<PAGE>
As filed with the Securities and Exchange Commission on March 30, 2000
Registration No. 333-31770
================================================================================
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>
<CAPTION>
<S> <C> <C>
Delaware 7371 13-3808483
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation) or Organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
417 Fifth Avenue
11th Floor
New York, New York 10016
(212) 659-3400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
Gary N. Papilsky, Esq.
Vice President and General Counsel
Predictive Systems, Inc.
417 Fifth Avenue
11th Floor
New York, NY 10016
(212) 659-3400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agents for Service)
---------------------
Copies to:
Babak Yaghmaie, Esq. Philip P. Rossetti, Esq.
Brobeck, Phleger & Harrison LLP Hale and Dorr LLP
1633 Broadway, 47th Floor 60 State Street
New York, New York 10019 Boston, Massachusetts 02109
(212) 581-1600 (617) 526-6000
---------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated March 30, 2000.
3,800,000 Shares
[GRAPHIC OMITTED]
Common Stock
---------------
Predictive Systems, Inc. is offering 1,000,000 of the shares to be sold in
the offering. The selling stockholders identified in this prospectus are
offering an additional 2,800,000 shares. Predictive will not receive any of the
proceeds from the sale of the shares being sold by the selling stockholders.
Predictive's common stock is quoted on the Nasdaq National Market under
the symbol "PRDS." On March 14, 2000, the last reported sale price of the
common stock was $60.00 per share.
See "Risk Factors" beginning on page 5 to read about factors you should
consider before buying shares of our common stock.
---------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
---------------
<TABLE>
<CAPTION>
Per Share Total
----------- --------
<S> <C> <C>
Initial price to public ........................................ $ $
Underwriting discount .......................................... $ $
Proceeds, before expenses, to Predictive ....................... $ $
Proceeds, before expenses, to the selling stockholders ......... $ $
</TABLE>
To the extent that the underwriters sell more than 3,800,000 shares of
common stock, the underwriters have the option to purchase up to an additional
570,000 shares from some of the selling stockholders at the initial price to
public less the underwriting discount.
---------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co. Robertson Stephens
Bear, Stearns & Co. Inc. First Union Securities, Inc.
---------------
Prospectus dated , 2000.
<PAGE>
[Predictive logo with picture of network consultants
and the text "Business-savvy network consultants".]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and our consolidated financial statements and related notes
appearing elsewhere in this prospectus.
Predictive Systems, Inc.
Our Business
We are a network consulting company focused on the design, performance,
management and security of complex computing networks. We utilize our
proprietary consulting methodology, BusinessFirst, to translate our clients'
strategic business objectives into sound technology solutions. Using our
BusinessFirst methodology, we demonstrate the business value of technology
solutions in specific and measurable terms, thereby enabling our clients to
incorporate objective and quantifiable analysis into their technology
investment decisions. As a result, our clients can gain a clear understanding
of the benefits that they will derive from their network technology investments
and a measure of certainty regarding how their technology investments will be
translated into quantifiable improvements to their business processes.
Our Services
As an independent service provider, we provide our clients with unbiased
expertise that enables the design, implementation and management of optimal
technology solutions. We provide our services on either a project outsource or
collaborative consulting basis. Our project outsource services are primarily
based and measured against mutually agreed upon service offerings and provide
our clients with certainty of costs, delivery time and project scope. Our
collaborative consulting services enable our clients to utilize our extensive
expertise in order to extend their internal capabilities and to access our
methodologies.
In addition to these services, we have developed an innovative service
model through which we deliver our clients productized services, which are
pre-packaged service products. Our service products are characterized by
pre-defined service offerings that have a pre-defined set of service
deliverables, a pre-defined pricing model and are implemented using a
pre-defined methodology. In contrast to our project outsource and collaborative
consulting services which provide our clients with services that are customized
for, and therefore unique to, each engagement, our service products are
typically provided with little or no modification. We believe that this unique
approach to network services further differentiates us from our competitors.
Our consultants are organized into the following practice areas, which
cover the four cornerstones of network computing: network and systems
management; internetwork design and engineering; performance management; and
information security. This structure enables our consultants to gain in-depth
expertise and become intimately familiar with the best practices and
methodologies identified within each of those disciplines.
Our Market
We believe we are well-positioned to capitalize on global trends impacting
communications technology, primarily the acceptance and growth of the Internet
and private intranets. As a result of these trends, the demand for network
consulting services has grown dramatically. International Data Corporation, a
market research organization, estimates that the worldwide market for these
services will grow from $12.1 billion in 1998 to $25.5 billion by 2003.
Although there are many third-party
1
<PAGE>
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.
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:
o continue to evolve our BusinessFirst methodology;
o expand and enhance our service product offerings;
o continue to attract and retain highly qualified consultants;
o further increase our industry expertise;
o expand in existing and new geographic markets; and
o establish additional and broaden existing strategic relationships.
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 Bear Stearns; Cisco Systems; UUNET,
an MCI WorldCom company; Pfizer and Qwest. These clients, in the aggregate,
accounted for approximately 45.8% of our revenues for the year ended December
31, 1999.
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, Inc., 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 December 31, 1999, our employee base had grown to 416
full-time employees.
Our principal executive offices are located at 417 Fifth Avenue, 11th
Floor, New York, NY 10016. Our telephone number is (212) 659-3400. In addition,
we maintain offices in California, Georgia, Massachusetts, New Jersey, North
Carolina, Texas, Virginia, England and The Netherlands. We maintain a web site
at www.predictive.com. Information contained on our web site does not constitute
part of this prospectus.
---------------------
"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.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Predictive .............. 1,000,000 shares
Common stock offered by the selling stockholders 2,800,000 shares
Common stock to be outstanding after the offering 24,429,200 shares
Use of proceeds ................................. For general corporate purposes, including work-
ing capital. We may also use a portion of the
proceeds for acquisitions of complementary
businesses or technologies. Please see "Use of
Proceeds."
Nasdaq National Market symbol ................... PRDS
</TABLE>
Unless we specifically state otherwise, the information in this prospectus
does not take into account the sale of up to 570,000 shares of our common stock
by some of the selling stockholders which the underwriters have the option to
purchase solely to cover over-allotments.
The number of shares to be outstanding after this offering is based upon
shares outstanding as of December 31, 1999, and does not include:
o 10,756,910 shares subject to options outstanding as of December 31, 1999,
at a weighted average exercise price of $3.11 per share;
o 769,220 additional shares issued to various selling stockholders as a
result of the exercise of options, which shares will be sold by such
selling stockholders in this offering;
o 1,903,870 additional shares reserved for issuance under our stock option
plan; and
o 750,000 additional shares available for issuance under our employee
stock purchase plan.
3
<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>
Year Ended December 31,
--------------------------------------
1997 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues ............................. $ 18,087 $25,923 $ 52,745
Cost of revenues ..................... 10,407 14,560 27,465
Gross profit ......................... 7,680 11,363 25,280
Noncash compensation expense ......... -- -- 48
Operating profit (loss) .............. 1,887 (822) (1,138)
Net income (loss) .................... $ 1,011 $ (627) $ (957)
======== ======= ========
Net Income (Loss) Per Share:
Basic ................................ $ 0.22 $ (0.11) $ (0.08)
======== ======= ========
Diluted .............................. $ 0.08 $ (0.11) $ (0.08)
======== ======= ========
Weighted Average Shares Outstanding:
Basic ................................ 4,382 6,015 12,138
======== ======= ========
Diluted .............................. 12,765 6,015 12,138
======== ======= ========
</TABLE>
The following table is a summary of our balance sheet at December 31,
1999. The as adjusted data give effect to the sale of 1,000,000 shares of
common stock by us at an assumed offering price of $60.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
December 31, 1999
-------------------------
Actual As Adjusted
---------- ------------
Balance Sheet Data:
Cash and cash equivalents .......... $89,634 $145,669
Marketable securities .............. 2,018 2,018
Working capital .................... 102,092 158,127
Total assets ....................... 117,423 173,458
Total stockholders' equity ......... 108,502 164,537
The as adjusted data does not give effect to the receipt by us of proceeds
of approximately $616 in connection with the exercise of options to acquire
769,220 shares of common stock by various selling stockholders, which shares
will be sold by such selling stockholders in this offering. Giving effect to
such proceeds, our cash and cash equivalents, marketable securities, working
capital, total assets and total stockholders' equity would have been $146,285,
$2,018, $158,743, $174,074 and $165,153, respectively.
4
<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
trading price of our common stock could decline, and you may lose all or part
of your investment.
Risks Related to Our Financial Condition and Business Model
Our limited operating history, particularly in light of our recent growth,
makes it difficult for you to evaluate our business and to predict our future
success
We commenced operations in February 1995 and therefore have only a limited
operating history for you to evaluate our business. Because of our limited
operating history, recent growth and the fact that many of our competitors have
longer operating histories, we believe that the prediction of our future
success is difficult. You should evaluate our chances of financial and
operational success in light of the risks, uncertainties, expenses, delays and
difficulties associated with operating a new business, many of which are beyond
our control. You should not rely on our historical results of operations as
indications of future performance. The uncertainty of our future performance
and the uncertainties of our operating in a new and expanding market increase
the risk that the value of your investment will decline.
Because most of our revenues are generated from a small number of clients, our
revenues are difficult to predict and the loss of one client could
significantly reduce our revenues
During the year ended December 31, 1999, Qwest Communications and Bear
Stearns accounted for 16.8% and 14.0%, respectively, of our revenues. Our five
largest clients accounted for 45.8% of our revenues for the year ended December
31, 1999. If one of our major clients discontinues or significantly reduces the
use of our services, we may not generate sufficient revenues to offset this
loss of revenues and our net income will decrease. In addition, the non-payment
or late payment of amounts due from a major client could adversely affect us.
Our clients may terminate their contracts with us on short notice
Our services are often delivered pursuant to short-term arrangements and
most clients can reduce or cancel their contracts for our services without
penalty and with little or short notice. If a major client or a number of small
clients terminate our contracts or significantly reduce or modify their
business relationships with us, we may not be able to replace the shortfall in
revenues. Consequently, you should not predict or anticipate our future
revenues based upon the number of clients we have currently or the number and
size of our existing projects.
Our operating results may vary from quarter to quarter in future periods, and
as a result, we may fail to meet the expectations of our investors and
analysts, which may cause our stock price to fluctuate or decline
Our operating results have varied from quarter to quarter. Our operating
results may continue to vary as a result of a variety of factors. These factors
include:
o the loss of key employees;
o the development and introduction of new service offerings;
o reductions in our billing rates;
o the miscalculation of resources required to complete new or ongoing
projects;
o the utilization of our workforce; and
o the timing and extent of training.
5
<PAGE>
Many of these factors are beyond our control. Accordingly, you should not
rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. In addition, our operating results may be
below the expectations of public market analysts or investors in some future
quarter. If this occurs, the price of our common stock is likely to decline.
We derive a substantial portion of our revenues from fixed-price projects,
under which we assume greater financial risk if we fail to accurately estimate
the costs of the projects
We derive a substantial portion of our revenues from fixed-price projects.
For the year ended December 31, 1999, fixed-price projects accounted for 35.0%
of our revenue. We assume greater financial risks on a fixed-price project than
on a time-and-expense based project. If we miscalculate the resources or time
we need for these fixed-price projects, the costs of completing these projects
may exceed the price, which could result in a loss on the project and a
decrease in net income. Further, the average size of our contracts has
increased in recent quarters, resulting in a corresponding increase in our
exposure to the financial risks of fixed-price engagements. We recognize
revenues from fixed-price projects based on our estimate of the percentage of
each project completed in a reporting period. To the extent our estimates are
inaccurate, the revenues and operating profits, if any, that we report for
periods during which we are working on a fixed-price project may not accurately
reflect the final results of the project and we would be required to record an
expense for these periods equal to the amount by which our revenues were
previously overstated.
Our operating results may fluctuate due to seasonal factors which could result
in greater than expected losses
Our results of operations may experience seasonal fluctuations as
businesses typically spend less on network management services during the
summer and year-end vacation and holiday periods. Additionally, as a large
number of our employees take vacation during these periods, our utilization
rates during these periods tend to be lower, which reduces our margins and
operating income. Accordingly, we may report greater than expected losses for
these periods.
Our long sales cycle makes our revenues difficult to predict and could cause
our quarterly operating results to be below the expectations of public market
analysts and investors
The timing of our revenues is difficult to predict because of the length
and variance of the time required to complete a sale. Before hiring us for a
project, our clients often undertake an extensive review process and may
require approval at various levels within their organization. Any delay due to
a long sales cycle could reduce our revenues for a quarter and cause our
quarterly operating results to be below the expectations of public market
analysts or investors. If this occurs, the price of our common stock is likely
to decline.
We may need to raise additional capital to grow our business, which we may not
be able to do
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the success of our existing
and new service offerings and competing technological and market developments.
As a result, we may not be able to generate sufficient cash from our operations
to meet additional working capital requirements, support additional capital
expenditures or take advantage of acquisition opportunities. Accordingly, we
may need to raise additional capital in the future. Our ability to obtain
additional financing will be subject to a number of factors, including market
conditions, our operating performance and investor sentiment. These factors 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.
6
<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 December 31, 1999, our staff increased from
approximately 123 to approximately 416 employees. To manage our growth, we must
continue to improve our financial and management controls, reporting systems
and procedures, and expand and train our work force. We may not be able to do
so successfully.
We may not be able to hire and retain qualified network systems consultants
which could affect our ability to compete effectively
Our continued success depends on our ability to identify, hire, train and
retain highly qualified network management consultants. These individuals are
in high demand and we may not be able to attract and retain the number of
highly qualified consultants that we need. If we cannot retain, attract and
hire the necessary consultants, our ability to grow, complete existing projects
and bid for new projects will be adversely affected.
Competition in the network consulting industry is intense, and therefore we may
lose projects to our competitors
Our market is intensely competitive, highly fragmented and subject to
rapid technological change. We expect competition to intensify and increase
over time. We may lose projects to our competitors, which could adversely
affect our business, results of operations and financial condition. In
addition, competition could result in lower billing rates and gross margins and
could require us to increase our spending on sales and marketing.
We face competition from systems integrators, value added resellers,
network services firms, telecommunications providers, and network equipment and
computer systems vendors. These competitors may be able to respond more quickly
to new or emerging technologies and changes in client requirements or devote
greater resources to the expansion of their market share.
Additionally, our competitors have in the past and may in the future form
alliances with various network equipment vendors that may give them an
advantage in implementing networks using that vendor's equipment.
We also compete with internal information technology departments of
current and potential clients. To the extent that current or potential clients
decide to satisfy their needs internally, our business will suffer.
If we are unable to integrate our recent acquisition of Network Resource
Consultants and Company and any other future acquisitions, our business may be
disrupted
We recently acquired Network Resource Consultants and Company B.V., a
network consulting company based in The Netherlands. The integration of this
and other future acquisitions presents us with significant financial,
managerial and operational challenges. We may not be able to meet these
challenges effectively. To the extent our management is required to devote
significant time and attention to integrating the technology, operations and
personnel of acquired businesses, we may not be able to properly serve our
current clients or attract new clients. Any difficulties in integrating
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
7
<PAGE>
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:
o adverse effects on our reported operating results due to accounting
charges associated with acquisitions;
o increased expenses, including compensation expense resulting from newly
hired employees; and
o potential disputes with the sellers of acquired businesses,
technologies, services or products.
Client dissatisfaction or performance problems with an acquired business,
technology, service or product could also have a material adverse impact on our
reputation as a whole. In addition, any acquired business, technology, service
or product could significantly underperform relative to our expectations.
Competition for experienced personnel is intense and our inability to retain
key personnel could interrupt our business and adversely affect our growth
Our future success depends, in significant part, upon the continued
service and performance of our senior management and other key personnel, in
particular Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer,
and Robert L. Belau, our President. Losing the services of any of these
individuals may impair our ability to effectively deliver our services and
manage our company, and to carry out our business plan. In addition,
competition for qualified personnel in the network consulting industry is
intense and we may not be successful in attracting and retaining these
personnel. There may be only a limited number of persons with the requisite
skills to serve in these positions and it may become increasingly difficult to
hire these persons. Our business will suffer if we encounter delays in hiring
additional personnel.
Our international expansion efforts, which are a key part of our growth
strategy, may not be successful
We expect to expand our international operations and international sales
and marketing efforts. In January 1999, we commenced operations in England. In
addition, in August 1999, we acquired Network Resource Consultants and Company,
a network consulting company based in The Netherlands. We have had limited
experience in marketing, selling and distributing our services internationally.
We may not be able to maintain and expand our international operations or
successfully market our services internationally. Failure to do so may
negatively affect our business, as well as our ability to grow.
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:
o the burden and expense of complying with a wide variety of foreign laws
and regulatory requirements;
8
<PAGE>
o potentially adverse tax consequences;
o longer payment cycles and problems in collecting accounts receivable;
o technology export and import restrictions or prohibitions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o cultural and language differences;
o fluctuations in currency exchange rates; and
o seasonal reductions in business activity during the summer months in
Europe.
If we do not appropriately anticipate changes and adapt our practices to
meet these challenges, our growth could be impeded and our results of
operations could suffer.
If we do not keep pace with technological changes, our services may become less
competitive and our business will suffer
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. As a result
of the complexities inherent in today's computing environments, we face
significant challenges in remaining abreast of such changes and product
introductions. If we cannot keep pace with these changes, we will not be able
to meet our clients' increasingly sophisticated network management needs and
our services will become less competitive.
Our future success will depend on our ability to:
o keep pace with continuing changes in industry standards, information
technology and client preferences;
o respond effectively to these changes; and
o develop new services or enhance our existing services.
We may be unable to develop and introduce new services or enhancements to
existing services in a timely manner or in response to changing market
conditions or client requirements.
If the use of large-scale, complex networks does not continue to grow, we may
not be able to successfully increase or maintain our client base and revenues
To date, a majority of our revenues have been from network management
services related to large-scale, complex networks. We believe that we will
continue to derive a majority of our revenues from providing network design,
performance, management and security services. As a result, our future success
is highly dependent on the continued growth and acceptance of large-scale,
complex computer networks and the continued trend among our clients to use
third-party service providers. If the growth of the use of enterprise networks
does not continue or declines, our business may not grow and our revenues may
decline.
If the Internet does not grow and continue to develop as a viable business
tool, demand for our services and our revenues may decline
The growing demand for network management services has been driven in part
by the growth of the Internet. The Internet may not prove to be a viable
commercial marketplace because of:
o inadequate development of the necessary infrastructure;
o lack of development of complementary products (such as high speed modems
and high speed communication lines);
9
<PAGE>
o implementation of competing technology;
o delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; or
o governmental regulation.
Moreover, critical issues concerning the use of the Internet remain
unresolved and may affect the growth of the use of such technologies to solve
business problems. If the Internet fails to grow or grows more slowly as a
viable business tool than anticipated, there will be a significant decline in
the need for our services and our revenues will decline.
Year 2000 problems present technological risks which may be costly to correct
and which may disrupt our business
Year 2000 problems could cause us, or our clients, to experience
operational difficulties and incur expenses. We are not aware of any material
Year 2000 problems that have harmed or threaten to harm our business, but we
cannot assure you that no such problems will emerge. Our failure to timely fix
or replace our internal systems or material third-party software, hardware or
services as a result of a material Year 2000 problem could result in lost
revenues and other business interruptions, any of which could materially and
adversely effect us. Any significant Year 2000 problem could also require us to
incur significant unanticipated expenses to remedy these problems and could
divert management from other tasks of operating our business, which would harm
our business, results of operations and financial condition. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000" for more detailed information regarding the Year 2000
issue.
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.
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 United States Patent and Trademark Office has raised objections to the
registration of our "BUSINESSFIRST" and Predictive logo trademarks, including
likelihood of confusion with pre-existing trademarks. We have responded to
these objections and are awaiting 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, where
we presently have pending trademark applications for our "PREDICTIVE SYSTEMS"
and "BUSINESSFIRST" marks, for one or more of these trademarks, in which case
we will be unable to enforce any statutory trademark rights against third
parties for these trademarks, and/or we must decide to replace such trademarks
with new trademarks.
10
<PAGE>
We may have to defend against intellectual property infringement claims, which
could be expensive and, if we are not successful, could disrupt our business
We cannot be certain that our services, the finished products that we
deliver or materials provided to us by our clients for use in our finished
products do not or will not infringe valid patents, copyrights, trademarks or
other intellectual property rights held by third parties. As a result, we may
be subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business. We may
incur substantial expenses in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against us
may result in substantial monetary liability or may materially disrupt the
conduct of our business.
Because our services are often critical to our clients' operations, we may be
subject to significant claims if our services do not meet our clients
expectations
Many of our projects are critical to the operations of our clients'
businesses. If we cannot complete these projects to our clients' expectations,
we could materially harm our clients' operations. This could damage our
reputation, subject us to increased risk of litigation or result in our having
to provide additional services to a client at no charge. Although we carry
general liability insurance coverage, our insurance may not cover all potential
claims to which we are exposed or may not be adequate to indemnify us for all
liability that may be imposed.
Risks Related to this Offering
We do not have a plan for the use of the net proceeds of this offering and will
therefore have discretion as to the use of these proceeds, which we may not use
effectively
We have no plan with respect to the use of the net proceeds of this
offering and have not committed these proceeds to any particular purpose.
Therefore, our management will have significant flexibility in applying the net
proceeds of this offering and may use the proceeds in ways with which
stockholders disagree. We may not be able to invest these funds effectively.
Our stock price is likely to be highly volatile and could drop unexpectedly
The market price of our common stock is 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.
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 66.4% of the outstanding shares of our common stock, and
after the offering will beneficially own approximately 55.8% 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.
11
<PAGE>
Shares eligible for public sale after this offering could adversely affect our
stock price
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering, or the perception that these sales could occur. 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 public offering price per share will significantly exceed the net
tangible book value per share. Accordingly, investors purchasing shares in this
offering will suffer immediate and substantial dilution of their investment. In
addition, we had 10,756,910 shares subject to options outstanding as of
December 31, 1999 at a weighted average exercise price of $3.11 per share. The
exercise of these options will result in further dilution of the value of the
shares purchased in this offering.
12
<PAGE>
FORWARD-LOOKING STATEMENTS; MARKET DATA
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because
these forward looking-statements involve risks and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
This prospectus contains market data related to our business and the
network consulting and integration services industry. This market data includes
projections that are based on a number of assumptions. If these assumptions
turn out to be incorrect, actual results may differ from the projections based
on these assumptions. As a result, our markets may not grow at the rates
projected by these data, or at all. The failure of these markets to grow at
these projected rates may have a material adverse effect on our business,
results of operations and financial condition, and the market price of our
common stock.
The forward-looking statements made in this prospectus relate only to
events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
13
<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 $56.0 million, at an assumed offering
price of $60.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us. We will not receive
any proceeds from the sale of shares being sold by the selling stockholders,
however, we will receive approximately $616,000 in connection with the exercise
of options to acquire 769,220 shares of common stock by various selling
stockholders, which shares will be sold by such selling stockholders in this
offering.
The primary purpose of this offering is to obtain additional equity
capital. As of the date of this prospectus, we have not made any specific
expenditure plans with respect to the proceeds of this offering. Accordingly,
our management will have significant flexibility in applying the net proceeds
of this offering. We expect to use the net proceeds of this offering for
general corporate purposes, including working capital. A portion of the net
proceeds may also be used for the acquisition of complementary businesses or
technologies. We are not currently a party to any contracts, letters of intent,
commitments or agreements and are not currently engaged in active negotiations,
with respect to any acquisitions.
Pending such uses, we will invest the net proceeds of this offering in
investment grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol PRDS since our initial public offering on October 27, 1999. The
following table sets forth, for the periods indicated, the high and low sale
prices per share of the common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
----------- -----------
<S> <C> <C>
Fourth Quarter 1999 (since October 27, 1999) .......... $ 68.00 $ 28.00
First Quarter 2000 (through March 14, 2000) ........... 89.00 46.50
</TABLE>
On March 14, 2000, the last sale price of our common stock reported on the
Nasdaq National Market was $60.00 per share. As of March 1, 2000, we had
approximately 95 holders of record of our common stock.
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.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on an actual basis and on an as adjusted basis to reflect our sale of 1,000,000
shares of our common stock at an assumed offering price of $60.00 per share,
after deducting underwriting discounts and commissions and the estimated
offering expenses payable by us, excluding proceeds of approximately $616,000
we will receive in connection with the exercise of options to acquire 769,220
shares of common stock by various selling stockholders, which shares will be
sold by such selling stockholders in this offering.
You should read this information together with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
Actual As Adjusted
------------ ------------
<S> <C> <C>
Long-term debt ............................................ $ -- $ --
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, 0 shares issued and outstanding, actual
and as adjusted ........................................ -- --
Common stock, $.001 par value, 200,000,000 shares
authorized, 23,429,200 issued and outstanding, actual;
24,429,200 issued and outstanding, as adjusted ......... 23 24
Additional paid-in capital ................................ 108,405 164,439
Deferred compensation ..................................... (257) (257)
Retained earnings ......................................... 370 370
Accumulated other comprehensive loss ...................... (39) (39)
-------- --------
Total stockholders' equity ............................... 108,502 164,537
-------- --------
Total capitalization ................................... $108,502 $164,537
======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999 and does
not include:
o 10,756,910 shares subject to options outstanding as of December 31, 1999
at a weighted average exercise price of $3.11 per share;
o 769,220 additional shares issued to various selling stockholders as a
result of the exercise of options, which shares will be sold by such
selling stockholders in this offering;
o 1,903,870 additional shares reserved for issuance under our stock option
plan; and
o 750,000 additional shares available for issuance under our employee
stock purchase plan.
15
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999 was approximately
$104.6 million, or $4.46 per share of common stock. Net tangible book value per
share is determined by dividing the amount of our total tangible assets less
total liabilities by the number of shares of common stock outstanding at that
date. 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, at an assumed offering price of $60.00 per share, and after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us, and the application of the net proceeds therefrom, our
pro forma net tangible book value as of December 31, 1999 would have been
$160.6 million, or $6.57 per share. This represents an immediate increase in
net tangible book value of $2.11 per share to existing stockholders and an
immediate dilution of $53.43 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed offering price per share ................................................ $ 60.00
Net tangible book value per share at December 31, 1999 ......................... $ 4.46
Pro forma increase in net tangible book value attributable to this offering .... 2.11
------
Pro forma net tangible book value per share after this offering ................. 6.57
-------
Pro forma dilution per share to new investors ................................... $ 53.43
=======
</TABLE>
This table does not give effect to the receipt by us of approximately
$616,000 in connection with the exercise of options to acquire 769,220 shares
of common stock by various selling stockholders, which shares will be sold by
such selling stockholders in this offering. Giving effect to the receipt of
such proceeds and the issuance of such shares of common stock, our pro forma
net tangible book value as of December 31, 1999 would have been $161.2 million
or $6.40 per share. This represents an immediate increase in net tangible book
value of $1.93 per share to existing stockholders and an immediate dilution of
$53.60 per share to new investors purchasing shares in this offering.
---------------------
The following table summarizes, on a pro forma basis as of December 31,
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
offering price of $60.00 per share, before deducting the estimated underwriting
discounts 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 ......... 23,429,200 95.9% $102,507,187 63.1% $ 4.38
New investors ................. 1,000,000 4.1 60,000,000 36.9 60.00
---------- ----- ------------ -----
Total ........................ 24,429,200 100.0% $162,507,187 100.0%
========== ===== ============ =====
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding as of December 31, 1999. As of December 31, 1999, there were
options outstanding to purchase a total of 10,756,910 shares of common stock
with a weighted average exercise price of $3.11 per share. To the extent that
any of these options are exercised, there will be further dilution to new
investors. Please see "Capitalization."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1998 and
1999 and the selected consolidated statements of operations data for the years
ended December 31, 1997, 1998 and 1999 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of December 31, 1996 and 1997 and
the selected consolidated statements of operations data for the year ended
December 31, 1996 have 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 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)
to December 31, Year Ended December 31,
------------------ -----------------------------------------------
1995 1996 1997 1998 1999
------------------ ----------- ---------- ---------- ----------
(in thousands, except per share
(unaudited) data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Professional services. .................. $ 2,090 $ 6,819 $16,897 $23,858 $50,698
Hardware and software sales ............. 161 1,287 1,190 2,065 2,047
-------- -------- ------- ------- -------
Total revenues ......................... 2,251 8,106 18,087 25,923 52,745
Cost of revenues:
Professional services ................... 981 3,382 9,590 12,861 25,699
Hardware and software purchases ......... 161 970 817 1,699 1,766
-------- -------- ------- ------- -------
Total cost of revenues ................. 1,142 4,352 10,407 14,560 27,465
-------- -------- ------- ------- -------
Gross profit ............................. 1,109 3,754 7,680 11,363 25,280
Expenses:
Sales and marketing ..................... 220 386 1,082 3,433 8,478
General and administrative .............. 535 1,683 4,390 8,184 16,809
Depreciation and amortization ........... 63 142 321 568 1,083
Noncash compensation expense ............ -- -- -- -- 48
-------- -------- ------- ------- -------
Operating profit (loss) .................. 291 1,543 1,887 (822) (1,138)
Other income (expense):
Interest income ......................... 5 31 27 58 944
Other income ............................ -- 8 4 1 76
Interest expense ........................ -- -- (36) (324) (157)
-------- -------- ------- ------- -------
Income (loss) before income tax provision
(benefit) ............................... 296 1,582 1,882 (1,087) (275)
Income tax provision (benefit) ........... 146 719 871 (460) 682
-------- -------- ------- ------- -------
Net income (loss) ........................ $ 150 $ 863 $1,011 $ (627) $ (957)
======== ======== ======= ======= =======
Net income (loss) per share--
Basic ................................... $ 0.04 $ 0.20 $ 0.22 $(0.11) $(0.08)
======== ======== ======= ======= =======
Diluted ................................. $ 0.01 $ 0.07 $ 0.08 $(0.11) $(0.08)
======== ======== ======= ======= =======
Weighted average shares outstanding--
Basic ................................... 4,245 4,269 4,382 6,015 12,138
======== ======== ======= ======= =======
Diluted ................................. 10,396 11,586 12,765 6,015 12,138
======== ======== ======= ======= =======
</TABLE>
<PAGE>
Please see Note 4 to our consolidated financial statements for an
explanation of the number of shares used in per share computations for 1997,
1998 and 1999.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
------------- -------- -------- --------- ----------
(unaudited) (in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents .......... $ 270 $ 638 $ 420 $ -- $ 89,634
Marketable securities .............. -- -- -- -- 2,018
Working capital .................... 661 1,178 1,679 2,365 102,092
Total assets ....................... 1,180 3,629 6,870 13,677 117,423
Total stockholders' equity ......... 192 1,061 2,072 2,026 108,502
</TABLE>
17
<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 notes to those statements and other financial information
appearing elsewhere in this prospectus.
Overview
Substantially all of our revenues are derived from professional services.
We provide network consulting services to our clients on either a project
outsource or collaborative consulting basis. We derive revenues from these
services on both a fixed-price, fixed-time basis and on a time-and-expense
basis. We use our BusinessFirst methodology to estimate and propose prices for
our fixed-price projects. The estimation process accounts for standard billing
rates particular to each project, the client's technology environment, the
scope of the project, and the project's timetable and overall technical
complexity. A member of our senior management team must approve all of our
fixed-price proposals in excess of $1.0 million. 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:
o the reduction in size, delay in commencement, interruption or termination
of one or more significant projects;
o the completion during a quarter of one or more significant projects;
o the miscalculation of resources required to complete new or ongoing
projects; and
o the timing and extent of training, weather related shut-downs, vacations
and holidays.
Our cost of revenues consists of costs associated with our professional
services and hardware and software purchases. Costs of revenues associated with
professional services include compensation and benefits for our consultants and
project-related travel expenses. Costs of hardware and software purchases
consist of acquisition costs of third-party hardware and software resold.
On August 12, 1999, we acquired Network Resource Consultants and Company
for an aggregate purchase price of approximately $4.3 million. The purchase
price was paid in the form of 1,062,814 shares of our common stock in exchange
for all of the outstanding capital stock of Network Resource Consultants and
Company. The acquisition was accounted for as a purchase and resulted in
intangible assets of approximately $4.3 million representing the excess
purchase price over the fair value of the net assets acquired which have been
allocated to workforce, customer lists and goodwill. The intangible assets are
being amortized over a period of 5 years.
18
<PAGE>
On September 16, 1999, we completed the sale of 1,242,000 shares of our
common stock to Cisco at $12.00 per share for net proceeds of approximately
$14.2 million.
On September 22, 1999, we completed the sale of 94,867 and 18,133 shares
of our common stock to General Atlantic Partners 57, L.P., and GAP Coinvestment
Partners II, L.P., respectively, at $12.00 per share for net proceeds of
approximately $1.4 million.
In November 1999, we consummated the initial public offering of 4.6
million shares of our common stock, at $18.00 per share, which resulted in net
proceeds of approximately $75.1 million after deducting underwriters discounts
and commissions, and expenses, payable by us.
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>
Year Ended December 31,
----------------------------------------
1997 1998 1999
---------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Professional services .................. 93.4% 92.0% 96.1%
Hardware and software sales ............ 6.6 8.0 3.9
------ ----- -----
Total revenues ....................... 100.0 100.0 100.0
Cost of revenues:
Professional services .................. 53.0 49.6 48.7
Hardware and software sales ............ 4.5 6.6 3.4
------ ----- -----
Total cost of revenues ............... 57.5 56.2 52.1
Gross Profit ............................ 42.5 43.8 47.9
Expenses:
Sales and marketing .................... 6.0 13.2 16.1
General and administrative ............. 24.3 31.6 31.8
Depreciation and amortization .......... 1.8 2.2 2.1
Noncash compensation expense ........... -- -- 0.1
Operating profit (loss) ................. 10.4 ( 3.2) ( 2.2)
Other income (expense) .................. ( 0.0) ( 1.0) 1.7
------ ----- -----
Income (loss) before income tax provision
(benefit) .............................. 10.4 ( 4.2) ( 0.5)
Income tax provision (benefit) .......... 4.8 ( 1.8) 1.3
------ ----- -----
Net income (loss) ....................... 5.6% ( 2.4)% ( 1.8)%
====== ===== =====
</TABLE>
Years Ended December 31, 1998 and 1999
Revenues. Substantially all of our revenues are derived from fees for
professional services. Revenues increased 103.5% from $25.9 million in 1998 to
$52.7 million in 1999. Revenues from professional services increased 112.5%
from $23.9 million in 1998 to $50.7 million in 1999. This increase was
primarily due to an increase in the number of professional services projects
and an increase in the size of the projects. Revenues from hardware and
software sales decreased from
19
<PAGE>
$2.1 million in 1998 to $2.0 million in 1999. During 1999, Qwest Communications
and Bear Stearns accounted for 16.8% and 14.0%, respectively, of our revenues.
The number of our billable consultants increased from approximately 149 at
December 31, 1998 to approximately 302 at December 31, 1999.
Gross Profit. Gross profit increased 122.5% from $11.4 million in 1998 to
$25.3 million in 1999. As a percentage of revenues, gross profit increased from
43.8% in 1998 to 47.9% in 1999. This increase in gross profit was due to
efficiencies in completing fixed-price, fixed-time projects, higher utilization
rates and an increase in average billing rates. Cost of revenues increased from
$14.6 million in 1998 to $27.5 million in 1999. This increase in cost of
revenues was due to an increase in compensation and benefits paid to
consultants, which was directly related to increased revenue.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of compensation and benefits, travel expenses and promotional
expenses. Sales and marketing expenses increased 146.9% from $3.4 million in
1998 to $8.5 million in 1999. As a percentage of revenues, sales and marketing
expenses increased from 13.2% in 1998 to 16.1% in 1999. This increase was
primarily due to an increase of $3.7 million in compensation and benefits paid
due to the hiring of additional personnel, and an increase of $1.1 million in
commissions paid.
General and Administrative Expenses. General and administrative expenses
increased 105.4% from $8.2 million in 1998 to $16.8 million in 1999. As a
percentage of revenues, general and administrative expense increased from 31.6%
in 1998 to 31.8% in 1999. The increase in absolute dollars was primarily due to
an increase of $3.9 million in recruiting and professional development and
other administrative costs, an increase of $3.3 million in compensation and
benefits costs, and an increase of $1.4 million in facilities and equipment
costs.
Depreciation and Amortization. Depreciation and amortization increased
90.7% from $568,000 in 1998 to $1.1 million in 1999. This increase was due to
purchases of additional equipment to support our growth and amortization of
intangible assets of $327,000.
Noncash Compensation Expense. During 1999, we granted options to purchase
shares of common stock at exercises prices that were less than the fair market
value of the underlying shares of common stock. This resulted in noncash
compensation expense of approximately $48,000 for the year ended December 31,
1999. The remaining noncash compensation expense beyond 1999 is currently
estimated to be $257,000.
Other Income (Expense). Other expense changed from ($265,000) in 1998 to
income of $863,000 in 1999. This decrease was primarily due to an increase of
$886,000 in interest income related to net proceeds from our initial public
offering, which proceeds were invested in interest-bearing cash equivalents and
marketable securities.
Income Taxes. Income tax expense was $682,000 on pre-tax losses of
$275,000 for 1999. In 1998, the income tax benefit was ($460,000) on pre-tax
losses of $1.1 million. The effective tax rate was 248.3% and 42.3% during 1999
and 1998, respectively. The change in the effective tax rates primarily relates
to the provision for a valuation allowance against net operating losses of our
foreign subsidiaries as well as non-deductible amortization expense of the
intangibles resulting from the acquisition of NRCC.
Years Ended December 31, 1997 and 1998
Revenues. Revenues increased 43.3% from $18.1 million in 1997 to $25.9
million in 1998. Revenues from professional services increased 41.2% from $16.9
million in 1997 to $23.9 million in 1998. This increase was primarily due to an
increase in the number of professional services projects and an increase in the
size of these projects. Revenues from hardware and software sales increased
73.6% from $1.2 million in 1997 to $2.1 million in 1998. During 1998, Bear
Stearns 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.
20
<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. This increase in gross profit was due to
efficiencies in completing fixed-price, fixed-time projects, partially offset
by lower utilization rates and a decrease in average billing rates. Cost of
revenues increased from $10.4 million in 1997 to $14.6 million in 1998. This
increase in cost of revenues was due primarily to an increase in compensation
and benefits paid to consultants.
Sales and Marketing Expenses. Sales and marketing expenses increased
217.4% from $1.1 million in 1997 to $3.4 million in 1998. As a percentage of
revenues, sales and marketing expenses increased from 6.0% in 1997 to 13.2% in
1998. This increase was primarily due to an increase of $1.6 million in
compensation and benefits paid due to the hiring of additional personnel, an
increase of $591,000 due to increased sales and marketing efforts, and an
increase of $142,000 in commissions paid because of the increase in revenues.
General and Administrative Expenses. General and administrative expenses
increased 86.4% from $4.4 million in 1997 to $8.2 million in 1998. As a
percentage of revenues, general and administrative expense increased from 24.3%
in 1997 to 31.6% in 1998. This increase was due to an increase of $1.4 million
in recruiting and professional development and other administrative costs, an
increase of $1.3 million in compensation and benefits costs, and an increase of
$1.1 million in facilities and equipment costs.
Depreciation and Amortization. Depreciation and amortization increased
76.9% from $321,000 in 1997 to $568,000 in 1998. This increase was due to
purchases of additional equipment to support our growth.
Other Income (Expense). Other expense increased from ($5,000) in 1997 to
($265,000) in 1998. This increase was primarily due to an increase in interest
expense related to an increase in short-term borrowings.
Income Taxes. The income tax provision was $871,000 on pre-tax income of
$1.9 million in 1997. In 1998 the income tax benefit was ($460,000) on pre-tax
losses of $1.1 million. The effective tax rate was 46.3% and 42.3% for 1997 and
1998, respectively. The differences in the effective tax rate resulted from a
greater amount of non-tax deductible expenses during 1997.
21
<PAGE>
Quarterly Results of Operations
The following table sets forth unaudited quarterly statement of operations
data for each of the eight quarters in the period ended December 31, 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
---------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
------------ ------------ ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Professional services .............. $ 3,798 $ 5,137 $ 6,702 $ 8,221
Hardware and software sales ........ 78 452 233 1,302
------- ------- ------- -------
Total revenues .................... 3,876 5,589 6,935 9,523
Cost of Revenues:
Professional services .............. 2,387 2,792 3,308 4,374
Hardware and software purchases 65 373 229 1,032
------- ------- ------- -------
Total cost of revenues ............ 2,452 3,165 3,537 5,406
------- ------- ------- -------
Gross profit ........................ 1,424 2,424 3,398 4,117
Expenses:
Selling and marketing .............. 484 771 1,032 1,146
General and administrative ......... 1,722 1,865 2,231 2,366
Depreciation and amortization ...... 108 121 123 216
Noncash compensation expense........ -- -- -- --
------- ------- ------- -------
Operating profit (loss) ............. (890) (333) 12 389
Other income (expense) .............. (22) (32) (85) (126)
------- ------- ------- -------
Income (loss) before income tax
provision (benefit) ................ (912) (365) (73) 263
Income tax provision (benefit) ...... (390) (150) 46 34
------- ------- ------- -------
Net income (loss) ................... $ (522) $ (215) $ (119) $ 229
======= ======= ======= =======
Percentage of Total Revenues
-----------------------------------------------------
Revenues:
Professional services .............. 98.0% 91.9% 96.6% 86.3%
Hardware and software sales ........ 2.0 8.1 3.4 13.7
--------- ------- ------- -------
Total revenues .................... 100.0 100.0 100.0 100.0
Cost of Revenues:
Professional services .............. 61.5 50.0 47.7 45.9
Hardware and software purchases 1.7 6.6 3.3 10.9
--------- ------- ------- -------
Total cost of revenues ............ 63.2 56.6 51.0 56.8
--------- ------- ------- -------
Gross profit ........................ 36.8 43.4 49.0 43.2
Expenses:
Selling and marketing .............. 12.5 13.8 14.9 12.0
General and administrative ......... 44.5 33.4 32.1 24.8
Depreciation and amortization ...... 2.8 2.2 1.8 2.3
Noncash compensation expense........ -- -- -- --
--------- ------- ------- -------
Operating profit (loss) ............. (23.0) ( 6.0) 0.2 4.1
Other income (expense) .............. ( 0.5) ( 0.5) ( 1.3) ( 1.3)
--------- ------- ------- -------
Income (loss) before income tax
provision (benefit) ................ (23.5) ( 6.5) ( 1.1) 2.8
Income tax provision (benefit) ...... (10.1) ( 2.7) 0.6 0.4
--------- ------- ------- -------
Net income (loss) ................... (13.4)% ( 3.8)% ( 1.7)% 2.4%
========= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
------------ ------------ ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Professional services .............. $ 9,887 $ 11,391 $ 13,624 $ 15,796
Hardware and software sales ........ 478 810 465 294
-------- -------- -------- --------
Total revenues .................... 10,365 12,201 14,089 16,090
Cost of Revenues:
Professional services .............. 4,849 5,397 7,005 8,448
Hardware and software purchases 426 606 299 435
-------- -------- -------- --------
Total cost of revenues ............ 5,275 6,003 7,304 8,883
-------- -------- -------- --------
Gross profit ........................ 5,090 6,198 6,785 7,207
Expenses:
Selling and marketing .............. 1,589 1,820 2,424 2,645
General and administrative ......... 3,469 3,908 4,710 4,722
Depreciation and amortization ...... 144 168 341 430
Noncash compensation expense........ 5 5 19 19
-------- -------- -------- --------
Operating profit (loss) ............. (117) 297 (709) (609)
Other income (expense) .............. (28) 26 25 840
-------- -------- -------- --------
Income (loss) before income tax
provision (benefit) ................ (145) 323 (684) 231
Income tax provision (benefit) ...... (49) 410 (56) 377
-------- -------- -------- --------
Net income (loss) ................... $ (96) $ (87) $ (628) $ (146)
======== ======== ======== ========
Revenues:
Professional services .............. 95.4% 93.4% 96.7% 98.2%
Hardware and software sales ........ 4.6 6.6 3.3 1.8
-------- -------- -------- --------
Total revenues .................... 100.0 100.0 100.0 100.0
Cost of Revenues:
Professional services .............. 46.8 44.2 49.7 52.5
Hardware and software purchases 4.1 5.0 2.1 2.7
-------- -------- -------- --------
Total cost of revenues ............ 50.9 49.2 51.8 55.2
-------- -------- -------- --------
Gross profit ........................ 49.1 50.8 48.2 44.8
Expenses:
Selling and marketing .............. 15.3 14.9 17.3 16.4
General and administrative ......... 33.5 32.0 33.4 29.4
Depreciation and amortization ...... 1.4 1.4 2.4 2.7
Noncash compensation expense........ 0.0 0.0 0.1 0.1
-------- -------- -------- --------
Operating profit (loss) ............. ( 1.1) 2.5 ( 5.0) ( 3.8)
Other income (expense) .............. ( 0.3) 0.2 0.1 5.2
-------- -------- -------- --------
Income (loss) before income tax
provision (benefit) ................ ( 1.4) 2.7 ( 4.9) 1.4
Income tax provision (benefit) ...... ( 0.5) 3.4 ( 0.4) 2.3
-------- -------- -------- --------
Net income (loss) ................... ( 0.9)% ( 0.7)% ( 4.5)% ( 0.9)%
======== ======== ======== ========
</TABLE>
22
<PAGE>
We have historically experienced significant quarterly fluctuations in our
revenues and results of operations and expect these fluctuations to continue.
Factors causing these variations include the number, timing, scope and
contractual terms of client projects, delays incurred in the performance of
such projects, accuracy of estimates of resources and time required to complete
ongoing projects, and general economic conditions. In addition, our future
revenues and operating results may fluctuate as a result of changes in pricing
in response to customer demand and competitive pressures, the ratio of
fixed-price contracts versus time-and-expense contracts and the timing of
collection of accounts receivable. A high percentage of our operating expenses,
particularly personnel and rent, are relatively fixed in advance of any
particular quarter. As a result, unanticipated variations in the number and
timing of our projects or in employee utilization rates may cause significant
variations in operating results in any particular quarter, and could result in
losses. Any significant shortfall of revenues in relation to our expectations,
any material reduction in utilization rates for our consultants, an
unanticipated termination of a major project, a client's decision not to pursue
a new project or proceed to succeeding stages of a current project, or the
completion during a quarter of several major customer projects could require us
to pay underutilized employees and have a material adverse effect on our
business, results of operations and financial condition.
Our quarterly operating results are also subject to certain seasonal
fluctuations. We have in the past recruited new consultants in the first and
second quarters who have not conducted billable services until later in the
year. Demand for our services may be lower in the fourth quarter due to reduced
activity during the holiday season and fewer working days for those customers
that curtail operations during this period. These and other seasonal factors
may contribute to fluctuations in our operating results from quarter to
quarter.
Liquidity and Capital Resources
Since inception, we have financed our operations through the sale of
equity securities and cash flow from operations. As of December 31, 1999, we
had approximately $89.6 million in cash and cash equivalents and $2.0 million
in marketable securities.
Cash used in operating activities decreased from $3.7 million for 1998 to
$2.6 million for 1999. A significant use of cash resulted from an increase in
accounts receivable, partially offset by an increase in accounts payable and
accrued expenses and other current liabilities.
Cash used in operating activities was $3.7 million in 1998, and $1.2
million in 1997. The increase in the use of cash resulted from the net loss in
1998, an increase in accounts receivable and unbilled work in process during
1998 partially offset by an increase in accounts payable and accrued expenses
and other current liabilities at December 31, 1998.
Cash provided by financing activities was $95.0 million for 1999, $5.4
million for 1998 and $1.4 million for 1997. Cash provided by financing
activities for 1999 resulted from the receipt of approximately $75.1 million in
net proceeds from the sale of our common stock in our initial public offering,
the receipt of approximately $18.6 million in net proceeds related to the sale
of preferred stock and the receipt of approximately $15.5 million in net
proceeds from the sale of common stock to Cisco and General Atlantic Partners
prior to the initial public offering, offset partially by the repayment of
short-term borrowings and repurchase of treasury stock. Cash provided by
financing activities for 1998 and 1997 resulted from short-term borrowings.
Our capital expenditures were $2.2 million for 1999, $687,000 for 1998 and
$357,000 for 1997. Capital expenditures were made to purchase computer
equipment, 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 December 31, 1999, there were no amounts
outstanding under the facility.
Year 2000
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
23
<PAGE>
"00" as the year 1900 rather than the year 2000. As a result, it has been
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.
Most reports to date, however, are that computer systems are functioning
normally and the compliance and remediation work accomplished leading up to the
Year 2000 was effective to prevent material problems. Computer experts have
warned, however, that there may still be residual consequences.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant and we cannot assure you that any
Year 2000 problems will not result in disruptions.
Based on initial reports, we believe that 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, are Year 2000 compliant.
In addition, to date, we have not experienced any significant problems
relating to the Year 2000 compliance of our major distributors, suppliers and
vendors. However, we cannot assure you that these distributors, suppliers or
vendors will not experience a Year 2000 problem in the future. In the event
that any of them experience a Year 2000 problem and we are unable to locate an
acceptable alternative, our business would be harmed.
Although our initial reports have not identified any material Year 2000
problems affecting our material third-party vendors, it is possible that
certain Year 2000 problems may have residual consequences or that our
third-party vendors were mistaken in certifying that their systems are Year
2000 compliant. 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.
Although initial reports are that computer systems are functioning
normally, we cannot assure you that governmental agencies, utility companies,
Internet access companies, third-party service providers and others outside our
control will not develop Year 2000 problems. 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.
Based on our assessment of our Year 2000 readiness, we do not anticipate
being required to implement any material aspects of a contingency plan to
address Year 2000 readiness of our critical operations.
Recent Accounting Pronouncements
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, 2000. We do
not expect the adoption of this standard to have a material effect on our
results of operations, financial position or cash flows.
24
<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 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 based on and
measured against mutually agreed upon service offerings and provide our clients
with certainty of costs, delivery time and project scope. Our collaborative
consulting services enable our clients to utilize our extensive expertise in
order to extend their internal capabilities and to access our methodologies. In
addition to these services, we have developed an innovative service model
through which we deliver our clients packaged service products, otherwise
referred to as productized services. Our service products are characterized by
pre-defined service offerings that have pre-defined deliverables, a pre-defined
pricing model and are implemented using a pre-defined methodology. In contrast
to our project outsource and collaborative consulting services which provide
our clients with services that are customized for, and therefore unique to,
each engagement, our service products are typically provided with little or no
modification.
Our consultants are organized into the following practice areas, which
cover the four cornerstones of network computing: network and systems
management; internetwork design and engineering; performance management; and
information security. This structure enables our consultants to gain in-depth
expertise and become intimately familiar with the best practices and
methodologies identified within each of those disciplines.
Industry Background
The effective communication and management of information has become
critical to success in today's competitive and rapidly changing global business
environment. Network infrastructures that once were viewed as sources of
competitive advantage are now being recognized as competitive necessities for
businesses in a broad range of industries. This shift is driven primarily by
the following factors:
o the migration from mainframe and client/server technologies to
Internet-based computing environments among most industries;
o the demand for real-time exchange of critical, time-sensitive information
within organizations and among their external constituents; and
o 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
25
<PAGE>
technology has further increased the complexity of designing and implementing
these network solutions. As competing hardware and software companies develop
applications to more effectively and efficiently manage increasing volumes of
information, rapid adoption of new technologies is required for businesses to
remain competitive. Accordingly, the demand for experienced professionals that
can assist businesses in designing, implementing, managing and monitoring
complex network solutions has increased dramatically.
As a result of demand for professionals with networking expertise, it has
become increasingly difficult for businesses to attract and retain dedicated
internal information technology resources. In response, many businesses are
focusing on their core competencies and outsourcing their network management
needs to third-party service providers. Consequently, the demand for network
consulting and integration services has grown dramatically. International Data
Corporation, a market research organization, estimates that the worldwide
market for these services will grow from $12.1 billion in 1998 to $25.5 billion
by 2003. There are many third-party service providers, including network
equipment vendors, systems integrators, value-added resellers and network
consulting companies, seeking to capitalize on this growth.
However, we believe that few have the requisite focus and expertise to
address the complex, multi-faceted issues surrounding today's networks, and
many are limited by the fact that they:
o are primarily motivated by distributing their own products and often lack
the skills to implement multi-vendor solutions;
o are focused on traditional mainframe computing environments and derive a
large percentage of their revenue from reselling hardware and software
products; or
o 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 service products. When engaged on a project outsource basis,
we work with our clients to mutually define a fixed scope of work at the
beginning of the project that is tailored to the clients'
26
<PAGE>
specific needs and therefore, modified from engagement to engagement. We then
deliver the services for a fixed fee, in a fixed period of time with a fixed
set of deliverables. When engaged on a collaborative consulting basis, we
extend our clients' internal technical capabilities with our consultants. This
enables our clients to utilize our extensive expertise and to access our
methodologies while they retain overall responsibility for the project.
Collaborative consulting services are typically billed on a time and expense
basis, and typically do not entail fixed-cost, fixed-time or fixed-service
commitments. Our service products are pre-defined service offerings that we
believe address the needs that are common to many of our clients. These service
products are characterized by pre-defined deliverables, pre-defined pricing and
are provided with little or no modification.
In-Depth Network Computing Expertise. Our consultants are organized into
practice areas which cover the four cornerstones of network computing: network
and systems management; internetwork design and engineering; performance
management; and information security. This enables our consultants to gain
in-depth expertise and become intimately familiar with the best practices
within each of those disciplines. More importantly, it enables us to leverage
the knowledge base within each practice group to provide our clients with
cross-functional teams of consultants that are better equipped to address their
varying networking needs in a coordinated and efficient manner.
Strategy
Our goal is to become the leading provider of services for the design,
performance, management and security of complex networks. To achieve this goal,
we intend to pursue the following strategies:
Continue to Evolve Our BusinessFirst Methodology. The evolution and
enhancement of our BusinessFirst methodology is critical to our ability to
leverage and share knowledge across engagements and to further improve our
ability to deliver predictable, high-quality services to our clients on time
and on budget. We have a dedicated team of consultants that is focused on
continuously enhancing and refining our BusinessFirst methodology by
incorporating the best practices identified over numerous engagements. We
believe that this enables us to consistently deliver high-quality network
technology solutions.
Expand and Enhance Our Service Product Offerings. We intend to continue to
enhance and expand our innovative service product offerings. These service
offerings provide our clients with a pre-defined set of deliverables that
require minimal customization and are characterized by an objective and
quantifiable value proposition and return on investment justification.
Moreover, our service products enable us to increase our margin opportunities
by improving the efficiency of our sales and service delivery model. These
products also enable us to market and sell our services through indirect
channels. For example, BellSouth offers our E-Readiness Assessment service
product to their customers in the nine-state BellSouth region.
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 Systems University, which is designed to
improve the skills and productivity of our consultants. We intend to continue
to build our nationwide recruiting organization, promote our corporate culture
with stated values, and 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.
27
<PAGE>
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. Last
year, we 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 offices in eight states throughout the
United States and in England and 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.
Establish Additional and Broaden Existing Strategic Relationships. We have
developed a number of strategic relationships, including alliances with Cisco
Systems and BellSouth. Under these relationships, our partners recommend or
directly resell our services to their clients, including our service products
and our consulting services on a project outsource basis. We intend to continue
to expand the scope of these relationships and to develop new strategic
alliances to further broaden the indirect sales channel for our services.
BusinessFirst Methodology
BusinessFirst is a proprietary methodology that governs our organization
and client engagements. Our BusinessFirst methodology enables us to better
understand the business objectives that drive the need for technology solutions
and provide our clients with pre-defined services on a fixed-time, fixed-price
basis. We begin each engagement by helping our clients clarify their business
requirements in specific terms. We then undertake a thorough assessment of our
client's existing business processes and technology infrastructure. Based on
this assessment, we formulate an analysis of the requirements to translate
their technology investments into measurable business objectives. Once we
formulate a requirements analysis, we draw upon our broad expertise to design a
solution that leverages our clients' existing technology infrastructure to
maximize their return on investment. We believe that our BusinessFirst
methodology bridges the gap in the marketplace between management consulting
firms and technical staff augmentation services and enables us to translate
business objectives into leading-edge technology solutions.
Services
Our consultants are organized into four practice areas. Although many of
our consultants are cross-skilled in a variety of technologies and many
technologies span multiple practice areas, each practice area represents an
aspect of network technology important enough to warrant specialization.
These practice areas are:
o network and systems management;
o internetwork design and engineering;
o performance management; and
o information security.
Our consultants have extensive experience with a wide variety of
technologies and vendors. For some clients, our consultants are involved in
both technology and vendor selection. Other clients have already selected the
technology, vendor or both. Regardless, we offer our clients a completely
objective, vendor-neutral approach. Our knowledge of advanced technologies and
leading vendors is a significant part of our value proposition to our clients.
28
<PAGE>
Network and Systems Management. Our network and systems management
practice focuses on designing and implementing reliable and continuously
available management systems for large-scale, highly-complex networks. The
fundamental tenet of this practice area is that proactive management is an
essential element of any network design and engineering effort. Our network
management consultants develop systems and processes that are able to identify,
isolate and resolve network failures, sometimes before they occur.
The following table lists some of the services provided by our network and
systems management practice area:
<TABLE>
<CAPTION>
Service Description
- -------------------------------------- ---------------------------------------------------------
<S> <C>
Service Definition and Service Level Highlights a client's service level commitments and
Agreement Workshop assists in the development of a rational, long-term plan
for meeting and exceeding those commitments.
Rapid Restart Assessment Determines the readiness of a client's network
operations center and provides short-term and long-term
recommendations for addressing its deficiencies.
Network Operation Center Assists clients in evaluating and selecting network and
Architecture and Implementation systems management technologies appropriate for their
network operations centers. Configures and implements
the selected technology and trains clients' operations
staff.
Process and Procedure Development Designs, implements and documents the processes and
procedures required to operate a network operations
center.
Automation, Correlation and Root Automates repetitive management tasks associated with
Cause Analysis Technology operating a network.
Development
</TABLE>
29
<PAGE>
Internetwork Design and Engineering. Our internetwork design and
engineering practice focuses on designing and implementing network solutions in
support of our clients' strategic business initiatives. We have created a team
of seasoned professionals who use their specialized technical skills,
real-world industry experience and methodologies to solve the problems
associated with building and maintaining network foundations. With core
competencies in the areas of backbone technology, local area network switching,
Internet Protocol, or IP, management and design, asynchronous transfer mode, or
ATM, and remote access, our versatile team contributes both technical depth and
breadth to client engagements.
The following table lists some of the services provided by our
internetwork design and engineering practice area:
<TABLE>
<CAPTION>
Service Description
------- -------------
<S> <C>
Advanced Technology Planning and Assists clients in planning and integrating advanced
Migration 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 Designs and deploys secure, high-performance remote
Network 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 Designs and implements Internet Protocol address
Solutions 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>
30
<PAGE>
Performance Management. Our performance management practice leverages
proven methodologies and our extensive experience to help our clients optimize
their networks. We use sophisticated tools and techniques to gather, organize
and warehouse network performance data. This data may subsequently be used for
a number of related performance analysis applications, including capacity
planning, response time management and network simulation modeling. Consultants
in our performance management practice area are experts in applicable
technologies, including core competencies in remote monitoring, or RMON, data
warehousing and discrete event simulation modeling.
The following table lists some of the services provided by our performance
management practice area:
<TABLE>
<CAPTION>
Service Description
------- --------------
<S> <C>
Network Baselining Collects data in order to establish a baseline of network
resource utilization. The baseline is then used as a
comparison against future trends.
Application Impact Analysis Analyzes how an application uses network resources 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 Assists clients' transition from a flat-rate billing model to
Services 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>
31
<PAGE>
Information Security. Our information security practice is focused on
ensuring that the confidentiality, integrity and availability of our clients'
networks are protected. Our information security consultants have practical
experience with a wide array of advanced security technologies, as well as the
social and procedural aspects of security. By translating the complexities of
information security into understandable terms such as risks, costs and
benefits, we enable our clients to make clear and informed decisions about
protecting their information assets.
The following table lists some of the services provided by our information
security practice area:
<TABLE>
<CAPTION>
Service Description
--------- --------------
<S> <C>
Information Security Requirements Assesses clients' physical security environment, the
Analysis 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 Assists customers to create a comprehensive
Development 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 Designs and implements security systems using custom
Implementation configured products to enforce the specific information
security policy of each client.
Incident Response and Digital Provides critical response team services in the event of
Forensics Services a security breach. Restores the operational integrity of
the systems, maintains evidence, provides forensic and
investigative services and facilitates changes to prevent
a recurrence of the breach.
Information Security Assessments Verifies the implementation and effectiveness of clients'
security policies by reviewing and testing their policies,
employee awareness, perimeter security and response
team readiness.
</TABLE>
Service Products
Through our collective experience, we gain insights into the common needs
of our clients. When we determine that a need is both urgent and pervasive, we
standardize our services into a solution referred to as a service product. Our
service products are pre-defined service offerings that are replicable from one
project to another and have a pre-defined set of service deliverables, a
pre-defined pricing model and are implemented using a pre-defined methodology.
In contrast to our project outsource and collaborative consulting services
which provide our clients with services that are customized for, and therefore
unique to, each engagement, our service products are typically provided with
little or no modification.
Our service products offer a number of advantages as compared to custom
consulting engagements. These include:
o efficient delivery of our services over and over again using a
replicable methodology;
o 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;
32
<PAGE>
o ability to more effectively articulate the business benefit of our
services based on observing the impact that our service products have for
other clients; and
o a more flexible pricing strategy that is based on the business benefit to
our clients and not the cost to deliver our services.
Our current service products include:
Information Security Requirements Analysis. This service product is
designed to discover information security weaknesses in our clients' networks
and systems. It provides our clients with the ability to understand where they
are vulnerable to a security threat and both the likelihood and potential cost
of each threat. Our certified security experts assess a client's physical,
administrative and technical security. They then present a report to management
explaining how the security weaknesses that they have found could impact the
client's business and propose strategies for addressing these weaknesses.
Network Assessment. This service product provides a cost-effective expert
analysis of a client's existing network environment. It provides a report that
helps the client to understand the performance and reliability characteristics
of its network and provides specific recommendations for improvements to the
network along with an analysis of the business benefits that can be achieved
through the recommended improvements.
Application Impact Study. This service product provides clients with the
information they need to understand how the deployment of a new application
will impact an existing network. Our consultants use a combination of
sophisticated analysis tools and methodologies to thoroughly understand how an
application uses network resources. They then issue a report on the
application's performance and its impact on the client's network. Clients can
then determine if they need to enhance their network in order to ensure that
their critical applications perform to their requirements.
Network Management Assessment. This service product provides an evaluation
of a client's current network management systems. Our consultants analyze both
a client's 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.
E-Readiness Assessment. This service product provides our enterprise
clients with a comprehensive assessment of their network infrastructure's
readiness to support busness-to-business or business-to-consumer electronic
commerce over the Internet. The e-readiness assessment includes an evaluation
of their network design, a network management systems analysis, a performance
and capacity planning check and a review of information security policies,
procedures and systems. The client receives a report detailing gaps in the
network infrastructure that could adversely impact e-business transactions and
a priortized list of suggested infrastructure enhancements.
E-Business Risk Analysis. This service product helps our financial
services clients to measure, monitor and control risks arising from doing
business over the Internet. Using risk categories that are recognized by
industry regulators, the E-Business Risk Analysis provides a quantitative
profile of network infrastructure-related risks and a range of suggested
mitigation alternatives.
33
<PAGE>
Clients
We provide professional network services to a variety of clients across a
broad range of industries including:
<TABLE>
<S> <C> <C> <C>
Bear Stearns Deutsche Bank ICG Primus Telecom
Bell Atlantic DLJdirect ING Barings Furman Selz PSINet
BellSouth EMC INTELSAT Qwest
Bose Enron Communications Mary Kay Cosmetics Raytheon
British Telecom Exodus Communications MCI WorldCom SIAC
Cable & Wireless Fidelity Investments Navisite State Street Bank
Cignal Global Comm. First Union Norfolk Southern Teligent
Cisco Fleet Bank Pepsi Union Bank of
Comdisco homeruns.com Pershing California
CTC Communications iBEAM Broadcasting Pfizer UUNET
</TABLE>
Representative Client Case Studies
The following case studies are representative of some of the network
consulting services that we have provided to our clients.
UUNET. UUNET, the Internet services division of MCI WorldCom, is a global
leader in Internet communications solutions to businesses worldwide. UUNET has
built its reputation on providing high-quality services such as Internet
access, web hosting, remote access and other value-added networking services.
To ensure its ability to provide clients with the highest levels of service,
UUNET constructed one of the most rigorously-engineered and widely deployed
Internet-protocol networks in the world. UUNET currently offers service to more
that 70,000 businesses in 114 countries throughout North America, Europe and
Asia Pacific. UUNET selected us to develop its next-generation Internet-based
service offering, Virtual Private Networking.
Virtual Private Networks, or VPNs, provide secure, encrypted connections
over the public Internet that allow businesses to communicate privately without
having to build separate private networks. While UUNET's own network systems
engineers are among the most experienced in the world, they wanted an
independent assessment of their VPN system design. We worked with UUNET to
develop a comprehensive VPN solution, including network management, service
provisioning and fulfillment, and network security. We also worked successfully
with UUNET to ensure that the VPN was scalable across UUNET's global network,
both in terms of functionality, ease of deployment and ease of operation.
Finally, we helped develop and document the processes and procedures necessary
to efficiently operate the service.
The success of UUNET's VPN service has led to other collaborations with
us, including the development of UUNET's Internet-based fax service and branded
dial-up Internet access service.
BT Syncordia Solutions. BT Syncordia Solutions, a division of British
Telecom, is Europe's second largest provider of managed and outsourced network
solutions. BT Syncordia manages the infrastructure of more than 27,000 clients
in 46 countries. BT Syncordia-managed networks carry a significant portion of
the commercial banking transactions in the United Kingdom. In order to meet the
availability requirements of its customers, BT Syncordia turned to us to help
it design and build a world-class network operations center.
We used our BusinessFirst methodology and extensive technical experience
to design and build a network operations center for BT Syncordia. We integrated
sophisticated network management
34
<PAGE>
tools that could manage BT Syncordia's multi-vendor network and easily
incorporate changes due to increases in network traffic, introduction of new
services and increases in customer base. We also instituted processes and
procedures that enabled BT Syncordia's operations staff to act rapidly to
identify and resolve network performance issues.
Union Bank of California. Union Bank of California has been a leader in
the development of on-line banking products and services. Its early entry into
the on-line banking arena has allowed it to effectively utilize the Internet to
conduct a significant amount of banking transactions each day. Critical to the
continued success and growth of Union Bank of California's on-line presence is
the security of its networks. Union Bank of California has turned to us to
address its network security requirements.
Even though Union Bank of California had designed and implemented
sophisticated security technology solutions, it enlisted our help to validate
its security program and to assist it in highlighting deficiencies or
vulnerabilities in its existing security program. We performed a thorough
assessment of its perimeter defenses, encryption strategy, authentication
techniques, and operational processes and procedures. Our efforts helped Union
Bank of California make necessary changes to its infrastructure, security
systems and operational policies that significantly improved the security of
their Internet banking and other on-line initiatives. We also created an
ongoing review process to ensure continued, optimal security.
Sales and Marketing
We have developed direct and indirect sales channels for the sale of our
services. To facilitate our direct sales effort we have developed the
infrastructure necessary to capture and track the major sales indicators
through the sales cycle. Additionally, a significant amount of time and effort
has been and will continue to be invested in the development of tools, training
materials and training for sales and technical personnel. Our service products
have provided us with an opportunity to develop strategic third-party
relationships with hardware, software service and telecommunications providers
in order to expand our sales channel. As a result, we are developing an
indirect sales channel through relationships with third-party strategic
partners. We have developed a number of strategic relationships, including
alliances with Cisco Systems and BellSouth. Under these relationships, our
partners recommend or directly resell our services to their clients, including
our service products and our consulting services on a project outsource basis.
For example, we serve as BellSouth's preferred provider of network consulting
for their business customers. Companies can contact BellSouth as the single
point of accountability for their e-business needs, reducing the investment in
time and resources needed to implement effective solutions. We intend to
continue to expand the scope of these relationships and to develop new
strategic alliances to further broaden the indirect sales channel for our
services.
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 December 31, 1999, we had 416 full-time employees.
Recruiting. Our success is dependent in part on attracting and retaining
talented and motivated personnel at all levels. Accordingly, we invest
significant resources in our recruiting efforts. We have a proactive recruiting
philosophy and believe in a broad-based model for attracting candidates.
Generally, we hire technical consultants according to profiles that fit into
one of our four practice areas.
Corporate Culture. Our corporate culture is shaped by our view of
employees as investors because they choose to invest their talents, skills,
time and energy into our organization. This mindset is critical to our ability
to attract and retain professional staff at a time when information
35
<PAGE>
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 Systems 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 an employee stock
purchase plan.
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, network services firms, telecommunications providers, network
equipment and computer systems vendors. Many of our competitors have greater
name recognition, longer operating histories, more relationships with large and
established clients and greater financial, technical and managerial resources.
Furthermore, we expect that our competitors may in the future form alliances
with other technology vendors, which may give them an advantage in managing
networks that use that vendor's equipment.
Most of our current clients and prospective clients have internal
information technology departments and could choose to satisfy their network
management needs through internal resources rather than by outsourcing them to
third-party service providers such as ourselves. The decision by clients or
prospective clients to rely on their own information technology departments
could have a material adverse affect on our business, results of operations and
financial condition. Moreover, as the domestic and global markets for
information technology services continue to grow, we expect to face stiff
competition from new entrants into the network management consulting industry.
We believe that the principal competitive factors in the network
management market are the ability to attract and retain qualified personnel,
quality and breadth of services offered, price and reliability of services
provided and the strength of client relationships. We believe we compete
favorably with respect to all of these factors. We believe we distinguish
ourselves from our competitors through our expertise in managing complex,
multi-vendor networks and our ability to provide clients with cost certainty
and guaranteed deliverables.
Intellectual Property and Proprietary Rights
We regard our copyrights, trade secrets and other intellectual property as
critical to our success. Unauthorized use of our intellectual property by third
parties may damage our brand and our reputation. We rely on trademark and
copyright law, trade secret protection and confidentiality and/or license and
other agreements with our employees, customers, partners and others to protect
our intellectual property rights. Despite our precautions, it may be possible
for third parties to obtain and use our intellectual property without our
authorization. Furthermore, the validity, enforceability and scope of
protection of intellectual property in Internet-related industries is 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.
36
<PAGE>
We pursue the registration of our trademarks in the United States and
England. We may not be able to secure adequate protection of our trademarks in
the United States and other countries. We currently have applied for trademark
registrations in the United States and England for the PREDICTIVE SYSTEMS and
BUSINESSFIRST marks, and further, a trademark application in the United States
for the Predictive logo. The United States Patent and Trademark Office has
raised preliminary objections to the registration of the BUSINESSFIRST mark and
the Predictive logo on a number of grounds, including likelihood of confusion
with pre-existing trademarks. We have responded to these objections and are
awaiting the 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 any
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 located in approximately 32,000 square
feet of office space in New York, New York, with an option for an additional
32,000 square feet available by March 2001. We also lease office space in
California, Georgia, Massachusetts, New Jersey, North Carolina, Texas, Virginia,
England and The Netherlands.
We believe that our existing facilities are adequate for our current needs
and that additional space will be available as needed.
Legal Proceedings
Except as set forth below, we are not a party to any material legal
proceedings.
In an action entitled Art Eckert vs. Predictive Systems, Inc., in October
1999, a former employee commenced an action against us in New York Supreme
Court (Putnam County) seeking damages for various claims relating to his
employment. The former employee is claiming damages totaling approximately $16
million. In December of 1999, we filed a motion to dimiss one of the claims.
The former employee has opposed our motion and filed an amended complaint
containing the same claims in slightly different form. We believe that these
claims are without merit and intend to continue to vigorously defend ourselves
against them.
37
<PAGE>
MANAGEMENT
The following table sets forth our executive officers, directors and key
employees, their ages and the positions they hold:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------ ----- --------------------------------------------------
<S> <C> <C>
Ronald G. Pettengill, Jr. .......... 41 Chairman of the Board and Chief Executive Officer
Robert L. Belau .................... 36 President and Director
Gerard E. Dorsey ................... 53 Chief Financial Officer
Thomas R. Joseph ................... 32 Vice President, General Manager North America
Carl D. Humes ...................... 34 Vice President, Global Operations
Gregory D. Nicastro ................ 40 Vice President, Services Strategy
Neeraj Sethi ....................... 36 Vice President, Finance
R. Kevin Holt ...................... 46 Vice President, Human Resources
John Wright ........................ 36 Managing Director, Europe
Gary N. Papilsky ................... 28 Vice President and General Counsel
Peter L. Bloom (1) ................. 42 Director
Donald J. Duffy (1) ................ 32 Director
Braden R. Kelly (2) ................ 29 Director
Eric Meyer (2) ..................... 39 Director
Inder Sidhu ........................ 39 Director
William L. Smith ................... 42 Director
William W. Wyman (2) ............... 62 Director
</TABLE>
- ------------
(1) Member of the compensation committee
(2) Member of the audit committee
Ronald G. Pettengill, Jr. co-founded Predictive in February 1995 and has
been Chairman of the Board and Chief Executive Officer since that time. Prior
to founding Predictive, Mr. Pettengill was Senior Vice President of Network
Operations at Allerion, Inc., a systems integration and network control center
design, operation and service delivery firm, from 1992 to 1995. From 1990 to
1992, Mr. Pettengill was the Director of Technical Services at Network
Management, Inc., which provided consulting services to assist Fortune 500
companies migrate from mainframe to network-based client/server environments.
Prior to working at Network Management, Mr. Pettengill was the Network Manager
at Bear, Stearns & Co. Inc.
Robert L. Belau co-founded Predictive in February 1995 and has been
President and a Director since that time. Prior to founding Predictive, Mr.
Belau was Director of Sales at Allerion, and also managed the definition,
productization and pricing of its network management outsourcing services, from
1993 to 1995. From 1987 to 1993, Mr. Belau was the Director of Sales at Network
Management. Mr. Belau is the step-brother of Eric Meyer, one of our directors.
Gerard E. Dorsey has been Chief Financial Officer since September 1999.
Prior to joining us, Mr. Dorsey was Senior Vice President-Finance, Chief
Financial Officer and Secretary of Intelligroup, Inc., a professional
information technology consulting services company, from 1998 to 1999. From
1995 to 1998, Mr. Dorsey was Senior Vice President-Finance and Chief Financial
Officer of Ariel Corporation, a data communications company. Prior to joining
Ariel Corporation, from 1991 until 1995, Mr. Dorsey was Chief Financial Officer
of Information Management Technologies Corporation, a printing and office
services outsourcing company. From 1987 until 1990, Mr. Dorsey was Treasurer of
Loral Corporation.
Thomas R. Joseph has been Vice President, General Manager North America
since April 1999. Prior to that Mr. Joseph held various positions with us, most
recently as National Vice President of Business Development, from 1996 to 1999.
From 1994 to 1996, Mr. Joseph was a Global Accounts Manager at Metropolitan
Fiber Systems, a competitive access provider.
38
<PAGE>
Carl D. Humes has been Vice President, Global Operations since April 1999.
Prior to that Mr. Humes served as Regional Vice President of Technical Services
for our Mid-Atlantic region since 1996. From 1995 to 1996, Mr. Humes was a
consultant at Booz-Allen & Hamilton, a strategic consulting firm. Prior to
that, Mr. Humes was an officer in the United States Navy, and served on a
nuclear submarine and at the White House Office of Emergency Operations.
Gregory D. Nicastro has been Vice President, Services Strategy since April
1999. Prior to that, Mr. Nicastro served as Vice President of Marketing since
1997. Prior to joining us, Mr. Nicastro founded ActingExec, a marketing
consulting firm, in 1995. From July 1995 to October 1995, Mr. Nicastro was
Director of Systems Marketing at 3Com Corporation. From 1988 to 1995, Mr.
Nicastro served as National Account Sales Manager at Sun Microsystems.
Neeraj Sethi has been Vice President, 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, Human Resources since March 1999.
Prior to joining us, Mr. Holt was a Managing Partner at USWeb/CKS (formerly
USWeb). Prior to the merger of USWeb/CKS and Gray Peak Technologies, Mr. Holt
served as Vice President and Director of Recruiting at Gray Peak, a high-end
network solutions provider. From October 1995 until September 1997, Mr. Holt
served as the Eastern Division Recruiting Manager at Sprint-Paranet, a global
network solutions provider. Previously, Mr. Holt was the Founder and President
of Metropolitan Search, a contingency and retained search and consulting
company.
John Wright has been Managing Director, Europe since January 1999. Prior
to joining us, Mr. Wright founded Visia Management Consultants, a strategic
consulting company, in 1997. From 1996 to 1997, Mr. Wright served as Director,
Business Development at Global Village, a communications software firm. From
1987 to 1996, Mr. Wright served in various roles at Gandalf Digital
Communications, including, most recently, Director of Indirect Channels.
Gary N. Papilsky has been Vice President and General Counsel since October
1999. Prior to joining us, Mr. Papilsky was an attorney with Brobeck, Phleger &
Harrison LLP, a law firm specializing in emerging growth technology companies,
from 1998 to 1999. From 1996 to 1998, Mr. Papilsky was an attorney with the law
firm of Sonnenschein Nath & Rosenthal.
Peter L. Bloom has been a director of Predictive since March 1999. Mr.
Bloom is a managing member of General Atlantic Partners, LLC, a private equity
investment firm that focuses exclusively on Internet and information technology
investments on a global basis, and has been at General Atlantic since 1995.
From 1982 to 1995, Mr. Bloom served in various roles at Salomon Brothers,
including as Managing Director of Salomon's U.S. Technology Division. Mr. Bloom
is a Director of Bindview Development Corporation and a Special Advisor to the
Board of Directors of E*TRADE Group, Inc.
Donald J. Duffy has been a director of Predictive since its inception in
February 1995. Mr. Duffy is a co-founder of Meyer, Duffy & Associates, Inc.,
and Meyer Duffy Ventures, firms that invest in early stage networking and
Internet technology companies. 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 a principal 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 a director of Predictive since its inception in
February 1995. Mr. Meyer is a co-founder of Meyer, Duffy & Associates and Meyer
Duffy 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.
39
<PAGE>
Inder Sidhu has been a director of Predictive since September 1999. Mr.
Sidhu has been the Vice President of Worldwide Professional Services at Cisco
since December 1998. From 1995 to 1998, Mr. Sidhu served in various executive
management positions in the Sales and Business Development organizations at
Cisco. From 1991 to 1995 Mr. Sidhu was a consultant at McKinsey & Company.
Prior to that, Mr. Sidhu led a network management group at 3Com Corporation.
William L. Smith has been a director of Predictive since March 2000. Mr.
Smith has been with BellSouth since 1979, most recently serving since January
2000 as its Executive Vice President of Network Planning and Chief Technology
Officer, where he is responsible for, among other things, strategic planning of
BellSouth's telecommunications infrastructure, as well as its product
development, Internet, entertainment and long distance units. From February
1998 to December 1999 he served as Vice President -- Network Strategic Planning
for BellSouth Telecommunications, BellSouth's domestic telephone unit. Prior to
that he served as President of BellSouth's Internet unit from December 1997
through January 1998 and from September 1996 to November 1997 as Executive
Director -- Product Commercialization Unit. From January 1995 to August 1996,
he served as Assistant Vice President -- Data Services Unit for BellSouth.
William W. Wyman has been a director of Predictive since September 1999.
Since 1995, Mr. Wyman has been a business advisor and counselor on a broad
range of issues to a number of corporate chief executives of financial
services, information services, forest products and software companies. From
1984 to 1995, Mr. Wyman was a partner at Oliver, Wyman & Company, a firm which
specializes in management consulting to large financial institutions and which
he co-founded. Mr. Wyman is a director of SS&C Technologies and U.S.
Timberlands. He also serves as a trustee of the Dartmouth Hitchcock Medical
Center and on the Boards of Advisors of The Sprout Group, a venture capital
fund associated with Donaldson, Lufkin & Jenrette, and Legend Capital, a
leveraged buyout firm associated with Castle Harlan Investments.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving
staggered three year terms. Upon expiration of the term of a class of
directors, the directors in that class will be elected for three-year terms at
the annual meeting of stockholders in the year in which their term expires.
Messrs. Pettengill, Belau and Duffy are our Class I directors whose terms
expire at the 2000 annual meeting of stockholders. Messrs. Bloom, Meyer and
Wyman are our Class II directors whose terms expire at the 2001 annual meeting
of stockholders. Messrs. Kelly, Sidhu and Smith are our Class III directors
whose terms expire at the 2002 annual meeting of stockholders. These
provisions, when coupled with the provision of our amended and restated
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies with its own
nominees.
Board Committees
The audit committee reports to the board of directors regarding the
appointment of our independent public accountants, the scope and results of our
annual audits, compliance with our accounting and financial policies and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. Meyer,
Kelly and Wyman who were appointed in May 1999, June 1999 and September 1999,
respectively. Prior to that time, the responsibilities of the audit committee
were handled by the entire board of directors.
The compensation committee reviews and makes recommendations to the board
of directors regarding our compensation policies and all forms of compensation
to be provided to our executive officers and directors. In addition, the
compensation committee reviews bonus and stock compensation arrangements for
all of our other employees. The members of the compensation committee are
Messrs. Duffy and Bloom, who were appointed in May 1999. Prior to that time,
the responsibilities of the compensation committee were handled by the entire
board of directors.
40
<PAGE>
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:
o Messrs. Pettengill and Duffy served, through September 1999, and Messrs.
Belau and Meyer currently serve, on the board of directors of Tribeca
Software, a network management software company; Messrs. Pettengill and
Belau served, through September 1999, as executive officers of Tribeca, and
Mr. Meyer currently serves as an executive officer of Tribeca. Please see
"Certain Transactions--Tribeca Software" for information about our
relationship with Tribeca.
o 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.
o Our directors have engaged in various other transactions with us. For
information about these transactions please see "Certain
Transactions--Relationship with Cisco," "--Sale of Common Stock," "--Sales
of Series A Convertible Preferred Stock and Warrants," "--Share
Redemption," "--Meyer, Duffy & Associates," "--Loans to Officers" and
"--Option Grants."
Director Compensation
We do not currently compensate our directors for attending meetings of the
board of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings. Each of Messrs. Bloom, Duffy, Kelly and Meyer
were granted options to purchase 25,000 shares of our common stock at a price
of $4.00 per share in May 1999. Messrs. Sidhu and Wyman were granted options to
purchase 25,000 shares of our common stock at a price of $11.05 per share in
September 1999. Mr. Smith was granted options to purchase 25,000 shares of our
common stock at a price of $60.50 per share in March 2000. 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 November 1, 1999 as a non-employee
member of the board of directors will also receive an option grant for 25,000
shares of our common stock at the time of his or her commencement of service on
the board of directors. In addition, at each annual meeting of stockholders,
beginning with the 2001 annual meeting, each individual who is to continue to
serve as a non-employee member of the board of directors will receive an option
to purchase 2,500 shares of our common stock.
41
<PAGE>
Executive Compensation
The following table sets forth the total compensation paid or accrued
during the fiscal years ended December 31, 1999 and 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 1999 exceeded
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
---------------------- --------------------
Shares Underlying All Other
Name and Principal Position Year Salary $ Bonus $ Options Compensation
- --------------------------------------------- ------ ---------- ---------- -------------------- ----------------
<S> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr. ................... 1999 $195,833 $75,000 200,000 $ 12,157(1)
Chief Executive Officer 1998 175,000 50,000 60,000 8,447(1)
Robert L. Belau ............................. 1999 195,833 75,000 200,000 9,839(1)
President 1998 175,000 50,000 60,000 8,899(1)
Thomas R. Joseph ............................ 1999 150,000 99,000 100,000 6,600(2)
Vice President, General Manager 1998 112,500 190,000 270,000 3,000(2)
North America
Carl D. Humes ............................... 1999 150,000 64,000 60,000 6,000(2)
Vice President, Global Operations .......... 1998 112,500 190,000 270,000 3,000(2)
Gregory D. Nicastro ......................... 1999 154,700 50,000 -- --
Vice President, Strategic Services ......... 1998 140,000 14,000 -- --
Neeraj Sethi ................................ 1999 170,000 70,000 70,000 5,000
Vice President, Finance 1998 135,167 55,000 -- --
R. Kevin Holt ............................... 1999 110,833 100,000 130,000 --
Vice President, Human Resources 1998 -- -- -- --
</TABLE>
- ------------
(1) We paid a monthly car allowance and automobile insurance premiums for each
of Messrs. Pettengill and Belau during the years ended December 31, 1999
and 1998.
(2) We paid a monthly car allowance effective July 1998 for each of Messrs.
Joseph and Humes during the years ended December 31, 1999 and 1998.
42
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options for the year ended
December 31, 1999 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 $100,000. Mr. Nicastro was not
granted stock options in the year ended December 31, 1999. We have never
granted any stock appreciation rights. The potential realizable value is
calculated based on the term of the option at its time of grant. It is
calculated assuming that the fair market value of common stock on the date of
grant appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price. These numbers are calculated
based on the requirements of the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth. The percentage of total
options granted to employees in the last fiscal year is based on options to
purchase an aggregate of 3,686,990 shares of common stock granted under our
option plans.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Per Expiration ------------------------------
Name Granted In 1999 Share ($) Date 5% 10%
- ----------------------------------- ------------ --------------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr. ......... 200,000 5.4% $ 4.00 5/11/09 $19,522,400 $30,089,115
Robert L. Belau ................... 200,000 5.4 4.00 5/11/09 19,522,400 30,089,115
Thomas R. Joseph .................. 100,000 2.7 6.50 7/1/09 9,511,200 14,794,557
Carl D. Humes ..................... 60,000 1.6 6.50 7/1/09 5,416,400 8,034,304
Neeraj Sethi ...................... 70,000 1.9 2.50 4/1/09 6,937,840 10,636,190
R. Kevin Holt ..................... 130,000 3.5 2.50 3/1/09 12,255,533 17,927,659
</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 1999 and the number and value of unexercised
options held by each of our named executive officers at December 31, 1999. The
last reported sale price of our common stock on December 31, 1999 was $65.50
per share. Accordingly, the values set forth below have been calculated on the
basis of the fair market value on December 31, 1999 less the applicable
exercise price per share, multiplied by the number of shares underlying the
options.
<TABLE>
<CAPTION>
Options at In-the-Money Options
Fiscal Year-End at Fiscal Year-End
------------------------------ -----------------------------
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value ------------------------------ -----------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------- ------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ronald G. Pettengill, Jr. ......... -- -- 830,000 150,000 $53,510,000 $ 9,225,000
Robert L. Belau ................... -- -- 830,000 150,000 53,510,000 9,225,000
Thomas R. Joseph .................. -- -- 270,000 190,000 17,370,030 11,667,500
Carl D. Humes ..................... -- -- 270,000 150,000 17,332,500 9,307,500
Gregory D. Nicastro ............... -- -- 84,000 252,000 5,397,000 16,191,000
Neeraj Sethi ...................... -- -- 120,000 130,000 7,722,500 8,265,000
R. Kevin Holt ..................... -- -- 32,500 97,500 2,047,500 6,142,500
</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 a 1999
performance-based bonus, which totalled $75,000, and bonuses in all subsequent
years at the discretion of our Board of Directors. Under the agreements, each
executive
43
<PAGE>
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 extension or
earlier termination. 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 or one year from the date of termination. Additionally,
all stock options granted to them will immediately vest.
Under the agreements, good reason includes:
o a material breach of the agreements by us;
o a material change in the executive's duties and responsibilities;
o a change in the executive's reporting relationship;
o a relocation of our executive offices further than 75 miles from its
current location; or
o a change of control.
Each employment agreement prohibits Messrs. Pettengill and Belau from
competing with us, or soliciting our customers or employees, for a period of
one year from the date of their termination of employment.
We have also entered into an employment agreement with R. Kevin Holt, our
Vice President of Human Resources, John Wright, Managing Director Europe, and
Gerard E. Dorsey, our Chief Financial Officer. Mr. Holt's agreement provides
for an initial annual base salary of $130,000 and for a 1999 performance-based
bonus, which totaled $100,000, and bonuses in all subsequent years based upon
the achievement of certain hiring goals. Under the agreement, Mr. Holt received
options to purchase 130,000 shares of our common stock at a price of $2.50 per
share, which vest over four years.
Our employment agreement with Mr. Holt expires on January 23, 2001,
subject to earlier termination. Mr. Holt's agreement provides that if he is
terminated by us without cause or if he terminates his employment with us for
good reason, he will be entitled to receive his base salary until the earlier
of six months after the date of his termination or the date he accepts new
employment. Under the agreement, good reason includes:
o a reduction in Mr. Holt's base salary;
o a relocation of Mr. Holt's office further than 50 miles from his current
office; or
o 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
British Pounds71,200, approximately $114,000 at an exchange rate of 1.60, plus
a bonus based on our performance. Under the agreement, Mr. Wright received
options to purchase 80,000 shares of our common stock at a price of $2.50 per
share, which vest over four years. We agreed to contribute an amount equal to
5% of Mr. Wright's base salary to a pension plan. The employment agreement
prohibits Mr. Wright from competing with us and soliciting our employees for a
period of 6 and 12 months, respectively, from the termination of his
employment. The agreement is in effect until terminated by either party by
giving at least 3 months notice to the other party.
Our agreement with Mr. Dorsey provides for an initial base salary of
$210,000 and an annual bonus of up to a maximum of $75,000. Under the
agreement, Mr. Dorsey received options to
44
<PAGE>
purchase 175,000 shares of our common stock at a price of $11.05 per share,
which vest over 4 years. Our agreement further provides that Mr. Dorsey will
receive an automobile allowance of $650 per month. The agreement prohibits Mr.
Dorsey from competing with us and soliciting our employees for a period of one
year from the termination of his employment. The agreement has an initial term
of three years, and renews automatically for successive one year periods unless
written notice is given by either party. Our employment agreement with Mr.
Dorsey expires on September 24, 2002, subject to extension or earlier
termination. Mr. Dorsey's agreement provides that if he is terminated by us
without cause or if he terminates his employment agreement with us for good
reason, he will be entitled to receive his base salary until the earlier of
twelve months after the date of his termination or the date he accepts new
employment. Under terms of this agreement good reason includes if Mr. Dorsey
terminates his employment within 30 days after a change in control of
Predictive. If Mr. Dorsey is terminated by us without cause or if he terminates
his employment agreement with us for good reason, any unvested options will
vest immediately.
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 and was
approved by our stockholders on that date.
6,655,600 shares of common stock have been authorized for issuance under
the 1999 Plan. This share reserve consists of the shares which were available
for issuance under the predecessor plans on the effective date of the 1999 Plan
plus an additional increase of 2,345,597 shares. The share reserve will
automatically be increased on the first trading day of January each calendar
year, beginning in January 2001, by a number of shares equal to 1% of the total
number of shares of common stock outstanding on the last trading day of the
immediately preceding calendar year, but no such annual increase will exceed
500,000 shares. However, in no event may any one participant in the 1999 Plan
receive option grants or direct stock issuances for more than 500,000 shares in
the aggregate per calendar year.
Outstanding options under the predecessor plans were incorporated into the
1999 Plan upon the date of our initial public offering, and no further option
grants may 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:
o 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;
o 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;
o 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;
o the automatic option grant program under which option grants are
automatically made at periodic intervals to eligible non-employee board
members; and
o 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.
45
<PAGE>
The discretionary option grant and stock issuance programs are
administered by our compensation committee. This committee determines 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 also selects 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 exercises any administrative
discretion with respect to option grants made under the salary investment
option grant program or under the automatic option grant or director fee option
grant program for the non-employee board members.
The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by
the optionee. In addition, the compensation committee may allow a participant
to pay the option exercise price or direct issue price (and any associated
withholding taxes incurred in connection with the acquisition of shares) with a
full-recourse, interest-bearing promissory note.
In the event that we are acquired, whether by merger or asset sale or
board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent our repurchase rights with respect to those shares are to
be assigned to the successor corporation or otherwise continued in effect. The
compensation committee may grant options under the discretionary option grant
program which will accelerate in the acquisition even if the options are
assumed or which will accelerate if the optionee's service is subsequently
terminated. The compensation committee may grant options and issue shares which
accelerate in connection with a hostile change in control effected through a
successful tender offer for more than 50% of our outstanding voting stock or by
proxy contest for the election of board members) or the options and shares may
accelerate upon a subsequent termination of the individual's service.
Options currently outstanding under the plan may be assumed by the
successor corporation in an acquisition; such options are not by their terms
subject to acceleration at the time of an acquisition or a change in control or
upon the termination of the optionee's service following any such transaction.
Stock appreciation rights may be issued under the discretionary option
grant program which will provide the holders with the election to surrender
their outstanding options for an appreciation distribution from us equal to the
fair market value of the vested shares subject to the surrendered option less
the aggregate exercise price payable for such shares. This appreciation
distribution may be made in cash or in shares of our common stock. There are
currently no outstanding stock appreciation rights under the predecessor plans.
The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program (including options incorporated
from predecessor plans) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.
In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $5,000 nor more than $50,000. In
return,
46
<PAGE>
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 our initial public offering as a non-employee board member will
automatically be granted an option for 25,000 shares of our common stock at the
time of his or her commencement of board service. In addition, on the date of
each annual stockholders meeting, beginning with the 2001 meeting, each
individual who has served as a non-employee board member since the last annual
stockholders meeting will receive an option grant to purchase 2,500 shares of
our common stock. Each automatic grant will have an exercise price equal to the
fair market value per share of our common stock on the grant date and will have
a maximum term of 10 years, subject to earlier termination following the
optionee's cessation of board service. Each option will be immediately
exercisable, subject to our right to repurchase any unvested shares, at the
original exercise price, at the time of the board member's cessation of
service. The options will vest, and our repurchase right will lapse, with
respect to, the initial 25,000-share option grant in a series of four (4) equal
successive annual installments upon the optionee's completion of each year of
service over the four (4)-year period measured from the grant date. However,
each such outstanding option will immediately vest upon an acquisition or
change in control or the death or disability of the optionee while serving as a
board member. Each 2,500-share option grant will be fully vested on grant.
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically be made on the first trading day in
January in the year for which the non-employee board member would otherwise be
paid the cash retainer fee in the absence of his or her election. The option
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per share of our
common stock on the grant date. As a result, the fair market value of the
option shares on the grant date less the exercise price payable for those
shares will be equal to the portion of the retainer fee applied to that option.
The option will become exercisable in a series of twelve equal monthly
installments over the calendar year for which the election is in effect.
However, the option will become immediately exercisable for all the option
shares upon the death or disability of the optionee while serving as a board
member.
Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant, director fee option grant
and salary investment option grant programs and may be granted to one or more
officers as part of their option grants under the discretionary option grant
program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than
50% of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the highest price per share of our common
stock paid in connection with the tender offer less the exercise price payable
for such share.
The board may amend or modify the 1999 Plan at any time, subject to any
required stockholder approval. The 1999 Plan will terminate no later than
September 14, 2009.
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan was adopted by the board on September 14,
1999 and approved by our stockholders on that date. The plan became effective
on October 27, 1999. The
47
<PAGE>
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 may be issued under the plan.
The plan has a series of successive offering periods, each with a maximum
duration of 24 months. The initial offering period began on October 27, 1999
and will end on the last business day in October 2001. The next offering period
will begin on the first business day in November 2001, and subsequent offering
periods will be set by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on that start date or on any subsequent semi-annual
entry date (generally May 1 or November 1 each year). Individuals who become
eligible employees after the start date of the offering period may join the
plan on any subsequent semi-annual entry date within that period.
A participant may contribute up to 10% of his or her cash earnings through
payroll deductions and the accumulated payroll deductions will be applied to
the purchase of shares on the participant's behalf on each semi-annual purchase
date (the last business day in January and July each year). The purchase price
per share will be 85% of the lower of the fair market value of our common stock
on the participant's entry date into the offering period or the fair market
value on the semi-annual purchase date. The first purchase date will occur on
the last business day in April 2000. In no event, however, may any participant
purchase more than 500 shares, nor may all participants in the aggregate
purchase more than 187,500 shares on any one semi-annual purchase date. Should
the fair market value of our common stock on any semi-annual purchase date be
less than the fair market value on the first day of the offering period, then
the current offering period will automatically end and a new offering period
will begin, based on the lower fair market value.
The board may at any time amend or modify the plan. The plan will
terminate no later than the last business day in October 2009.
48
<PAGE>
CERTAIN TRANSACTIONS
Relationship with Cisco
In September 1999, we sold 1,242,000 shares of our common stock to Cisco
for $12.00 per share. In connection with the investment, we have agreed to
nominate a person designated by Cisco to our Board of Directors so long as
Cisco owns more than 750,000 shares of our common stock. Additionally, we
provide network consulting services to Cisco pursuant to an existing agreement
negotiated by the parties in an arm's-length transaction. This agreement
expires in May 2003 and governs the terms and conditions that apply to all
consulting services performed by us for Cisco and for customers of Cisco. This
agreement provides that if we give more favorable rates to another client we
will inform Cisco and Cisco will have the right to terminate this agreement. In
fiscal 1998 and 1999, revenues from Cisco were $35,190 and $2,240,229,
respectively. Inder Sidhu, one of our directors, is the Vice President of
Worldwide Professional Services at Cisco.
Sale of Common Stock
In September 1999, we sold 94,867 and 18,133 shares of our common stock to
General Atlantic Partners 57 and GAP Coinvestment Partners II, respectively,
for $12.00 per share. Peter L. Bloom and Braden R. Kelly, our directors, are,
respectively, a managing member and a principal of General Atlantic Partners,
LLC. General Atlantic Partners, LLC is the general partner of General Atlantic
Partners 57 and the managing members of General Atlantic Partners, LLC are also
the general partners of GAP Coinvestment Partners II.
Tribeca Software
In March 1998, we made a pro rata distribution of all of the outstanding
shares of our former subsidiary, Tribeca Software, Inc., to our stockholders.
Of the 1,501,700 then outstanding shares of Tribeca, we distributed the
following amounts to our officers, directors and 5% stockholders and their
affiliates:
Number of Shares
Name of Stockholder of Tribeca
- ---------------------------------------- -----------------
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
- ------------
(1) Boyce Meyer was the father of Eric Meyer and the stepfather of Robert L.
Belau.
Subsequent to this transaction, Tribeca purchased from us, and we assigned
to Tribeca, network management software and other assets, including computer
and office equipment. As payment for these assets, Tribeca gave us a demand
note in the amount of $130,000, which accrued interest at 8% per annum.
Additionally, we gave Tribeca a $1,000,000 line of credit at an interest rate
of 8% per annum. In March 1999, Tribeca paid us the full amounts due under the
demand note and line of credit and the line of credit was terminated. The
largest amount outstanding under the line of credit was $988,800.
From March 1998 through June 1999, we performed payroll, accounting and
other administrative services for Tribeca for a fee of $7,000 per month.
Additionally, Tribeca leases office space and
49
<PAGE>
equipment from us for approximately $8,000 per month as of January 1, 2000,
which monthly payment had been approximately $12,000 through December 31, 1999.
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, and
Donald J. Duffy, our director, were directors of Tribeca until September 1999
and own shares of Tribeca's common stock. Robert L. Belau, our President, and
Eric Meyer, our director, are directors of Tribeca and own shares of common
stock of Tribeca. Additionally, Messrs. Pettengill and Belau served as executive
officers of Tribeca until September 1999 and Mr. Meyer has served as Tribeca's
interim Chief Executive Officer since September 1999.
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
equaled 15% of the number of shares registered in our initial public offering,
at $18.00 per share, to six accredited investors for an aggregate purchase
price of approximately $18.6 million. General Atlantic Partners 54, L.P.
purchased 5,350,441 shares and GAP Coinvestment Partners II purchased 1,112,765
shares. Peter L. Bloom and Braden R. Kelly, our directors, are respectively a
managing member and a principal of General Atlantic Partners, LLC. General
Atlantic Partners, LLC is the general partner of General Atlantic Partners 54
and the managing members of General Atlantic Partners, LLC are also the general
partners of GAP Coinvestment Partners II. The purchase price for the series A
convertible preferred stock was $2.85 per share. On the closing of our initial
public offering, the series A convertible preferred stock converted into
6,512,316 shares of our 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:
Number of Shares Aggregate
Name of Stockholder Redeemed Consideration
- ----------------------------------- ------------------ --------------
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
Eric Meyer and Donald J. Duffy, our directors, 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
they provided us with consulting and advisory services regarding capital
raising and strategic partnerships. Eric Meyer and Donald J. Duffy, our
directors, serve as co-managing Directors of Meyer, Duffy & Associates. We
50
<PAGE>
paid Meyer, Duffy & Associates a retainer fee of $5,000 per month in connection
with these services through March 31, 1999, the date that the agreement
terminated. Additionally, in August 1998, we loaned Meyer, Duffy & Associates,
L.P., in connection with the exercise of options, $300,000 at an interest rate
of 7% per annum. Meyer, Duffy & Associates, L.P. repaid this loan in March
1999. Messrs. Meyer and Duffy are the general partners of Meyer, Duffy &
Associates, L.P.
Loans to Officers
In August 1998, in connection with the exercise of options, we loaned each
of Ronald G. Pettengill, Jr., our Chairman and Chief Executive Officer and
Robert L. Belau, our President, $97,500 at an interest rate of 7% per annum.
Messrs. Pettengill and Belau repaid those loans in March 1999. In addition to
these loans, from time to time, we have advanced loans to Messrs. Pettengill
and Belau. As of December 31, 1998 the amounts outstanding under these advances
for Messrs. Pettengill and Belau was $15,000 and $13,402, respectively, which
represents the largest amounts outstanding under these advances during fiscal
1998. There are currently no advances outstanding. We may in the future make
loans to our officers.
Option Grants
We granted each of Messrs. Bloom, Duffy, Kelly and Meyer, our non-employee
directors, options to purchase 25,000 shares of our common stock at a price of
$4.00 per share. We granted each of Messrs. Sidhu and Wyman, our non-employee
directors, options to purchase 25,000 shares of our common stock at a price of
$11.05 per share. Further, in 1999, we granted to Messrs. Pettengill, Belau,
Dorsey, Joseph, Humes, Holt, Sethi, Wright and Papilsky options to purchase
200,000; 200,000; 175,000; 100,000; 60,000; 130,000; 70,000; 80,000 and 50,000,
respectively. Additionally, in March 2000, we granted Mr. Smith, one of our
non-employee directors, options to purchase 25,000 shares of our common stock
at a price of $60.50 per share. 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 and First Union
pursuant to agreements they have entered into with us. The terms of these
agreements were negotiated by the parties in arm's-length transactions and were
entered into prior to our selection of the underwriters of our initial public
offering. In 1999, revenues derived from Bear Stearns and First Union equalled
$7,382,706, and $977,625, respectively. We may provide network consulting
services to other underwriters in this offering after the date of this
prospectus.
Relationship with BellSouth
We provide network consulting services to BellSouth pursuant to an
existing agreement negotiated by the parties in an arm's-length transaction.
This agreement expires in May 2001 and governs the terms and conditions that
apply to all consulting services performed by us for BellSouth and for
BellSouth's customers. In fiscal 1999, revenue from BellSouth was $1,229,881.
William L. Smith, one of our directors, is Executive Vice President of Network
Planning and Chief Technology Officer of BellSouth.
We have 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.
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of March 15, 2000 and as adjusted to reflect
the sale of common stock offered by us in this offering for:
o each person known by us to beneficially own more than 5% of our common
stock;
o each executive officer named in the Summary Compensation Table;
o each of our directors;
o all of our executive officers and directors as a group; and
o the selling stockholders.
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., 417 Fifth Avenue, 11th Floor, New
York, New York 10019. 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 March 15, 2000, but excludes shares of common stock underlying
options held by any other person. Percentage of beneficial ownership is based on
23,429,200 shares of common stock outstanding as of March 15, 2000, and
25,198,420 shares of common stock outstanding after completion of this offering,
which represents the amount of shares of common stock outstanding plus the
1,000,000 shares of common stock to be offered by us and the 769,220 additional
shares of common stock issued to various selling stockholders as a result of the
exercise of options since December 31, 1999, which shares will be sold by such
selling stockholders in this offering.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Before Offering Shares After Offering
----------------------- ------------ ----------------------
Shares Percent to be Sold Shares Percent
------------ --------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Directors, Executive Officers and Principal
Stockholders:
Ronald G. Pettengill, Jr. (1) ................. 2,312,333 9.5% 196,548 2,115,785 8.1%
Robert L. Belau (2) ........................... 2,738,333 11.3 232,758 2,505,575 9.6
Gerard R. Dorsey .............................. -- -- -- -- --
R. Kevin Holt (3) ............................. 32,500 * 0 32,500 *
Carl D. Humes (4) ............................. 270,000 1.1 54,000 216,000 *
Thomas R. Joseph (5) .......................... 270,000 1.1 54,000 216,000 *
Gregory D. Nicastro (6) ....................... 168,000 * 33,600 134,400 *
Gary N. Papilsky .............................. 1,000 * 0 1,000 *
Neeraj Sethi (7) .............................. 197,500 * 29,500 168,000 *
John Wright (8) ............................... 20,000 * 4,000 16,000 *
Peter L. Bloom (9) ............................ 6,886,256 29.4 798,810 6,087,446 24.2
Donald J. Duffy (10) .......................... 2,638,150 11.2 326,471 2,311,679 9.1
Braden R. Kelly (11) .......................... -- -- -- -- --
Eric Meyer (12) ............................... 3,121,150 13.2 382,547 2,738,603 10.8
Inder Sidhu (13) .............................. 1,242,000 5.3 0 1,242,000 4.9
William L. Smith (14) ......................... -- -- -- -- --
William W. Wyman (15) ......................... -- -- -- -- --
Cisco Systems, Inc. (16) ...................... 1,242,000 5.3 0 1,242,000 4.9
General Atlantic Partners, LLC (17) ........... 6,880,006 29.4 798,810 6,081,196 24.1
Meyer, Duffy & Associates, L.P. (18) .......... 1,585,064 6.8 101,428 1,483,636 5.9
Putnam Investments, Inc. (19) ................. 1,388,787 5.9 0 1,388,787 5.5
All directors and executive officers as a group
(17 persons) (20) ............................ 17,445,322 66.4 1,785,763 15,659,559 55.8
Other Selling Stockholders:
Jos Bourgonje ................................. 743,970 3.2 74,397 669,573 2.7
Nelson Hung (21) .............................. 366,600 1.6 73,320 293,280 1.2
Jaimin Patel (22) ............................. 247,600 1.1 49,520 198,080 *
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Before Offering Shares After Offering
----------------------- ------------ ----------------------
Shares Percent to be Sold Shares Percent
------------ --------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Gregory T. Barry (23) ................... 240,600 1.0 48,120 192,480 *
Frank L. Rosalia (24) ................... 214,600 * 42,920 171,680 *
Gregory Eng Yee (25) .................... 207,600 * 41,520 166,080 *
Kathleen Rocci .......................... 60,000 * 37,500 22,500 *
Charles Young (26) ...................... 187,000 * 37,400 149,600 *
Doris P. Tillman (27) ................... 180,000 * 36,000 144,000 *
Nelson K. Tai (28) ...................... 174,600 * 34,920 139,680
Augusto Ray Guillermo (29)............... 160,200 * 32,040 128,160 *
Wilfried Van Haeren ..................... 318,844 1.4 31,884 286,960 1.1
Timothy R. Letki (30) ................... 156,600 * 31,320 125,280 *
Harold S. Schultz (31) .................. 142,200 * 28,440 113,760 *
Adam C. Steckelman (32) ................. 141,600 * 28,320 113,280 *
Joel Ercolani (33) ...................... 150,600 * 25,100 125,500 *
Hope Meyer (34) ......................... 120,000 * 24,000 96,000 *
Barry Belau (35)......................... 144,000 * 14,400 129,600 *
Pamela Kapsimalis (36)................... 72,000 * 14,400 57,600 *
Stanton F. Weissenborn (37).............. 72,000 * 14,400 57,600 *
Dr. Peter Kapsimalis (38)................ 66,000 * 13,200 52,800 *
Andrew R. Cherna (39).................... 46,000 * 9,200 36,800 *
Brobeck, Phleger & Harrison LLP (40)..... 35,078 * 7,016 28,062 *
Michael Green (41)....................... 34,000 * 6,800 27,200 *
Louis T. Alesi (42)...................... 30,000 * 6,000 24,000 *
Arden L. Boren (43)...................... 30,000 * 6,000 24,000 *
Judith Margolis (44)..................... 30,000 * 6,000 24,000 *
George J. Donohue (45)................... 60,000 * 5,000 55,000 *
Leigh Welles (46)........................ 24,000 * 4,800 19,200 *
Other Selling Stockholders (47) ......... 1,313,350 5.3 230,300 1,083,050 4.1
</TABLE>
- ------------
* Indicates less than one percent of the common stock.
(1) Includes (a) 863,333 shares issuable upon the exercise of currently
exercisable options (b) 1,224,330 shares held by Tao Partners, L.P., (c)
10,000 shares held by The Pettengill Family Foundation, 5,000 of which are
intended to be sold in this offering and (d) 214,670 shares held by
Ballantine Associates Limited Partnership, 191,548 of which are intended to
be sold in this offering. The general partner of Ballantine Associates
Limited Partnership is Ballantine Associates, Inc. Mr. Pettengill and his
wife are the sole stockholders of Julcon, Inc., the general partner of Tao
Partners, L.P. and the sole stockholder of Ballantine Associates, Inc. Mr.
Pettengill disclaims beneficial ownership of the shares held by The
Pettengill Family Foundation. In the event that the underwriters exercise
the option to purchase shares of common stock to cover over-allotments,
Ballantine Associates Limited Partnership will sell up to an additional
23,122 shares.
(2) Includes (a) 863,333 shares issuable upon the exercise of currently
exercisable options (b) 126,000 shares held by The Belau Family Trust, (c)
10,000 shares held by The Belau Family Foundation, (d) 1,478,859 shares
held by the Belau First Tier Limited Partnership and (e) 260,141 shares
held by the Belau Second Tier Limited Partnership, 232,758 of which are
intended to be sold in this offering. The general partner of the Belau
First Tier Limited Partnership is Belau First Tier, Inc., of which Mr.
Belau is the sole stockholder. The general partner of the Belau Second Tier
Limited Partnership is Belau Second Tier, Inc., of which Belau First Tier,
Inc. is the sole stockholder. Mr. Belau disclaims beneficial ownership of
the shares held by The Belau Family Foundation. In the event that the
underwriters exercise the option to purchase shares of common stock to
cover over-allotments, the Belau Second Tier Limited Partnership will sell
up to an additional 27,383 shares.
(3) Includes 32,500 shares issuable upon the exercise of currently exercisable
options.
(4) Includes 270,000 shares issuable upon the exercise of currently
exercisable options, 54,000 of which are intended to be sold in this
offering.
(5) Includes (a) 250,000 shares issuable upon the exercise of currently
exercisable options, 54,000 of which are intended to be sold in this
offering and (b) 20,000 shares issuable upon the exercise of currently
exerciseable stock options held by The Joseph Family Trust. Mr. Joseph
disclaims beneficial ownership of the securities held by The Joseph Family
Trust.
(6) Includes 168,000 shares issuable upon the exercise of currently
exercisable options, 33,600 of which are intended to be sold in this
offering.
53
<PAGE>
(7) Includes 167,500 shares issuable upon the exercise of currently
exercisable options, 29,500 of which are intended to be sold in this
offering.
(8) Includes 20,000 shares issuable upon the exercise of currently exercisable
options, 4,000 of which are intended to be sold in this offering.
(9) Includes (a) 6,250 shares issuable upon the exercise of currently
exercisable options, (b) 5,350,441 shares owned by General Atlantic
Partners 54, (c) 349,918 shares owned by General Atlantic Partners 57, and
(d) 1,179,647 shares owned by GAP Coinvestment Partners II. The general
partner of General Atlantic Partners 54 and General Atlantic Partners 57 is
General Atlantic Partners, LLC and the managing members of General Atlantic
Partners, LLC are also the general partners of GAP Coinvestment Partners
II. Peter L. Bloom is a managing member of General Atlantic Partners, LLC.
Mr. Bloom disclaims beneficial ownership of these securities except to the
extent of his economic interest in General Atlantic Partners, LLC, and GAP
Coinvestment Partners II. The address of Mr. Bloom is c/o General Atlantic
Partners, LLC, 3 Pickwick Plaza, Greenwich, Connecticut 06830. Of the
indicated shares to be sold, (a) 661,280 shares are intended to be sold by
General Atlantic Partners 54 and (b) 137,530 shares are intended to be sold
by GAP Coinvestment Partners II. In the event that the underwriters
exercise the option to purchase shares of common stock to cover
over-allotments, (a) General Atlantic Partners 54 will sell up to an
additional 290,945 shares and (b) GAP Coinvestment Partners II will sell up
to an additional 60,510 shares.
(10) Includes (a) 186,250 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares held by MD Strategic, L.P., (c)
1,585,064 shares held by Meyer, Duffy & Associates, L.P., (d) 140,940
shares held by PVII, L.P. and (e) 214,936 shares held by Five D's
Associates Limited Partnership. Mr. Duffy is a general partner of each of
MD Strategic, L.P., Meyer, Duffy & Associates, L.P. and PVII, L.P. Messrs.
Duffy and Meyer are the stockholders of Five D's Associates, Inc., which is
the general partner of Five D's Associates Limited Partnership. 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., PVII, L.P. and Five D's Associates Limited Partnership. The address
of Mr. Duffy is c/o of Meyer, Duffy & Associates, Inc., 237 Park Avenue,
New York, New York 10017. Of the indicated shares to be sold, (a) 59,332
shares are intended to be sold by MD Strategic, L.P., (b) 101,428 shares
are intended to be sold by Meyer, Duffy & Associates, L.P. (c) 16,363
shares are intended to sold by PVII, L.P. and (d) 149,338 shares of common
stock are intended to be sold by Five D's Associates Limited Partnership.
In the event that the underwriters exercise the option to purchase shares
of common stock to cover over-allotments, (a) MD Strategic, L.P. will sell
up to an additional 26,059 shares, (b) Meyer, Duffy & Associates, L.P. will
sell up to an additional 44,572 shares, (c) PVII, L.P. will sell up to an
additional 7,188 shares and (d) Five D's Associates Limited Partnership
will sell up to an additional 65,598 shares.
(11) Mr. Kelly is a limited partner of GAP Coinvestment Partners II. Mr. Kelly
disclaims beneficial ownership of the securities held by GAP Coinvestment
Partners II except to the extent of his economic interest in those
securities. The address of Mr. Kelly is c/o General Atlantic Partners,
LLC, 3 Pickwick Plaza, Greenwich, Connecticut 06830.
(12) Includes (a) 186,250 shares issuable upon the exercise of currently
exercisable options, (b) 510,960 shares held by MD Strategic, L.P., (c)
1,585,064 shares held by Meyer, Duffy & Associates, L.P., (d) 140,940
shares held by PVII, L.P. and (e) 214,936 shares held by Five D's
Associates Limited Partnership. Mr. Meyer is a general partner of each of
MD Strategic L.P., Meyer, Duffy & Associates, L.P. and PVII, L.P. Messrs.
Meyer and Duffy are the sole stockholders of Five D's Associates, Inc.,
which is the general partner of Five D's Associates Limited Partnership.
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., PVII, L.P.and Five D's Associates Limited Partnership.
The address of Mr. Meyer is c/o Meyer, Duffy & Associates, Inc., 237 Park
Avenue, New York, New York 10017. Of the indicated shares to be sold, (a)
56,076 shares are intended to be sold by Mr. Meyer, (b) 59,332 shares are
intended to be sold by MD Strategic, L.P., (c) 101,428 shares are intended
to be sold by Meyer, Duffy & Associates, L.P. (d) 16,363 shares are
intended to be sold by PVII, L.P. and (e) 149,338 shares are intended to be
sold by Five D's Associates Limited Partnership. In the event that the
underwriters exercise the option to purchase shares of common stock to
cover over-allotments, (a) Mr. Meyer will sell up to an additional 24,633
shares, (b) MD Strategic, L.P. will sell up to an additional 26,059 shares,
(c) Meyer, Duffy & Associates, L.P. will sell up to an additional 44,572
shares, (d) PVII, L.P. will sell up to an additional 7,188 shares and (e)
Five D's Associates Limited Partnership will sell up to an additional
65,598 shares.
54
<PAGE>
(13) Includes 1,242,000 shares of common stock owned by Cisco. Mr. Sidhu is the
Vice President of Worldwide Professional Services at Cisco. The address of
Mr. Sidhu is c/o Cisco Systems, Inc., 170 West Tasman Drive, San Jose,
California 95134-1706.
(14) The address of Mr. Smith is c/o BellSouth Corporation, 1155 Peachtree
Street, N.W., Atlanta, Georgia 30309.
(15) The address of Mr. Wyman is 4 North Balch Street, Hanover, New Hampshire
03755.
(16) The address of Cisco is 170 West Tasman Drive, San Jose, California
95134-1706.
(17) Includes (a) 5,350,441 shares owned by General Atlantic Partners 54, (b)
349,918 shares owned by General Atlantic Partners 57, and (c) 1,179,647
shares owned by GAP Coinvestment Partners II. General Atlantic Partners,
LLC is the general partner of General Atlantic Partners 54 and General
Atlantic Partners 57 and the managing members of General Atlantic
Partners, LLC are also the general partners of GAP Coinvestment Partners
II. Therefore, General Atlantic Partners, LLC may vote and dispose of the
shares owned by these entities. The address of General Atlantic Partners,
LLC is 3 Pickwick Plaza, Greenwich, Connecticut 06830. Of the indicated
shares to be sold, (a) 661,280 shares are intended to be sold by General
Atlantic Partners 54 and (b) 137,530 shares are intended to be sold by GAP
Coinvestment Partners II. In the event that the underwriters exercise the
option to purchase shares of common stock to cover over-allotments, (a)
General Atlantic Partners 54 will sell up to an additional 290,945 shares
and (b) GAP Coinvestment Partners II will sell up to an additional 60,510
shares.
(18) The address of Meyer, Duffy & Associates, L.P. is c/o Meyer, Duffy &
Associates, Inc., 237 Park Avenue, New York, New York 10017. In the event
that the underwriters exercise the option to purchase shares of common
stock to cover over-allotments Meyer, Duffy & Associates, L.P. will sell up
to an additional 44,572 shares.
(19) Includes (a) 1,223,687 shares held by Putnam Investment Management, Inc.
("PIM") and (b) 165,100 shares held by The Putnam Advisory Company, Inc.
("PAC"). PIM and PAC are wholly- owned subsidiaries of Putnam Investments,
Inc., a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. Of the
1,223,687 shares held by PIM, 1,115,897 shares are held by Putnam OTC &
Emerging Growth Fund. The address of Putnam Investments, Inc. is One Post
Office Square, Boston, Massachusetts 02109.
(20) Includes 2,768,000 shares issuable upon the exercise of currently
exercisable options, 175,100 of which are intended to be sold in this
offering.
(21) Includes 156,600 shares issuable upon the exercise of currently
exercisable options, 49,320 of which are intended to be sold in this
offering.
(22) Includes 144,600 shares issuable upon the exercise of currently
exercisable options, 49,520 of which are intended to be sold in this
offering.
(23) Includes 156,600 shares issuable upon the exercise of currently
exercisable options, 48,120 of which are intended to be sold in this
offering.
(24) Includes 126,600 shares issuable upon the exercise of currently
exercisable options, 30,000 of which are intended to be sold in this
offering.
(25) Includes 126,600 shares issuable upon the exercise of currently
exercisable options, 41,520 of which are intended to be sold in this
offering.
(26) The address of Mr. Young is 129 West 70th Street, New York, New York 10023.
(27) Includes 172,800 shares issuable upon the exercise of currently
exercisable options, 28,800 of which are intended to be sold in this
offering.
(28) Includes 126,600 shares issuable upon the exercise of currently
exercisable options, 34,920 of which are intended to be sold in this
offering.
(29) Includes (a) 22,200 shares issuable upon the exercise of currently
exercisable options, (b) 105,960 shares held by Montanero Associates
Limited Partnership and (c) 32,040 shares held by Terraza Associates
Limited Partnership, all of which are intended to be sold in this offering.
The general partner of Montanero Associates Limited Partnership is
Montanero Associates, Inc., of which Mr. Guillermo is the sole stockholder.
The general partner of Terraza Associates Limited Partnership is Terraza
Associates, Inc., of which Mr. Guillermo is the sole stockholder.
(30) Includes 126,600 shares issuable upon the exercise of currently
exercisable options, 31,320 of which are intended to be sold in this
offering.
55
<PAGE>
(31) Includes 22,200 shares issuable upon the exercise of currently exercisable
options, 22,200 of which are intended to be sold in this offering.
(32) Includes 96,600 shares issuable upon the exercise of currently exercisable
options, 28,320 of which are intended to be sold in this offering.
(33) Includes 150,600 shares issuable upon the exercise of currently
exercisable options, 25,100 of which are intended to be sold in this
offering.
(34) The address of Ms. Meyer is 906 Alpine Avenue, Apt. 4, Boulder, Colorado
80304.
(35) The address of Mr. Belau is 6946 North Greenwich Avenue, Portland, Oregon
97216-5416. Mr. Belau is the brother of Robert L. Belau, our President
and a member of our board of directors.
(36) The address of Ms. Kapsimalis is 284 Ashland Road, Summit, New Jersey
07901.
(37) The address of Mr. Weissenborn is 21 Holton Lane, Essex Falls, New Jersey
07021.
(38) The address of Dr. Kapsimalis is 284 Ashland Road, Summit, New Jersey
07901.
(39) The address of Mr. Cherna is 404 Moffet Road, Lake Bluff, Illinois 60044.
(40) The address of Brobeck, Phleger & Harrison LLP is 1633 Broadway,
47th Floor, New York, New York 10019.
(41) The address of Mr. Green is 202 Ryder Road, Manhasset, New York 11030.
(42) The address of Mr. Alesi is 3 Old Well Lane, Dallas, Pennsylvania 18612.
(43) The address of Mr. Boren is 5363 Alhambra Avenue, Los Angeles, California
90032.
(44) The address of Ms. Margolis is 43 Dartmoor Street, Enfield, Connecticut
06082.
(45) The address of Mr. Donohue is 286 Hartshorn Drive, Short Hills, New Jersey
07078.
(46) The address of Ms. Welles is 46 East 89th Street, New York, New York 10128.
(47) Includes 1,211,730 shares issuable upon the exercise of currently
exercisable options, 230,300 of which are intended to be sold in this
offering.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our amended and restated certificate of incorporation 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 March 1, 2000, 23,429,200 shares of common stock were
outstanding, and were held of record by approximately 95 stockholders; and no
shares of our preferred stock were outstanding.
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.
Preferred Stock
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue, from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences,
powers, rights and restrictions of different series of preferred stock may
differ. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock or affect
adversely the rights and powers, including voting rights, of the holders of
common stock. Such issuance may also have the effect of delaying, deferring or
preventing a change in control of Predictive. We have no current plans to issue
any shares of preferred stock.
Registration Rights
In March 1999, we entered into a registration rights agreement with some
of our stockholders, including: General Atlantic Partners 54; GAP Coinvestment
Partners II; Ronald G. Pettengill, Jr., our Chief Executive Officer; Robert L.
Belau, our President; Eric Meyer and Donald J. Duffy, our directors; and Meyer,
Duffy & Associates. This agreement was amended in September 1999 to include
General Atlantic Partners 57. Under the terms of this agreement, as amended, at
any time after the first anniversary of the effective date of our initial
public offering, each of General Atlantic Partners 54, General Atlantic
Partners 57 and GAP Coinvestment Partners II may, on two occasions only,
require us to register for sale all or any portion of the shares of common
stock issuable upon conversion of the preferred shares held by them. We are
also obligated to register some shares of common stock held by parties to the
registration rights agreement if they request to be included in the
registration. In August and September 1999, we entered into separate
registration rights agreements with the shareholders of Network Resource
Consultants and Company B.V. and with Cisco Systems, respectively.
Under each of these agreements, if we become eligible to file registration
statements on Form S-3, some parties to the registration rights agreements may
require us to file a registration statement on Form S-3 under the Securities
Act with respect to some shares of common stock held by them. We are also
obligated to register some shares of common stock held by parties to the
registration
57
<PAGE>
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:
o 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
o 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
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
interested stockholder attained that status with the approval of the board of
directors or unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to various exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts with respect to us and, accordingly, may discourage attempts to
acquire us.
In addition, various 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.
58
<PAGE>
Stockholder Action; Special Meeting of Stockholders
Our amended and restated certificate of incorporation eliminates the
ability of stockholders to act by written consent. It further provides that
special meetings of our stockholders may be called only by the chairman of the
board of directors or a majority of the board of directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our amended and restated by-laws provide that stockholders seeking to
bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be received at our principal executive offices not less than 60 days nor
more than 90 days prior to the anniversary date of the immediately preceding
annual meeting of stockholders. In the event 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 is American Stock
Transfer & Trust Company, New York, New York.
Listing
Our common stock is quoted on the Nasdaq National Market under the trading
symbol "PRDS."
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
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 our equity securities.
Upon completion of this offering, we will have an aggregate of 25,198,420
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 3,800,000 shares sold in this offering, the
4,600,000 shares of common stock sold in our initial public offering and an
aggregate of 600,000 shares of common stock that were formerly restricted
securities but were sold or had restrictive legends removed in order to provide
for immediate sale pursuant to an exemption from the registration requirements
of the Securities Act of 1933 are freely tradable, except that any shares held
by our "affiliates," as defined in Rule 144 promulgated under the Securities
Act, may only be sold in compliance with the limitations described below. The
remaining 16,198,420 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
16,198,420 shares will be available for sale in the public market as follows:
Number of
Shares Date
- -------------- ----
50,050 Immediately
362,082 Commencing April 24, 2000 due to an agreement
these stockholders have with the underwriters of our
initial public offering (however, the underwriters can
waive this restriction and allow these stockholders
to sell their shares at any time without prior notice)
13,170,955 90 days after the date of this prospectus, due to an
agreement these stockholders have with the
underwriters (however, the underwriters can waive
this restriction and allow these stockholders to sell
their shares at any time without prior notice)
956,533 Commencing August 2000, due to the requirements
of the federal securities laws
1,658,800 Commencing September 2000, due to the
requirements of the federal securities laws
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, a number of shares that does not exceed
the greater of (1) 1% of the then outstanding shares of common stock 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
60
<PAGE>
purchased our shares in connection with a compensatory stock or option plan or
other written agreement is eligible to resell such shares in reliance on Rule
144, but without compliance with certain restrictions, including the holding
period in Rule 144.
As of December 31, 1999, options to purchase a total of 10,756,910 shares
of common stock are outstanding, of which 5,279,340 are currently exercisable
(without regard to the 90-day lock up period). We have filed a registration
statement to register for resale all shares of common stock issued or issuable
under our 1999 employee stock purchase plan and not otherwise freely
transferable. Accordingly, shares covered by that registration statement are
eligible for sale in the public markets, unless those options are subject to
vesting restrictions.
Our directors and officers and some of our stockholders who hold
14,544,288 shares in the aggregate have agreed that they will not sell,
directly or indirectly, any shares of common stock, subject to various
exceptions, without the prior written consent of Goldman, Sachs & Co. for a
period of 90 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 90-day period following the date of the prospectus,
subject to certain exceptions.
Following this offering, under certain circumstances and, subject to
various exceptions, holders of 8,122,006 shares of our outstanding common stock
will have certain demand registration rights with respect to their shares of
common stock (subject to the 90-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."
61
<PAGE>
UNDERWRITING
Predictive, the selling stockholders and the underwriters named below have
entered into an underwriting agreement with respect to the shares being
offered. Subject to certain conditions, each underwriter has severally agreed
to purchase the number of shares indicated in the following table. Goldman,
Sachs & Co., FleetBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc. and
First Union Securities, Inc. are the representatives of the underwriters.
Number of
Underwriter Shares
----------- ----------
Goldman, Sachs & Co. ........................
FleetBoston Robertson Stephens Inc. .........
Bear, Stearns & Co. Inc. ....................
First Union Securities, Inc. ................ ---------
Total .................................. 3,800,000
=========
If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
570,000 shares from some of the selling stockholders to cover such sales. They
may exercise that option for 30 days. If any shares are purchased under this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by Predictive and the selling
stockholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares.
Paid by Predictive
------------------------------
No Exercise Full Exercise
------------- --------------
Per Share ......... $ $
Total ........... $ $
Paid by the Selling
Stockholders
------------------------------
No Exercise Full Exercise
------------- --------------
Per Share ......... $ $
Total ........... $ $
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased form the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
Predictive, its executive officers and the selling stockholders have
agreed with the underwriters not to dispose of or hedge any of Predictive's
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. This agreement does not apply to
the sale of shares in this offering, issuances of securities pursuant to
existing employee benefit plans or the issuance of common stock pursuant to the
exercise of existing options or warrants.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters
62
<PAGE>
of a greater number of shares than they are required to purchase in the
offering. Stabilizing transactions consist of certain bids or purchases made
for the purpose of preventing or retarding a decline in the market price of the
common stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Securities Exchange Act of 1934,
certain underwriters and selling group members that are market makers ("passive
market makers") in the common stock may make bids for or purchases of common
stock in the Nasdaq National Market until a stabilizing bid has been made. Rule
103 generally provides that:
o a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part;
o a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers; and
o bids made by passive market makers must be identified as such.
Predictive estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $815,000.
Predictive and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
Predictive provides network consulting services to some of the
underwriters. Please see "Certain Transactions -- Agreements with
Underwriters."
63
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, New York, New York. The Brobeck investment
fund and attorneys at Brobeck hold in the aggregate 52,110 shares of common
stock. The Brobeck investment fund intends to sell 7,016 shares of common stock
in this offering. Various legal matters in connection with this offering will
be passed upon for the underwriters by Hale and Dorr LLP, Boston,
Massachusetts.
EXPERTS
The financial statements of Predictive Systems, Inc. as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 and the financial statements of Network Resource Consultants and Company
B.V. as of and for the year ended December 31, 1998 included in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. We
file annual, quarterly and special reports, proxy statements and other
information with the Commission. For further information with respect to
Predictive and the common stock, reference is made to the registration
statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in Predictive files in the
Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C., 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Commission. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Predictive's
Commission filings, including the registration statement, will also be
available to you on the Commission's Internet site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Predictive Systems, Inc. and Subsidiaries
- -----------------------------------------
Report of Independent Public Accountants ............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ......................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and
1999 ................................................................................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years
Ended December 31, 1997, 1998 and 1999 .............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and
1999 ................................................................................ F-6
Notes to Consolidated Financial Statements ........................................... F-7
</TABLE>
<TABLE>
<CAPTION>
Network Resource Consultants and Company B.V.
- ---------------------------------------------
<S> <C>
Report of Independent Public Accountants ................................................. F-18
Balance Sheet as of December 31, 1998 .................................................... F-19
Statements of Income for the Year Ended December 31, 1998 and the Six Months Ended June
30, 1998 and 1999 (Unaudited) ........................................................... F-20
Statements of Stockholders' (Deficit) Equity for the Year Ended December 31, 1998 and the
Six Months Ended June 30, 1999 (Unaudited) ............................................... F-21
Statements of Cash Flows for the Year Ended December 31, 1998 and the Six Months Ended
June 30, 1998 and 1999 (Unaudited) ...................................................... F-22
Notes to Financial Statements ............................................................ F-23
</TABLE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Condensed Consolidated Financial Statement
- ---------------------------------------------------------------
<S> <C>
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended
December 31, 1999 .................................................................. F-27
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statement ............. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Predictive
Systems, Inc. (a Delaware corporation) (the "Company") and subsidiaries as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for
each of the three years in the period ended December 31, 1999. 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 accounting standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Predictive Systems, Inc.
and subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting standards generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
February 10, 2000
F-2
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1999
-------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ -- $ 89,633,634
Marketable securities .......................................................... -- 2,018,060
Accounts receivable--net of allowance for doubtful accounts of $141,489 and
$568,344, respectively ........................................................ 8,806,184 16,257,304
Unbilled work in process ....................................................... 1,062,824 289,120
Notes receivable--employees .................................................... 55,100 116,859
Notes receivable--stockholders ................................................. 515,000 --
Due from related party ......................................................... 916,948 --
Refundable income taxes ........................................................ 342,829 842,606
Prepaid expenses and other current assets ...................................... 386,453 1,219,717
----------- ------------
Total current assets .......................................................... 12,085,338 110,377,300
Property and equipment -- net of accumulated depreciation and amortization of
$947,735 and $1,703,711, respectively........................................... 1,356,634 2,884,105
Intangible assets, net of accumulated amortization of $326,871................... -- 3,936,666
Other assets .................................................................... 235,047 224,740
----------- ------------
Total assets .................................................................. $13,677,019 $117,422,811
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft ................................................................. $ 475,610 $ --
Short-term borrowings .......................................................... 5,598,000 --
Accounts payable ............................................................... 1,255,661 2,322,065
Accrued compensation ........................................................... 668,321 2,005,859
Accrued expenses and other current liabilities ................................. 879,704 2,709,002
Current portion of capital lease obligaions .................................... 151,027 183,193
Deferred income tax liability .................................................. 185,000 --
Deferred income ................................................................ 445,414 1,064,721
Dividends payable .............................................................. 61,250 --
----------- ------------
Total current liabilities ..................................................... 9,719,987 8,284,840
NONCURRENT LIABILITIES:
Capital lease obligations ...................................................... 446,018 284,037
Deferred rent .................................................................. 70,957 49,863
Deferred income tax liability .................................................. 714,146 299,851
Other long-term liabilities .................................................... -- 2,498
----------- ------------
Total liabilities ............................................................. 10,951,108 8,921,089
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 11):
Mandatory redeemable convertible preferred stock, $.001 par value, 5%
cumulative, 4,200,000 and 0 shares issued and outstanding ...................... 700,000 --
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized, 0 shares issued
and outstanding ................................................................ -- --
Common stock, $.001 par value, 50,000,000 and 200,000,000 shares authorized,
7,900,200 and 23,429,200 shares issued and outstanding ......................... 7,900 23,429
Additional paid-in capital ...................................................... 682,270 108,404,681
Deferred compensation ........................................................... -- (256,672)
Retained earnings ............................................................... 1,335,741 369,625
Accumulated other comprehensive loss ............................................ -- (39,341)
----------- ------------
Total stockholders' equity .................................................... 2,025,911 108,501,722
----------- ------------
Total liabilities and stockholders' equity .................................... $13,677,019 $117,422,811
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-3
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Professional services ................... $16,897,456 $23,857,780 $50,698,035
Hardware and software sales ............. 1,189,617 2,065,348 2,046,810
----------- ----------- -----------
Total revenues ........................ 18,087,073 25,923,128 52,744,845
Cost of Revenues:
Professional services ................... 9,590,306 12,861,272 25,698,926
Hardware and software purchases ......... 816,935 1,698,356 1,765,746
----------- ----------- -----------
Total cost of revenues ................ 10,407,241 14,559,628 27,464,672
----------- ----------- -----------
Gross profit .......................... 7,679,832 11,363,500 25,280,173
Sales and marketing ...................... 1,081,889 3,433,751 8,477,692
General and administrative ............... 4,390,476 8,184,486 16,809,504
Depreciation and amortization ............ 320,908 567,761 1,082,890
Noncash compensation expense ............. -- -- 47,953
----------- ----------- -----------
Operating profit (loss) ............... 1,886,559 (822,498) (1,137,866)
Other Income (Expense):
Interest income ......................... 26,575 57,976 943,898
Other income ............................ 3,849 1,555 76,309
Interest expense ........................ (35,545) (324,591) (157,210)
----------- ----------- -----------
Income (loss) before income tax
provision (benefit) .................. 1,881,438 (1,087,558) (274,869)
Income tax provision
(benefit) ............................... 870,504 (460,258) 682,497
----------- ----------- -----------
Net income (loss) ..................... $1,010,934 $ (627,300) $ (957,366)
=========== =========== ===========
Net income (loss) per share --
Basic ................................... $ 0.22 $ (0.11) $ (0.08)
=========== =========== ===========
Diluted ................................. $ 0.08 $ (0.11) $ (0.08)
=========== =========== ===========
Weighted average shares outstanding--
Basic ................................... 4,382,417 6,015,433 12,137,560
=========== =========== ===========
Diluted ................................. 12,764,610 6,015,433 12,137,560
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-4
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Convertible Additional
Preferred Stock Common Stock
---------------------------- ------------------------- Paid-in
Shares Par Value Shares Par Value Capital
--------------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
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
Comprehensive loss
Net loss ................................ -- -- -- -- --
Unrealized gains on investments ......... -- -- -- -- --
Foreign currency translation
adjustment .............................. -- -- -- -- --
Total comprehensive loss ................
Preferred stock dividends ............... -- -- -- -- --
Issuance of preferred stock ............. 6,512,316 6,512 -- -- 18,559,713
Common stock repurchased to
treasury, 2,855,100 shares .............. -- -- -- -- --
Issuance of common stock, net of
offering expenses of $750,000 ........... -- -- 1,355,000 1,355 15,508,645
Issuance of common stock in
connection with the acquisition of
NRCC .................................... -- -- 1,062,814 1,063 4,250,193
Issuance of common stock in initial
public offering, net of offering
expenses, including the
reissuance of 2,855,100 shares
of treasury stock ....................... -- -- 1,744,900 1,745 66,737,265
Conversion of preferred stock to
common stock ............................ (6,512,316) (6,512) 10,712,316 10,712 695,800
Exercise of options ..................... -- -- 653,970 654 300,065
Income tax benefit relating to
exercise of options ..................... -- -- -- -- 1,366,105
Recognition of deferred
compensation ............................ -- -- -- -- 304,625
Noncash compensation expense ............ -- -- -- -- --
---------- --------- ---------- ------- ------------
Balance at December 31, 1999 .............. -- $ -- 23,429,200 $23,429 $108,404,681
========== ========= ========== ======= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Treasury Deferred Retained Comprehensive Stockholders'
Stock Compensation Earnings Income (Loss) Equity
--------------- -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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
Comprehensive loss
Net loss ................................ -- -- (957,366) (957,366)
Unrealized gains on investments ......... -- -- -- 1,426 1,426
Foreign currency translation
adjustment .............................. -- -- -- (40,767) (40,767)
------------
Total comprehensive loss ................ (996,707)
============
Preferred stock dividends ............... -- -- (8,750) -- (8,750)
Issuance of preferred stock ............. -- -- -- -- 18,566,225
Common stock repurchased to
treasury, 2,855,100 shares .............. (8,398,753) -- -- -- (8,398,753)
Issuance of common stock, net of
offering expenses of $750,000 ........... -- -- -- -- 15,510,000
Issuance of common stock in
connection with the acquisition of
NRCC .................................... -- -- -- -- 4,251,256
Issuance of common stock in initial
public offering, net of offering
expenses, including the
reissuance of 2,855,100 shares
of treasury stock ....................... 8,398,753 -- -- -- 75,137,763
Conversion of preferred stock to
common stock ............................ -- -- -- -- 700,000
Exercise of options ..................... -- -- -- -- 300,719
Income tax benefit relating to
exercise of options ..................... -- -- -- -- 1,366,105
Recognition of deferred
compensation ............................ -- (304,625) -- -- --
Noncash compensation expense ............ -- 47,953 -- -- 47,953
------------- ---------- ---------- --------- ------------
Balance at December 31, 1999 .............. $ -- $ (256,672) $ 369,625 $ (39,341) $108,501,722
============= ========== ========== ========= ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1998 1999
--------------- ---------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ 1,010,934 $ (627,300) $ (957,366)
Adjustments to reconcile net income (loss) to net cash used in
operating activities--
Noncash compensation expense ...................................... -- -- 47,953
Deferred income taxes ............................................. 838,572 (540,469) (674,836)
Depreciation and amortization ..................................... 320,908 567,761 1,082,890
Provision for doubtful accounts ................................... 99,308 102,196 469,000
Unrealized gain on sale of marketable securities .................. -- -- 1,426
(Increase) decrease in--
Accounts receivable .............................................. (2,718,335) (4,710,510) (7,597,971)
Unbilled work in process ......................................... 204,978 (883,420) 773,704
Income taxes ..................................................... (210,916) 1,220 866,328
Prepaid expenses and other current assets ........................ (44,401) (215,378) (749,493)
Other assets ..................................................... (127,283) 32,267 10,307
(Decrease) increase in--
Accounts payable ................................................. (168,844) 1,096,032 885,107
Accrued expenses and other current liabilities ................... 106,928 1,053,276 2,909,894
Deferred income .................................................. (464,493) 412,459 601,810
Deferred rent .................................................... (7,269) 47,651 (21,094)
Other long-term liabilities ...................................... -- -- (266,652)
------------ ------------- ------------
Net cash used in operating activities ............................ (1,159,913) (3,664,215) (2,618,993)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities ................................. -- -- (3,118,060)
Proceeds from sale or redemption of marketable securities ......... -- -- 1,100,000
Payments to employees ............................................. (57,151) (26,950) (110,637)
Repayments from employees ......................................... 3,780 25,221 48,878
Payments to stockholders .......................................... -- (515,000) --
Repayments from stockholders ...................................... -- -- 515,000
Payments to related party ......................................... -- (916,948) (478,078)
Repayments from related party ..................................... -- -- 1,395,026
Cash received from acquisition of NRCC ............................ -- -- 163,768
Purchase of property and equipment ................................ (356,782) (686,823) (2,194,847)
------------ ------------- ------------
Net cash used in investing activities ............................ (410,153) (2,120,500) (2,678,950)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft .................................................... 545,351 (69,741) (475,610)
Common shares repurchased to treasury ............................. -- -- (8,398,753)
Proceeds from short-term borrowings ............................... 2,452,000 19,643,000 4,351,000
Repayments of short-term borrowings ............................... (1,672,000) (14,825,000) (9,949,000)
Payment of preferred dividends .................................... -- -- (70,000)
Proceeds from sale of preferred stock ............................. -- -- 18,566,225
Proceeds from sale of common stock, net of expenses ............... -- -- 15,510,000
Proceeds from initial public offering, net of expenses,
including reissuance of treasury stock ........................... -- -- 75,137,763
Proceeds from exercise of stock options ........................... 27,000 616,000 300,719
------------ ------------- ------------
Net cash provided by financing activities ........................ 1,352,351 5,364,259 94,972,344
------------ ------------- ------------
Effects of exchange rates ......................................... -- -- (40,767)
Net (decrease) increase in cash .................................. (217,715) (420,456) 89,633,634
CASH AND CASH EQUIVALENTS, beginning of period ..................... 638,171 420,456 --
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 420,456 $ -- $ 89,633,634
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-- ...................................
Interest ......................................................... $ 35,545 $ 262,539 $ 234,768
============ ============= ============
Taxes ............................................................ $ 260,000 $ -- $ 442,420
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING
TRANSACTIONS:
Stock issued for acquisition ...................................... $ -- $ -- $ 4,251,256
============ ============= ============
Tax benefit of stock option exercises ............................. $ -- $ -- $ 1,366,105
============ ============= ============
Borrowings under capital leases ................................... $ 335,669 $ 238,050 $ --
============ ============= ============
Dividends declared on mandatory redeemable convertible preferred
stock ............................................................ $ 26,250 $ 35,000 $ 8,750
============ ============= ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OWNERSHIP AND OPERATIONS:
Predictive Systems, Inc. (the "Company"), was incorporated under the laws
of the State of Delaware on February 10, 1995. The Company was formerly 100%
owned by Predictive Holdings, Inc. (the "Parent"). During the first quarter of
1999 the Parent was merged with and into the Company and the Parent was
concurrently dissolved. The financial statements and footnotes reflect the
combined operations and financial position of the Company and the Parent for
all periods presented.
The Company provides network consulting services for the design,
performance, management and securities of complex computing networks. Services
are currently provided through the Company's offices located throughout the
United States and its wholly-owned subsidiaries in England, which was formed in
the first quarter of 1999, and in The Netherlands, which was acquired in the
third quarter of 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 --
Revenues 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, 1998 and 1999 is $1,032,390 and $132,323, 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.
Cash Equivalents --
The Company considers all short-term marketable debt and 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
F-7
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
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, 1997, approximately 60% of sales were from
four customers. For the year ended December 31, 1998, approximately 20% of
sales were from one customer. For the year ended December 31, 1999,
approximately 31% of sales were from two customers. The amounts due from these
customers at December 31, 1998 and 1999 were approximately $2,931,000 and
$4,146,181, 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. Note 9.
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)
available to common stockholders by the weighted average number of shares
outstanding. Diluted net income (loss) per 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 --
The Company has 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 11).
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.
F-8
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Comprehensive Income --
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." The
standard requires that comprehensive income, which includes net income as well
as certain changes in assets and liabilities recorded in stockholders' equity,
be reported in the financial statements. The adoption of SFAS No. 130 increased
the reporting disclosures but had no impact on the results of operations or
financial position of the Company.
Segment Reporting --
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. 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.
(3) ACQUISITION:
On August 12, 1999, the Company acquired Network Resource Consultants and
Company B.V. ("NRCC") in a transaction accounted for as a purchase. In
connection with this transaction, the Company exchanged 1,062,814 shares of its
common stock in exchange for all of the outstanding stock of NRCC. The Company
acquired net assets of approximately $88,000 and recorded intangible assets of
approximately $4.3 million which represented the excess of the purchase price
over the fair value of the assets acquired.
The following information presents the pro forma results of operations for
the Company for the years ending December 31, 1998 and 1999 as if the
acquisition of NRCC had occurred on the first day of the years presented.
Year Ended December 31,
-----------------------------------
1998 1999
---------------- ----------------
Revenues ............................... $ 27,812,053 $ 53,997,772
Operating loss ......................... (1,413,386) (1,518,687)
Net loss ............................... $ (1,313,630) $ (1,394,550)
Per Share Information:
Net loss per share --
Basic ............................... $ (0.19) $ (0.11)
Diluted ............................. $ (0.19) $ (0.11)
Weighted Average Shares Outstanding --
Basic ............................... 7,078,247 12,786,896
Diluted ............................. 7,078,247 12,786,896
F-9
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(4) 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>
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Numerator --
Net income (loss) ........................................ $1,010,934 $ (627,300) $ (957,366)
Preferred stock dividends ................................ (26,250) (35,000) (8,750)
----------- ---------- -----------
Numerator for basic earnings per share -- net
income (loss) available to common
stockholders .......................................... 984,684 (662,300) (966,116)
=========== ========== ===========
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 ................... $1,010,934 $ (662,300) $ (966,116)
=========== ========== ===========
Denominator --
Denominator for basic earnings per share --
weighted average shares ................................ 4,382,417 6,015,433 12,137,560
=========== ========== ===========
Effect of dilutive securities --
Incremental shares for assumed conversions of
preferred stock ........................................ 4,200,000 -- --
Incremental shares for assumed conversions of
options ................................................ 4,182,193 -- --
----------- ---------- -----------
Dilutive potential common shares ......................... 8,382,193 -- --
=========== ========== ===========
Denominator for diluted earnings per share --
adjusted weighted average shares and assumed
conversions .............................................. 12,764,610 6,015,433 12,137,560
=========== ========== ===========
Basic earnings per share from net income (loss) ........... $ 0.22 $ (0.11) $ (0.08)
=========== ========== ===========
Diluted earnings per share from net income (loss) ......... $ 0.08 $ (0.11) $ (0.08)
=========== ========== ===========
</TABLE>
(5) PROPERTY AND EQUIPMENT:
The components of property and equipment are as follows --
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
------------- ---------------
<S> <C> <C>
Computer equipment ........................................ $1,243,475 $ 2,487,334
Office furniture .......................................... 630,722 810,822
Leasehold improvements .................................... 430,172 1,289,660
---------- ------------
2,304,369 4,587,816
Less -- Accumulated depreciation and amortization ......... (947,735) (1,703,711)
---------- ------------
$1,356,634 $ 2,884,105
========== ============
</TABLE>
Depreciation and amortization expense related to property and equipment
aggregated $320,908, $567,761 and $756,019, respectively, for the years ending
December 31, 1997, 1998 and 1999.
F-10
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(6) 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 to that company bearing interest at 8%. As of December 31, 1998,
$916,948 was due from this company, which was fully repaid during 1999. At
December 31, 1999 no balance is due from this company and the line of credit no
longer exists.
Two of the Company's customers, Cisco Systems and BellSouth, each have one
seat on the Company's Board of Directors. During 1999, the Company recorded
revenues of $2.2 million and $1.2 million from services performed for Cisco
Systems and BellSouth, respectively.
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
during 1999.
The Company's managment believes that these transactions were entered into
on a basis that approximates fair value.
(7) SHORT-TERM BORROWINGS:
The Company has a secured demand loan under which it may borrow up to
$5,000,000, but not more than 80% of the Company's eligible accounts
receivable, as defined. At December 31, 1998, the balance outstanding on this
demand loan was $5,598,000 as the lender has informally extended the Company's
ability to borrow under this demand loan. The interest rate on the demand loan
was 11.25% at December 31, 1998. During the first quarter of 1999, the balance
outstanding on the demand loan was paid in full. No amounts were outstanding
under this loan as of December 31, 1999.
(8) 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
2004. 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 --
Year
----
2000 ................................................ $ 225,698
2001 ................................................ 160,068
2002 ................................................ 92,241
2003 ................................................ 60,127
2004 ................................................ 1,124
Less -- Amount representing interest ................ (72,028)
----------
Present value of net minimum lease payments ......... 467,230
Less -- Current portion ............................. (183,193)
----------
$ 284,037
==========
F-11
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(9) INCOME TAXES:
The components of the Company's provision (benefit) for income taxes for
the years ended December 31, 1997, 1998 and 1999 are as follows --
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
---------- ------------- -------------
<S> <C> <C> <C>
Current income tax provision:
Federal ..................................... $ 26,882 $ -- $988,715
State ....................................... 5,050 80,211 368,618
-------- ---------- ---------
31,932 80,211 1,357,333
Deferred income tax provision (benefit):
Federal ..................................... 578,823 (407,182) (507,059)
State ....................................... 259,749 (133,287) (167,777)
-------- ---------- ---------
838,572 (540,469) (674,836)
-------- ---------- ---------
Total income tax provision (benefit) ......... $870,504 $ (460,258) $682,497
======== ========== =========
</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>
Year Ended December 31,
------------------------------------------
1997 1998 1999
---------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate ................................ 34.0% (34.0)% (34.0)%
State taxes, net of Federal effect .................... 6.6 ( 6.6) 73.1
Non-deductible amortization ........................... -- -- 40.3
Meals and entertainment ............................... -- -- 27.6
Adjustment to cash to accrual basis liability ......... -- -- (56.4)
Valuation allowance ................................... -- -- 206.0
Other ................................................. 5.7 ( 1.7) ( 8.3)
----- ----- -----
46.3% (42.3)% 248.3%
===== ===== =====
</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 approximately $1,667,000. Other
major components of the deferred tax assets and (liabilities) as of December
31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1999
--------------- -------------
<S> <C> <C>
Bad debt reserve .................................... $ 57,529 $ 223,741
Depreciation ........................................ 100,124 62,200
Change from cash to accrual basis liability ......... (1,249,974) (724,202)
Net operating loss carryforwards .................... 174,474 824,322
Valuation allowance ................................. -- (639,230)
Other, net .......................................... 18,701 28,859
------------ ----------
Total deferred income taxes, net ................. $ (899,146) $ (224,310)
============ ==========
</TABLE>
At December 31, 1998 and 1999 the Company had available net operating loss
carryforwards of approximately $390,000 and $2,125,000 to reduce future
period's taxable income. These loss carryforwards begin to expire in 2012.
During 1999, the Company's subsidiaries in England and The Netherlands
incurred net operating losses, the tax benefits of which have been fully
reserved for by a valuation allowance because of the uncertainty of their
realizability.
F-12
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) 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 accrued dividends at 5% per year, commencing
March 1, 1997. Each share was convertible, subject to certain adjustments,
into 1 share of common stock, at the option of the holder. 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
repurchased 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 converted into common
shares on a 1 to 1 ratio on the date of the initial public offering.
Effective September 14, 1999, the Company is authorized to issue 10,000,000
shares of Preferred Stock, par value $.001 per share.
In connection with the issuance of the 1999 Preferred Shares to General
Atlantic Partners 54, L.P. and GAP Coinvestment Partners II, L.P., warrants
were issued to purchase shares of common stock equal to 15% of the number
of shares sold in the proposed initial public offering at a price equal to
the initial price to the public. In order to exercise the warrants, a
notice of exercise was required to be delivered within 20 business days
following the first filing of the Company's registration statement on Form
S-1. These warrants expired without any common stock purchases.
On September 14, 1999, the Company sold 1,242,000 shares of its common
stock to Cisco Systems, Inc. at a price of $12.00 per share. In connection
with this transaction, the Company entered into an Investor's Rights
Agreement with Cisco Systems, Inc. pursuant to which the Company granted
Cisco Systems, Inc. certain registration rights.
On September 22, 1999, the Company sold 94,867 and 18,133 shares of its
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment
Partners II, L.P., respectively, at a price of $12.00 per share.
On October 27, 1999, the Company sold 4,600,000 shares of common stock
at an initial public offering price of $18.00 per share and began trading
on the Nasdaq National Market under the symbol PRDS. The net proceeds of
the offering were approximately $75.1 million, after deducting underwriting
discounts, commissions, and other offering expenses.
Stock Options --
In 1998, the Company adopted its Stock Option/Stock Issuance Plan (the
"Option Plan"). Prior to this time, options issued were not issued in
connection with a plan. The Option Plan is 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
F-13
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) STOCKHOLDERS' EQUITY: -- (Continued)
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, 1999 a combined total of 1,903,870 shares of common stock
has been reserved for issuance under the Option Plan.
The 1999 Stock Incentive Plan (the "1999 Plan"), adopted and effective on
September 14, 1999, is intended to serve as the successor equity incentive
program to the Option Plan.
6,655,600 shares of common stock have been authorized for issuance under
the 1999 Plan. This share reserve consists of the shares which were available
for issuance under the predecessor plan 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 Option Plan were incorporated into the 1999
Plan upon the date of the initial public offering, and no further option grants
may be made under the plan. The incorporated options will continue to be
governed by their existing terms, unless the Company extends one or more
features of the 1999 Plan to those options.
The Employee Stock Purchase Plan (the "Employee Plan") was adopted and
approved by the Company on September 14, 1999. The plan, effective on October
27, 1999, is designed to allow eligible employees, as defined, to purchase
shares of common stock, at semi-annual intervals, through periodic payroll
deductions. A total of 750,000 shares of common stock may be issued under this
plan.
The Employee Plan has a series of successive offering periods, each with a
maximum duration of 24 months. The initial offering period began on October 27,
1999 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. The Employee Plan
will terminate no later than the last business day in October 2009.
Individuals who are eligible employees on the start date of any offering
period may enter the Employee 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 Employee 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 the 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 the 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.
F-14
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) STOCKHOLDERS' EQUITY: -- (Continued)
A summary of the Company's stock option activity is as follows --
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1997 1998 1999
------------------------- --------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ---------- --------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period ...................... 5,916,000 $ 0.33 9,471,600 $ 0.61 8,397,600 $ 1.02
Granted ...................... 3,856,800 1.04 2,427,000 1.41 3,686,990 7.25
Exercised .................... (109,200) 0.25 (3,492,000) 0.18 (653,970) 0.46
Forfeited .................... (192,000) 0.83 (9,000) 0.83 (673,710) 2.36
--------- ------ ---------- ------ --------- ------
Outstanding at end of period . 9,471,600 $ 0.61 8,397,600 $ 1.02 10,756,910 $ 3.11
========= ====== ========== ====== ========== ======
Options exercisable at end of
period ...................... 5,700,300 $ 0.42 4,586,250 $ 0.80 5,259,270 $ 1.02
========= ====== ========== ====== ========== ======
Weighted average fair value of
options granted during period $ 0.23 $ 0.26 $ 4.31
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 --
Options Weighted Options
Outstanding at Average Exercisable at
December 31, Remaining December 31,
Exercise Prices 1999 Contractual Life 1999
- ----------------- ---------------- ------------------ ---------------
$0.17............ 330,000 5.20 years 330,000
0.50 ........... 240,000 6.00 years 240,000
0.83 ........... 2,890,800 6.82 years 2,724,300
1.25 ........... 2,628,300 7.61 years 1,390,800
1.50 ........... 1,282,000 8.62 years 442,520
2.50 ........... 775,500 9.23 years 20,000
4.00 ........... 1,184,960 9.43 years 106,000
6.50 ........... 375,750 9.52 years --
10.20 ........... 179,500 9.67 years --
11.05 ........... 727,850 9.76 years 5,650
15.00 ........... 19,000 9.82 years --
45.06 ........... 84,250 9.92 years --
66.50 ........... 39,000 10.00 years --
--------- ---------
10,756,910 5,259,270
========== =========
The Company has elected to follow APB 25 in accounting for its employee
stock options. Had the determination of compensation costs been based on the
fair value at the grant dates 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 pro forma amounts in the table below.
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 1997, 1998 and 1999.
o weighted-average risk free interest rates of 6.28%, 5.51% and 5.79%,
respectively;
o expected dividend yields of 0%;
F-15
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) STOCKHOLDERS' EQUITY: -- (Continued)
o expected lives of 4 years; and
o expected volatility of 73.17%.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss):
As reported ................................. $ 1,010,934 $ (627,300) $ (957,366)
Pro forma ................................... 774,427 (1,006,406) (1,980,145)
Basic net income (loss) per share:
As reported ................................. $ 0.22 $ (0.11) $ (0.08)
Pro forma ................................... $ 0.18 $ (0.17) $ (0.16)
Diluted net income (loss) per share: .........
As reported ................................. $ 0.08 $ (0.11) $ (0.08)
Pro forma ................................... $ 0.06 $ (0.17) $ (0.16)
</TABLE>
Deferred Compensation --
During 1999, the Company granted stock options with exercise prices which
were less than the fair market value of the underlying shares of common stock
at the date of grant. As a result, the Company recorded deferred compensation
of $304,625. This amount will be recognized as noncash compensation expense
over the vesting period of the options (4 years). For the year ended December
31, 1999, $47,953 of the deferred compensation was amortized to expense and has
been reflected as noncash compensation expense in the accompanying statements
of operations.
(11) COMMITMENTS AND CONTINGENCIES:
Operating Leases --
The Company has entered into non-cancelable operating leases for office
space with terms ranging from approximately one month to ten 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 the terms of the leases.
The future minimum lease payments required under the above mentioned
operating leases for the year ended December 31, are as follows --
Year
----
2000 ................................... $ 2,942,309
2001 ................................... 2,109,118
2002 ................................... 1,521,564
2003 ................................... 1,311,518
2004 ................................... 1,067,054
2005 and thereafter .................... 5,126,059
-----------
Total minimum lease payments ......... $14,077,622
===========
Rent expense was approximately $457,825, $736,120 and $1,311,411 for the
years ended December 31, 1997, 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 1997, 1998 or 1999.
F-16
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(11) COMMITMENTS AND CONTINGENCIES: -- (Continued)
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.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Network Resource Consultants and Company B.V.:
We have audited the accompanying balance sheet of Network Resource
Consultants and Company B.V. (the "Company") as of December 31, 1998, and the
related statements of income, stockholders' (deficit) equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Network Resource
Consultants and Company B.V. as of December 31, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
August 13, 1999
F-18
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................................. $ 32,432
Accounts receivable--net of allowance for doubtful accounts of $10,000 465,347
Prepaid expenses and other current assets ............................ 175,021
---------
Total current assets ............................................... 672,800
FURNITURE, FIXTURES AND EQUIPMENT:
Leasehold improvements ............................................... 12,390
Computer equipment ................................................... 95,278
Office furniture ..................................................... 95,511
---------
Total ................................................................ 203,179
Less--Accumulated depreciation ....................................... (59,481)
---------
Total furniture, fixtures and equipment, net ......................... 143,698
---------
Total assets ....................................................... $816,498
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ..................................................... $117,253
Accrued expenses and other current liabilities ....................... 252,615
Due to shareholder ................................................... 322,712
Deferred revenue ..................................................... 45,158
Income taxes payable ................................................. 88,350
---------
Total current liabilities .......................................... 826,088
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock $6.086 par value; 20,000 shares
authorized; 5,714 shares issued and outstanding .................... 34,775
Additional paid-in capital ........................................... 86,760
Accumulated deficit .................................................. (168,622)
Accumulated other comprehensive income ............................... 37,497
---------
Total stockholders' deficit ........................................ (9,590)
---------
Total liabilities and stockholders' deficit ........................ $816,498
=========
</TABLE>
The accompanying notes to financial statements are an
integral part of this balance sheet.
F-19
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
June 30,
Year Ended -------------------------
December 31, 1998 1998 1999
------------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Revenues:
Professional services ...................... $1,657,427 $856,406 $963,065
Hardware and software sales ................ 231,498 33,593 36,460
---------- -------- --------
Total revenues ........................... 1,888,925 889,999 999,525
Cost of Revenues: ...........................
Professional services ...................... 903,204 468,012 532,868
Hardware and software purchases ............ 148,783 16,108 19,551
---------- -------- --------
Total cost of revenues ................... 1,051,987 484,120 552,419
---------- -------- --------
Gross profit ............................. 836,938 405,879 447,106
Sales and marketing ......................... 26,261 11,141 1,438
General and administrative .................. 504,791 247,343 280,157
Depreciation and amortization ............... 44,067 14,435 18,264
---------- -------- --------
Operating profit ........................... 261,819 132,960 147,247
Other Income (Expense):
Interest income ............................ 8,431 -- 2,355
Other income (expense) ..................... 5,070 (146) (132)
Interest expense ........................... (24,760) (9,881) (8,936)
---------- -------- --------
Income before income tax provision ......... 250,560 122,933 140,534
Income tax provision ........................ 84,183 41,798 47,782
---------- -------- --------
Net income ................................. $ 166,377 $81,135 $92,752
========== ======== ========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-20
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stockholders'
Common Stock
-------------------- Paid-in Accumulated Comprehensive (Deficit)
Shares Amount Capital Deficit Income Equity
-------- ---------- ------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 .............. 4,000 $24,344 $ -- $ (334,999) $ 53,236 $ (257,419)
Common stock issued to
stockholder ........................ 1,714 10,431 86,760 -- -- 97,191
Net income ........................... -- -- -- 166,377 -- 166,377
Foreign currency translation
adjustment ......................... -- -- -- -- (15,739) (15,739)
----------
Total comprehensive income ......... 150,638
----------
Balance, December 31, 1998 ............ 5,714 34,775 86,760 (168,622) 37,497 (9,590)
Net income ........................... -- -- -- 92,752 -- 92,752
Foreign currency translation
adjustment ......................... -- -- -- -- 4,557 4,557
----------
Total comprehensive income ......... 97,309
----------
Balance, June 30, 1999
(unaudited) .......................... 5,714 $34,775 $86,760 $ (75,870) $ 42,054 $ 87,719
===== ======= ======= ========== ========= ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-21
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
Year Ended ----------------------------
December 31, 1998 1998 1999
------------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 166,377 $ 81,135 $ 92,752
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization .......................... 44,067 14,435 18,264
(Increase) decrease in--
Accounts receivable .................................... (158,335) (184,494) 143,198
Prepaid expenses and other current assets .............. (124,216) (10,671) 91,251
(Decrease) increase in--
Accounts payable ....................................... (87,938) 55,292 (35,957)
Accrued expenses and other current liabilities ......... 157,681 43,824 (48,111)
Deferred revenue ....................................... 39,310 (5,848) (27,661)
Income taxes payable ................................... 88,350 16,419 39,629
---------- ---------- --------
Net cash provided by operating activities .............. 125,296 10,092 273,365
---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments to stockholder ................................ (115,840) (39,225) (53,563)
Purchase of furniture, fixtures and equipment ............ (134,721) (19,474) (93,023)
---------- ---------- --------
Net cash used in investing activities .................... (250,561) (58,699) (146,586)
---------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES--
Proceeds from sale of common stock ....................... 97,191 97,191 --
---------- ---------- --------
Effects of exchange rates ................................ (15,739) (59,838) 4,557
Net (decrease) increase in cash .......................... (43,813) (11,254) 131,336
CASH, beginning of period ................................. 76,245 76,245 32,432
---------- ---------- --------
CASH, end of period ....................................... $ 32,432 $ 64,991 $163,768
========== ========== ========
</TABLE>
The accompanying notes to financial statements are an
integral part of these statements.
F-22
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business-
Network Resource Consultants and Company B.V. (the "Company" or "NRCC"),
is based in Veenendaal, The Netherlands. The Company is engaged in rendering
services for the design, implementation and operation of network management
systems.
Unaudited Interim Financial Statements-The accompanying statements of
income, stockholders' (deficit) equity and cash flows for the six months ended
June 30, 1998 and 1999 included herein have been prepared by the Company and
are unaudited. The information furnished in the unaudited financial statements
referred to above includes all adjustments which are, in the opinion of
management, necessary for a fair presentation of such financial statements. The
results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Use of Estimates-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition-Revenues are recognized as services are rendered.
Amounts billed to clients in excess of revenues recognized to date are
classified as deferred revenues. In addition, the Company acts as a reseller of
certain hardware and software and sales revenue is recognized when these
products are shipped to the customer.
Furniture, Fixtures and Equipment-Furniture, fixtures and equipment are
stated at cost, net of accumulated depreciation and amortization. Furniture and
equipment are depreciated on a straight-line basis over estimated useful lives
of three to ten years. Leasehold improvements are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the lease term.
Accounting for Long-Lived Assets-The Company accounts for long-lived
assets in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 require, among other things, that
an entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. Management does not believe that any
such changes have taken place.
Income Taxes-The Company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
F-23
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
their tax basis for operating profit and tax liability carryforward. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that the tax
change occurs.
Comprehensive Income-
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income relate to foreign currency translation adjustments.
Foreign Currency Translation-
The Company's functional currency is the Dutch Guilder and the reporting
currency is the U.S. dollar. All assets and liabilities of the Company are
translated from its functional currency into its reporting currency at fiscal
year-end exchange rates. Income and expense items are translated at average
exchange rates prevailing during the fiscal year. The resulting translation
adjustments are recorded as a component of stockholders' (deficit) equity in the
accompanying financial statements.
Fair Value of Financial Instruments-
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments.
(2) RELATED PARTY TRANSACTIONS:
As of December 31, 1998, the Company had $322,712 outstanding to one of
the Company's stockholders. The interest rate on the loan was 6%. During 1999,
the loan was settled in full.
(3) INCOME TAXES:
The components of the Company's income tax provision are as follows-
<TABLE>
<CAPTION>
Year Ended For the Six Months
December 31, Ended June 30,
1998 1998 1999
-------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Income tax provision-
Current--International .......... $84,183 $41,798 $47,782
Deferred--International ......... -- -- --
------- ------- -------
$84,183 $41,798 $47,782
</TABLE>
A reconciliation from the U.S. Federal statutory rate to the Company's
effective tax rate is as follows-
<TABLE>
<CAPTION>
Year Ended For the Six Months
December 31, Ended June 30,
1998 1998 1999
-------------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
U.S. Federal statutory tax rate ......... 34.0% 34.0% 34.0%
Netherlands tax rate adjustment ......... 1.0 1.0 1.0
Other ................................... (1.4) (1.0) (1.0)
----- ----- -----
33.6% 34.0% 34.0%
</TABLE>
F-24
<PAGE>
NETWORK RESOURCE CONSULTANTS AND COMPANY B.V.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(3) INCOME TAXES: -- (Continued)
Deferred taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred taxes were not material as of December 31, 1998.
(4) STOCKHOLDERS' (DEFICIT) EQUITY:
In January 1998, the Company issued 1,714 shares of common stock at a
price of approximately $56.70 per share for total proceeds of approximately
$97,191.
(5) COMMITMENTS AND CONTINGENCIES:
Operating Lease Commitments-The Company was committed under operating
leases principally for office space and equipment. Rent expense was $85,742 for
the year ended December 31, 1998, and $39,311 and $46,883 for the six months
ended June 30, 1998 and 1999 (unaudited), respectively.
Future minimum payments under lease agreements are as follows-
Year ended December 31,
1999 .................. $137,379
2000 .................. 110,522
2001 .................. 73,660
2002 .................. 53,092
2003 .................. 50,441
Thereafter ............ 8,408
Concentrations of Credit Risk-As of December 31, 1998, the two largest
customer receivables represented 58% of total accounts receivable.
(6) SUBSEQUENT EVENT:
Subsequent to year-end the Company was acquired by Predictive Systems,
Inc., a network consulting company based in the United States.
F-25
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The following unaudited pro forma condensed consolidated financial
statement for the year ended December 31, 1999 has been derived from the
application of pro forma adjustments to the audited financial statements of
Predictive Systems, Inc. and subsidiaries ("Predictive") included elsewhere in
this prospectus and Network Resource Consultants and Company B.V. ("NRCC"), not
included in this prospectus. The unaudited pro forma condensed consolidated
statement of operations information for the year ended December 31, 1999 gives
effect to the acquisition as if it had occurred on January 1, 1999.
The unaudited pro forma condensed consolidated financial statement does
not necessarily reflect what our actual financial results would have been had
the acquisition been completed on these dates, nor does it purport to be
indicative of future financial results.
The acquisition has been accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their
respective fair values. The excess of the purchase price over the fair value of
the net assets acquired was approximately $4.3 million.
F-26
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------- ----------------------------------
Predictive NRCC Adjustments Combined
-------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Professional services .................. $ 50,698,035 $1,159,424 $ -- $ 51,857,459
Hardware and software sales ............ 2,046,810 93,503 -- 2,140,313
------------ ---------- ---------- ------------
Total revenues ............... ........ 52,744,845 1,252,927 -- 53,997,772
Cost of Revenues:
Professional services .................. 25,698,926 639,238 -- 26,338,164
Hardware and software purchases ........ 1,765,746 40,926 -- 1,806,672
------------ ---------- ---------- ------------
Total cost of revenues ....... ........ 27,464,672 680,164 -- 28,144,836
------------ ---------- ---------- ------------
Gross profit ................. ........ 25,280,173 572,763 -- 25,852,936
Sales and marketing ..................... 8,477,692 4,479 -- 8,482,171
General and administrative .............. 16,809,504 389,047 -- 17,198,551
Depreciation and amortization ........... 1,082,890 34,222 525,836(1) 1,642,948
Noncash compensation expense ............ 47,953 -- -- 47,953
------------ ---------- ------------ ------------
Operating profit (loss) ............... (1,137,866) 145,015 (525,836) (1,518,687)
Other Income (Expense):
Interest income ........................ 943,898 2,355 -- 946,253
Other income (expense) ................. 76,309 (132) -- 76,177
Interest expense ....................... (157,210) (10,804) -- (168,014)
------------ ---------- ------------ ------------
Income (loss) before income tax
provision ........................... (274,869) 136,434 (525,836) (664,271)
Income tax provision .................... 682,497 47,782 -- 730,279
------------ ---------- ------------ ------------
Net (loss) income ..................... $ (957,366) $ 88,652 $ (525,836) $ (1,394,550)
============ ========== ============ ============
Net loss per share-
Basic and Diluted ...................... $ (0.08) $ (0.11)
Weighted average shares
outstanding-Basic and Diluted .......... 12,137,560 649,336(2) 12,786,896
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro forma condensed consolidated financial
statement
are an integral part of this statement.
F-27
<PAGE>
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENT
The unaudited pro forma condensed consolidated statement of operations
have been prepared to reflect the acquisition of NRCC as if this acquisition
occurred on January 1, 1999. NRCC's historical financial statements were
derived from its books and records and reflect the statement of operations of
NRCC for the period from January 1, 1999 to August 11, 1999.
The acquisition has been accounted for under the purchase method of accounting.
The following is a summary of the adjustments reflected in the unaudited
pro forma condensed consolidated statement of operations:
1. Represents the amortization of the excess of the purchase price over
the net assets of NRCC acquired, which was approximately $4.3 million.
2. Represents the increase in the number of outstanding shares of common
stock to reflect the 1,062,814 shares issued to the stockholders of NRCC to
fund the purchase price.
Predictive believes that all significant assets and liabilities have been
identified and, accordingly, that the final determination of the allocation of
the NRCC purchase price should not vary materially from the preliminary
estimate.
The identifiable assets are being amortized over their estimated useful
lives. Intangible assets resulting from the excess of the purchase price over
the fair value of the net assets acquired, including workforce, customer lists
and goodwill, are being amortized over a period of 5 years.
Subsequent to the acquisition, Predictive will review the carrying values
assigned to the intangible assets to determine whether later events or
circumstances have occurred that indicate that the balance of the intangible
assets may be impaired. Predictive's principal considerations in determining
the impairment of the intangible assets will include the strategic benefit to
Predictive of the particular business as measured by expected undiscounted
future cash flows. Predictive is not aware of any events or circumstances which
would impair the intangible assets.
F-28
<PAGE>
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the
shares offered hereby, but only under circumstances and in jurisdictions where
it is lawful to do so. The information contained in this prospectus is current
only as of its date.
------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ............................ 1
Risk Factors .................................. 5
Forward-Looking Statements; Market
Data ....................................... 13
Use of Proceeds ............................... 14
Price Range of Common Stock ................... 14
Dividend Policy ............................... 14
Capitalization ................................ 15
Dilution ...................................... 16
Selected Consolidated Financial Data .......... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .............................. 18
Business ...................................... 25
Management .................................... 38
Certain Transactions .......................... 49
Principal and Selling Stockholders ............ 52
Description of Capital Stock .................. 57
Shares Eligible for Future Sale ............... 60
Underwriting .................................. 62
Legal Matters ................................. 64
Experts ....................................... 64
Where You Can Find More Information ........... 64
Index to Financial Statements ................. F-1
================================================================================
<PAGE>
================================================================================
3,800,000 Shares
Predictive Systems, Inc.
Common Stock
--------------------------------------------
[GRAPHIC OMITTED]
--------------------------------------------
Goldman, Sachs & Co.
Robertson Stephens
Bear, Stearns & Co. Inc.
First Union Securities, Inc.
Representatives of the Underwriters
================================================================================
<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.
Amount to
be Paid
----------
SEC registration fee ...................................... $ 67,491
NASD filing fee ........................................... 26,065
Nasdaq National Market listing fee ........................ 17,500
Legal fees and expenses ................................... 200,000
Accounting fees and expenses .............................. 200,000
Printing and engraving expenses ........................... 200,000
Blue sky fees and expenses (including legal fees) ......... 10,000
Transfer Agent and Registrar fees and expenses ............ 20,000
Miscellaneous ............................................. 73,944
--------
Total ................................................. $815,000
========
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 maintains 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 (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
II-1
<PAGE>
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since January
1, 1996:
1. On March 5, 1999, the Registrant issued 6,512,316 shares of Series A
Convertible Preferred Stock for an aggregate amount of $18,565,225.44 in
a private placement to six accredited investors in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act of 1933 as amended (the "Securities Act").
2. On March 5, 1999, the Registrant issued warrants to purchase 15% of the
number of shares registered in its initial public offering at the initial
public offering price for an aggregate amount of $1,000 in a private
placement to two accredited investors in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
3. On August 12, 1999, the Registrant issued 1,062,814 shares of common
stock to two persons in exchange for all of the outstanding capital stock
of Network Resource Consultants and Company, B.V. in reliance upon the
exemption from registration provided by Section 4(2).
4. On September 16, 1999, the Registrant issued 1,242,000 shares of common
stock to Cisco Systems, Inc., an accredited investor, in a private
placement for an aggregate amount of $14,904,000 in reliance upon the
exemption from registration provided by Section 4(2) of the Securities
Act.
5. On September 22, 1999, the Registrant issued 94,867 and 18,133 shares of
common stock to General Atlantic Partners 57, L.P. and GAP Coinvestment
Partners II, L.P., both accredited investors, in a private placement for
an aggregate amount of $1,356,000 in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act.
6. The Registrant from time to time has granted stock options to employees,
directors and consultants in reliance upon exemption from registration
pursuant to either (i) issuances to accredited investors in private
placements pursuant to Section 4(2) of the Securities Act, or (ii)
issuances to employees, directors and consultants for services pursuant
to Rule 701 promulgated under the Securities Act. The following table
sets forth certain information regarding such grants:
<TABLE>
<CAPTION>
Number of Exercise
Shares Prices
----------- -----------------
<S> <C> <C>
January 1, 1996 to December 31, 1996 ......... 1,560,000 $ 0.50-$ 0.83
January 1, 1997 to December 31, 1997 ......... 3,856,800 $ 0.83-$ 1.25
January 1, 1998 to December 31, 1998 ......... 2,427,000 $ 1.25-$ 1.50
January 1, 1999 to December 31, 1999 ......... 3,686,990 $ 1.50-$65.50
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ ------------
<S> <C>
1.1 Form of underwriting agreement.
3.1# Amended and Restated Certificate of Incorporation.
3.2## Amended and Restated By-laws.
4.1+ Specimen common stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws of the Registrant defining the rights of
holders of Common Stock of the Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between General Atlantic Partners
54, L.P. and the Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between GAP Coinvestment
Partners II, L.P. and the Registrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Incentive Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.4+ Employment Agreement, dated May 11, 1999, by and between Ronald Pettengill and the
Registrant.
10.5+ Employment Agreement, dated May 11, 1999, by and between Robert Belau and the
Registrant.
10.6+ Employment Agreement, dated January 22, 1999, by and between Kevin Holt and the
Registrant.
10.7+ Registration Rights Agreement, dated March 5, 1999.
10.8+ Secured Promissory Note, dated August 31, 1998, in favor of Brown Brothers Harriman &
Co.
10.9+ Agreement of Lease, dated June 25, 1999, by and between the Registrant and Polestar
Fifth Property Associates LLC.
10.10** Development and License Agreement, dated July 29, 1998, by and between Bear, Stearns
& Co. Inc. and the Registrant.
10.10.1@ Statements of Work, by and between Bear, Stearns & Co. Inc. and the Registrant, entered
into pursuant to the Development and License Agreement included as Exhibit 10.10.
10.12** Consulting Services Agreement, dated October 15, 1998, by and between First Union
Corporation and the Registrant.
10.12.1@ Statement of Work, by and between First Union Corporation and the Registrant, entered
into pursuant to the Consulting Services Agreement included as Exhibit 10.12.
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.
10.15.1@ Statements of Work, by and between Qwest Communications Corporation and the
Registrant, entered into pursuant to the Consulting Services Agreement included as Exhibit
10.14, as amended by Amendment No. 1 thereto included as Exhibit 10.15.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------- -------------
<S> <C>
10.18+ Common Stock Purchase Agreement, dated September 16, 1999, by and between Cisco
Systems, Inc. and the Registrant.
10.19+ Investor's Rights Agreement, dated September 16, 1999, by and between Cisco Systems,
Inc. and the Registrant.
10.20** Professional Services Subcontract, dated May 14, 1999, by and between Cisco Systems,
Inc. and the Registrant.
10.20.1@ Statements of Work, by and between Cisco Systems, Inc. and the Registrant, entered into
pursuant to the Professional Services Subcontract included as Exhibit 10.20.
10.21+ Common Stock Purchase Agreement, dated September 22, 1999, by and among General
Atlantic Partners 57, L.P., GAP Coinvestment Partners II, L.P. and the Registrant.
10.22+ Amendment No. 1 to the Registration Rights Agreement, dated March 5, 1999, dated
September 22, 1999.
10.23+ Employment Agreement, dated September 21, 1999 by and between Gerard Dorsey and
the Registrant.
10.24+ Amendment No. 1 to Common Stock Purchase Agreement, dated September 27, 1999, by
and between Cisco Systems, Inc. and the Registrant.
10.25@ Master Professional Services Agreement, dated May 14, 1999, by and between BellSouth
MNS, Inc. and the Registrant.
10.25.1@ Statements of Work, by and between BellSouth MNS, Inc. and the Registrant, entered into
pursuant to the Master Professional Services Agreement included as Exhibit 10.25.
10.26! Service Agreement, dated February 1, 2000, by and between Cisco Systems, Inc. and the
Registrant.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.3 Consent of Arthur Andersen LLP.
24.1! Powers of attorney.
27.1! Financial Data Schedule.
</TABLE>
- ------------
# Incorporated by reference to Exhibit 3.2 of Predictive's Registration
Statement on Form S-1, No. 333-84045 ("Registration Statement No.
333-84045").
## Incorporated by reference to Exhibit 3.4 of Registration Statement No.
333-84045.
+ Incorporated by reference to the indentically numbered exhibit of
Registration Statement No. 333-84045.
** Non-confidential portions of this Exhibit were filed as the identically
numbered Exhibit of Registration Statement No. 333-84045, which
non-confidential portions are incorporated herein by reference.
Confidential treatment was granted 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.
@ Confidential treatment was granted 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.
! Previously filed.
(b) Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or related notes.
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.
II-4
<PAGE>
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-5
<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 30th day of
March, 2000.
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.
<TABLE>
<CAPTION>
Signature Title(s) Date
- ------------------------------- -------------------------------------------------- ---------------
<S> <C> <C>
/s/ Ronald G. Pettengill, Jr. Chief Executive Officer and Chairman of the March 30, 2000
- ------------------------------- Board of Directors (principal executive officer)
Ronald G. Pettengill, Jr.
/s/ Robert L. Belau President and Director March 30, 2000
- ------------------------------
Robert L. Belau
/s/ Gerard E. Dorsey Chief Financial Officer (principal financial and March 30, 2000
- ----------------------------- accounting officer)
Gerard E. Dorsey
* Director March 30, 2000
- ----------------------------
Peter L. Bloom
* Director March 30, 2000
- ----------------------------
Donald J. Duffy
* Director March 30, 2000
- ----------------------------
Braden R. Kelly
* Director March 30, 2000
- ----------------------------
Eric Meyer
* Director March 30, 2000
- ----------------------------
Inder Sidhu
* Director March 30, 2000
- ----------------------------
William L. Smith
* Director March 30, 2000
- ----------------------------
William W. Wyman
By: /s/ Robert L. Belau
-----------------------------
Robert L. Belau, Attorney-in-Fact March 30, 2000
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Predictive Systems, Inc.:
We have audited in accordance with accounting standards generally accepted
in the United States, the financial statements of Predictive Systems, Inc.
included in this registration statement and have issued our report thereon
dated February 10, 2000. 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
February 10, 2000
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 End
Year Expenses Deductions of Year
-------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
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
For the fiscal year ended December 31, 1999
Allowance for doubtful accounts .......... $141 $469 $ (42) $568
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ ------------
<S> <C>
1.1 Form of underwriting agreement.
3.1# Amended and Restated Certificate of Incorporation.
3.2## Amended and Restated By-laws.
4.1+ Specimen common stock certificate.
4.2 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws of the Registrant defining the rights of
holders of Common Stock of the Registrant.
4.3+ Stock Purchase Warrant, dated March 5, 1999, by and between General Atlantic Partners
54, L.P. and the Registrant.
4.4+ Stock Purchase Warrant, dated March 5, 1999, by and between GAP Coinvestment
Partners II, L.P. and the Registrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1+ 1999 Stock Incentive Plan.
10.2+ 1999 Employee Stock Purchase Plan.
10.4+ Employment Agreement, dated May 11, 1999, by and between Ronald Pettengill and the
Registrant.
10.5+ Employment Agreement, dated May 11, 1999, by and between Robert Belau and the
Registrant.
10.6+ Employment Agreement, dated January 22, 1999, by and between Kevin Holt and the
Registrant.
10.7+ Registration Rights Agreement, dated March 5, 1999.
10.8+ Secured Promissory Note, dated August 31, 1998, in favor of Brown Brothers Harriman &
Co.
10.9+ Agreement of Lease, dated June 25, 1999, by and between the Registrant and Polestar
Fifth Property Associates LLC.
10.10** Development and License Agreement, dated July 29, 1998, by and between Bear, Stearns
& Co. Inc. and the Registrant.
10.10.1@ Statements of Work, by and between Bear, Stearns & Co. Inc. and the Registrant, entered
into pursuant to the Development and License Agreement included as Exhibit 10.10.
10.12** Consulting Services Agreement, dated October 15, 1998, by and between First Union
Corporation and the Registrant.
10.12.1@ Statement of Work, by and between First Union Corporation and the Registrant, entered
into pursuant to the Consulting Services Agreement included as Exhibit 10.12.
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.
10.15.1@ Statements of Work, by and between Qwest Communications Corporation and the
Registrant, entered into pursuant to the Consulting Services Agreement included as Exhibit
10.14, as amended by Amendment No. 1 thereto included as Exhibit 10.15.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number Description
------- -------------
<S> <C>
10.18+ Common Stock Purchase Agreement, dated September 16, 1999, by and between Cisco
Systems, Inc. and the Registrant.
10.19+ Investor's Rights Agreement, dated September 16, 1999, by and between Cisco Systems,
Inc. and the Registrant.
10.20** Professional Services Subcontract, dated May 14, 1999, by and between Cisco Systems,
Inc. and the Registrant.
10.20.1@ Statements of Work, by and between Cisco Systems, Inc. and the Registrant, entered into
pursuant to the Professional Services Subcontract included as Exhibit 10.20.
10.21+ Common Stock Purchase Agreement, dated September 22, 1999, by and among General
Atlantic Partners 57, L.P., GAP Coinvestment Partners II, L.P. and the Registrant.
10.22+ Amendment No. 1 to the Registration Rights Agreement, dated March 5, 1999, dated
September 22, 1999.
10.23+ Employment Agreement, dated September 21, 1999 by and between Gerard Dorsey and
the Registrant.
10.24+ Amendment No. 1 to Common Stock Purchase Agreement, dated September 27, 1999, by
and between Cisco Systems, Inc. and the Registrant.
10.25@ Master Professional Services Agreement, dated May 14, 1999, by and between BellSouth
MNS, Inc. and the Registrant.
10.25.1@ Statements of Work, by and between BellSouth MNS, Inc. and the Registrant, entered into
pursuant to the Master Professional Services Agreement included as Exhibit 10.25.
10.26! Service Agreement, dated February 1, 2000, by and between Cisco Systems, Inc. and the
Registrant.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.3 Consent of Arthur Andersen LLP.
24.1! Powers of attorney.
27.1! Financial Data Schedule.
</TABLE>
- ------------
# Incorporated by reference to Exhibit 3.2 of Predictive's Registration
Statement on Form S-1, No. 333-84045 ("Registration Statement No.
333-84045").
## Incorporated by reference to Exhibit 3.4 of Registration Statement No.
333-84045.
+ Incorporated by reference to the indentically numbered exhibit of
Registration Statement No. 333-84045.
** Non-confidential portions of this Exhibit were filed as the identically
numbered Exhibit of Registration Statement No. 333-84045, which
non-confidential portions are incorporated herein by reference.
Confidential treatment was granted 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.
@ Confidential treatment was granted 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.
! Previously filed.
<PAGE>
Predictive Systems, Inc.
Common Stock, $.001 par value
-------------------------
Underwriting Agreement
----------------------
March __, 2000
Goldman, Sachs & Co.,
FleetBoston Robertson Stephens Inc.
Bear, Stearns & Co. Inc.
First Union Securities, Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
Predictive Systems, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 1,000,000 shares of Common Stock, $.001 par value per share ("Stock") of the
Company and the stockholders of the Company named in Schedule II-A hereto (the
"Selling Stockholders") propose, subject to the terms and conditions stated
herein, severally to sell to the Underwriters an aggregate of 2,800,000 shares
and, at the election of the Underwriters, certain of the Selling Stockholders
named in Schedule II-B hereto (the "Optional Selling Stockholders") propose,
subject to the terms and conditions stated herein, to sell to the Underwriters
up to 570,000 additional shares of Stock. The aggregate of 3,800,000 shares to
be sold by the Company and the Selling Stockholders is herein called the "Firm
Shares" and the aggregate of 570,000 additional shares to be sold by the
Optional Selling Stockholders is herein called the "Optional Shares". The Firm
Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof are herein collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-31770)
(together with any pre-effective amendments thereto, the "Initial
Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each
in the form heretofore delivered to you for each of the other
Underwriters, and, excluding exhibits thereto, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the offering (a "Rule 462(b)
Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other document with respect to the Initial Registration
Statement has heretofore been filed with the Commission; and no stop
order suspending the effectiveness of the Initial Registration
<PAGE>
Statement, any post-effective amendment hereto or the Rule 462(b)
Registration Statement, if any, has been issued and no proceeding for
that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement
or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement, any post-effective amendment and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus
filed with the Commission pursuant to Rule 424(b) under the Act in
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the
time it was declared effective, each as amended at the time such part
of the Initial Registration Statement became effective or such part of
the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first
filed pursuant to Rule 424(b) under the Act, is hereinafter called the
"Prospectus").
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder. The Preliminary Prospectus and the
Prospectus, as each may be or have been amended or supplemented, as of
its date and at all subsequent times, did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use
therein or by a Selling Stockholder expressly for use in the
preparation of the answers therein to Items 7 and 11(m) of Form S-1.
(iii) The Registration Statement conforms, and any further
amendments or supplements to the Registration Statement will conform,
in all material respects, to the requirements of the Act and the rules
and regulations of the Commission thereunder, and does not and will
not, as of the applicable effective date of the Registration Statement,
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through Goldman,
Sachs & Co. expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to Items 7
and 11(m) of Form S-1.
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a prospective
material adverse change, in or affecting the management, financial
2
<PAGE>
position, stockholders' equity or results of operations of the Company
and its subsidiaries taken as a whole (each such change or resulting
effect, a "Material Adverse Change" or "Material Adverse Effect," as
the context requires), otherwise than as set forth in or contemplated
by the Prospectus;
(v) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially and adversely affect the value
of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not materially interfere with the use made and proposed
to be made of such property and buildings by the Company and its
subsidiaries;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, except where the failure
to do so would not result in a Material Adverse Effect; and each
subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth
in the Prospectus under the caption "Capitalization" (other than
subsequent issuances, if any, pursuant to the Company's employee
benefit plans, or upon the exercise of outstanding options or warrants,
if any), and all of the issued shares of capital stock of the Company
have been duly authorized and validly issued, are fully paid and
non-assessable and conform to the description of the Stock contained in
the Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued,
are fully paid and non-assessable and (except for directors' qualifying
shares and except as set forth in the Prospectus) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims;
(viii) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be validly
issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject, except, in any such case, for such conflicts, breaches,
violations or defaults which could reasonably be expected to result in
a Material Adverse Effect, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of the
Company or any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any
3
<PAGE>
of its subsidiaries or any of their properties; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be required (A)
under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters, (B) by the National
Association of Securities Dealers, Inc., or (C) by the Nasdaq National
Market;
(x) Neither the Company nor any of its subsidiaries is (A) in
violation of its Certificate of Incorporation or By-laws or (B) in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound, except, with respect to clause (B), as otherwise disclosed in
the Prospectus and except for such violations or defaults which could
not reasonably be expected to result in a Material Adverse Effect;
(xi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption
"Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, would individually
or in the aggregate have a Material Adverse Effect; and, to the best of
the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xiii) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company",
as such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(xiv) Arthur Andersen LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(xv) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to
which the business or operations of the Company or any of its
subsidiaries will be affected by the Year 2000 Problem. As a result of
such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a Material Adverse
Effect. The "Year 2000 Problem" as used herein means any significant
risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000;
(xvi) There are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under
the Registration Statement or included in the offering contemplated by
this Agreement, except for such rights as have been duly waived;
4
<PAGE>
(xvii) The Company and each of its subsidiaries maintain a system
of accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles as applied in the United
States and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
(xviii)The financial statements filed with the Commission as a
part of the Registration Statement and included in the Prospectus
present fairly the consolidated financial position of the Company and
its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The
supporting schedules included in the Registration Statement, if any,
present fairly the information required to be stated therein. Such
financial statements and supporting schedules have been prepared in
conformity with generally accepted accounting principles as applied in
the United States on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes
thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial
data set forth in the Prospectus under the captions "Prospectus
Summary--Summary Selected Financial Data", "Selected Financial Data"
and "Capitalization" fairly present the information set forth therein
on a basis consistent with that of the audited financial statements
contained in the Registration Statement;
(xix) The Company and its consolidated subsidiaries have filed
all necessary federal, state and foreign income and franchise tax
returns or have properly requested extensions thereof and have paid all
taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of
them, except where such failure could not reasonably result in a
Material Adverse Effect. The Company has made adequate charges,
accruals and reserves in the applicable financial statements referred
to in Section 1(xviii) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has
not been finally determined. The Company is not aware of any tax
deficiency that has been or might be asserted or threatened against the
Company that could result in a Material Adverse Effect;
(xx) Except as disclosed in the Prospectus, each of the Company
and its subsidiaries owns or possesses adequate rights to use all
patents, patent rights or licenses, inventions, collaborative research
agreements, trade secrets, know-how, trademarks, service marks, trade
names and copyrights and other intellectual property rights which are
necessary to conduct its businesses as described in the Registration
Statement and Prospectus; except as disclosed in the Prospectus, the
expiration of any patents, patent rights, trade secrets, trademarks,
service marks, trade names or copyrights would not result in a Material
Adverse Effect that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or
copyrights; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of
others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights
which, singly or in the aggregate, if the subject of an unfavorable
5
<PAGE>
decision, ruling or finding, might have a Material Adverse Effect. To
the Company's knowledge, there is no claim being made against the
Company regarding patents, patent rights or licenses, inventions,
collaborative research, trade secrets, know-how, trademarks, service
marks, trade names or copyrights. The Company and its subsidiaries do
not in the conduct of their business as now or proposed to be conducted
as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third
party, known to the Company or any of its subsidiaries, which such
infringement or conflict is reasonably likely to result in a Material
Adverse Effect;
(xxi) Each of the Company and its subsidiaries is insured by
recognized, financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks as
are generally deemed adequate and customary for their businesses
including, but not limited to, policies covering real and personal
property owned or leased by the Company and its subsidiaries against
theft, damage, destruction, acts of vandalism and earthquakes, general
liability and Directors and Officers liability. The Company has no
reason to believe that it or any subsidiary will not be able (i) to
renew its existing insurance coverage as and when such policies expire
or (ii) to obtain comparable coverage from similar institutions as may
be necessary or appropriate to conduct its business as now conducted
and at a cost that would not result in a Material Adverse Effect.
Neither of the Company nor any subsidiary has been denied any insurance
coverage which it has sought or for which it has applied; and
(xxii) The Company and its subsidiaries and any "employee benefit
plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations
thereunder (collectively, "ERISA")) established or maintained by the
Company, its subsidiaries or their "ERISA Affiliates" (as defined
below) are in compliance in all material respects with ERISA, except
where the failure to comply would not reasonably be expected to result
in a Material Adverse Effect. "ERISA Affiliates" means, with respect to
the Company or a subsidiary, any member of any group of organizations
described in Sections 414(b),(c),(m) or (o) of the Internal Revenue
Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company or such
subsidiary is a member. No "reportable event" (as defined under ERISA)
has occurred or is reasonably expected to occur with respect to any
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company, its subsidiaries or any
of their ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfounded benefit liabilities"
(as defined under ERISA). Neither the Company, its subsidiaries nor any
of their ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination
of, or withdrawal from, any "employee benefit plan" or (ii) Sections
412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of
their ERISA Affiliates that is intended to be qualified under Section
401(a) of the Code is so qualified and nothing has occurred, whether by
action or failure to act, which would cause the loss of such
qualification.
(b) Each of the Selling Stockholders severally represents and warrants
to, and agrees with, each of the Underwriters and the Company that:
6
<PAGE>
(i) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Stockholder of this
Agreement and the Power of Attorney (as defined) and the Custody
Agreement hereinafter referred to, and for the sale and delivery of the
Shares to be sold by such Selling Stockholder hereunder, have been
obtained or waived; and such Selling Stockholder has full right, power
and authority to enter into this Agreement, the Power-of-Attorney and
the Custody Agreement (as defined) and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling
Stockholder hereunder and the compliance by such Selling Stockholder
with all of the provisions of this Agreement, the Power of Attorney and
the Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach
or violation of any of the terms or provisions of, or constitute a
default under, any statute, indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder is bound or
to which any of the Shares to be sold by the Selling Stockholder is
subject, nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the
partnership agreement of such Selling Stockholder if such Selling
Stockholder is a partnership or any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such
Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each
Time of Delivery (as defined in Section 4 hereof) such Selling
Stockholder will have, good and valid title to the Shares to be sold by
such Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares,
free and clear of all liens, encumbrances, equities or claims, will
pass to the several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, such Selling Stockholder shall not offer, sell, contract to
sell, pledge, grant any option to purchase, make any short sale or
otherwise dispose of, except as provided hereunder, any securities of
the Company that are substantially similar to the Shares, including but
not limited to any securities that are convertible into or exchangeable
for, or that represent the right to receive, Stock or any such
substantially similar securities (other than (A) pursuant to employee
stock option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of
this Agreement, (B) to any trust for the direct or indirect benefit of
such Selling Stockholder or the immediate family of such Selling
Stockholder (provided that the trustee agrees to be bound in writing by
these restrictions and that the transfer is not for value), and (C)
securities acquired in the public market after the date of the
Prospectus), without your prior written consent;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information relating to such Selling
Stockholder furnished to the Company by such Selling Stockholder
expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further
7
<PAGE>
amendments or supplements to the Registration Statement and the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material respects
to the requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or
at the First Time of Delivery (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Stockholder hereunder have been
placed in custody under a Custody Agreement, in the form heretofore
furnished to you (the "Custody Agreement"), duly executed and delivered
by such Selling Stockholder to the Company, as custodian (the
"Custodian"), and such Selling Stockholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you
(the "Power of Attorney"), appointing the persons indicated in Schedule
II hereto, and each of them, as such Selling Stockholder's
attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute
and deliver this Agreement on behalf of such Selling Stockholder, to
determine the purchase price to be paid by the Underwriters to the
Selling Stockholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Stockholder hereunder
and otherwise to act on behalf of such Selling Stockholder in
connection with the transactions contemplated by this Agreement, the
Power of Attorney and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody
for such Selling Stockholder under the Custody Agreement are subject to
the interests of the Underwriters hereunder; the arrangements made by
such Selling Stockholder for such custody, and the appointment by such
Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney,
are to that extent irrevocable; the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law,
whether by the death or incapacity of any individual Selling
Stockholder or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such estate
or trust, or in the case of a partnership or corporation, by the
dissolution of such partnership or corporation, or by the occurrence of
any other event; if any individual Selling Stockholder or any such
executor or trustee should die or become incapacitated, or if any such
estate or trust should be terminated, or if any such partnership or
corporation should be dissolved, or if any other such event should
occur, before the delivery of the Shares hereunder, certificates
representing the Shares shall be delivered by or on behalf of the
Selling Stockholders in accordance with the terms and conditions of
this Agreement and of the Custody Agreements; and actions taken by the
Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid
as if such death, incapacity, termination, dissolution or other event
had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such
death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
8
<PAGE>
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $.............., the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Shares to be sold by the
Company and each of the Selling Stockholders as set forth opposite their
respective names in Schedule II-A hereto by a fraction, the numerator of which
is the aggregate number of Firm Shares to be purchased by such Underwriter as
set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company and all of the Selling Stockholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, each of the
Selling Stockholders listed on Schedule II-B agrees, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from each of such Selling Stockholders,
at the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Selling Stockholders listed on Schedule II-B, as and to the extent
indicated in Schedule II-B hereto, hereby grant, severally and not jointly, to
the Underwriters the right to purchase at their election up to an aggregate of
570,000 Optional Shares, at the purchase price per share set forth in the
paragraph above, for the sole purpose of covering sales of shares in excess of
the number of Firm Shares. Any such election to purchase Optional Shares shall
be made in proportion to the maximum number of Optional Shares to be sold by
each Selling Stockholder as set forth in Schedule II-B hereto. Any such election
to purchase Optional Shares may be exercised only by written notice from you to
the Attorneys-in-Fact, given within a period of 30 calendar days after the date
of this Agreement and setting forth the aggregate number of Optional Shares to
be purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Attorneys-in-Fact otherwise
agree in writing, earlier than two or later than ten business days after the
date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company ("DTC"), for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Company and the Custodian to Goldman, Sachs & Co. at
least forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with respect
thereto at the office of DTC or its designated custodian Goldman, Sachs & Co.,
85 Broad Street, New York, New York 10004 (the "Designated Office"). The time
and date of such delivery and payment shall be, with respect to the Firm Shares,
9
<PAGE>
9:30 a.m., New York time, on ............., 2000 or such other time and date as
Goldman, Sachs & Co., the Company and the Selling Stockholders may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York time, on
the date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. the Selling
Stockholders may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New York, New York 10019 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
.......p.m., New York City time, on the New York Business Day next preceding
such Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when any amendment
to the Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and to
furnish you with copies thereof; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, promptly to use its best efforts to obtain
the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus
10
<PAGE>
is required at any time prior to the expiration of nine months after the time of
issue of the Prospectus in connection with the offering or sale of the Shares
and if at such time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus in order to comply with the Act, to notify you and upon your request
to prepare and furnish without charge to each Underwriter and to any dealer in
securities as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Shares
at any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule
158);
(e) During the period beginning from the date hereof and continuing to
and including the date 90 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder,
any securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent, except that (i) the Company may issue such
securities in exchange for all of the equity or substantially all of the assets
of a company in connection with a merger or acquisition and (ii) the Company may
issue shares of its common stock in connection with one or more strategic
investments, provided that, in all such cases, prior to any such issuance the
recipient of such securities shall have agreed with Goldman, Sachs & Co. in
writing to be bound by the provisions of the lock-up restrictions set forth in
Annex II hereto throughout the remainder of the 90-day period;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish or make available in electronic format to you
copies of all reports or other communications (financial or other) furnished to
stockholders, and to deliver or make available in electronic format to you (i)
as soon as they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any national securities exchange on
which any class of securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the Company as
you may from time to time reasonably request (such financial statements to be on
a consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders generally
or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
11
<PAGE>
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National Market
System ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that the Company will pay or
cause to be paid all of the following: (i) the fees, disbursements and expenses
of the Company's counsel and accountants in connection with the registration of
the Shares under the Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any Preliminary
Prospectus and the Prospectus and amendments and supplements thereto and the
mailing and delivering of copies thereof to the Underwriters and dealers; (ii)
the cost of printing or producing any Agreement among Underwriters, this
Agreement, the Blue Sky Memorandum, closing documents (including any
compilations thereof) and any other documents in connection with the offering,
purchase, sale and delivery of the Shares; (iii) all expenses in connection with
the qualification of the Shares for offering and sale under state securities
laws as provided in Section 5(b) hereof, including the reasonable fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey, (iv) all fees and
expenses in connection with listing the Shares on NASDAQ, (v) the filing fees
incident to, and the reasonable fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares,
(vi) the cost of preparing stock certificates; (vii) the cost and charges of any
transfer agent or registrar; (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section, and (ix) all costs and expenses incident to the
performance of each Selling Stockholder's obligations hereunder which are not
otherwise specifically provided for in this Section, including (x) any fees and
expenses of counsel for such Selling Stockholder, (y) such Selling Stockholder's
pro rata share of the fees and expenses of the Attorneys-in-Fact and the
Custodian, and (z) all expenses and taxes incident to the sale and delivery of
the Shares to be sold by such Selling Stockholder to the Underwriters hereunder.
In connection with clause (z) of the preceding sentence, Goldman, Sachs & Co.
agrees to pay New York State stock transfer tax, and the Company agrees to
reimburse Goldman, Sachs & Co. for associated carrying costs if such tax payment
is not rebated on the day of payment and/or any portion of such tax payment not
rebated. It is understood that the Company shall bear, and the Selling
Stockholders shall not be required to pay or to reimburse the Company for, the
cost of any other matters not directly relating to the sale and purchase of the
Shares pursuant to this Agreement, and that, except as provided in this Section,
and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected with
any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
12
<PAGE>
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed
for such filing by the rules and regulations under the Act and in
accordance with Section 5(a) hereof; if the Company has elected to rely
upon Rule 462(b), the Rule 462(b) Registration Statement shall have
become effective by 10:00 P.M., Washington, D.C. time, on the date of
this Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened
by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Hale and Dorr LLP, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated as of such Time of
Delivery, with respect to the matters covered in paragraphs (i), (ii),
(iii), (vii) and (xii) of subsection (c) below as well as such other
related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Brobeck, Phleger & Harrison LLP, counsel for the Company,
shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of
Delivery, in form and substance satisfactory to you and subject to such
assumptions, qualifications and limitations as is customary in such
opinions, to the effect that:
(i) The Company is duly incorporated and is validly
existing and in good standing under the laws of the State of
Delaware; the Company has the corporate power and authority to
own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company has the status set forth
opposite the jurisdictions listed on Schedule A to such opinion;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus;
(iii) All of the shares of capital stock of the Company
outstanding prior to the Time of Delivery (including the Shares
to be sold by the Selling Stockholders) have been duly authorized
and validly issued, are fully paid and nonassessable and, to such
counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale, registration right,
right of first refusal or other similar right; and the Shares
conform to the description of the Stock contained in the
Prospectus;
(iv) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered to the Underwriters
against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued, fully paid and
nonassessable and free of (A) any preemptive rights arising under
the Company's certificate of incorporation or the Delaware
General Corporation Law or (B) to such counsel's knowledge,
similar rights that entitle or will entitle any person to acquire
any shares of capital stock of the Company upon the issuance and
sale of the Shares by the Company;
(v) Each of the subsidiaries has been duly incorporated
and is validly existing and in good standing under the laws of
their respective jurisdiction of incorporation; each of the
subsidiaries has the corporate power and authority to own, lease
and operate its properties and to conduct the business in which
it is engaged; to such counsel's knowledge, the Company does not
own or control, directly or indirectly, any corporation,
association or other entity other than Predictive Limited and
Network Resource Consultants and Company B.V.;
13
<PAGE>
(vi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the
Company or any of its subsidiaries, or to which the Company, any
of its subsidiaries or any of its properties is subject, which
are required to be described in the Registration Statement or
Prospectus (or any amendment or supplement thereto) by the Act or
the rules and regulations promulgated thereunder that are not so
described;
(vii) This Agreement has been duly authorized, executed
and delivered by the Company;
(viii) Neither the offer, sale or delivery of the Shares,
the compliance by the Company with the provisions of this
Agreement nor consummation by the Company of the transactions
contemplated by this Agreement (A) violates the Company's
certificate of incorporation or bylaws or (B) constitutes a
breach of, or a default under, any agreement, indenture, lease or
other instrument to which the Company is a party or by which the
Company or any of its properties is bound or that is known to
such counsel, which breach or default would reasonably be
expected to have a Material Adverse Effect or (C) will result in
any material violation of any existing law or regulation (other
than applicable state securities and Blue Sky laws, as to which
such counsel need not express an opinion), or any ruling,
judgment, injunction, order or decree known to such counsel and
applicable to the Company or any of its properties;
(ix) No consent, approval, authorization or other order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or
official is required on the part of the Company (except (A) as
have been obtained (I) under the Act and the Exchange Act and
(II) from the NASDAQ National Market, Inc., (B) such as may be
required (I) under state securities or Blue Sky laws governing
the purchase and distribution of the Shares, or (II) by the
National Association of Securities Dealers, Inc., as to each of
which such counsel need express no such opinion) for the valid
issuance and sale of the Shares to the Underwriters as
contemplated by this Agreement;
(x) To such counsel's knowledge, the Company is not
presently (a) in violation of its certificate of incorporation or
bylaws or (b) in breach of any applicable statute, rule or
regulation or any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company
or any of its subsidiaries, or over any of their properties or
operations, which would result in a Material Adverse Effect;
(xi) To such counsel's knowledge, there are no agreements,
contracts, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that are not
so described or filed, as the case may be;
(xii) That statements set forth in the Prospectus under
the caption "Description of Capital Stock," insofar as they
purport to constitute a summary of the terms of the Stock, and
under the caption "Underwriting," insofar as they purport to
describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair; and
14
<PAGE>
(xiii) The Company is not an "investment company," as such
term is defined in the Investment Company Act.
Such opinion letter shall also state that, although such
counsel is not passing upon, and does not assume any
responsibility for, and has not independently checked or
verified, the accuracy, completeness or fairness of the
information and statements contained in the Registration
Statement and the Prospectus, such counsel has participated in
conferences with certain officers and other representatives of
the Company, its independent public accountants, the Underwriters
and the Underwriters' counsel at which the contents of the
Registration Statement, the Prospectus and related matters were
discussed, and based upon such participation (i) such counsel is
of the opinion that the Registration Statement and the Prospectus
(other than the financial statements, including the notes and
schedules thereto and the other financial data, included in the
Registration Statement and the Prospectus, as to which they need
express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the
requirements of the Act and the applicable rules and regulations
thereunder; (ii) such counsel confirms that they have no reason
to believe that the Registration Statement (other than the
financial statements, including the notes and schedules thereto
and the other financial data, included in the Registration
Statement, as to which they need express no belief), at the time
the Registration Statement became effective, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and (iii) such counsel confirms that they
have no reason to believe that the Prospectus (other than the
financial statements, including the notes and schedules thereto
and the other financial data, included in the Prospectus, as to
which they need express no belief), as of its date and on the
date of such opinion, contained or contains any untrue statement
of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) The respective counsel for each of the Selling Stockholders,
as indicated in Schedule II hereto, each shall have furnished to you
their written opinion with respect to each of the Selling Stockholders
for whom they are acting as counsel (a draft of each such opinion is
attached as Annex II(c) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been
duly executed and delivered by such Selling Stockholder and
constitute valid and binding agreements of such Selling
Stockholder in accordance with their terms;
(ii) This Agreement has been duly executed and delivered
by or on behalf of such Selling Stockholder; and the sale of the
Shares to be sold by such Selling Stockholder hereunder and the
compliance by such Selling Stockholder with all of the provisions
of this Agreement, the Power-of-Attorney and the Custody
Agreement and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach
or violation of any terms or provisions of, or constitute a
default under, any statute, indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such
counsel which is filed as an exhibit to the Registration
Statement to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the
Shares to be sold by the Selling Stockholder is subject, nor will
15
<PAGE>
such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, the
Partnership Agreement of such Selling Stockholder if such Selling
Stockholder is a partnership or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over such Selling Stockholder or the property
of such Selling Stockholder;
(iii) No consent, approval, authorization or order of any
New York State or federal court or governmental agency or body is
required for the consummation of the transactions contemplated by
this Agreement in connection with the Shares to be sold by such
Selling Stockholder hereunder, except as may have been obtained
(I) under the Act and the Exchange Act and from the NASDAQ
National Market, Inc. and (II) as may be required (A) under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters, or (B) by the
National Association of Securities Dealers, Inc., as to which
such counsel need express no opinion;
(iv) Immediately prior to such Time of Delivery, such
Selling Stockholder was the sole registered owner of the Shares
to be sold at such Time of Delivery by such Selling Stockholder
under this Agreement, and had full right, power and authority to
sell, assign, transfer and deliver the Shares to be sold by such
Selling Stockholder hereunder; and
(v) Good and valid title to such Shares, free and clear of
all liens, encumbrances, equities or claims, has been transferred
to each of the several Underwriters who have purchased such
Shares in good faith and without notice of any adverse claim
within the meaning of the Uniform Commercial Code.
In rendering the opinion in paragraph (iv), such counsel may rely upon
a certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold by
such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
(e) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
such Time of Delivery, Arthur Andersen LLP shall have furnished to you
a letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in
Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a
draft of the form of letter to be delivered on the effective date of
any post-effective amendment to the Registration Statement and as of
each Time of Delivery is attached as Annex I(b) hereto);
(f)(i)Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of
its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of
the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
16
<PAGE>
described in clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(g) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii)
a suspension or material limitation in trading in the Company's
securities on NASDAQ; (iii) a general moratorium on commercial banking
activities declared by either Federal or New York State authorities; or
(iv) the outbreak or escalation of hostilities involving the United
States or the declaration by the United States of a national emergency
or war, if the effect of any such event specified in this clause (iv)
in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) The Shares at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(i) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each Selling Stockholders in
substantially the form attached hereto as Annex II;
(j) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
and
(k) The Company and the Selling Stockholders shall have furnished
or caused to be furnished to you at such Time of Delivery certificates
of officers of the Company and of the Selling Stockholders,
respectively, satisfactory to you as to the accuracy of the
representations and warranties of the Company and the Selling
Stockholders, respectively, herein at and as of such Time of Delivery,
as to the performance by the Company and the Selling Stockholders of
all of their respective obligations hereunder to be performed at or
prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to
be furnished certificates as to the matters set forth in subsections
(a) and (f) of this Section.
8. (a) The Company and each of Ronald G. Pettengill, Jr. and Robert L.
Belau, jointly and severally, will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company and Ronald G. Pettengill, Jr. and
Robert L. Belau shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the
17
<PAGE>
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein; provided, further, that
the liability of Ronald G. Pettengill, Jr. and Robert L. Belau pursuant to this
subsection 8(a) shall not exceed the product of the number of Shares sold by
such individuals, including Optional Shares, and the public offering price of
the Shares as set forth in the Prospectus.
(b) Each of the Selling Stockholders, other than Ronald G. Pettengill,
Jr. and Robert L. Belau, severally and not jointly, will indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished relating to such Selling
Stockholder to the Company by such Selling Stockholder (other than Ronald G.
Pettengill, Jr. and Robert L. Belau) expressly for use therein; and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that such
Selling Stockholder (other than Ronald G. Pettengill, Jr. and Robert L. Belau)
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein; provided, further, that the liability of a Selling
Stockholder (other than Ronald G. Pettengill, Jr. and Robert L. Belau) pursuant
to this subsection 8(b) shall not exceed the product of the number of Shares
sold by such Selling Stockholder, including Optional Shares, and the public
offering price of the Shares as set forth in the Prospectus;
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
18
<PAGE>
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action 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 participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Selling Stockholders on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company, each of the
Selling Stockholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (e) were determined by
19
<PAGE>
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. Notwithstanding anything to the contrary set forth in this Section
8(e), no Selling Stockholder shall be required to contribute any amounts in
excess of the product of the number of Shares sold by such Selling Stockholder,
including Optional Shares, and the public offering price of the Shares as set
forth in the Prospectus. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company or any Selling Stockholder within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Stockholders shall be entitled to
a further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone a Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
20
<PAGE>
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Optional Selling Stockholders to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company or the Selling Stockholders, except
for the expenses to be borne by the Company and the Selling Stockholders and the
Underwriters as provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them
severally, respectively, pursuant to this Agreement, shall remain in full force
and effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or any of the Selling Stockholders, or any
officer or director or controlling person of the Company, or any controlling
person of any Selling Stockholder, and shall survive delivery of and payment for
the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company and each of
the Selling Stockholders severally pro rata (based on the number of Shares to be
sold by the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including reasonable fees and disbursements of counsel, reasonably incurred
by the Underwriters in making preparations for the purchase, sale and delivery
of the Shares not so delivered, but the Company and the Selling Stockholders
shall then be under no further liability to any Underwriter in respect of the
Shares not so delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Stockholder made or given by any
or all of the Attorneys-in-Fact for such Selling Stockholder.
21
<PAGE>
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the Representatives plus one
for each counsel and the Custodian, if any, and upon the acceptance hereof by
you, on behalf of each of the Underwriters, this letter and such acceptance
hereof shall constitute a binding agreement among each of the Underwriters, the
Company and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company and the Selling Stockholders for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
22
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing
and binding Power-of-Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
Predictive Systems, Inc.
By: ..............................
Name:
Title:
Ronald G. Pettengill, Jr.
Robert L. Belau
Carl D. Humes
Thomas R. Joseph
Gregory D. Nicastro
Neeraj Sethi
John Wright
Peter L. Bloom
Donald J. Duffy
Eric Meyer
General Atlantic Partners, LLC
Meyer, Duffy & Associates, L.P.
Jos Bourgonje
Nelson Hung
MD Strategic, L.P.
Jamin Patel
Gregory T. Barry
Frank L. Rosalia
Gregory Eng Yee
Katherine Rocci
Charles Young
Doris P. Tillman
Nelson K. Tai
Augusto Ray Guillermo
Wilfried Van Haeren
Timothy R. Letki
Harold S. Schultz
Adam C. Steckelman
Joel Ercolani
Hope Meyer
PVII, L.P.
Barry Belau
Pamela Kapsimalis
Stanton F. Weissenborn
Dr. Peter Kapsimalis
Andrew R. Cherna
Brobeck, Phleger & Harrison LLP
Michael Green
Louis T. Alesi
Arden L. Boren
Judith Margolis
George J. Donohue
Leigh Welles
By: ..............................
Name: Gary N. Papilsky
Title: Vice President and
General Counsel
As Attorney-in-Fact acting on
behalf of each of the Selling
Stockholders named in Schedule
II to this Agreement.
Accepted as of the date hereof:
Goldman, Sachs & Co.
FleetBoston Robertson Stephens Inc.
Bear, Stearns & Co. Inc.
First Union Securities Inc.:
By:.......................................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
23
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C> <C>
Goldman, Sachs & Co.................................................
FleetBoston Robertson Stephens Inc..................................
Bear, Stearns & Co. Inc.............................................
First Union Securities Inc..........................................
---------- --------
Total...................................................... 3,800,000 570,000
========== ========
</TABLE>
24
<PAGE>
SCHEDULE II-A
Firm Shares
<TABLE>
<CAPTION>
Total Number of
Firm Shares
to be Sold
---------------
<S> <C>
The Company........................................................ 1,000,000
The Selling Stockholders(a):..................................
---------------
Total..................................................... 3,800,000
===============
</TABLE>
- -------------
(a) This Selling Stockholder is represented by Brobeck, Phleger & Harrison LLP
and has appointed Gary N. Papilsky and Gerard E. Dorsey, and each of them, as
the Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by Salans Hertzfeld Heilbronn
Christy & Viener and has appointed Gary N. Papilsky and Gerard E. Dorsey, and
each of them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by Paul, Weiss, Rifkind, Wharton &
Garrison and has appointed Gary N. Papilsky and Gerard E. Dorsey, and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
<PAGE>
SCHEDULE II-B
Optional Shares
<TABLE>
<CAPTION>
Number of Optional
Shares to be sold
if Maximum Option
Exercised
-------------------
<S> <C>
The Optional Selling Stockholders(a):.........................
Total..................................................... -----------------
570,000
=================
</TABLE>
- -------------
(a) This Selling Stockholder is represented by Brobeck, Phleger & Harrison LLP
and has appointed Gary N. Papilsky and Gerard E. Dorsey, and each of them, as
the Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by Salans Hertzfeld Heilbronn
Christy & Viener and has appointed Gary N. Papilsky and Gerard E. Dorsey, and
each of them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by Paul, Weiss, Rifkind, Wharton &
Garrison and has appointed Gary N. Papilsky and Gerard E. Dorsey, and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been separately furnished to the
representatives of the Underwriters (the "Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus as indicated in their reports thereon copies
of which have been separately furnished to the Representatives and on
the basis of specified procedures including inquiries of officials of
the Company who have responsibility for financial and accounting
matters regarding whether the unaudited condensed consolidated
financial statements referred to in paragraph (vi)(A)(i) below comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified in such letter nothing
came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all
material respects with the disclosure requirements of Items 301, 302,
402 and 503(d), respectively, of Regulation S-K;
F-1
<PAGE>
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available
interim financial statements of the Company and its subsidiaries,
inspection of the minute books of the Company and its subsidiaries
since the date of the latest audited financial statements included in
the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter,
nothing came to their attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, or (ii)
any material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in clause (B)
were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included
in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared
with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
F-2
<PAGE>
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or per
share amounts of consolidated net income or other items specified
by the Representatives, or any increases in any items specified
by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period
of corresponding length specified by the Representatives, except
in each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to
in paragraphs (iii) and (vi) above, they have carried out certain
specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records
of the Company and its subsidiaries, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain
of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found
them to be in agreement
F-3
<PAGE>
EXHIBIT 5.1
March 30, 2000
Predictive Systems, Inc.
417 Fifth Avenue, 11th Floor
New York, NY 10016
Re: Predictive Systems, Inc. Registration Statement
on Form S-1 for 1,000,000 Shares of Common Stock
------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Predictive Systems, Inc., a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of up to 1,000,000 shares of the Company's Common Stock (the
"Shares") pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF PREDICTIVE SYSTEMS, INC.
1. Predictive Limited, organized under the laws of England and Wales.
2. Network Resource Consultants and Company, B.V., organized under the laws of
The Netherlands, trading as Predictive Systems B.V.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 10, 2000 for Predictive Systems, Inc. and to all
references to our Firm, included in or made a part of this Registration
Statement.
/s/ ARTHUR ANDERSEN LLP
-------------------------
Arthur Andersen LLP
New York, New York
March 27, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated August 13, 1999 for Network Resource Consultants and Company B.V.
and to all references to our Firm, included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
-------------------------
Arthur Andersen LLP
New York, New York
March 27, 2000
