SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 16, 2000
--------------------
Predictive Systems, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
000-30422 13-3808483
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(Commission File Number) (I.R.S. Employer Identification No.)
417 Fifth Avenue, New York, NY 10016
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(Address of Principal Executive Offices) (Zip Code)
(212) 659-3400
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(Registrant's Telephone Number, Including Area Code)
N.A.
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 16, 2000, Synet Service Corporation, a Minnesota corporation
which had been reincorporated as a Delaware corporation prior to the
merger ("Synet") merged with and into Salmon Acquisition Corporation
("Merger Sub"), a Delaware corporation and wholly-owned subsidiary of
Predictive Systems, Inc., a Delaware corporation ("Predictive"). The
merger was completed pursuant to the terms of an Agreement and Plan of
Reorganization, dated September 25, 2000, as amended, by and among
Predictive, Merger Sub, Synet, Michael J. Wethington, as stockholders'
agent, and certain stockholders of Synet. Synet is a network and
systems management consulting firm that works with organizations to
improve the availability and reliability of e-commerce applications and
network infrastructure. The consideration for the acquisition consisted
of an aggregate of 1,922,377 shares of Predictive common stock, par
value $0.001 per share, plus nine million dollars ($9,000,000) cash
including certain transaction expenses. Predictive also issued options
to purchase 242,459 shares of Predictive common stock to employees of
Synet.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Predictive hereby files this Form 8K/A to file the financial statements
and related pro forma consolidated financial statements required pursuant to
Item 7 of Form 8-K with respect to the acquisition of Synet.
(a) Financial Statements of Business Acquired.
Audited Financial Statements:
1. Report of Independent Auditors, dated April 5, 2000.
2. Synet Consolidated Balance Sheets as of December 31, 1999 and
1998.
3. Synet Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998.
4. Synet Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999 and 1998.
5. Synet Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998.
6. Synet Notes to Consolidated Financial Statements.
Unaudited Financial Statements:
1. Review Report of Independent Accountants, dated November
22, 2000.
2. Synet Consolidated Balance Sheet as of September 30, 2000.
3. Synet Consolidated Statements of Operations for the nine month
periods ended September 30, 2000 and 1999.
4. Synet Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2000 and 1999.
5. Synet Notes to Consolidated Financial Statements.
(b) Pro Forma Financial Information:
1. Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 2000.
2. Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1999.
3. Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 2000.
4. Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
(c) Exhibits
Exhibit Number Description
2.1 Agreement and Plan of Reorganization, dated September
25, 2000, by and among Predictive, Merger Sub, Synet,
Michael J. Wethington, as stockholders' agent, and
certain stockholders of Synet (incorporated by
reference to Predictive's Form 8-K filed on October
31, 2000).
2.2 Amendment No. 1 to Agreement and Plan of
Reorganization, dated October 16, 2000, by and among
Predictive, Merger Sub, Synet, Michael J. Wethington,
as stockholders' agent, and certain stockholders of
Synet (incorporated by reference to Predictive's Form
8-K filed on October 31, 2000).
23.1 Independent Auditor's Consent.
23.2 Independent Auditor's Acknowledgement.
99.1 Press release, dated October 17, 2000, relating to
the merger (incorporated by reference to Predictive's
Form 8-K filed on October 31, 2000).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Predictive Systems, Inc.
-----------------------------------
(Registrant)
By: /s/ Ronald G. Pettengill, Jr.
-------------------------------
Name: Ronald G. Pettengill, Jr.
Title: Chief Executive Officer
Dated: January 2, 2001
Consolidated Financial Statements
Synet Service Corporation and Subsidiary
Years ended December 31, 1999 and 1998
Synet Service Corporation and Subsidiary
Consolidated Financial Statements
Years ended December 31, 1999 and 1998
Contents
Report of Independent Auditors ............................................ 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ............................................... 2
Consolidated Statements of Operations ..................................... 4
Consolidated Statements of Shareholder's Equity ........................... 5
Consolidated Statements of Cash Flows ..................................... 6
Notes to Consolidated Financial Statements ................................ 7
Report of Independent Auditors
Board of Directors and Shareholders
Synet Service Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Synet Service
Corporation and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholder's equity and cash flows for
the years 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 audits.
We conducted our audits in accordance with auditing 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 consolidated financial position of Synet Service
Corporation and Subsidiary at December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 5, 2000
1
Synet Service Corporation and Subsidiary
Consolidated Balance Sheets
December 31
1999 1998
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 99,168 $ 98,648
Accounts receivable 1,012,863 1,257,609
Work-in-process 46,080 --
Prepaid expenses and other assets 216,892 145,716
--------------------------
Total current assets 1,375,003 1,501,973
Furniture and equipment:
Software 91,962 90,725
Furniture and fixtures 529,861 415,604
Leasehold improvements 9,809 9,809
Equipment under capital lease 96,354 87,858
--------------------------
727,986 603,996
Less accumulated depreciation (508,917) (346,475)
--------------------------
219,069 257,521
Other assets:
Goodwill, net of $16,560 in accumulated amortization 161,778 --
Other 7,193 12,751
--------------------------
Total assets $ 1,763,043 $ 1,772,245
==========================
2
December 31
1999 1998
--------------------------
Liabilities and shareholder's equity
Current liabilities:
Line of credit $ 50,000 $ --
Accounts payable 338,117 60,492
Deferred revenue 150,000 522,481
Accrued expenses 511,501 319,640
Long-term debt, current portion 124,000 --
Capital lease obligations, current portion 19,700 53,476
--------------------------
Total current liabilities 1,193,318 956,089
Long-term debt 14,000 --
Capital lease obligations -- 20,545
Shareholder's equity:
Undesignated Stock, par value $.01:
Authorized shares - 5,000,000
Issued and outstanding shares - none -- --
Class B Common Stock, par value $.01:
Authorized shares - 1,000,000
Issued and outstanding shares - none -- --
Class A Common Stock, par value $.01 per share:
Authorized shares - 4,000,000
Issued and outstanding shares - 1,300,000 13,000 13,000
Additional paid-in capital 15,570 15,570
Retained earnings 527,875 767,041
Accumulated other comprehensive loss (720) --
--------------------------
Total shareholder's equity 555,725 795,611
--------------------------
Total liabilities and shareholder's equity $ 1,763,043 $ 1,772,245
==========================
See accompanying notes.
3
Synet Service Corporation and Subsidiary
Consolidated Statements of Operations
Year ended December 31
1999 1998
--------------------------
Net sales $ 7,142,837 $ 6,578,773
Cost of sales 3,781,280 2,720,517
--------------------------
Gross profit 3,361,557 3,858,256
Operating expenses:
Research and development 363,330 204,533
Selling and marketing 1,544,307 1,332,440
General and administrative 1,584,327 1,608,377
--------------------------
Operating (loss) income (130,407) 712,906
Other income (expense):
Interest income 1,052 11,062
Interest expense (45,687) (10,220)
--------------------------
(Loss) income before income tax (175,042) 713,748
Income tax expense 19,532 --
--------------------------
Net (loss) income $ (194,574) $ 713,748
==========================
Net (loss) income per share:
Basic $ (.15) $ .55
==========================
Diluted $ (.15) $ .52
==========================
Weighted average number of shares outstanding:
Basic 1,300,000 1,300,000
==========================
Diluted 1,300,000 1,367,198
==========================
4
See accompanying notes.
Synet Service Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
Class B Class A
Undesignated Stock Common Stock Common Stock
----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------
Balance at December 31, 1997 -- $ -- -- $ -- 6,500,000 $ 65,000
5-for-1 reverse stock split -- -- -- -- (5,200,000) (52,000)
Distributions to shareholder -- -- -- -- -- --
Net income -- -- -- -- -- --
----------------------------------------------------------------------
Balance at December 31, 1998 -- -- -- -- 1,300,000 13,000
Distributions to shareholder -- -- -- -- -- --
Net loss -- -- -- -- -- --
Other comprehensive loss -- -- -- -- -- --
Comprehensive loss
----------------------------------------------------------------------
Balance at December 31, 1999 -- $ -- -- $ -- 1,300,000 $ 13,000
======================================================================
Accumulated
Additional Other
Paid-In Retained Comprehensive
Capital Earnings Loss Total
----------------------------------------------------------------------
Balance at December 31, 1997 $ (36,430) $ 338,866 $ -- $ 367,436
5-for-1 reverse stock split 52,000 -- -- --
Distributions to shareholder -- (285,573) -- (285,573)
Net income -- 713,748 -- 713,748
----------------------------------------------------------------------
Balance at December 31, 1998 15,570 767,041 -- 795,611
Distributions to shareholder -- (44,592) -- (44,592)
Net loss -- (194,574) -- (194,574)
Other comprehensive loss -- -- (720) (720)
----------
Comprehensive loss (195,294)
----------------------------------------------------------------------
Balance at December 31, 1999 $ 15,570 $ 527,875 $ (720) $ 555,725
======================================================================
See accompanying notes.
5
Synet Service Corporation and Subsidiary
Consolidated Statements of Cash Flows
Year ended December 31
1999 1998
----------------------
Operating activities
Net (loss) income $(194,574) $ 713,748
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 183,074 126,639
Gain on disposal of fixed assets -- (3,213)
Changes in operating assets and liabilities:
Accounts receivable 242,208 (617,506)
Work-in-process (48,060) --
Prepaid expenses and other assets (66,208) (70,023)
Accounts payable 281,111 29,596
Deferred revenue (372,481) 55,686
Accrued expenses 196,501 (12,402)
----------------------
Net cash provided by operating activities 221,571 222,525
Investing activities
Purchases of software and equipment (129,105) (35,566)
Goodwill (178,428) --
Proceeds from sale of equipment -- 3,242
----------------------
Net cash used in investing activities (307,533) (32,324)
Financing activities
Payments of capital lease obligations (54,321) (13,837)
Proceeds from line of credit 50,000 --
Proceeds from long-term debt 138,000 --
Distributions to shareholder (44,592) (285,573)
----------------------
Net cash provided by (used in) financing activities 89,087 (299,410)
Effect on foreign currency exchange rate changes on cash
and cash equivalents (2,605) --
----------------------
Net increase (decrease) in cash and cash equivalents 520 (109,209)
Cash and cash equivalents at beginning of year 98,648 207,857
----------------------
Cash and cash equivalents at end of year $ 99,168 $ 98,648
======================
Supplemental schedule of non-cash investing and
financing activities
Acquisitions of property and equipment through capital
leases $ -- $ 87,858
======================
See accompanying notes.
6
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999
1. Description of Business
Synet Service Corporation (the "Company") and its wholly-owned subsidiary (the
"Subsidiary") (collectively herein referred to as the "Companies"), are systems
management consulting companies that provide a full range of services from full
scope project management through specific application expertise.
2. Summary of Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Synet
Service Corporation and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Companies consider all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Investments classified as
cash equivalents consist of money market funds, the cost of which approximates
fair value.
Foreign Currency Translation Adjustment
The only component of accumulated other comprehensive income is the accumulated
foreign currency translation adjustment. This adjustment represents the
translation into United States dollars of the Company's investment in the net
assets of its foreign subsidiary in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 52.
Furniture and Equipment
Furniture and equipment are recorded at cost and are depreciated using the
straight-line method based on estimated useful lives of three to ten years.
Leasehold improvements and equipment under capital leases are depreciated over
the related lease term or estimated useful life, whichever is shorter.
7
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Accounting Policies (continued)
Revenue Recognition
The Companies recognize revenue for services in the period the service is
provided. Deposits received on services yet to be performed are recorded as
deferred revenue and are recognized in the period the services are performed.
Income Taxes
The Company elected S corporation status in the United States, whereby net
income of the Company is allocated to the shareholders to be reported on their
individual income tax returns. Accordingly, no provision for U.S. federal or
state income taxes has been made in the financial statements.
Income tax expense reported consists of foreign taxes assessed in other
countries.
Research and Development Costs
All research and development costs are charged to operations as incurred.
Earnings Per Share
Net income per share is calculated under FASB Statement 128. Basic income per
share is based on the weighted average shares outstanding while diluted income
per share includes any dilutive effects of options, warrants and convertible
securities. Diluted loss per share for the Company for 1999 is the same as basic
loss per share because the effect of options and warrants is anti-dilutive.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
8
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
2. Summary of Accounting Policies (continued)
Stock-Based Compensation
The Companies apply Accounting Principles Board Opinion No. 25 ("APB") and
related interpretations in accounting for its stock option plan. Under APB 25,
when the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Impairment of Long-Lived Assets
The Companies will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
3. Acquisitions
During 1999, the Company acquired certain assets of another company for $56,000
plus contingent payments based on future revenues generated by certain acquired
employees through 2001. Contingent payments due in 1999 were $78,710 which were
added to goodwill. As a result of the acquisition, total goodwill of $95,190 was
recorded as of December 31, 1999. Goodwill is being amortized on the
straight-line method over five years.
4. Line of Credit
The Company has a line of credit facility with a bank whereby it can borrow up
to $600,000. The line of credit expires in July 2000. This credit facility bears
interest at the rate of prime plus 1% per annum (9.5% at December 31, 1999). The
line of credit is guaranteed by the Company's President. All borrowings under
this line of credit are secured by the Company's accounts receivable, fixed
assets, inventory and general intangibles.
The line of credit contains certain financial and non-financial covenants that
the Company was not in compliance with as of December 31, 1999. The Company has
received a waiver letter for all covenant violations.
9
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
4. Line of Credit (continued)
Interest paid associated with this facility for the years ended December 31,
1999 and 1998 was $28,407 and $8,346.
5. Long-Term Debt
Long-term debt consisted of the following at December 31, 1999 and 1998:
1999 1998
-------------------
Unsecured note payable due in total on October 2000
Interest accrues at prime plus 1% (8.5% at
December 31, 2000) $100,000 $ --
Unsecured note payable due in monthly principal
payments of $2,000 through August 2001. Interest is
payable monthly at 8% 38,000 --
-------------------
138,000 --
Less current maturities 124,000 --
-------------------
Long-term portion $ 14,000 $ --
===================
6. Capital Leases
The Company leases computer equipment under a long-term lease agreement which is
classified as a capital lease.
Leased assets included in the accompanying balance sheet as of December 31, 1999
and 1998 consist of:
1999 1998
-------------------
Computer equipment $ 96,354 $ 87,858
Less accumulated amortization (77,940) (14,643)
-------------------
Net equipment under capital lease $ 18,414 $ 73,215
===================
10
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
6. Capital Leases (continued)
Future minimum lease payments under the capital lease consist of the following:
Year ending December 31 2000: $ 20,068
--------
Total minimum payments 20,068
Less amount representing interest (368)
--------
Present value of net minimum payments 19,700
Less current portion (19,700)
--------
Long-term portion of capital lease obligations $ --
========
7. Operating Lease
The Company leases its office facility and certain equipment under noncancelable
operating lease agreements which expire on various dates through 2002. Under the
facility agreement, the Company is required to pay base rent plus a percentage
of the landlord's operating expenses.
Total rent expense, inclusive of the Company's portion of the landlord's
operating expenses, under noncancelable operating leases was $350,539 and
$268,703 for the years ended December 31, 1999 and 1998.
Future minimum lease commitments, exclusive of costs associated with the
landlord's operating costs, required under noncancelable operating leases with
remaining terms in excess of one year as of December 31, 1999 are as follows:
2000 $171,468
2001 171,360
2002 105,735
--------
$448,563
========
11
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Stock Options
The Company has established a stock option plan for the purpose of providing
incentives to employees and consultants of the Company. The options generated
under the plan are nonstatutory stock options ("NSO"). The Company has reserved
1,000,000 shares for distribution under the plan as of December 31, 1999.
Options granted under the plan are at prices not less than fair market value on
the date of the grant. The following table summarizes activity under the plan.
Shares Plan Weighted
Available Options Average Exercise
for Grant Outstanding Price Per Share
--------- ----------- ---------------
Balance at December 31, 1997 852,400 147,600 $ 3.43
Granted (271,119) 271,119 5.00
Exercised -- -- --
Expired -- -- --
-------- -------
Balance at December 31, 1998 581,281 418,719 4.45
Granted (30,700) 30,700 6.30
Exercised -- -- --
Expired -- -- --
-------- -------
Balance at December 31, 1999 550,581 449,419 $ 4.58
======== =======
The weighted average fair value of options granted in 1999 and 1998 was $1.86
and $1.37, respectively, at December 31. The exercise prices for the options
outstanding as of December 31, 1999 ranged from $3.35 to $6.50 per share, and
from $3.35 to $5.00 per share as of December 31, 1998. As of December 31, 1999,
options to purchase 95,000 shares of common stock were exercisable at $3.35 -
$6.00 per share. As of December 31, 1998, options to purchase 77,000 shares of
common stock were exercisable at $3.35 per share.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock- Based Compensation ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
12
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
8. Stock Options (continued)
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the minimum
value option pricing model with the following weighted average assumptions for
1999: risk-free interest rates at 5%; dividend yield of 0% and a weighted
average expected life of the option of seven years. The following assumptions
were used for 1998: risk-free interest rates at 4.56%; dividend yield of 0%; and
a weighted average expected life of the option of seven years.
For purposes of pro forma disclosures, the estimated fair value of the option is
amortized to expense over the options' vesting period. The Company's pro forma
information is as follows:
1999 1998
-------------------------
Net (loss) income as reported $ (194,574) $ 713,748
Pro forma net (loss) income (326,462) 662,561
Pro forma basic net (loss) income per common share $ (.25) $ .51
Pro forma diluted net (loss) income per common share $ (.25) $ .48
9. Significant Customers
Approximately 74% of the Company's revenues for 1998 were derived from sales to
seven customers.
13
Synet Service Corporation and Subsidiary
Notes to Consolidated Financial Statements (continued)
10. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
1999 1998
------------------------
Numerator:
Net (loss) income $ (194,574) $ 713,748
Denominator:
Denominator for basic earnings per share -
weighted average shares 1,300,000 1,300,000
Effect of dilutive securities:
Stock options -- 67,198
------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 1,300,000 1,367,198
========================
Basic earnings per share $ (.15) $ .55
Diluted earnings per share $ (.15) $ .52
11. Commitments and Contingencies
In December 1998, the Company granted a stock option to a member of its
executive management for 253,744 shares of Class B Common Stock at $5 per share.
The option is exercisable only in the event of either an extraordinary company
transaction or initial public offering and the continued employment of the
individual with the Company. An extraordinary company transaction has been
defined as: (i) a reorganization, merger or consolidation in which the plan of
reorganization, merger or consolidation does not provide for substitution of the
option, (ii) a sale or disposition of substantially all of the assets or stock
of the Company or (iii) the tenth anniversary date of this agreement.
In September 1999, the Company entered into an agreement with a third party
under which the Company is required to refer $500,000 of sales from customers to
the other company. This sales commitment is fixed and noncancelable, and is due
by September 30, 2000. If the figure is not reached, the Company must pay the
difference.
14
Consolidated Financial Statements
Synet Service Corporation and Subsidiary
As of and for the Nine-Month Period
ended September 30, 2000 and 1999
Synet Service Corporation and Subsidiary
Consolidated Financial Statements
As of and for the Nine-Month Period ended September 30, 2000 and 1999
Contents
Independent Accountants' Review Report ..................................... 1
Consolidated Financial Statements
Consolidated Balance Sheet ................................................. 2
Consolidated Statements of Operations ...................................... 4
Consolidated Statements of Cash Flows ...................................... 5
Notes to Consolidated Financial Statements ................................. 6
Independent Accountants' Review Report
Board of Directors and Shareholders
Synet Service Corporation and Subsidiary
We have reviewed the accompanying consolidated balance sheet of Synet Service
Corporation and Subsidiary as of September 30, 2000, and the related
consolidated statements of operations and cash flows for the nine-month periods
ended September 30, 2000 and 1999. These consolidated financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States which
will be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
November 22, 2000
1
Synet Service Corporation and Subsidiary
Consolidated Balance Sheet
September 30, 2000
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 80,930
Accounts receivable, less allowance for doubtful accounts of $58,800 1,628,289
Work-in-process 446,642
Prepaid expenses 204,424
----------
Total current assets 2,360,285
Furniture and equipment 330,823
Less accumulated depreciation 188,370
----------
142,453
Goodwill, net of accumulated amortization of $68,850 183,987
Other assets 47,161
----------
Total assets $2,733,886
==========
See Independent Accountants' Review Report and accompanying notes.
2
Liabilities and shareholder's deficit
Current liabilities:
Accounts payable $ 550,638
Accrued expenses 786,770
Notes payable - bank 810,000
Notes payable - other 222,000
Deferred revenue 305,121
-----------
Total current liabilities 2,674,529
Deferred compensation 140,250
Shareholder's deficit:
Undesignated Stock, par value $.01:
Authorized shares - 5,000,000
Issued and outstanding shares - none --
Class B Common Stock, par value $.01:
Authorized shares - 1,000,000
Issued and outstanding shares - 389,994 3,900
Class A Common Stock, par value $.01 per share:
Authorized shares - 4,000,000
Issued and outstanding shares - 1,300,000 13,000
Additional paid-in capital 4,082,233
Accumulated deficit (3,684,731)
Accumulated other comprehensive loss (7,802)
Receivables from stock option exercises (487,493)
-----------
Total shareholder's deficit (80,893)
-----------
Total liabilities and shareholder's deficit $ 2,733,886
===========
3
Synet Service Corporation and Subsidiary
Consolidated Statements of Operations
Nine-Month Period ended
September 30
2000 1999
------------------------------
(Unaudited)
Net sales $ 7,722,593 $ 5,233,338
Cost of sales 3,402,377 2,802,532
------------------------------
Gross profit 4,320,216 2,430,806
Operating expenses:
Research and development 93,595 286,845
Selling and marketing 2,359,153 1,160,079
General and administrative 2,379,881 1,053,733
Stock compensation 3,583,070 --
------------------------------
Operating loss (4,095,483) (69,851)
Other income (expense):
Interest income 22,124 1,047
Interest expense (69,649) (17,553)
Loss on sale of fixed assets (16,092) --
------------------------------
Net loss $(4,159,100) $ (86,357)
==============================
4
See Independent Accountants' Review Report and accompanying notes.
Synet Service Corporation and Subsidiary
Consolidated Statements of Cash Flows
Nine-Month Period ended
September 30
2000 1999
--------------------------
(Unaudited)
Operating activities
Net loss $(4,159,100) $ (86,357)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for bad debts 58,800 --
Depreciation and amortization 169,180 97,166
Loss on write-down of fixed assets 16,092 --
Stock compensation 3,583,070 --
Changes in operating assets and liabilities:
Accounts receivable (674,226) (203,767)
Work-in-process (400,562) (196,337)
Prepaid expenses and other assets (27,500) (201,572)
Accounts payable 212,521 39,681
Deferred revenue 155,121 (226,287)
Accrued expenses 415,519 449,938
--------------------------
Net cash used in operating activities (651,085) (327,535)
Investing activities
Purchases of software and equipment (63,365) (49,064)
Business acquisitions (74,409) (109,511)
--------------------------
Net cash used in investing activities (137,774) (158,575)
Financing activities
Payments of capital lease obligations (19,700) (45,253)
Proceeds from line of credit 760,000 480,000
Proceeds from notes payable 84,000 44,000
Distributions to shareholder (53,506) (41,737)
--------------------------
Net cash provided by financing activities 770,794 437,010
Effect on foreign currency exchange rates on cash and
cash equivalents (173) --
--------------------------
Net decrease in cash and cash equivalents (18,238) (49,100)
Cash and cash equivalents at beginning of period 99,168 98,648
--------------------------
Cash and cash equivalents at end of period $ 80,930 $ 49,548
==========================
See Independent Accountants' Review Report and accompanying notes.
5
Synet Services Corporation and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2000
1. Basis of Presentation
The consolidated financial statements as of September 30, 2000 and for the
nine-month periods ended September 30, 2000 and 1999, are unaudited and have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the September 30, 2000 and 1999 consolidated financial information
includes all adjustments, consisting of normal recurring adjustments, considered
necessary to fairly present the consolidated financial information set forth
herein. These interim consolidated financial statements should be read in
conjunction with the Company's December 31, 1999 audited consolidated financial
statements. The results for the nine-month period ended September 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
2. Acquisition of Company
The Company was acquired by Predictive Systems, Inc. in a transaction which
closed on October 16, 2000. Pursuant to the acquisition, Predictive Systems,
Inc. issued approximately 1,922,377 shares of Predictive common stock, par
value $0.001 per share, plus $9 million in cash, which includes certain
transaction expenses. Predictive Systems, Inc. also issued options to purchase
242,459 shares of Predictive common stock to employees of Synet.
3. Stock Compensation
In 2000, the Company repriced certain employee options downward from their
original exercise prices to $1.25 per share, which options were then exercised
through notes receivable from the employer. The Company has recognized a stock
compensation charge totaling $3,583,000 which represents the difference between
the exercise price of $1.25 and the deemed fair value of $10.44 per share.
6
PREDICTIVE SYSTEMS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements for the nine months ended September 30, 2000 and the year ended
December 31, 1999 have been derived from the application of pro forma
adjustments to the historical financial statements for Predictive Systems, Inc.
("Predictive") and Synet Service Corporation ("Synet"). The unaudited pro forma
condensed consolidated statement of operations information for the nine months
ended September 30, 2000 and 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 balance sheet gives effect to the acquisition of
Synet as if it occurred on September 30, 2000.
The unaudited pro forma condensed consolidated financials statements do
not necessarily reflect what our actual financial results would have been had
the acquisition been completed on these dates, nor does it purport to be
indicative of future financial results.
The acquisition has been accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their respective
fair values. The excess of the purchase price over the fair value of the net
assets acquired was approximately $32.1 million.
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Historical Pro Forma
------------------------------ -----------------------------------
Predictive Synet Adjustments Combined
------------ ------------ ------------- -------------
Revenues:
Professional services $ 64,722,534 $ 7,722,593 $ -- $ 72,445,127
Hardware and software sales 2,364,435 -- -- 2,364,435
------------ ------------ ------------ ------------
Total revenues 67,086,969 7,722,593 -- 74,809,562
------------ ------------ ------------ ------------
Cost of revenues:
Professional services 33,011,745 3,402,377 -- 36,414,122
Hardware and software purchases 1,777,293 -- -- 1,777,293
------------ ------------ ------------ ------------
Total cost of revenues 34,789,038 3,402,377 -- 38,191,415
------------ ------------ ------------ ------------
Gross profit 32,297,931 4,320,216 -- 36,618,147
Sales and marketing 8,945,321 2,359,153 -- 11,304,474
General and administrative 18,819,571 2,303,486 -- 21,123,057
Depreciation and amortization 1,805,605 162,914 4,817,326 (1) 6,785,845
Noncash compensation expense 57,117 3,583,070 112,323 (2) 3,752,510
------------ ------------ ------------ ------------
Operating profit (loss) 2,670,317 (4,088,407) (4,929,649) (6,347,739)
Other income (expense):
Interest income 5,306,745 22,124 -- 5,328,869
Other expense (15,783) (16,092) -- (31,875)
Interest expense (43,989) (69,649) -- (113,638)
------------ ------------ ------------ ------------
Income (loss) before income tax provision 7,917,290 (4,152,024) (4,929,649) (1,164,383)
Income tax provision 3,443,024 7,076 -- 3,450,100
------------ ------------ ------------ ------------
Net income (loss) $ 4,474,266 $ (4,159,100) $ (4,929,649) $ (4,614,483)
============ ============ ============ ============
Net income (loss) per share: Basic $ 0.18 $ (0.17)
============ ============
Net income (loss) per share: Diluted $ 0.13 $ (0.17)
============ ============
Weighted average shares outstanding: Basic 25,195,475 1,400,612 (3) 26,596,087
============ ============ ============
Weighted average shares outstanding: Diluted 33,844,093 26,596,087
============ ============
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this statement.
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
Historical Pro Forma
------------------------------ ------------------------------
Predictive Synet Adjustments Combined
------------ ------------ ------------ ------------
Revenues:
Professional services $ 50,698,035 $ 7,142,837 $ -- $ 57,840,872
Hardware and software sales 2,046,810 -- -- 2,046,810
------------ ------------ ------------ ------------
Total revenues 52,744,845 7,142,837 -- 59,887,682
------------ ------------ ------------ ------------
Cost of revenues:
Professional services 25,698,926 3,781,280 -- 29,480,206
Hardware and software purchases 1,765,746 -- -- 1,765,746
------------ ------------ ------------ ------------
Total cost of revenues 27,464,672 3,781,280 -- 31,245,952
------------ ------------ ------------ ------------
Gross profit 25,280,173 3,361,557 -- 28,641,730
Sales and marketing 8,477,692 1,544,307 -- 10,021,999
General and administrative 16,809,504 1,764,538 -- 18,574,042
Depreciation and amortization 1,082,890 183,119 6,423,101 7,689,110
Noncash compensation expense 47,953 -- 158,127 206,080
------------ ------------ ------------ ------------
Operating loss (1,137,866) (130,407) (6,581,228) (7,849,501)
Other income (expense):
Interest income 943,898 1,052 -- 944,950
Other income 76,309 -- -- 76,309
Interest expense (157,210) (45,687) -- (202,897)
------------ ------------ ------------ ------------
Loss before income tax provision (274,869) (175,042) (6,581,228) (7,031,139)
Income tax provision 682,497 19,532 -- 702,029
------------ ------------ ------------ ------------
Net loss $ (957,366) $ (194,574) $ (6,581,228) $ (7,733,168)
============ ============ ============ ============
Net loss per share: Basic and Diluted $ (0.08) $ (0.57)
============ ============
Weighted average shares outstanding: Basic and Diluted 12,137,560 1,400,612 13,538,172
============ ============ ============
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this statement.
PREDICTIVE SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
Historical Pro Forma
------------------------------ ------------------------------
Predictive Synet Adjustments Combined
------------ ------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $124,864,249 $ 80,930 $ (8,381,079)(4) $116,564,100
Investment in marketable securities, at market value 8,947,921 -- -- 8,947,921
Accounts receivable, net 22,005,219 1,628,289 -- 23,633,508
Unbilled work in process 2,639,415 446,642 -- 3,086,057
Notes receivable - employees 202,085 -- -- 202,085
Deferred tax asset 6,496,341 -- -- 6,496,341
Prepaid expenses and other current assets 1,375,370 204,424 -- 1,579,794
------------ ------------ ------------ ------------
Total current assets 166,530,600 2,360,285 (8,381,079) 160,509,806
Property and equipment, net 7,107,208 142,453 -- 7,249,661
Intangibles, net 3,297,136 183,987 (183,987)(6) 35,412,642
32,115,506 (5) --
Other assets 278,930 47,161 -- 326,091
------------ ------------ ------------ ------------
Total assets $177,213,874 $ 2,733,886 $ 23,550,440 $203,498,200
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,287,749 $ 550,638 $ -- $ 2,838,387
Accrued expenses 7,089,220 786,770 1,700,000 (7) 9,575,990
Current portion of capital lease obligations 172,385 -- -- 172,385
Notes payable -- 1,032,000 -- 1,032,000
Income taxes payable 127,091 -- -- 127,091
Deferred income tax liability 394,820 -- -- 394,820
Deferred income 513,705 305,121 -- 818,826
------------ ------------ ------------ ------------
Total current liabilities 10,584,970 2,674,529 1,700,000 14,959,499
------------ ------------ ------------ ------------
Noncurrent liabilities
Capital lease obligations 162,700 -- -- 162,700
Deferred rent 506,726 -- -- 506,726
Other long-term liabilities -- 140,250 -- 140,250
------------ ------------ ------------ ------------
Total noncurrent liabilities 669,426 140,250 -- 809,676
------------ ------------ ------------ ------------
Total liabilities 11,254,396 2,814,779 1,700,000 15,769,175
------------ ------------ ------------ ------------
Commitments and Contingencies
Stockholders' equity
Common stock 27,159 16,900 (14,978)(8) 29,081
Additional paid-in capital 161,566,443 4,082,233 18,647,193 (8) 184,295,869
Deferred compensation (199,555) -- (474,308)(8) (673,863)
Retained earnings 4,843,891 (3,684,731) 3,684,731 (8) 4,843,891
Accumulated other comprehensive loss (278,460) (7,802) 7,802 (8) (278,460)
Receivables from stock option exercises -- (487,493) -- (487,493)
------------ ------------ ------------ ------------
Total stockholders' equity 165,959,478 (80,893) 21,850,440 187,729,025
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $177,213,874 $ 2,733,886 $ 23,550,440 $203,498,200
============ ============ ============ ============
The accompanying notes to unaudited pro forma condensed consolidated financial
statements are an integral part of this balance sheet.
PREDICTIVE SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated statements of operations
have been prepared to reflect the acquisition of Synet as if this acquisition
occurred on January 1, 1999. The unaudited pro forma condensed consolidated
balance sheet was prepared to reflect the acquisition as of September 30, 2000.
Synet's historical financial statements were derived from its books and records
and reflect:
o The statement of operations of Synet for the nine month period ended
September 30, 2000;
o The statement of operations of Synet for the twelve month period
ended December 31, 1999; and
o The balance sheet of Synet as of September 30, 2000.
The acquisition has been accounted for under the purchase method of accounting.
The following is a summary of the adjustments reflected in the
unaudited pro forma condensed consolidated statements of operations:
1. Represents the amortization of the excess of the purchase price over
the net tangible assets acquired.
2. Represents the noncash compensation expense related to the issuance
of Predictive options to Synet option holders in exchange for the
unvested portion of their Synet options.
3. Represents the increase in the number of outstanding shares of
common stock to reflect the 1,922,377 shares issued to the
stockholders of Synet to fund the purchase price less 521,765 shares
which are being accounted for as stock options as they were issued
in exchange for a note which remains unpaid. The 242,459 Predictive
options issued to Synet option holders in exchange for their Synet
options was not included in the weighted average calculation as
their effect would be antidilutive.
The following is a summary of the adjustments reflected in the
unaudited pro forma condensed consolidated balance sheet:
4. Represents the cash paid to stockholders in the purchase price.
5. Represents the preliminary estimates of the excess purchase price
over the net tangible assets acquired as follows -
Purchase price (including $1,700,000 of transaction expenses) $32,338,119
Net tangible assets acquired 222,613
Excess of purchase price over net tangible assets acquired $32,115,506
6. Represents the elimination of Synet intangibles.
Predictive believes that all significant assets and liabilities have
been identified and, accordingly, that the final determination of the allocation
of the Synet purchase price should not vary materially from the preliminary
estimate. Predictive anticipates finalizing the purchase price allocation upon
completing the preparation and review of the October 16, 2000 (acquisition date)
financial statements of Synet.
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 intangibles 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.
7. Represents the amount of estimated cost for legal and accounting
services and other expenses associated with the acquisition.
8. Reflects the adjustments to stockholders' equity as follows:
Common stock:
Elimination of Synet common stock $ (16,900)
Par value of 1.9 million shares of Predictive common stock
issued at $0.001 par value per share in connection with the
acquisition of Synet 1,922
------------
Subtotal (14,978)
Additional paid-in capital:
Elimination of Synet additional paid-in capital (4,082,233)
Additional paid-in capital from issuance of 1.9 million shares
of Predictive common stock in connection with the
acquisition of Synet 21,144,225
Additional paid-in capital from unissued Predictive common stock
in connection with stock options issued in exchange for a
note which remains unpaid (652,206)
Fair market value of 242,459 Predictive stock options issued
to acquired employees 2,237,407
------------
Subtotal 18,647,193
Deferred compensation:
Deferred compensation of unvested portion of Predictive
stock options granted to acquired employees (474,308)
Retained earning (deficit):
Elimination of Synet retained deficit 3,684,731
Accumulated other comprehensive income:
Elimination of Synet accumulated other comprehensive income 7,802
------------
Total $ 21,850,440
============