing Date, the aggregate number of shares of Preferred Stock
set forth opposite such Purchaser's name on SCHEDULE 2.1 hereto, for the
aggregate purchase price set forth opposite such Purchaser's name on SCHEDULE
2.1 hereto (all of the shares of Preferred Stock being purchased by the GAP
Purchasers listed on SCHEDULE 2.1 being referred to herein as the "GAP Purchased
Shares," all of the shares of Preferred Stock being purchased by the Other
Purchasers listed on SCHEDULE 2.1 being referred to herein as "Other Purchased
Shares," and the GAP Purchased Shares and the Other Purchased Shares together
being referred to herein as the "Purchased Shares").
2.2 PURCHASE AND SALE OF WARRANTS. Subject to the terms and
<PAGE>
conditions herein set forth, the Company agrees to issue and sell to each of the
GAP Purchasers, and each of the GAP Purchasers agrees that it will purchase from
the Company, on the Closing Date, its Warrant to purchase the aggregate number
of shares of Common Stock set forth in such GAP Purchaser's Warrant, for the
aggregate purchase price set forth opposite such GAP Purchaser's name on
SCHEDULE 2.1 hereto (all of the shares of Common Stock issuable upon exercise of
the Warrants being purchased pursuant hereto being referred to herein as the
"Warrant Shares").
2.3 CERTIFICATE OF INCORPORATION. The Purchased Shares shall
have the preferences and rights set forth in the Certificate of Incorporation.
2.4 USE OF PROCEEDS. From the proceeds of the sale of the
Purchased Shares and the Warrants to the Purchasers, the Company shall use (a)
$8,425,228 to purchase 2,864,100 shares of Common Stock from certain
stockholders of the Company as set forth on SCHEDULE 2.4 hereto (the "Share
Repurchase"), and (b) $10,140,997.44 to fund working capital needs of the
Company, payment of fees and expenses incurred in connection with the
consummation of the transactions contemplated hereunder, and repayment of any
currently existing indebtedness of the Company in an amount not to exceed
$3,500,000.
2.5 CLOSING. Subject to the satisfaction or waiver of the
conditions set forth in Article 5 hereof, the closing of the sale and purchase
of the Purchased Shares and the Warrants (the "Closing") shall take place at the
offices of Paul, Weiss, Rifkind, Wharton & Garrison, at 10:00 a.m., local time,
on the first Business Day after the conditions set forth in Article 5 are
satisfied or waived, or at such other time, place and date that the Company and
the Purchasers may agree in writing (the "Closing Date"). On the Closing Date,
the Company shall deliver to each Purchaser a stock certificate representing the
Purchased Shares being purchased by such Purchaser and to each GAP Purchaser its
Warrant, each against delivery by such Purchaser to the Company of the aggregate
purchase price therefor (a) by wire transfer of immediately available funds in
the case of the GAP Purchases and (b) by check in the case of the Other
Purchasers.
2.6 FULLY DILUTED OWNERSHIP. On the Closing Date, after giving
effect to the transactions contemplated by this Agreement, the GAP Purchased
Shares will represent 26.26% of the shares of Common Stock outstanding on a
fully diluted basis (assuming the conversion or exercise, as applicable, of all
outstanding Stock Equivalents and the issuance and exercise of all Stock
Equivalents reserved for grant under the Company's stock option plans and other
employee benefit arrangements).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as otherwise set forth on the schedule of exceptions
attached hereto as Exhibit F (the "Disclosure Schedule"), the Company represents
and warrants to the
<PAGE>
Purchasers as follows:
3.1 CORPORATE EXISTENCE AND POWER. Each of the Company and its
Subsidiaries (a) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation; (b) has all
requisite power and authority to own and operate its property, to lease the
property it operates as lessee and to conduct the business in which it is
currently, or is proposed to be, engaged; (c) is duly qualified as a foreign
corporation, licensed and in good standing under the laws of each jurisdiction
in which its ownership, lease or operation of property or the conduct of its
business requires such qualification, except where failure to be so qualified
would not have a material adverse effect on the Condition of the Company; and
(d) has the corporate or other power and authority to execute, deliver and
perform its obligations under this Agreement and each of the other Transaction
Documents to which it is a party. No jurisdiction, other than those referred to
in clause (c) above, has claimed, in writing or otherwise, that the Company or
any of its Subsidiaries is required to qualify as a foreign corporation or other
entity therein, and neither the Company nor any of its Subsidiaries files any
franchise, income or other tax returns in any jurisdiction, other than the
jurisdiction of its incorporation and those jurisdictions referred to in clause
(c) above, based upon the ownership or use of property therein or the derivation
of income therefrom. Neither the Company nor any of its Subsidiaries owns or
leases property in any jurisdiction other than its jurisdiction of incorporation
or other formation and the jurisdictions referred to in clause (c) above.
3.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by the Company of this Agreement and each of the other
Transaction Documents and the transactions contemplated hereby and thereby (a)
have been duly authorized by all necessary corporate action of the Company; (b)
do not contravene the terms of the Certificate of Incorporation or the By-laws,
or any certificate of incorporation or by-laws or other organizational documents
of any of its Subsidiaries, each as amended to date; (c) do not violate,
conflict with or result in any breach or contravention of, or the creation of
any Lien under, any Contractual Obligation of the Company or any of its
Subsidiaries, or any Requirement of Law applicable to the Company or any of its
Subsidiaries; and (d) do not violate any judgment, injunction, writ, award,
decree or order of any nature (collectively, "Orders") of any Governmental
Authority against, or binding upon, the Company or any of its Subsidiaries.
3.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. Except
as set forth in SCHEDULE 3.3 of the Disclosure Schedule, no approval, consent,
compliance, exemption, authorization or other action by, or notice to, or filing
with, any Governmental Authority or any other Person, and no lapse of a waiting
period under a Requirement of Law, is necessary or required in connection with
the execution, delivery or performance (including, without limitation, the sale,
issuance and delivery of the Purchased Shares, the Warrants and the Warrant
Shares) by the Company of this Agreement and the other Transaction Documents or
the transactions contemplated hereby and thereby.
<PAGE>
3.4 BINDING EFFECT. This Agreement and each of the other
Transaction Documents have been duly executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as enforceability may
be limited by (i) applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability (regardless of whether considered in a proceeding at law or in
equity), (ii) laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) the extent the
indemnification provisions contained in the Registration Rights Agreement may be
limited by applicable federal or state securities law.
3.5 LITIGATION. Except as set forth in SCHEDULE 3.5 of the
Disclosure Schedule, there are no actions, suits, proceedings, claims,
complaints, disputes, arbitrations or investigations (collectively, "Claims")
pending or, to the Company's knowledge, threatened, at law, in equity, in
arbitration or before any Governmental Authority against the Company or any of
its Subsidiaries. The Company has not received notice either orally or in
writing that any Order has been issued by any court or other Governmental
Authority against the Company or any of its Subsidiaries purporting to enjoin or
restrain the execution, delivery or performance of this Agreement or any of the
other Transaction Documents.
3.6 COMPLIANCE WITH LAWS.
(a) The Company and each of its Subsidiaries are in
compliance with all Requirements of Law and all Orders issued by any court or
Governmental Authority against the Company or any of its Subsidiaries in all
respects except where the failure to be in compliance would not have a material
adverse effect on the Condition of the Company.
(b) (i) The Company and each of its Subsidiaries have
all licenses, permits and approvals of any Governmental Authority (collectively,
"Permits") that are necessary for the conduct of the business of the Company or
such Subsidiary, except where the failure to have such Permits would not have a
material adverse effect on the Condition of the Company; (ii) such Permits are
in full force and effect; and (iii) no violations are or have been recorded in
respect of any Permit.
(c) No material expenditure is presently required by
the Company or any of its Subsidiaries to comply with any existing Requirement
of Law or Order.
3.7 CAPITALIZATION.
(a) On the Closing Date, after giving effect to the
transactions contemplated by this Agreement, including, without limitation, the
Share Repurchase, the authorized capital stock of the Company shall consist of
(i) 50,000,000 shares of
<PAGE>
Common Stock, of which 9,536,100 shares are issued and outstanding, and (ii)
20,000,000 shares of preferred stock, par value $.001 per share, of which
6,512,316 shares are Preferred Stock, all of which is outstanding and issued to
the Purchasers. SCHEDULE 3.7(a) of the Disclosure Schedule sets forth, as of the
Closing Date, after giving effect to the transactions contemplated by this
Agreement, including, without limitation, the Share Repurchase, a true and
complete list of (x) the stockholders of the Company and, opposite the name of
each stockholder, the amount of all outstanding capital stock and Stock
Equivalents owned by such stockholder and (y) the holders of Stock Equivalents
(other than the stockholders set forth in clause (x) above) and, opposite the
name of each such holder, the amount of all Stock Equivalents owned by such
holder, together with the vesting schedule. As of the date of this Agreement,
options to purchase a total of 8,564,598 shares of Common Stock have been
granted (the "Granted Options"), and options to purchase a total of 1,722,910
shares of Common Stock are reserved for grant but unissued, under the Company's
existing stock option plans. 4,375,200 of the Granted Options are fully vested.
The Company has reserved an aggregate of 6,512,316 shares of Common Stock for
issuance upon conversion of the Purchased Shares. Except as set forth on
SCHEDULE 3.7(a) of the Disclosure Schedule and except for the Warrants, there
are no options, warrants, conversion privileges, subscription or purchase rights
or other rights presently outstanding to purchase or otherwise acquire (i) any
authorized but unissued, unauthorized or treasury shares of the Company's
capital stock, (ii) any Stock Equivalents or (iii) other securities of the
Company. The Purchased Shares and the Warrants are duly authorized, and when
issued and sold to the Purchasers after payment therefor and assuming the truth
and accuracy of the Purchasers' representations and warranties contained herein,
will be validly issued, fully paid and non-assessable, and will be issued in
compliance with all applicable federal and state securities laws. The Warrant
Shares issuable upon exercise of the Warrants, when issued in compliance with
the provisions of the Warrants, and when duly authorized, validly issued, fully
paid and non-assessable, and, assuming the truth and accuracy of the Purchasers'
representations and warranties contained herein, will be issued in compliance
with all applicable federal and state securities laws. The issued and
outstanding shares of Common Stock are all duly authorized, validly issued,
fully paid and non-assessable, and were issued in compliance with the
registration and qualification requirements of all applicable federal and state
securities laws.
(b) Neither the Company nor any of its Subsidiaries
directly or indirectly owns or has made any investment in any of the capital
stock of, or any other proprietary interest in, any Person other than Predictive
Limited, a company registered in England and Wales under number 3689306. The
Company owns all of the issued and outstanding capital stock of each of its
Subsidiaries, free and clear of all Liens. All of such shares of capital stock
are duly authorized, validly issued, fully paid and non-assessable, and all of
such shares of capital stock were issued in compliance with all applicable
federal and state securities laws. There are no options, warrants, conversion
privileges, subscription or purchase right or other rights to purchase or
otherwise acquire any authorized but unissued, unauthorized or treasury shares
of the capital stock or other securities of, or any proprietary interest in, the
Subsidiary, and there is no outstanding security of any kind convertible into or
exchangeable for such capital stock or proprietary
<PAGE>
interest.
3.8 NO DEFAULT OR BREACH; CONTRACTUAL OBLIGATIONS. SCHEDULE
3.8 of the Disclosure Schedule lists all of the Contractual Obligations to which
the Company or the Subsidiary is a party, whether written or oral, (i) which
generated an amount in excess of $500,000 of revenue for the Company in calendar
year 1998, (ii) which are otherwise material to the Condition of the Company, or
(iii) which are with the Company's twenty-five (25) largest customers
(calculated based upon 1998 gross annual sales revenue) (collectively, the
"Material Contractual Obligations"). All of such Material Contractual
Obligations are valid, subsisting, in full force and effect and binding upon the
Company or the Subsidiary and the other parties thereto, and the Company or the
Subsidiary, as the case may be, has paid in full or accrued all amounts due
thereunder and has satisfied in full or provided for all of its liabilities and
obligations thereunder in all material respects. No other party to any such
Material Contractual Obligation is in default thereunder, nor, to the Company's
knowledge, does any condition exist that with notice or lapse of time or both
would constitute a default by such other party thereunder. Except as set forth
on SCHEDULE 3.8 of the Disclosure Schedule, neither the Company nor the
Subsidiary has received notice of, or is in default under, or with respect to,
any Material Contractual Obligation, or any other Contractual Obligation the
default of which other Contractual Obligation would be reasonably likely to have
a material adverse effect on the Condition of the Company.
3.9 TITLE TO PROPERTIES. Each of the Company and the
Subsidiary holds interests as lessee under leases in full force and effect in
all real property used in connection with its business or otherwise, but neither
the Company nor any Subsidiary owns or has any title to any real property.
3.10 FIRPTA. The Company is not a "foreign person" within the
meaning of Section 1445 of the Code.
3.11 FINANCIAL STATEMENTS. The Company has delivered to the
Purchasers the audited consolidated financial statements of the Company and its
Subsidiaries (balance sheet and statements of operations, cash flow and
stockholders' equity, together with the notes thereto) for the fiscal year ended
December 31, 1998 (the "Audited Financial Statements") and the unaudited
consolidated financial statements of the Company and its Subsidiaries (balance
sheet and statements of operations) for the fiscal years ended December 31, 1996
and 1997 (the "Unaudited Financial Statements" and, together with the Audited
Financial Statements, the "Financial Statements"). The Financial Statements are
complete and correct in all material respects and have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
indicated and with each other; except that the Unaudited Financial Statements do
not contain footnotes or normal year-end adjustments. The Financial Statements
fairly present, in all material respects, the financial condition, operating
results and cash flows of the Company and its Subsidiaries as of the respective
dates and for the respective periods indicated in accordance with GAAP, except
that the Unaudited Financial Statements do not contain footnotes or normal
year-end adjustments. With respect to the
<PAGE>
Audited Financial Statements, the Company has delivered to Purchasers a schedule
of adjustments made by the independent accounting firm that conducted the audit
for the fiscal year ended December 31, 1998, and none of such adjustments have
been waived.
3.12 TAXES. Except as set forth on SCHEDULE 3.12 of the
Disclosure Schedule, (a) each of the Company and its Subsidiaries has paid all
federal, state, county, local, foreign and other taxes, including, without
limitation, income taxes, estimated taxes, excise taxes, sales taxes, use taxes,
gross receipts taxes, franchise taxes, employment and payroll related taxes,
property taxes and import duties, whether or not measured in whole or in part by
net income (hereinafter, "Taxes" or, individually, a "Tax") which have come due
and are required to be paid by it through the date hereof, and all deficiencies
or other additions to Tax, interest and penalties owed by it in connection with
any such Taxes, other than Taxes being disputed by the Company in good faith for
which adequate reserves have been made in accordance with GAAP; (b) each of the
Company and each of its Subsidiaries has timely filed or caused to be filed all
returns for Taxes that it is required to file on and through the date hereof
(including all applicable extensions), and all such Tax returns are accurate and
complete; (c) with respect to all Tax returns of the Company and its
Subsidiaries, (i) there is no unassessed Tax deficiency proposed or, to the
knowledge of the Company, threatened against the Company or the Subsidiary and
(ii) no audit is in progress with respect to any return for Taxes, no extension
of time is in force with respect to any date on which any return for Taxes was
or is to be filed and no waiver or agreement is in force for the extension of
time for the assessment or payment of any Tax; (d) all provisions for Tax
liabilities of the Company and its Subsidiaries with respect to the Financial
Statements have been made in accordance with GAAP consistently applied, and all
liabilities for Taxes of the Company and its Subsidiaries attributable to
periods prior to or ending on the Closing Date have been adequately provided for
on the Financial Statements; and (e) there are no Liens for Taxes on the assets
of the Company or any of its Subsidiaries except for Liens for current Taxes not
yet due.
3.13 NO MATERIAL ADVERSE CHANGE; ORDINARY COURSE OF BUSINESS.
Except as otherwise set forth on SCHEDULE 3.13 of the Disclosure Schedule, since
December 31, 1998, (a) there has not been any material adverse change, nor to
the knowledge of the Company is any such change expected, in the Condition of
the Company, (b) neither the Company nor any of its Subsidiaries has
participated in any transaction material to the Condition of the Company or
otherwise acted outside the ordinary course of business, including, without
limitation, declaring or paying any dividend or declaring or making any
distribution to its stockholders except out of the earnings of the Company and
(c) neither the Company nor any of its Subsidiaries has increased the
compensation of any of its officers or the rate of pay of any of its employees,
except as part of regular compensation increases in the ordinary course of
business.
3.14 INVESTMENT COMPANY. Neither the Company nor the
Subsidiary is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
<PAGE>
3.15 PRIVATE OFFERING. No form of general solicitation or
general advertising was used by the Company or its representatives in connection
with the offer or sale of the Purchased Shares or the Warrants.
3.16 LABOR RELATIONS. (a) Neither the Company nor any of its
Subsidiaries is engaged in any unfair labor practice; (b) there is (i) no
grievance or arbitration proceeding arising out of or under collective
bargaining agreements pending or, to the knowledge of the Company, threatened
against the Company or any of its Subsidiaries, and (ii) no strike, labor
dispute, slowdown or stoppage is pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries; (c) neither the
Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or contract; (d) there is no union representation question existing
with respect to the employees of the Company or the Subsidiary; and (e) to the
knowledge of the Company, no union organizing activities are taking place.
3.17 EMPLOYEE BENEFIT PLANS. Neither the Company, any of its
Subsidiaries, nor any of their ERISA Affiliates has any actual or contingent,
direct or indirect, liability in respect of any employee benefit plan or
arrangement, including any plan subject to ERISA, other than to make
contributions under or pay benefits pursuant to the plans listed on SCHEDULE
3.17 of the Disclosure Schedule (collectively, the "Plans"). All of the Plans
are in compliance with all applicable Requirements of Law except where the
failure to be in compliance would not have a material adverse effect on the
Condition of the Company. No Plan (a) is subject to Title IV of ERISA, or is
otherwise a Defined Benefit Plan, or is a multiple employer plan (within the
meaning of Section 413(c) of the Code); or (b) provides for post-retirement
welfare benefits or a "parachute payment" (within the meaning of Section 280G(b)
of the Code). The execution and delivery of this Agreement and each of the other
Transaction Documents, the purchase and sale of the Purchased Shares, the
Warrants and the Warrant Shares and the consummation of the transactions
contemplated hereby and thereby will not result in any prohibited transaction
within the meaning of Section 406 of ERISA or Section 4975 of the Code.
3.18 TITLE TO ASSETS. Except as set forth on SCHEDULE 3.18 of
the Disclosure Schedule, each of the Company and each of its Subsidiaries owns
and has good, valid, and marketable title to all of its properties and assets
used in its business and reflected as owned on the Financial Statements or so
described in any Schedule hereto (collectively, the "Assets"), in each case free
and clear of all Liens, except for Liens specifically described in the notes to
the Financial Statements.
3.19 LIABILITIES. Neither the Company nor any of its
Subsidiaries has any direct or indirect obligation or liability (the
"Liabilities") other than (a) Liabilities fully and adequately reflected or
reserved against on the Financial Statements, (b) Liabilities incurred since
December 31, 1998 in the ordinary course of business and (c) Liabilities which
are not required to be disclosed by GAAP in the Financial Statements. Except as
otherwise set forth on SCHEDULE 3.19 of the Disclosure Schedule, the Company has
no knowledge of any circumstance, condition, event or arrangement
<PAGE>
that could reasonably be expected to give rise hereafter to any Liabilities of
the Company or the Subsidiary except in the ordinary course of business.
3.20 INTELLECTUAL PROPERTY.
(a) (i) Each of the Company and its Subsidiaries is
the exclusive owner of, or has a sufficient license or right to use, all of the
Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets, Software and
other proprietary rights (collectively, "Intellectual Property") that are
necessary to conduct its business as presently conducted or contemplated, free
and clear of all Liens. Neither the Company nor any of its Subsidiaries sells or
licenses any of its Intellectual Property.
(ii) SCHEDULE 3.20(a)(ii) of the Disclosure Schedule
sets forth all of the Intellectual Property owned by, and filings and
applications for any of the above filed by, the Company or any of its
Subsidiaries. Except as set forth on SCHEDULE 3.20(a)(ii) of the Disclosure
Schedule, none of the Intellectual Property listed on SCHEDULE 3.20(a)(ii) of
the Disclosure Schedule is subject to any outstanding Order, and no action,
suit, proceeding, hearing, investigation, charge, complaint, claim or demand is
pending or, to the knowledge of the Company, threatened, which challenges the
validity, enforceability, use or ownership of the item.
(iii) SCHEDULE 3.20(a)(iii) of the Disclosure
Schedule sets forth all Intellectual Property licenses, sublicenses, distributor
agreements and other agreements under which the Company or any of its
Subsidiaries is either a licensor, licensee or distributor, except such
licenses, sublicenses and other agreements relating to off-the-shelf software,
which is commercially available on a retail basis and used solely on the
computers of the Company or the applicable Subsidiary. Each of the Company and
its Subsidiaries has performed all obligations imposed upon it thereunder, and
neither the Company nor any of its Subsidiaries is, nor to the knowledge of the
Company is any other party thereto, in breach of or default thereunder in any
respect, nor is there any event which with notice or lapse of time or both would
constitute a default thereunder. All of the Intellectual Property licenses
listed on SCHEDULE 3.20(a)(iii) of the Disclosure Schedule are valid,
enforceable and in full force and effect, and will continue to be so on
identical terms immediately following the Closing except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity relating to
enforceability (regardless of whether considered in a proceeding at law or in
equity).
(iv) To the knowledge of the Company, other than as
set forth on SCHEDULE 3.20(a)(iv) of the Disclosure Schedule, none of the
Intellectual Property currently sold or licensed by the Company or any of its
Subsidiaries to any Person or used by or licensed to the Company or the
Subsidiary infringes upon or otherwise violates any Intellectual Property rights
of others.
(v) Except as set forth on SCHEDULE 3.20(a)(v) of the
<PAGE>
Disclosure Schedule, no litigation is pending and no Claim has been made against
the Company or any of its Subsidiaries or, to the knowledge of the Company, is
threatened, contesting the right of the Company or any of its Subsidiaries to
sell or license to any Person or use the Intellectual Property presently sold or
licensed to such Person or used by the Company or any of its Subsidiaries.
(b) Except as set forth on SCHEDULE 3.20(b) of the
Disclosure Schedule, to the knowledge of the Company, no Person is infringing
upon or otherwise violating the Intellectual Property rights of the Company or
any of its Subsidiaries.
(c) No former employer of any employee of the Company
or any of its Subsidiaries, and no current or former client of any consultant of
the Company or any of its Subsidiaries, has made a claim against the Company or
any of its Subsidiaries or, to the knowledge of the Company, against any other
Person, that such employee or such consultant is utilizing Intellectual Property
of such former employer or client.
(d) Except as set forth on SCHEDULE 3.20(d) of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to or bound by, any license or other agreement requiring the payment by the
Company or any of its Subsidiaries of any material royalty payment, excluding
such agreements relating to software licensed for use solely on the computers of
the Company or the applicable Subsidiary.
(e) To the knowledge of the Company, no employee of
the Company or any of its Subsidiaries is in violation of any material
Requirement of Law applicable to such employee in connection with his or her
employment, or any term of any employment agreement, patent or invention
disclosure agreement or other contract or agreement relating to the relationship
of such employee with the Company or such Subsidiary.
(f) To the knowledge of the Company, none of the
Trade Secrets, wherever located, the value of which is contingent upon
maintenance of confidentiality thereof, has been disclosed to any Person other
than employees, representatives and agents of the Company or its Subsidiaries,
except as required pursuant to the filing of a patent application by the Company
or the applicable Subsidiary.
(g) It is not necessary for any of the Company's or
the Subsidiaries' business to use any Intellectual Property owned by any
director, officer, employee or consultant of the Company or any of the
Subsidiaries (or Persons the Company or any of the Subsidiaries presently
intends to hire). To the Company's knowledge, at no time during the conception
or reduction to practice of any of the Company's or the Subsidiaries'
Intellectual Property was any developer, inventor or other contributor to such
Intellectual Property operating under any grants from any Governmental Authority
or subject to any employment agreement, invention assignment, nondisclosure
agreement or other Contractual Obligation with any third party that could have a
material adverse effect on the Company's or the Subsidiaries' rights to its
<PAGE>
Intellectual Property.
(h) All present employees of the Company have
executed and delivered proprietary invention agreements with the Company, and
are obligated under the terms thereof to assign all inventions made by them
during the course of employment to the Company.
3.21 YEAR 2000 COMPLIANCE. No material expenditure is required
by the Company to make the Software used by the Company (other than Software of
the Company's customers or third party Software used by the Company in providing
consulting services to its customers in the ordinary course of the Company's
business) (a) accurately process date information before, during and after
January 1, 2000, including, but not limited to, accepting date input, providing
date output and performing calculations on dates or portions of dates; (b)
function accurately and without interruption before, during and after January 1,
2000 without any change in operations associated with the advent of the new
century; (c) respond to two (2) digit year date input in a way that resolves the
ambiguity as to century in a disclosed, defined and predetermined manner; and
(d) store and provide output of date information in ways that are unambiguous as
to century.
3.22 NETWORK REDUNDANCY AND COMPUTER BACK-UP. Except as set
forth on SCHEDULE 3.22 of the Disclosure Schedule,
(a) The server hardware and supporting equipment
(including communications equipment, terminals and hook-ups that interface with
airline computer reservation systems) used in the Company's and Subsidiaries'
services network provide redundancy and meet industry standards relating to high
availability; and
(b) The Company and its Subsidiaries have made
back-ups of all material computer Software and databases utilized by them and
maintain such Software and databases at a secure off-site location.
3.23 PRIVACY OF CUSTOMER INFORMATION. Neither the Company nor
any of its Subsidiaries uses any of the customer information it receives through
its website in an unlawful manner or in a manner violative of the rights of
privacy of its customers. Each of the Company and its Subsidiaries has adequate
security measures in place to protect the customer information it receives
through its website from illegal use by third parties or use by third parties in
a manner violative of the rights of privacy of its customers. Neither the
Company nor any of its Subsidiaries represents to its customers that it assures
complete security as to the customer information its receives through its
website.
3.24 POTENTIAL CONFLICTS OF INTEREST. Except as set forth on
SCHEDULE 3.24 of the Disclosure Schedule, no officer, director or stockholder of
the Company or any of its Subsidiaries, no spouse of any such officer, director
or stockholder, and, to the knowledge of the Company, no relative of such spouse
or of any such officer, director or stockholder and no Affiliate of any of the
foregoing (a) owns,
<PAGE>
directly or indirectly, any interest in (excepting less than 1% stock holdings
for investment purposes in securities of publicly held and traded companies), or
is an officer, director, employee or consultant of, any Person which is, or is
engaged in business as, a competitor, lessor, lessee, supplier, distributor,
sales agent or customer of, or lender to or borrower from, the Company or any of
its Subsidiaries; (b) owns, directly or indirectly, in whole or in part, any
tangible or intangible property that the Company or its Subsidiaries has used,
or that the Company or any of its Subsidiaries will use, in the conduct of
business; or (c) has any cause of action or other claim whatsoever against, or
owes or has advanced any amount to, the Company or any of its Subsidiaries,
except for claims in the ordinary course of business such as for accrued
vacation pay, accrued benefits under employee benefit plans, and similar matters
and agreements existing on the date hereof.
3.25 TRADE RELATIONS. There exists no actual or, to the
knowledge of the Company, threatened termination, cancellation or limitation of,
or any adverse modification or change in, the business relationship of the
Company or any of its Subsidiaries, or the business of the Company or any of its
Subsidiaries, with any customer or supplier or any group of customers or
suppliers, including without limitation, Bear, Stearns & Co. Inc., whose
purchases or inventories provided to the Company's or any of its Subsidiaries'
business, or whose relationship with the Company or any of its Subsidiaries
pursuant to a Contractual Obligation are individually or in the aggregate
material to the Condition of the Company, and, to the Company's knowledge, there
exists no present condition or state of fact or circumstances that could
reasonably be expected to materially and adversely affect the Condition of the
Company or prevent the Company or any of its Subsidiaries from conducting such
business relationships or such business with any such customer, supplier or
group of customers or suppliers in the same manner as heretofore conducted by
the Company and its Subsidiaries.
3.26 OUTSTANDING BORROWING. SCHEDULE 3.26 of the Disclosure
Schedule sets forth (a) the amount of all Indebtedness of the Company and its
Subsidiaries as of the date hereof, (b) the Liens that relate to such
Indebtedness and that encumber the Assets and (c) the name of each lender
thereof.
3.27 INSURANCE. SCHEDULE 3.27 of the Disclosure Schedule lists
all of the insurance policies held by or on behalf of the Company or its
Subsidiaries, with the coverage amounts indicated thereon. Such policies and
binders are valid and enforceable in accordance with their terms and are in full
force and effect and cover all risks associated with the Company's and the
Subsidiaries' business that are customarily insured against in the industry in
such amounts as are customary in the industry. None of such policies will be
affected by, or terminate or lapse by reason of, any transaction contemplated by
this Agreement or any of the other Transaction Documents.
3.28 ENVIRONMENTAL MATTERS. Each of the Company and its
Subsidiaries is in compliance with all material applicable Environmental Laws.
There is no civil, criminal or administrative judgment, action, suit, demand,
claim, hearing, notice of violation, investigation, proceeding, notice or demand
letter pending or, to the
<PAGE>
Company's knowledge, threatened against the Company or any of its Subsidiaries
pursuant to Environmental Laws which could reasonably be expected to result in a
fine, penalty or other obligation, cost or expense that would have a material
adverse effect on the Condition of the Company; and, to the knowledge of the
Company, there are no past or present events, conditions, circumstances,
activities, practices, incidents, agreements, actions or plans which could
reasonably expected to prevent compliance with, or which have given rise to or
will give rise to liability under, Environmental Laws that would have a material
adverse effect on the Condition of the Company.
3.29 BROKER'S, FINDER'S OR SIMILAR FEES. There are no
brokerage commissions, finder's fees or similar fees or commissions payable by
the Company or any of its Subsidiaries in connection with the transactions
contemplated hereby based on any agreement, arrangement or understanding with
the Company or any of its Subsidiaries or any action taken by any such Person.
3.30 DISCLOSURE.
(a) MATERIAL ADVERSE EFFECTS. There is no fact, which
the Company has not disclosed to the Purchasers in writing, which materially
adversely affects, or insofar as the Company can reasonably foresee could
materially adversely affect, the Condition of the Company or the ability of the
Company to perform its obligations under this Agreement, any of the other
Transaction Documents or any document contemplated hereby or thereby.
3.31 TRIBECA. There exists no continuing business relationship
between the Company or any of its Subsidiaries and Tribeca Software Inc.
("Tribeca"), and neither the Company nor any of its Subsidiaries provides
Tribeca or any of its affiliates with any administrative, management or
financial service nor has any outstanding obligations towards Tribeca or any of
its affiliates, except to the extent set forth on SCHEDULE 3.31 of the
Disclosure Schedule.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS
Each of the Purchasers hereby represents and warrants
(severally as to itself and not jointly) to the Company as follows:
4.1 EXISTENCE AND POWER. Such Purchaser (a) is an individual,
or an entity duly organized and validly existing under the laws of the
jurisdiction of its formation and (b) has the requisite legal, partnership or
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and each of the other Transaction Documents to which it is
a party.
<PAGE>
4.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery
and performance by such Purchaser of this Agreement and each of the other
Transaction Documents to which it is a party and the transactions contemplated
hereby and thereby (a) have been duly authorized by all necessary legal,
partnership or corporate action, (b) do not contravene the terms of such
Purchaser's organizational documents, or any amendment thereof (unless such
Purchaser is an individual), and (c) do not violate, conflict with or result in
any breach or contravention of or the creation of any Lien under, any
Contractual Obligation of such Purchaser, or any Requirement of Law or Orders
applicable to such Purchaser.
4.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No
approval, consent, compliance, exemption, authorization, or other action by, or
notice to, or filing with, any Governmental Authority or any other Person, and
no lapse of a waiting period under any Requirement of Law, is necessary or
required in connection with the execution, delivery or performance (including,
without limitation, the purchase of the Purchased Shares and/or the Warrants) by
such Purchaser of this Agreement and each of the other Transaction Documents to
which such Purchaser is a party or the transactions contemplated hereby and
thereby.
4.4 BINDING EFFECT. This Agreement and each of the other
Transaction Documents to which such Purchaser is a party have been duly executed
and delivered by such Purchaser and constitute the legal, valid and binding
obligations of such Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting the enforcement of creditors' rights generally or by
equitable principles relating to enforceability (regardless of whether
considered in a proceeding at law or in equity).
4.5 PURCHASE FOR OWN ACCOUNT. The Purchased Shares and/or the
Warrants to be acquired by such Purchaser pursuant to this Agreement are being
or will be acquired for its own account and with no intention of distributing or
reselling such Purchased Shares or the Warrants or any part thereof in any
transaction that would be in violation of the securities laws of the United
States of America, or the securities or "blue sky" laws of any state or foreign
jurisdiction, without prejudice, however, to the rights of such Purchaser at all
times to sell or otherwise dispose of all or any part of such Purchased Shares
or the Warrants under an effective registration statement under the Securities
Act, or under an exemption from such registration available under the Securities
Act, and subject, nevertheless, to the disposition of such Purchaser's property
being at all times within its control. If such Purchaser should in the future
decide to dispose of any of such Purchased Shares or the Warrants, such
Purchaser understands and agrees that it may do so only in compliance with the
Securities Act and applicable state securities laws, as then in effect. Such
Purchaser agrees to the imprinting, so long as required by law, of legends on
certificates representing all of its Purchased Shares, the Warrants, the Warrant
Shares issuable upon exercise of its Warrant and shares of Common Stock issuable
upon conversion of its Purchased Shares to the following effect:
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE
SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.
THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER
DISPOSITION (EACH A "TRANSFER") AND VOTING OF ANY OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE
STOCKHOLDERS AGREEMENT, DATED MARCH 5, 1999, AMONG PREDICTIVE SYSTEMS,
INC., GENERAL ATLANTIC PARTNERS 54, L.P., GAP COINVESTMENT PARTNERS II,
L.P. AND THE STOCKHOLDERS NAMED THEREIN. THE COMPANY WILL NOT REGISTER
THE TRANSFER OF SUCH SECURITIES ON THE BOOKS OF THE COMPANY UNLESS AND
UNTIL THE TRANSFER HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF THE
STOCKHOLDERS AGREEMENT. THE COMPANY WILL MAIL A COPY OF SUCH AGREEMENT,
TOGETHER WITH A COPY OF THE EXPRESS TERMS OF THE SECURITIES AND THE
OTHER CLASS OR CLASSES AND SERIES OF SHARES, IF ANY, WHICH THE COMPANY
IS AUTHORIZED TO ISSUE, TO THE RECORD HOLDER OF THIS CERTIFICATE,
WITHOUT CHARGE, WITHIN FIVE DAYS AFTER RECEIPT OF A WRITTEN REQUEST
THEREFOR.
4.6 RESTRICTED SECURITIES. Such Purchaser understands that the
Purchased Shares and the Warrants will not be registered at the time of their
issuance under the Securities Act for the reason that the sale provided for in
this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that
the reliance of the Company on such exemption is predicated in part on such
Purchaser's representations set forth herein. Such Purchaser represents that it
is experienced in evaluating companies such as the Company, has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks of its investment and has the ability to suffer the total
loss of its investment. Such Purchaser further represents that it has had the
opportunity to ask questions of and receive answers from the Company concerning
the terms and conditions of the offering and to obtain additional information to
such Purchaser's satisfaction.
4.7 BROKER'S, FINDER'S OR SIMILAR FEES. There are no brokerage
commissions, finder's fees or similar fees or commissions payable by the
Purchasers, in connection with the transactions contemplated hereby based on any
agreement, arrangement or understanding with the Purchasers or any action taken
by the Purchasers.
<PAGE>
ARTICLE 5
CONDITIONS TO THE OBLIGATION OF
THE PURCHASERS TO CLOSE
The obligation of the Purchasers to purchase the Purchased
Shares and the Warrants, to pay the purchase price therefor at the Closing and
to perform any obligations hereunder shall be subject to the satisfaction as
determined by, or waiver by, the Purchasers of the following conditions on or
before the Closing Date.
5.1 REPRESENTATIONS AND WARRANTIES. All of the representations
and warranties of the Company contained in Article 3 hereof shall be true and
correct in all material respects (except for any such representations and
warranties which are qualified by their terms by a reference to materiality or
material adverse effect, which representations and warranties as so qualified
shall be true and correct in all respects) on and as of Closing Date, as if made
by the Company on and as of such date.
5.2 COMPLIANCE WITH THIS AGREEMENT. The Company shall have
performed and complied in all material respects with all of the agreements and
conditions set forth herein that are required to be performed or complied with
by it on or before the Closing Date.
5.3 OFFICER'S CERTIFICATE. The GAP Purchasers shall have
received a certificate from the Company, in form and substance reasonably
satisfactory to the GAP Purchasers, dated the Closing Date and signed by the
Chairman of the Company and the Treasurer of the Company, certifying that (a)
the representations and warranties of the Company contained in Article 3 hereof
are true and correct in all material respects (except for any such
representations and warranties which are qualified by their terms by a reference
to materiality or material adverse effect, which representations and warranties
as so qualified are true and correct in all respects) on and as of the Closing
Date as if made by the Company on as of such date; and (b) the Company has
performed and complied in all material respects with all of the agreements and
conditions set forth or contemplated herein that are required to be performed or
complied with by it on or before the Closing Date.
5.4 SECRETARY'S CERTIFICATE. The GAP Purchasers shall have
received a certificate from the Company, in form and substance reasonably
satisfactory to the GAP Purchasers, dated the Closing Date and signed by the
Secretary or an Assistant Secretary of the Company, certifying that the attached
copies of the Certificate of Incorporation, the By-laws and the resolutions of
the Board of Directors approving this Agreement and each of the other
Transaction Documents to which the Company is a party and the transactions
contemplated hereby and thereby, are all true, complete and correct and remain
unamended and in full force and effect.
<PAGE>
5.5 FILING OF CERTIFICATE OF INCORPORATION. The Certificate of
Incorporation shall have been duly filed by the Company with the Secretary of
State of the State of Delaware in accordance with the General Corporation Law of
the State of Delaware.
5.6 DOCUMENTS. The GAP Purchasers shall have received true,
complete and correct copies of such documents as they may reasonably request in
connection with or relating to the sale of the GAP Purchased Shares and the
transactions contemplated hereby, all in form and substance reasonably
satisfactory to the GAP Purchasers.
5.7 STOCKHOLDERS AGREEMENT. The Company and the Stockholders
shall have duly executed and delivered the Stockholders Agreement, substantially
in the form attached hereto as EXHIBIT B.
5.8 REGISTRATION RIGHTS AGREEMENT. The Company and the
Stockholders shall have duly executed and delivered the Registration Rights
Agreement, substantially in the form attached hereto as EXHIBIT C.
5.9 WARRANTS. The Warrants shall have been duly executed and
the Company shall be prepared to deliver the Warrants to the GAP Purchasers upon
payment therefor.
5.10 OPINION OF COUNSEL. The GAP Purchasers shall have
received an opinion of Brobeck, Phleger & Harrison LLP, counsel to the Company
and the Subsidiary, dated the Closing Date, relating to the transactions
contemplated by or referred to herein, substantially in the form attached hereto
as EXHIBIT D.
5.11 PURCHASED SHARES. The Company shall be prepared to
deliver, upon payment therefor, to the Purchasers certificates in definitive
form representing the number of Purchased Shares set forth opposite such
Purchaser's name on SCHEDULE 2.1 hereto, registered in the name of such
Purchaser, as applicable.
5.12 CONSENTS AND APPROVALS. All consents, exemptions,
authorizations, or other actions by, or notices to, or filings with,
Governmental Authorities and other Persons in respect of all Requirements of Law
and with respect to those Contractual Obligations of the Company or the
Subsidiary which are required in connection with the execution, delivery or
performance by, or enforcement against, the Company of this Agreement and each
of the other Transaction Documents shall have been obtained and be in full force
and effect, and the GAP Purchasers shall have been furnished with appropriate
evidence thereof and all applicable waiting periods shall have expired without
any action being taken or threatened which would have a material adverse effect
on the Condition of the Company.
<PAGE>
5.13 NO MATERIAL JUDGMENT OR ORDER. There shall not be on the
Closing Date any Order of a court of competent jurisdiction or any ruling of any
Governmental Authority or any condition imposed under any Requirement of Law
which would, in the reasonable judgment of the GAP Purchasers, (a) prohibit or
restrict (i) the purchase of the Purchased Shares or the Warrants or (ii) the
consummation of the transactions contemplated by this Agreement, (b) subject the
Purchasers to any penalty or onerous condition under or pursuant to any
Requirement of Law if the Purchased Shares or the Warrants were to be purchased
hereunder or (c) restrict the operation of the business of the Company or the
Subsidiary as conducted on the date hereof in a manner that would have a
material adverse effect on the Condition of the Company.
5.14 NO LITIGATION. No action, suit, proceeding, claim or
dispute shall have been brought or otherwise arisen at law, in equity, in
arbitration or before any Governmental Authority against the Company which
would, if adversely determined, (a) have a material adverse effect on the
Condition of the Company or (b) have a material adverse effect on the ability of
the Company to perform its obligations under this Agreement or each of the other
Transaction Documents.
5.15 BUDGETS. The GAP Purchasers shall have received external
and internal budgets of the Company for fiscal year 1999, in form and substance
reasonably satisfactory to the GAP Purchasers.
5.16 INDEBTEDNESS. The aggregate amount of Indebtedness of the
Company and its Subsidiaries, collectively, as of the Closing Date shall be no
more than $3,530,000.
5.17 RELATED TRANSACTIONS. The Company shall have delivered or
made available for inspection to the GAP Purchasers copies of documentation
reasonably satisfactory to the GAP Purchasers evidencing: (a) the consummation
of the merger of Predictive Holdings Inc. ("Predictive Holdings") with and into
the Company; (b) the redemption or conversion of all of the previously issued
and outstanding shares of the old Series A Convertible Preferred Stock, par
value $.001 per share of Predictive Holdings, into shares of Common Stock; (c)
the six-for-one split of the shares Common Stock; and (d) the cancellation of
(i) the promissory note and the termination of the related revolving credit
agreement, dated as of March 19, 1998, between the Company and PSoft, Inc.
(predecessor in interest to Tribeca) for a maximum principal amount of
$1,000,000, and (ii) the demand note of PSoft, Inc. (predecessor in interest to
Tribeca), dated as of March 31, 1998, in favor of the Company in the principal
amount of $130,000.
ARTICLE 6
CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE
<PAGE>
The obligation of the Company to issue and sell the Purchased
Shares and the Warrants and the obligation of the Company to perform its other
obligations hereunder, shall be subject to the satisfaction as determined by, or
waiver by, the Company of the following conditions on or before the Closing
Date:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Purchasers contained in Article 4 hereof shall be true and
correct in all material respects on and as of the Closing Date as if made on and
as of such date.
6.2 COMPLIANCE WITH THIS AGREEMENT. Each of the Purchasers
shall have performed and complied in all material respects with all of the
agreements and conditions set forth herein that are required to be performed or
complied with by such Purchaser on or before the Closing Date.
6.3 STOCKHOLDERS AGREEMENT. The Purchasers shall have duly
executed and delivered the Stockholders Agreement, substantially in the form
attached hereto as EXHIBIT B.
6.4 REGISTRATION RIGHTS AGREEMENT. The Purchasers shall have
duly executed and delivered the Registration Rights Agreement, substantially in
the form attached hereto as EXHIBIT C.
6.5 NO MATERIAL JUDGMENT OR ORDER. There shall not be on the
Closing Date any Order of a court of competent jurisdiction or any ruling of any
Governmental Authority or any condition imposed under any Requirement of Law
which would, in the reasonable judgment of the Company, (a) prohibit or restrict
(i) the sale of the Purchased Shares or the Warrants or (ii) the consummation of
the transactions contemplated by this Agreement, or (b) subject the Company to
any penalty or onerous condition under or pursuant to any Requirement of Law if
the Purchased Shares or the Warrants were to be sold hereunder.
6.6 PAYMENT OF PURCHASE PRICE. Each Purchaser shall pay the
aggregate purchase price for the Purchased Shares and/or the Warrants to be
purchased by such Purchaser.
ARTICLE 7
INDEMNIFICATION
7.1 INDEMNIFICATION BY THE COMPANY. Except as otherwise
provided in this Article 7, the Company (the "Indemnifying Party") agrees to
indemnify, defend and hold harmless the GAP Purchasers and their Affiliates and
their respective officers, directors, agents, employees, subsidiaries, partners,
members and controlling persons
<PAGE>
(each, an "Indemnified Party") to the fullest extent permitted by law from and
against any and all losses, Claims (including any Claim by a third party),
damages, expenses or other liabilities (collectively, "Losses") incurred in any
legal, administrative or other actions (including actions brought by the GAP
Purchasers or the Company or any equity holders of the Company or derivative
actions brought by any Person claiming through or in the Company's name),
proceedings or investigations (whether formal or informal), or written threats
thereof (including reasonable fees, disbursements and other charges of counsel
incurred by the Indemnified Party in any action between the Indemnifying Party
and the Indemnified Party or between the Indemnified Party and any third party
or otherwise), resulting from, arising out of or relating to any breach of any
representation or warranty, covenant or agreement by the Company in this
Agreement or the other Transaction Documents or any Indemnified Party's role
therein; PROVIDED, HOWEVER, that the Indemnifying Party shall not be liable
under this Section 7.1 to an Indemnified Party to the extent that it is finally
judicially determined that such Losses resulted from the material breach by such
Indemnified Party of any representation, warranty, covenant or other agreement
of such Indemnified Party contained in this Agreement; and PROVIDED, FURTHER,
that if and to the extent that such indemnification is unenforceable for any
reason, the Indemnifying Party shall make the maximum contribution to the amount
paid or payable by such Indemnified Party as a result of any such Losses (i) in
such proportion as is appropriate to reflect the relative benefits received by
the GAP Purchasers on the one hand and the Company on the other hand, or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the GAP Purchasers in connection with the action or inaction which resulted in
any such Loss. Each of the Company and the GAP Purchasers agree that it would
not be just and equitable if contribution pursuant to this Section 7.1 were
determined by pro rata or per capita allocation or by other method of allocation
which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. In connection with the obligation of the
Indemnifying Party to indemnify for expenses as set forth above, the
Indemnifying Party shall, upon presentation of appropriate invoices containing
reasonable detail, reimburse each Indemnified Party for all such reasonable
expenses (including reasonable fees, disbursements and other charges of one law
firm in any single jurisdiction incurred by the Indemnified Party in any action
between the Indemnifying Party and the Indemnified Party or between the
Indemnified Party and any third party or otherwise) as they are incurred by such
Indemnified Party; PROVIDED, HOWEVER, that the Indemnifying Party shall not be
liable for the fees and expenses of more than one counsel to all Indemnified
Parties and if an Indemnified Party is reimbursed hereunder for any expenses,
then such reimbursement of expenses shall be refunded to the extent it is
finally judicially determined that the Losses in question resulted from the
willful misconduct or gross negligence of such Indemnified Party.
Notwithstanding anything to the contrary set forth herein, the Company shall not
be obligated to provide indemnification for Losses in respect of claims made
under this Section 7.1 (i) unless the total of all such Losses shall exceed
$500,000 in the aggregate, whereupon the full amount of such Losses shall be
recoverable by the GAP Purchasers, and (ii) to the extent that the cumulative
amounts paid by the Company hereunder exceed $18,425,000.
<PAGE>
7.2 NOTIFICATION. Each Indemnified Party shall, promptly after
the receipt of notice of the commencement of any action, investigation, claim or
other proceeding against such Indemnified Party in respect of which indemnity
may be sought from the Indemnifying Party under this Article 7, notify the
Indemnifying Party in writing of the commencement thereof. The omission of any
Indemnified Party to so notify the Indemnifying Party of any such action shall
not relieve the Indemnifying Party from any liability which it may have to such
Indemnified Party (a) other than pursuant to this Article 7 or (b) under this
Article 7 unless, and only to the extent that, the Indemnifying Party is
materially prejudiced or otherwise forfeits substantive rights or defenses by
reason of such omission. In case any such action, claim or other proceeding
shall be brought against any Indemnified Party, and it shall notify the
Indemnifying Party of the commencement thereof, the Indemnifying Party shall be
entitled to assume the defense thereof at its own expense, with counsel
satisfactory to such Indemnified Party in its reasonable judgment; PROVIDED,
HOWEVER, that any Indemnified Party may, at its own expense, retain separate
counsel to participate in such defense at its own expense. Notwithstanding the
foregoing, in any action, claim or proceeding in which both the Indemnifying
Party, on the one hand, and an Indemnified Party, on the other hand, are, or are
reasonably likely to become, a party, such Indemnified Party shall have the
right to employ separate counsel, the reasonable costs and expenses of which
shall be borne by the Indemnifying Party, and to control its own defense of such
action, claim or proceeding if, in the reasonable opinion of counsel to such
Indemnified Party, a conflict or potential conflict exists between the
Indemnifying Party, on the one hand, and such Indemnified Party, on the other
hand, that would make such separate representation advisable; PROVIDED, HOWEVER,
that the Indemnifying Party shall not be liable for the fees and expenses of
more than one counsel to all Indemnified Parties. The Indemnifying Party agrees
that it will not, without the prior written consent of the GAP Purchasers,
settle, compromise or consent to the entry of any judgment in any pending or
threatened claim, action or proceeding relating to the matters contemplated
hereby (if any Indemnified Party is a party thereto or has been actually
threatened to be made a party thereto) unless such settlement, compromise or
consent includes an unconditional release of all Indemnified Parties from all
liability arising or that may arise out of such claim, action or proceeding, and
does not include any admission of fault on behalf of any Indemnified Party. The
Indemnifying Party shall not be liable for any settlement of any claim, action
or proceeding effected against an Indemnified Party without the Indemnifying
Party's prior written consent, which consent shall not be unreasonably withheld.
The parties agree and acknowledge that subsequent to the Closing, the
indemnification rights provided in this Article 7 shall be the exclusive remedy
of the parties hereto for breaches of this Agreement; PROVIDED, HOWEVER, that
notwithstanding the foregoing or anything to the contrary contained in this
Agreement, nothing in this Article 7 should restrict or limit any rights that
any Indemnified Party may have to seek equitable relief.
ARTICLE 8
<PAGE>
AFFIRMATIVE COVENANTS
The Company hereby covenants and agrees with the Purchasers as
follows:
8.1 PRESERVATION OF EXISTENCE. The Company shall, and shall
cause each of its Subsidiaries to:
(a) preserve and maintain in full force and effect
its existence and good standing under the laws of its jurisdiction of formation
or organization where the failure to so preserve and maintain would have a
material adverse effect on the Condition of the Company;
(b) preserve and maintain in full force and effect
all rights, privileges, qualifications, applications, licenses and franchises
where the failure to so preserve and maintain would have a material adverse
effect on the Condition of the Company;
(c) use its reasonable commercial efforts to preserve
its business organization;
(d) conduct its business in the ordinary course in
accordance with sound business practices, keep its properties in good working
order and condition (normal wear and tear excepted), and from time to time make
all needed repairs to, renewals of or replacements of its properties so that the
efficiency of its business operation shall be reasonably maintained and
preserved;
(e) comply in all material respects with all
Requirements of Law and with the directions of any Governmental Authority having
jurisdiction over the Company or its Subsidiaries or their respective business
or property, where the failure to so comply would have a material adverse effect
on the Condition of the Company; and
(f) file or cause to be filed in a timely manner all
reports, applications, estimates and licenses that shall be required by a
Governmental Authority and that, if not timely filed, would have a material
adverse effect on the Condition of the Company.
8.2 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Company
shall deliver to each GAP Purchaser, in form and substance satisfactory to such
GAP Purchaser:
(a) as soon as available, but not later than ninety
(90) days after the end of each fiscal year of the Company, a copy of the
audited consolidated balance sheet of the Company and its Subsidiaries as of the
end of such fiscal year and
<PAGE>
the related statements of operations and cash flows for such fiscal year,
setting forth in each case in comparative form the figures for the previous
year, all in reasonable detail and accompanied by a management summary and
analysis of the operations of the Company and its Subsidiaries for such fiscal
year accompanied by the report of a nationally recognized independent certified
public accounting firm reasonably satisfactory to the GAP Purchasers, which
report shall state without qualification that such consolidated financial
statements present fairly, in all material respects, the consolidated financial
condition as of such date and results of operations and cash flows for the
periods indicated in conformity with GAAP;
(b) commencing with the fiscal period ending on March
31, 1999, as soon as available, but in any event not later than forty-five (45)
days after the end of each of the first three fiscal quarters of each fiscal
year, the consolidated unaudited balance sheet of the Company and its
Subsidiaries, and the related statements of operations and cash flows for such
quarter and for the period commencing on the first day of the fiscal year and
ending on the last day of such quarter, all certified by an appropriate officer
of the Company as presenting fairly the consolidated financial condition as of
such date and results of operations and cash flows for the periods indicated in
conformity with GAAP applied on a consistent basis, subject to normal year-end
adjustments and the absence of footnotes required by GAAP;
(c) as promptly as practicable, but not later than
five (5) Business Days after a request by such GAP Purchaser, a certificate
signed by the Chief Executive Officer of the Company that the Company is not a
"foreign person" within the meaning of Section 1445 of the Code; and
(d) such other financial and operating data which are
customarily prepared by the Company, as the GAP Purchasers reasonably may
request.
8.3 ANNUAL BUDGET. Not less than 30 days prior to the end of
each fiscal year, the Company shall prepare and submit to its Board of Directors
for its approval an operating budget of the Company for the next fiscal year.
8.4 RESERVATION OF COMMON STOCK. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issue or delivery upon conversion of the Purchased
Shares as provided in the Certificate of Incorporation, the maximum number of
shares of Common Stock that may be issuable or deliverable upon such conversion
or exercise, and, from the time when the number of Warrant Shares is ascertained
(in accordance with the terms of the Warrants), shall reserve and keep available
out of its authorized shares of Common Stock, solely for the purpose of issue or
delivery upon exercise of the Warrants, the maximum number of shares of Common
Stock that may be issuable or deliverable upon such exercise. The shares of
Common Stock reserved for issuance upon conversion of the Purchased Shares are
duly authorized and, when issued or delivered in accordance with the Certificate
of Incorporation or the terms thereof, as the case may be, and against payment
therefor, shall
<PAGE>
be validly issued, fully paid and non-assessable. The shares of Common Stock to
be reserved for issuance upon exercise of the Warrants will be duly authorized
and, when issued or delivered in accordance with the Certificate of
Incorporation and the Warrants or the terms thereof, as the case may be, and
against payment therefor, shall be validly issued, fully paid and
non-assessable. The Company shall issue such shares of Common Stock in
accordance with the terms of the Certificate of Incorporation or the terms
thereof, as the case may be, and otherwise comply with the terms hereof and
thereof.
8.5 INSURANCE. The Company shall maintain, and shall cause the
Subsidiary to maintain, insurance with insurance companies or associations with
a rating of "A" or better as established by Best's Rating Guide (or an
equivalent rating with such other publication of a similar nature as shall be in
current use) in such amounts and covering such risks as are usually and
customarily carried with respect to similar businesses according to their
respective locations.
8.6 BOOKS AND RECORDS. The Company shall keep, and shall cause
the Subsidiary to keep, proper books of record and account, in accordance with
GAAP consistently applied.
8.7 BACK-UPS OF COMPUTER SOFTWARE. The Company shall, and
shall cause the Subsidiary to, make back-ups of all material computer software
programs and databases and shall maintain such software programs and databases
at a secure off-site location.
8.8 INSPECTION. The Company shall, and shall cause its
Subsidiary to, permit a representative of the GAP Purchasers to visit and
inspect any of its properties, to examine its corporate, financial and operating
records and make copies thereof or abstracts therefrom, and to discuss its
affairs, finances and accounts with their respective directors, officers and
independent public accountants, all at such reasonable times during normal
business hours and as often as may be reasonably requested upon reasonable
advance notice to the Company, PROVIDED that the Purchasers hereby agree to
enter into a reasonably and mutually satisfactory agreement, as a condition to
such visitations or inspections, pursuant to which such Purchasers shall agree
to maintain the confidentiality of the corporate, financial and operating
records and affairs of the Company.
8.9 CANCELLATION OF NOTES. The Company shall use its best
efforts to cause the payment in full under and cancellation of the Notes secured
by stock pledge agreements, dated August 11, 1998 (the "Notes"), of (a) Ronald
G. Pettengill, (b) Robert Belau, (c) Eric Meyer, (d) Donald Duffy and (e) Meyer,
Duffy and Associates, L.P. (collectively the "Note Holders"), in favor of
Predictive Holdings, predecessor in interest to the Company, by the Note Holders
within three (3) Business Days of the Closing Date.
8.10 SHARE REPURCHASE. The Company shall begin and complete
the Share Repurchase within three (3) Business Days of the Closing Date.
<PAGE>
8.11 STOCKHOLDERS AGREEMENT. The Company shall use its good
faith efforts to cause the stockholders listed on Schedule II to this Agreement
(the "Group A Stockholders") to execute and deliver the Stockholders Agreement.
8.12 REGISTRATION RIGHTS AGREEMENT. The Company shall use its
good faith efforts to cause the stockholders listed on Schedule II to this
Agreement to execute and deliver the Registration Rights Agreement.
8.13 TRIBECA. The Company shall use its best efforts (i) by
April 30, 1999 to receive fair market value compensation for certain payroll and
other administrative functions (as set forth in Schedule 3.31 of the Disclosure
Schedule) which it currently provides to Tribeca or to cease providing those
functions; and (ii) by April 30, 1999 to receive fair market value compensation
for Tribeca's leasing of equipment and rental of office space from the Company
or to cease providing those functions.
ARTICLE 9
TERMINATION OF AGREEMENT
9.1 TERMINATION. This Agreement may be terminated prior to the
Closing as follows:
(a) at any time on or prior to the Closing Date, by
mutual written consent of the Company and the GAP Purchasers;
(b) at the election of the Company or the GAP
Purchasers by written notice to the other parties hereto after 5:00 p.m., New
York time, on March 8, 1999, if the Closing shall not have occurred, unless such
date is extended by the mutual written consent of the Company and the GAP
Purchasers; PROVIDED, HOWEVER, (i) that the right to terminate this Agreement
under this Section 9.1(b) shall not be available to any party whose breach of
any representation, warranty, covenant or agreement under this Agreement has
been the cause of, or resulted in, the failure of the Closing to occur on or
before such date, and (ii) if the failure of the Closing to occur on or before
such date has been caused by or resulted from the Company's inability to obtain
any consents required under Section 5.13, then the Company may not elect to
terminate this Agreement under this Section 9.1(b) until after 5:00 p.m., New
York time, on March 22, 1999;
(c) at the election of the Company, if there has been
a material breach of any representation, warranty, covenant or agreement on the
part of any GAP Purchaser contained in this Agreement, which breach has not been
cured within five (5) Business Days of notice to the GAP Purchasers of such
breach; or
(d) at the election of the GAP Purchasers, if there
has been a material breach of any representation, warranty, covenant or
agreement on the part of the Company contained in this Agreement, which breach
has not been cured within five (5)
<PAGE>
Business Days notice to the Company of such breach.
If this Agreement so terminates, it shall become null and void and have no
further force or effect, except as provided in Section 9.2.
9.2 SURVIVAL. If this Agreement is terminated and the
transactions contemplated hereby are not consummated as described above, this
Agreement shall become void and of no further force and effect; except for the
provisions of Article 1, and this Section 9.2; PROVIDED that (a) none of the
parties hereto shall have any liability in respect of a termination of this
Agreement pursuant to Section 9.1(a) or Section 9.1(b) and (b) nothing shall
relieve any party from any liability for actual damages resulting from a
termination of this Agreement pursuant to Section 9.1(c) or 9.1(d); and
PROVIDED, FURTHER, that none of the parties hereto shall have any liability for
speculative, indirect, unforeseeable or consequential damages resulting from any
legal action relating to this Agreement or any termination of this Agreement.
ARTICLE 10
MISCELLANEOUS
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the
representations and warranties made herein shall survive the execution and
delivery of this Agreement until the date that is sixty (60) days after the
receipt by the GAP Purchasers of audited financial statements of the Company for
the fiscal year ending December 31, 1999 (or, if such fiscal year changes and no
such audited consolidated financial statements are available, then the successor
fiscal year), except for (a) Sections 3.1, 3.2, 3.4, 3.7, 3.15, 3.21, 4.1, 4.2,
4.4 and 4.6, which representations and warranties shall survive until the
earlier to occur of the Initial Public Offering and the second anniversary of
the Closing Date, and (b) Section 3.12, which shall survive until the later to
occur of (x) the lapse of the statute of limitations with respect to the
assessment of any Tax to which such representation and warranty relates
(including any extensions or waivers thereof) and (y) sixty (60) days after the
final administrative or judicial determination of the Taxes to which such
representation and warranty relates, and no claim with respect to Section 3.12
may be asserted thereafter with the exception of claims arising out of any fact,
circumstance, action or proceeding to which the party asserting such claim shall
have given notice to the other parties to this Agreement prior to the
termination of such period of reasonable belief that a tax liability will
subsequently arise therefrom.
10.2 NOTICES. All notices, demands and other communications
provided for or permitted hereunder shall be made in writing and shall be by
registered or certified first-class mail, return receipt requested, telecopier,
courier service or personal delivery:
(a if to the Company, to:
<PAGE>
Predictive Systems, Inc.
145 Hudson Street
Sixth Floor
New York, NY 10013
Telecopy: (212) 219-4499
Attention: Ron Pettengill
Robert Belau
with a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway
47th Floor
New York, New York 10019
Telecopy: (212) 586-7878
Attention: Alexander D. Lynch, Esq.
(b if to GAP LP or GAP Coinvestment, to:
c/o General Atlantic Service Corporation
3 Pickwick Plaza
Greenwich, Connecticut 06830
Telecopy: (203) 622-8818
Attention: Peter L. Bloom
Mark J. Lotke
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Telecopy: (212) 757-3990
Attention: Matthew Nimetz, Esq.
(c if to any of the Other Purchasers, to:
Brobeck, Phleger & Harrison LLP
1633 Broadway
47th Floor
New York, New York 10019
Telecopy: (212) 586-7878
Attention: Alexander D. Lynch, Esq.
All such notices and communications shall be deemed to have
been duly
<PAGE>
given when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial courier service; five (5) Business Days
after being deposited in the mail, postage prepaid, if mailed; and when receipt
is mechanically acknowledged, if telecopied.
10.3 SUCCESSORS AND ASSIGNS; THIRD PARTY BENEFICIARIES. This
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of the parties hereto. Subject to applicable securities laws,
each of the GAP Purchasers may assign any of its rights under any of the
Transaction Documents to any of its Affiliates. The Company may not assign any
of its rights under this Agreement without the written consent of the GAP
Purchasers. Except as provided in Article 7, no Person other than the parties
hereto and their successors and permitted assigns is intended to be a
beneficiary of this Agreement.
10.4 AMENDMENT AND WAIVER.
(a No failure or delay on the part of the Company
or the Purchasers in exercising any right, power or remedy hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy. The remedies provided for
herein are cumulative and are not exclusive of any remedies that may be
available to the Company or the Purchasers at law, in equity or otherwise.
(b Any amendment, supplement or modification of or
to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by the Company or the holders of a
majority of the Purchased Shares from the terms of any provision of this
Agreement, shall be effective only if it is made or given in writing and signed
by the Company and the holders of a majority of the Purchased Shares. Except
where notice is specifically required by this Agreement, no notice to or demand
on the Company in any case shall entitle the Company to any other or further
notice or demand in similar or other circumstances.
10.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
10.6 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
10.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION.
<PAGE>
10.8 SEVERABILITY. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions hereof shall not be in any way impaired, unless the
provisions held invalid, illegal or unenforceable shall substantially impair the
benefits of the remaining provisions hereof.
10.9 ENTIRE AGREEMENT. This Agreement, together with the
exhibits and schedules hereto, and the other Transaction Documents, is intended
by the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein and therein.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This Agreement, together with
the exhibits and schedules hereto and the other Transaction Documents,
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
10.10 FEES. Upon the Closing, the Company shall reimburse the
GAP Purchasers for their reasonable fees, disbursements and other charges of
counsel incurred in connection with the transactions contemplated by this
Agreement, provided that the amount of such reimbursement shall not exceed
$50,000.
10.11 PUBLICITY. Except as may be required by applicable
Requirement of Law, none of the parties hereto shall issue a publicity release
or public announcement or otherwise make any disclosure concerning this
Agreement or the transactions contemplated hereby, without prior approval by the
other parties hereto (which approval shall not be unreasonably withheld);
PROVIDED, HOWEVER, that nothing in this Agreement shall restrict any Purchaser
from disclosing information (a) that is already publicly available; (b) to the
prospective transferee in connection with any contemplated transfer of any of
the Purchased Shares; and (c) to its attorneys, accountants, consultants and
other advisors to the extent necessary to obtain their services in connection
with such Purchaser's investment in the Company. GAP LLC may disclose on its
worldwide web page, www.gapartners.com, the name of the Company, its address,
the identity of the Chief Executive Officer, a description of the Company's
business and the aggregate dollar amount invested by the GAP Purchasers in the
Company. If any announcement is required by law to be made by any party hereto,
prior to making such announcement such party will deliver a draft of such
announcement to the other parties and shall give the other parties a reasonable
opportunity to comment thereon.
10.12 FURTHER ASSURANCES. Each of the parties shall execute
such documents and perform such further acts (including, without limitation,
obtaining any consents, exemptions, authorizations or other actions by, or
giving any notices to, or making any filings with, any Governmental Authority or
any other Person, and otherwise fulfilling, or causing the fulfillment of, the
conditions to Closing set forth in Articles 5
<PAGE>
and 6) as may be reasonably required or desirable to carry out or to perform the
provisions of this Agreement and to consummate and make effective as promptly as
possible the transactions contemplated by this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock
and Warrant Purchase Agreement to be executed and delivered by their respective
officers hereunto duly authorized on the date first above written.
PREDICTIVE SYSTEMS, INC.
By: /s/ Ronald Pettengill
Name: Ronald Pettengill
Title: Chief Executive Officer
GENERAL ATLANTIC PARTNERS 54, L.P.
By: GENERAL ATLANTIC PARTNERS, LLC,
its General Partner
By: /s/ Thomas J. Murphy
Name: Thomas J. Murphy
Title: Attorney in-fact
GAP COINVESTMENT PARTNERS II, L.P.
By: /s/ Thomas J. Murphy
Name: Thomas J. Murphy
Title: Attorney in-fact
<PAGE>
BROBECK, PHLEGER & HARRISON LLP
By: /s/ Alexander D. Lynch
Name: Alexander D. Lynch
Title: Partner
/s/ Alexander D. Lynch
Alexander Lynch
/s/ Babak Yaghmaie
Babak Yaghmaie
/s/ Nigel Howard
Nigel Howard
<PAGE>
Exhibit 10.17
DATED 1 January 1999
(1) PREDICTIVE LIMITED
and
(2) JOHN WRIGHT
-----------------------------------
SERVICE AGREEMENT
-----------------------------------
<PAGE>
THIS AGREEMENT is made the 1st day of January, 1999
BETWEEN:
(1) PREDICTIVE LIMITED a company registered in England and Wales whose
registered address is at 60 Bishopsgate, London EC2N 4AJ (the
"Company"); and
(2) JOHN WRIGHT of The Barn, Badgers Lane, Lower Tysal CV35 OBY (the
"Executive")
IT IS HEREBY AGREED as follows:
1. ENGAGEMENT AND TERM
1.1 With effect from January 1, 1999, the Company engages the services of
the Executive as Managing Director of Europe, the Middle East and
Africa and the Executive accepts such engagement by the Company upon
the terms set out in this Agreement unless and until terminated by
either party giving to the other at least three months' notice in
writing.
1.2 The Executive hereby warrants and represents to the Company that he is
not in breach of any existing or former terms of employment whether
express or implied or of any other obligation binding upon the
Executive by reason of entering into this Agreement on the terms herein
1.3 The Executive's period of continuous employment will commence on
January 1, 1999 and does not include any service with any previous
employer.
2. DUTIES OF THE EXECUTIVE
2.1 The Executive shall perform such duties and exercise such powers in
relation to the business of the Company or of any Group Company as may
from time to time be assigned to or vested in him by the Board and
shall at all times and in all respects conform to and comply with the
reasonable directions and regulations made by the Board and so that the
Executive shall perform such services for any Group Company without
further remuneration and accept such offices in any such Group Company
as the Board may require.
2.2 The Executive shall well and faithfully serve the Company and any
relevant Group Company (where applicable) to the utmost of 09 ability
and shall promote the interests and welfare thereof and shall unless
prevented by accident or ill-health devote the whole of his time
attention and abilities during the normal working hours of the Company
or relevant Group Company (and, for no further remuneration, during
such additional hours as shall be reasonably necessary for the proper
performance thereof) to the said duties.
2.3 The Executive shall at all times keep the Board informed (in writing if
so requested) of the
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conduct of the business or affairs of the Company or the relevant Group
Company and provide such explanations as the Board may reasonably
require in connection therewith.
2.4 The Executive shall at all times give to the Board and to the Company's
auditors from time to time appointed all such information, explanation,
data and assistance as may be reasonably required in connection with
the business of the Company.
2.5 The Executive shall perform his duties at such place in the United
Kingdom as He Company from time to time requires him to work ("Usual
Place of Work").
2.6 The Executive shall comply with all the Company's rules, regulations
and policies from time to time in force.
3. SALARY AND OTHER COMPENSATION.
3.1 The Company shall pay to the Executive during the term of his
engagement a gross salary of (pound)71,200 per annum in aggregate,
which shall accrue from day to day and be payable in equal monthly
instalments in arrears on the last Friday of each calendar month (or
such other date as the Company shall determine). The Executive's salary
shall be reviewed by the Board annually and the decision upon such
review shall be at the complete discretion of the Board.
3.2 If the Executive shall be required to carry out any duties or exercise
any powers in relation to any Group Company a proper proportion of his
remuneration for the performance of such duties may be paid by such
Group Company and payment of such remuneration by such Group Company
shall be accepted by the Executive pro tanto in satisfaction of the
obligation of the Company to remunerate him/her hereunder.
3.3 The Company shall pay the Executive a bonus based on the performance of
the Company in accordance with Schedule A to this Agreement (the
"Bonus"). Prior to the start of each year during the term of this
Agreement the Executive and the Board (which for this purpose Shall
include the representatives of the Company's parent company, Predictive
Systems, Inc. (the "Parent Company")) shall agree a revised Bonus for
the Executive to apply for the next year and Schedule A to this
Agreement shall be amended or replaced accordingly.
3.4 The Company shall procure that Predictive Holdings, Inc grants to the
Executive stock options over its $0.01 common stock in accordance with
Schedule B to this Agreement and otherwise on the terms of the
Predictive Holdings, Inc 1998 Stock Option/ Issuance Plan as amended
from time to time.
4. PENSIONS AND SICKNESS
4.1 Each month during the term of this Agreement, the Company shall
contribute an amount equal to 5% (five percent) of the basic salary of
the Executive to a personal pension scheme
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nominated by the Executive. There is no contracting out certificate in
force in relation to the State Earnings Related Pensions Scheme.
4.2 Subject to the right of the Company to terminate this Agreement as set
out in Clause 7.1 hereof or otherwise the Executive shall
notwithstanding illness or other incapacity beyond his control as a
result of which he is unable to perform his duties hereunder remaining
entitled to receive his salary hereunder in full for an aggregate
period of up to thirty (30) days in any year subject to:
(a) compliance with the Company's procedures relating to sickness
notification, statutory sick pay and self-certification to
cover absence from work due to sickness or other incapacity
and to the provision of medical certificates and/or undergoing
a medical examination by a doctor appointed by the Company as
may be required by the Company; and
(b) a reduction (at the Company's discretion) from his salary of
an amount or amounts equal to any state sickness benefit or
statutory sick pay to which the Executive is entitled.
5. TRAVEL EXPENSES
5.1 In the performance of his duties hereunder the Executive shall work and
travel to such places (whether inside or outside the United Kingdom)
and on such occasions as the Board may from time to tome reasonably
require.
5.2 The Company will not provide a company car for the Executive nor will
it reimburse the Executive for the costs of insuring or maintaining any
motor vehicle maintained by him. However, the Company will pay to the
executive an amount equal to (pound)0.49 per mile (or such other amount
as is from time to time recommended by the Royal Automobile Club as the
business allowance per mile for vehicles of above two thousand cubic
capacity) for each mile driven by the Executive in his own car during
the course of his employment hereunder.
5.3 The Company shall upon the production of the appropriate vouchers or
such other evidence as the Company shall require from time to time
reimburse the Executive all other reasonable travelling, hotel,
entertainment and other expenses properly incurred by him/her in or
about the performance of his duties hereunder with the prior authority
of the Board.
5.4 Should the Company temporarily require the Executive to perform his
duties over than at his Usual Place of Work, the Company shall
reimburse him/her for all reasonable travelling and accommodation and
such other expenses as the Board in its discretion decides.
6. HOLIDAYS
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<PAGE>
6.1 The Executive shall be enticed to 20 working days' holiday (in addition
to the usual public or statutory holidays) in each calendar year to be
taken in such period and at such times as the Board shall consider most
convenient having regard to the requirements of the Company's or
relevant Group Company's business.
6.2 The Company reserves the right at its sole discretion to require the
Executive to take any outstanding holiday during any notice period or
to make payment in lieu thereof.
6.3 On termination of the Executive's engagement (howsoever occasioned) if
the Executive has taken more or less than his annual holiday
entitlement an appropriate adjustment shall be made to any payment of
salary or benefits from the Company to the Executive.
6.4 Save with the prior written consent of the Company, untaken holiday
entitlement for any one calendar year may not be carried forward to any
subsequent year and no payment in lieu shall be made for such accrued
holiday upon termination of this Agreement howsoever.
7. TERMINATION OF ENGAGEMENT
7.1 The Executive's engagement may be terminated by the Company forthwith
by notice in writing if:
(a) the Executive commits any material breach or (after warning)
any repeated or continued breach of his obligations hereunder
or is guilty of conduct tending to bring himself or the
Company or any Group Company into disrepute;
(b) the Executive commits any criminal offense other then a minor
motoring offense;
(c) the Company reasonably believes that the Executive is guilty
of gross misconduct or gross negligence;
(d) the Executive is unable to fulfil his duties hereunder through
illness or other incapacity for an aggregate period exceeding
thirty (30) days in any calendar year,
(e) the Executive becomes bankrupt or has an interim order made
against him/her under the Insolvency Act 1986 or makes any
arrangement or composition with his creditors generally or the
equivalent under any other jurisdiction;
(f) the Executive has been disqualified or is liable to be
disqualified from being a director by reason of any order made
under the Company Directors Disqualification Act 1986 or
otherwise;
(g) the Executive is required to vacate his office as a director
of the Company and/or any Group Company by virtue of any
provision of the Articles of Association of the Company and/or
any Group Company; or
(h) the Executive becomes of unsound mind or a patient within the
meaning of any statute
5
<PAGE>
relating to mental health.
7.2 The termination by the Company of the Executive's engagement (howsoever
occasioned) shall be without prejudice to any claim which the Company
may have for damages arising from breach of this Agreement by the
Executive.
7.3 On termination of the Executive's engagement hereunder the Company may
make deductions/adjustments from any salary ant/or contractual benefits
due to the Executive of monies due from the Executive to the Company
including not limited to any outstanding loans, advances and the cost
of repairing any damage or loss to the Company's property caused by the
Executive (and the cost of recovering the same), and any other monies
due from the Executive to the Company.
7.4 The Executive agrees that the Company may by notice in its absolute
discretion:
(a) require the Executive during any period of notice (whether
given by the Executive or by the Company) or dig any unexpired
term of his employment ("the Remaining Period") to carry out
such services as the Company shall direct or to undertake no
work provided that the Company shall continue to pay the
Executive's salary and contractual benefits;
(b) require the Executive during the Remaking Period not to attend
work at all but to be available and contactable by telephone
at home during normal office hours to carry out such services
as the Company directs or to cease to perform his functions as
described in the his job description and to do such other task
or tasks that the Company may assign to him/her provided that
the Company shall continue to pay the Executive's salary and
contractual benefits;
(c) terminate the Executive's engagement forthwith and make a
payment in lieu of any notice of termination of employment.
7.5 Upon any notice under Clause 7.4 being given, notwithstanding any other
term contained herein, the restrictions referred to in Clause 11.l(b),
(c) ant (d) shall be deemed to commence upon such notice being
effective.
7.6 Upon termination of the Executive's engagement hereunder (howsoever
occasioned) the Executive shall not be entitled to any compensation in
respect of any loss of any right or benefit or prospective right or
benefit under any share option or other share incentive scheme operated
or granted by the Company or any Group Company.
7.7 Should the Company become entitled to terminate the employment of the
Executive pursuant to Clause 7.1 above, it shall be entitled (without
prejudice to its right subsequently to terminate his engagement on the
same or any other ground) to suspend the Executive on full pay for as
long as it may reasonably think fit.
8. RESIGNATION OF DIRECTORSHIPS AND OTHER OFFICES
6
<PAGE>
8.1 The Executive shall immediately upon termination of his engagement
howsoever occasioned or upon a notice of termination being served by
either party in accordance with this Agreement (whichever is earlier),
upon request by the Company give written notice resigning forthwith as
a director or trustee or from any other office he may hold from tune to
time with the Company and/or any Group Company or arising from his
engagement by the Company and/or any Group Company without any further
compensation.
8.2 If such notice as is referred to in Clause 8.1 has not been received by
the Company or such Group Company within seven days of the Company
requesting the same, the Secretary of the Company from time to time is
hereby irrevocably authorised to appoint any person in the Executive's
name and on his behalf to execute any documents and to do all acts
necessary to effect the Executive's resignation as set out in Clause
8.1.
9. INVENTIONS AND IMPROVEMENTS
9.1 It shall be part of the normal duties of the Executive at all times to
consider in what manner and by what new methods any devices, products,
services, processes, equipment or systems of the Company and each Group
Company might be improved and promptly to give to the Board full
details of any invention, discovery, design, improvement or other
matter or work whatsoever in relation thereto (the "Inventions") which
he may from time to time make or discover during his engagement
hereunder and the Executive hereby acknowledges and agrees that the
sole ownership of the Inventions and all proprietary rights therein
discovered or made by him/her (whether alone or jointly with others) at
any tune during his engagement hereunder shall (subject to any contrary
provisions of the Patents Act 1977 and the Copyright Design and Patents
Act 1988 and to any rights of a joint inventor thereof) belong free of
charge and exclusively to the Company or as it may direct.
9.2 All records, documents, papers (including all copies and summaries
thereof) copyright protected works made or acquired by the Executive in
the course of his employment, together with all worldwide copyright and
design nights in all Me Inventions, shall be and remain the property of
the Company.
9.3 For the avoidance of doubt and the Executive irrevocably and
unconditionally waives all rights granted by Chapter IV or Part I of
the Copyright Designs and Patents Act 1988 that vests in the Executive
the authorship of any copyright works in respect of the Inventions by
the Executive in the course of his employment with the Company or any
Group Company including without limitation the right to be identified
as the author of any such works and the right not to have any such
works subjected to derogatory treatment.
9.4 The Executive hereby agrees (at any time during his employment or
thereafter and at the Company's expense) to do all such acts and things
(including without limitation making application for letters patent) as
the Board may reasonably request to vest
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<PAGE>
effectually any Invention (whether owned by the Company in accordance
with Clause 9.1 or owned by the Executive) and any protection as to
ownership or use (in any part of the world) of the same in the Company
or in any Group Company or as it may direct, jointly if necessary with
any joint inventor thereof, and the Executive hereby irrevocably
appoints the Company for the purposes aforesaid to be his attorney in
his name and on his behalf to execute and do any such documents acts
and things aforesaid.
9.5 The Executive shall not knowingly do or omit to do anything which will
or may have the result of imperilling any such protection aforesaid or
any application therefor.
9.6 Should the Executive during his engagement hereunder make any
Inventions that do not belong to the Company by reason of the Patents
Act 1977 or otherwise, the Executive shall forthwith license or assign
(as determined by the Company) to the Company all the Executive's
rights in relation to such Invention and will deliver to the Company
all documents and other materials relating thereto whereupon the
Company shall pay the Executive such compensation provided in Section
40 of The Patents Act 1977.
10. CONFIDENTIAL AND BUSINESS INFORMATION
10.1 Upon the termination of the Executive's engagement (howsoever
occasioned) the Executive (or as appropriate his personal
representative) shall forthwith deliver to the Company (without
retaining copies of the same) all plans, designs, specifications, price
lists, lists of customers and suppliers, correspondence, manuscripts,
records (in whatever medium), documents, accounts and papers of any
description, any other property of the Company or any Group Company,
notes, memoranda, records and writings made by the Executive relating
to the business of Me Company or any Group Company within the
possession or under the control of the Executive (or as appropriate his
personal representatives) relating to the affairs and business of the
Company or any Group Company.
10.2 The Executive hereby undertakes to the Company (for itself and as
trustee for each Group Company) that (save as expressly required by
law) neither during the course of his employment (except in the proper
performance of his duties) nor at any time after the termination of
this Agreement howsoever occasioned, will he directly or indirectly:
(a) use for his own purposes or those of say other person,
company, business entity or other organization whatsoever; or
(b) disclose to any person, company, business entity or other
organization whatsoever;
any trade secrets or confidential information relating or belonging to
the Company or Group Company including but not limited to any such
information relating to customers, customer lists or requirements,
price lists or pricing structures, marketing and sales information,
business plans or dealings, employees or officers, financial
information and plans, designs, formulae, product lines and research
activities, any document marked
8
<PAGE>
"confidential", or any information which the Executive has been told or
is aware is confidential or which he might reasonably expect the
Company or any Group Company would regard as confidential, or any
information which has been given to the Company or any Group Company in
confidence by customers, suppliers or other persons and that he shall
use his best endeavours to prevent the publication or disclosure of any
information concerning such matters.
10.3 The list of categories of confidential information referred to in
Clause 10.2 may be modified from time to time by the Company giving the
Executive notice of the same.
10.4 The obligations contained in Clause 10.2 shall cease to apply to any
information or knowledge which may subsequently come into the public
domain after the termination of the Executive's employment other than
by way of unauthorized disclosure.
11. NON-COMPETITION
11.1 Notwithstanding termination of this Agreement, the Executive hereby
covenants and undertakes with the Company (for itself and as trustee
for each other Group Company) and so that each covenant and undertaking
below shall be a further and separate and severable obligation and
without prejudice and in addition to all other like obligations already
or hereafter so undertaken by the Executive that:
(a) he shall not during his engagement hereunder be directly or
indirectly engaged, concerned or interested whether as
principal, employee, agent, consultant or otherwise in any
trade occupation or business which in the opinion of the Board
is or is likely to be in competition with the business from
time to time of the Company or of any Group Company;
(b) within the United Kingdom, the United States of America or any
other territory where any Group Company is then doing
business, he shall not during his engagement hereunder and for
a period of six months following the Termination Date and
whether soley or jointly with or as manager agent officer
employee or otherwise for any other person firm or corporation
directly or indirectly without the consent in writing of the
Board be engaged in or interest in or perform services in
respect of or be concerned with:-
(i) the research into, development, manufacture, supply
or marketing of any product which is of the same or
similar type to any product researched or developed
or manufactured or supplied or marketed by the
Company or any Group Company during the Relevant
Period or within a reasonable time after the
Termination Date;
(ii) the development or provision of any services
(including but not limited to technical and product
support, or consultancy or customer services) which
are of the same or similar type to any services
provided by the Company or any Group Company during
the Relevant Period or to be provided by the Company
or any Group Company within a reasonable time after
the Termination Date
9
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(iii) the sales of goods or provision of services of a kind
supplies by the Company or any Group Company in
connection with the Relevant Business, to Customers
and Prospective Customers for such goofs or services;
provided always that the provisions of this sub-clause shall apply only
in respect of goods or services or Relevant Businesses with which the
Executive was either personally concerned or for which he was directly
responsible during the Relevant Period;
(c) he shall not during his engagement hereunder and for a period
of six months following the Termination Date whether solely or
jointly with or as manager, agent, officer, employee or
otherwise for any other person, company, film or corporation
or directly or indirectly:
(i) solicit or assist in soliciting in competition with
the Company the custom or business of any Customer or
Prospective Customer with whom the Executive has had
personal contact or dealing on behalf of the Company
or any Group Company during the Relevant Period
and/or with whom employees reporting to the Executive
have had personal contact or dealings on behalf of
the Company or any Group Company during the Relevant
Period;
(ii) accept, or facilitate the acceptance of, or deal
with, in competition with the Company the custom or
business of any Customer or Prospective Customer with
whom the Executive has had personal contact or
dealings on behalf of the Company or any Group
Company during the Relevant Period and/or with whom
employees reporting to the Executive have had
dealings on behalf of the Company or any Group
Company during the Relevant Period;
(iii) endeavour to procure the supply of goods or services
from any person, firm or company which during the
Relevant Period has been a supplier of goods or
services in connection with any Relevant Business to
the Company or any Group Company where such supply
may have an adverse effect on or cause loss to the
Company or such Group Company;
(iv) knowingly or recklessly do or say anything which is
or is calculated to be prejudicial to the interests
of the Company or any Group Company or its business
or which results or may result in the discontinuance
of any contract or arrangement or benefit to the
Company or any Group Company;
(d) he shall not for a period of 12 months after the Termination
Date solicit away from the Company or any Group Company or
interfere with any person who during the Relevant Period was
employed by the Company or any Group Company and with whom the
Executive had personal contact or had dealt with during the
Relevant Period whether or not the said employee would be in
breach of his contract of employment with the Company or any
Group Company,
provided always that nothing above provided in this Clause 11 shall
prohibit the
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Executive (i) from being the holder of not more than three per cent of
any class of stock, shares or debentures or other securities in any
company which is listed and/or dealt in on the London Stock Exchange or
in Be Unlisted Securities Market of such stock exchange or any other
recognized stock exchange or (ii) from being interested as a
shareholder or director only in such companies as the Board from time
to time in writing agrees such agreement not to be unreasonably
withheld or withdrawn for so long as such interest of the Executive or
any of them shall not prejudice the business interests of the Company
or of any Group Company and for so long as the Executive shall during
his engagement hereunder comply with the provisions of this Clause 11.
For the purposes of the proviso to this Clause, the expression
"Executive" shall include those persons to whom section 203 of the
Companies Act 1985 refers, whose interests shall be aggregated with the
interest of the Executive.
11.2 The Executive also covenants and undertake with the Company (for itself
and as trustee for each Group Company) as a further and separate and
severable obligation aforesaid that:
(a) he will not during the term of his engagement hereunder
introduce to any other person fun or company business of any
kind which could appropriately be dealt with by the Company or
any Group Company and he will not have any financial interest
in or derive any financial benefit from contracts made by the
Company or any Group Company with any third party without
first disclosing such interest or benefit to the Board in
writing and obtaining its written approval thereto; and
(b) save in the proper performance of his duties hereunder, he
will not directly or indirectly during his engagement
hereunder or thereafter make use of any corporate or lousiness
name which is identical or similar to or likely to be confused
or associated with any corporate or business or brand name of
the Company or any Group Company or which might suggest a
connection with the same; and
(c) he will not after the Termination Date represent or otherwise
indicate any present association with the Company or any Group
Company or for the purpose of carrying on any business claim,
represent or otherwise indicate any past association win the
Company or any Group Company.
11.3 For the purposes of Clause 11.1 and 11.2 only, a Group Company shall
mean a Group Company for which the Executive shall have rendered
services in an employment or consultancy capacity or of the affairs of
which he shall have gained knowledge at any time during the Relevant
Period.
11.4 The restrictions contained in this Clause 11 and in Clause 10 are
considered reasonable by the parties but in the event that any such
restrictions shall be found to be void but would be valid if some part
thereof were deleted or the period or area of application reduced such
restrictions shall apply with such modification as may be necessary to
make them valid and effective.
11.5 No provision of this Agreement or any agreement or arrangement of which
it forms part by virtue
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of which the agreement constituted by all of the foregoing is subject
to registration (if such be the case) under the Restrictive Trade
Practices Acts 1976 and 1977 shall take effect until the day after
particulars of such agreement have been furnished to the Director
General of Fair Trading pursuant to Section 24 of the Restrictive Trade
Practices Act 1976.
11.6 The undertakings and covenants contained in this Clause 11 and Clause
10 shall be directly enforceable by the Company or any Group Company
enjoying the benefit thereof and the Company may also enforce the same
for the benefit of any Group Company as well for its own benefit.
11.7 The Executive agrees that in the event of receiving from any person,
company, business entity or other organization an offer of employment
either during the continuance of this Agreement or during the
continuance in force of any of the restrictions set out above, he will
forthwith provide to such person, company, business entity or other
organization making such an offer of employment a full and accurate
copy of this Agreement signed by the parties hereto.
12. GRIEVANCE PROCEDURE
The Company hereby notifies the Executive that in the event of the
Executive wishing to seek redress of arty grievance relating to his
engagement he should write to the Board setting out full details of the
matter and the Executive shall promptly answer (in writing if required)
such questions (if any) as are put to him/her by any member of the
Board. A majority decision of the Board on such matter shall be final
and binding and will be communicated to the Executive in writing.
13. INSURANCE
13.1 The Executive hereby covenants with the Company on behalf of himself
and his personal representatives at all times fully and effectively to
comply with the terms of any insurance policy taken out by the Company
and/or any Group Company on his life or in respect of his position as a
director and/or officer of the Company and/or any Group Company and
further covenants that all statements, representations and declarations
made by him in connection with such insurance policy shall when made be
true, complete and accurate in all respects.
13.2 The Executive undertakes to co-operate fully and assist the Company or
the relevant Group Company in relation to any claim(s) made or to be
made in connection therewith (including without limitation submitting
to a medical examination) notwithstanding that this Agreement has been
terminated or has come to an end.
14. RECONSTRUCTION OR AMALGAMATION
If this Agreement is terminated because of the liquidation of the
Company for the purpose of amalgamation or reconstruction or if a third
party agrees to acquire the
12
<PAGE>
whole or substantially the whole of the undertaking and assets of the
Company and the Executive is offered employment with such amalgamated
or reconstructed company or third party on terms which taken as a whole
are not less favourable in all material respects than the terms of this
Agreement the Executive shall have no claim against the Company in
respect of such termination.
15. NOTICES
15.1 Any notice given or required hereunder may be served by personal
delivery or facsimile transmission or by leaving the same at or by
sending the same through the post addressed in the case of the Company
to its registered office from time to time and in the case of the
Executive to his aforesaid address or if different, the address of his
main residence at the relevant time or if the Executive is engaged on
business of the Company abroad at such address as the Executive shall
notify to the Company for this purpose.
15.2 Any notice sent by post shall be deemed to have been served twenty-four
hours after the time of posting by first class mail or forty eight
hours in the case of a notice sent to a Executive abroad and service
thereof shall be sufficiently proved by proving that the notice was
duly despatched through the post in a pre-paid envelope addressed as
aforesaid. Any notice sent by facsimile transmission shall be deemed
served twenty-four hours after the time, when, in the ordinary course
of transmission, it would have been received.
16. EXTENT AND SUBSISTENCE OF AGREEMENT
16.1 This Agreement is in substitution for any previous contract of
employment between the Company or any Group Company and the Executive
which shall be deemed to have been terminated by mutual agreement from
the date hereof and the Executive acknowledges and warrants that there
are no agreements or arrangements whether written or oral or implied
between the Company or any Group Company and the Executive relating to
the engagement of the Executive other than those expressly set out in
this Agreement and that he is not entering into this Agreement in
reliance on --any representation not expressly set out herein save that
the Executive shall be entitled to be indemnified by the Company in
respect of any such liability as is mentioned in Article 118 of Table A
of the Company Act 1985 as incorporated into the Articles of
Association of the Company.
16.2 The expiration or determination of dais Agreement howsoever arising
shall not operate to affect such of the provisions hereof as in
accordance with their terms are expressed to operate or have effect or
are capable of operation or effect thereafter.
16.3 In relation to Section 36A of the Companies Act 1985 it is hereby
agreed and declared that this document shall not be presumed to be
delivered until and is not intended by the person or persons making it
to be a deed until and shall not be or take effect as a deed until it
is dated.
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<PAGE>
17. DEFINITIONS
In these terms and conditions:
(a) references to terms mentioned in the Summary preceding these
teens and conditions shall be to those terms as described or
defined in the Summary;
(b) the following terms shall have the meaning set out beside them
below:
"the Board" the board of directors of the
Company as from time to time
constituted;
"Customer" any person, firm, company or
other organization whatsoever to
whom the Company; or any Group
Company has supplied goods or
services;
"Prospective Customer" any person, firm, company or
other organization whatsoever to
whom the Company or any Group
Company has offered to supply
goods or services, or to whom
the Company has provided details
of the terms on which it would
or might be willing to supply
goods or services, or with whom
the Company or any Group Company
has had any negotiations or
discussions regarding the
possible supply of goods or
services;
"Group Company" any body corporate which is a
holding company of the Company
or a subsidiary undertaking of
the Company or any such holding
company (as such expressions are
defined in Sections 258, 259 and
736 of the Companies Act 1985
(as amended);
"Relevant Business" the business of providing
Internet products and any other
business carried on by the
Company or any Group Company
during die Relevant Period and
at the Termination Date;
"Relevant Period" the period of engagement
hereunder or if the Agreement
has been terminated or has come
to an end, the period of one
year prior to the Termination
Date;
"Termination Date" the date upon which the
Executive's employment with the
Company terminates or comes to
an end
(c) References to statutory provisions shall be construed as
references to those provisions as
14
<PAGE>
respectively amended or re enacted or the provisions by which
they have been replaced (whether on before or after the date
hereof) and shall include any provisions of which they are
re-enactments (whether with or without modification) and any
orders, regulations instruments or over subordinate
legislation made from time to time.
18. GENERAL
18.1 This Agreement shall be governed by and construed in accordance with
the laws of England and each party irrevocably submits to the
non-exclusive jurisdiction of the English courts in connection
herewith.
18.2 The continuous employment of the Executive commences on the date of
this Agreement.
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<PAGE>
IN WITNESS whereof a duly authorised representative of the Company has executed
this agreement and the Executive has executed this Agreement as higher Deed on
the date hereof.
Signed by /s/ Robert Belau ) Robert Belau
for and on behalf of the Company ) President
SIGNED AND DELIVERED by ) /s/ John Wright
the said JOHN WRIGHT ) John Wright
as his/her Deed in the presence of:- )
Witnesse's signature /s/ DAVID GENT
Witnesse's name DAVID GENT
Address 60 BISHOPSGATE,
LONDON EC2N 4AJ
Occupation SOLICITOR
16
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EXHIBIT 10.18
PREDICTIVE SYSTEMS, INC.
COMMON STOCK PURCHASE AGREEMENT
SEPTEMBER 16, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Purchase and Sale of Stock...............................................................................1
1.1. Sale and Issuance of Common Stock...............................................................1
1.2. Closing.........................................................................................1
2. Representations and Warranties of the Company............................................................1
2.1. Organization, Good Standing and Qualification...................................................1
2.2. Capitalization and Voting Rights................................................................1
2.3. Subsidiaries....................................................................................2
2.4. Authorization...................................................................................2
2.5. Valid Issuance of Common Stock..................................................................2
2.6. Governmental Consents...........................................................................3
2.7. Offering........................................................................................3
2.8. Litigation......................................................................................3
2.9. Patents and Trademarks..........................................................................3
2.10. Compliance with Other Instruments...............................................................4
2.11. Financial Statements............................................................................4
2.12. Changes.........................................................................................4
2.13. Tax Returns.....................................................................................5
2.14. Permits.........................................................................................5
2.15. Environmental and Safety Laws...................................................................5
2.16. Disclosure......................................................................................5
2.17. Title to Property and Assets....................................................................5
2.18. Employee Benefit Plans..........................................................................5
2.19. Labor Agreements and Actions....................................................................5
3. Representations and Warranties of the Investor...........................................................6
<S> <C>
3.1. Authorization...................................................................................6
3.2. Purchase Entirely for Own Account...............................................................6
3.3. Disclosure of Information.......................................................................6
3.4. Investment Experience...........................................................................7
3.5. Accredited Investor.............................................................................7
3.6. Restricted Securities...........................................................................7
3.7. Further Limitations on Disposition..............................................................7
3.8. Legends.........................................................................................8
3.9. Tax Advisors....................................................................................8
4. California Commissioner of Corporations..................................................................8
4.1. Corporate Securities Law........................................................................8
5. Conditions of Investor's Obligations at Closing..........................................................8
5.1. Representations and Warranties..................................................................8
5.2. Performance.....................................................................................9
5.3. Compliance Certificate..........................................................................9
5.4. Qualifications..................................................................................9
5.5. Proceedings and Documents.......................................................................9
5.6. Opinion of Company Counsel......................................................................9
5.7. Investor's Rights Agreement.....................................................................9
6. Conditions of the Company's Obligations at Closing.......................................................9
6.1. Representations and Warranties..................................................................9
6.2. Payment of Purchase Price.......................................................................9
6.3. Qualifications..................................................................................9
6.4. Investor's Rights Agreement.....................................................................9
7. Miscellaneous............................................................................................10
<S> <C>
7.1. Survival........................................................................................10
7.2. Successors and Assigns..........................................................................10
7.3. Governing Law...................................................................................10
7.4. Titles and Subtitles............................................................................10
7.5. Notices.........................................................................................10
7.6. Finder's Fee....................................................................................10
7.7. Amendments and Waivers..........................................................................10
7.8. Severability....................................................................................11
7.9. Aggregation of Stock............................................................................11
7.10. Entire Agreement................................................................................11
7.11. Counterparts....................................................................................11
</TABLE>
SCHEDULE A Schedule of Investors
SCHEDULE B Schedule of Exceptions
EXHIBIT A Opinion of Counsel for the Company
EXHIBIT B INVESTOR'S Rights Agreement
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is
made on the 16th day of September, 1999, by and between Predictive Systems,
Inc., a Delaware corporation (the "Company"), and Cisco Systems, Inc., a
California corporation (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1. SALE AND ISSUANCE OF COMMON STOCK. Subject to the terms
and conditions of this Agreement, the Investor agrees to purchase at the Closing
and the Company agrees to sell and issue to the Investor at the Closing, that
number of shares of the Company's Common Stock set forth opposite the Investor's
name on Schedule A hereto for the purchase price set forth thereon.
1.2. CLOSING. The purchase and sale of the Common Stock shall
take place at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway,
47th Floor, New York, New York 10019 at 12:00 P.M., on September 14, 1999, or at
such other time and place as the Company and the Investor mutually agree upon
orally or in writing (which time and place are designated as the "Closing"). At
the Closing, the Company shall deliver to the Investor a certificate
representing the Common Stock that such Investor is purchasing against payment
of the purchase price therefor by check, wire transfer, cancellation of
indebtedness or any combination thereof. In the event that payment by the
Investor is made, in whole or in part, by cancellation of indebtedness, then
such Investor shall surrender to the Company for cancellation at the Closing any
evidence of such indebtedness or shall execute an instrument of cancellation in
form and substance acceptable to the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") furnished the Investor and special
counsel for the Investor prior to execution hereof and attached hereto as
Schedule B, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its business or
properties. The Company has all requisite power and authority necessary to own
and operate its property, to carry on its business as now conducted and as
currently proposed to be conducted and to carry out the transactions
contemplated by this agreement.
2.2. CAPITALIZATION AND VOTING RIGHTS.
The authorized capital of the Company consists of:
(a) PREFERRED STOCK. 6,512,316 shares of Preferred
Stock, par value $.001 (the "Preferred Stock"), all of which have been
designated Series A Convertible
<PAGE>
Preferred Stock (the "Preferred Stock") and all of which are issued and
outstanding. The rights, privileges and preferences of the Preferred Stock are
stated in the Company's Certificate of Incorporation.
(b) COMMON STOCK. 50,000,000 shares of common stock,
par value $.001 ("Common Stock"), of which 10,674,964 shares are issued and
outstanding.
(c) The outstanding shares of Preferred Stock and
Common Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(d) Except for (i) the conversion privileges of the
Preferred Stock, (ii) currently outstanding options to purchase 10,373,763
shares of Common Stock granted to employees pursuant to the Company's Stock
Incentive Plan (the "Option Plan"), and (iii) 750,000 shares available for
issuance under the Company's 1999 Employee Stock Purchase Plan, there are not
outstanding any options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock. In addition to the aforementioned options, the
Company has reserved an additional 2,626,237 shares of its Common Stock for
purchase upon exercise of options to be granted in the future under the Option
Plan. The Company is not a party or subject to any agreement or understanding,
and, to the Company's knowledge, there is no agreement or understanding between
any persons and/or entities, which affects or relates to the voting or giving of
written consents with respect to any security or by a director of the Company.
2.3. SUBSIDIARIES. The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant in any
joint venture, partnership, or similar arrangement.
2.4. AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Investor's
Rights Agreement, the performance of all obligations of the Company hereunder
and thereunder, and the authorization, sale and issuance of the Common Stock
being sold hereunder has been taken or will be taken prior to the Closing. This
Agreement and the Investor's Rights Agreement constitute valid and legally
binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Investor's Rights Agreement may be limited by applicable federal or state
securities laws.
2.5. VALID ISSUANCE OF COMMON STOCK. The Common Stock that is
being purchased by the Investor hereunder, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable and will
be free of restrictions on transfer, other than
2
<PAGE>
restrictions on transfer under this Agreement and the Investor's Rights
Agreement and under applicable state and federal securities laws.
2.6. GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for: (i) the filing of a Notice of
Transaction pursuant to Section 25102(f) of the California Corporate Securities
Law of 1968, as amended, and the rules thereunder (the "Law"), which filing will
be effected within the time prescribed by law, and (ii) such other filings
required pursuant to applicable federal and state securities laws and blue sky
laws, which filings will be effected within the required statutory period.
2.7. OFFERING. Subject in part to the truth and accuracy of
the Investor's representations set forth in Section 3 of this Agreement, the
offer, sale and issuance of the Common Stock as contemplated by this Agreement
are exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Act"), and the qualification or registration requirements of the
Law or other applicable blue sky laws. Neither the Company nor any authorized
agent acting on its behalf will take any action hereafter that would cause the
loss of such exemptions.
2.8. LITIGATION. There is no action, suit, proceeding or
investigation pending, or to the Company's knowledge, currently threatened
against the Company or its officers or directors that questions the validity of
this Agreement or the right of the Company to enter into such agreement or to
consummate the transactions contemplated hereby, or that might result, either
individually or in the aggregate, in any material adverse changes in the
business, assets or condition of the Company, financially or otherwise, or any
change in the current equity ownership of the Company. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or that the
Company intends to initiate.
2.9. PATENTS AND TRADEMARKS. To its knowledge (but without
having conducted any special investigation or patent search), except for the
disclosures made in the Company's Registration Statement on Form S-1 (File No.
333-84045), as amended (the "Registration Statement"), the Company possesses all
patents, patent rights, trademarks, trademark rights, service marks, service
mark rights, trade names, trade name rights and copyrights (collectively, the
"Intellectual Property") necessary for its business without any conflict with or
infringement of the valid rights of others and the lack of which could
materially and adversely affect the operations or condition, financial or
otherwise, of the Company, and the Company has not received any notice of
infringement upon or conflict with the asserted rights of others. The Company
has a valuable body of trade secrets, including know-how, concepts, computer
programs and other technical data (the "Proprietary Information") for the
development, manufacture and sale of its products. To its knowledge, the Company
has the right to use the Proprietary Information free and clear of any rights,
liens, encumbrances or claims of others, except that the possibility exists that
other persons may have independently developed trade secrets or technical
information similar or identical to those of the Company. The Company is
3
<PAGE>
not aware of any such independent development nor of any misappropriation of its
Proprietary Information. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company, except
for inventions that have been assigned or licensed to the Company as of the date
hereof.
2.10. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation in any material respect of any provision of its Certificate of
Incorporation, as amended to date, or Bylaws, as amended to date, nor in any
material respect of any instrument, judgment, order, writ, decree or contract,
statute, rule or regulation to which the Company is subject and a violation of
which would have a material adverse effect on the condition, financial or
otherwise, or operations of the Company. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
will not result in any such violation, or be in conflict with or constitute,
with or without the passage of time and giving of notice, either a default under
any such provision or an event that results in the creation of any lien, charge
or encumbrance upon any assets of the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
2.11. FINANCIAL STATEMENTS. The Company has delivered to the
Investor its audited financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at December 31, 1998 and for the fiscal year then
ended, and its unaudited financial statements (balance sheet and statement of
operations) as, at and for the six-month period ended June 30, 1999 (the
"Financial Statements"). The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and with each other, except that
unaudited Financial Statements may not contain all footnotes required by
generally accepted accounting principles. The Financial Statements fairly
present the financial condition and operating results of the Company as of the
dates, and for the periods, indicated therein, subject in the case of unaudited
Financial Statements to normal year-end audit adjustments. Except as set forth
in the Financial Statements, the Company has no material liabilities, contingent
or otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to June 30, 1999 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company. Except
as disclosed in the Financial Statements, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
2.12. CHANGES. To the Company's knowledge, since June 30, 1999
there has not been any change in the assets, liabilities, financial condition or
operating results of the
4
<PAGE>
Company from that reflected in the Financial Statements, except changes in the
ordinary course of business that have not been, in the aggregate, materially
adverse.
2.13. TAX RETURNS. The Company has timely filed all tax
returns (federal, state and local) required to be filed by it and all taxes,
assessments and other government changes imposed upon the Company, or upon any
of the assets, income or franchises of the Company, have been timely paid or, if
not yet payable, are adequately accrued on the Company's books and records.
There are no actual or proposed tax deficiencies, assessments or adjustments
with respect to the Company or any assets or operations of the Company. The
Company has not been advised that any of its returns have been or are being
audited.
2.14. PERMITS. The Company has all franchises, permits,
licenses and any similar authority necessary for the conduct of its business,
the lack of which could materially and adversely affect the business, properties
or financial condition of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.15. ENVIRONMENTAL AND SAFETY LAWS. To its knowledge, the
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16. DISCLOSURE. The Company has fully provided each Investor
with all the information that such Investor has requested for deciding whether
to purchase the Common Stock. Neither this Agreement (including all the exhibits
and schedules hereto) nor any other statements or certificates made or delivered
in connection herewith contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements herein or therein not
misleading in light of the circumstances under which they were made.
2.17. TITLE TO PROPERTY AND ASSETS. The property and assets
the Company owns are owned by the Company free and clear of all mortgages,
liens, loans and encumbrances, except (i) as reflected in the Financial
Statements, (ii) for statutory liens for the payment of current taxes that are
not yet delinquent, and (iii) for liens, encumbrances and security interests
that arise in the ordinary course of business and minor defects in title, none
of which, individually or in the aggregate, materially impair the Company's
ownership or use of such property or assets. With respect to the property and
assets it leases, the Company is in material compliance with such leases and, to
its knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances, subject to clauses (i)-(iii).
2.18. EMPLOYEE BENEFIT PLANS. The Company does not have any
Employee Benefit Plan as defined in the Employee Retirement Income Security Act
of 1974.
2.19. LABOR AGREEMENTS AND ACTIONS. The Company is not bound
by or subject to (and none of its assets or properties is bound by or subject
to) any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute
5
<PAGE>
involving the Company pending, or to the Company's knowledge, threatened, that
could have a material adverse effect on the assets, properties, financial
condition, operating results or business of the Company, nor is the Company
aware of any labor organization activity involving its employees. The Company is
not aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
2.20. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS. Each
employee, officer and consultant of the Company has executed a Proprietary
Information and Inventions Agreement in the form provided to special counsel to
the Investor. The Company, after reasonable investigation, is not aware that any
of its employees, officers or consultants are in violation thereof, and the
Company will use commercially reasonable efforts to prevent any such violation.
2.21. AGREEMENTS; ACTIONS; RELATED-PARTY TRANSACTIONS. The
Registration Statement accurately discloses all agreements, understandings or
proposed transactions required to be disclosed pursuant to Regulation S-K. There
are no agreements, understandings or proposed transactions, judgements, orders,
writs or decrees to which the Company is a party or by which it is bound that
would be required to be filed as part of the Registration Statement that are not
filed as part of the Registration Statement.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor hereby
represents, warrants and covenants that:
3.1. AUTHORIZATION. The Investor has full power and authority
to enter into this Agreement and the Investor's Rights Agreement, and each such
agreement constitutes its valid and legally binding obligation, enforceable in
accordance with its terms.
3.2. PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with such Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Common Stock to be received by such Investor
(collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in or otherwise
distributing the same. By executing this Agreement, the Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
3.3. DISCLOSURE OF INFORMATION. Such Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Common Stock. Such Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Common Stock and the
business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investor to
rely thereon.
6
<PAGE>
3.4. INVESTMENT EXPERIENCE. Such Investor is an investor in
securities of similarly situated companies and acknowledges that it is able to
fend for itself, can bear the economic risk of its investment, and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Common Stock. Such
Investor also represents it has not been organized for the purpose of acquiring
the Common Stock.
3.5. ACCREDITED INVESTOR. Such Investor is an "accredited
investor" within the meaning of Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect.
3.6. RESTRICTED SECURITIES. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities or an available exemption from
registration under the Act, the Common Stock must be held indefinitely. In this
connection, such Investor represents that it is familiar with SEC Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Act, including without limitation the Rule 144 condition that current
information about the Company be available to the public. Such information is
not now available and the Company has no present plans to make such information
available.
3.7. FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, such Investor further agrees not
to make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 3 and the Investor's Rights Agreement, and:
(a) There is then in effect a registration statement
under the ct covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company
of the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of subsections (a)
and (b) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by an Investor that is a partnership to a partner of
such partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner or the
transfer by gift, will or intestate succession of any partner to his or her
spouse or to the siblings, lineal descendants or ancestors of such partner or
his or her spouse, if the transferee
7
<PAGE>
agrees in writing to be subject to the terms hereof to the same extent as if he
or she were an original Investor hereunder.
3.8. LEGENDS. It is understood that the certificates
evidencing the Securities may bear one or all of the following legends:
(a) "These securities have not been registered under
the Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
(b) Any legend required by the laws of the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the California Corporations Code.
3.9. TAX ADVISORS. Such Investor has reviewed with such
Investor's own tax advisors the federal, state and local tax consequences of
this investment, where applicable, and the transactions contemplated by this
Agreement. Such Investor is relying solely on such advisors and not on any
statements or representations of the Company or any of its agents and
understands that each such Investor (and not the Company) shall be responsible
for such Investor's own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
4. CALIFORNIA COMMISSIONER OF CORPORATIONS.
4.1. CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES THAT
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
5. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of
the Investor under subsection 1.1 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, unless
waived in writing by the Investor:
5.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
8
<PAGE>
5.2. PERFORMANCE. The Company shall have performed and
complied with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
5.3. COMPLIANCE CERTIFICATE. The Chief Executive Officer or
President of the Company shall deliver to Investor at the Closing a certificate
stating that the conditions specified in Sections 5.1 and 5.2 have been
fulfilled.
5.4. QUALIFICATIONS. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
5.5. PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
5.6. OPINION OF COMPANY COUNSEL. The Investor shall have
received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an
opinion, dated as of the Closing, in the form attached hereto as Exhibit A.
5.7. INVESTOR'S RIGHTS AGREEMENT. The Company and the Investor
shall have entered into the Investor's Rights Agreement in the form attached as
Exhibit B.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
of the Company to Investor under this Agreement are subject to the fulfillment
on or before the Closing of each of the following conditions by that Investor:
6.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
6.2. PAYMENT OF PURCHASE PRICE. The Investor shall have
delivered the purchase price specified in Section 1.
6.3. QUALIFICATIONS. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
6.4. INVESTOR'S RIGHTS AGREEMENT. The Company and Investor
shall have entered into the Investor's Rights Agreement in the form attached as
EXHIBIT B.
9
<PAGE>
7. MISCELLANEOUS.
7.1. SURVIVAL. The warranties, representations and covenants
of the Company and Investor contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing for a
period of one year after the Closing and shall in no way be affected by any
investigation of the subject matter thereof made by or on behalf of the Investor
or the Company.
7.2. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3. GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York as applied to agreements among
State of New York residents entered into and to be performed entirely within the
State of New York.
7.4. TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.5. NOTICES. All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day; (iii) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (iv) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the address as set forth on the signature page hereof or at such other
address as such party may designate by ten days advance written notice to the
other parties hereto.
7.6. FINDER'S FEE. Each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with this
transaction. Investor agrees to indemnify and to hold harmless the Company from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which Investor or any of its officers, partners, employees or
representatives is responsible. The Company agrees to indemnify and hold
harmless Investor from any liability for any commission or compensation in the
nature of a finders' fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Company or any of its officers,
employees or representatives is responsible.
7.7. AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock not previously sold to the
10
<PAGE>
public that is issued hereunder. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each holder of any securities
purchased under this Agreement at the time outstanding (including securities
into which such securities are convertible), each future holder of all such
securities and the Company.
7.8. SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
7.9. AGGREGATION OF STOCK. All shares of the Common Stock
issued hereunder or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
7.10. ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein.
7.11. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
PREDICTIVE SYSTEMS, INC.
By: /s/ Robert Belau
----------------------------------
Robert Belau,President
Address: 145 Hudson Street
-------------------------------------
New York, NY 10013
-------------------------------------
CISCO SYSTEMS INC.
By: /s/ Judith Estrin
----------------------------------
Address: 170 West Tasman Drive
-------------------------------------
San Jose, CA 95134-1706
-------------------------------------
12
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Name of Investor Number of Shares Total Purchase Price
- ---------------- ---------------- --------------------
<S> <C> <C>
Cisco Systems Inc. 1,378,052 $16,536,624
</TABLE>
<PAGE>
EXHIBIT 10.19
----------------
INVESTOR'S RIGHTS AGREEMENT
----------------
September 16, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. REGISTRATION RIGHTS......................................................................................1
1.1. DEFINITIONS.....................................................................................1
1.2. COMPANY REGISTRATION............................................................................2
1.3. OBLIGATIONS OF THE COMPANY......................................................................2
1.4. FURNISH INFORMATION.............................................................................4
1.5. EXPENSES OF COMPANY REGISTRATION................................................................4
1.6. UNDERWRITING REQUIREMENTS.......................................................................4
1.7. DELAY OF REGISTRATION...........................................................................5
1.8. INDEMNIFICATION.................................................................................5
1.9. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934...................................................7
1.10. FORM S-3 REGISTRATION...........................................................................7
1.11. ASSIGNMENT OF REGISTRATION RIGHTS...............................................................8
1.12. "MARKET STAND-OFF"AGREEMENT.....................................................................9
1.13. TERMINATION OF REGISTRATION RIGHTS..............................................................9
2. COVENANTS OF THE COMPANY................................................................................10
2.1. DELIVERY OF FINANCIAL STATEMENTS...............................................................10
2.2. TERMINATION OF INFORMATION COVENANTS...........................................................10
2.3. POSITIVE COVENANTS.............................................................................10
2.4. BOARD REPRESENTATION AND OBSERVER RIGHTS.......................................................12
2.5. MOST FAVORED NATION............................................................................12
2.6. TERMINATION OF CERTAIN COVENANTS...............................................................12
3. MISCELLANEOUS...........................................................................................12
3.1. SUCCESSORS AND ASSIGNS.........................................................................12
3.2. GOVERNING LAW..................................................................................13
3.3. COUNTERPARTS...................................................................................13
3.4. TITLES AND SUBTITLES...........................................................................13
3.5. NOTICES........................................................................................13
3.6. EXPENSES.......................................................................................13
3.7. AMENDMENTS AND WAIVERS.........................................................................13
3.8. SEVERABILITY...................................................................................13
3.9. AGGREGATION OF STOCK...........................................................................13
3.10. ENTIRE AGREEMENT; AMENDMENT; WAIVER............................................................14
</TABLE>
<PAGE>
INVESTOR'S RIGHTS AGREEMENT
THIS INVESTOR'S RIGHTS AGREEMENT is made as of the 16th day of
September, 1999, by and between Predictive Systems, Inc., a Delaware corporation
(the "Company"), and Cisco Systems Inc., a California corporation, herein
referred to as an "Investor."
RECITALS
WHEREAS, the Company and the Investor are parties to the Common Stock
Purchase Agreement of even date herewith (the "Purchase Agreement");
WHEREAS, in order to induce the Company to enter into the Purchase
Agreement and to induce the Investor to invest funds in the Company pursuant to
the Purchase Agreement, the Investor and the Company hereby agree that this
Agreement shall govern the rights of the Investor to cause the Company to
register shares of Common Stock issuable to the Investor and certain other
matters as set forth herein;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. REGISTRATION RIGHTS. The Company covenants and agrees as follows:
1.1. DEFINITIONS. For purposes of this Section 1:
(a) The term "Act" means the Securities Act of 1933,
as amended.
(b) The term "Form S-3" means such form under the Act
as in effect on the date hereof or any registration form under the Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
(c) The term "Holder" means any person owning or
having the right to acquire Registrable Securities or any assignee thereof in
accordance with Section 1.11 hereof.
(d) The term "1934 Act" shall mean the Securities
Exchange Act of 1934, as amended.
(e) The term "register", "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in compliance with the Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
(f) The term "Registrable Securities" means (i) the
1,378,052 shares of Common Stock issued to the Investor pursuant to the Purchase
Agreement and (ii) any Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect
1.
<PAGE>
to, or in exchange for or in replacement of the shares referenced in (i) above,
excluding in all cases, however, any Registrable Securities sold by a person in
a transaction in which his rights under this Section 1 are not assigned.
(g) The number of shares of "Registrable Securities
then outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(h) The term "SEC" shall mean the Securities and
Exchange Commission.
1.2. COMPANY REGISTRATION. If (but without any obligation to
do so) the Company proposes to register (including for this purpose a
registration effected by the Company for stockholder(s) other than the Holder)
any of its stock or other securities under the Act in connection with the public
offering of such securities solely for cash (other than a registration relating
to the Company's initial public offering or solely to the sale of securities to
participants in a Company stock plan, a registration on any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities or a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after mailing of such notice by the Company in accordance with Section
3.5, the Company shall, subject to the provisions of Section 1.6, cause to be
registered under the Act all of the Registrable Securities that each such Holder
has requested to be registered.
1.3. OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its commercially
reasonable efforts to cause such registration statement to become effective,
and, upon the request of the Holders of a majority of the Registrable Securities
registered thereunder, keep such registration statement effective for a period
of up to one hundred twenty (120) days or until the distribution contemplated in
the Registration Statement has been completed; provided, however, that (i) such
120-day period shall be extended for a period of time equal to the period the
Holder refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company;
and (ii) in the case of any registration of Registrable Securities on Form S-3
which are intended to be offered on a continuous or delayed basis, such 120-day
period shall be extended, if necessary, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor rule under the Act, permits an offering on a continuous or
delayed basis, and provided further that applicable rules under the Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment which (I) includes any prospectus required by
Section 10(a)(3) of the Act or (II) reflects facts or events representing a
material or fundamental change in the
2.
<PAGE>
information set forth in the registration statement, the incorporation by
reference of information required to be included in (I) and (II) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934
Act in the registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders such numbers of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its commercially reasonable efforts to
register and qualify the securities covered by such registration statement under
such other securities or Blue Sky laws of such jurisdictions as shall be
reasonably requested by the Holders; provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions, unless the Company is already subject to service in such
jurisdiction and except as may be required by the Act.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
(i) Use commercially reasonable efforts to furnish,
at the request of any Holder requesting registration of Registrable Securities
pursuant to this Section 1, on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with a registration
pursuant to this Section 1, if such securities are being sold through
underwriters, or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective, (i) an opinion, dated
3.
<PAGE>
such date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities and (ii) a letter
dated such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of
Registrable Securities.
1.4. FURNISH INFORMATION.
(a) It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
(b) The Company shall have no obligation with respect
to any registration requested pursuant to Section 1.10 if, due to the operation
of subsection 1.4(a), the number of shares or the anticipated aggregate offering
price of the Registrable Securities to be included in the registration does not
equal or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's obligation to initiate such
registration as specified in subsection 1.10(b)(2).
1.5. EXPENSES OF COMPANY REGISTRATION. The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.2 for each Holder (which right may be assigned as provided
in Section 1.11), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto, and the fees and expenses of one counsel to the Holders, if the Company
counsel does not make itself available for this purpose, but excluding
underwriting discounts and commissions relating to Registrable Securities.
1.6. UNDERWRITING REQUIREMENTS. In connection with any
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required under Section 1.2 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not,
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by stockholder(s) to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling stockholder(s) according
to the total amount of securities entitled to be included therein owned by each
selling stockholder or in such other proportions as shall mutually be agreed to
by such selling stockholder(s)), but in no
4.
<PAGE>
event shall the amount of securities of the selling Holders included in the
offering be reduced below fifteen percent (15%) of the total amount of
securities included in such offering. For purposes of the preceding
parenthetical concerning apportionment, for any selling shareholder which is a
holder of Registrable Securities and which is a partnership or corporation, the
partners, retired partners and stockholder(s) of such holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
shareholder", and any pro-rata reduction with respect to such "selling
shareholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling shareholder", as defined in this sentence.
1.7. DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.8. INDEMNIFICATION. In the event any Registrable Securities
are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Act, the 1934 Act, any state securities law or
any rule or regulation promulgated under the Act, or the 1934 Act or any state
securities law; and the Company will pay to each such Holder, underwriter or
controlling person, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.8(a) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Act, any underwriter, any
other Holder selling securities in such registration
5.
<PAGE>
statement and any controlling person of any such underwriter or other Holder,
against any losses, claims, damages, or liabilities (joint or several) to which
any of the foregoing persons may become subject, under the Act, or the 1934 Act
or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay, any legal or other expenses reasonably incurred
by any person intended to be indemnified pursuant to this subsection 1.8(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.8(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this subsection
1.8(b) exceed the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party
under this Section 1.8 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.8,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.8.
(d) If the indemnification provided for in this
Section 1.8 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
6.
<PAGE>
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under
this Section 1.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.9. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a
view to making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times after
ninety (90) days after the effective date of the first registration statement
filed by the Company for the offering of its securities to the general public;
(b) take such action, including the voluntary
registration of its Common Stock under Section 12 of the 1934 Act, as is
necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities, such action to be taken as soon as practicable after the
end of the fiscal year in which the first registration statement filed by the
Company for the offering of its securities to the general public is declared
effective;
(c) file with the SEC in a timely manner all reports
and other documents required of the Company under the Act and the 1934 Act; and
(d) furnish to any Holder, so long as the Holder owns
any Registrable Securities, forthwith upon request (i) a written statement by
the Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
1.10. FORM S-3 REGISTRATION. In case the Company shall receive
from any Holder or Holders a written request or requests that the Company effect
a registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
7.
<PAGE>
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration
and all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within 15 days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.10: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $1,000,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
stockholder(s) for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 60 days after receipt of
the request of the Holder or Holders under this Section 1.10; provided, however,
that the Company shall not utilize this right more than once in any twelve month
period; (4) if the Company has, within the 12-month period preceding the date of
such request, already effected two registrations on Form S-3; or (5) in any
particular jurisdiction in which the Company would be required to qualify to do
business or to execute a general consent to service of process in effecting such
registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file
a registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. All expenses incurred in connection with
a registration requested pursuant to Section 1.10, including (without
limitation) all registration, filing, qualification, printer's and accounting
fees and the reasonable fees and disbursements of counsel for the selling Holder
or Holders and counsel for the Company, shall be borne pro rata by the Holder or
Holders participating in the Form S-3 Registration. Registrations effected
pursuant to this Section 1.10 shall not be counted as registrations effected
pursuant to Sections 1.2.
1.11. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 300,000 shares of Registrable Securities (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalizations), provided: (a) the Company is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 1.12 below;
and (c) such assignment shall be effective only if immediately following such
transfer the further disposition
8.
<PAGE>
of such securities by the transferee or assignee is restricted under the Act.
For the purposes of determining the number of shares of Registrable Securities
held by a transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under this Section
1.
1.12. "MARKET STAND-OFF" AGREEMENT. The Investor hereby agrees
that, during the period of duration specified by the Company and an underwriter
of common stock or other securities of the Company, following the effective date
of a registration statement of the Company filed under the Act, it shall not, to
the extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be similarly bound) any securities of the Company
held by it at any time during such period except common stock included in such
registration; provided, however, that:
(a) such agreement shall be applicable only to the
first such registration statement of the Company which covers common stock (or
other securities) to be sold on its behalf to the public in an underwritten
offering;
(b) all officers and directors of the Company and all
other persons with registration rights (whether or not pursuant to this
Agreement) enter into similar agreements; and
(c) such market stand-off time period shall not
exceed (180) days.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.12 shall not apply to a registration relating solely to employee
benefit plans on Form S-l or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a Commission Rule 145
transaction on Form S-4 or similar forms which may be promulgated in the future.
1.13. TERMINATION OF REGISTRATION RIGHTS. The right of any
Holder to request registration or inclusion in any registration pursuant to
Section 1 shall terminate on the earlier of (a) after five years following the
consummation of the sale of securities pursuant to a registration statement
filed by the Company under the Act in connection with the initial firm
commitment underwritten offering of its securities to the general public or (b)
if all shares of Registrable Securities held may immediately be sold under Rule
144 during any 90-day period.
9.
<PAGE>
2. COVENANTS OF THE COMPANY.
2.1. DELIVERY OF FINANCIAL STATEMENTS. The Company shall
deliver to each Investor:
(a) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
shareholder's equity as of the end of such year, and a schedule as to the
sources and applications of funds for such year, such year-end financial reports
to be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("gaap"), and audited and certified by independent public
accountants of nationally recognized standing selected by the Company;
(b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss statement and an
unaudited balance sheet as of the end of such fiscal quarter;
(c) with respect to the financial statements called
for in subsections (b) of this Section 2.1, an instrument executed by the Chief
Financial Officer or President of the Company and certifying that such
financials were prepared in accordance with gaap consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by gaap) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment;
(d) such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as the
Investor or any assignee of the Investor may from time to time reasonably
request, provided, however, that the Company shall not be obligated under this
subsection (d) or any other subsection of Section 2.1 to provide information
which it deems in good faith to be a trade secret or similar confidential
information.
2.2. TERMINATION OF INFORMATION COVENANTS. The covenants set
forth in subsections 2.1 shall terminate as to Investor and be of no further
force or effect when the sale of securities pursuant to a registration statement
filed by the Company under the Act in connection with the firm commitment
underwritten offering of its securities to the general public is consummated or
when the Company first becomes subject to the periodic reporting requirements of
Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur.
2.3. POSITIVE COVENANTS. The Company agrees as follows:
(a) The Company will promptly pay and discharge, or
cause to be paid and discharged, when due and payable, all lawful taxes,
assessments, and governmental charges or levies imposed upon the income,
profits, property, or business of the Company or any subsidiary; provided,
however, that any such tax, assessment, charge, or levy need not be paid if the
validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company shall have set aside on its books adequate
reserves with respect thereof, and provided further, that the Company will pay
all such taxes, assessments, charges, or levies forthwith upon the commencement
of proceedings to foreclose any lien that may have attached
10.
<PAGE>
as security therefor. The Company will promptly pay or cause to be paid when
due, or in conformance with customary trade terms, all other indebtedness
incident to the operations of the Company;
(b) The Company will keep its properties and those of
its subsidiaries in good repair, working order, and condition, reasonable wear
and tear excepted, and from time to time make all needful and proper repairs,
renewals, replacements, additions, and improvements thereto; and the Company and
its subsidiaries will at all times comply with the provisions of all material
leases to which any of them is a party or under which any of them occupies
property so as to prevent any loss or forfeiture thereof or thereunder;
(c) Except as otherwise decided in accordance with
policies adopted by the Company's Board of Directors, the Company will keep its
assets and those of its subsidiaries that are of an insurable character insured
by financially sound and reputable insurers against loss or damage by fire,
extended coverage, and explosion insurance in amounts customary for companies in
similar businesses similarly situated; and the Company will maintain, with
financially sound and reputable insurers, insurance against other hazards,
risks, and liabilities to persons and property to the extent and in the manner
customary for companies in similar businesses similarly situated;
(d) The Company will keep true records and books of
account in which full, true, and correct entries will be made of all dealings or
transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis;
(e) The Company and all its subsidiaries shall duly
observe and conform to all valid requirements of governmental authorities
relating to the conduct of their businesses or to their property or assets; and
(f) The Company shall maintain in full force and
effect its corporate existence, rights, and franchises and all licenses and
other rights to use patents, processes, licenses, trademarks, trade names, or
copyrights owned or possessed by it or any subsidiary and deemed by the Company
to be necessary to the conduct of its business.
(g) The Company will retain independent public
accountants of recognized national standing who shall certify the Company's
financial statements at the end of each fiscal year. In the event the services
of the independent public accountants so selected, or any firm of independent
public accountants hereafter employed by the Company are terminated, the Company
will promptly thereafter notify the Holders and will request the firm of
independent public accountants whose services are terminated to deliver to the
Holders a letter from such firm setting forth the reasons for the termination of
their services. In the event of such termination, the Company will promptly
thereafter engage another firm of independent public accountants of recognized
national standing. In its notice to the Holders the Company shall state whether
the change of accountants was recommended or approved by the Board of Directors
of the Company or any committee thereof.
11.
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(h) The Company and all its subsidiaries shall duly
observe and conform to all valid requirements of governmental authorities
relating to the conduct of their businesses or to their properties or assets.
(i) The Company will cause each person now or
hereafter employed by it or any subsidiary with access to confidential
information to enter into a proprietary information and inventions agreement
substantially in the form approved by the Board of Directors.
2.4. BOARD REPRESENTATION AND OBSERVER RIGHTS. Until such time
as the Investor holds less than 750,000 shares of Common Stock, a representative
of Investor shall serve on the Company's Board of Directors. In the event that
during the period set forth above, a designee of Investor is not a member of the
Board of Directors, the Company shall invite a representative of Investor to
attend all meetings of its Board of Directors in a nonvoting observer capacity
and, in this respect, shall give such representative copies of all notices,
minutes, consents, and other materials that it provides to its directors;
provided, however, that such representative shall agree to hold in confidence
and trust and to act in a fiduciary manner with respect to all information so
provided; and, provided further, that the Company reserves the right to withhold
any information and to exclude such representative from any meeting or portion
thereof if access to such information or attendance at such meeting could
adversely affect the attorney-client privilege between the Company and its
counsel or would result in disclosure of trade secrets to such representative of
if such Investor or its representative is a direct competitor of the Company.
2.5. MOST FAVORED NATION. For a period of three (3) months
following the date of this Agreement, the Company shall not enter into any
agreement or commitment to sell, transfer or otherwise convey any security of
the Company in connection with a financing transaction, other than the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the initial firm commitment underwritten offering of its
securities to the general public, at a valuation of less than $12.00 per share.
2.6. TERMINATION OF CERTAIN COVENANTS. The covenants set forth
in Sections 2.1 and 2.2 shall terminate and be of no further force or effect
upon the consummation of the sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the firm
commitment underwritten offering of its securities to the general public.
3. MISCELLANEOUS.
3.1. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities). Nothing in this
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
12.
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3.2. GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York as applied to agreements among
California residents entered into and to be performed entirely within
California.
3.3. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4. TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5. NOTICES. Unless otherwise provided, any notice required
or permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
3.6. EXPENSES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.7. AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any Registrable Securities then outstanding, each
future holder of all such Registrable Securities, and the Company.
3.8. SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
3.9. AGGREGATION OF STOCK. All shares of Registrable
Securities held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
13.
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3.10. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
(including the Exhibits hereto, if any) constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
PREDICTIVE SYSTEMS, INC.
By: /s/ Robert Belau
----------------------- --------------
Robert Belau, President
Address: 145 Hudson Street
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New York, NY 10013
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CISCO SYSTEMS INC.
By: /s/ Judith Estrin
--------------------------------------
Address: 170 West Tasman Drive
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San Jose, CA 95134-1706
----------------------------------
14.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated May 12, 1999 for Predictive Systems, Inc. included in or made a
part of this Registration Statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
September 16, 1999
