===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K/A
(Amendment No. 1)
--------------------
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number: 000-30422
PREDICTIVE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3808483
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
19 West 44th Street, 9th Floor 10036
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 659-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K |X|
The aggregate market value of voting stock held by non-affiliates of the
registrant as of the last business day of the registrant's most recently
completed second fiscal quarter was $8,282,944 (based on the last reported
sale price on the NASDAQ SmallCap Market on that date).
The number of shares outstanding of the registrant's common stock as of
April 18, 2003 was 38,064,988.
--------------------
DOCUMENTS INCORPORATED BY REFERENCE
None.
===============================================================================
Predictive Systems, Inc., a Delaware corporation (the "Company" or
"Predictive Systems") hereby amends Items 1, 8, 10, 11, 12, 13 and 15 of its
Form 10-K for the fiscal year ended December 31, 2002, as filed with the
Securities and Exchange Commission on March 31, 2003, to add the additional
information contained herein.
PART I
ITEM 1. BUSINESS
Item 1 is amended by adding the following:
Subsequent Events
On April 9, 2003, the Company and International Network Services Inc.
("INS"), a leading provider of global network consulting and security
services, announced a definitive agreement under which INS will acquire the
Company. Pursuant to the terms of the agreement and pending shareholder
approval, a wholly-owned subsidiary of INS will merge with and into the
Company. The Company will continue operations as a wholly-owned subsidiary of
INS. The total cash consideration is expected to be $19,186,700. The
$19,186,700 aggregate consideration will be increased if and to the extent the
Company's net assets at closing exceed the estimate of net assets at closing
as set forth in the merger agreement by more than $1,250,000, and will be
decreased if and to the extent the Company's net assets at closing are less
than the estimate of net assets at closing set forth in the merger agreement
by more than $1,250,000. The estimate of net assets at closing set forth in
the merger agreement is $15,386,700.
On April 10, 2003, the Company entered into an Asset Purchase Agreement with
Science Applications International Corporation ("SAIC"), whereby the Company
agreed to sell to SAIC its Information Sharing and Analysis Centers and Open
Source Intelligence services business in exchange for 4,192,220 shares of its
common stock currently held by SAIC. Consummation of the asset sale is subject
to various conditions, including the receipt of certain third party consents.
1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Deloitte & Touche LLP and note 19 contained in the Notes to
Consolidated Financial Statements set forth in Item 8 are hereby amended as
follows:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Predictive Systems, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Predictive
Systems, Inc. and subsidiaries (the "Company") as of December 31, 2002, and
the related consolidated statements of operations, stockholders' equity and
comprehensive loss, and of cash flows for the year then ended. Our audit also
included the 2002 financial statement schedule listed in the Index at Item 15.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the 2002 financial statements and the financial statement
schedule based on our audit. The financial statements of the Company as of
December 31, 2001 and for each of the years in the two-year period then ended,
before: (a) the inclusion of the transitional disclosures required by
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142") as discussed in Note 7, (b) the revision
of the disclosure of proforma stock-based compensation expense, proforma net
loss and proforma basic and diluted net loss per share as discussed in Note 2
and (c) the reclassification in the statements of operations of Revenues and
Cost of Revenues for reimbursed expenses required by Emerging Issues Task
Force Issue No. 01-14 "Income Statement Characterization of Reimbursements
Received for "Out-of-Pocket" Expenses Incurred" ("EITF 01-14") as discussed in
Note 2 to the financial statements, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements and stated that such 2001 and 2000 financial statement
schedule, when considered in relation to the 2001 and 2000 basic financial
statements taken as a whole, presented fairly, in all material respects, the
information set forth therein, in their report dated February 6, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 2002 consolidated financial statements present fairly,
in all material respects, the financial position of Predictive Systems, Inc.
and subsidiaries as of December 31, 2002, and the results of their operations
and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the 2002 financial statement schedule, when considered in relation to
the basic 2002 consolidated financial statements taken as a whole, presents
fairly in all material respects, the information set forth therein.
As discussed above, the financial statements of the Company as of
December 31, 2001, and for each of the years in the two-year period then
ended, were audited by other auditors who have ceased operations and (a) as
described in Note 7, those financial statements have been revised to include
the transitional disclosures required by SFAS 142 which was adopted by the
Company as of January 1, 2002. Our audit procedures with respect to the
disclosures in Note 7 with respect to 2001 and 2000 included (i) comparing the
previously reported net loss to the previously issued financial statements and
the adjustments to reported net loss representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill and intangible assets that are no longer being amortized to the
Company's underlying records obtained from management, and (ii) testing the
mathematical accuracy of the reconciliation of adjusted net loss to reported
loss, and the related earnings-per-share amounts. In our opinion, the
disclosures for 2001 and 2000 in Note 7 are appropriate. (b) as discussed
above, the notes to the financial statements of the Company
2
for the years ended December 31, 2001 and 2000 have been revised for the
disclosure in Note 2 of the proforma stock-based compensation expense, proforma
net loss and proforma basic and diluted net loss per share that would have been
recorded had the fair value based method of SFAS 123 "Accounting for Stock-Based
Compensation" been adopted for all option grants. Our audit procedures with
respect to the revised disclosures in Note 2 included (i) agreeing the revised
disclosures of proforma stock-based compensation expense, proforma net loss and
proforma basic and diluted net loss per share to the revised underlying
accounting analysis obtained from management, (ii) testing the methods and
assumptions used by management in determining the fair value of option grants
and agreeing the terms of the options granted to underlying supporting
documentation obtained from management and (iii) testing the mathematical
accuracy of the accounting analysis of proforma stock-based compensation
expense, proforma net loss and proforma basic and diluted net loss per share. In
our opinion, such revised disclosures for 2001 and 2000 are appropriate. (c) As
discussed above, the financial statements of the Company for the years ended
December 31, 2001 and 2000 have also been reclassified to give effect to EITF
01-14, which was adopted by the Company on January 1, 2002. We audited the
reclassifications described in Note 2 that were applied to conform the 2001 and
2000 financial statements to the comparative presentation required by EITF
01-14. Our audit procedures with respect to the 2001 and 2000 disclosures in
Note 2 included (i) comparing the amounts shown as Revenue -- Reimbursed
Expenses and Cost of Revenues -- Reimbursed Expenses in the Company's
consolidated statements of operations to the Company's underlying accounting
analysis obtained from management, (ii) on a test basis, comparing the amounts
comprising Reimbursed Expenses for Revenues and Cost of Revenues obtained from
management to independent supporting documentation, and (iii) testing the
mathematical accuracy of the underlying analysis. In our opinion, such
reclassifications have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to
the 2001 and 2000 financial statements of the Company other than with respect
to such disclosures and reclassifications, as mentioned above, and,
accordingly, we do not express an opinion or any form of assurance on the 2001
and 2000 financial statements taken as a whole.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
has changed its method of accounting for goodwill and other intangible assets
to conform to SFAS 142, and as discussed in Note 14 to the consolidated
financial statements, the Company changed its method of accounting for stock-
based compensation to conform to SFAS 123. Both changes were adopted by the
Company on January 1, 2002.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2003 (except
March 27, 2003, as to the disclosure
of the settlement of a litigation
claim as described in Note 15 and
April 10, 2003, as to the disclosure of
the merger and asset sale as described
in Note 19)
3
(19) Subsequent Events:
Pursuant to the terms of their employment agreements, in January 2003, the
Company issued to two executives of the Company 375,000 and 150,000 shares of
restricted stock (the "Restricted Stock"), respectively, at a price of $0.001
per share pursuant to the 1999 Plan. The Restricted Stock was issued under the
terms and conditions set forth in the 1999 Plan and a stock purchase
agreement, and is subject to a repurchase right by the Company at the per
share purchase price paid by the executive, which repurchase right shall lapse
as to 25% of the Restricted Stock on the first anniversary of January 2, 2003,
and in thirty-six equal monthly installments thereafter as long as the
executive is employed by the Company.
On April 9, 2003, the Company and International Network Services Inc.
("INS"), a leading provider of global network consulting and security
services, announced a definitive agreement under which INS will acquire the
Company. Pursuant to the terms of the agreement and pending shareholder
approval, a wholly-owned subsidiary of INS will merge with and into the
Company. The Company will continue operations as a wholly-owned subsidiary of
INS. The total cash consideration is expected to be $19,186,700. The
$19,186,700 aggregate consideration will be increased if and to the extent the
Company's net assets at closing exceed the estimate of net assets at closing
as set forth in the merger agreement by more than $1,250,000, and will be
decreased if and to the extent the Company's net assets at closing are less
than the estimate of net assets at closing set forth in the merger agreement
by more than $1,250,000. The estimate of net assets at closing set forth in
the merger agreement is $15,386,700.
On April 10, 2003, the Company entered into an Asset Purchase Agreement with
Science Applications International Corporation ("SAIC"), whereby the Company
agreed to sell to SAIC its Information Sharing and Analysis Centers and Open
Source Intelligence services business in exchange for 4,192,220 shares of its
common stock currently held by SAIC. Consummation of the asset sale is subject
to various conditions, including the receipt of certain third party consents.
4
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The following individuals were serving as directors and executive officers
of the Company on April 30, 2003:
Name Age Position
---- --- --------
Andrew Zimmerman................... 48 Chief Executive Officer and Director
Neeraj Sethi....................... 40 Chief Financial Officer
Shirley Howell..................... 43 Executive Vice President for Operations
Edward G. Schwartz................. 42 General Manager Global Integrity Services and Executive
Vice President
Gary N. Papilsky................... 31 General Counsel, Executive Vice President and Secretary
William W. Wyman................... 65 Chairman of the Board
Peter L. Bloom..................... 45 Director (1)
Eric Meyer......................... 42 Director (1)
Howard Morgan...................... 57 Director (1) (2)
Inder Sidhu........................ 43 Director (2)
William L. Smith................... 45 Director (2)
---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Andrew Zimmerman has been a director and Chief Executive Officer of the
Company since July 2001. Prior to joining Predictive, Mr. Zimmerman was Chief
Operating Officer for Idealab New York, a leading creator and operator of
technology businesses, from 2000 to 2001. From 1983 to 2000, Mr. Zimmerman
served in various roles at PricewaterhouseCoopers, including Global Leader of
the E-Business Consulting Practice and Global Industry Leader of the
Information and Communications Practice. Mr. Zimmerman held similar roles at
Coopers & Lybrand prior to the firm's merger with Price Waterhouse.
Mr. Zimmerman holds a B.A. from Haverford College, a Masters Degree in
Accounting from New York University and is a Certified Public Accountant.
Neeraj ("Berry") Sethi has been Chief Financial Officer since August 2002.
Prior to that, Mr. Sethi served as interim Chief Financial Officer from May to
August of 2002. From 2001 to 2002, Mr. Sethi served as a financial consultant
to various companies, including Predictive. From 1995 to 2001, Mr. Sethi was
Vice President of Finance for the Company. From 1992 to 1995, Mr. Sethi was
Assistant Vice President for Global Expense Management at Bankers Trust. From
1989 to 1992, Mr. Sethi was Controller and Financial Analyst at Network
Management.
Shirley Howell has been Executive Vice President for Operations since March
2002. From January 1999 through February 2002, Ms. Howell served in various
positions with the Company, including Vice President and General Manager of
the SouthEast Region and BellSouth Account Team Practice Director. Prior to
joining the Company, Ms. Howell was President of PeopleTech, a professional
services and consultancy firm, from November 1997 through January 1999. From
June 1979 through November 1997, Ms. Howell served in various technical and
management positions at Telcordia Technologies, including Executive Director
of Professional Services for the SouthEast Region and Director of Software
Systems Development.
Edward G. Schwartz has been General Manager Global Integrity Services and
Executive Vice President since February 2002. Prior to joining the Company,
Mr. Schwartz was Senior Vice President of Operations at Guardent, Inc. From
1998 to 2000, Mr. Schwartz was Vice President and Chief Information Security
Officer at Nationwide Insurance Enterprise. From 1997 to 1998, Mr. Schwartz
was National Practice Director for the Information Risk Management group of
Crowe, Chizek and Company, LLP. From 1993 to 1997, Mr. Schwartz
5
worked as a Senior Computer Scientist with Computer Sciences Corporation, and
Technical Director of the U.S. Department of State Diplomatic Security Service
InfoSec Laboratory. From 1985 to 1993, Mr. Schwartz worked as a Foreign
Service Officer for the U.S. Department of State overseas.
Gary N. Papilsky has been General Counsel and Executive Vice President since
October 1999 and Secretary since March 2001. Prior to joining the Company,
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. Mr. Papilsky received his B.S. in Accounting from New York
University's Stern School of Business and his J.D. from Columbia Law School.
William W. Wyman has been a director of the Company since September 1999 and
has been the Chairman of the Board of Directors since March 2001. Mr. Wyman
served as Interim Chief Executive Officer from March until July of 2001. 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 managing partner at Oliver, Wyman & Company, a firm that
specializes in management consulting to large financial institutions, which he
co-founded. Mr. Wyman is a director of Pegasystems, Inc. and U.S. Timberlands,
both public companies, and Internosis, Inc., a privately held company. He also
serves as a trustee of the Dartmouth Hitchcock Medical Center, on the Boards
of Advisors of The Sprout Group, a venture capital fund associated with Credit
Suisse First Boston, and Legend Capital, a leveraged buyout firm associated
with Castle Harlan Investments, and as a Special Advisor to General Atlantic
Partners, LLC.
Peter L. Bloom has been a director ofthe Company since March 1999. Mr. Bloom
is a managing member of General Atlantic Partners, LLC, a private equity
investment firm that makes investments in information technology, process
outsourcing and communications businesses globally, 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.
Eric Meyer has been a director of the Company since its inception in
February 1995. Mr. Meyer is a founder of Meyer Capital Partners and 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.
Howard L. Morgan has been a Director of the Company since September 2002.
Dr. Morgan is Vice Chairman of Idealab and is also President and Founder of
Arca Group, Inc., a consulting and venture capital investment firm
specializing in the areas of computer and communications technologies. Dr.
Morgan was Professor of Decision Sciences at the Wharton School of the
University of Pennsylvania and Professor of Computer Science at the Moore
School at the University of Pennsylvania for approximately 15 years. He serves
on the boards of Franklin Electronic Publishers, Inc., Segue Software
Corporation, Unitronix Corporation, Evolution Robotics and CarsDirect.com. He
holds a B.S. in Physics from City College of New York and a Ph.D. in
Operations Research from Cornell University.
Inder Sidhu has been a director of the Company since September 1999.
Mr. Sidhu has been the Vice President, Worldwide Sales Strategy at Cisco
Systems, Inc. since January 2002. From 1995 to 2002, Mr. Sidhu served in
various executive management positions in the Sales, Services and Business
Development organizations at Cisco Systems, including VP/GM Worldwide
Professional Services, VP Advanced Engineering Services and VP Strategy &
Business Development, Customer Advocacy. From 1991 to 1995, Mr. Sidhu was with
McKinsey & Company. Prior to that, Mr. Sidhu led a network management group at
3Com Corporation, and before that he served in various management/engineering
positions at Novell and Intel. Mr. Sidhu holds an MBA from the University of
Pennsylvania's Wharton Business School and is a graduate of the Advanced
Management Program at the Harvard Business School. He also holds a Masters
Degree in Electrical & Computer Engineering from the University of
Massachusetts, Amherst.
William L. Smith has been a director of the Company since March 2000.
Mr. Smith has been with BellSouth Corporation since 1979, currently serving as
its Chief Product Development and Technology
6
Officer, where he is responsible for setting the technology direction of
BellSouth's core infrastructure and products. 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.
Committees of the Board
The Audit Committee reports to the Board of Directors regarding the
appointment and performance of the Company's independent public accountants,
the scope and results of our annual audits, fees to be paid to the independent
public accountants, compliance with the Company's accounting and financial
policies and management's procedures and policies relative to the adequacy of
the Company's internal accounting controls. The members of the Audit Committee
are Messrs. Morgan, Smith and Sidhu.
The Compensation Committee reviews and makes recommendations to the Board of
Directors regarding the Company's compensation policies and all forms of
compensation to be provided to the Company's executive officers and directors.
In addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all of the Company's other employees. The members of the
Compensation Committee are Messrs. Meyer, Morgan and Bloom.
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the Company's Directors,
executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their ownership of the Company's
Common Stock and any changes in that ownership to the Securities and Exchange
Commission and the Nasdaq National Market Surveillance Department. Specific
due dates for these reports have been established and the Company is required
to report any failure to file by these dates.
To the Company's knowledge, based upon the reports filed and written
representations that no other reports were required, during the fiscal year
ended December 31, 2002, none of its directors and executive officers failed
to file on a timely basis reports required by Section 16(a).
7
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation received by our Chief
Executive Officer during 2002, by the other four most highly compensated
current executive officers who served as executive officers as of December 31,
2002 and whose salary exceeded $100,000 in 2002 for services rendered in all
capacities to the Company during 2002 (together, the "Named Executive
Officers"), and by one additional individual who would have been a Named
Executive Officer had such individual continued serving as an executive
officer on December 31, 2002 and one additional individual who would have been a
Named Executive Officer had such individual continued serving as an executive
officer through the date hereof (the "Additional Officers").
Summary Compensation Table
Long-Term
Compensation
Awards
Annual Compensation -----------------
-------------------- Shares Underlying
Names and Principal Position Year Salary Bonus Options
---------------------------- ---- -------- -------- -----------------
Andrew Zimmerman ............................................................... 2002 $275,856 $ -- 500,000
Chief Executive Officer 2001(1) 138,269 195,000 2,000,000
Neeraj Sethi ................................................................... 2002(2) 165,063 55,000 500,000
Chief Financial Officer
Gerard E. Dorsey ............................................................... 2002(3) 91,437 109,725 --
Chief Financial Officer 2001 232,400 93,500 275,000
2000 210,000 75,000 100,000
Shirley Howell ................................................................. 2002 171,875 8,431(4) 428,500
Executive Vice President of Operations 2001 122,839 123,124(5) 15,000
2000 122,917 42,574(6) --
Gary Papilsky .................................................................. 2002 166,250 -- 250,000
General Counsel 2001 172,083 70,000 125,000
2000 156,250 70,000 75,000
Eamonn Kearns .................................................................. 2002 188,303 25,000 250,000
Managing Director, Europe 2001 173,772 36,205 100,000
Edward Schwartz ................................................................ 2002(7) 157,205 10,000 200,000
General Manager Global Integrity Services
---------------
(1) Mr. Zimmerman was elected Chief Executive Officer on June 15, 2001.
Mr. Zimmerman's bonus includes a $100,000 sign on bonus.
(2) Mr. Sethi was elected Interim Chief Financial Officer on May 13, 2002 and
Chief Financial Officer on August 26, 2002. Mr. Sethi's bonus represents a
$55,000 sign on bonus.
(3) Mr. Dorsey resigned as Chief Financial Officer on May 13, 2002 and his last
day of employment with the Company was May 31, 2002. Mr. Dorsey's bonus
represents a lump sump severance paid made in connection with his
resignation.
(4) Ms. Howell received $8,431 in sales commissions in 2002 which are included
in this number.
(5) Ms. Howell received $111,343 in sales commissions in 2001 which are
included in this number.
(6) Ms. Howell received $17,814 in sales commissions in 2000 which are included
in this number.
(7) Mr. Schwartz was elected General Manager Global Integrity Services on
February 19, 2002. Mr. Schwartz's bonus includes a $10,000 sign on bonus.
In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits has
been omitted for each of the Named Executive Officers because the aggregate
amount of such perquisites and other personal benefits constituted less than
the lesser
8
of $50,000 or 10% of the total of annual salary and bonuses for each of the
Named Executive Officers in 2002.
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options for the year ended
December 31, 2002 to the Named Executive Officers and the Additional Officers.
The Company has never granted any stock appreciation rights. The potential
realizable value is calculated based on the term of the option at its time of
grant. It is calculated assuming that the fair market value of Common Stock on
the date of grant appreciates at the indicated annual rate compounded annually
for the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. These amounts are
calculated based on the requirements of the Securities and Exchange Commission
and do not reflect the Company's estimate of future stock price growth. The
percentage of total options granted to employees in the last fiscal year is
based on options to purchase an aggregate of 8,847,467 shares of Common Stock
granted by the Company in 2002.
Potential
Realizable
Value at
Assumed Annual
Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation
Underlying Granted to for Option Term
Stock Options Employees in Exercise Price Expiration ------------------
Name Granted 2002 Per Share ($) Date 5% 10%
---- ------------- ------------- -------------- ---------- ------- --------
Andrew Zimmerman ............................ 500,000 5.7% $0.22 10/18/12 $69,178 $175,312
Neeraj Sethi ................................ 30,000 0.3 0.19 7/31/12 3,585 9,084
457,500 5.2 0.25 8/31/12 71,930 182,284
12,500 0.1 0.22 10/18/12 1,729 4,383
Gerard Dorsey ............................... --
Shirley Howell .............................. 400,000 4.5 0.25 8/31/12 62,889 159,374
28,500 0.3 0.22 10/18/12 3,943 9,993
Gary Papilsky ............................... 125,000 1.4 0.25 8/31/12 19,653 49,804
125,000 1.4 0.22 10/18/12 17,295 43,828
Eamonn Kearns ............................... 150,000 1.7 0.25 8/31/12 23,584 59,765
100,000 1.1 0.22 10/18/12 13,836 35,062
Edward Schwartz ............................. 200,000 2.3 0.22 10/18/12 27,671 70,125
9
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth information concerning the value realized
upon exercise of options during 2002 and the number and value of unexercised
options held by each of the Company's Named Executive Officers at December 31,
2002 and the Additional Officers. The last reported sale price of the
Company's Common Stock in 2002 was $0.36 per share on December 31, 2002.
Accordingly, the values set forth below have been calculated on the basis of
the fair market value on December 31, 2002, less the applicable exercise price
per share, multiplied by the number of shares underlying the options.
Options at Fiscal Year-End In-the-Money Options at
---------------------------- Fiscal Year-End
Number of Securities ---------------------------
Underlying Unexercised Value of Unexercised
Shares Options In-the-Money Options
Acquired on Value ---------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Andrew Zimmerman .......................... -- -- 333,328 1,666,672 $46,666 $233,334
Neeraj Sethi .............................. -- -- 34,426 465,574 5,720 51,455
Gerard Dorsey ............................. -- -- -- -- -- --
Shirley Howell ............................ -- -- 41,645 386,855 4,830 43,160
Gary Papilsky ............................. -- -- 46,873 203,127 6,250 25,000
Eamonn Kearns ............................. -- -- 29,166 220,834 3,708 26,792
Edward Schwartz ........................... -- -- 20,833 179,167 2,917 25,083
Ten Year Option "Repricing"
The following table provides information on "repricing" of options held by
any executive officer during the last ten years. Please see "Compensation
Committee Report -- Stock Option Exchange Program" for more information.
Length of
Original
Number of Option Term
Securities Remaining
Underlying Market Price of Exercise Price at Date of
Options Stock at Time of at Time of New Exercise Repricing
Name/Title Date Repriced Repricing Repricing Price ($) (in years)
---------- -------- ---------- ---------------- -------------- ------------ -----------
Andrew Zimmerman ...................... 10/18/02 1,600,000 $0.22 $ 3.73 $0.22 8.66
Chief Executive Officer 10/18/02 400,000 0.22 7.46 0.22 8.66
Neeraj Sethi .......................... 10/18/02 12,500 0.22 0.99 0.22 9.11
Chief Financial Officer
Shirley Howell ........................ 10/18/02 13,500 0.22 1.50 0.22 6.23
Executive Vice President of Operations 10/18/02 15,000 0.22 2.88 0.22 8.37
Gary Papilsky ......................... 10/18/02 50,000 0.22 11.05 0.22 7.02
General Counsel 10/18/02 75,000 0.22 8.81 0.22 8.12
Eamonn Kearns ......................... 10/18/02 100,000 0.22 2.88 0.22 8.37
Managing Director, Europe
Edward Schwartz ....................... 10/18/02 200,000 0.22 1.42 0.22 9.37
General Manager Global Integrity
Services
Compensation of Directors
Starting with the 2002 Annual Meeting, non-employee directors receive cash
compensation of $20,000 per year plus an additional fee per meeting of $1,000
for in person and $500 for telephonic attendance. Members of the Compensation
and Audit Committees receive an additional $5,000 and $10,000 per year,
respectively. Additionally, non-employee directors receive an additional
$5,000 for serving as the chairperson
10
of a committee. These amounts are paid quarterly. The Company has instituted
this program in order to attract and retain directors of the highest caliber
to the Board. Mr. Sidhu has declined all compensation offered to him by us,
either in cash or stock options, for his entire tenure as a director.
Under the automatic option grant program of the 1999 Stock Incentive Plan,
non-employee members of the Board of Directors receive an option grant for
75,000 shares of the Company's 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, each individual who is to continue to serve as a non-
employee member of the Board of Directors receives an option to purchase
10,000 shares of the Company's Common Stock. Mr. Morgan was granted options to
purchase 75,000 shares of the Company's Common Stock at a price of $0.26 per
share in 2002 upon his appointment to the Board of Directors. These options
vest ratably over a period of four years.
Employment Agreements
The Company entered into an executive employment agreement with Andrew
Zimmerman, our Chief Executive Officer, on June 15, 2001. The agreement
provides for an annual base salary of $300,000. As part of our cost reduction
efforts, a companywide salary reduction was put in place. In connection with
this, Mr. Zimmerman agreed to reduce his annual base salary to $265,050. The
agreement also provides for a signing bonus of $100,000, an annual cash bonus
of $200,000, $50,000 of which shall be at the discretion of the Company's
Board of Directors, and $150,000 of which shall be based upon the achievement
of mutually agreed upon performance goals, and an additional annual cash bonus
of $200,000 based upon the achievement of additional exceptional performance
goals. The annual cash bonuses for the year 2001 were prorated to reflect
Mr. Zimmerman's commencement of service on July 9, 2001. No cash bonus was
paid to Mr. Zimmerman for the year 2002. Under the agreement, Mr. Zimmerman
also received options to purchase 1,600,000 shares of Common Stock at a price
of $3.73 per share and 400,000 shares of Common Stock at a price of $7.46 per
share. In October 2002, the Company cancelled 500,000 of Mr. Zimmerman's
options with an exercise price of $3.73 per share, and granted him 500,000 new
options with an exercise price of $0.22 per share, pursuant to an option
exchange offer conducted by the Company for all the Company's then current
employees. Furthermore, the Company amended the exercise price of
Mr. Zimmerman's remaining 1,500,000 options to provide for a $0.22 exercise
price for those options as well. All options vest over four years. Upon
termination without cause or resignation for good reason, Mr. Zimmerman shall
be entitled to a lump sum payment equal to his salary for a period of twelve
months. Additionally, all outstanding stock options scheduled to vest within
the twelve month period following termination shall immediately become fully
vested and exercisable, and shall remain exercisable, through the end of their
originally scheduled terms. Mr. Zimmerman shall also be entitled to continued
health coverage at the Company's expense for a period of twelve months. In the
event of termination occurring in the months of July through December of any
given calendar year, Mr. Zimmerman shall receive a pro rata portion of his
annual bonus for that year. Upon termination due to death or disability during
the months of July through December of any given calendar year, Mr. Zimmerman
shall be entitled to a pro rata portion of his annual bonus for that year.
Upon termination by the Company for cause, Mr. Zimmerman shall be entitled to
receive any earned but unpaid bonus. In the event there is a change of control
all unvested stock options granted to Mr. Zimmerman shall accelerate and vest
in full immediately prior to the change of control.
The Company entered into an executive employment agreement with Neeraj
Sethi, our Chief Financial Officer, on August 26, 2002. The agreement provides
for an annual base salary of $220,000. The agreement also provides for a
signing bonus of $30,000, and an annual cash bonus at the discretion of the
Company. Under the agreement, Mr. Sethi received options to purchase 457,500
shares of Common Stock at a price of $0.25 per share. We also agreed to grant
Mr. Sethi options to purchase the greater of (a) 200,000 shares of the
Company's Common Stock or (b) an amount of Common Stock equal to 1.2% of the
Company's outstanding Common Stock, calculated on a fully-diluted basis based
on all outstanding Common Stock including Common Stock subject to granted
stock options, provided that in no event shall such amount exceed 500,000. On
January 14, 2003, we granted Mr. Sethi options to purchase 200,000 shares of
Common Stock at a price of $0.30 per share pursuant to this provision. All
options vest over four years. We also issued Mr. Sethi 150,000 shares of
restricted stock on January 2, 2003. The repurchase right on such restricted
stock shall lapse over four years. Upon termination without cause or
resignation for good reason, Mr. Sethi shall be
11
entitled to a lump sum payment equal to his salary for a period of six months.
Additionally, all outstanding stock options scheduled to vest within the
twelve month period following termination shall immediately become fully
vested and exercisable, and shall remain exercisable, through the end of their
originally scheduled terms. Mr. Sethi shall also be entitled to continued
health coverage at the Company's expense for a period of six months. In the
event of termination occurring in the months of July through December of any
given calendar year, Mr. Sethi shall receive a pro rata portion of his annual
bonus for the proceeding year. Upon termination due to death or disability
during the months of July through December of any given calendar year,
Mr. Sethi shall be entitled to a pro rata portion of his annual bonus for that
year. Upon termination by the Company for cause, Mr. Sethi shall be entitled
to receive any earned but unpaid bonus. In the event a change of control
occurs on or before August 22, 2003, fifty percent of any unvested stock
options granted to Mr. Sethi shall accelerate and vest in full immediately
prior to the change of control. Any remaining unvested stock options granted
to Mr. Sethi shall vest in equal monthly installments over a period of twelve
months from the date of the change of control. If, upon a change control,
Mr. Sethi is terminated other than for cause, disability or death, or if he
terminates his employment for good reason within sixty days prior to the
announcement of a change of control or within twelve months from the effective
date of a change of control, then all unvested stock options granted to
Mr. Sethi shall accelerate and vest in full and Mr. Sethi shall receive a lump
sum payment equal to his salary for a period of one year. If a change of
control occurs after August 22, 2003, then all unvested stock options granted
to Mr. Sethi shall accelerate and vest in full immediately prior to the change
of control.
The Company also entered into employment agreements with Shirley Howell,
Executive Vice President of Operations and Gary Papilsky, General Counsel, on
November 8, 2002. The agreements provide for annual base salaries for
Ms. Howell and Mr. Papilsky of $170,000 and $166,250, respectively. The
agreements also provide for an annual cash bonus at the discretion of the
Company. Upon termination without cause or resignation for good reason,
Ms. Howell and Mr. Papilsky shall be entitled to a lump sum payment equal to
her or his salary for a period of six months. Additionally, they will be
entitled to continued health coverage at the Company's expense for a period of
six months. In the event of termination occurring in the months of July
through December of any given calendar year, they shall receive a pro rata
portion of their annual bonus for that year. In the event of a change of
control, fifty percent of any of their unvested stock options shall accelerate
and vest in full immediately prior to the change of control. If, upon a change
control, either is terminated other than for cause, disability or death, or if
either terminates their employment for good reason within sixty days prior to
the announcement of a change of control or within twelve months from the
effective date of a change of control, then all unvested stock options granted
to Ms. Howell and Mr. Papilsky shall accelerate and vest in full and they
shall receive a lump sum payment equal to salary for a period of nine months.
The Company also entered into an employment agreement with Edward Schwartz,
Executive Vice President and General Manager of Predictive Systems' Global
Integrity Business Unit, on February 19, 2002. The agreements provides for an
annual base salary of $200,000, which was reduced to $176,000 on July 30,
2002. The agreement also provides for an annual cash bonus at the discretion
of the Company. Upon termination without cause or resignation for good reason,
he shall be entitled to a lump sum payment equal to salary for a period of six
months. Additionally, he will be entitled to continued health coverage at the
Company's expense for a period of six months. In the event of a change of
control, twenty five percent of any of his unvested stock options shall
accelerate and vest in full immediately prior to the change of control. If,
upon a change control, he is terminated other than for cause, disability or
death, or if he terminates his employment for good reason within sixty days
prior to the announcement of a change of control or within twelve months from
the effective date of a change of control, then all unvested stock options
shall accelerate and vest in full.
Compensation Committee Interlocks and Insider Participation
No interlocking relationships exist between the Company's 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, except that Mr. Meyer previously served on the board of directors of
Riversoft PLC, a network management software company.
12
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors advises the Chief
Executive Officer and the Board of Directors on matters of the Company's
compensation philosophy and the compensation of executive officers and other
individuals compensated by the Company. The Compensation Committee is also
responsible for the administration of the Company's stock option plans under
which option grants and direct stock issuances may be made to executive
officers. The Compensation Committee has reviewed and is in accord with the
compensation paid to executive officers in 2002.
General Compensation Policy
The fundamental policy of the Compensation Committee is to provide the
Company's executive officers with competitive compensation opportunities based
upon their contribution to the Company's development and financial success and
their personal performance. It is the Compensation Committee's objective to
have a portion of each executive officer's compensation contingent upon the
Company's performance, as well as upon such executive officer's own level of
performance. Accordingly, the compensation package for each executive officer
is comprised of three elements: (i) base salary, (ii) cash bonus payment and
(iii) long-term stock-based incentive awards that strengthen the mutuality of
interests between the executive officers and the Company's stockholders.
Factors
The principal factors which the Compensation Committee considered with
respect to each executive officer's compensation package for fiscal year 2002
are summarized below. The Compensation Committee may, however, in its
discretion apply entirely different factors in advising the Chief Executive
Officer and the Board of Directors with respect to executive compensation for
future years.
Base Salary. The suggested base salary for each executive officer is
determined on the basis of the following factors: experience, personal
performance, the salary levels in effect for comparable positions within and
without the industry and internal base salary comparability considerations.
The weight given to each of these factors differs from individual to
individual, as the Compensation Committee deems appropriate.
Cash Bonus Payment. Under special circumstances, the Compensation Committee
has the discretion to pay cash bonuses to executive officers based on both
individual performance as well as performance of the Company when
predetermined goals are met or exceeded. Bonuses are determined and paid
annually.
Long-Term Incentive Compensation. Long-term incentives are generally
provided through grants of stock options. The grants are designed to align the
interests of each executive officer with those of the stockholders and provide
each individual with a significant incentive to manage the Company from the
perspective of an owner with an equity stake in the Company. Each option
generally becomes exercisable in installments over a four year period,
contingent upon the executive officer's continued employment with the Company.
Accordingly, the option grant will provide a return to the executive officer
only if the executive officer remains employed by the Company during the
vesting period, and then only if the market price of the underlying shares
appreciates.
The number of shares subject to each option grant is set at a level intended
to create a meaningful opportunity for stock ownership based on the executive
officer's current position with the Company, the base salary associated with
that position, the size of comparable awards made to individuals in similar
positions within the industry, the individual's potential for increased
responsibility and promotion over the option term and the individual's
personal performance in recent periods. The Compensation Committee also
considers the number of unvested options held by the executive officer in
order to maintain an appropriate level of equity incentive for that
individual. However, the Compensation Committee does not adhere to any
specific guidelines as to the relative option holdings of the Company's
executive officers. Stock options to purchase an aggregate of 2,628,500 shares
of Common Stock were granted to executive officers in 2002.
13
Stock Option Exchange Program
In October 2002, the Company conducted a voluntary stock option exchange
offer whereby all Company employees, including executive officers, were
eligible to exchange certain outstanding options to purchase shares of the
Company's Common Stock for new options to purchase shares of the Company's
Common Stock with an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant (the "Offer to Exchange"). A total
of 193 eligible employees participated in the Offer to Exchange. Subject to
the terms and conditions of the Offer to Exchange, the Company cancelled
options to purchase 4,085,860 shares of Company Common Stock and granted new
options to purchase 3,139,424 shares of Company Common Stock, all with an
exercise price of $0.22 per share, in exchange for the options tendered and
accepted pursuant to the Offer to Exchange. The Offer to Exchange provided an
opportunity to offer eligible employees a valuable incentive to stay with the
Company, as a large portion of the then-outstanding options had exercise
prices significantly higher than the then-current market price of the
Company's Common Stock. The Company believes the Offer to Exchange was
necessary to create better performance incentives for eligible employees and
thereby maximize stockholder value.
CEO Compensation
The plans and policies discussed above were the basis for the 2002
compensation of the Company's Chief Executive Officer, Andrew Zimmerman. In
advising the Board of Directors with respect to this compensation, the
Compensation Committee seeks to achieve two objectives: (i) establish a level
of base salary competitive with that paid by companies within the industry
that are of comparable size to the Company and by companies outside of the
industry with which the Company competes for executive talent and (ii) make a
significant percentage of the total compensation package contingent upon the
Company's performance and stock price appreciation. In accordance with these
objectives, Mr. Zimmerman received a base salary of $275,856 and no bonus for
fiscal year 2002. He currently holds a total of 2,000,000 unexercised stock
options.
Compliance with Internal Revenue Code Section 162(m)
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, which was enacted into law in 1993, the Company will not be allowed a
federal income tax deduction for compensation paid to certain executive
officers to the extent that such compensation exceeds $1 million per officer
in any one year. This limitation will apply to all compensation paid to the
covered executive officers that is not considered to be performance-based.
Compensation that does qualify as performance-based compensation will not have
to be taken into account for purposes of this limitation. The Company's stock
plans contain certain provisions that are intended to ensure that any
compensation deemed paid in connection with the exercise of stock options
granted under that plan with an exercise price equal to the market price of
the option shares on the grant date will qualify as performance-based
compensation.
The Compensation Committee does not expect that the compensation to be paid
to the Company's executive officers for 2002 will exceed the $1 million limit
per officer.
14
PERFORMANCE GRAPH
The following graph compares the Company's cumulative total stockholder
return on its Common Stock during the period commencing on October 27, 1999
(the initial public offering of the Company's Common Stock) and ending on
December 31, 2002 (as measured by dividing (i) the sum of (A) the cumulative
amount of dividends (if any) for the measurement period, assuming dividend
reinvestment, and (B) the excess of the Company's share price at the end of
the measurement period over the price at the beginning of the measurement
period, by (ii) the share price at the beginning of the measurement period)
with the cumulative return so calculated on the Nasdaq Stock Market--U.S.
Index and a self-constructed peer group index.
COMPARISON OF 38 MONTH CUMULATIVE TOTAL RETURN*
AMONG PREDICTIVE SYSTEMS, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX AND A PEER GROUP
[Graphic Omitted]
Cumulative Total Return
-------------------------------------------
10/27/99 12/99 12/00 12/01 12/02
-------- ------ ----- ----- -----
PREDICTIVE SYSTEMS, INC............................................................. 100.00 363.89 39.76 10.89 2.00
NASDAQ STOCK MARKET (U.S.).......................................................... 100.00 145.06 87.33 69.28 47.89
PEER GROUP(1)....................................................................... 100.00 217.82 28.53 22.86 8.39
---------------
(1) The Peer Group consists of the following companies: CIBER, Inc., Razorfish,
Inc. and Sapient Corporation
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is amended by adding the following:
The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 9, 2003, by:
o the Chief Executive Officer of Predictive and our other executive
officers;
o each person who is known by us to beneficially own 5% or more of our
outstanding common stock;
o each of our directors; and
o all our officers and directors as a group.
Beneficial ownership is determined in accordance with SEC rules. In
computing the number of shares beneficially owned by a person, we have
included shares for which the named person has sole or shared power over
voting or investment decisions. The number of shares beneficially owned
includes common stock which the named person has the right to acquire, through
conversion, option or warrant exercise, or otherwise, within 60 days after
April 9, 2003. The number of shares beneficially owned also includes shares of
restricted stock held by the named person. Percentage of beneficial ownership
is based on 37,983,438 shares outstanding as of April 9, 2003. Except as
otherwise noted, the address of each person listed in the table is c/o
Predictive Systems, Inc., 19 West 44th Street, 9th Floor, New York, New York
10036.
Approximate
Percentage
Name of Beneficial Owner Number of Shares Ownership
------------------------ ---------------- -----------
Andrew Zimmerman (1) ......................... 541,571 1.4%
Neeraj Sethi (2) ............................. 244,528 *
Shirley Howell (3) ........................... 87,759 *
Gary N. Papilsky (4) ......................... 74,912 *
Edward Schwartz (5) .......................... 41,667 *
William W. Wyman (6) ......................... 318,750 *
Peter L. Bloom (7) ........................... 6,715,017 17.7%
Eric Meyer (8) ............................... 2,236,737 5.9%
Howard Morgan (9) ............................ 15,000 *
Inder Sidhu (10) ............................. 1,242,000 3.3%
William L. Smith (11) ........................ 21,250 *
Entities affiliated with General Atlantic
Partners, LLC (12).......................... 6,687,517 17.6%
Science Applications International
Corporation (13)............................ 5,240,275 13.8%
All directors and executive officers as a
group (11 persons) (14)..................... 11,539,191 29.5%
---------------
* Indicates less than one percent of the Common Stock.
(1) Includes 541,471 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003. Does not include options to purchase 1,458,529 shares which are
not currently exercisable or exercisable within 60 days of April 9,
2003, but which are expected to accelerate and be vested in full
immediately prior to the closing of the pending merger with
International Network Services, Inc.
(2) Includes (i) 35,728 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003, and (ii) 150,000 shares of restricted stock subject to a
repurchase option, over which Mr. Sethi has voting control. Does not
include options to purchase 664,272 shares of common stock which are not
currently exercisable or exercisable within 60 days of April 9, 2003,
but which are expected to accelerate and be vested in full immediately
prior to the closing of the pending merger with International Network
Services, Inc.
16
(3) Includes 86,278 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003. Does not include options to purchase 342,222 shares which are not
currently exercisable or exercisable within 60 days of April 9, 2003,
but which are expected to accelerate and be vested in full immediately
prior to the closing of the pending merger with International Network
Services, Inc.
(4) Includes 72,912 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003. Does not include options to purchase 177,088 shares which are not
currently exercisable or exercisable within 60 days of April 9, 2003,
but which are expected to accelerate and be vested in full immediately
prior to the closing of the pending merger with International Network
Services, Inc.
(5) Includes 41,667 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003. Does not include options to purchase 208,333 shares which are not
currently exercisable or exercisable within 60 days of April 9, 2003,
but which are expected to accelerate and be vested in full immediately
prior to the closing of the pending merger with International Network
Services, Inc.
(6) Includes 118,750 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003. The address of Mr. Wyman is 4 North Balch Street, Hanover, New
Hampshire 03755. Does not include options to purchase 6,250 shares which
are not currently exercisable or exercisable within 60 days of April 9,
2003, but which are expected to accelerate and be vested in full
immediately prior to the closing of the merger.
(7) Includes (a) 27,500 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003, (b) 4,559,458 shares owned by General Atlantic Partners 54, L.P.,
(c) 349,918 shares owned by General Atlantic Partners 57, L.P., (d)
628,054 shares owned by General Atlantic Partners 74, L.P., (e) 47,688
shares owned by GapStar, LLC, and (f) 1,102,399 shares owned by GAP
Coinvestment Partners II, L.P. The general partner of General Atlantic
Partners 54, General Atlantic Partners 57 and General Atlantic Partners
74 is General Atlantic Partners, LLC, and the managing members of
General Atlantic Partners, LLC (other than Klaus Esser) are also the
general partners of GAP Coinvestment Partners II. General Atlantic
Partners LLC is also the managing member of GapStar, LLC. Mr. 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 therein. The address of Mr. Bloom is c/o General
Atlantic Service Corporation, 3 Pickwick Plaza, Greenwich, Connecticut
06830.
(8) Includes (a) 87,500 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of November 1,
2002, (b) 90,000 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003 held by Meyer Capital Partners LLC. Mr. Meyer is a managing member
of Meyer Capital Partners LLC, (c) 453,400 shares held by MCP Value
Technology Fund, L.P. Mr. Meyer is the managing member of MCP Technology
LLC which is the general partner of MCP Value Technology Fund, L.P., (d)
90,686 shares held by EM/DD L.P. Mr. Meyer is an executive officer of
EMDD Associates, Inc. which is the general partner of EM/DD, L.P., (e)
723,204 shares held by Trigence Partners, L.P. Mr. Meyer is an executive
officer of L'abbaye, Inc., which is the general partner of Trigence
Partners, L.P., and (f) 15,000 shares held by the Eric Meyer 2000
Irrevocable Trust. The address of Mr. Meyer is c/o Meyer Capital
Partners, 125 Elm Street, Suite 6, New Canaan, Connecticut 06840.
(9) The address of Mr. Morgan is 764 Mt. Moro Road, Villanova, PA 19085.
Does not include options to purchase 75,000 shares which are not
currently exercisable or exercisable within 60 days of April 9, 2003,
but which are expected to accelerate and be vested in full immediately
prior to the closing of the pending merger with International Network
Services, Inc.
(10) Includes 1,242,000 shares of Common Stock owned by Cisco. Mr. Sidhu is
the Vice President, Worldwide Sales Strategy at Cisco. The address of
Mr. Sidhu is c/o Cisco Systems, Inc., 170 West Tasman Drive, San Jose,
California 95134-1706.
(11) Includes 21,250 shares issuable upon exercise of currently exercisable
options and options exercisable within 60 days of April 9, 2003. The
address of Mr. Smith is c/o BellSouth Corporation, Suite 4515, 675 West
Peachtree Street, N.E., Atlanta, Georgia 30375. Does not include options
to purchase 6,250 shares which are not currently exercisable or
exercisable within 60 days of April 9, 2003, but which are
17
expected to accelerate and be vested in full immediately prior to the
closing of the pending merger with International Network Services, Inc.
(12) Includes (a) 4,559,458 shares owned by General Atlantic Partners 54,
L.P., (b) 349,918 shares owned by General Atlantic Partners 57, L.P.,
(c) 628,054 shares owned by General Atlantic Partners 74, L.P., (d)
47,688 shares owned by GapStar, LLC, and (e) 1,102,399 shares owned by
GAP Coinvestment Partners II, L.P. The general partner of General
Atlantic Partners 54, General Atlantic Partners 57 and General Atlantic
Partners 74 is General Atlantic Partners, LLC, and the managing members
of General Atlantic Partners, LLC (other than Klaus Esser) are also the
general partners of GAP Coinvestment Partners II. General Atlantic
Partners LLC is also the managing member of GapStar, LLC. The address of
the General Atlantic entities is c/o General Atlantic Service
Corporation, 3 Pickwick Plaza, Greenwich, Connecticut 06830.
(13) Includes 5,240,275 shares owned by SAIC Venture Capital Corporation, a
wholly owned subsidiary of Science Applications International
Corporation. The address of Science Applications International
Corporation is 10260 Campus Point Drive, San Diego, California 92121.
(14) Includes 1,123,156 shares issuable upon the exercise of currently
exercisable options and options exercisable within 60 days of April 9,
2003 and 150,000 shares of restricted stock subject to a repurchase
option. The holdings of Messrs. Dorsey, Kearns and Kreloff, former
executive officers of Predictive, have not been included in this number
as they were not directors or executive officers of Predictive as of
April 9, 2003 and we have no knowledge of their current holdings. Does
not include options to purchase 2,937,844 shares which are not currently
exercisable or exercisable within 60 days of April 9, 2003, but which
are expected to accelerate and be vested in full immediately prior to
the closing of the pending merger with International Network Services,
Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with BellSouth
The Company provides network consulting services to BellSouth pursuant to a
consulting services agreement negotiated by both parties in an arm's-length
transaction. In 2002, revenues from BellSouth were approximately $7.3 million.
William L. Smith, one of the Company's directors, is Chief Product Development
and Technology Officer of BellSouth.
Relationship with Cisco Systems
The Company provides network consulting services to Cisco Systems pursuant
to a consulting services agreement negotiated by the parties in an arm's-
length transaction. This agreement provides that if the Company gives more
favorable rates to another client it will inform Cisco Systems and it will
have the right to terminate this agreement. In 2002, revenues from Cisco were
approximately $28,000. Inder Sidhu, one of the Company's directors, is the
Vice President of Worldwide Sales Strategy at Cisco Systems. Additionally,
Cisco Systems owns 1,242,000 shares of the Company's Common Stock.
Relationship with Science Application International Corporation
The Company and SAIC provide network and security consulting services to
each other pursuant to existing agreements negotiated by both parties in
arm's-length transactions. In 2002, revenues from SAIC were approximately
$153,000 and the Company incurred approximately $4,000 in costs from
consulting services provided by SAIC. Additionally, the Company rents certain
of its office space from SAIC. In 2002, the Company paid approximately
$1.1 million for such services and the rental of office space including the
buyout of the real estate lease in August 2002. In addition, the Company and
SAIC license certain of their respective intellectual property to the other.
The Company believes that these transactions are on terms that are no less
favorable than those that could be obtained from unaffiliated third parties.
SAIC owns 5,240,275 shares of the Company's Common Stock.
On April 10, 2003, the Company entered into an Asset Purchase Agreement with
SAIC, whereby the Company agreed to sell to SAIC its Information Sharing and
Analysis Centers and Open Source Intelligence services business in exchange
for 4,192,220 shares of its common stock currently held by SAIC.
18
Consummation of the asset sale is subject to various conditions, including the
receipt of certain third party consents.
Consulting Agreement with Meyer Capital Partners LLC
In June 2002, the Company entered into a consulting agreement with Meyer
Capital Partners LLC to provide certain consulting services to the Company in
return for a consulting fee of $10,000 and 10,000 stock options per month.
Eric Meyer, one of the Company's directors, is the managing member of Meyer
Capital Partners LLC. In 2002, the Company granted Meyer Capital Partners LLC
50,000 options pursuant to the terms of the consulting agreement. For the year
ended December 31, 2002, the Company recognized expense of approximately
$63,000 for such services.
Employment Agreements
The Company has entered into employment agreements with certain of its
executive officers. Please see -- Executive Compensation -- Employment
Agreements.
Loans to Officers
In January of 2002, we made a loan to Rod Dorsey in the amount of $10,000 at
an interest rate of 4.75% per annum. Mr. Dorsey resigned as Chief Financial
Officer on May 13, 2002. The loan was paid in full in July 2002. There are no
currently outstanding loans to Executive Officers.
Bonus Arrangements
In connection with the Company's pending merger with INS, the Board
considered the assistance of the Company's senior executives integral in
entering into the merger agreement and deems the continued service of these
senior executives necessary in order to complete the merger. To incentivize
such executives, and other members of senior management, to assist the Company
in effecting the merger, the Board has established a bonus program whereby the
Company's senior executives and senior management will be entitled to certain
payments upon the closing of the merger. The following table sets forth the
aggregate amount to be set aside and paid pursuant to the bonus program:
Merger Consideration Per Share Total Set Aside Under Bonus Program
------------------------------ -----------------------------------
Less than $0.35 ............................ $150,000
Between $0.35 and $0.374 ................... $250,000
Between $0.375 and $0.399 .................. $350,000
Equal to or greater than $0.40 ............. $450,000
Andrew Zimmerman, our Chief Executive Officer, Neeraj Sethi, our Chief
Financial Officer, Gary Papilsky, our General Counsel, Shirley Howell, our
Executive Vice President of Operations and Edward Schwartz, our Executive Vice
President - Global Integrity Services, are eligible to participate in the
bonus program. Mr. Zimmerman, subject to Board approval, will determine the
percentage each eligible senior executive or other member of senior management
will receive of the total amount subject to the bonus program.
Option Grants
In January 2003, we issued Shawn Kreloff and Berry Sethi 375,000 and 150,000
shares of restricted common stock, respectively, at a purchase price of $0.001
per share. In January 2003, we granted Mr. Sethi options to purchase 200,000
shares of Common Stock at a price of $0.30 per share. In September 2002, we
granted Mr. Kreloff and Howard Morgan options to purchase 500,000 and 75,000
shares of Common Stock at prices of $0.21 and $0.26 per share, respectively.
In August 2002, we granted Shirley Howell, Neeraj Sethi, Gary Papilsky and
Eamonn Kearns options to purchase 400,000, 457,500, 125,000 and 150,000 shares
of Common Stock, respectively, at a price of $0.25 per share. In October
2002,we amended the exercise price of 1,500,000 of Andrew Zimmerman's options
to provide for a $0.22 exercise price. For additional information
19
regarding the grant of stock options to executive officers and directors,
please see "Executive Compensation and Security Ownership of Certain
Beneficial Owners and Management."
Option Exchange Program
In October 2002, the Company conducted an offer to exchange certain
outstanding options to purchase shares of the Company's Common Stock held by
eligible employees of the Company for new options to purchase shares of the
Company's Common Stock (the "Offer to Exchange"). A total of 193 eligible
employees participated in the Offer to Exchange. Subject to the terms and
conditions of the Offer to Exchange, we cancelled options to purchase
4,085,860 shares of our common stock and granted new options to purchase
3,139,424 shares of our common stock, all with an exercise price of $0.22 per
share, in exchange for the options tendered and accepted pursuant to the Offer
to Exchange. Andrew Zimmerman, Shirley Howell, Neeraj Sethi, Eamonn Kearns and
Gary Papilsky cancelled 500,000, 28,500, 12,500, 100,000 and 125,000 options,
respectively, and were granted 500,000, 28,500, 12,500, 100,000 and 125,000
new options, respectively, with an exercise price of $0.22 per share through
the Offer to Exchange.
General
The Company has 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 the Company than could be obtained from
unaffiliated parties and are reasonably expected to benefit the Company.
20
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Item 15 (c) is hereby amended in its entirety:
(c) Exhibits The following Exhibits are incorporated herein by reference or
are filed with this report as indicated below.
Exhibit No. Description
----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(2) Amended and Restated By-laws.
4.1(3) 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.
10.1(3) 1999 Stock Incentive Plan.
10.2(3) 1999 Employee Stock Purchase Plan.
10.3(4) Synet Service Corporation 1996 Stock Option Plan.
10.4(5) Global Integrity Corporation 1998 Stock Incentive Plan.
10.5++ Agreement, dated October 6, 2000, by and between the Registrant and
BellSouth MNS, Inc.
10.7(4) Amended and Restated Registration Rights Agreement, dated December 14,
2000.
10.8+++ Professional Services Agreement, dated December 20, 2002, by and between
the Registrant and Pfizer Inc.
10.9(6) Agreement of Lease, dated September 25, 2001, by and between the
Registrant and EBS Forty- Fourth Property Associates LLC.
10.10(7) Employment Agreement, dated as of June 15, 2001, by and between the
Registrant and Andrew Zimmerman.
10.11(8) Employment Agreement, dated as of, by and between the Registrant and
Neeraj Sethi.
10.12(9) Employment Agreement, dated as of, by and between the Registrant and Gary
Papilsky.
10.13(10) Employment Agreement, dated as of, by and between the Registrant and
Shirley Howell.
10.14(11) Service Agreement, dated February 2, 2000, by and between the Registrant
and Cisco systems, Inc.
10.15++ Professional Services Agreement, effective October 7, 2001, by and
between the Registrant and Science Applications International Corporation
10.16(4) Technical Services Agreement, dated November 17, 2000 by and between
Science Applications International Corporation and Global Integrity
Corporation.
10.17(4) Assignment and Cross License Agreement, dated December 6, 2000 by and
between Science Applications International Corporation and Global
Integrity Corporation.
10.18(11) Marketing Agreement, dated, August 2, 2001, by and between the Registrant
and BellSouth Telecommunications, Inc.
10.19(3) Investor's Rights Agreement, dated September 16, 1999, by and between
Cisco Systems, Inc. and the Registrant.
10.20++ Professional Services Subcontract, dated May 14, 1999, by and between
Cisco Systems, Inc. and the Registrant.
10.21(12) Employment Agreement, dated as of, by and between the Registrant and
Shawn Kreloff.
10.22(13) Consulting Agreement, dated June 27, 2002, by and between the Registrant
and Meyer Capital Partners LLC.
10.23(14) Agreement and Plan of Merger, dated as of April 8, 2003, by and among
International Network Services, Inc., Mid-West Acquisition Corporation
the Registrant.
10.24(15) Asset Purchase Agreement, dated as of April 10, 2003, by and among the
Registrant, Global Integrity Corporation and Science Applications
International Corporation.
21.1(16) List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (see signature page of Form 10-K filed on March 31,
2003)
99.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
21
---------------
(1) Incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form S-1, No. 333-84045 (Registration
Statement No. 333-84045).
(2) Incorporated by reference to Exhibit 3.4 of Registration Statement No.
333-84045.
(3) Incorporated by reference to the identically numbered exhibit of
Registration Statement No. 333-84045.
(4) Incorporated by reference to the identically numbered exhibit of the
Registrant's Annual Report on Form 10K for the period ending December 31,
2000.
(5) Incorporated by reference to Exhibit 10.3.1 of the Registrant's Annual
Report on Form 10K for the period ending December 31, 2000.
(6) Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10Q for the period ending September 30, 2001.
(7) Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10Q for the period ending June 30, 2001.
(8) Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10Q for the period ending September 30, 2002.
(9) Incorporated by reference to Exhibit 10.4 of the Registrant's Quarterly
Report on Form 10Q for the period ending September 30, 2002.
(10) Incorporated by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10Q for the period ending September 30, 2002.
(11) Incorporated by reference to the identically numbered exhibit of the
Registrant's Annual Report on Form 10K for the period ending December 31,
2001.
(12) Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10Q for the period ending September 30, 2002.
(13) Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10Q for the period ending June 30, 2002.
(14) Incorporated by reference to Exhibit 99.1 of the Registrant's Current
Report on Form 8K dated April 9, 2003.
(15) Incorporated by reference to Exhibit 99.1 of the Registrant's Current
Report on Form 8K dated April 11, 2003.
(16) Incorporated by reference to Exhibit 21.1 of the Registrant's Annual
Report on Form 10K filed on March 31, 2003.
+ 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.
++ Non-confidential portions of this Exhibit were filed as the identically
numbered exhibit of the Registrants Annual Report on Form 10K for the
period ending December 31, 2001, which non-confidential portions are
incorporated herein by reference. Confidential treatment was granted for
certain portions of this Exhibit pursuant to Rule 24b-2 promulgated
under the Securities Exchange Act of 1934, as amended. Confidential
portions of this Exhibit have been filed separately with the Securities
and Exchange Commission.
+++ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of
1934, as amended. Confidential portions of this Exhibit have been filed
separately with the Securities and Exchange Commission.
22
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, State of New York, on the
30th day of April, 2003.
PREDICTIVE SYSTEMS, INC.
By: /s/ ANDREW ZIMMERMAN
-------------------------------------------
Name: Andrew Zimmerman
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ ANDREW ZIMMERMAN Chief Executive Officer and Director April 30, 2003
---------------------------------------------- (principal executive officer)
Andrew Zimmerman
/s/ NEERAJ SETHI Chief Financial Officer April 30, 2003
---------------------------------------------- (principal financial and accounting officer)
Neeraj Sethi
/s/ PETER L. BLOOM * Director April 30, 2003
----------------------------------------------
Peter L. Bloom
/s/ ERIC MEYER * Director April 30, 2003
----------------------------------------------
Eric Meyer
/s/ HOWARD L. MORGAN * Director April 30, 2003
----------------------------------------------
Howard L. Morgan
/s/ INDER SIDHU * Director April 30, 2003
----------------------------------------------
Inder Sidhu
/s/ WILLIAM L. SMITH * Director April 30, 2003
----------------------------------------------
William L. Smith
/s/ WILLIAM W. WYMAN * Chairman of the Board and Director April 30, 2003
----------------------------------------------
William W. Wyman
---------------
* by Andrew Zimmerman, attorney in fact.
23
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Andrew Zimmerman, certify that:
1. I have reviewed this annual report on Form 10-K of Predictive Systems,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ ANDREW ZIMMERMAN
--------------------
Andrew Zimmerman
Chief Executive Officer
24
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Neeraj Sethi, certify that:
1. I have reviewed this annual report on Form 10-K of Predictive Systems,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ NEERAJ SETHI
----------------
Neeraj Sethi
Chief Financial Officer
25