<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 000-25893
_____________________
SCIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3288107
(State of incorporation) (IRS Employer Identification No.)
One Front Street, 28th Floor, San Francisco, California 94111
(Address of principal executive offices, including ZIP code)
(415) 733-8200
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
_____________________
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 [_].
The number of shares outstanding of the Registrant's Common Stock as of
September 30, 1999 was 35,127,102.
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<PAGE>
SCIENT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Balance Sheets................................................. 1
Condensed Consolidated Statements of Operations....................................... 2
Condensed Consolidated Statements of Cash Flows....................................... 3
Notes to Condensed Consolidated Financial Statements.................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 6
Item 3. Qualitative and Quantitative Disclosure About Market Risk............................. 16
Part II. Other Information
Item 1. Legal Proceedings..................................................................... 17
Item 2. Changes in Securities and Use of Proceeds............................................. 17
Item 3. Defaults Upon Senior Securities....................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................... 17
Item 5. Other Information..................................................................... 17
Item 6. Exhibits and Reports on Form 8-K...................................................... 18
Signature............................................................................. 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
--------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents.............................................................. . $ 14,277 $ 11,261
Short-term investments................................................................. . 35,709 16,868
Accounts receivable, net............................................................... . 25,882 5,876
Other.................................................................................. . 7,737 1,129
-------- --------
Total current assets.................................................................. . 83,605 35,134
Long-term investments................................................................... . 22,160 --
Notes receivable........................................................................ . 160 160
Property and equipment, net............................................................. . 5,687 3,410
Other................................................................................... . 678 108
-------- --------
$112,290 $ 38,812
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings, current............................................................... . $ 1,106 $ 413
Accounts payable....................................................................... . 1,598 832
Accrued expenses....................................................................... . 15,838 4,632
Deferred revenue....................................................................... . 1,427 524
Capital lease obligations, current..................................................... . 721 625
-------- --------
Total current liabilities............................................................. . 20,690 7,026
Bank borrowings, long-term.............................................................. . 1,424 1,129
Capital lease obligations, long-term.................................................... . 604 680
-------- --------
Total liabilities..................................................................... . 22,718 8,835
-------- --------
Commitments and contingencies
Stockholders' equity
Convertible preferred stock: issuable in series, $0.0001 par value; 10,000 and
11,500 shares authorized, respectively; no and 9,012 shares issued and
outstanding, respectively............................................................. . -- 1
Common stock: $0.0001 par value; 125,000 and 40,000 shares authorized,
respectively; 35,106 shares and 16,567 shares issued and outstanding,
respectively.......................................................................... . 4 2
Additional paid-in capital............................................................. . 137,577 70,056
Unearned compensation.................................................................. . (20,935) (27,222)
Accumulated deficit.................................................................... . (27,074) (12,860)
-------- --------
Total stockholders' equity............................................................. . 89,572 29,977
-------- --------
$112,290 $ 38,812
======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
1
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
----------------- -------------- ---------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Revenues ................................. $30,805 $ 3,094 $ 47,209 $ 5,018
Operating expenses:
Professional services ................... 14,233 1,795 22,173 2,738
Selling, general and administrative ..... 19,212 1,630 32,315 2,855
Stock compensation ...................... 4,173 1,143 8,522 1,501
------- ------- -------- -------
Total operating expenses ..................... 37,618 4,568 63,010 7,094
------- ------- -------- -------
Loss from operations ......................... (6,813) (1,474) (15,801) (2,076)
Interest income, net ......................... 992 186 1,588 265
------- ------- -------- -------
Net loss ..................................... $(5,821) $(1,288) $(14,213) $(1,811)
======= ======= ======== =======
Net loss per share:
Basic and diluted ....................... $ (0.21) $ (0.21) $ (0.61) $ (0.30)
======= ======= ======== =======
Weighted average shares ................. 27,924 6,155 23,414 6,068
======= ======= ======== =======
</TABLE>
See notes to interim condensed consolidated financial statements.
2
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
-------------
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................... $ (14,213) $ (1,811)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 1,147 147
Provision for doubtful accounts......................................................... 1,896 89
Amortization of unearned compensation................................................... 8,522 1,501
Changes in assets and liabilities:
Accounts receivable................................................................. (24,398) (2,044)
Other assets........................................................................ (4,762) (196)
Accounts payable.................................................................... 926 (92)
Accrued expenses.................................................................... 11,206 339
Deferred revenue.................................................................... 903 3
---------- --------
Net cash used in operating activities...................................................... (18,773) (2,064)
---------- --------
Cash flows from investing activities:
Purchase of property and equipment, net.................................................... (3,129) (1,059)
Purchase of investments.................................................................... (203,627) --
Proceeds from sale of investments.......................................................... 162,391 --
----------- --------
Net cash used in investing activities...................................................... (44,365) (1,059)
----------- --------
Cash flows from financing activities:
Proceeds from bank borrowings.............................................................. 988 877
Proceeds from convertible preferred stock, net............................................. -- 14,754
Proceeds from initial public offering, net................................................. 62,728 --
Proceeds from exercise of common stock options and warrants, net........................... 2,714 422
Principal payments on capital lease obligations............................................ (276) --
----------- --------
Net cash provided by financing activities.................................................. 66,154 16,053
----------- --------
Increase in cash and cash equivalents....................................................... 3,016 12,930
Cash and cash equivalents at beginning of period............................................ 11,261 3,301
----------- --------
Cash and cash equivalents at end of period.................................................. $ 14,277 $ 16,231
=========== ========
Supplemental cash flow information:
Cash paid for interest..................................................................... $ 101 $ 11
=========== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
3
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements for the three and six
months ended September 30, 1999 and 1998 are unaudited and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for
their fair presentation. These financial statements should be read in
conjunction with Scient's financial statements and notes thereto included in
Scient's Registration Statement on Form S-1 for the fiscal year ended March 31,
1999. The results of operations for the interim period ended September 30, 1999
are not necessarily indicative of results to be expected for the full year or
any other period.
Certain previously reported amounts have been reclassified to conform with
current presentation format.
2. Net Loss Per Share
Scient computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," and SEC
Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128
and SAB 98, basic and diluted net loss per share is computed by dividing the net
loss available to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period. The calculation
of diluted net loss per share excludes potential common shares if the effect is
antidilutive. Potential common shares are composed of common stock subject to
repurchase rights and incremental shares of common stock issuable upon the
exercise of stock options and warrants.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
----- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator
Net loss............................................................. $(5,821) $(1,288) $(14,213) $(1,811)
======= ======= ======== =======
Denominator
Weighted average shares.............................................. 35,098 12,654 30,773 12,020
Weighted average unvested common shares subject to repurchase........ (7,174) (6,499) (7,359) (5,952)
------- ------- -------- -------
Denominator for basic and diluted calculation........................ 27,924 6,155 23,414 6,068
======= ======= ======== =======
Net loss per share:
Basic and diluted.................................................... $ (0.21) $ (0.21) $ (0.61) $ (0.30)
======= ======= ======== =======
</TABLE>
3. Investments
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", Scient has categorized its marketable securities as
"available-for-sale". At September 30, 1999, amortized cost approximated fair
value and unrealized gains and losses were insignificant.
4. Borrowings
Scient has a Loan and Security Agreement that provides $4.0 million for an
equipment lease line and $8.0 million line of credit. The equipment lease lines
draw down expires during the period of May 1999 through September 2000. Interest
will accrue from the date of each draw down at a rate of one percent plus prime
per annum (9.3% at September 30, 1999) and is payable monthly through the
expiration date. Equipment draw downs that are outstanding on the expiration
date are payable in 36 equal monthly principal installments, plus all accrued
interest, beginning the following month. The line of credit expires in May 2000
and charges interest at a rate of one-half percent plus prime per annum (8.8% at
September 30, 1999). The assets of Scient are pledged as collateral for Scient's
credit facilities.
Under the Loan and Security Agreement, Scient is required to maintain
certain financial covenants. At September 30, 1999, Scient was in compliance
with all such covenants.
4
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Recent Accounting Pronouncements
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities--Deferral of the Effective Date of SFAS No.
133", respectively. SFAS 133 is effective for all fiscal quarters
beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting
and reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Scient will
adopt SFAS 133 in its quarter ending June 30, 2000 and does not expect such
adoption to have an impact on Scient's results of operations, financial position
or cash flows.
6. Initial Public Offering
In May 1999, Scient completed its initial public offering of 3,450,000
shares of common stock (including the exercise of the underwriters'
overallotment option) and realized proceeds, net of underwriting discounts,
commissions and issuance costs, of $62.7 million.
7. Stock Split
In November 1999, Scient approved a 2-for-1 stock split of common stock.
The stock split will be distributed on December 3, 1999, to holders of record of
its common stock on November 15, 1999. Share information has not been adjusted
to reflect the stock split.
5
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934, as amended. Such statements are based upon
current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes", anticipates",
"plans", "expects", "intends" and similar expressions are intended to identify
forward-looking statements. Scient's actual results and the timing of certain
events may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a discrepancy include, but are
not limited to, those discussed in "Other Factors Affecting Operating Results''
and "Liquidity and Capital Resources" below, as well as Risk Factors included in
Scient's Rule 424(b) prospectus dated May 13, 1999, as filed with the Securities
and Exchange Commission. All forward-looking statements in this document are
based on information available to Scient as of the date hereof and Scient
assumes no obligation to update any such forward-looking statements.
Overview
Our revenues are derived primarily from providing professional services to
clients who are creating eBusinesses or are rethinking or expanding their
existing businesses to integrate eBusiness capabilities. We expect that our
revenues will be driven primarily by the number and scope of our client
engagements and by our professional services headcount. In the quarter ended
September 30, 1999, The Chase Manhattan Corporation accounted for approximately
12% of our revenues. Revenues from any given client will vary from period to
period; however, we expect that significant customer concentration will continue
for the foreseeable future. To the extent that any significant client uses less
of our services or terminates its relationship with us, our revenues could
decline substantially. As a result, the loss of any significant client could
seriously harm our business and results of operations.
We generally provide our services on a time and materials basis. For the
quarter ended September 30, 1999, approximately 84% of revenues were derived
from time and materials contracts, including completed capped contracts that
were recognized on a time and materials basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Revenues
pursuant to fixed-fee type contracts are generally recognized as services are
rendered using the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues exclude reimbursable
expenses charged to clients. Substantially all clients were located within North
America and all revenues were denominated in U.S. dollars.
Professional services expenses consist primarily of compensation and
benefits of our employees engaged in the delivery of professional services.
Professional services margins reflect revenues less the professional services
expenses whether or not the employee's time is billed to a client. We expect
that our professional services expenses will increase over time due to wage
increases and inflation. Our professional services margins are affected by
trends in our ability to bill clients, defined as the percentage of professional
services employees' time that is billed to clients, and, as such, will vary in
the future. Any significant decline in fees billed to clients or the loss of a
significant client would materially adversely affect our professional services
margins. Client engagements currently average six to nine months' duration. If a
client engagement ends earlier than we expect, we must re-deploy professional
services personnel. Any resulting unbillable time will adversely affect
professional services margins.
Selling, general and administrative expenses consist of salaries,
commissions, and related expenses for personnel engaged in sales; salaries and
related expenses for recruiting, internal training, human resources, knowledge
management, information technology, finance and administrative personnel; office
facilities and information technology expenditures; professional fees; trade
shows; promotional expenses; and other general corporate expenses. We expect
selling, general and administrative expenses to increase in absolute dollars as
we expand our direct sales force, continue expenditures on knowledge management
and information technology infrastructure, open new offices, increase our
recruiting efforts and incur additional costs related to the growth of our
business and operation as a public company.
Despite growth in our revenues, we have not been profitable and we expect
to continue to incur net losses. Our net losses may not decrease proportionately
with the increase in our revenues primarily because of increased expenses
related to the expansion of the number of our offices, increased investment in
our knowledge management and operations infrastructure, and increased marketing
and sales efforts. To the extent that future revenues do not increase
significantly in the same periods in which operating expenses increase, our
operating results would be adversely affected.
6
<PAGE>
Results of Operations
Revenues
Net revenues increased by 895% in the quarter ended September 30, 1999
compared to the quarter ended September 30, 1998. For the first six months of
fiscal 2000, revenues increased 841% over the comparable period of the prior
fiscal year. These increases principally resulted from increases in both the
number of clients and the scope of engagements.
Operating Expenses
Professional Services. Our professional services expenses increased by 693%
in the quarter ended September 30, 1999 compared to the quarter ended September
30, 1998. For the first six months of fiscal 2000, professional services
increased 710% over the comparable period of the prior fiscal year. These
increases were primarily a result of increases in the number of professional
services personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 1,078% in the quarter ended September 30, 1999 compared to
the quarter ended September 30, 1998. For the first six months of fiscal 2000,
selling, general and administrative expenses increased 1,032% over the
comparable period of the prior fiscal year. These increases were primarily due
to expenses related to the addition of sales, marketing, recruiting, knowledge
management, information technology, finance and administration personnel and the
costs of leasing additional office space to support our growth.
Stock Compensation. We have recorded stock compensation for the difference
between the exercise price of certain stock option grants and the deemed fair
value of our common stock at the time of such grants. We are amortizing this
amount over the vesting periods of the applicable options, resulting in
amortization expense of $4.2 million and $1.1 million in the three months ended
September 30, 1999 and 1998, respectively, and $8.5 million and $1.5 million for
the six months ended September 30, 1999 and 1998, respectively.
Interest Income, Net
Interest income, net, increased by 433% in the quarter ended September 30,
1999 compared to the quarter ended September 30, 1998. For the first six months
of fiscal 2000, interest income, net increased 499% over the comparable period
of the prior fiscal year. These increases were due primarily to higher interest-
bearing balances in the 1999 period resulting from our investing activities,
partially offset by interest expense generated from our increased drawings under
our lines of credit.
Provision for Income Taxes
From inception through September 30, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of September 30, 1999, we had approximately $12 million of federal
and state net operating loss carryforwards to offset future taxable income which
expire in varying amounts beginning in 2018 and 2006, respectively. Given our
limited operating history, losses incurred to date, and the difficulty in
accurately forecasting our future results, we do not believe that the
realization of the related deferred income tax asset meets the criteria required
by generally accepted accounting principles. Accordingly, a full valuation
allowance has been recorded.
Liquidity and Capital Resources
We raised $62.7 million in May 1999 from an initial public offering of
3,450,000 shares of our common stock, net of underwriting discounts, commissions
and issuance costs. The primary purposes of this offering were to obtain
additional equity capital, create a public market for our common stock, and
facilitate future access to public markets. We have used, and continue to expect
to use the proceeds for general corporate purposes, including working capital. A
portion of the proceeds may also be used for the acquisition of businesses that
are complimentary to ours. Pending such uses, we have invested the net proceeds
of this offering in investment grade, interest-bearing securities. Prior to our
initial public offering, we raised $30.9 million of equity capital from the sale
of preferred stock, net of issuance costs.
Cash used in operating activities for each of the six months ended
September 30, 1999 and 1998 was $18.8 million and $2.1 million, respectively. As
of September 30, 1999, we had $50.0 million in cash, cash equivalents and short-
term investments and $22.2 million in long-term investments. We expect that
accounts receivable will continue to increase to the extent our revenues
continue to rise. Any such increase that occurs at a greater rate than increases
in revenues can be expected to reduce cash, cash equivalents and investments.
7
<PAGE>
Cash provided by financing activites was $66.2 million for the six months
ended September 30, 1999 and consisted primarily of cash received for the sale
of common stock through Scient's initial public offering. Cash provided by
financing activities was $16.0 million for the six months ended September 30,
1998 and was primarily due to proceeds from a preferred stock offering of $14.8
million.
Capital expenditures for the six months ended September 30, 1999 and 1998
was approximately $3.1 million and $1.1 million, respectively. These
expenditures were primarily for computer equipment, software, and furniture and
fixtures. We expect that capital expenditures will continue to increase to the
extent we continue to increase our headcount, increase the number of offices and
expand our operations.
We have a revolving line of credit for $8.0 million with a bank. Borrowings
under this line of credit bear interest at the bank's prime rate plus 0.5%. As
of September 30, 1999, there were no outstanding borrowings under this line of
credit. Nine standby letters of credit totaling $6.3 million have been issued
against this line of credit. We also have a capital equipment line with a bank
for $4.0 million. Borrowings under this capital equipment line bear interest at
the bank's prime rate plus 1.0%. This agreement requires that we maintain
certain financial ratios and levels of tangible net worth, profitability and
liquidity.
Year 2000 Readiness
Many currently installed computer systems and software products are coded
to accept only two-digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may not be able to distinguish 21st century dates from 20th century dates. As a
result, computer systems and software used by many companies, including us, our
clients and our potential clients, may need to be upgraded to comply with such
"Year 2000" requirements.
Although we believe that our principal internal systems are Year 2000
compliant, some of our systems are not yet certified. We have received Year 2000
compliance statements from the suppliers of some of our principal internal
systems, and have sought similar statements from other vendors. Scient has
developed a Year 2000 readiness program, which includes our assessment of our
internal systems as well as those of third parties with whom we have material
interactions. Because we and our clients are dependent, to a substantial degree,
upon the proper functioning of our computer systems and those of third parties
with whom we have material interactions in our operations, a failure of such
systems to correctly recognize dates beyond December 31, 1999 could materially
disrupt our operations, which could seriously harm our business, financial
condition and operating results.
The Year 2000 problem may also affect software or code that we develop or
third-party software products that are incorporated into the business systems
that we create for our clients. Although our clients license software directly
from third parties, we generally discuss Year 2000 issues with these suppliers
and sometimes perform internal testing on their products, but we do not
guarantee that the software licensed by these suppliers is Year 2000 compliant.
Any failure on our part to provide Year 2000 compliant eBusiness systems to our
clients could result in financial loss, harm to our reputation and liability to
others and could seriously harm our business, financial condition and operating
results.
We do not currently have any information concerning the general Year 2000
compliance status of our clients, nor do we intend to examine our clients for
general Year 2000 compliance. Our current or potential clients may incur
significant expenses to achieve Year 2000 compliance. If our clients are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential clients could have for purchases
of our services. In addition, we anticipate that some of our financial services
clients may institute a standstill on electronic services spending during the
final quarter of 1999 as they attend to Year 2000 issues. As a result, our
business, financial condition and operating results could be seriously harmed.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We will incur additional costs related to Year 2000 compliance
for administrative personnel to manage the engagement, outside contractor
assistance, engineering and client satisfaction. In addition, we may experience
material problems and costs with Year 2000 compliance that could seriously harm
our business, financial condition and operating results, including:
8
<PAGE>
. Operational disruptions and inefficiencies for us, our clients and
vendors that provide us with internal systems that will divert
management's time and attention and financial and human resources from
ordinary business activities;
. Business disputes and claims for pricing adjustments by our clients,
some of which could result in litigation or contract termination; and
. Harm to our reputation to the extent that our clients' eBusiness
systems experience errors or interruptions of service.
The worst case scenario for Year 2000 problems for us would be the need to
cease normal operations for an indefinite period of time while we attempted to
respond to clients' Year 2000 problems without having full internal operational
capabilities.
We substantially completed our Year 2000 contingency plan in October 1999.
We have designed our Year 2000 contingency plan to address situations that may
result if we are unable to achieve Year 2000 readiness for our critical
operations.
Other Factors Affecting Operating Results
Risks Related to Our Business
We Have a History of Losses and Expect to Incur Losses in the Future. We
incurred net losses of $5.8 million during the quarter ended September 30, 1999.
As of September 30, 1999, we had an accumulated deficit of $27.1 million. We
have not had a profitable quarter and may never achieve profitability. We also
expect to continue to incur increasing sales and marketing, infrastructure
development and general and administrative expenses. As a result, we will need
to generate significant revenues to achieve profitability. If we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. Although our revenues have grown in
recent quarters, we do not believe that we can sustain our historical growth
rates. Accordingly, you should not view our historical growth rates as
indicative of our future revenues.
Our Quarterly Revenues and Operating Results Are Volatile and May Cause Our
Stock Price to Fluctuate. Our quarterly revenues and operating results are
volatile and difficult to predict. It is possible that in some future quarter or
quarters our operating results will be below the expectations of public market
analysts or investors. In such event, the market price of our common stock may
decline significantly.
Our quarterly operating results have varied in the past and are likely to
vary significantly from quarter to quarter. As a result, we believe that period-
to-period comparisons of our results of operations are not a good indication of
our future performance. A number of factors are likely to cause these
variations, including:
. Our ability to obtain new and follow-on client engagements;
. The amount and timing of expenditures by our clients for eBusiness
services;
. Our ability to attract, train and retain skilled management, strategic,
technical, design, sales, marketing and support professionals;
. Our employee utilization rate, including our ability to transition
employees quickly from completed projects to new engagements, for which
we typically receive little or no notice;
. The introduction of new services by us or our competitors;
. Changes in our pricing policies or those of our competitors;
. Our ability to manage costs, including personnel costs and support
services costs; and
. Costs related to the expected opening or expansion of Scient offices.
9
<PAGE>
We derive all of our revenues from professional services, which we
generally provide on a time and materials basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Since
personnel and related costs constitute the substantial majority of our operating
expenses and since we establish these expenses in advance of any particular
quarter, underutilization of our professional services employees may cause
significant reductions in our operating results for a particular quarter and
could result in losses for such quarter. In addition, we have hired a large
number of personnel in core support services, including knowledge management,
recruiting, technology infrastructure and finance and administrative, in order
to support our anticipated growth. As a result, a significant portion of our
operating expenses are fixed in the short term. Therefore, any failure to
generate revenues according to our expectations in a particular quarter could
result in losses for the quarter.
Although we have limited historical financial data, we have experienced and
expect to continue to experience seasonality in revenues from our eBusiness
services. These seasonal trends may materially affect our quarter-to-quarter
operating results. Revenues and operating results in our quarter ending December
31 are typically lower relative to our other quarters because there are a lower
number of billable days in this quarter due to holidays and vacation days. In
addition, operating expenses may increase in each quarter ending September 30,
both in absolute terms and as a percentage of revenues, due to the potential
hiring of large numbers of recent college graduates each year, which results in
increased salary expenses before such new employees begin to generate
substantial revenues for Scient.
Our Ability to Attract, Train and Retain Qualified Employees Is Crucial to
Our Results of Operations and Any Future Growth. Our future success depends in
large part on our ability to hire, train and retain project and engagement
managers, technical architects, strategists, engineers, design professionals,
other technical personnel and sales and marketing professionals of various
experience levels. Any inability to hire, train and retain a sufficient number
of qualified employees could hinder the growth of our business. Skilled
personnel are in short supply, and this shortage is likely to continue for some
time. As a result, competition for these people is intense, and the industry
turnover rate for them is high. In addition, we believe that prospective
employees may perceive that the stock option component of our compensation
package is not as valuable as that component was prior to our initial public
offering. Consequently, we may have more difficulty hiring our desired numbers
of qualified employees than we did prior to our initial offering. Moreover, even
if we are able to expand our employee base, the resources required to attract
and retain such employees may adversely affect our operating margins. In
addition, some companies have adopted a strategy of suing or threatening to sue
former employees and their new employers. As we hire new employees from our
current or potential competitors we are likely to become a party to one or more
lawsuits involving the former employment of one or more of our employees. Any
future litigation against us or our employees, regardless of the outcome, may
result in substantial costs and expenses to us and may divert management's
attention away from the operation of our business.
We Depend on Our Key Personnel, and the Loss of Any Key Personnel May
Adversely Affect Our Business. We believe that our success will depend on the
continued employment of our senior management team and key technical personnel.
This dependence is particularly important to our business because personal
relationships are a critical element of obtaining and maintaining client
engagements. If one or more members of our senior management team or key
technical personnel were unable or unwilling to continue in their present
positions, such persons would be very difficult to replace and our business
could be seriously harmed. Accordingly, the loss of one or more members of our
senior management team could have a direct adverse impact on our future sales.
In addition, if any of these key employees joins a competitor or forms a
competing company, some of our clients might choose to use the services of that
competitor or new company instead of our own. Furthermore, clients or other
companies seeking to develop in-house eBusiness capabilities may hire away some
of our key employees. This would not only result in the loss of key employees
but could also result in the loss of a client relationship or a new business
opportunity. Any losses of client relationships could seriously harm our
business.
We Have a Limited Operating History and a Limited Number of Completed
Engagements that Make an Evaluation of Our Business Difficult. We were
incorporated in November 1997 and began providing services to clients in
February 1998. Our limited operating history makes an evaluation of our business
and prospects very difficult. Companies in an early stage of development
frequently encounter enhanced risks and unexpected expenses and difficulties.
These risks, expenses and difficulties apply particularly to us because our
market, eBusiness services, is new and rapidly evolving. Our long-term success
will depend on our ability to achieve satisfactory results for our clients and
to form long-term relationships with core clients. We have not been in operation
long enough to judge whether our clients will perceive our work as being
beneficial to their businesses or to form any long-term business relationships.
Also, because of our limited operating history, our business reputation is based
on a limited number of client engagements. All of our clients have only limited
experience with the electronic business systems we have developed for them.
Accordingly, there can be no assurance that the limited number of electronic
business systems we have implemented will be successful in the longer
10
<PAGE>
term. If the electronic business systems we have implemented are not successful,
our brand will be harmed and we may incur liability to our clients. If one or
more of our clients for whom we have done substantial work suffers a significant
failure or setback in its eBusiness, our business reputation could be severely
damaged, whether or not such failure or setback was caused by our work or was
within our control. Our ability to obtain new engagements, retain clients and
recruit and retain highly-skilled employees could be seriously harmed if our
work product or our clients' eBusinesses fail to meet the expectations of our
clients.
Competition from Bigger, More Established Competitors Who Have Greater
Financial Resources Could Result in Price Reductions, Reduced Profitability and
Loss of Market Share. Competition in the eBusiness services market is intense.
If we fail to compete successfully against current or future competitors, our
business, financial condition and operating results would be seriously harmed.
We compete against companies selling electronic commerce software and services,
and the in-house development efforts of companies seeking to engage in
electronic commerce. We expect competition to persist and intensify in the
future. We cannot be certain that we will be able to compete successfully with
existing or new competitors.
Because relatively low barriers to entry characterize our market, we also
expect other companies to enter our market. We expect that competition will
continue to intensify and increase in the future. Some large information
technology consulting firms have announced that they will focus more resources
on eBusiness opportunities. Because we contract with our clients on an
engagement-by-engagement basis, we compete for engagements at each stage of our
methodology. There is no guarantee that we will be retained by our existing or
future clients on later stages of work.
The vast majority of our current competitors have longer operating
histories, larger client bases, larger professional staffs, greater brand
recognition and greater financial, technical, marketing and other resources than
we do. This may place us at a disadvantage in responding to our competitors'
pricing strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives. In addition, many of our competitors have
well-established relationships with our current and potential clients and have
extensive knowledge of our industry. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements and they may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors that
offer more standardized or less customized services than we do may have a
substantial cost advantage, which could force us to lower our prices, adversely
affecting our operating margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
Failure to Manage Our Growth May Adversely Affect Our Business. We have
grown rapidly and expect to continue to grow rapidly both by hiring new
employees and serving new business and geographic markets. Our growth has
placed, and will continue to place, a significant strain on our management and
our operating and financial systems. Our headcount has grown from 121 as of
September 30, 1998 to 661 as of September 30, 1999, and several members of our
senior management team have recently joined Scient. We do not believe this
growth rate is sustainable for the long-term. In addition, we recently opened
offices in Singapore and Boston and expect to open additional offices in the
future.
Our personnel, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate the increased number of
engagements, number of clients and the increased size of our operations, we will
need to hire, train and retain the appropriate personnel to manage our
operations. We will also need to improve our financial and management controls,
reporting systems and operating systems. We have recently implemented a new
enterprise resource planning software system for human resource functions and
some financial functions. We currently plan to redesign several internal
systems, including recruiting and engagement management systems. We may
encounter difficulties in transitioning to the new enterprise resource planning
software system or in developing and implementing other new systems.
Potential Acquisitions Could Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value and Adversely Affect Our Operating Results.
We may acquire other businesses in the future, which may complicate our
management tasks. We may need to integrate widely dispersed operations with
distinct corporate cultures. Such integration efforts may not succeed or may
distract our management from servicing existing clients. Our failure to manage
acquisitions successfully could seriously harm our operating results. Also,
acquisition costs could cause our quarterly operating results
11
<PAGE>
to vary significantly. Furthermore, our stockholders would be diluted if we
finance the acquisitions by incurring debt or issuing equity securities.
Our Planned International Operations May Be Expensive and May Not Succeed.
We have limited experience in marketing, selling and supporting our services in
foreign countries. Development of such skills may be more difficult or take
longer than we anticipate, especially due to language barriers, currency
exchange risks and the fact that the Internet infrastructure in foreign
countries may be less advanced than the United States' Internet infrastructure.
To date, we have not generated significant revenues from engagements with
international clients. We intend to expand our operations internationally in
future periods by opening international offices and hiring international
management, strategic, technical, design, sales, marketing and support
personnel.
We may be unable to successfully market, sell, deliver and support our
services internationally. If we are unable to expand our international
operations successfully and in a timely manner, our business, financial
condition and operating results could be seriously harmed. We will need to
devote significant management and financial resources to our international
expansion. In particular, we will have to attract and retain experienced
management, strategic, technical, design, sales, marketing and support personnel
for our international offices. Competition for such personnel is intense, and we
may be unable to attract and retain qualified staff.
Moreover, international operations are subject to a variety of additional
risks that could seriously harm our financial condition and operating results.
These risks include the following:
. Problems in collecting accounts receivable;
. The impact of recessions in economies outside the United States;
. Longer payment cycles;
. Fluctuations in currency exchange rates;
. Restrictions on the import and export of certain sensitive technologies,
including data security and encryption technologies that we may use; and
. Seasonal reductions in business activity in certain parts of the world,
such as during the summer months in Europe.
We Have Relied and Expect to Continue to Rely on a Limited Number of
Clients for a Significant Portion of Our Revenues. We currently derive and
expect to continue to derive a significant portion of our revenues from a
limited number of clients. To the extent that any significant client uses less
of our services or terminates its relationship with us, our revenues could
decline substantially. As a result, the loss of any significant client could
seriously harm our business, financial condition and operating results. For the
three months ended September 30, 1999, our three largest clients accounted for
approximately 27% of our revenues. The volume of work that we perform for a
specific client is likely to vary from period to period, and a significant
client in one period may not use our services in a subsequent period.
Our Lack of Long-Term Contracts with Clients Reduces the Predictability of
Our Revenues. Our clients retain us on an engagement-by-engagement basis, rather
than under long-term contracts. As a result, our revenues are difficult to
predict. Because we incur costs based on our expectations of future revenues,
our failure to predict our revenues accurately may seriously harm our financial
condition and results of operations. Although it is our goal to design and build
complete eBusiness systems for our clients, we are generally retained to design
and build discrete segments of an overall eBusiness system on an engagement-by-
engagement basis. Since large client projects involve multiple engagements or
stages, there is a risk that a client may choose not to retain us for additional
stages of a project or that the client will cancel or delay additional planned
projects. Such cancellations or delays could result from factors unrelated to
our work product or the progress of the project, but could be related to general
business or financial conditions of the client. For example, many of our current
or potential clients that are in the early stages of development may be unable
to retain our services because of financial constraints. In addition, our
existing clients can generally reduce the scope of or cancel their use of our
services without penalty and with little or no notice. If a client defers,
modifies or cancels an engagement or chooses not to retain us for additional
phases of a project, we must be able to rapidly redeploy our employees to other
engagements in order to
12
<PAGE>
minimize underutilization of employees and the resulting harm to our operating
results. Our operating expenses are relatively fixed and cannot be reduced on
short notice to compensate for unanticipated variations in the number or size of
engagements in progress.
We May Lose Money on Fixed-Fee Contracts. If we miscalculate the resources
or time we need to complete engagements with capped or fixed fees, our operating
results could be seriously harmed. The risk of such miscalculations for us is
high because we work with complex technologies in compressed timeframes, and
therefore it is difficult to judge the time and resources necessary to complete
a project. To date, we have generally entered into contracts with our clients on
a time and materials basis, though we sometimes work on a fixed-fee basis or cap
the amount of fees we may invoice on time and material contracts without client
consent. In the future our strategy is to increase the percentage of our client
engagements subject to fixed-fee arrangements, because we believe they have the
potential to be more profitable.
We Sometimes Agree Not to Perform Services for Our Clients' Competitors. We
sometimes agree not to perform services for competitors of our clients for
limited periods of time, which have been as long as two years. These non-compete
agreements reduce the number of our prospective clients and the number of
potential sources of revenue. In addition, these agreements increase the
significance of our client selection process because many of our clients compete
in markets where only a limited number of players gain meaningful market share.
If we agree not to perform services for a particular client's competitors and
our client fails to capture a significant portion of its market, we are unlikely
to receive future revenues in that particular market.
Our Efforts to Develop Brand Awareness of Our Services May Not Be
Successful. An important element of our business strategy is to develop and
maintain widespread awareness of the Scient brand name. To promote our brand
name, we plan to increase our advertising and marketing expenditures, which may
cause our operating margins to decline. Moreover, our brand may be closely
associated with the business success or failure of some of our high-profile
clients, many of whom are pursuing unproven business models in competitive
markets. As a result, the failure or difficulties of one of our high-profile
clients may damage our brand. If we fail to successfully promote and maintain
our brand name or incur significant related expenses, our operating margins and
our growth may decline.
Our Failure to Meet Client Expectations or Deliver Error-Free Services
Could Result in Losses and Negative Publicity. Our client engagements involve
the creation, implementation and maintenance of eBusiness systems and other
applications that are often critical to our clients' businesses. Any defects or
errors in these applications or failure to meet clients' expectations could
result in:
. Delayed or lost revenues due to adverse client reaction;
. Requirements to provide additional services to a client at no charge;
. Negative publicity regarding us and our services, which could adversely
affect our ability to attract or retain clients; and
. Claims for substantial damages against us, regardless of our
responsibility for such failure.
Our contracts generally limit our liability for damages that may arise from
negligent acts, errors, mistakes or omissions in rendering services to our
clients. However, we cannot be sure that these contractual provisions will
protect us from liability for damages in the event we are sued. Furthermore, our
general liability insurance coverage may not continue to be available on
reasonable terms or in sufficient amounts to cover one or more large claims, or
the insurer may disclaim coverage as to any future claim. The successful
assertion of any such large claim against us could seriously harm our business,
financial condition and operating results.
Our Business is Dependent on Our Ability to Keep Pace with the Latest
Technological Changes. Our market and the enabling technologies used by our
clients are characterized by rapid technological change. Failure to respond
successfully to these technological developments, or to respond in a timely or
cost-effective way, will result in serious harm to our business and operating
results. We have derived, and we expect to continue to derive, a substantial
portion of our revenues from creating eBusiness systems that are based upon
today's leading technologies and that are capable of adapting to future
technologies. As a result, our success will depend, in part, on our ability to
offer services that keep pace with continuing changes in technology, evolving
industry standards and changing client preferences. In addition, we must hire,
train and
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<PAGE>
retain technologically knowledgeable professionals so that they can fulfill the
increasingly sophisticated needs of our clients.
We May Not Be Able to Protect Our Intellectual Property and Proprietary
Rights. We cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our
intellectual property. In addition, we may not be able to detect unauthorized
use of our intellectual property and take appropriate steps to enforce our
rights. If third parties infringe or misappropriate our trade secrets,
copyrights, trademarks or other proprietary information, our business could be
seriously harmed. In addition, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other parties may
assert infringement claims against us or claim that we have violated their
intellectual property rights. Such claims, even if not true, could result in
significant legal and other costs and may be a distraction to management. In
addition, protection of intellectual property in many foreign countries is
weaker and less reliable than in the United States, so if our business expands
into foreign countries, risks associated with protecting our intellectual
property will increase.
A Few Individuals Own Much of Our Stock. Our directors, executive officers
and their affiliates beneficially own, in the aggregate, approximately 66% of
our outstanding common stock. As a result, these stockholders are able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, such
as acquisitions, and to block an unsolicited tender offer. Accordingly, this
concentration of ownership could have the effect of delaying or preventing a
third party from acquiring control over us at a premium over the then-current
market price of our common stock.
We Have Various Mechanisms in Place to Discourage Takeover Attempts.
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of Scient that a stockholder
may consider favorable. These provisions include:
. Authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. A classified board of directors with staggered, three-year, terms, which
may lengthen the time required to gain control of our board of directors;
. Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than majority of stockholders to elect director
candidates;
. Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. Limitations on who may call special meetings of stockholders;
. Prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of the stockholders; and
. Establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
Scient.
Risks Related to the Systems Innovation Industry
Our Success Will Depend on the Development of a Market for Systems
Innovation Services. We cannot be certain that a viable market for systems
innovation services will emerge or be sustainable. If a viable and sustainable
market for our systems innovation services does not develop, Scient will fail.
Even if a systems innovation services market develops, we may not be able to
differentiate our services from those of our competitors. If we are unable to
differentiate our services from those of our competitors, our revenue growth and
operating margins may decline.
Our Success Depends on Increased Adoption of the Internet as a Means for
Commerce. Our future success depends heavily on the acceptance and use of the
Internet as a means for commerce. The widespread acceptance and adoption of
14
<PAGE>
the Internet for conducting business is likely only in the event that the
Internet provides businesses with greater efficiencies and improvements. If
commerce on the Internet does not continue to grow, or grows more slowly than
expected, our growth would decline and our business would be seriously harmed.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including:
. Potentially inadequate network infrastructure;
. Delays in the development of Internet enabling technologies and
performance improvements;
. Delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
. Delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information;
. Changes in, or insufficient availability of, telecommunications services
to support the Internet; and
. Failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.
Increasing Government Regulation Could Affect Our Business. We are subject
not only to regulations applicable to businesses generally, but also laws and
regulations directly applicable to electronic commerce. Although there are
currently few such laws and regulations, both state, federal and foreign
governments may adopt a number of these laws and regulations. Any such
legislation or regulation could dampen the growth of the Internet and decrease
its acceptance as a communications and commercial medium. If such a decline
occurs, companies may decide in the future not to use our services to create an
electronic business channel. This decrease in the demand for our services would
seriously harm our business and operating results.
Any new laws and regulations may govern or restrict any of the following
issues:
. User privacy;
. The pricing and taxation of goods and services offered over the Internet;
. The content of websites;
. Consumer protection; and
. The characteristics and quality of products and services offered over the
Internet.
For example, the Telecommunications Act of 1996 prohibits the transmission
of certain types of information and content over the Internet. The scope of the
Act's prohibition is currently unsettled. In addition, although courts recently
held unconstitutional substantial portions of the Communications Decency Act,
federal or state governments may enact, and courts may uphold, similar
legislation in the future. Future legislation could expose companies involved in
Internet commerce to liability.
Risks Related to the Securities Markets
We May Need to Raise Additional Capital, Which May Not Be Available. We may
need to raise additional funds, and we cannot be certain that we will be able to
obtain additional financing on favorable terms or at all. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to:
. Open new offices, in the United States or internationally;
. Create additional market-specific business units;
. Enhance our infrastructure and leveragable assets;
15
<PAGE>
. Hire, train and retain employees;
. Respond to competitive pressures or unanticipated requirements; or
. Pursue acquisition opportunities.
. Our failure to do any of these things could seriously harm our financial
condition.
Our Stock Price Is Volatile. Prior to our initial public offering in May
1999, our stock could not be bought or sold publicly. Accordingly, we cannot
give assurance that an active public trading market for our stock will be
sustained. The market price may vary in response to any of the following
factors, some of which are beyond our control:
. Changes in financial estimates or investment recommendations by
securities analysts relating to our stock;
. Changes in market valuations of other electronic commerce software and
service providers or electronic businesses;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major client;
. Additions or departures of key personnel; and
. Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector.
We Are at Risk of Securities Class Action Litigation Due to Our Expected
Stock Price Volatility. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. Due to the potential volatility of our stock
price, we may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our financial condition and operating
results.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Scient does not believe that there is any material market risk exposure
with respect to derivative or other financial instruments, which would require
disclosure under this item.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Second Amended and Restated Certificate of Incorporation of Scient filed with the Secretary of
State of Delaware on May 19, 1999-- incorporated herein by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (File No. 333-74731).
3.2 Amended and Restated Bylaws of Scient--incorporated herein by reference to Exhibit 3.3 to the
Registrant's Registration Statement on Form S-1 (File No. 333-74731).
4.1* Amended and Restated Investor Rights Agreement, dated February 16, 1999, among Scient and the
investors and founder named therein, as amended.
4.2* Specimen Certificate of Scient's common stock.
10.1* Form of Indemnification Agreement entered into between Scient and its directors and executive
officers.
10.2* 1997 Stock Plan.
10.3 1999 Equity Incentive Plan (As Amended and Restated Effective August 1, 1999).
10.4* 1999 Employee Stock Purchase Plan.
10.5* Employment Agreement between Scient and Eric Greenberg, dated December 10, 1997.
10.6* Employment Agreement between Scient, Eric Greenberg and Robert M. Howe, dated February 9,
1998.
10.7* Employment Agreement between Scient and William H. Kurtz, dated September 12, 1998.
10.8* Employment Agreement between Scient and Stephen A. Mucchetti, dated September 14, 1998.
10.9* Stock Repurchase Agreement between Scient and Robert M. Howe, dated December 22, 1998.
10.10* Recruiting Letter Agreement between Scient and Ramsey/Beirne Associates, Inc., dated August 20,
1998
10.11* Recruiting Letter Agreement between Scient and Ramsey/Beirne Associates, Inc., dated
February 25, 1998.
10.12* Recruiting Letter Agreement between Scient and Ramsey/Beirne Associates, Inc., dated
February 25, 1998.
10.13* Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab & Co., Inc., dated October 7,
1998.
10.14* Standard Form of Loft Lease between Scient and Lautob Realty Company, dated October 28, 1998.
10.15* Agreement to Sub-Sublease between Scient and Northpoint Communications, Inc., dated
October 16, 1998.
10.16* Full-Recourse Promissory Note between Scient and Aron Dutta, dated January 28, 1999.
10.17* Sublease between Scient and Robins, Kaplan, Miller & Ciresi, LLP, dated April 13, 1999.
10.18* Sub-Sub-Sub-Sublease between Scient and Charles Schwab & Co., Inc., dated October 1, 1998.
10.19* Addendum to Sub-Sub-Sub-Sublease and Sub-Sub-Sub-Sub-Sublease between Scient and
Charles Schwab & Co., Inc., dated October 8, 1998.
10.20* Lease between Scient and Pembroke Real Estate, Inc., dated May 1, 1999.
27.1 Financial Statement Schedule.
</TABLE>
* Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on From S-1 (File No. 333-74731).
(b) Reports on Form 8-K.
On October 21, 1999, Scient filed a Current Report on Form 8-K dated October
20, 1999, reporting that Morgan Stanley Dean Witter, the lead underwriter for
Scient's initial public offering, had agreed to an early release of the
underwriters' lock-up restrictions on up to 535,995 shares of Scient's common
stock. These shares were available starting October 25, 1999.
18
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SCIENT CORPORATION
SIGNATURE
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 thereunto duly authorized.
SCIENT CORPORATION
Date: November 12, 1999
By: /s/ William H. Kurtz
--------------------------------------------
William H. Kurtz
Chief Financial Officer,
Executive Vice President
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<PAGE>
EXHIBIT 10.3
Scient Corporation
1999 Equity Incentive Plan
(As Amended and Restated Effective August 1, 1999)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1. INTRODUCTION................................................ 1
ARTICLE 2. ADMINISTRATION.............................................. 1
2.1 Committee Composition......................................... 1
2.2 Committee Responsibilities.................................... 1
2.3 Committee for Non-Officer Grants.............................. 1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS................................. 2
3.1 Basic Limitation.............................................. 2
3.2 Annual Increase in Shares..................................... 2
3.3 Additional Shares............................................. 2
3.4 Dividend Equivalents.......................................... 2
ARTICLE 4. ELIGIBILITY................................................. 3
4.1 Incentive Stock Options....................................... 3
4.2 Other Grants.................................................. 3
ARTICLE 5. OPTIONS..................................................... 3
5.1 Stock Option Agreement........................................ 3
5.2 Number of Shares.............................................. 3
5.3 Exercise Price................................................ 3
5.4 Exercisability and Term....................................... 3
5.5 Effect of Change in Control................................... 4
5.6 Modification or Assumption of Options......................... 4
5.7 Buyout Provisions............................................. 4
ARTICLE 6. PAYMENT FOR OPTION SHARES................................... 4
6.1 General Rule.................................................. 4
6.2 Surrender of Stock............................................ 5
6.3 Exercise/Sale................................................. 5
6.4 Exercise/Pledge............................................... 5
6.5 Promissory Note............................................... 5
6.6 Other Forms of Payment........................................ 5
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS................ 5
7.1 Quarterly Grants.............................................. 5
7.2 Exercise Price................................................ 5
7.3 Term.......................................................... 5
7.4 Affiliates of Outside Directors............................... 6
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ARTICLE 8. STOCK APPRECIATION RIGHTS................................... 6
8.1 SAR Agreement................................................. 6
8.2 Number of Shares.............................................. 6
8.3 Exercise Price................................................ 6
8.4 Exercisability and Term....................................... 6
8.5 Effect of Change in Control................................... 6
8.6 Exercise of SARs.............................................. 7
8.7 Modification or Assumption of SARs............................ 7
ARTICLE 9. RESTRICTED SHARES........................................... 7
9.1 Restricted Stock Agreement.................................... 7
9.2 Payment for Awards............................................ 7
9.3 Vesting Conditions............................................ 7
9.4 Voting and Dividend Rights.................................... 8
ARTICLE 10. STOCK UNITS................................................ 8
10.1 Stock Unit Agreement......................................... 8
10.2 Payment for Awards........................................... 8
10.3 Vesting Conditions........................................... 8
10.4 Voting and Dividend Rights................................... 9
10.5 Form and Time of Settlement of Stock Units................... 9
10.6 Death of Recipient........................................... 9
10.7 Creditors' Rights............................................ 9
ARTICLE 11. PROTECTION AGAINST DILUTION................................ 9
11.1 Adjustments.................................................. 9
11.2 Dissolution or Liquidation................................... 10
11.3 Reorganizations.............................................. 10
ARTICLE 12. DEFERRAL OF AWARDS......................................... 10
ARTICLE 13. AWARDS UNDER OTHER PLANS................................... 11
ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES................... 11
14.1 Effective Date............................................... 11
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units.. 11
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units... 12
ARTICLE 15. LIMITATION ON RIGHTS....................................... 12
15.1 Retention Rights............................................. 12
15.2 Stockholders' Rights......................................... 12
15.3 Regulatory Requirements...................................... 12
ARTICLE 16. WITHHOLDING TAXES.......................................... 12
16.1 General...................................................... 12
16.2 Share Withholding............................................ 12
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ARTICLE 17. FUTURE OF THE PLAN......................................... 13
17.1 Term of the Plan............................................. 13
17.2 Amendment or Termination..................................... 13
ARTICLE 18. LIMITATION ON PAYMENTS..................................... 13
18.1 Scope of Limitation.......................................... 13
18.2 Basic Rule................................................... 13
18.3 Reduction of Payments........................................ 13
18.4 Overpayments and Underpayments............................... 14
18.5 Related Corporations......................................... 14
ARTICLE 19. DEFINITIONS................................................ 14
ARTICLE 20. EXECUTION.................................................. 18
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Scient Corporation
1999 Equity Incentive Plan
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective as of the date of the
Company's initial public offering on May 13, 1999. The Plan was amended and
restated by the Board effective as of August 1, 1999. The purpose of the Plan
is to promote the long-term success of the Company and the creation of
stockholder value by (a) encouraging Colleagues, Outside Directors and
Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Colleagues, Outside Directors and Consultants with
exceptional qualifications and (c) linking Colleagues, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission
may establish for administrators acting under plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify for
exemption under section 162(m)(4)(C) of the Code.
2.2 Committee Responsibilities. The Committee shall (a) select the
Colleagues, Outside Directors and Consultants who are to receive Awards under
the Plan, (b) determine the type, number, vesting requirements and other
features and conditions of such Awards, (c) interpret the Plan and (d) make all
other decisions relating to the operation of the Plan. The Committee may adopt
such rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 Committee for Non-Officer Grants. The Board may also appoint a
secondary committee of the Board, which shall be composed of one or more
directors of the Company who
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need not satisfy the requirements of Section 2.1. Such secondary committee may
administer the Plan with respect to Colleagues and Consultants who are not
considered officers or directors of the Company under section 16 of the Exchange
Act, may grant Awards under the Plan to such Colleagues and Consultants and may
determine all features and conditions of such Awards. Within the limitations of
this Section 2.3, any reference in the Plan to the Committee shall include such
secondary committee.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall
not exceed (a) 1,200,000 plus (b) the aggregate number of Common Shares
remaining available for grants under the Predecessor Plan on the date of the
Company's initial public offering plus (c) the additional Common Shares
described in Sections 3.2 and 3.3. No additional grants shall be made under the
Predecessor Plan after the date of the Company's initial public offering. The
limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment
pursuant to Article 11.
3.2 Annual Increase in Shares. As of January 1 of each year, commencing
with the year 2000, the aggregate number of Options, SARs, Stock Units and
Restricted Shares that may be awarded under the Plan shall automatically
increase by a number equal to the lesser of (a) 8% of the total number of Common
Shares then outstanding or (b) five million.
3.3 Additional Shares. If Options granted under this Plan or the
Predecessor Plan are forfeited or terminate for any other reason before being
exercised, then the corresponding Common Shares shall again become available for
Awards under this Plan. If Common Shares issued upon the exercise of Options
granted under this Plan or the Predecessor Plan are forfeited, then such Common
Shares shall again become available for Awards under this Plan. If Restricted
Shares issued under this Plan or the Predecessor Plan are forfeited, then the
corresponding Common Shares shall again become available for Awards under this
Plan. If Stock Units or SARs are forfeited or terminate for any other reason
before being exercised, then the corresponding Common Shares shall again become
available for Awards under the Plan. If Stock Units are settled, then only the
number of Common Shares (if any) actually issued in settlement of such Stock
Units shall reduce the number available under Section 3.1 and the balance shall
again become available for Awards under the Plan. If SARs are exercised, then
only the number of Common Shares (if any) actually issued in settlement of such
SARs shall reduce the number available under Section 3.1 and the balance shall
again become available for Awards under the Plan. The foregoing
notwithstanding, the aggregate number of Common Shares that may be issued under
the Plan upon the exercise of ISOs shall not be increased when Restricted Shares
or other Common Shares are forfeited.
3.4 Dividend Equivalents. Any dividend equivalents paid or credited under
the Plan shall not be applied against the number of Restricted Shares, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
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ARTICLE 4. ELIGIBILITY.
4.1 Incentive Stock Options. Only Colleagues who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant of
ISOs. In addition, a Colleague who owns more than 10% of the total combined
voting power of all classes of outstanding stock of the Company or any of its
Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(6) of the Code are satisfied.
4.2 Other Grants. Only Colleagues, Outside Directors and Consultants
shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The Stock
Option Agreement shall specify whether the Option is an ISO or an NSO. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction
in the Optionee's other compensation. A Stock Option Agreement may provide that
a new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 Number of Shares. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 11. Options granted to any
Optionee in a single fiscal year of the Company shall not cover more than one
million Common Shares, except that Options granted to a new Colleague in the
fiscal year of the Company in which his or her service as a Colleague first
commences shall not cover more than two million Common Shares. The limitations
set forth in the preceding sentence shall be subject to adjustment in accordance
with Article 11.
5.3 Exercise Price. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant, and the Exercise Price under an NSO shall in no event be less than the
par value of a Common Share. In the case of an NSO, a Stock Option Agreement
may specify an Exercise Price that varies in accordance with a predetermined
formula while the NSO is outstanding.
5.4 Exercisability and Term. Each Stock Option Agreement shall specify
the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination
3
<PAGE>
of the Optionee's service. Options may be awarded in combination with SARs, and
such an Award may provide that the Options will not be exercisable unless the
related SARs are forfeited.
5.5 Effect of Change in Control. The Committee may determine, at the time
of granting an Option or thereafter, that such Option shall become exercisable
as to all or part of the Common Shares subject to such Option in the event that
the Company is subject to a Change in Control or in the event that the Optionee
is subject to an Involuntary Termination within 12 months after a Change in
Control, subject to the following limitations:
(a) In the case of an ISO, the acceleration of exercisability
shall not occur without the Optionee's written consent.
(b) If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be
treated as a "pooling of interests" for financial reporting purposes, and
if such transaction in fact is so treated, then the acceleration of
exercisability shall not occur to the extent that the Company's independent
accountants and such other party's independent accountants separately
determine in good faith that such acceleration would preclude the use of
"pooling of interests" accounting.
5.6 Modification or Assumption of Options. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
5.7 Buyout Provisions. The Committee may at any time (a) offer to buy out
for a payment in cash or cash equivalents an Option previously granted or (b)
authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time
when such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall
be made only pursuant to the express provisions of the applicable Stock
Option Agreement. The Stock Option Agreement may specify that payment may
be made in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
4
<PAGE>
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Common Shares that are already owned by the
Optionee. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan. The Optionee
shall not surrender, or attest to the ownership of, Common Shares in payment of
the Exercise Price if such action would cause the Company to recognize
compensation expense (or additional compensation expense) with respect to the
Option for financial reporting purposes.
6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, all
or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to
pledge all or part of the Common Shares being purchased under the Plan to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.
6.5 Promissory Note. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) a full-recourse promissory
note. However, the par value of the Common Shares being purchased under the
Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 Other Forms of Payment. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.
7.1 Quarterly Grants. Upon the close of each calendar quarter, commencing
on September 30, 1999, each Outside Director shall receive an NSO covering 2,500
Common Shares (subject to adjustment under Article 11). NSOs granted under this
Section 7.1 shall be exercisable immediately for fully vested shares. An
Outside Director who previously was a Colleague shall be eligible to receive
grants under this Section 7.1.
7.2 Exercise Price. The Exercise Price under all NSOs granted to an
Outside Director under this Article 7 shall be equal to 100% of the Fair Market
Value of a Common Share on the date of grant, payable in one of the forms
described in Sections 6.1, 6.2, 6.3 and 6.4.
7.3 Term. All NSOs granted to an Outside Director under this Article 7
shall terminate on the earlier of (a) the 10th anniversary of the date of grant
or (b) the date 12 months after the termination of such Outside Director's
service for any reason.
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<PAGE>
7.4 Affiliates of Outside Directors. The Committee may provide that the
NSOs that otherwise would be granted to an Outside Director under this Article 7
shall instead be granted to an affiliate of such Outside Director. Such
affiliate shall then be deemed to be an Outside Director for purposes of the
Plan, provided that the service-related termination provisions pertaining to the
NSOs shall be applied with regard to the service of the Outside Director.
ARTICLE 8. STOCK APPRECIATION RIGHTS.
8.1 SAR Agreement. Each grant of an SAR under the Plan shall be evidenced
by an SAR Agreement between the Optionee and the Company. Such SAR shall be
subject to all applicable terms of the Plan and may be subject to any other
terms that are not inconsistent with the Plan. The provisions of the various
SAR Agreements entered into under the Plan need not be identical. SARs may be
granted in consideration of a reduction in the Optionee's other compensation.
8.2 Number of Shares. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 11. SARs granted to any Optionee in a
single calendar year shall in no event pertain to more than one million Common
Shares, except that SARs granted to a new Colleague in the fiscal year of the
Company in which his or her service as a Colleague first commences shall not
pertain to more than two million Common Shares. The limitations set forth in
the preceding sentence shall be subject to adjustment in accordance with Article
11.
8.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price;
provided that the Exercise Price shall in no event be less than 100% of the Fair
Market Value of a Common Share on the date of grant. An SAR Agreement may
specify an Exercise Price that varies in accordance with a predetermined formula
while the SAR is outstanding.
8.4 Exercisability and Term. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may be
awarded in combination with Options, and such an Award may provide that the SARs
will not be exercisable unless the related Options are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at
the time of grant or thereafter. An SAR granted under the Plan may provide that
it will be exercisable only in the event of a Change in Control.
8.5 Effect of Change in Control. The Committee may determine, at the time
of granting an SAR or thereafter, that such SAR shall become fully exercisable
as to all Common Shares subject to such SAR in the event that the Company is
subject to a Change in Control or in the event that the Optionee is subject to
an Involuntary Termination within 12 months after a Change in Control, subject
to the following sentence. If the Company and the other party to the
transaction constituting a Change in Control agree that such transaction is to
be treated as a
6
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"pooling of interests" for financial reporting purposes, and if such transaction
in fact is so treated, then the acceleration of exercisability shall not occur
to the extent that the Company's independent accountants and such other party's
independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.
8.6 Exercise of SARs. Upon exercise of an SAR, the Optionee (or any
person having the right to exercise the SAR after his or her death) shall
receive from the Company (a) Common Shares, (b) cash or (c) a combination of
Common Shares and cash, as the Committee shall determine. The amount of cash
and/or the Fair Market Value of Common Shares received upon exercise of SARs
shall, in the aggregate, be equal to the amount by which the Fair Market Value
(on the date of surrender) of the Common Shares subject to the SARs exceeds the
Exercise Price. If, on the date when an SAR expires, the Exercise Price under
such SAR is less than the Fair Market Value on such date but any portion of such
SAR has not been exercised or surrendered, then such SAR shall automatically be
deemed to be exercised as of such date with respect to such portion.
8.7 Modification or Assumption of SARs. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the grant of new SARs for the same or a different
number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of an SAR shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.
ARTICLE 9. RESTRICTED SHARES.
9.1 Restricted Stock Agreement. Each grant of Restricted Shares under the
Plan shall be evidenced by a Restricted Stock Agreement between the recipient
and the Company. Such Restricted Shares shall be subject to all applicable
terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
9.2 Payment for Awards. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the
extent that an Award consists of newly issued Restricted Shares, the
consideration shall consist exclusively of cash, cash equivalents or past
services rendered to the Company (or a Parent or Subsidiary) or, for the amount
in excess of the par value of such newly issued Restricted Shares, full-recourse
promissory notes, as the Committee may determine.
9.3 Vesting Conditions. Each Award of Restricted Shares may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The
Committee may determine, at the time of granting Restricted Shares or
thereafter, that all or
7
<PAGE>
part of such Restricted Shares shall become vested in the event that the Company
is subject to a Change in Control or in the event that the Participant is
subject to an Involuntary Termination within 12 months after a Change in
Control, except as provided in the next following sentence. If the Company and
the other party to the transaction constituting a Change in Control agree that
such transaction is to be treated as a "pooling of interests" for financial
reporting purposes, and if such transaction in fact is so treated, then the
acceleration of vesting shall not occur to the extent that the Company's
independent accountants and such other party's independent accountants
separately determine in good faith that such acceleration would preclude the use
of "pooling of interests" accounting.
9.4 Voting and Dividend Rights. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends received
in additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.
ARTICLE 10. STOCK UNITS.
10.1 Stock Unit Agreement. Each grant of Stock Units under the Plan shall
be evidenced by a Stock Unit Agreement between the recipient and the Company.
Such Stock Units shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
provisions of the various Stock Unit Agreements entered into under the Plan need
not be identical. Stock Units may be granted in consideration of a reduction in
the recipient's other compensation.
10.2 Payment for Awards. To the extent that an Award is granted in the
form of Stock Units, no cash consideration shall be required of the Award
recipients.
10.3 Vesting Conditions. Each Award of Stock Units may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Stock Unit Agreement. A Stock
Unit Agreement may provide for accelerated vesting in the event of the
Participant's death, disability or retirement or other events. The Committee
may determine, at the time of granting Stock Units or thereafter, that all or
part of such Stock Units shall become vested in the event that the Company is
subject to a Change in Control or in the event that the Participant is subject
to an Involuntary Termination within 12 months after a Change in Control, except
as provided in the next following sentence. If the Company and the other party
to the transaction constituting a Change in Control agree that such transaction
is to be treated as a "pooling of interests" for financial reporting purposes,
and if such transaction in fact is so treated, then the acceleration of vesting
shall not occur to the extent that the Company's independent accountants and
such other party's independent accountants separately determine in good faith
that such acceleration would preclude the use of "pooling of interests"
accounting.
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<PAGE>
10.4 Voting and Dividend Rights. The holders of Stock Units shall have no
voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under
the Plan may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock Units.
Settlement of dividend equivalents may be made in the form of cash, in the form
of Common Shares, or in a combination of both. Prior to distribution, any
dividend equivalents which are not paid shall be subject to the same conditions
and restrictions as the Stock Units to which they attach.
10.5 Form and Time of Settlement of Stock Units. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any
combination of both, as determined by the Committee. The actual number of Stock
Units eligible for settlement may be larger or smaller than the number included
in the original Award, based on predetermined performance factors. Methods of
converting Stock Units into cash may include (without limitation) a method based
on the average Fair Market Value of Common Shares over a series of trading days.
Vested Stock Units may be settled in a lump sum or in installments. The
distribution may occur or commence when all vesting conditions applicable to the
Stock Units have been satisfied or have lapsed, or it may be deferred to any
later date. The amount of a deferred distribution may be increased by an
interest factor or by dividend equivalents. Until an Award of Stock Units is
settled, the number of such Stock Units shall be subject to adjustment pursuant
to Article 11.
10.6 Death of Recipient. Any Stock Units Award that becomes payable after
the recipient's death shall be distributed to the recipient's beneficiary or
beneficiaries. Each recipient of a Stock Units Award under the Plan shall
designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the
prescribed form with the Company at any time before the Award recipient's death.
If no beneficiary was designated or if no designated beneficiary survives the
Award recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
10.7 Creditors' Rights'. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Unit Agreement.
ARTICLE 11. PROTECTION AGAINST DILUTION.
11.1 Adjustments. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares in an amount that has a
material effect on the price of Common Shares, a combination or consolidation of
the outstanding Common Shares (by reclassification or otherwise) into a lesser
number of Common Shares, a recapitalization, a spin-off or a similar
9
<PAGE>
occurrence, the Committee shall make such adjustments as it, in its sole
discretion, deems appropriate in one or more of:
(a) The number of Options, SARs, Restricted Shares and Stock
Units available for future Awards under Article 3;
(b) The limitations set forth in Sections 5.2 and 8.2;
(c) The number of NSOs to be granted to Outside Directors under
Article 7;
(d) The number of Common Shares covered by each outstanding
Option and SAR;
(e) The Exercise Price under each outstanding Option and SAR; or
(f) The number of Stock Units included in any prior Award which
has not yet been settled.
Except as provided in this Article 11, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.
11.2 Dissolution or Liquidation. To the extent not previously exercised
or settled, Options, SARs and Stock Units shall terminate immediately prior to
the dissolution or liquidation of the Company.
11.3 Reorganizations. In the event that the Company is a party to a
merger or other reorganization, outstanding Awards shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Awards by the Company, if the Company is a
surviving corporation, (b) the assumption of the outstanding Awards by the
surviving corporation or its parent or subsidiary, (c) the substitution by the
surviving corporation or its parent or subsidiary of its own awards for the
outstanding Awards, (d) full exercisability or vesting and accelerated
expiration of the outstanding Awards or (e) settlement of the full value of the
outstanding Awards in cash or cash equivalents followed by cancellation of such
Awards.
ARTICLE 12. DEFERRAL OF AWARDS.
The Committee (in its sole discretion) may permit or require a
Participant to:
(a) Have cash that otherwise would be paid to such Participant as
a result of the exercise of an SAR or the settlement of Stock Units
credited to a
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deferred compensation account established for such Participant by the
Committee as an entry on the Company's books;
(b) Have Common Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR converted into
an equal number of Stock Units; or
(c) Have Common Shares that otherwise would be delivered to such
Participant as a result of the exercise of an Option or SAR or the
settlement of Stock Units converted into amounts credited to a deferred
compensation account established for such Participant by the Committee as
an entry on the Company's books. Such amounts shall be determined by
reference to the Fair Market Value of such Common Shares as of the date
when they otherwise would have been delivered to such Participant.
A deferred compensation account established under this Article 12 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Article 12.
ARTICLE 13. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of Stock Units and shall, when issued, reduce the
number of Common Shares available under Article 3.
ARTICLE 14. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.'
14.1 Effective Date. No provision of this Article 14 shall be effective
unless and until the Board has determined to implement such provision.
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units. An
Outside Director may elect to receive any annual retainer payments and/or
meeting fees from the Company in the form of cash, NSOs, Restricted Shares or
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 14 shall be filed with the Company on the prescribed form.
11
<PAGE>
14.3 Number and Terms of NSOs, Restricted Shares or Stock Units. The
number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of any annual retainers and meeting fees that would otherwise
be paid in cash shall be calculated in a manner determined by the Board. The
terms of such NSOs, Restricted Shares or Stock Units shall also be determined by
the Board.
ARTICLE 15. LIMITATION ON RIGHTS.
15.1 Retention Rights. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain a Colleague,
Outside Director or Consultant. The Company and its Parents, Subsidiaries and
Affiliates reserve the right to terminate the service of any Colleague, Outside
Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
15.2 Stockholders' Rights'. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, if applicable, the time when he or she becomes
entitled to receive such Common Shares by filing any required notice of exercise
and paying any required Exercise Price. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to such time,
except as expressly provided in the Plan.
15.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 16. WITHHOLDING TAXES.
16.1 General. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
16.2 Share Withholding. The Committee may permit a Participant to satisfy
all or part of his or her withholding or income tax obligations by having the
Company withhold all or a portion of any Common Shares that otherwise would be
issued to him or her or by surrendering all or a portion of any Common Shares
that he or she previously acquired. Such Common Shares shall be valued at their
Fair Market Value on the date when they are withheld or surrendered.
12
<PAGE>
ARTICLE 17. FUTURE OF THE PLAN.
17.1 Term of the Plan. The Plan, as set forth herein, shall become
effective as of August 1, 1999. The Plan shall remain in effect until it is
terminated under Section 17.2, except that no ISOs shall be granted on or after
the 10th anniversary of the later of (a) the date when the Board first adopted
the Plan or (b) the date when the Board adopted the most recent increase in the
number of Common Shares available under Article 3 that was approved by the
Company's stockholders.
17.2 Amendment or Termination. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 18. LIMITATION ON PAYMENTS.
18.1 Scope of Limitation. This Article 18 shall apply to an Award only
if:
(a) The independent auditors most recently selected by the Board
(the "Auditors") determine that the after-tax value of such Award to the
Participant, taking into account the effect of all federal, state and local
income taxes, employment taxes and excise taxes applicable to the
Participant (including the excise tax under section 4999 of the Code), will
be greater after the application of this Article 18 than it was before the
application of this Article 18; or
(b) The Committee, at the time of making an Award under the Plan
or at any time thereafter, specifies in writing that such Award shall be
subject to this Article 18 (regardless of the after-tax value of such Award
to the Participant).
If this Article 18 applies to an Award, it shall supersede any contrary
provision of the Plan or of any Award granted under the Plan.
18.2 Basic Rule. In the event that the Auditors determine that any
payment or transfer by the Company under the Plan to or for the benefit of a
Participant (a "Payment") would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" in section 280G of the Code, then the aggregate present value of all
Payments shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Article 18, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible by the Company because of
section 280G of the Code.
18.3 Reduction of Payments. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall
13
<PAGE>
promptly give the Participant notice to that effect and a copy of the detailed
calculation thereof and of the Reduced Amount, and the Participant may then
elect, in his or her sole discretion, which and how much of the Payments shall
be eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall advise the Company in
writing of his or her election within 10 days of receipt of notice. If no such
election is made by the Participant within such 10-day period, then the Company
may elect which and how much of the Payments shall be eliminated or reduced (as
long as after such election the aggregate present value of the Payments equals
the Reduced Amount) and shall notify the Participant promptly of such election.
For purposes of this Article 18, present value shall be determined in accordance
with section 280G(d)(4) of the Code. All determinations made by the Auditors
under this Article 18 shall be binding upon the Company and the Participant and
shall be made within 60 days of the date when a Payment becomes payable or
transferable. As promptly as practicable following such determination and the
elections hereunder, the Company shall pay or transfer to or for the benefit of
the Participant such amounts as are then due to him or her under the Plan and
shall promptly pay or transfer to or for the benefit of the Participant in the
future such amounts as become due to him or her under the Plan.
18.4 Overpayments and Underpayments. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
18.5 Related Corporations. For purposes of this Article 18, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 19. DEFINITIONS.
19.1 "Affiliate" means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity.
19.2 "Award" means any award of an Option, an SAR, a Restricted Share or a
Stock Unit under the Plan.
14
<PAGE>
19.3 "Board" means the Company's Board of Directors, as constituted from
time to time.
19.4 "Cause" means:
(a) The unauthorized use or disclosure of the confidential
information or trade secrets of the Company, which use or disclosure causes
material harm to the Company;
(b) Conviction of, or a plea of "guilty" or "no contest" to, a
felony under the laws of the United States or any state thereof;
(c) Gross negligence or willful misconduct, after the Board has
given the Participant written notice and a reasonable opportunity to cure
such negligence or misconduct; or
(d) Continued failure to perform assigned duties, after the Board
has given the Participant written notice and a reasonable opportunity to
cure such failure.
The foregoing, however, shall not be deemed an exclusive list of all acts or
omissions that the Company (or a Parent, Subsidiary or Affiliate) may consider
as grounds for the discharge of a Participant without Cause.
19.5 "Change in Control" shall mean:
(a) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if
persons who were not stockholders of the Company immediately prior to such
merger, consolidation or other reorganization own immediately after such
merger, consolidation or other reorganization 50% or more of the voting
power of the outstanding securities of each of (i) the continuing or
surviving entity and (ii) any direct or indirect parent corporation of such
continuing or surviving entity;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(c) A change in the composition of the Board, as a result of
which fewer than 50% of the incumbent directors are directors who either
(i) had been directors of the Company on the date 24 months prior to the
date of the event that may constitute a Change in Control (the "original
directors") or (ii) were elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of the aggregate of the
original directors who were still in office at the time of the election or
nomination and the directors whose election or nomination was previously so
approved; or
15
<PAGE>
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing at least
30% of the total voting power represented by the Company's then outstanding
voting securities. For purposes of this Paragraph (d), the term "person"
shall have the same meaning as when used in sections 13(d) and 14(d) of the
Exchange Act but shall exclude (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of a Parent or
Subsidiary and (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
19.6 "Code" means the Internal Revenue Code of 1986, as amended.
19.7 "Colleague" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.
19.8 "Committee" means a committee of the Board, as described in Article
2.
19.9 "Common Share" means one share of the common stock of the Company.
19.10 "Company" means Scient Corporation, a Delaware corporation.
19.11 "Consultant" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.1.
19.12 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
19.13 "Exercise Price," in the case of an Option, means the amount for
which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
19.14 "Fair Market Value" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
-----------------------
shall be conclusive and binding on all persons.
16
<PAGE>
19.15 "Involuntary Termination" means the termination of the Participant's
service by reason of:
(a) The involuntary discharge of the Participant by the Company
(or the Parent, Subsidiary or Affiliate employing him or her) for reasons
other than Cause; or
(b) The voluntary resignation of the Participant following (i) a
change in his or her position with the Company (or the Parent, Subsidiary
or Affiliate employing him or her) that materially reduces his or her
stature, authority or responsibilities, (ii) a reduction in his or her
compensation, including base salary, fringe benefits and participation in
bonus or incentive programs based on corporate performance, or (iii) a
relocation of his or her principal workplace by more than 30 miles.
19.16 "ISO" means an incentive stock option described in section 422(b) of
the Code.
19.17 "NSO" means a stock option not described in sections 422 or 423 of
the Code.
19.18 "Option" means an ISO or NSO granted under the Plan and entitling
the holder to purchase Common Shares.
19.19 "Optionee" means an individual or estate who holds an Option or SAR.
19.20 "Outside Director" shall mean a member of the Board who is not a
Colleague. Service as an Outside Director shall be considered employment for
all purposes of the Plan, except as provided in Section 4.1.
19.21 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent
on a date after the adoption of the Plan shall be considered a Parent commencing
as of such date.
19.22 "Participant" means an individual or estate who holds an Award.
19.23 "Plan" means this Scient Corporation 1999 Equity Incentive Plan, as
amended from time to time.
19.24 "Predecessor Plan" means the Scient Corporation 1997 Stock Plan.
19.25 "Restricted Share" means a Common Share awarded under the Plan.
19.26 "Restricted Stock Agreement" means the agreement between the Company
and the recipient of a Restricted Share which contains the terms, conditions and
restrictions pertaining to such Restricted Share.
17
<PAGE>
19.27 "SAR" means a stock appreciation right granted under the Plan.
19.28 "SAR Agreement" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to his
or her SAR.
19.29 "Stock Option Agreement" means the agreement between the Company and
an Optionee that contains the terms, conditions and restrictions pertaining to
his or her Option.
19.30 "Stock Unit" means a bookkeeping entry representing the equivalent
of one Common Share, as awarded under the Plan.
19.31 "Stock Unit Agreement" means the agreement between the Company and
the recipient of a Stock Unit which contains the terms, conditions and
restrictions pertaining to such Stock Unit.
19.32 "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
ARTICLE 20. EXECUTION.
To record the amendment and restatement of the Plan by the Board
effective August 1, 1999, the Company has caused its duly authorized officer to
execute this document in the name of the Company.
Scient Corporation
By:
------------------------------------
Title:
---------------------------------
18
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