<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7379 94-3288107
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
ONE FRONT STREET, 28TH FLOOR
SAN FRANCISCO, CA 94111
(415) 733-8200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM H. KURTZ
CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT AND SECRETARY
SCIENT CORPORATION
ONE FRONT STREET, 28TH FLOOR
SAN FRANCISCO, CA 94111
(415) 733-8200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
ROBERT V. GUNDERSON, JR., ESQ. GREGORY M. GALLO, ESQ.
DAVID T. YOUNG, ESQ. PAUL A. BLUMENSTEIN, ESQ.
CARLA S. NEWELL, ESQ. GRAY CARY WARE & FREIDENRICH LLP
GUNDERSON DETTMER STOUGH 400 HAMILTON AVENUE
VILLENEUVE FRANKLIN & HACHIGIAN, LLP PALO ALTO, CALIFORNIA 94301
155 CONSTITUTION DRIVE (650) 833-2000
MENLO PARK, CALIFORNIA 94025
(650) 321-2400
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.0001 par
value per share............. 2,702,500 $85.50 $231,063,750 $61,001
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a). Based on the last sale price of the Common
Stock on December 20, 1999, as reported on the Nasdaq National Market.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued December 22, 1999
2,350,000 Shares
[LOGO]
COMMON STOCK
-------------------------
SCIENT CORPORATION IS OFFERING 1,500,000 SHARES OF ITS COMMON STOCK AND THE
SELLING STOCKHOLDERS ARE OFFERING 850,000 SHARES.
-------------------------
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"SCNT." ON DECEMBER 21, 1999, THE REPORTED LAST SALE PRICE OF OUR COMMON STOCK
ON THE NASDAQ NATIONAL MARKET WAS $90 3/16 PER SHARE.
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
-------------------------
PRICE $ A SHARE
-------------------------
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<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS SCIENT CORPORATION STOCKHOLDERS
-------- ------------- ------------------ ------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total...................... $ $ $ $
</TABLE>
Scient Corporation has granted the underwriters the right to purchase up to an
additional 352,500 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
-------------------------
MORGAN STANLEY DEAN WITTER
HAMBRECHT & QUIST
LEHMAN BROTHERS
MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 7
Use of Proceeds..................... 17
Dividend Policy..................... 17
Price Range of Common Stock......... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Business............................ 29
Management.......................... 44
Certain Transactions................ 58
Principal and Selling
Stockholders...................... 61
Description of Capital Stock........ 63
Shares Eligible for Future Sale..... 65
Underwriters........................ 67
Legal Matters....................... 69
Experts............................. 69
Additional Information.............. 69
Index to Financial Statements....... F-1
</TABLE>
-------------------------
Scient Corporation was originally incorporated in California on November 7,
1997 and reincorporated in Delaware on May 5, 1999. Our principal executive
offices are located at One Front Street, 28th Floor, San Francisco, California
94111 and our telephone number is (415) 733-8200. Our World Wide Web address is
www.scient.com. The information on our website is not incorporated by reference
into this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
In this prospectus, "Scient," "we," "us" and "our" refer to Scient
Corporation. Unless otherwise indicated, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option. All of the
information in this prospectus gives effect to the two-for-one stock split
effected on December 3, 1999.
We use the following trademarks of Scient in this prospectus: Scient, the
Scient logo, the Scient Approach, The eBusiness Systems Innovator and New Bottom
Line. This prospectus also includes trademarks of other companies.
3
<PAGE> 4
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
about our company, the common stock being sold in this offering and our
financial statements and notes appearing elsewhere in this prospectus.
OUR COMPANY
Scient is a leading provider of the new category of professional services
called systems innovation. We provide integrated eBusiness strategy and
technology implementation services to clients who are creating eBusinesses or
are rethinking or expanding their existing businesses to integrate eBusiness
capabilities. eBusinesses are businesses that combine the reach and efficiency
of the Internet with both emerging and existing technologies to enable companies
to strengthen relationships with customers and business partners, create new
revenue opportunities, reduce costs, improve operating efficiencies, optimize
supply chains, shorten cycle times and improve communications. Our services
include strategy consulting, customer experience design, systems architecture,
application and technology infrastructure development and asset-based services.
Our services are designed to rapidly improve and sustain a client's competitive
position through the development of innovative business strategies enabled by
the integration of emerging and existing technologies. We have developed a
methodology, the Scient Approach, that provides a framework for each stage of a
client engagement from helping the client conceive its strategy to architecting,
engineering and operating and extending its eBusiness. We believe that our
integrated methodology allows us to deliver reliable, robust, secure, scalable
and extensible systems innovation in rapid timeframes.
We have performed professional services for over 65 clients, including
BenefitPoint, Carstation.com, Chase Manhattan, Hambrecht & Quist, homestore.com,
InnoVentry, Johnson & Johnson, living.com, Miadora, Nasdaq, PlanetRx.com,
sales.com, sephora.com, Washington Mutual Bank, WineShopper.com and several
telecommunications companies.
OUR MARKET OPPORTUNITY
Scient believes that most companies seeking to build or enhance their
eBusiness capabilities require a professional services provider with a broad
range of integrated capabilities. Such a services provider must provide
strategic industry insights combined with extensive technological skills to
design and create applications, technology infrastructure and business systems
that are reliable, robust, secure, scalable and extensible. Moreover, it must
have a structured approach and the skills necessary to achieve the rapid
innovation and deployment of eBusinesses demanded by today's competitive
marketplace. Such a skill set must include the ability to understand and
integrate a wide spectrum of both emerging and existing technologies. Scient
believes that many existing service providers are not well suited to address the
broad range of challenges posed by eBusiness because they lack the necessary
combination of strategic consulting and technological expertise. As a result,
Scient believes that there is a growing need for the new category of
professional services called systems innovation.
Scient provides the integrated services required to rapidly design, build
and improve eBusinesses. We provide strategy consulting that combines expertise
in eBusiness with market-specific knowledge in order to produce a combined
business and technology strategy for our clients. We also architect and build
applications and technology infrastructure that support a wide variety of
eBusiness functions. We believe that we have a set of integrated skills that
enable our clients to create or enhance competitive eBusinesses in rapid
timeframes. This skill set includes:
- A broad range of integrated strategy and technology capabilities;
- Strategic industry insight;
- Extensive skill with both emerging and existing technologies;
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<PAGE> 5
- Customer experience design expertise;
- Back-end integration skills;
- Networking and security expertise;
- Remote systems management, release management, customer intelligence
management and customer experience management;
- A structured and integrated approach to client engagements;
- Rapid deployment and execution capabilities; and
- Knowledge management expertise.
OUR STRATEGY
Scient's objective is to build upon its position as a leader in systems
innovation. Our strategies for achieving that objective are as follows:
Target Critical Engagements for Emerging eBusiness Leaders. To continue to
differentiate our services, we intend to continue to be selective with respect
to the clients we serve and the engagements we undertake, and focus on
engagements that are critical to the efforts of emerging market leaders building
and enhancing innovative eBusinesses.
Hire and Retain Outstanding Professionals and Maintain a Culture that
Fosters Innovation. We place a strong focus on attracting, hiring, developing
and retaining outstanding professionals. We also focus on maintaining a one-firm
culture that fosters innovation and emphasizes professional development.
Target Potential Clients Through Market-Specific Business Units. Our
marketing and sales strategy includes targeting potential clients through
market-specific business units that operate globally. Thus far, we have
established six market-specific business units through which we market and sell
our services, including Financial Services, eMarkets, Enterprise,
Telecommunications, Retail and Consumer Products and Media and Entertainment. We
intend to add additional market-specific business units as our capabilities and
client opportunities warrant.
Establish Global Presence to Support Emerging eBusiness Leaders. In order
to better serve the needs of enterprises operating on a worldwide basis, we
intend to expand our geographic presence within the United States and abroad. In
addition to our offices in San Francisco, New York and Dallas, we recently
opened offices in Boston, Chicago, Sunnyvale, London and Singapore.
Continue to Develop and Refine the Scient Approach Methodology and
Knowledge Management. In order to capture, upgrade and refine our intellectual
capital, including the Scient Approach methodology, we intend to continue to
invest in our knowledge management processes and systems. We believe that these
processes and systems will allow us to use our intellectual capital in order to
accelerate the delivery of our services, reduce our costs and leverage our
industry expertise.
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THE OFFERING
Common stock offered:
Shares offered by us.......... 1,500,000 shares
Shares offered by the selling
stockholders.................. 850,000 shares
Total........................... 2,350,000 shares
Common stock to be outstanding
after the offering.............. 71,754,204 shares(1)
Over-allotment option........... 352,500 shares
Use of proceeds................. For general corporate purposes, including
working capital and international expansion.
See "Use of Proceeds."
Nasdaq National Market symbol... SCNT
- -------------------------
(1) The share number excludes:
- 11,605,828 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 1999 at a weighted average exercise price
of $8.93 per share; and
- 1,089,056 shares of common stock available for issuance under our 1999
Equity Incentive Plan as of September 30, 1999.
The foregoing information is based on the number of shares outstanding as
of September 30, 1999. Excludes 11,605,828 shares of common stock issuable upon
exercise of outstanding options as of September 30, 1999 at a weighted average
exercise price of $8.93. See "Management -- Employee Stock Plans" and Notes 6
and 8 of Notes to Consolidated Financial Statements.
SUMMARY FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 7,
1997
(INCEPTION) YEAR SIX MONTHS ENDED
THROUGH ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1998 1999 1998 1999
---------------- --------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 179 $ 20,675 $ 5,018 $ 47,209
Total operating expenses............................ 1,394 33,022 7,094 63,010
Loss from operations................................ (1,215) (12,347) (2,076) (15,801)
Net loss............................................ (1,159) (11,701) (1,811) (14,213)
Net loss per share:
Basic and diluted................................. $ (.10) $ (.89) $ (.15) $ (.30)
Weighted average shares........................... 11,894 13,198 12,136 46,828
</TABLE>
The following table presents our summary balance sheet as of September 30,
1999. The data in the "As Adjusted" column has been adjusted to reflect the sale
of 1,500,000 shares of common stock offered by us at an assumed public offering
price of $90.19 per share, after deducting the underwriting discount and
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------
ACTUAL AS ADJUSTED
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 49,986 $178,581
Long-term investments....................................... 22,160 22,160
Working capital............................................. 62,915 191,510
Total assets................................................ 112,290 240,885
Bank borrowings and capital lease obligations, long-term.... 2,028 2,028
Total stockholders' equity.................................. 89,572 218,167
</TABLE>
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are not the only ones that we
face. Any of the following risks could seriously harm our business, financial
condition or results of operations. As a result, these risks could cause the
decline of the trading price of our common stock, and you may lose all or part
of your investment. You should also refer to the other information set forth in
this prospectus, including our financial statements and the related notes.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We incurred net losses of $14.2 million during the six months 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 to new or other existing engagements;
- 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 opening or expanding Scient offices.
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
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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
administration, 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 or greater than expected 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. 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 may 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
key management and 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.
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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 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 eBusiness software and services, and the in-house
development efforts of companies seeking to engage in eBusiness. 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
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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
several offices 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 to vary
significantly. Furthermore, our stockholders would be diluted if we finance the
acquisitions by issuing equity or equity-linked 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 recently opened offices in London and Singapore and we
intend to expand our operations internationally in future periods by opening
other 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.
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<PAGE> 11
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 six months ended September 30, 1999, our five largest
clients accounted for approximately 38% 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 frequently 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 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
11
<PAGE> 12
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.
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
12
<PAGE> 13
pace with continuing changes in technology, evolving industry standards and
changing client preferences. In addition, we must hire, train and 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 or will take 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 or intellectual
property, 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
After this offering, our directors, executive officers and their affiliates
will beneficially own, in the aggregate, approximately 58.1% 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:
- "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
- 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.
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<PAGE> 14
INVESTMENTS MADE BY SCIENT CAPITAL MAY CAUSE SOME POTENTIAL CLIENTS TO NOT
USE OUR SERVICES
We make investments in some of our clients through our wholly owned
subsidiary, Scient Capital. Competitors of our clients may be discouraged from
using our services if they perceive these investments as creating a conflict of
interest that would result in us not providing the same level of service to
these competitors if they became our clients. If potential clients hold this
perception, we may not be able to increase our customer base as we would
otherwise be able to, which could harm our business and results of operations.
RISKS RELATED TO THE SYSTEMS INNOVATION INDUSTRY
OUR SUCCESS WILL DEPEND ON THE CONTINUED DEVELOPMENT OF A MARKET FOR
SYSTEMS INNOVATION SERVICES
We cannot be certain that a viable market for systems innovation services
will be sustainable. If a viable and sustainable market for our systems
innovation services does not continue to develop, Scient will fail. Even if a
systems innovation services market continues to develop, 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 continued use and acceptance of
the Internet as a means for commerce. The widespread acceptance and adoption of
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 affected by not only regulations applicable to businesses generally,
but also laws and regulations directly applicable to eBusiness. 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.
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<PAGE> 15
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;
- 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. 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 relating to
our stock by securities analysts;
- Changes in market valuations of other eBusiness 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.
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<PAGE> 16
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include those listed under "Risk Factors" and elsewhere in this
prospectus.
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results.
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to Scient from the sale of the 1,500,000 shares of common
stock offered by us are estimated to be approximately $128.6 million, based on
the price of our common stock of $90.19 as of December 21, 1999 and after
deducting underwriting discounts and commissions and estimated offering expenses
of approximately $600,000 payable by Scient. The net proceeds of this offering
are estimated to be approximately $159.0 million if the underwriters'
over-allotment option is exercised in full. We will not receive any proceeds
from the sale of shares by the selling stockholders.
We expect to use the net proceeds for general corporate purposes, including
working capital and international expansion. A portion of the net proceeds may
also be used for the acquisition of businesses that are complementary to ours.
We have no current plans, agreements or commitments and are not currently
engaged in any negotiations with respect to any such transaction. Pending such
uses, we will invest the net proceeds of this offering in investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future. Pursuant to the terms of
our credit facility, we are unable to pay dividends without first obtaining the
written consent of our bank, which will not be unreasonably withheld.
PRICE RANGE OF COMMON STOCK
Our common stock began trading publicly on the Nasdaq National Market on
May 14, 1999 and is traded under the symbol "SCNT." The following table shows
the high and low per share closing sale prices of our common stock, as reported
by the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
-------------------
HIGH LOW
------- ------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 2000
First Quarter (beginning May 14, 1999).................... $ 25.06 $15.13
Second Quarter............................................ 41.56 19.31
Third Quarter (through December 21, 1999)................. 100.50 33.47
</TABLE>
On December 21, 1999, the reported last sale price of our common stock on
the Nasdaq National Market was $90.19 per share, and on September 30, 1999,
there were approximately 269 holders of record of the common stock.
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<PAGE> 18
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
September 30, 1999. The as adjusted information reflects the receipt of the
estimated net proceeds from the sale by us of 1,500,000 shares of common stock
in this offering, after deducting the underwriting discounts and commissions and
estimated offering expenses. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Bank borrowings, current.................................. $ 1,106 $ 1,106
Capital lease obligations, current........................ 721 721
-------- --------
Total short-term debt................................ $ 1,827 $ 1,827
======== ========
Long-term debt:
Bank borrowings, long-term................................ $ 1,424 $ 1,424
Capital lease obligations, long-term...................... 604 604
-------- --------
Total long-term debt................................. 2,028 2,028
-------- --------
Stockholders' equity:
Convertible preferred stock, $.0001 par value per share,
10,000 shares authorized; no shares outstanding actual
and as adjusted........................................ -- --
Common stock, $.0001 par value per share, 125,000 shares
authorized, 70,254 shares issued and outstanding
actual; 71,754 shares outstanding as adjusted(1)....... 7 7
Additional paid-in capital................................ 137,574 266,169
Unearned compensation..................................... (20,935) (20,935)
Accumulated deficit....................................... (27,074) (27,074)
-------- --------
Total stockholders' equity........................... 89,572 218,167
-------- --------
Total capitalization.............................. $ 91,600 $220,195
======== ========
</TABLE>
- -------------------------
(1) The share numbers exclude:
- 11,605,828 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 1999 at a weighted average exercise price
of $8.93 per share; and
- 1,089,056 shares of common stock available for issuance under our 1999
Equity Incentive Plan as of September 30, 1999.
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<PAGE> 19
DILUTION
The net tangible book value of our common stock as of September 30, 1999
was $89.6 million or approximately $1.27 per share. Net tangible book value per
share represents the amount of our stockholders' equity less intangible assets,
divided by 70,254,204 shares of common stock outstanding.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of common stock in
this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
by us of 1,500,000 shares of common stock in this offering, after deducting the
underwriting discounts and commissions and estimated offering expenses and the
application of the estimated net proceeds therefrom, our net tangible book value
as of September 30, 1999, would have been $218.2 million or $3.04 per share.
This represents an immediate increase in net tangible book value of $1.77 per
share to existing stockholders and an immediate dilution in net tangible book
value of $87.15 per share to purchasers of common stock in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 90.19
Net tangible book value per share at September 30, 1999... $ 1.27
Increase per share attributable to new investors.......... 1.77
-------
Net tangible book value per share after this offering....... 3.04
-------
Dilution per share to new investors......................... $ 87.15
=======
</TABLE>
As of September 30, 1999, there were options outstanding to purchase a
total of 11,605,828 shares of common stock at a weighted average exercise price
of $8.93 per share under our stock option plans and stock purchase plan. To the
extent outstanding options are exercised, there will be further dilution to new
investors.
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<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and is qualified by reference to financial statements and notes
thereto and appearing elsewhere in this prospectus. The statement of operations
data for the period from November 7, 1997 (inception) through March 31, 1998 and
the year ended March 31, 1999 and the balance sheet data at March 31, 1998 and
March 31, 1999, are derived from, and are qualified by reference to, the audited
financial statements of Scient included elsewhere in this prospectus. The
selected financial data at September 30, 1999 and for the six months ended
September 30, 1998 and 1999 have been derived from unaudited financial
statements also included elsewhere in this prospectus and which, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of results for the unaudited
periods. The historical results are not necessarily indicative of results to be
expected in any future period.
<TABLE>
<CAPTION>
NOVEMBER 7,
1997
(INCEPTION) YEAR SIX MONTHS ENDED
THROUGH ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, ------------------
1998 1999 1998 1999
----------- --------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 179 $ 20,675 $ 5,018 $ 47,209
Operating expenses:
Professional services.......................... 102 10,028 2,738 22,173
Selling, general and administrative............ 1,228 15,315 2,855 32,315
Stock compensation............................. 64 7,679 1,501 8,522
------- -------- ------- --------
Total operating expenses............... 1,394 33,022 7,094 63,010
------- -------- ------- --------
Loss from operations............................. (1,215) (12,347) (2,076) (15,801)
Interest income, net............................. 56 646 265 1,588
------- -------- ------- --------
Net loss......................................... $(1,159) $(11,701) $(1,811) $(14,213)
======= ======== ======= ========
Net loss per share:
Basic and diluted.............................. $ (.10) $ (.89) $ (.15) $ (.30)
======= ======== ======= ========
Weighted average shares........................ 11,894 13,198 12,136 46,828
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF
--------------------- SEPTEMBER 30,
1998 1999 1999
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $3,301 $28,129 $ 49,986
Long-term investments................................... -- -- 22,160
Working capital......................................... 3,299 28,108 62,915
Total assets............................................ 4,225 38,812 112,290
Bank borrowings and capital lease obligations,
long-term............................................. 26 1,809 2,028
Total stockholders' equity.............................. 3,805 29,977 89,572
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes included elsewhere in this
prospectus. In addition to historical information, the discussion in this
prospectus contains certain forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
by these forward-looking statements due to factors, including, but not limited
to, those set forth under "Risk Factors" and elsewhere in this prospectus.
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 six months ended
September 30, 1999, Chase Manhattan 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. As we expand
internationally, we expect to generate a greater percentage of our revenues
outside of North America, much of which will be denominated in foreign
currencies.
Professional services expenses consist primarily of compensation and
benefits for 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.
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<PAGE> 22
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.
In July 1999 we established a wholly owned subsidiary, Scient Capital,
which serves as an investment vehicle for us to make equity investments in
clients who meet certain criteria. We believe that such equity investments may
provide an opportunity to enhance our long-term relationships with these clients
and may allow us to share in the potential appreciation of such clients' market
value, which we believe may be enhanced by the services we provide to these
clients. Scient Capital will be funded entirely by Scient on an as-needed basis.
Investments will only be made in clients of Scient and will be made on a
minority basis where a venture capital firm or private equity investor takes a
lead role and sets valuation. It is our policy not to accept equity in place of
standard engagement fees and not to discount standard engagement fees based on
the opportunity to invest in a client. As of September 30, 1999, we have
purchased a minority interest in three of our clients.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
NOVEMBER 7, 1997 SIX MONTHS ENDED
(INCEPTION) SEPTEMBER 30,
THROUGH YEAR ENDED -------------------
MARCH 31, 1998 MARCH 31, 1999 1998 1999
---------------- -------------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................... 100% 100% 100% 100%
Operating expenses:
Professional services................ 57 49 54 47
Selling, general and
administrative.................... 686 74 57 68
Stock compensation................... 35 37 30 18
------- -------- ------- --------
Total operating expenses............... 778 160 141 133
------- -------- ------- --------
Loss from operations................... (678) (60) (41) (33)
Interest income, net................... 31 3 5 3
------- -------- ------- --------
Net loss............................... (647)% (57)% (36)% (30)%
======= ======== ======= ========
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUES
For the first six months of fiscal 2000, revenues increased to $47.2
million from $5.0 million during 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. For the first six months of fiscal 2000,
professional services expenses increased to $22.2 million from $2.7 million
during the comparable period of the prior fiscal year. These increases were
primarily a result of increases in the number of professional services
personnel.
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<PAGE> 23
Selling, General and Administrative. For the first six months of fiscal
2000, selling, general and administrative expenses increased to $32.3 million
from $2.9 million during 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 stock
compensation expense of $8.5 million and $1.5 million for the six months ended
September 30, 1999 and 1998, respectively.
INTEREST INCOME, NET
For the first six months of fiscal 2000, interest income, net increased to
$1.6 million from $265,000 during the comparable period of the prior fiscal
year. The increase was due primarily to higher interest-bearing cash balances in
the 1999 period resulting from our financing activities, including our initial
public offering, 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.
INCEPTION PERIOD AND YEAR ENDED MARCH 31, 1999
REVENUES
The increase in revenues in the year ended March 31, 1999 compared to the
Inception Period reflected the introduction of our eBusiness professional
services in February 1998, the increase in the number of clients and wider scope
of engagements during the year ended March 31, 1999 compared to the Inception
Period, our increased capacity due to increased investment in our sales and
professional services organizations, and the comparison of a full year period to
a partial year period.
OPERATING EXPENSES
Professional Services. Our professional services expenses increased in
absolute dollars in the year ended March 31, 1999 compared to the Inception
Period, primarily as a result of increases in the number of professional
services personnel, and the comparison of a full year period to a partial year
period.
Selling, General and Administrative. Selling, general and administrative
expenses increased in absolute dollars in the year ended March 31, 1999 compared
to the Inception Period. The increase was primarily due to expenses related to
the addition of sales, marketing, recruiting, knowledge management, technology,
finance and administration personnel, the cost of leasing additional office
space to support our growth, and the comparison of a full year period to a
partial year period.
Stock Compensation. In the Inception Period and the year ended March 31,
1999, we recorded aggregate unearned stock compensation of $1.6 million and
$33.4 million, respectively, in connection with stock option grants. This
increase was primarily a result of increases in the number of options
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<PAGE> 24
granted due to the increased hiring of employees and the comparison of a full
year period to a partial year period. Stock compensation expense is being
recognized over the vesting period of the related options (generally four
years). During the Inception Period and the year ended March 31, 1999, we
recognized stock compensation of $64,000 and $7.7 million, respectively. This
increase was primarily a result of increases in the number of options granted
due to increased hiring of employees and the comparison of a full year period to
a partial year period.
INTEREST INCOME, NET
Interest income increased in the year ended March 31, 1999 compared to the
Inception Period. This increase was due primarily to interest income earned over
a full year period versus a partial year period and higher interest bearing
funds in the full year period resulting from our private financing activities
during 1998 and 1999.
PROVISION FOR INCOME TAXES
From inception through March 31, 1999, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit. As
of March 31, 1999, we had approximately $4.6 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 100% valuation allowance has been
recorded.
QUARTERLY RESULTS OF OPERATIONS
Given our limited operating history and the fact that we did not begin to
generate significant amounts of revenues until the fiscal year ended March 31,
1999, we do not believe that year-over-year comparisons for our financial
results are meaningful; therefore, we have included the results from operations
on a quarterly basis.
The following tables set forth a summary of our unaudited quarterly
operating results for each of our six most recently ended fiscal quarters. We
have derived this information from our unaudited interim consolidated financial
statements, which, in the opinion of our management, have been prepared on a
basis consistent with our financial statements contained elsewhere in this
prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation in accordance with generally
accepted accounting principles when read in conjunction with our consolidated
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<PAGE> 25
financial statements and related notes included elsewhere in this prospectus.
Our quarter operating results are not necessarily indicative of future results
of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 1,924 $ 3,094 $ 6,270 $ 9,387 $16,404 $ 30,805
Operating expenses:
Professional
services............ 942 1,796 3,000 4,290 7,940 14,233
Selling, general and
administrative...... 1,225 1,630 4,852 7,608 13,105 19,212
Stock compensation..... 358 1,143 2,355 3,823 4,348 4,173
------- ------- ------- ------- ------- --------
Total operating
expenses.... 2,525 4,569 10,207 15,721 25,393 37,618
------- ------- ------- ------- ------- --------
Loss from operations..... (601) (1,475) (3,937) (6,334) (8,989) (6,813)
------- ------- ------- ------- ------- --------
Interest income, net..... 78 187 196 185 596 992
------- ------- ------- ------- ------- --------
Net loss................. $ (523) $(1,288) $(3,741) $(6,149) $(8,393) $ (5,821)
======= ======= ======= ======= ======= ========
Net loss per share:
Basic and diluted...... $ (.04) $ (.10) $ (.28) $ (.40) $ (.23) $ (.10)
======= ======= ======= ======= ======= ========
Weighted average
shares.............. 12,096 12,310 13,474 15,246 36,810 55,848
======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. 100% 100% 100% 100% 100% 100%
Operating expenses:
Professional
services............ 49% 58% 48% 46% 48% 46%
Selling, general and
administrative...... 64% 53% 77% 81% 80% 62%
Stock compensation..... 18% 37% 38% 41% 27% 14%
--- --- --- --- --- ---
Total operating
expenses.... 131% 148% 163% 168% 155% 122%
--- --- --- --- --- ---
Loss from operations..... (31)% (48)% (63)% (68)% (55)% (22)%
--- --- --- --- --- ---
Interest income, net..... 4% 6% 3% 2% 4% 3%
--- --- --- --- --- ---
Net loss................. (27)% (42)% (60)% (66)% (51)% (19)%
=== === === === === ===
</TABLE>
REVENUES
Our revenues increased in each of the quarterly periods presented. The
increase in revenues in these periods reflected the increase in the number of
clients and scope of engagements in each quarter and increased capacity due to
increased investment in our sales and professional services organizations.
OPERATING EXPENSES
Professional Services. Our professional services expenses increased in
absolute dollars in each of the quarterly periods presented. These increases
were primarily a result of increases in the number of professional services
personnel.
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<PAGE> 26
Selling, General and Administrative. Selling, general and administrative
expenses increased in absolute dollars in each of the quarterly periods
presented. The increases were primarily due to expenses related to the addition
of sales, marketing, recruiting, knowledge management, technology, finance and
administration personnel and the costs of leasing additional office space to
support our growth.
Stock Compensation. Stock compensation expenses increased in each of the
quarterly periods presented. These increases were primarily a result of
increases in the number of options granted due to increased hiring of employees.
See Note 8 of Notes to Consolidated Financial Statements.
INTEREST INCOME, NET
Interest income increased in each of the quarterly periods presented with
the exception of the quarter ended March 31, 1999. These increases were due
primarily to interest income earned on the invested portion of the proceeds of
our private financing activities. Interest income was offset by insignificant
interest expense generated from our increased drawings under our lines of credit
necessary to support our internal growth.
LIQUIDITY AND CAPITAL RESOURCES
We raised $62.7 million in May 1999 from an initial public offering of
6,900,000 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 complementary 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 operations for the Inception Period and each of the quarters
from June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999 was
$1.2 million, $1.0 million, $1.1 million, $1.2 million and $1.3 million,
respectively. 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.
Cash provided by financing activities 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 Inception Period and each of the quarters
ended June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999
were approximately $334,000, $392,000, $662,000, $604,000 and $2.1 million,
respectively. 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 .5%. As of
September 30, 1999, there were no outstanding borrowings under this line of
credit. The amount available at September 30, 1999 was $1.9 million. Ten standby
letters of credit totaling $7.4 million have been issued against this line of
credit to secure office
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<PAGE> 27
space. We also have a capital equipment line with a bank for $4.0 million. As of
September 30, 1999, borrowings under this capital equipment line were
approximately $2.5 million. The amount available at September 30, 1999 was $1.5
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. We adopted
SOP 98-1 effective April 1, 1999. Such adoption did not have a significant
effect on our results of operations.
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" ("SFAS 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. We will
adopt SFAS 133 in the quarter ending June 30, 2000 and do not expect such
adoption to have an impact on our results of operations, financial position or
cash flows.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Scient does not believe that there is any material risk exposure with
respect to derivative or other financial instruments.
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. Issues related to the change in century could continue
to arise after January 1, 2000.
Although we believe that our principal internal systems are Year 2000
compliant, some of our non-critical 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.
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<PAGE> 28
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. 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:
- 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.
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<PAGE> 29
BUSINESS
The following description of Scient's business should be read in
conjunction with the information included elsewhere in this prospectus. This
description contains forward-looking statements that involve risks and
uncertainties. Scient's actual results could differ significantly from the
results discussed in the forward-looking statements as a result of the factors
set forth in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Scient is a leading provider of the new category of professional services
called systems innovation. We provide integrated eBusiness strategy and
technology implementation services to clients who are creating eBusinesses or
are rethinking or expanding their existing businesses to integrate eBusiness
capabilities. eBusinesses are businesses that combine the reach and efficiency
of the Internet with both emerging and existing technologies to enable companies
to strengthen relationships with customers and business partners, create new
revenue opportunities, reduce costs, improve operating efficiencies, optimize
supply chains, shorten cycle times and improve communications. Our services
include strategy consulting, customer experience design, systems architecture,
application and technology infrastructure development and asset-based services.
Our services are designed to rapidly improve and sustain a client's competitive
position through the development of innovative business strategies enabled by
the integration of emerging and existing technologies. We have developed a
methodology, the Scient Approach, that provides a framework for each stage of a
client engagement from helping the client conceive its strategy to architecting,
engineering and operating and extending its eBusiness. We believe that our
integrated methodology allows us to deliver reliable, robust, secure, scalable
and extensible systems innovation in rapid timeframes.
We have performed professional services for over 65 clients, including
BenefitPoint, Carstation.com, Chase Manhattan, Hambrecht & Quist, homestore.com,
InnoVentry, Johnson & Johnson, living.com, Miadora, Nasdaq, PlanetRx.com,
sales.com, sephora.com, Washington Mutual Bank, WineShopper.com and several
telecommunications companies.
INDUSTRY BACKGROUND
The emergence and acceptance of the Internet has fundamentally changed the
way that consumers and businesses communicate, obtain information, purchase
goods and services and transact business. International Data Corporation, or
IDC, estimates that the number of Internet users worldwide will grow from
approximately 70 million in 1997 to 320 million in 2002 and that revenues
generated from Internet commerce in 2002 will exceed $400 billion. The Internet
has emerged as a fundamental opportunity to transform the way business is
conducted, joining the telephone, paper-based communication and face-to-face
interaction as one of the primary means of doing business.
Initially, companies used the Internet as a means of advertising or
promoting their businesses. Typically they published websites with "read only,"
brochure-like information that was intended to enhance internal and external
communications. Companies either used their own internal design and information
technology resources or hired online advertising agencies and web design firms
to develop and deploy their initial websites.
Businesses quickly recognized the Internet's potential, beyond
"brochure-ware," to enhance their ability to attract and serve clients. The next
stage in the adoption of the Internet as a business medium typically involved
the construction of systems that enabled limited types of transactions to be
conducted over the Internet or that focused on improvements in procurement and
distribution. At this stage, companies generally viewed the Internet primarily
as another channel or adjunct to their core business. In order to build these
sorts of electronic business systems, companies were required to shift their
focus from simple web design to the integration of client/server applications
with those systems. As internal
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<PAGE> 30
information technology, or IT, departments often lacked the resources or
capabilities to build these systems, firms increasingly began to hire
traditional IT services firms focused on the integration of client/server
systems to complement the services of web design firms.
Today, many companies are recognizing that the Internet offers even greater
potential for enhancing or defending competitive positions. These companies
understand that the Internet is not simply going to play an ancillary role in
business, but is going to redefine the key determinants of business success and
the way business is conducted. This understanding has led to the emergence of a
new business model, known as eBusiness. eBusiness combines the reach and
efficiency of the Internet with both emerging and existing technologies to
enable companies to strengthen relationships with customers and business
partners, create new revenue opportunities, reduce costs, improve operating
efficiencies, shorten cycle times and improve communications. In short,
eBusiness extends beyond the Internet and represents a means to improve a
company's competitive position through the development of innovative business
strategies enabled by the integration of emerging and existing technologies.
The emergence of eBusiness is significant for virtually all companies
regardless of industry or location. In many industries, physical or capital
assets are becoming less important as barriers to entry. The increasingly
interconnected world, in which the Internet and other technologies create the
potential to link any communication device to any other, is reducing the effect
of geographic barriers, providing access to the best prices worldwide and
challenging the way many businesses have historically competed. Competition can
come from new, unexpected sources, in addition to traditional ones. The ability
to differentiate products or services and to price advantageously is greatly
reduced as the consumer is given more information, choice and power. In light of
all of these factors, many new and established companies are rethinking,
expanding or creating their businesses to integrate eBusiness capabilities. They
are doing so with the recognition that establishing and maintaining customer
relationships are increasingly important to success. In addition, as the
advantage of being a first mover becomes increasingly clear, new and existing
businesses are eager to establish eBusinesses in rapid timeframes, with cost
being a secondary consideration. Thus, a continued focus on rapid innovation
will be critical as more eBusinesses emerge and the nature of competition
continues to evolve.
In order to develop and implement a successful eBusiness capability in the
required timeframe, companies are increasingly hiring outside service providers
to augment internal resources. However, many companies find that existing
service providers, such as web design firms and traditional IT service firms,
are not well suited to address the broad range of challenges posed by eBusiness.
Web design firms typically focus on user interfaces and front-end design and do
not offer a broad scope of expertise for rapid development and deployment of
innovative eBusiness systems and capabilities. Traditional IT service firms
typically have been focused primarily on legacy systems enhancements, Year 2000
compliance and the implementation of traditional business applications. Their
methodology for delivery is focused on client/server application development,
which is not conducive to short development cycles and methods required for
eBusiness. Hence, they have not cultivated the skills necessary to design and
implement eBusiness systems in a timeframe consistent with market requirements.
Companies that are seeking to build or enhance their eBusiness capabilities
require a professional services provider that has developed a broad range of
integrated capabilities. Such a services provider must provide strategic
industry insights combined with extensive technological skills to design and
create infrastructure, applications and business systems that are reliable,
robust, secure, scalable and extensible. Moreover, it must have a structured
approach and the skills necessary to achieve the rapid innovation and deployment
of eBusinesses. Such a services firm must be able to understand and integrate a
wide spectrum of emerging technologies and existing systems. In short, Scient
believes that there is a growing need for a new category of professional
services called systems innovation.
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<PAGE> 31
THE SCIENT SOLUTION
Scient was established for the specific purpose of becoming the leader in
systems innovation. Scient provides integrated eBusiness strategy and technology
implementation services to clients who are creating eBusinesses or are
rethinking or expanding their existing businesses to integrate eBusiness
capabilities. Our services are designed to rapidly improve a client's
competitive position through the development of innovative business strategies
enabled by the integration of emerging and existing technologies. By exclusively
focusing on eBusiness services, Scient believes that it can better serve its
clients, as well as enhance its own eBusiness capabilities.
Because eBusiness requires knowledge that extends beyond the Internet, a
broad range of integrated capabilities is required. Scient believes that it has
a set of integrated skills that enable its clients to create or enhance
competitive eBusinesses in rapid timeframes. This skill set includes:
- A broad range of integrated strategy and technology capabilities;
- Strategic industry insight;
- Extensive skill with both emerging and existing technologies;
- Customer experience design expertise;
- Back-end integration skills;
- Networking and security expertise;
- Remote systems management, release management, customer intelligence
management and customer experience management;
- A structured and integrated approach to client engagements;
- Rapid deployment and execution capabilities; and
- Knowledge management expertise.
Scient provides the services required to design, build and improve an
eBusiness. Scient provides strategy consulting that combines expertise in
eBusiness with industry specific knowledge in order to produce a combined
business and technology strategy for its clients and architects and builds
applications and technology infrastructure that supports a wide variety of
eBusiness functions. Scient works with a wide variety of software and hardware
vendors in order to best address a client's needs. Scient maintains the skills
necessary to build systems that are reliable, robust, secure, scalable and
extensible.
Scient has developed an integrated methodology, the Scient Approach, that
provides a framework for each stage of a client engagement, from helping the
client conceive its strategy to architecting, engineering and operating and
extending its eBusiness. We believe that our integrated methodology allows us to
deliver robust systems innovation in rapid timeframes. Scient is also developing
knowledge management systems and processes with the goal of being able to
capture and disseminate intellectual capital and experience throughout Scient to
optimize the execution of client engagements and to continually update and
innovate the Scient Approach methodology. By quickly and efficiently sharing
Scient's intellectual capital with all of our employees, whom we call
"colleagues," we believe we will be able to help our clients achieve faster time
to market and reduce the risks associated with the application and integration
of emerging technologies.
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<PAGE> 32
STRATEGY
Scient's objective is to build upon its position as a leader in systems
innovation. Our strategies for achieving that objective are as follows:
Target Critical Engagements for Emerging eBusiness Leaders. We focus on
attracting clients that understand and intend to capture the competitive
advantages provided by eBusiness. To continue to differentiate our services and
achieve recognition as a leader in systems innovation, we intend to continue to
be selective with respect to the clients we serve and the engagements we
undertake, and focus on engagements that are critical to the efforts of emerging
market leaders building and enhancing innovative eBusinesses. Attracting
engagements that are critical for existing and emerging eBusiness leaders
enhances our ability to hire outstanding professionals that desire to work on
such projects and provides the opportunity to add to our intellectual capital.
Hire and Retain Outstanding Professionals and Maintain a Culture that
Fosters Innovation. We believe that attracting and retaining outstanding
professionals is essential to our growth. We place a strong focus on attracting,
hiring, developing and retaining outstanding personnel. To facilitate ongoing
professional development and innovation, we have established Innovation Centers
that focus on four key skill competencies: consulting, customer experience,
technology and asset services. We also have created a dedicated recruiting
organization that is incentivized to recruit high-quality professionals to
support our growth. In addition, we focus on maintaining a culture that fosters
innovation and emphasizes professional development. Our culture embodies our
values of spirit, growth, innovation, urgency, community and excellence. In
addition, our one-firm concept, in which the entire company is operated on a
single profit and loss basis, fosters teamwork and cooperation throughout the
company.
Target Potential Clients Through Market-Specific Business Units. Our
marketing and sales strategy includes targeting potential clients through
market-specific business units that operate globally. Thus far, we have
established six such market-specific business units through which we market and
sell our services. We currently have six business units, including Financial
Services, eMarkets, Enterprise, Telecommunications, Retail and Consumer Products
and Media and Entertainment. We intend to add additional market-specific
business units as our capabilities and client opportunities warrant. Market-
specific expertise helps us attract and service the leading clients that we
target. We believe our market-specific expertise enables us to win the
confidence of target clients' senior management, resulting in engagements that
focus on our clients' most vital issues.
Establish Global Presence to Support Emerging eBusiness Leaders. In order
to better serve the needs of enterprises operating on a worldwide basis, we
intend to build our brand name globally and expand our geographic presence
within the United States and abroad. In addition to our offices in San
Francisco, New York and Dallas, we recently opened offices in Boston, Chicago,
Sunnyvale, London and Singapore. We intend to open additional offices in Asia,
Europe and in the United States over the next 12 months.
Continue to Develop and Refine the Scient Approach and Knowledge
Management. The market for eBusiness services is evolving rapidly, and we
believe that the leaders in this market will be those who can respond quickly to
changing market conditions and the evolving needs of clients. We believe that
our integrated methodology, the Scient Approach, allows us to deliver robust and
cost-effective business systems innovation in rapid timeframes. In order to
capture, upgrade and refine our intellectual capital, including the Scient
Approach, we intend to continue to invest in our knowledge management processes
and systems. We believe that these processes and systems will allow us to use
our intellectual capital in order to accelerate the delivery of our services,
reduce our costs and leverage our industry expertise.
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SERVICES
We offer professional services to build and enhance eBusinesses. These
services include strategy consulting, customer experience design, systems
architecture, application and technology infrastructure development and
asset-based services. Recognizing that all clients have different needs at
different times, we use our proprietary methodology, the Scient Approach, to
customize our service offerings based on each client's requirements. The
following descriptions highlight the primary services that we offer.
Strategy Consulting. We work with clients to tailor an eBusiness strategy
designed to provide them with a measurable competitive advantage in a short
timeframe. Our goal is to leverage the industry experience and knowledge base of
our professionals along with the experiences of our clients' senior executives
to formulate innovative, executable and flexible eBusiness strategies.
Customer Experience Design. Scient develops user interface designs for
clients. Because Scient considers the user interface to be more than just visual
design, we incorporate our abilities in information architecture, user interface
engineering, editorial services and usability research along with visual design
to develop systems with innovative customer experiences. In addition to offering
these services directly to our clients, Scient may partner with third-party
design firms from time to time to achieve our clients' specific visual design
requirements.
Systems Architecture. Using the Internet and emerging technologies, we
architect and design eBusiness applications and technology infrastructure for
clients in rapid timeframes. We offer application designs that range from
intranet solutions to complex business-to-business and business-to-consumer
innovations. Recognizing that the technical infrastructure becomes the
foundation for any future application development, our technology infrastructure
design services focus on enabling eBusiness applications to be reliable, robust,
secure, scalable and extensible.
Application and Technology Infrastructure Development. We build and
implement innovative eBusiness applications and technology infrastructure that
take into account the current and future business needs of our clients. We
recognize that new types of communications devices are proliferating, network
usage is expanding, and the future of eBusiness will be dependent upon the
development and integration of a variety of technologies. We build applications
and technology infrastructure to be able to accommodate these changes in the
eBusiness environment. Our applications and technology infrastructure
development services utilize our capabilities in software development,
applications software, databases, networking, security and infrastructure
architecture. Scient develops applications and technology infrastructure to be
robust and to serve as the foundation for eBusiness innovations that can link to
existing systems and technologies.
Asset-Based Services. Upon completion of engagements, we offer our clients
asset-based services to help them operate and extend their eBusinesses. These
services include remote systems management, release management, customer
intelligence management and customer experience management and are provided on a
monthly subscription basis with established service level agreements. Our extend
capabilities leverage the iterative nature of the Scient Approach to provide the
framework and business structure for continuous re-innovation of an eBusiness.
CLIENT CASE STUDIES
The following case studies of the services that we have provided for three
of our clients are representative of the services we offer.
SEPHORA.COM
sephora.com is a leading online-destination for cosmetics, fragrances and
well-being products for women, men and youth. Extending Sephora's global retail
presence to the online world, sephora.com is
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committed to educating and assisting consumers through a non-invasive experience
that helps consumers become more informed about fragrance and cosmetic product
offerings as well as general beauty issues.
Sephora teamed with Scient to build its eBusiness and to accelerate its
time-to-market. Sephora chose Scient because of Scient's technology expertise
and clear understanding of the unique eBusiness issues facing Sephora. Applying
the end-to-end Scient Approach methodology, the Scient team helped to refine,
extend and translate Sephora's offline experience into the online world,
focusing on the core concepts of customer freedom, choice and advocacy. Scient
drew upon its customer experience expertise, including information architecture,
visual design and usability, to help Sephora extend its "brick and mortar" brand
to an effective "click and mortar" experience. Scient designed and built a
robust and scalable business and technical architecture that enables sephora.com
to dynamically respond to the market. Scient and Sephora integrated the
consumer's "click and mortar" experience not only online, but also through
kiosks and interactive browsers to develop a universally consistent interaction
with Sephora at any point of contact.
The timing from inception to launch of sephora.com as a fully functional,
completely transactional, scalable and integrated eBusiness took less than 6
months. sephora.com continues to add significant new features and functionality
to its offerings of more than 160 brands, 7,000 SKUs and 1,600 product images,
as well as an eMagazine. Scient has been engaged to provide on-going asset-based
services on a monthly subscription basis, including remote systems management,
customer experience and intelligence management and release management, to allow
sephora.com to focus on refining and building its business in order to maintain
its competitive advantage.
BENEFITPOINT
BenefitPoint is a leader in digital insurance management, a new model for
insurance product distribution and customer service. At the core of this
business-to-business application is a broker-centric workflow engine that
leverages Internet technologies to drive efficiencies throughout the lifecycle
of selling group insurance products, including medical, dental, vision, life and
disability coverage, and to enable brokers and consultants to provide a higher
level of customer service. BenefitPoint's recently launched eBusiness addresses
major challenges in the disconnected, inefficient and paper-based insurance
industry.
In January 1999, BenefitPoint and Scient embarked on a formal partnership
applying the end-to-end Scient Approach methodology to create a complex
eBusiness system that provides insurance brokers and consultants access to
critical customer data and enables them to extend eCommerce functionality and
workflows out to their business partners and clients.
BenefitPoint's executive team, having extensive insurance industry
experience, teamed with Scient's strategists, technologists and customer
experience experts to translate BenefitPoint's industry knowledge into a viable
eBusiness. Scient's business strategists performed an in-depth analysis of the
insurance brokerage process while the technology team explored existing
solutions to address core functionalities of the system and the customer
experience team created a visual identity and functional prototype of the system
to support BenefitPoint's business development efforts.
As the project evolved, the focus shifted toward sophisticated program
management in order to orchestrate the large development effort. Five parallel
development teams, including one BenefitPoint representative on each team, were
responsible for architecting and engineering the overall system. Scient designed
and built a flexible and scalable integrated system that gives brokers and
consultants the tools to manage the marketing, sales and servicing of group
employee benefits. In less than 12 months, Scient helped BenefitPoint conceive,
architect, engineer and launch their eBusiness, allowing BenefitPoint to rapidly
enter the market and continue to extend and innovate its product offerings.
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INNOVENTRY
InnoVentry is a developer and distributer of advanced cash management
machines that incorporate biometric face-recognition technologies. These
machines provide self-service check cashing, ATM, money orders, bill payment and
other financial services to individuals. Additionally, the machines incorporate
a biometric face-recognition system to authenticate customers, thereby reducing
fraud risk for InnoVentry, while enhancing security for customers.
InnoVentry hired Scient to design, develop and test its cash management
machine platform and networking technologies. In approximately 30 weeks, Scient
evaluated the client's needs and architected and engineered an integrated
system. This system employs Internet-based technologies,voice transmission over
the Internet and software that recognizes facial patterns. These cash management
machines were piloted in September 1999 and are currently being rolled out
across the United States. Scient continues to work closely with InnoVentry to
further develop the overall system. This will enable InnoVentry to realize their
plans to deploy 2,000 of these self-service machines in 30 U.S. cities by year-
end 2000.
THE SCIENT APPROACH METHODOLOGY
The Scient Approach is a well-defined methodology that helps us efficiently
and successfully deliver our services. This methodology provides a framework
that facilitates the distribution of knowledge within an engagement and across
all parts of our firm. The Scient Approach methodology is designed to allow us
to provide consistent quality across engagements and to deliver high value to
clients in all aspects of our services.
The key to the Scient Approach methodology is the iterative improvement of
the eBusiness innovations that we deliver. Because the needs of our clients are
dynamic, we have designed the Scient Approach methodology with built-in feedback
and iteration processes in order to improve the services delivered to clients
and to enhance the approach itself. The approach is results-based and focuses on
delivering client-specific economic results that Scient calls the New Bottom
Line. The New Bottom Line results are a measurement of quantitative and
qualitative improvements specific to a client's business resulting from
eBusiness innovations. It measures the future results to be derived from new
markets and audiences, enhanced relationships and other benefits sought by each
client. These metrics serve as a critical feedback tool that assists Scient in
designing and extending eBusiness systems.
The Scient Approach methodology has four stages: Conceive, Architect,
Engineer and Operate.
Conceive. During the Conceive stage of the approach, Scient works closely
with the client to formulate the eBusiness strategy that will drive the
functional requirements, customer experience design, and technical specification
of the eBusiness system. The objectives of the Conceive stage include assessing
the current business landscape, formulating an eBusiness vision that will
develop and sustain competitive advantage, and formulating the eBusiness
strategy necessary to implement the vision.
Upon completion of the Conceive stage, Scient should have the information
necessary to define key business success factors and to prioritize the client's
engagements based on a common understanding of the client's eBusiness
objectives.
Architect. In the Architect stage, Scient defines the scope of the
eBusiness applications to be developed and designs applications to enable
clients to meet their objectives. Scient also scopes and designs the underlying
infrastructure to integrate the software, network and hardware components
necessary to support the applications. This stage includes the evaluation of any
third party software. The architect stage occurs in two phases, Architect-Scope
and Architect-Design.
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- Architect-Scope. The goal of this phase is to collect application and
process requirements to confirm the boundaries of the eBusiness
initiative and develop a baseline for the Architect-Design phase.
- Architect-Design. During this phase, Scient defines the processes,
components and timeline necessary to design the technical architecture
and solution framework that will support the proposed business processes,
satisfy the functionality requirements and meet the technical objectives.
The goal of this phase is to create a complete plan that allows the
applications to be constructed, tested and implemented on time and within
budget.
After the Architect stage, the client has a "blueprint" for its eBusiness
development. This blueprint identifies in detail the tasks necessary to meet the
objectives and overall strategy goals as defined in the Conceive stage.
Engineer. In this stage, Scient iteratively builds and delivers the
eBusiness applications, which may include the incorporation or integration of
third party software. Within this stage are four phases that are focused on
successfully implementing the applications defined during the Architect stage.
- Engineer-Detailed Design. In this phase Scient works with the client to
generate a comprehensive detailed engineering specification, including
the user interface and key technical designs, from which to construct the
eBusiness solution.
- Engineer-Construct. In this phase all of the modules of the application
are built, refined and unit tested. This phase is aimed at producing the
tangible results for the client that were identified in the earlier
stages of the Scient Approach methodology. During the Engineer-Construct
phase, Scient also trains both internal and external users on newly built
applications.
- Engineer-Test. In this phase applications are rigorously tested to ensure
they meet all functional, technical and user requirements. This phase
intends to ensure that the engineered applications perform in accordance
with the requirements defined in the Architect stage.
- Engineer-Deploy. In this phase, the eBusiness system is deployed into a
production environment, providing the necessary support and rapid issue
resolution. The Engineer-Deploy phase will deliver the eBusiness system
in its production environment typically for a limited volume beta test,
followed by a full-scale introduction to the complete target user
population.
Upon completion of the Engineer stage, Scient delivers the applications to
the client.
Operate. In the Operate stage, Scient manages and measures the eBusiness
technical operations and provides a framework for ongoing re-innovation of the
client's eBusiness. By utilizing Scient for the ongoing management and
innovation of its eBusiness systems, the client can focus on its core
competencies. The Operate stage centers around two separate but related sets of
activities.
- eSolution Management. This area focuses on the day-to-day operations of
the eBusiness solution, including remote systems management, release
management, customer intelligence management and customer experience
management.
- eBusiness Management. This area focuses on the strategic planning of an
eBusiness solution and extending it into new versions with improved
capabilities. This involves continued re-innovation and improvement in
the eBusiness solution, implemented via a series of new releases with
enhanced capabilities.
SALES AND MARKETING
Through our direct sales force and marketing organization, we market and
sell our services to clients who are creating eBusinesses or are rethinking or
expanding their existing businesses to integrate
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eBusiness capabilities. Our sales professionals are aligned with market-specific
business units. We currently target six principal markets:
- Financial Services Markets, including financial products and services
providers such as banks, brokerage firms, securities firms, insurance
companies and other financial services companies;
- eMarkets, which we define as companies whose business models rely
primarily on new electronic delivery channels, including startup and
existing Internet and new media businesses, as well as spin-offs and
independent ventures of larger companies;
- Enterprise Markets, which includes large companies that are adding
electronic delivery channels for their products and services;
- Telecommunications Markets, including wireline, broadcast, cable,
wireless and Internet service providers;
- Retail and Consumer Products Markets, which includes traditional
companies that are adding direct-to-consumer channel extensions and
implementing business-to-business strategies; and
- Media and Entertainment Markets, including diversified media companies,
advertiser-supported media companies, entertainment service providers,
suppliers of recorded entertainment, suppliers of live entertainment,
information service companies and book publishers.
As of September 30, 1999, our sales and marketing group consisted of 26
professionals. We employ a team selling approach, whereby our sales people
collaborate with our business unit professionals and management to identify
prospects, conduct sales and manage client relationships. Due to the strategic
nature of our engagements, we typically interact with the senior business and
technical management personnel of our current and potential clients.
Our marketing efforts are focused on creating awareness of the systems
innovation category, establishing Scient as the leader in this new category and
building the Scient brand. Scient uses a broad mix of programs to accomplish
these goals, including market research, brochures, information pieces published
for industry forums, public relations activities, marketing programs, seminars
and speaking engagements and website marketing. The goal of these activities is
to promote Scient as a leading authority on eBusiness.
CLIENTS
We have performed professional services for a variety of clients in many
industries. We are currently focused on serving companies in the Financial
Services, eMarkets, Enterprise, Telecommunications, Retail and Consumer Products
and Media and Entertainment markets. We have only recently hired the resources
to serve the Retail and Consumer Goods and Media and Entertainment markets and
have not yet disclosed clients in these markets. In addition, because of the
strategic and competitively sensitive nature of the engagements we perform for
many of our clients, we have agreed to keep some clients'
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identities confidential, including all of our clients in the Telecommunications
business unit. Accordingly, the following is a partial list of our clients that
we believe is representative of our overall client base:
<TABLE>
<CAPTION>
FINANCIAL SERVICES EMARKETS ENTERPRISE
------------------ -------- ----------
<S> <C> <C>
Bank of Montreal BenefitPoint Cirqit.com (L.P. Thebault)
Chase Manhattan Carstation.com Gateway
First Union National Bank E-Physician Hawaii Medical Service
Global Sourcing Services Exodus Communications Association
Hambrecht & Quist FasTurn Inacom
InnoVentry Homebid.com Johnson & Johnson
Nasdaq homestore.com S.C. Johnson & Son
Washington Mutual Bank GetThere.com Starwood Hotels
Witan Group living.com
PlanetRx.com
PointServe
Sales.com
sephora.com
sixdegrees
WineShopper.com
</TABLE>
For the six months ended September 30, 1999, our five largest clients
accounted for approximately 37% of our revenues, with Chase Manhattan accounting
for approximately 12% of our revenues. For the year ended March 31, 1999, our
five largest clients accounted for approximately 50% of our revenues, with First
Union, PlanetRx.com and InnoVentry accounting for 13%, 11% and 11%,
respectively, of such revenues.
We generally enter into contracts with our clients on a time and materials
basis, though we sometimes work on a fixed-fee basis or cap the amounts we may
invoice. In the future, we anticipate an increasing percentage of our client
engagements will be under fixed-fee arrangements. If we miscalculate the
resources or time we need to complete engagements with capped or fixed fees, our
operating results could be seriously harmed. Because of the strategic and
competitively sensitive nature of the engagements we perform for some of our
clients, we sometimes agree not to perform services for our clients' competitors
or in a particular field for limited periods of time which to date have been as
long as two years. These non-compete agreements reduce the number of our
prospective clients and reinforce the importance of our client selection.
SCIENT CAPITAL
In July 1999 we established a wholly owned subsidiary, Scient Capital,
which serves as an investment vehicle for us to make equity investments in
clients who meet certain criteria. We believe that such equity investments may
provide an opportunity to enhance our long-term relationships with these clients
and may allow us to share in the potential appreciation of such clients' market
value, which we believe may be enhanced by the services we provide to these
clients. Scient Capital will be funded entirely by Scient on an as-needed basis.
Investments will only be made in clients of Scient and will be made on a
minority basis where a venture capital firm or private equity investor takes a
lead role and sets valuation. It is our policy not to accept equity in place of
standard engagement fees and not to discount standard engagement fees based on
the opportunity to invest in a client. As of September 30, 1999, we have
purchased a minority interest in three of our clients.
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SCIENT ACCELERATOR PROGRAM
Scient recently established the Scient Accelerator Program as an additional
sales channel to attract early-stage clients and support them in formalizing
their business plans, soliciting venture capital funding and achieving rapid
time-to-market. The Scient Accelerator Program combines Scient's full-service
offering along with infrastructure, facilities and administrative support in
exchange for standard engagement fees, as well as minority equity ownership.
INNOVATION CENTERS
Scient's professional services colleagues are organized into areas of
expertise and core competencies called Innovation Centers. Our Innovation
Centers are designed to address the full range of expertise and competencies
needed in order to address the eBusiness needs of clients in our targeted
markets. When we deliver services to our clients, we typically build an
integrated team of professionals from several or all of our Innovation Centers.
In addition, the Innovation Centers promote the development of specialized
knowledge, techniques and experience and foster the training, mentoring and
professional development of its members. Each of Scient's professional services
colleagues is in one of the following Innovation Centers:
- Consulting Innovation Center -- Provides consulting services to define
and implement the strategic business, organization, market and brand
direction for an eBusiness. Includes strategy consultants and industry
experienced managers, each of whom is focused on one of Scient's targeted
markets;
- Customer Experience Innovation Center -- Integrates the disciplines of
branding and identity systems, information architecture, content strategy
and editorial systems, creative strategy and visual design, user
interface engineering, front-end technology and qualitative user testing
to deliver integrated brand and user experience to eBusinesses;
- Technology Innovation Center -- Delivers the technical skills and
expertise necessary to manage, strategize, analyze, architect and
engineer the applications and infrastructure of eBusinesses, including
project management, databases, security, network infrastructure,
applications, software development, testing and quality assurance.
Includes the management of Scient's relationships with technology
vendors; and
- Asset Services Innovation Center -- Defines and manages the eBusiness
assets Scient delivers to clients on a subscription, annuity or service
bureau basis. The Asset Services Innovation Center works with other
Innovation Centers, business units, operations, finance and management to
package and subsequently manage those aspects of Scient's assets that can
be offered on subscription, annuity or service bureau basis.
KNOWLEDGE MANAGEMENT
Our knowledge management processes and systems, which we refer to as
Knowledge Management, enable the development and re-use of Scient's intellectual
capital. We have found that while there are unique features to each client
engagement, there is often a degree of commonality. Scient's focus on particular
industries, business processes and technologies creates intellectual capital
that can be adapted for use in different industries and applications provided
that it is not proprietary to a client. Knowledge Management is designed to
enable each engagement team to bring the experiences of our entire company to
bear on each client engagement.
We believe Knowledge Management is important to every aspect of our
business in systems innovation. Our client engagements generate many forms of
knowledge, including requirements, security evaluations, operational processes,
designs, specifications, evaluations, implementations, technology assessments
and project reviews. We have made, and will continue to make, a substantial
investment in
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Knowledge Management, treating it not just as desirable infrastructure, but as a
core capability. In our view, the knowledge from all of the functional groups in
our organization, including our Innovation Centers, market-specific business
units and administration and support groups, is part of an integrated whole. By
establishing a single, corporate-wide format for sharing data, we enable
information to be accessed throughout Scient.
Knowledge Management facilitates access to the Scient Approach methodology
and helps our colleagues determine what services to deliver to clients and when
to perform the services during the different steps of the approach. Resources
available through Knowledge Management include tutorial materials, templates,
expert contacts and sample outputs for the different process steps. We are also
constructing an interactive, dynamic environment, the Scient Workbench, which is
being designed to provide our colleagues with a comprehensive context for
creating client deliverables. In addition, we have developed a system to help us
staff engagements that will query our Scient Approach process database to
determine what skills are needed for an engagement and examine our skills
inventory to identify available colleagues with the appropriate skills.
A knowledge journalist is assigned to each client engagement. During the
course of an engagement this person is responsible for:
- Guiding the Scient team to information that can be extracted from
Knowledge Management;
- Instructing colleagues on the use of Knowledge Management;
- Incorporating new content and information developed during the engagement
into Knowledge Management, to the extent that such content and
information is not proprietary or confidential to the client; and
- Providing feedback to Knowledge Management staff about the use of
Knowledge Management's products and services.
An explicit goal of each engagement is knowledge transfer to our clients.
Through the development of our extranet we intend to share information online in
a secure way with each of our clients.
Adoption of Knowledge Management and its integration into the workflow is
reinforced through our training programs. Learning opportunities for our
colleagues include classroom instruction, informal forums, conferences, client
engagements, mentoring, sponsorship and certification programs.
We have invested significantly in Knowledge Management with the intent that
such expenditures will allow us to use our intellectual capital in order to
accelerate the delivery of our services, reduce our costs and leverage our
industry experience. However, we cannot guarantee that Knowledge Management will
help us achieve these goals or will be adequate to support our future
operations.
CORE ENGINEERING LABS
In all of our principal locations, we have established Core Engineering
Labs that are responsible for identifying and evaluating new hardware and
software products and emerging technologies. The Core Engineering Labs also
support engagement teams during the initial implementations of new products and
technologies. In addition, the Core Engineering Labs are responsible for
integrating new products and technologies into the Scient Approach methodology,
in order to help us manage the risk to clients of working with new products and
emerging technologies. We believe that gaining experience with these new
technologies and products in the Core Engineering Labs enables us to develop and
implement applications and systems for clients more quickly than we otherwise
could and with less interruption to and reliance on clients' systems during
engagements.
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RECRUITING, TRAINING, RETENTION AND CULTURE
To succeed, we must continue to identify, recruit, hire, professionally
develop and retain outstanding professionals. We believe that our success in
recruiting and retaining such individuals will depend significantly on our
ability to provide a rich learning environment, to provide a one-firm culture
and to offer continued professional development as well as financial rewards and
incentives.
RECRUITING
We dedicate significant resources to our recruiting efforts and manage it
similar to a sales function. As of September 30, 1999, we employed 19
professionals that focused full-time on recruiting. Our recruiting efforts are
targeted at three levels: executive, technical and college recruiting. In
addition to the efforts of our in-house recruiting group, we seek to meet our
hiring needs through referrals from existing Scient colleagues and through
technical and executive search firms. While recruiting personnel are responsible
for screening candidates, business, functional or administrative managers make
hiring decisions for their own groups in order to help ensure high-quality
hires.
CAREER DEVELOPMENT
We believe that our continuous focus on career development will help us
retain our colleagues. Upon joining our company, each new colleague participates
in a full week training program that covers a broad range of topics, including
technology, consulting and the Scient culture. During their first year with
Scient, recent college graduates typically receive four weeks of training and
experienced hires typically receive one to two weeks of training. We have also
created a sponsorship program where experienced colleagues provide ongoing
career development, mentorship and training to less-experienced colleagues. Our
existing colleagues attend professional development and training programs and
keep apprised of technological advances and developments through on-the-job
exposure to relevant technology and the efforts of our Tech Center.
CORPORATE CULTURE
We believe that developing a rich environment and a one-firm concept with a
shared culture is critical to Scient becoming an employer of choice for
management, strategic, technical, design, sales, marketing and support
professionals of all levels. We actively foster a set of core values that were
developed jointly by management and Scient's colleagues. These values include a
dedication to maintaining an innovative and empowering environment where we work
as a team to achieve total client satisfaction and provide our colleagues with
personal and professional growth opportunities. In addition, we believe that by
linking employee compensation to the success of Scient through our incentive
compensation program, we encourage an owner attitude which we believe results in
decisions that benefit our clients, our colleagues and our company. We believe
that our growth and success in attracting and retaining high-caliber colleagues
will be in large part dependent on our adherence to a one-firm culture supported
by the following values:
<TABLE>
<S> <C>
- - Spirit - Growth
- - Community - Innovation
- - Excellence - Urgency
</TABLE>
OPERATIONAL INFRASTRUCTURE
INFORMATION TECHNOLOGY INFRASTRUCTURE
We currently have in place an information technology infrastructure which
supports our internal computer network, website, intranet and extranet. Because
Knowledge Management is a significant component of the Scient Approach
methodology, we believe a scalable and robust information
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technology infrastructure is critical to our success. Accordingly, we have
invested and will continue to invest significant resources in our information
technology personnel, software and hardware.
OFFICE IN A BOX
In order to facilitate the creation of new offices both internationally and
in the United States, we have developed an infrastructure template that we call
"office in a box." The template includes policies, procedures and systems for a
new office to become operational, including technology, recruiting, information
and management infrastructures.
MANAGEMENT SYSTEMS
We are currently implementing 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, and to add other financial systems. We may encounter
difficulties in transitioning to the new enterprise resource planning software
system or in developing and implementing other new systems. Even once these
systems are established, we cannot guarantee that our personnel, systems,
procedures and controls will be adequate to support our future operations.
Difficulties encountered with developing, implementing or operating such systems
could seriously harm our business.
COMPETITION
Competition in the eBusiness services market is intense. We compete against
companies selling eBusiness software and services, and the in-house development
efforts of companies seeking to engage in eBusiness.
Our current competitors include the following:
- Systems integrators that primarily engage in fixed-time/fixed-fee
contracts, such as Cambridge Technology Partners, Sapient and Viant;
- Large systems integrators, such as Andersen Consulting and the consulting
arms of the "Big Five" accounting firms;
- Web consulting firms and online agencies, such as Agency.com, iXL,
Proxicom, Razorfish and USWeb/CKS;
- The professional services groups of computer equipment companies, such as
IBM;
- Outsourcing firms, such as Computer Sciences Corporation, Electronic Data
Systems and Perot Systems;
- General management consulting firms, such as Bain & Company, Booz Allen &
Hamilton, Boston Consulting Group and McKinsey & Company; and
- Internal IT departments of current and potential clients.
Because relatively low barriers to entry characterize our market, we also
expect other companies to enter our market.
We believe that the principal competitive factors in our industry are the
speed of development and implementation of eBusiness systems, the quality of
services and deliverables, technical, strategic and industry expertise, project
management capabilities, reputation and experience of professionals delivering
the service, the effectiveness of sales and marketing efforts, brand
recognition, size of firm and value of the services provided compared to the
price of such services. We believe that we presently compete favorably with
respect to most of these factors. In particular, we believe that we offer an
integrated set of
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strategic consulting skills and technological expertise that many existing
service providers are not well suited to provide. However, the market for
eBusiness services is evolving and we cannot be certain that we will compete
successfully in the future. We expect that competition will continue to
intensify and increase in the future, particularly if large IT consulting firms
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. See "Risk
Factors -- Competition from Bigger, More Established Competitors Who Have
Greater Financial Resources Could Result in Price Reductions, Reduced
Profitability and Loss of Market Share."
PROPRIETARY RIGHTS
We have developed detailed tools, processes and methodologies underlying
the Scient Approach methodology and software code, scripts, libraries and other
technology used internally and in client engagements. To date we have sought to
protect our proprietary rights and our other intellectual property through a
combination of copyrights, trademarks and trade secret protection, as well as
through contractual protections such as proprietary information agreements and
nondisclosure agreements. We cannot guarantee that the steps we have taken or
will take to protect our proprietary rights will be adequate to deter
misappropriation of our intellectual property, and we may not be able to detect
unauthorized use and take appropriate steps to enforce our intellectual property
rights. See "Risk Factors -- We May Not Be Able to Protect Our Intellectual
Property and Proprietary Rights."
COLLEAGUES
We generally use the term "colleagues" instead of "employees" to reinforce
our one-firm concept and collegial culture. As of September 30, 1999, we had a
total of 661 colleagues. Of these, 484 were in professional services, 26 in
sales and marketing, 19 in recruiting and 132 in core services, including
Knowledge Management, the Core Engineering Labs, finance and administration. Our
future success will depend in part on our ability to attract, retain and
motivate highly qualified technical and management personnel, for whom
competition is intense. None of our colleagues is represented by any collective
bargaining unit, and we have never experienced a work stoppage. We believe our
relations with our colleagues are good.
FACILITIES
We moved into our office in San Francisco in October 1998 and are leasing
136,000 square feet through April 2001. We also currently lease office space in
New York, New York, Irving, Texas, Sunnyvale, California and Chicago, Illinois.
We lease approximately 38,000 square feet of office space in New York under a
lease that expires in September 2009. We also lease 22,000 square feet of office
space in Irving, Texas. This lease expires in November 2004. Additionally we
have a lease for 25,000 square feet in Sunnyvale, California which expires in
October 2004, and a lease for 33,000 in Chicago, Illinois which expires in
August 2007. We continue to be obligated under a lease for our prior
headquarters facility in San Francisco, California. We have leased all space in
our prior headquarters facility to a subtenant. The lease and corresponding
sublease expire in February 2000. Periodically the company enters short term
leases in certain cities. We currently have offices in Boston, London and
Singapore that have lease obligations under one year.
43
<PAGE> 44
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors and other key employees of Scient, and
their ages as of September 30, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers and Directors
Eric Greenberg.................. 35 Chairman and Founder
Robert M. Howe(1)............... 54 President, Chief Executive Officer and Director
Stephen A. Mucchetti............ 57 Chief Operating Officer and Executive Vice President
William H. Kurtz................ 42 Chief Financial Officer, Executive Vice President and
Secretary
David M. Beirne(2).............. 36 Director
Frederick W. Gluck(3)........... 64 Director
Douglas Leone(2)(3)............. 43 Director
Kenichi Ohmae................... 56 Director
Other Key Employees
Robert N. Beck.................. 59 Vice President, People
Diana L. Brown.................. 43 Vice President and General Manager, Financial
Services
Nicholas J. DiGiacomo........... 46 Vice President and General Manager, Innovation
Centers
Aron Dutta...................... 36 Vice President and General Manager, Enterprise
Beth A. Frensilli............... 33 Vice President, General Counsel
C. Scott Frisbie................ 43 Chief Technology Officer
Joseph G. Galuszka.............. 43 Vice President, Recruiting
Christine M. Gardner............ 33 Vice President and General Manager, eMarkets
Douglas I. Kalish............... 46 Chief Knowledge Officer
William P. Kim.................. 34 Vice President, Operations
Gerry Komlofske................. 42 Chief Strategy Officer
Christopher W. Lochhead......... 31 Chief Marketing Officer
Randall McComas................. 50 Vice President and General Manager,
Telecommunications
James McKee..................... 34 Vice President and General Manager, Sales, Recruiting
and Delivery
John J. Rheinfrank III.......... 55 Master Customer Experience Architect
Edward J. Spangler.............. 44 Vice President and General Manager, Retail and
Consumer Products
Daniel A. Stone................. 38 Vice President and General Manager, Media and
Entertainment
Garry Van Patter................ 46 Master Information Architect
Jeff B. Van Zanten.............. 39 Vice President, Finance and Administration and
Treasurer
</TABLE>
- -------------------------
(1) Member of Stock Plans Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
EXECUTIVE OFFICERS AND DIRECTORS
Eric Greenberg founded Scient and has served as our Chairman since November
1997. Mr. Greenberg served as our President and Chief Executive Officer from
December 1997 to February 1998. Prior to founding Scient, from February 1996 to
November 1996, Mr. Greenberg was Founder,
44
<PAGE> 45
Chairman and Chief Executive Officer at Viant, a systems integrator. Prior to
founding Viant, he held various positions at Gartner Group, a market research
company, from April 1992 to December 1995, most recently as the Vice President
of Sales and Marketing for the @vantage Online Service. Mr. Greenberg previously
served as a management consultant with Price Waterhouse and Andersen Consulting.
Mr. Greenberg received a Bachelor of Business Administration in Finance from the
University of Texas at Austin in 1985.
Robert M. Howe has served as our President and Chief Executive Officer
since February 1998. He is also a member of our board of directors. Prior to
joining Scient, Mr. Howe was General Manager of the IBM Worldwide Banking,
Finance and Securities Industry Group from January 1996 to March 1998. From
November 1994 to January 1996, Mr. Howe managed IBM's North American Banking,
Finance and Securities Industry Group. From March 1991 to November 1994, Mr.
Howe founded and ran the IBM Consulting Group. From January 1976 to February
1991, Mr. Howe was a consultant at Booz Allen & Hamilton, a management
consulting firm. Mr. Howe is a member of the boards of directors of the
Development Bank of Singapore and S.C. Johnson Commercial Markets. Mr. Howe
received a Bachelor in Business Administration from Southern Methodist
University and a Master in Business Administration from the Harvard University
Graduate School of Business.
Stephen A. Mucchetti has served as our Chief Operating Officer since
October 1998. Prior to joining us, Mr. Mucchetti was the General Manager of
IBM's Telecommunications and Media Group from October 1992 to October 1998.
Prior to joining IBM, Mr. Mucchetti was a Partner in the consulting division of
Coopers & Lybrand from January 1984 to November 1989 and was Managing Partner
for Coopers & Lybrand's northeast United States region from November 1989 to
October 1992. Prior to joining Coopers & Lybrand, he was a consultant at Booz
Allen & Hamilton from December 1975 to January 1984. Mr. Mucchetti received a
Bachelor of Science in Electrical Engineering from Villanova University.
William H. Kurtz has served as our Chief Financial Officer since August
1998. Before joining Scient, Mr. Kurtz served in various capacities at AT&T from
July 1983 to August 1998, including Vice President of Cost Management and Chief
Financial Officer of AT&T's Business Markets Division. Prior to joining AT&T, he
worked at Price Waterhouse from June 1979 to July 1983. He is a member of the
board of directors of Redback Networks Inc. Mr. Kurtz is a certified public
accountant and received a Bachelor of Science in Accounting from Rider
University and a Master of Science in Management from the Stanford University
Graduate School of Business.
David M. Beirne has served as a member our board of directors since
December 1997. Mr. Beirne has been a Managing Member of Benchmark Capital
Management Co. II, L.P., a venture capital firm, since June 1997. Prior to
joining Benchmark, Mr. Beirne founded Ramsey/Beirne Associates, an executive
search firm, and served as its Chief Executive Officer from October 1987 to June
1997. Mr. Beirne serves as a director of 1-800-Flowers, Kana Communications,
PlanetRx.com, WebVan and several private companies. Mr. Beirne received a
Bachelor of Science in Management from Bryant College.
Frederick W. Gluck has served has as a member of our board of directors
since March 1998. Since July 1998, Mr. Gluck has served as Of Counsel at
McKinsey & Company, a management consulting firm. From February 1995 to June
1998, he served as Vice Chairman and Director at Bechtel Corporation, an
industrial corporation. From June 1967 to February 1995, Mr. Gluck was a
consultant at McKinsey & Company, holding a variety of positions, including
Managing Director of the firm. Mr. Gluck serves as a director to Amgen, ACT
Networks, Columbia/HCA Healthcare Corporation, Thinking Tools, Inc. and several
private companies. Mr. Gluck received a Bachelor of Science in Electrical
Engineering from Manhattan College and a Master of Science in Electrical
Engineering from New York University.
45
<PAGE> 46
Douglas Leone has served as a member of our board of directors since
December 1997. Mr. Leone has been at Sequoia Capital, a venture capital firm,
since August 1988, most recently as a General Partner. He is a member of the
board of directors of Hybrid Networks, Inc., Hyperion Solutions Corporation, VA
Linux Systems Inc. and several private companies. Mr. Leone received a Bachelor
of Mechanical Engineering from Cornell University, a Master of Industrial
Engineering from Columbia University and a Master of Management from
Massachusetts Institute of Technology, Sloan School of Management.
Kenichi Ohmae has served as a member of our board of directors since
October 1999. Since July 1997, Dr. Ohmae has served as Managing Director of
Ohmae & Associates, a management consulting firm. Since October 1998, Dr. Ohmae
has also served as Chief Executive Officer of Business Breakthroughs, Inc., a
satellite television channel. From November 1992 to June 1997, Dr. Ohmae was a
Managing Director of Heisei Research Institute. From June 1981 to July 1994, Dr.
Ohmae served as Director of McKinsey & Company, a management consulting firm.
Dr. Ohmae serves as a director to Softbank Corp. Dr. Ohmae received a Bachelor
of Science in Applied Chemistry from Waseda University, a Master of Science in
Nuclear Engineering from Tokyo Institute of Technology and a Ph.D. in Nuclear
Engineering from Massachusetts Institute of Technology.
OTHER KEY EMPLOYEES
Robert N. Beck has served as Vice President, People since August 1998.
Prior to joining Scient, Mr. Beck was President and Managing Director of Beck &
Associates, a consulting firm, from January 1998 to August 1998. From June 1995
to December 1997, Mr. Beck was Senior Vice President of Global Human Resources
at Gateway 2000, a computer company. Prior to joining Gateway, he served as
Senior Vice President of Human Resources at Abbott Laboratories, a
pharmaceutical company, from March 1992 to May 1995. Mr. Beck received a
Bachelor of Science in Business and a Master of Science in Business from San
Diego State University.
Diana L. Brown has served as Vice President and General Manager, Financial
Services since April 1998. Prior to joining Scient, Ms. Brown served in various
capacities at IBM from July 1978 to March 1998, including Vice President,
eBusiness Solutions for the Global Banking, Finance and Securities Industry
Group. Ms. Brown received a Bachelor of Science in Physics from St. Lawrence
University and a Master of Business Administration from New York University,
Stern School of Business.
Nicholas J. DiGiacomo has served as Vice President and General Manager,
Innovation Centers since October 1999, and as Vice President, eMarkets, from
July 1998 to October 1999. From July 1993 to July 1998, Dr. DiGiacomo was Senior
Vice President at Science Applications International Corporation, or SAIC, a
technology services company. While at SAIC, he began the Global Integrity
Corporation and Tenth Mountain Systems, both subsidiaries of SAIC. Dr. DiGiacomo
received a Bachelor of Science in Physics from Siena College, a Master of
Physics from the University of Colorado at Boulder and a Ph.D. in Physics from
the University of Colorado at Boulder.
Aron Dutta has served as Vice President and General Manager, Enterprise
since January 1999. Prior to joining Scient, Mr. Dutta was Vice President,
General Manager of the New York Market at Viant from October 1996 to January
1999. From February 1992 to October 1996, Mr. Dutta was a principal at Booz
Allen & Hamilton. Mr. Dutta received a Bachelor of Science in Electrical
Engineering from Polytechnic University.
Beth A. Frensilli has served as our Vice President, General Counsel since
November 1999, and as Senior Corporate Counsel from February 1999 to November
1999. Prior to joining Scient, Ms. Frensilli was an attorney at Hancock, Rothert
& Bunshoft, a law firm, from August 1991 to December 1995 and from June 1998 to
February 1999. From January 1997 to June 1998, Ms. Frensilli was an attorney at
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, a law firm. From
January 1996 to
46
<PAGE> 47
December 1996, Ms. Frensilli was a consultant at Cunningham Communications. Ms.
Frensilli received a Bachelor of Arts in Political Science from University of
Maryland, and a J.D. from George Washington University National Law Center.
C. Scott Frisbie has served as Chief Technology Officer since July 1998.
Prior to joining Scient, Mr. Frisbie served in various capacities at IBM from
April 1984 to July 1998, most recently as Manager of Advanced Technology and
Strategy for the Worldwide Banking, Finance and Securities Industry Group.
Joseph G. Galuszka has served as Vice President, Recruiting since April
1998. Prior to joining Scient, Mr. Galuszka served in various capacities at
Gartner Group from May 1986 to April 1998, most recently as Regional Vice
President, Sales. Mr. Galuskza received a Bachelor of Science in Mechanical
Engineering from the University of Buffalo, State University of New York.
Christine M. Gardner has served as our Vice President and General Manager,
eMarkets since September 1999 and as an engagement manager from August 1998 to
September 1999. Prior to joining Scient, Ms. Gardner served in various
capacities at USWeb/CKS, a consulting firm, and at Ikonic, prior to its
acquisition by USWeb/CKS, most recently as Vice President, Business Development,
from October 1996 to August 1998. From October 1994 to April 1996, Ms. Gardner
served as a Director at RCM Capital Management, a money management firm. Ms.
Gardner received a Bachelor of Arts in Communications and French Studies from
Stanford University.
Douglas I. Kalish has served as Chief Knowledge Officer since April 1998.
Prior to joining Scient, Dr. Kalish served in various capacities at Price
Waterhouse from October 1984 to April 1998, including Director of Systems of the
Consumer Financial Institute Division, Chief Operating Partner and Managing
Partner of the Price Waterhouse Technology Centre and Managing Partner of the
Electronic Business Solutions Center. Dr. Kalish received an Bachelor of Arts in
Neurobiology from the University of Michigan, a Master of Arts in Biology from
Harvard University and a Ph.D. in Biology from Harvard University.
William P. Kim has served as Vice President, Operations since April 1998.
Prior to joining Scient, Mr. Kim was Vice President, Product Management at
Vivant!, a software company, from October 1997 to April 1998. From July 1988 to
July 1997, Mr. Kim was a Managing Partner at Cambridge Technology Partners, a
systems integrator. Mr. Kim received a Bachelor of Arts in Electrical
Engineering and Music from Massachusetts Institute of Technology.
Gerry Komlofske has served as Chief Strategy Officer since May 1999. Prior
to joining Scient, Mr. Komlofske served as Group Vice President at Technology
Solutions Company, a systems integration company, from September 1997 to May
1999. From September 1985 to September 1997, Mr. Komlofske served in various
capacities, most recently as Vice President, Global Practice Leader, at Booz
Allen & Hamilton, a consulting firm. Mr. Komlofske received a Bachelor of
Science in Civil Engineering from Stanford University and a Master of Management
from Northwestern University.
Christopher W. Lochhead has served as Chief Marketing Officer since April
1998. Prior to joining Scient, Mr. Lochhead was Executive Vice President,
Strategic Marketing at The Vantive Corporation, a software company, from June
1996 to April 1998. From November 1993 to June 1996, Mr. Lochhead was President
and Chief Executive Officer of Always an Adventure, a consulting firm.
Randall McComas has served as Vice President and General Manager,
Telecommunications since February 1999. Prior to joining Scient, Mr. McComas
served in various capacities at IBM from July 1983 to February 1999, including
Vice President of Telecommunications for Global Telecommunications and Media
Industries. Mr. McComas received a Bachelor of Science in Civil/Structural
Engineering from The Citadel.
47
<PAGE> 48
James McKee has served as Vice President and General Manager, Sales,
Recruiting and Delivery since February 1999. Prior to joining Scient, Mr. McKee
served in various capacities at Renaissance Worldwide, an information technology
staffing firm, from November 1991 to January 1999, most recently as Vice
President, Business Development.
John J. Rheinfrank has served as Master Customer Experience Architect since
September 1999. Prior to joining Scient, Dr. Rheinfrank served as Chief
Executive Officer of SeeSpace, a consulting firm, from April 1996 to September
1999. From January 1994 to April 1996, Dr. Rheinfrank was a principal at the
Doblin Group, a consulting firm. From September 1978 to January 1994, Dr.
Rheinfrank served as Executive Vice President of Fitch, a consulting firm. Dr.
Rheinfrank received a Bachelor of Science, a Master of Science and a Ph.D., all
in Industrial and Systems Engineering, from Ohio State University.
Edward J. Spangler has served as Vice President and General Manager, Retail
and Consumer Products since May 1999. Prior to joining Scient, Mr. Spangler
served as a Worldwide Partner at Arthur Andersen, from September 1992 to May
1999. From June 1985 to August 1992, Mr. Spangler held various positions with
Senn Delaney, a consulting firm which was acquired by Arthur Andersen in 1992.
Mr. Spangler received a Bachelor of Arts in Political Science from Penn State
University and a Master of Business Administration from Penn State University.
Daniel A. Stone has served as Vice President and General Manager, Media and
Entertainment since May 1999. Prior to joining Scient, Mr. Stone served in
various capacities at Turner Broadcasting System, or TBS, from August 1994 to
May 1999, most recently as Executive Vice President, Operations and Business
Development for TBS International. Mr. Stone received a Bachelor of Science in
Economics from the University of Pennsylvania and a Master in Business
Administration from Columbia University.
Garry Van Patter has served as Master Information Architect since July
1999. Prior to joining Scient, Mr. Van Patter was Partner, Director of
Information Architecture at USWeb/CKS, a consulting firm and at Donovan & Green,
prior to its acquisition of USWeb/CKS, from April 1997 to July 1999. From
January 1995 to April 1997, Mr. Van Patter was Partner and Director at Free
Associates, a consulting firm. Mr. Van Patter received a Bachelor of Science in
Environmental Design from the University of Manitoba and a Master of Science in
Communication Design from the Pratt Institute.
Jeff B. Van Zanten has served as Vice President, Finance and Administration
since January 1999 and also as Treasurer since July 1999. Prior to joining
Scient, Mr. Van Zanten was Chief Financial Officer at Purple Moon Media, a
software company, from August 1997 to August 1998. From September 1989 to June
1997, Mr. Van Zanten was Vice President, Finance and Operations at Advent
Software. Mr. Van Zanten is a certified public accountant and received a
Bachelor of Science in Accounting from the University of Southern California.
BOARD OF DIRECTORS
Scient currently has authorized six directors. Upon the completion of the
offering, the terms of the office of the board of directors will be divided into
three classes: Class I, whose term will expire at the annual meeting of the
stockholders to be held in 2000; Class II, whose term will expire at the annual
meeting of stockholders to be held in 2001; and Class III, whose term will
expire at the annual meeting of stockholders to be held in 2002. The Class I
directors will be Frederick Gluck and Kenichi Ohmae; the Class II directors will
be David Beirne and Douglas Leone; and the Class III directors will be Eric
Greenberg and Robert Howe. At each annual meeting of stockholders after the
initial classification, each elected director will serve from the time of his
election and qualification until the third annual meeting following his
election. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of Scient. All of our
officers serve at the discretion of the board of directors. There are no family
relationships among the directors and officers of Scient.
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<PAGE> 49
BOARD COMMITTEES
Our board of directors has an audit committee, a compensation committee and
a stock plans committee. The audit committee consists of Messrs. Beirne and
Leone. The audit committee makes recommendations to the board of directors
regarding the selection of independent accountants, reviews the results and
scope of audit and other services provided by our independent accountants and
reviews and evaluates our audit and control functions. The compensation
committee consists of Messrs. Leone and Gluck. The compensation committee
administers our stock plans, other than the 1999 Employee Stock Purchase Plan,
and makes decisions concerning salaries and incentive compensation for our
employees. The stock plans committee consists of Mr. Howe. This committee
administers our 1999 Employee Stock Purchase Plan. In addition, it may make
awards under our 1999 Equity Incentive Plan, except that it may not make awards
to members of the board of directors or to our executive officers nor awards in
excess of 200,000 shares per person per year.
DIRECTOR COMPENSATION
Currently we do not provide our directors with cash compensation for their
services as members of the board of directors, although members are reimbursed
for some expenses in connection with attendance at board and committee meetings.
At the end of each calendar quarter, our non-employee directors automatically
receive options to purchase 5,000 shares of our common stock under our 1999
Equity Incentive Plan. See "Employee Stock Plans -- 1999 Equity Incentive
Plan -- Automatic Grants to Non-Employee Directors."
In March 1998, when we appointed Mr. Gluck to our board of directors, we
granted him an option to purchase 480,000 shares of our common stock at an
exercise price of $.03 per share, subject to our repurchase right. In April
1998, when we appointed Morton H. Meyerson to our board of directors, we granted
him an option to purchase 480,000 shares of our common stock at an exercise
price of $.13 per share, subject to our repurchase right. In connection with his
resignation from our board of directors on March 13, 1999, we repurchased
285,000 shares of unvested common stock from Mr. Meyerson for $.13 per share,
his original exercise price. In October 1999, when we appointed Kenichi Ohmae to
our board of directors, we granted him two options to purchase shares of our
common stock. The first option is for 100,000 shares and has an exercise price
of $42.25 per share. Twenty-five percent of the option becomes exercisable after
one year, with the balance becoming exercisable ratably on a monthly basis for
the next thirty-six months. The second option is for 20,000 shares, has an
exercise price of approximately $14.08 per share and becomes exercisable in two
equal installments, one after two years of service and the other after four
years of service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is currently or has been
at any time since the formation of Scient, an officer or employee of Scient. No
member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
INDEMNIFICATION
Scient has entered into indemnification agreements with each of our
directors and executive officers. The form of indemnity agreement provides that
we will indemnify our directors or executive officers for expenses incurred
because of their status as a director or executive officer, to the fullest
extent permitted by Delaware law, our certificate of incorporation and our
bylaws.
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<PAGE> 50
Scient's certificate of incorporation and bylaws contain provisions
relating to the limitation of liability and indemnification of our directors and
officers. The certificate of incorporation provides that directors shall not be
personally liable to Scient or its stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability for:
- Any breach of a director's duty of loyalty to Scient or its stockholders;
- Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- Unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- Any transaction from which the director derives any improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors after our stockholders approve the
certificate of incorporation, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by the amended Delaware
General Corporation Law. The foregoing provisions of our certificate of
incorporation are not intended to limit the liability of directors or officers
for any violation of applicable federal securities laws. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, our bylaws
provide that:
- We are required to indemnify our directors and executive officers to the
fullest extent permitted by the Delaware General Corporation Law;
- We may, in our discretion, indemnify other officers, employees and agents
to the fullest extent permitted by the Delaware General Corporation Law;
- We are required to advance all expenses incurred by our directors and
executive officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions;
- The rights conferred in the bylaws are not exclusive;
- We may, in our discretion, enter into indemnification agreements with our
directors, officers, employees and agents; and
- We may not retroactively amend the bylaw provisions relating to indemnity
in a way that would adversely affect the rights of our directors or
executive officers.
Our bylaws further provide that we shall indemnify our directors to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal year ended March 31, 1999 earned by our Chief Executive Officer and
our three other executive officers, collectively referred to as the Named
Executive Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
SALARY BONUS OPTIONS(1) COMPENSATION(2)
-------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert M. Howe............................ $250,000 $ -- -- $52,474
President and Chief Executive Officer
Eric Greenberg............................ 239,583 33,333 -- --
Chairman of the Board of Directors
Stephen A. Mucchetti(3)................... 118,429 50,000 1,500,000 58,879
Chief Operating Officer and Executive
Vice President
William H. Kurtz(4)....................... 159,135 50,000 1,100,000 78,967
Chief Financial Officer, Executive Vice
President, Treasurer and Secretary
</TABLE>
- -------------------------
(1) Numbers were adjusted to reflect the two-for-one stock split effective
December 1999.
(2) Amount shown for Mr. Howe includes $45,808 in relocation expenses and $6,666
for reimbursement of taxes paid by him. Amount shown for Mr. Mucchetti
includes $42,035 in commuting expenses and $16,844 for reimbursement of
taxes paid by him. Amount shown for Mr. Kurtz includes $77,214 in relocation
expenses and $1,753 for reimbursement of taxes paid by him.
(3) Mr. Mucchetti commenced employment with Scient in October 1998.
(4) Mr. Kurtz commenced employment with Scient in August 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth the stock options we granted during the
fiscal year ended March 31, 1999, to each of the Named Executive Officers. All
numbers in the table have been adjusted to reflect the two-for-one stock split
effective December 1999. Generally, these stock options are immediately
exercisable. We have the right to repurchase all unvested shares at the original
exercise price upon the optionee's cessation of service. Generally, our
repurchase right lapses and the optionee vests in 25% of the option shares upon
completion of 12 months of service from the vesting start date and vests in the
balance in a series of equal monthly installments over the next three years of
service. The option shares will vest upon an acquisition of Scient by merger or
asset sale, unless we transfer our repurchase right with respect to the unvested
option shares to the acquiring entity. Each of the options has a ten-year term,
subject to earlier termination in the event of the optionee's cessation of
service. The percentages in the column entitled "Percent of Total Options
Granted to Employees during the fiscal year ended March 31, 1999" are based on
an aggregate of 15,355,700 options granted to employees of Scient under the 1997
Stock Plan during the fiscal year ended March 31, 1999.
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<PAGE> 52
The amounts listed in the following table under the heading "Exercise
Price" were equal to the fair market value of our common stock as determined by
the board of directors on the date of grant. The exercise price may be paid in
cash, in shares of our common stock valued at fair market value on the exercise
date or through a cashless exercise procedure involving a same-day sale of the
purchased shares. We may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise. The fair market value of our common
stock was estimated by the board of directors on the basis of the purchase price
paid by investors for shares of our preferred stock, taking into account the
liquidation preferences and other rights, privileges and preferences associated
with the preferred stock and an evaluation by the board of our revenues,
operating history and prospects.
We calculated the amounts listed in the following table under the heading
"Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation
for Option Term" based on the ten-year term of the option at the time of grant.
For purposes of these columns, we assumed stock price appreciation of 5% and 10%
pursuant to rules promulgated by the Securities and Exchange Commission. These
rates of appreciation do not represent our prediction of our stock price
performance. We calculated the potential realizable values at 5% and 10%
appreciation by assuming that the estimated fair market value on the date of
grant appreciates at the indicated rate for the entire term of the option and
that the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price. Information on how we determined the fair
market value of our common stock is disclosed in the preceding paragraph. The
price to the public in this offering is higher than the estimated fair market
value on the date of grant. Therefore, the potential realizable value of the
option grants would be significantly higher than the numbers shown in this
column if future stock prices were projected to the end of the option term by
applying the same annual rates of stock price appreciation to the public
offering price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
PERCENT OF TOTAL POTENTIAL REALIZABLE
OPTIONS GRANTED VALUE AT ASSUMED
NUMBER OF TO EMPLOYEES ANNUAL RATES OF
SECURITIES DURING STOCK PRICE APPRECIATION
UNDERLYING THE FISCAL YEAR EXERCISE FOR OPTION TERM
OPTIONS ENDED PRICE EXPIRATION ------------------------
NAME GRANTED MARCH 31, 1999 ($/SHARE) DATE 5% 10%
---- ---------- ----------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Howe............... -- --% $ -- -- $ -- $ --
Eric Greenberg............... -- -- -- -- -- --
Stephen A. Mucchetti(1)...... 1,000,000 6.5 .80 10/12/08 6,841,357 10,893,718
200,000 1.3 .80 11/10/08 1,368,271 2,178,744
300,000 2.0 .80 12/22/08 2,052,407 3,268,115
William H. Kurtz(2).......... 1,000,000 6.5 .325 8/12/08 7,615,082 12,125,746
100,000 .7 .80 1/28/09 684,136 1,089,372
</TABLE>
- -------------------------
(1) For the options granted on October 12, 1998, Mr. Mucchetti was immediately
vested in 20% of these option shares, and he will vest in an additional 20%
of these option shares upon completion of his first 12 months of service
from the vesting start date. After that, he will vest in the balance in a
series of equal monthly installments over his next three years of service.
For the options granted on November 10, 1998, Mr. Mucchetti will become
fully vested after 60 months of continuous service to Scient. For the
options granted on December 22, 1998, Mr. Mucchetti will vest after 48
months of continuous service to Scient. If we discharge him without cause or
if he resigns because we reduce his salary, Mr. Mucchetti will receive an
additional 12 months of service credit. If Scient is acquired but Mr.
Mucchetti's remaining option shares do not vest in full, Mr. Mucchetti will
receive an additional 12 months of service credit if he is discharged or if
he resigns because his salary is
52
<PAGE> 53
reduced or he is not designated as the Chief Operating Officer, or a higher
position, of the surviving company.
(2) If Scient is acquired but Mr. Kurtz's option shares do not vest in full, Mr.
Kurtz receives an additional 12 months of service credit if he is discharged
or if he resigns because his salary is reduced or he is not designated as
the Chief Financial Officer of the surviving company.
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED MARCH 31, 1999 AND OPTION
VALUES AT MARCH 31, 1999
The following table sets forth for each of the Named Executive Officers
options exercised during the fiscal year ended March 31, 1999, and the number
and value of securities underlying unexercised options that were held by the
Named Executive Officers at March 31, 1999. All numbers in the table have been
adjusted to reflect the two-for-one stock split that took effect in December of
1999. The numbers in the column entitled "Value Realized" are equal to the fair
market value of the purchased shares on the option exercise date, less the
exercise price paid for such shares. Generally, these stock options are
immediately exercisable. We have the right to repurchase all unvested option
shares at the original exercise price upon the optionee's cessation of service.
The heading "Vested" refers to shares no longer subject to our right of
repurchase; the heading "Unvested" refers to shares subject to our right of
repurchase as of March 31, 1999. The numbers in the column entitled "Value of
Unexercised In-the-Money Options at March 31, 1999" are based on the fair market
value of our common stock at March 31, 1999 as determined by our board of
directors, $5.00, less the exercise price payable for such shares. The fair
market value of our common stock at March 31, 1999 was estimated by the board of
directors on the basis of the purchase price paid by investors for shares of our
preferred stock (taking into account the liquidation preferences and other
rights, privileges and preferences associated with the preferred stock) and an
evaluation by the board of our revenues, operating history and prospects. The
price to the public in this offering is higher than the estimated fair market
value at March 31, 1999. Consequently, the value of unexercised options would be
higher than the numbers shown in the table if the values were calculated by
subtracting the option's exercise price from the public offering price.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT MARCH 31, 1999 MARCH 31, 1999
ACQUIRED ON VALUE ---------------------- -----------------------
EXERCISE REALIZED VESTED UNVESTED VESTED UNVESTED
----------- -------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Howe.................... -- $ -- -- -- $ -- $ --
Eric Greenberg.................... -- -- -- -- -- --
Stephen A. Mucchetti.............. 1,000,000 -- 25,000 475,000 105,000 1,995,000
William H. Kurtz.................. 850,000 213,750 -- 250,000 -- 1,121,250
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
We have entered into an employment agreement, dated December 10, 1997, with
Eric Greenberg, our Chairman, which provides for annual base salary of $200,000,
annual bonus at the discretion of our board of directors and participation in
our employee benefit plans. On June 12, 1998, our board of directors increased
Mr. Greenberg's annual salary to $250,000. The employment agreement provides
that we will pay Mr. Greenberg a lump sum equal to 100% of the greater of (1)
his then current annual base compensation or (2) his actual base compensation
plus bonus for the most recently completed fiscal year if we terminate Mr.
Greenberg without his consent for any reason other than for cause or permanent
disability. In addition, we have the right to repurchase Mr. Greenberg's shares,
which lapses pursuant to a four-year vesting schedule. Our repurchase right will
lapse in its entirety upon a change of control of Scient, or upon Mr.
Greenberg's involuntary termination.
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<PAGE> 54
We have entered into an employment agreement, dated February 9, 1998 with
Robert Howe, our President and Chief Executive Officer, which provides for
annual base salary of $250,000, annual bonus at the discretion of the board of
directors and participation in our employee benefit plans. The employment
agreement also provides that we will pay Mr. Howe a lump sum equal to 100% of
the greater of (1) his then current annual base compensation or (2) his actual
base compensation plus bonus for the most recently completed fiscal year if we
terminate Mr. Howe without his consent for any reason other than for cause or
permanent disability. In addition, we granted Mr. Howe an immediately
exercisable option to purchase 4,800,000 shares of our common stock upon
commencement of his employment, subject to our right of repurchase which lapses
pursuant to a four-year vesting schedule. Our repurchase right will lapse with
respect to 25% of such shares if we terminate Mr. Howe without cause, and with
respect to 100% of such shares upon a change of control of Scient. In addition,
we made a one-time payment of $330,000 to Mr. Howe upon his joining Scient.
We have entered into an employment agreement, dated June 12, 1998, with
William Kurtz, our Chief Financial Officer, which provides for annual base
salary of $250,000, annual bonus at the discretion of the board of directors and
participation in our employee benefit plans. The employment agreement also
provides that we will pay Mr. Kurtz a lump sum equal to six months' salary if we
terminate Mr. Kurtz. In addition, we granted Mr. Kurtz an option to purchase
1,000,000 shares of our common stock upon commencement of his employment,
subject to our right of repurchase which lapses pursuant to a four-year vesting
schedule. The four-year vesting schedule will be adjusted to provide accelerated
vesting on 12 months' worth of shares if, upon a change of control of Scient,
Mr. Kurtz is terminated or not offered the position of Chief Financial Officer
with the surviving entity.
We have entered into an employment agreement, dated September 14, 1998,
with Stephen A. Mucchetti, our Chief Operating Officer, which provides for
annual base salary of $250,000, annual bonus of $50,000 for his first two years
at Scient and participation in our employee benefit plans. In addition, we
granted Mr. Mucchetti an option to purchase 1,000,000 shares of our common stock
upon commencement of his employment, of which 20% was immediately vested and the
remainder was subject to our right of repurchase which lapses pursuant to a
four-year vesting schedule. The employment agreement provides that if we
terminate Mr. Mucchetti, we will pay him a lump sum equal to one year's salary,
and he will vest in 12 months of stock options. The four-year vesting schedule
will be adjusted to provide accelerated vesting on 12 months' worth of shares
if, upon a change of control of Scient, Mr. Mucchetti is terminated or not
offered the position of Chief Operating Officer with the surviving entity.
EMPLOYEE STOCK PLANS
1999 EQUITY INCENTIVE PLAN
Share Reserve. Our board of directors adopted our 1999 Equity Incentive
Plan on March 18, 1999. Our stockholders also approved this plan. We have
reserved 6,400,000 shares of our common stock for issuance under the 1999 Equity
Incentive Plan, including an increase approved on October 13, 1999. Any shares
not issued under our 1997 Stock Plan on the date of our initial public offering
will also be available under the 1999 Equity Incentive Plan. On January 1 of
each year, starting with the year 2000, the number of shares in the reserve will
automatically increase by 8% of the sum of the total number of shares of common
stock that are outstanding at that time plus the number of shares of common
stock issuable upon the exercise of outstanding options at that time or, if
less, by 10,000,000 shares. In general, if options or shares awarded under the
1999 Equity Incentive Plan or the 1997 Stock Plan are forfeited, then those
options or shares will again become available for awards under the 1999 Equity
Incentive Plan.
Administration. The compensation committee of our board of directors
administers the 1999 Equity Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation of
the 1999 Equity Incentive Plan. The committee has the discretion to
54
<PAGE> 55
determine who will receive an award, what type of award it will be, how many
shares will be covered by the award, what the vesting requirements will be, if
any, and what the other features and conditions of each award will be. The
compensation committee may also reprice outstanding options and modify
outstanding awards in other ways. In addition, the board of directors has
appointed a stock plans committee. This committee currently consists of Robert
Howe, the Company's President and Chief Executive Officer. The stock plans
committee may make awards under the 1999 Equity Incentive Plan and may determine
all terms and conditions of these awards. But this committee may not make awards
to members of the board of directors or to our executive officers, and it may
not make awards in excess of 200,000 shares per person per year.
Eligibility. The following groups of individuals are eligible to
participate in the 1999 Equity Incentive Plan:
- Employees;
- Members of our board of directors who are not employees; and
- Consultants.
Types of Awards. The 1999 Equity Incentive Plan provides for the following
types of award:
- Options to purchase shares of our common stock;
- Stock appreciation rights;
- Restricted shares of our common stock; and
- Stock units, sometimes called phantom shares.
Options and Stock Appreciation Rights. Options may be incentive stock
options or nonstatutory stock options. An optionee who exercises an incentive
stock option may qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code of 1986. On the other hand, nonstatutory stock options do
not qualify for such favorable tax treatment. The exercise price for all
incentive stock options and stock appreciation rights granted under the 1999
Equity Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. The exercise price of nonstatutory stock
options may be as low as the par value of the underlying shares of our common
stock. Optionees may pay the exercise price by using:
- Cash;
- Shares of common stock that the optionee already owns;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- An immediate sale of the option shares through a broker designated by us;
or
- A loan from a broker designated by us, secured by the option shares.
Options and stock appreciation rights vest at the time or times determined
by the compensation committee. In most cases, our options vest over the
four-year period following the date of grant. Options and stock appreciation
rights generally expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service terminates earlier. The 1999
Equity Incentive Plan provides that no participant may receive options covering
more than 2,000,000 shares and stock appreciation rights covering more than
2,000,000 shares in the same year, except that a newly hired employee may
receive options covering up to 4,000,000 shares and stock appreciation rights
covering up to 4,000,000 shares in the first year of employment.
55
<PAGE> 56
Restricted Shares. Restricted shares may be awarded under the 1999 Equity
Incentive Plan in return for:
- Cash;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- Services already provided to us; and
- In the case of treasury shares only, services to be provided to us in the
future.
Restricted shares and stock units vest at the time or times determined by
the compensation committee.
Change in Control. If a change in control of Scient occurs, an option or
other award under the 1999 Equity Incentive Plan will generally become fully
vested, unless the surviving corporation assumes the option or award or replaces
it with a comparable award. In addition, an option or other award will
ordinarily become vested in full -- even if it was assumed or replaced -- if the
participant is discharged within 12 months after the change in control other
than for cause. For this purpose, a participant is also treated as having been
discharged other than for cause if the participant resigns after being asked to
relocate, after suffering a reduction in compensation, or after being demoted. A
change in control includes:
- A merger of Scient after which our own stockholders own 50% or less of
the surviving corporation;
- A sale of all or substantially all of our assets;
- A proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
- An acquisition of 30% or more of our outstanding stock by any person or
group, other than a person related to Scient, such as a holding company
owned by our stockholders.
Automatic Grants to Non-Employee Directors. The non-employee members of our
board of directors are eligible for automatic option grants under the 1999
Equity Incentive Plan. Each non-employee director receives options for 5,000
shares of our common stock during each calendar quarter. These options are
exercisable immediately after the grant, and the option shares will be fully
vested from the outset.
The exercise price of each non-employee director's option will be equal to
the fair market value of our common stock on the option grant date. A director
may pay the exercise price by using cash, shares of common stock that the
director already owns or an immediate sale of the option shares through a broker
designated by us. The non-employee directors' options have a 10-year term,
except that they expire one year after a director leaves the board, if earlier.
Our board may amend or terminate the 1999 Equity Incentive Plan at any
time. If our board amends the plan, it does not need to ask for stockholder
approval of the amendment unless applicable law requires it. The 1999 Equity
Incentive Plan will continue in effect indefinitely, unless the board decides to
terminate the plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted the 1999 Employee Stock Purchase Plan on
April 22, 1999. Our stockholders also approved this plan. The 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code. We have reserved 2,000,000 shares of our common stock for issuance
under the plan. On May 1 of each year, starting with the year 2000, the number
of shares in the reserve will be increased by the number of shares that have
been issued under the 1999 Employee Stock Purchase Plan during the prior
12-month period, such that the number of available
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<PAGE> 57
shares in the reserve will automatically be restored to 2,000,000. The plan is
administered by the stock plans committee of our board of directors.
All of our employees are eligible to participate if they are employed by us
for more than 20 hours per week and for more than five months per year. Eligible
employees may begin participating in the 1999 Employee Stock Purchase Plan at
the start of any offering period. Each offering period lasts six months.
Offering periods start on May 1 and November 1 of each year.
The 1999 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. An employee's payroll
deductions may not exceed 15% of the employee's salary. Purchases of our common
stock will occur on April 30 and October 31 of each year or on the last trading
day prior to those dates. Each participant may purchase up to 4,000 shares on
any purchase date, provided that the value of the shares purchased in any
calendar year, measured as of the beginning of the offering period may not
exceed $25,000.
The price of each share of common stock purchased under the 1999 Employee
Stock Purchase Plan will be 85% of the lower of:
- The fair market value per share of common stock on the trading day
immediately before the first day of the applicable offering period; or
- The fair market value per share of common stock on the purchase date.
Employees may end their participation in the 1999 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with Scient. If a change in control of Scient occurs, the 1999
Employee Stock Purchase Plan will terminate and shares will be purchased with
the payroll deductions accumulated to date by participating employees, unless
the plan is assumed by the surviving corporation or its parent. Our board of
directors may amend or terminate the 1999 Employee Stock Purchase Plan at any
time. If our board increases the number of shares of common stock reserved for
issuance under the plan, except for the automatic increases described above, it
must seek the approval of our stockholders.
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<PAGE> 58
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS AND OFFICERS
In December 1997, Scient sold shares of Series A Preferred Stock to obtain
equity capital for general corporate purposes, including working capital.
Purchasers in the offering were, among others, the following stockholders in the
amounts indicated for $.90 per share or an aggregate of $4,720,001. These shares
of Series A Preferred Stock converted into 20,977,780 shares of our common
stock.
<TABLE>
<CAPTION>
SHARES OF SERIES A
PREFERRED STOCK
------------------
<S> <C>
Benchmark Capital Partners II, L.P. ........................ 2,844,445
Sequoia Capital VII......................................... 2,196,000
Sequoia Technology Partners VII............................. 96,000
SQP 1997.................................................... 44,544
Sequoia 1997................................................ 25,056
Sequoia International Partners.............................. 38,400
---------
Total Shares.............................................. 5,244,445
=========
</TABLE>
Mr. Beirne, a director of Scient, is a managing member of the general partner of
Benchmark Capital Partners II, L.P. Mr. Leone, a director of Scient, is a
managing member of the general partner of the funds affiliated with Sequoia
Capital VII.
In May 1998, Scient sold 950,000 shares of Series A Preferred Stock to
obtain additional equity capital for general corporate purposes, including
working capital, to the following director and former director for $1.50 per
share or an aggregate of $1,425,000. These shares of Series A Preferred Stock,
net of the repurchase described below, converted into 1,550,000 shares of our
common stock.
<TABLE>
<CAPTION>
SHARES OF SERIES A
PREFERRED STOCK
------------------
<S> <C>
Frederick W. Gluck.......................................... 200,000
Morton H. Meyerson.......................................... 750,000
---------
Total Shares.............................................. 950,000
=========
</TABLE>
In connection with his purchase of Series A Preferred Stock, we loaned Mr.
Meyerson, one of our former directors, $843,750. Mr. Meyerson issued us a
promissory note dated May 11, 1998 for the principal sum of $843,750, with
interest accruing at 5.5% per annum. The loan was secured by 562,500 shares of
his Series A Preferred Stock pursuant to a Stock Pledge Agreement dated May 11,
1998. The 562,500 shares of Series A Preferred Stock were also subject to
repurchase by Scient pursuant to an October 31, 1998 Stock Repurchase Agreement.
In connection with his resignation from our board of directors on March 13,
1999, we repurchased the 562,500 shares of Series A Preferred Stock pursuant to
the Stock Restriction Agreement by canceling the promissory note. In connection
with the cancellation, we forgave approximately $38,400 of accrued interest that
was due under the note.
In June 1998, Scient sold shares of Series B Preferred Stock to obtain
additional equity capital for general corporate purposes, including working
capital. Purchasers in the offering were, among others, the
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<PAGE> 59
following stockholders in the amounts indicated for $6.35 per share or an
aggregate of $13,499,992. These shares of Series B Preferred Stock converted
into 4,251,966 shares of our common stock.
<TABLE>
<CAPTION>
SHARES OF SERIES B
PREFERRED STOCK
------------------
<S> <C>
Benchmark Capital Partners II, L.P.......................... 157,480
Sequoia Capital VII......................................... 144,094
Sequoia Technology Partners VII............................. 6,299
SQP 1997.................................................... 2,923
Sequoia 1997................................................ 1,644
Sequoia International Partners.............................. 2,520
Smallcap World Fund Inc. ................................... 1,417,323
Morgan Stanley Dean Witter Equity Funding, Inc. ............ 393,700
---------
Total Shares.............................................. 2,125,983
=========
</TABLE>
Mr. Beirne, a director of Scient, is a managing member of the general partner of
Benchmark Capital Partners II, L.P. Mr. Leone, a director of Scient, is a
managing member of the general partner of the funds affiliated with Sequoia
Capital VII.
In February 1999, Scient sold shares of Series C Preferred Stock to obtain
additional equity capital for general corporate purposes, including working
capital. Purchasers in the offering were, among others, the following
stockholders in the amounts indicated for $10.85 per share or an aggregate
consideration of $11,249,540. These shares of Series C Preferred Stock converted
into 2,073,648 shares of our common stock.
<TABLE>
<CAPTION>
SHARES OF SERIES C
PREFERRED STOCK
------------------
<S> <C>
Sequoia Capital Franchise Fund.............................. 460,830
Entities Affiliated with Amerindo Investment Advisors,
Inc......................................................... 483,829
Palantir Partners L.P....................................... 92,165
---------
Total Shares.............................................. 1,036,824
=========
</TABLE>
Mr. Leone, a director of Scient, is a managing member of the general partner of
Sequoia Capital Franchise Fund.
To provide further incentive to Stephen Mucchetti, our Chief Operating
Officer, we granted him an option to purchase 300,000 shares of our common stock
on December 22, 1998. The option vests in one installment on December 31, 2002
and has an exercise price of $.80 per share. In connection with the grant to Mr.
Mucchetti, we entered into a stock repurchase agreement with Mr. Howe, dated
December 22, 1998. Under the stock repurchase agreement, Mr. Howe agreed to sell
300,000 shares of our common stock held by him to us at $.80 per share if Mr.
Mucchetti vests in his December 22, 1998 option to purchase 300,000 shares of
common stock.
In March 1999, Eric Greenberg, our Chairman, and Robert Howe, our President
and Chief Executive Officer, sold 600,000 shares of common stock and 300,000
shares of common stock, respectively, to Gryphon Holdings, L.P. At the closing
of the sales, Gryphon made initial payments to Messrs. Greenberg and Howe equal
to $10.00 per share. We received no proceeds from either sale. In connection
with the sale by Mr. Greenberg we waived our right of first refusal.
In May 1999, entities affiliated with Sequoia Capital acquired 380,000
shares of our common stock for $10.00 per share in connection with our initial
public offering.
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<PAGE> 60
In addition, we have granted options to and have entered into compensation
agreements and other arrangements to attract, retain and provide incentive to
our directors and executive officers. These transactions are described in
"Management."
TRANSACTIONS WITH ENTITIES RELATED TO DIRECTORS AND GREATER THAN 5% STOCKHOLDERS
In connection with the recruiting of our Chief Financial Officer and Chief
Technology Officer, we engaged the services of Ramsey/Beirne Associates, an
executive search firm. Mr. Beirne, one of our directors, is the chairman of
Ramsey/Beirne and owns more than 5% of the stock of Ramsey/Beirne. As payment
for services, we paid Ramsey/Beirne $100,000 and issued a warrant to purchase
160,000 shares of common stock, with an exercise price of $.05 per share. We
received $8,000 when Ramsey/Beirne exercised the warrant on September 9, 1998.
In connection with the recruiting of our Vice President, Sales, we again
engaged the services of Ramsey/Beirne. As payment for services, we paid
Ramsey/Beirne $50,000 and issued an immediately exercisable warrant to purchase
15,750 shares of common stock, with an exercise price of $.38 per share. We
received $5,906 when Ramsey/Beirne exercised the warrant in May 1999.
Two of our directors have interests in some of our clients. Mr. Beirne is a
managing member of the general partner of funds affiliated with Benchmark
Capital. Mr. Leone is a managing member of the general partner of funds
affiliated with Sequoia Capital. Benchmark and Sequoia are venture capital firms
that hold equity interests exceeding ten percent of the total outstanding equity
of several of our clients. In addition, Benchmark and Sequoia each control a
seat on the board of directors of some of these clients.
Benchmark is a significant shareholder of PlanetRx.com, living.com,
E-Physician and WebVan and has a right to nominate one member of each company's
board of directors. During the year ended March 31, 1999, we recognized revenue
of $2.3 million, $624,000, $693,000 and $78,000, respectively, from these
companies in connection with our provision of eBusiness services to them. In
addition, Benchmark has an equity interest in eBay, a client for whom we have
provided approximately $168,000 in eBusiness services.
Sequoia is also a significant shareholder of PlanetRx.com and WebVan and
has a right to nominate one member of each company's board of directors. We have
provided eBusiness services to each of these companies as discussed above.
We believe that we made all of the transactions set forth above on terms no
less favorable to us than we could have obtained from unaffiliated third
parties. A majority of the disinterested outside directors on our board of
directors will approve all future transactions, including loans between us and
our officers, directors, principal stockholders and their affiliates. Such
transactions will continue to be on terms no less favorable to us than we could
have obtained from unaffiliated third parties.
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<PAGE> 61
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of November 30, 1999, information with
respect to shares beneficially owned by (1) each person who we know to be the
beneficial owner of more than five percent of our outstanding shares of common
stock; (2) each of the Named Executive Officers; (3) each of our directors; (4)
all current directors and executive officers as a group; and (5) all other
selling stockholders. The number of shares shown as beneficially owned by each
stockholder is adjusted to reflect the sale of shares offered in this offering.
We have determined beneficial ownership in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934. Under this rule, certain shares may be deemed
to be beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition, shares
are deemed to be beneficially owned by a person if the person has the right to
acquire shares (for example, upon exercise of an option or warrant) within 60
days of the date as of which the information is provided. In computing the
percentage ownership of any person, the number of shares beneficially owned by
him is deemed to include the number of shares beneficially owned by that person
(and only that person) by reason of such acquisition rights. In general, options
to purchase our capital stock are exercisable in full, with the underlying
shares subject to repurchase rights that lapse as the shares vest. As a result,
the percentage of outstanding shares of any person as shown in the following
table does not necessarily reflect the person's actual voting power at any
particular date. The percentage of beneficial ownership for the following table
is based on 70,586,582 shares of common stock outstanding as of November 30,
1999, and 72,086,582 shares of common stock outstanding after the completion of
this offering. Unless otherwise indicated, the address for each listed
stockholder is: c/o Scient Corporation, One Front Street, 28th Floor, San
Francisco, California, 94111. To our knowledge, except as indicated in the
footnotes to this table or pursuant to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
the shares of common stock indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER SHARES BENEFICIALLY
OFFERING OF SHARES OWNED AFTER OFFERING
5% STOCKHOLDERS, NAMED OFFICERS, DIRECTORS, -------------------- BEING --------------------
AND DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------------- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Eric Greenberg................................. 11,789,064 16.7% 400,000 11,389,064 15.8%
Entities associated with Benchmark
Capital(1)..................................... 10,523,466 14.9 -- 10,523,466 14.6
David M. Beirne(2)............................. 10,533,466 14.9 -- 10,533,466 14.6
Entities associated with Sequoia Capital(3).... 10,253,902 14.5 -- 10,253,902 14.2
Douglas Leone(4)............................... 10,305,882 14.6 -- 10,305,882 14.3
Robert M. Howe(5).............................. 6,960,000 9.9 200,000 6,760,000 9.4
Stephen A. Mucchetti(6)........................ 1,250,000 1.8 75,000 1,175,000 1.6
William H. Kurtz(7)............................ 1,040,464 1.5 30,000 1,010,464 1.4
Frederick W. Gluck(8).......................... 1,014,004 1.4 35,000 979,004 1.4
Morgan Stanley Dean Witter Equity Funding,
Inc. ........................................ 787,400 1.1 110,000 677,400 *
Kenichi Ohmae(9)............................... 5,000 * -- 5,000 *
All directors and executive officers as a group
(8 persons)(10).............................. 42,897,880 60.3 740,000 42,157,880 58.1
</TABLE>
- -------------------------
* Represents ownership of less than one percent.
(1) Benchmark Capital Partners II, L.P. holds 10,523,466 shares as nominee for
Benchmark Capital Partners II, L.P., Benchmark Founders Fund II, L.P.,
Benchmark Founders Fund II-A, L.P., and Benchmark Members' Fund, L.P. Mr.
Beirne, a director of Scient, is a Managing Member of the general partner of
Benchmark Capital Partners II, L.P. Mr. Beirne disclaims beneficial
ownership of the shares held by Benchmark Capital Partners II, L.P. except
to the extent of his pecuniary interest therein. The address for Benchmark
Capital is 2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
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<PAGE> 62
(2) Benchmark Capital Partners II, L.P. holds 10,523,466 shares as nominee for
Benchmark Capital Partners II, L.P., Benchmark Founders Fund II, L.P.,
Benchmark Founders Fund II-A, L.P., and Benchmark Members' Fund, L.P. Mr.
Beirne, a director of Scient, is a Managing Member of the general partner of
Benchmark Capital Partners II, L.P. Mr. Beirne disclaims beneficial
ownership of the shares held by Benchmark Capital Partners II, L.P. except
to the extent of his pecuniary interest therein. Includes options
immediately exercisable for 10,000 shares. The address for Mr. Beirne is
2480 Sand Hill Road, Suite 200, Menlo Park, CA 94025.
(3) Includes 8,164,970 shares held by Sequoia Capital VII, 356,940 shares held
by Sequoia Technology Partners VII, 184,022 shares held by SQP 1997, 103,512
shares held by Sequoia 1997, 142,798 shares held by Sequoia International
Partners and 1,301,660 shares held by Sequoia Capital Franchise Fund. Mr.
Leone, a director of Scient, is a Managing Member of SC VII-A Management,
L.L.C. which is the general partner of Sequoia Capital VII, Sequoia
Technology Partners VII, SQP 1997, Sequoia 1997, Sequoia International
Partners and Sequoia Capital Franchise Fund. Mr. Leone disclaims beneficial
ownership of the shares held by Sequoia Capital Franchise Fund, Sequoia
Capital VII, Sequoia Technology Partners VII, SQP 1997, Sequoia 1997 and
Sequoia International Partners except to the extent of his pecuniary
interest therein. The address for Sequoia Capital is 3000 Sand Hill Road,
Building 4, Suite 280, Menlo Park, CA 94025.
(4) Includes 8,164,970 shares held by Sequoia Capital VII, 356,940 shares held
by Sequoia Technology Partners VII, 184,022 shares held by SQP 1997,
103,512 shares held by Sequoia 1997, 142,798 shares held by Sequoia
International Partners and 1,301,660 shares held by Sequoia Capital
Franchise Fund. Mr. Leone, a director of Scient, is a Managing Member of SC
VII-A Management, L.L.C. which is the general partner of Sequoia Capital
VII, Sequoia Technology Partners VII, SQP 1997, Sequoia 1997, Sequoia
International Partners and Sequoia Capital Franchise Fund. Mr. Leone
disclaims beneficial ownership of the shares held by Sequoia Capital
Franchise Fund, Sequoia Capital VII, Sequoia Technology Partners VII, SQP
1997, Sequoia 1997 and Sequoia International Partners except to the extent
of his pecuniary interest therein. Includes options immediately exercisable
for 10,000 shares. The address for Mr. Leone is 3000 Sand Hill Road,
Building 4, Suite 280, Menlo Park, CA 94025.
(5) Includes 4,800,000 shares held by Robert M. Howe and Althea M. Howe as
Joint Tenants with Right of Survivorship. Includes 300,000 shares which are
subject to a stock repurchase agreement that allows Scient to repurchase up
to all of such shares in the event that Stephen A. Mucchetti, Scient's
Chief Operating Officer, vests in a December 22, 1998 300,000 share option
grant by Scient. Mr. Mucchetti will vest in such options if he remains
employed by the Company through December 22, 2002.
(6) Includes 1,000,000 shares held by Stephen A. Mucchetti and Rebecca S.
Mucchetti as Joint Tenants with Right of Survivorship and options
immediately exercisable for 250,000 shares.
(7) Includes 790,464 shares held by William H. Kurtz and Kathy H. Kurtz as
Joint Tenants with Right of Survivorship and options immediately
exercisable for 250,000 shares.
(8) Includes 219,992 shares held by the Gluck 1997 Irrevocable Trust and
options immediately exercisable for 10,000 shares.
(9) Consists entirely of immediately exercisable options.
(10) Includes options immediately exercisable for 535,000 shares.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of 125,000,000 shares of common stock, $.0001 par value, and 10,000,000
shares of preferred stock, $.0001 par value.
COMMON STOCK
As of November 30, 1999, there were 70,586,582 shares of common stock
outstanding that were held of record by approximately 269 stockholders. As of
November 30, 1999 there were 14,041,886 shares of common stock subject to
outstanding options, 7,648,647 of which were then currently exercisable. There
will be 72,086,582 shares of common stock outstanding after giving effect to the
sale of the shares of common stock to the public offered hereby. The holders of
common stock are entitled to one vote per share on all matters to be voted on by
the stockholders. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
board of directors out of legally available funds. In the event of the
liquidation, dissolution, or winding up of Scient, the holders of common stock
are entitled to share ratably in all assets remaining after payment of our
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. Our common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued on
completion of this offering will be fully paid and nonassessable. See "Dividend
Policy."
PREFERRED STOCK
No shares of preferred stock are outstanding. The board of directors has
the authority to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions on any series of preferred
stock, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control of Scient without further action by our stockholders and may adversely
affect the voting and other rights of the holders of common stock. Any issuance
of preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. We currently do not plan to issue any of the preferred stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation, provides that the board of directors will
be divided into three classes of directors, with each class serving a staggered
three-year term. The classification of directors may tend to discourage a party
from making a tender offer or otherwise attempting to obtain control of Scient
and may maintain the incumbency of the board of directors. The classification of
boards of directors has the effect of delaying the time when a party can replace
a majority of the incumbent directors thus it generally increases the difficulty
of replacing a majority of the directors. Our certificate of incorporation also
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. Further, provisions of our bylaws and
certificate of incorporation provide that the stockholders may amend the bylaws
or certain provisions of our certificate of incorporation only with the
affirmative vote of 75% of our outstanding capital stock. These provisions of
our certificate of incorporation and bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of Scient.
We intended these provisions to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors. The
63
<PAGE> 64
provisions are also meant to discourage transactions that may involve a change
of control of Scient. These provisions are designed to reduce our vulnerability
to an unsolicited acquisition proposal. The provisions also are intended to
discourage tactics that may be used in proxy fights. However, such provisions
could have the effect of discouraging others from making tender offers for our
shares and, as a consequence, they also may inhibit fluctuations in the market
price of our shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in our
management. See "Risk Factors -- We Have Various Mechanisms in Place to
Discourage Takeover Attempts."
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law which
regulates corporate acquisitions. Section 203 prevents Delaware corporations
whose securities are listed on the Nasdaq National Market from engaging in a
"business combination" with any "interested stockholder" for three years
following the date that such stockholder became an "interested stockholder." For
purposes of Section 203, a "business combination" includes a merger or
consolidation involving Scient and the interested stockholder and the sale of
10% or more of Scient's assets. In general, Section 203 defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of Scient and any entity or person affiliated with or
controlling or controlled by such entity or person. A Delaware corporation may
"opt out" of Section 203 with an express provision in its original certificate
of incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not "opted out" of the
provisions of Section 203.
REGISTRATION RIGHTS
After this offering, the holders of approximately 22,561,126 shares of
common stock and rights to acquire common stock, including Eric Greenberg, our
Chairman, will be entitled to rights with respect to the registration of such
shares under the Securities Act. Under the terms of the agreement between us and
the holders of such registrable securities, if we proposes to register any of
our securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such common stock therein. Additionally, such holders are entitled to require
us on up to two occasions to file a registration statement under the Securities
Act at our expense with respect to their shares of common stock, and we are
required to use all reasonable efforts to cause such registration to become
effective. Further, holders may require us to file an unlimited number of
additional registration statements on Form S-3 at our expense. All of these
registration rights terminate in May 2003 and are subject to conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares included in such registration and our right not to effect a
requested registration within 180 days following an offering of our securities,
including this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is U.S. Stock
Transfer Corporation, and its telephone number is (818) 502-1404.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 72,086,582 shares of common
stock outstanding, assuming no exercise of options after November 30, 1999.
These shares will be eligible for sale at various dates after the date of this
prospectus. These shares will be either freely tradeable or subject to certain
restrictions, including lock-up agreements and restrictions under Rule 144 and
Rule 701 under the Securities Act of 1933, as amended. The following table
summaries when these shares will be eligible for sale:
<TABLE>
<CAPTION>
APPROXIMATE SHARES
DATE ELIGIBLE FOR FUTURE SALE COMMENT
---- ------------------------ -------
<S> <C> <C>
On Effectiveness............. 27,326,044 Freely tradeable shares sold in this
offering and our initial public
offering, and shares saleable under
Rule 144 and Rule 701
On March 16, 2000............ 2,279,638 Additional shares saleable under Rule
144
On March 12, 2000............ 900,000 Additional shares saleable under Rule
144
90 days After 41,200,900 90 day lock-up expires
Effectiveness..............
On May 14, 2000.............. 380,000 One-year Initial Public Offering lockup
expires
</TABLE>
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year is entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 720,865 shares immediately after this offering; or
- The average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale requirements, and
depending on the amount sold, the filing of a Form 144 with respect to the sale.
Under Rule 144(k), a person, or persons whose shares are aggregated, is
entitled to sell his or her shares without regard to the limitations described
above if:
- The person has not been an affiliate of Scient, such as an officer,
director of 10%-or-greater stockholder, at any time during the 90 days
immediately preceding the sale; and
- The person has beneficially owned his or her shares for at least two
years.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to our initial
public offering, there was no public market for our common stock, and there can
be no assurance that a significant public market for the common stock will be
sustained after this offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered hereby.
In connection with this offering, Scient, its directors and executive
officers and some other stockholders, including the selling stockholders in this
offering, have agreed not to sell any common stock without the prior consent of
Morgan Stanley & Co. Incorporated for a period of 90 days from the date of this
prospectus, except that Scient may, without such consent, grant options and sell
shares pursuant to its stock plans.
65
<PAGE> 66
Any of our employees or consultants who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions. As of November 30, 1999, the holders of options exercisable
into approximately 14,041,886 shares of common stock will be eligible to sell
their shares, subject in some cases to vesting of such options.
In May 1999, we filed a registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issued or issuable under our stock plans.
Accordingly, shares registered under such registration statement are, subject to
Rule 144 volume limitations applicable to affiliates of Scient, available for
sale in the open market, unless such shares are subject to vesting restrictions
with the Company or the lock-up agreements described above.
In addition, after this offering, the holders of approximately 22,561,126
shares of common stock will be entitled to rights with respect to registration
of such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares, except for shares purchased by
affiliates of Scient, becoming freely tradable without restriction under the
Securities Act immediately on the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
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<PAGE> 67
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Hambrecht & Quist LLC, Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Thomas Weisel Partners LLC are
acting as representatives, have severally agreed to purchase, and we and the
selling stockholders have agreed to sell to them, an aggregate of 2,350,000
shares of common stock. The number of shares of common stock that each
underwriter has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Hambrecht & Quist LLC.......................................
Lehman Brothers Inc.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
Thomas Weisel Partners LLC..................................
---------
Total............................................. 2,350,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares of common stock
offered hereby, other than those covered by the over-allotment option described
below, if any such shares are taken. Morgan Stanley Dean Witter Online, an
affiliate of Morgan Stanley & Co. Incorporated and facilitator of Internet
distribution, is acting as a selected dealer in connection with the offering.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $. a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in excess
of $. a share to other underwriters or to certain other dealers. After the
public offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of 352,500 additional shares of common stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered hereby. To the extent such option
is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as the number set forth next to such underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all underwriters in the preceding table.
We, the directors, officers, selling stockholders and certain other of our
stockholders have each agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the
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<PAGE> 68
underwriters, during the period ending 90 days after the date of this
prospectus, we will not, directly or indirectly:
- Offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether
such shares or any such securities are then owned by such person or are
thereafter acquired directly from us); or
- Enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- The sale to the underwriters of the shares of common stock under the
underwriting agreement;
- The issuance by Scient of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus which is described in the prospectus;
- Transactions by any person other than Scient relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares of common stock; or
- Issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans that are in existence
on the date of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
In June 1998, we sold shares of our Series B Preferred Stock in a private
placement. In this private placement, Morgan Stanley Dean Witter Equity Funding,
Inc., or MSDW Equity Funding, purchased 393,700 shares of Series B Preferred
Stock, which converted into 787,400 shares of common stock for $2,449,995, or
$6.35 per share. MSDW Equity Funding purchased these shares on the same terms as
the other investors in the private placement. Morgan Stanley & Co. Incorporated,
one of the underwriters in this offering, and MSDW Equity Funding are both
wholly-owned subsidiaries of Morgan Stanley Dean Witter & Co.
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<PAGE> 69
Due to fact that one of the representatives of the underwriters was
organized within the last three years, we are providing you the following
information. Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December 1998.
Since December 1998, Thomas Weisel Partners has been named as a lead or
co-manager of, or as a syndicate member in, numerous public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Menlo Park, California. Members of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP participating in the consideration of legal matters
relating to the common stock offered hereby are the beneficial owners of 30,650
shares of our common stock. Legal matters in connection with this offering will
be passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, Palo
Alto, California.
EXPERTS
The financial statements as of March 31, 1998 and March 31, 1999, and for
the period from November 7, 1997 through March 31, 1998 and the year ended March
31, 1999 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and such common stock offered hereby, reference is made to the registration
statement and the exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the registration statement. Each such statement is
qualified in all respects by such reference to such exhibit. The registration
statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission. The Commission maintains a website that contains
reports, proxy and information statements and other information regarding
registrants, including us, that file electronically with the Commission. The
address of the site is http://www.sec.gov.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, file
annual and quarterly reports, proxy statements and other information with the
Commission. These reports, proxy statements and other information are available
for inspection and copying at the Commission's public reference rooms and the
Commission's website referred to above.
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<PAGE> 70
SCIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Scient Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Scient Corporation at March 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from November 7, 1997 (Inception) through March 31, 1998 and for the year
ended March 31, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
April 26, 1999
F-2
<PAGE> 72
SCIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1999 1999
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................... $ 3,301 $ 11,261 $ 14,277
Short-term investments............................ -- 16,868 35,709
Restricted cash................................... 100 -- --
Accounts receivable, net.......................... 155 6,141 25,882
Prepaid expenses.................................. 137 93 4,010
Other............................................. -- 771 3,727
------- -------- --------
Total current assets...................... 3,693 35,134 83,605
Long-term investments............................... -- -- 22,160
Notes receivable.................................... -- 160 160
Property and equipment, net......................... 322 3,410 5,687
Other.......................................... 210 108 678
------- -------- --------
$ 4,225 $ 38,812 $112,290
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings, current.......................... $ $ 413 $ 1,106
Accounts payable.................................. 351 832 1,598
Accrued expenses.................................. 32 4,632 15,838
Deferred revenue.................................. -- 524 1,427
Capital lease obligations, current................ 11 625 721
------- -------- --------
Total current liabilities................. 394 7,026 20,690
Bank borrowings, long-term.......................... -- 1,129 1,424
Capital lease obligations, long-term................ 26 680 604
------- -------- --------
Total liabilities......................... 420 8,835 22,718
------- -------- --------
Commitments and contingencies (Note 5)
Stockholders' equity
Convertible preferred stock: issuable in series,
$0.0001 par value; 10,000 shares authorized;
5,333, 9,012 and no shares issued and
outstanding, respectively...................... 1 1 --
Common stock: $0.0001 par value; 125,000 shares
authorized; 21,868, 33,134 and 70,254 shares
issued and outstanding, respectively........... 2 3 7
Additional paid-in capital........................ 6,496 70,055 137,574
Unearned compensation............................. (1,535) (27,222) (20,935)
Accumulated deficit............................... (1,159) (12,860) (27,074)
------- -------- --------
Total stockholders' equity................ 3,805 29,977 89,572
------- -------- --------
$ 4,225 $ 38,812 $112,290
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 73
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOVEMBER 7, 1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1998 1999 1998 1999
----------------- -------------------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues..................... $ 179 $ 20,675 $ 5,018 $ 47,209
Operating expenses:
Professional services...... 102 10,028 2,738 22,173
Selling, general and
administrative.......... 1,228 15,315 2,855 32,315
Stock compensation......... 64 7,679 1,501 8,522
------- -------- ------- --------
Total operating
expenses........ 1,394 33,022 7,094 63,010
------- -------- ------- --------
Loss from operations......... (1,215) (12,347) (2,076) (15,801)
Interest income, net......... 56 646 265 1,588
------- -------- ------- --------
Net loss..................... $(1,159) $(11,701) $(1,811) $(14,213)
======= ======== ======= ========
Net loss per share:
Basic and diluted.......... $ (0.10) $ (0.89) $ (0.15) $ (0.30)
======= ======== ======= ========
Weighted average shares.... 11,894 13,198 12,136 46,828
======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 74
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
--------------- --------------- PAID-IN SUBSCRIPTION UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT
------ ------ ------ ------ ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founder.................... -- $-- 17,068 $-- $ -- $ -- $ -- $ --
Issuance of Series A
convertible preference
stock, net of issuance cost
of $20..................... 5,333 1 -- -- 4,779 -- -- --
Unearned compensation........ -- -- -- -- 1,599 -- (1,599) --
Amortization of unearned
compensation............... -- -- -- -- -- -- 64 --
Exercise of common stock
options.................... -- -- 4,800 2 118 -- -- --
Net loss..................... -- -- -- -- -- -- -- (1,159)
------ -- ------ -- -------- ----- -------- --------
Balance at March 31, 1998.... 5,333 1 21,868 2 6,496 -- (1,535) (1,159)
Issuance of Series A
convertible preferred
stock...................... 950 -- -- -- 1,425 (873) -- --
Issuance of Series B
convertible preferred
stock, net of issuance cost
$38........................ 2,240 -- -- -- 14,189 -- -- --
Issuance of Series C
convertible preferred
stock, net of issuance cost
$54........................ 1,051 -- -- -- 11,346 -- -- --
Repurchase of Series A
convertible preferred stock
by canceling the stock
subscription receivable.... (562) -- -- -- (844) 873 -- --
Unearned compensation........ -- -- -- -- 33,366 -- (33,366) --
Amortization of unearned
compensation............... -- -- -- -- -- -- 7,679 --
Exercise of common stock
options and warrants,
net........................ -- -- 11,266 1 4,077 -- -- --
Net loss..................... -- -- -- -- -- -- -- (11,701)
------ -- ------ -- -------- ----- -------- --------
Balance at March 31, 1999.... 9,012 1 33,134 3 70,055 -- (27,222) (12,860)
Conversion of convertible
preferred stock to common
stock (unaudited).......... (9,012) (1) 29,466 3 (2) -- -- --
Issuance of common stock in
initial public offering net
of issuance cost $1,455
(unaudited)................ -- -- 6,900 1 62,727 -- -- --
Issuance of common stock
(unaudited)................ -- -- 300 -- 1,800 -- -- --
Unearned compensation
(unaudited)................ -- -- -- -- 2,234 -- (2,234) --
Amortization of unearned
compensation (unaudited)... -- -- -- -- -- -- 8,521 --
Exercise of common stock
options and warrants, net
(unaudited)................ -- -- 454 -- 760 -- -- --
Net loss (unaudited)......... -- -- -- -- -- -- -- (14,214)
------ -- ------ -- -------- ----- -------- --------
Balance at September 30, 1999
(unaudited)................ -- $-- 70,254 $7 $137,574 $ -- $(20,935) $(27,074)
====== == ====== == ======== ===== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock to
founder.................... $ --
Issuance of Series A
convertible preference
stock, net of issuance cost
of $20..................... 4,780
Unearned compensation........ --
Amortization of unearned
compensation............... 64
Exercise of common stock
options.................... 120
Net loss..................... (1,159)
--------
Balance at March 31, 1998.... 3,805
Issuance of Series A
convertible preferred
stock...................... 552
Issuance of Series B
convertible preferred
stock, net of issuance cost
$38........................ 14,189
Issuance of Series C
convertible preferred
stock, net of issuance cost
$54........................ 11,346
Repurchase of Series A
convertible preferred stock
by canceling the stock
subscription receivable.... 29
Unearned compensation........ --
Amortization of unearned
compensation............... 7,679
Exercise of common stock
options and warrants,
net........................ 4,078
Net loss..................... (11,701)
--------
Balance at March 31, 1999.... 29,977
Conversion of convertible
preferred stock to common
stock (unaudited).......... --
Issuance of common stock in
initial public offering net
of issuance cost $1,455
(unaudited)................ 62,728
Issuance of common stock
(unaudited)................ 1,800
Unearned compensation
(unaudited)................ --
Amortization of unearned
compensation (unaudited)... 8,521
Exercise of common stock
options and warrants, net
(unaudited)................ 760
Net loss (unaudited)......... (14,214)
--------
Balance at September 30, 1999
(unaudited)................ $ 89,572
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 75
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 7,
1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, ------------------
1998 1999 1998 1999
----------- ---------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(1,159) $(11,701) $(1,811) $(14,213)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.............. 12 622 147 1,147
Provision for doubtful accounts............ -- 200 89 1,896
Amortization of unearned compensation...... 64 7,679 1,501 8,522
Changes in assets and liabilities:
Accounts receivable................... (155) (6,186) (2,044) (24,398)
Notes receivable...................... -- (160) -- --
Other assets.......................... (347) (624) (196) (4,762)
Accounts payable...................... 351 481 (92) 926
Accrued expenses...................... 32 4,600 339 11,206
Deferred revenue...................... -- 524 3 903
------- -------- ------- --------
Net cash used in operating
activities....................... (1,202) (4,565) (2,064) (18,773)
------- -------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment, net....... (297) (2,360) (1,059) (3,129)
Purchase of investments....................... -- (16,868) -- (203,627)
Proceeds from sale of investments............. -- -- -- 162,391
------- -------- ------- --------
Net cash used in investing
activities....................... (297) (19,228) (1,059) (44,365)
------- -------- ------- --------
Cash flows from financing activities:
Proceeds from bank borrowings................. -- 1,542 877 988
Proceeds from convertible preferred stock,
net........................................ 4,780 26,116 14,754 --
Proceeds from initial public offering, net.... -- -- -- 62,728
Proceeds from exercise of common stock options
and warrants, net.......................... 120 4,077 422 2,714
Principal payments on capital lease
obligations................................ -- (82) -- (276)
Restricted cash............................... (100) 100 -- --
------- -------- ------- --------
Net cash provided by financing
activities....................... 4,800 31,753 16,053 66,154
------- -------- ------- --------
Increase in cash and cash equivalents........... 3,301 7,960 12,930 3,016
Cash and cash equivalents at beginning of
period........................................ -- 3,301 3,301 11,261
------- -------- ------- --------
Cash and cash equivalents at end of period...... $ 3,301 $ 11,261 $16,231 $ 14,277
======= ======== ======= ========
Supplemental cash flow information:
Cash paid for interest........................ $ 1 $ 85 $ 101 $ 101
======= ======== ======= ========
Supplemental non-cash financing activity:
Property and equipment acquired under capital
lease...................................... $ 37 $ 1,350 $ 1 $ 324
======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 76
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Scient Corporation (the "Company") was incorporated in California on
November 7, 1997. The Company is a leading provider of the new category of
professional services called systems innovation. The Company provides integrated
eBusiness strategy and technology implementation services to clients who are
creating eBusinesses or are rethinking or expanding their existing businesses to
integrate eBusiness capabilities. These services include strategy consulting,
customer experience design, systems architecture, application and technology
infrastructure development and asset-based services.
Consolidation (unaudited)
The consolidated financial statements include the accounts of Scient
Corporation and its subsidiaries after elimination of intercompany balances and
transactions.
Unaudited Interim Results
The interim consolidated financial statements as of September 30, 1999 and
for the six months ended September 30, 1998 and 1999, together with the
financial data and other information from those periods disclosed in these notes
to the consolidated financial statements, are unaudited. In the opinion of
management, the interim consolidated financial statements have been prepared on
the same basis as the audited financial statements and reflect all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the results of interim periods. The results of operations for
the interim periods are not necessarily indicative of the results to be expected
for any future periods.
Reincorporation
In March 1999, the Company's Board of Directors authorized, and in April
1999 the stockholders approved, the reincorporation of the Company in the State
of Delaware. Following the reincorporation, the Company is authorized to issue
40,000,000 shares of $.0001 par value Common Stock and 11,500,000 shares of
$.0001 par value Preferred Stock. In May 1999 (unaudited), upon the
effectiveness of the initial public offering, 125,000,000 shares of common stock
and 10,000,000 shares of undesignated convertible preferred stock were
authorized. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. Share information for the period from
November 7, 1997 (Inception) through March 31, 1998 and for the year ended March
31, 1999 has been retroactively adjusted to reflect the reincorporation and
increase in shares authorized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from service agreements. Revenues pursuant
to time and materials contracts are generally recognized as services are
performed. Revenues pursuant to fixed-fee
F-7
<PAGE> 77
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contracts are generally recognized as services are rendered on the
percentage-of-completion method of accounting (based on the ratio of costs
incurred to total estimated costs). Revenues exclude reimbursable expenses
charged to and collected from clients.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
become probable and can be reasonably estimated. To date, such losses have been
insignificant. Unbilled fees and services on contracts are comprised of costs
plus fees on certain contracts in excess of contractual billings on such
contracts. Advanced billings and billings in excess of costs plus fees are
classified as deferred revenue.
Operating Expenses
Professional Services. Professional services expenses consist primarily of
compensation and benefits of the Company's employees engaged in the delivery of
professional services.
Stock Compensation. The Company amortizes unearned compensation recorded in
connection with certain stock option grants over the vesting periods of the
related options.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
During 1998, in accordance with the terms of a credit arrangement, the
Company purchased a certificate of deposit for $100,000. The use of this cash
was restricted at March 31, 1998 and such restriction has lapsed. The fair value
of the certificate of deposit approximated cost at March 31, 1998.
Investments
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has categorized its marketable securities as "available-for-sale." At March 31,
1999, amortized cost approximated fair value and unrealized gains and losses
were insignificant.
The portfolio of short-term investments (including cash and cash
equivalents) consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Cash........................................................ $ 2,251
Commercial paper............................................ 5,956
Government securities....................................... 10,582
Foreign securities.......................................... 3,176
Term notes.................................................. 6,164
-------
$28,129
=======
</TABLE>
Long term investments consist primarily of marketable securities with
original maturities of greater than twelve months (unaudited). In addition, in
July 1999 (unaudited), the Company established a wholly-owned subsidiary, Scient
Capital LLC, which serves as an investment vehicle to make equity investments in
clients who meet certain criteria.
F-8
<PAGE> 78
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company uses the cost method to account for investments in which it has
made a minority interest and does not exercise significant influence.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are deposited
with high credit quality financial institutions. The Company's accounts
receivable are derived from revenue earned from clients located in the U.S. The
Company performs ongoing credit evaluations of its clients' financial condition
and generally requires no collateral from its clients. To date, the Company has
not experienced any material losses.
The following table summarizes the revenue from clients in excess of 10% of
total revenues:
<TABLE>
<CAPTION>
NOVEMBER 7,
1997
(INCEPTION)
THROUGH YEAR ENDED
MARCH 31, MARCH 31,
1998 1999
----------- ----------
<S> <C> <C>
Company A............................................... 60% 7%
Company B............................................... 35 3
Company C............................................... -- 13
Company D............................................... -- 11
Company E............................................... -- 11
</TABLE>
At March 31, 1998, Company A and B accounted for 54% and 40% of accounts
receivable, respectively. At March 31, 1999, three clients represented 31%, 21%
and 12% of accounts receivable.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, debt and capital
lease obligations, are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed using the straight-line method ranging from
eighteen months to five years for computer equipment and software and furniture
and fixtures, which is deemed to be the estimated useful lives of the assets.
Leasehold improvements and assets held under capital leases are amortized over
the term of the lease or estimated useful lives, whichever is shorter.
Stock Compensation
The Company accounts for employee stock compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". Under APB No. 25, compensation
expense is based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the exercise price.
F-9
<PAGE> 79
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated.
Net Loss Per Share
The Company computes net loss per share in accordance with 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 and
upon conversion of Series A, B and C Convertible Preferred Stock.
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>
NOVEMBER 7, 1997 SIX MONTHS SIX MONTHS
(INCEPTION) THROUGH YEAR ENDED ENDED ENDED
MARCH 31, 1998 MARCH 31, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------- -------------- ------------------ ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Numerator
Net loss............................ $(1,159) $(11,701) $ (1,811) $(14,213)
======= ======== ======== ========
Denominator
Weighted average shares........... 17,066 26,750 24,040 61,546
Weighted average unvested common
shares to repurchase............ (5,172) (13,552) (11,904) (14,718)
------- -------- -------- --------
Denominator for basic and diluted
calculation..................... 11,894 13,198 12,136 46,828
======= ======== ======== ========
Net loss per share:
Basic and diluted................. $ (0.10) $ (0.89) $ (0.15) $ (0.30)
======= ======== ======== ========
</TABLE>
F-10
<PAGE> 80
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth common stock equivalents that are not
included in the diluted net income per share calculation above because to do so
would be antidilutive for the periods indicated (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 7,
1997
(INCEPTION)
THROUGH YEAR ENDED
MARCH 31, MARCH 31,
1998 1999
----------- ----------
<S> <C> <C>
Weighted average effect of common stock equivalents:
Series A Convertible Preferred Stock...................... 17,360 24,600
Series B Convertible Preferred Stock...................... -- 3,622
Series C Convertible Preferred Stock...................... -- 254
Common Stock warrants..................................... 30 126
Unvested common shares subject to repurchase.............. 5,172 13,552
Employee Stock Options.................................... 1,944 4,702
------ ------
24,506 46,856
====== ======
</TABLE>
Comprehensive Income
Effective March 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. To date, the Company has not had any
significant transactions that are required to be reported in comprehensive
income.
Segment Information
Effective March 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company identifies its operating segments based on business activities,
management responsibility and geographical location. During the period from
November 7, 1997 (inception) through March 31, 1998 and the year ended March 31,
1999, the Company operated in a single business segment providing eBusiness
professional services, primarily in the United States. Through March 31, 1999,
foreign operations have not been significant in either revenue or investment in
long-lived assets.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. We adopted
SOP 98-1 effective April 1, 1999. Such adoption did not have a significant
effect on our results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities". In June 1999 (unaudited), the FASB issued SFAS No. 137,
"Accounting for Derivatives
F-11
<PAGE> 81
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and Hedging Activities-Deferral of the Effective Date of SFAS No. 133." SFAS
133, as amended by SFAS 137, 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. The Company will adopt
SFAS 133 in its quarter ending June 30, 2000 and does not expect such adoption
to have an impact on the Company's results of operations, financial position or
cash flows.
2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable..................................... $ 83 $3,701
Unbilled fees and services.............................. 72 2,640
---- ------
155 6,341
Less allowance for doubtful accounts.................... -- (200)
---- ------
$155 $6,141
==== ======
Property and equipment, net:
Computer equipment and software......................... $278 $1,775
Equipment under capital leases.......................... 37 1,387
Furniture and fixtures.................................. 19 524
Leasehold improvements.................................. -- 358
---- ------
334 4,044
Less accumulated depreciation and amortization.......... (12) (634)
---- ------
$322 $3,410
==== ======
</TABLE>
Depreciation expense from inception through March 31, 1998 and for the year
ended March 31, 1999 was $12,000 and $552,000, respectively. Accumulated
depreciation of assets under capital leases totaled $70,000 at March 31, 1999.
The equipment under capital leases collaterizes the related lease obligations.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses:
Accrued compensation and benefits....................... $ 32 $2,554
Professional expenses................................... -- 735
Purchased software...................................... -- 750
Other................................................... -- 593
---- ------
$ 32 $4,632
==== ======
</TABLE>
3. INCOME TAXES
At March 31, 1998 and 1999, the Company had approximately $1,069,000 and
$4,575,000, respectively, of federal and state net operating loss carryforwards
available to offset future taxable income
F-12
<PAGE> 82
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which expire in varying amounts beginning in 2018 and 2006, respectively. Under
the Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
The Company has incurred losses from inception through March 31, 1998 and
for the year ended March 31, 1999. Management believes that, based on the
history of such losses and other factors, the weight of available evidence
indicates that it is more likely than not that the Company will not be able to
realize its deferred tax assets and thus a full valuation reserve has been
recorded at March 31, 1998 and March 31, 1999.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 439 $1,877
Accruals and reserves................................... 7 123
----- ------
446 2,000
Less valuation allowance................................ (446) (2,000)
----- ------
$ -- $ --
===== ======
</TABLE>
4. BORROWINGS
In May 1998, the Company entered into a $1,400,000 equipment lease line and
a $1,000,000 line of credit under a Loan and Security Agreement. The equipment
line draw down expires in May 1999. Interest will accrue from the date of each
draw down at a rate of one percent plus prime per annum (8.8% at March 31, 1999)
and is payable monthly through May 15, 1999. Equipment draw downs that are
outstanding on May 15, 1999 are payable in 36 equal monthly principal
installments, plus all accrued interest, beginning on June 15, 1999. The line of
credit charges interest at a rate of one-half percent plus prime per annum (8.3%
at March 31, 1999). The assets of the Company are pledged as collateral for the
Company's credit facilities.
In August 1998, the Company amended the Loan and Security Agreement to add
a second $1,400,000 equipment lease line and increased the line of credit to
$2,000,000. The second equipment lease line draw down expires in September 1999.
Interest accrual and payment terms are similar to the terms of the first
equipment lease line.
At March 31, 1999, the Company had $1,542,000 outstanding under the
equipment lease line. Under the lines of credit, the Company is required to
maintain certain financial covenants. At March 31, 1999, the Company was in
compliance with all such covenants.
In April 1999, the Company drew down an additional $278,000 under the
equipment lease line.
In October 1999 (unaudited), the Company amended the Loan and Security
Agreement to increase the equipment lease line to $4.0 million and the line of
credit to $8.0 million. The equipment lease line's draw down expires during the
period of May 1999 through September 2000. The amounts available at September
30, 1999 were $1.5 million and $1.9 million, respectively. Interest will accrue
from the date of
F-13
<PAGE> 83
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
each draw down at a rate of one percent plus prime per annum and is payable
monthly through the expiration date. The line of credit expires in May 2000 and
charges interest at a rate of one-half percent plus prime per annum.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2010. Rent expense from
inception through March 31, 1998 and for the year ended March 31, 1999 was
$72,000 and $1,156,000, respectively. There was no sublease income for the
period from inception through March 31, 1998 and sublease income for the year
ended March 31, 1999 was $181,000. The terms of the facility leases provide for
rental payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period, and has recognized prepaid expense
for rent expenditures not incurred but paid.
Future minimum lease payments, (excluding future minimum sublease income of
$397,000), under noncancelable operating and capital leases at March 31, 1999
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
MARCH 31, LEASES LEASES
---------- ------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000........................................................ $ 713 $ 2,285
2001........................................................ 656 2,457
2002........................................................ 29 1,277
2003........................................................ 22 1,176
2004........................................................ 9 1,212
Thereafter.................................................. -- 7,157
------ -------
Total minimum lease payments................................ 1,429 $15,564
=======
Less amount representing interest........................... 124
------
Present value of capital lease obligations.................. 1,305
Less current portion........................................ 625
------
Capital lease obligations, long-term........................ $ 680
======
</TABLE>
In April 1999, the Company entered into a capital lease agreement to
purchase furniture and fixtures totaling approximately $116,000. Principal and
interest under the capital lease are payable in 60 equal monthly installments.
In May 1999 (unaudited), the Company entered into a lease agreement for one
of its office facilities. The lease term is from May 1999 through December 2004
with future minimum lease payments totaling $2,819,000.
Letters of Credit
At March 31, 1999, the Company maintained a $400,000 letter of credit to
secure the lease deposit on one of its office facilities. The letter of credit
expired October 1999 at which time a new letter of credit will automatically be
issued at $300,000 which expires May 2001. The Company also maintained a
$250,000 letter of credit to secure the lease deposit on another one of its
office facilities. The letter of credit expires October 2003. The Company
maintained a $300,000 letter of credit to secure one of its
F-14
<PAGE> 84
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
capital leases. The letter of credit expires March 31, 2000. The letters of
credit are secured by the line of credit.
In April 1999, the Company maintained an additional letter of credit for
approximately $104,000 to secure a lease deposit on one of its office
facilities. The letter of credit expires April 2000. The letter of credit is
secured by the line of credit.
In May 1999 (unaudited), the Company maintained an additional letter of
credit for approximately $528,000 to secure future rents on one of its office
facilities. The letter of credit expires December 2000. The letter of credit is
secured by the line of credit.
In August 1999 (unaudited), the Company maintained an additional letter of
credit for approximately $500,000 to secure a lease deposit on one of its office
facilities. The letter of credit expires April 2001. The letter of credit is
secured by the line of credit.
In October 1999 (unaudited), the Company maintained an additional two
letters of credit for approximately $3.0 million and $1.0 million to secure
future rents and a lease deposit, respectively, on two of its office facilities.
The letters of credit expire July 2000 and October 2000, respectively. The
letters of credit are secured by the line of credit.
In November 1999 (unaudited), the Company maintained an additional two
letters of credit for approximately $1.1 million and $323,000 to secure lease
deposits on two of its office facilities. The letters of credit expire December
2000 and November 2000, respectively. The letters of credit are secured by the
line of credit.
Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
the Company.
6. CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock at March 31, 1999 consists of the following,
(in thousands):
<TABLE>
<CAPTION>
LIQUIDATION PROCEEDS
SHARES AMOUNT NET OF
------------------------ LIQUIDATION PER ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT SHARE COSTS
------ ---------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
A.................................... 6,283 5,721 $ 5,149 $ .90 $ 5,360
B.................................... 2,241 2,240 14,224 6.35 14,189
C.................................... 1,382 1,051 11,403 10.85 11,346
Undesignated......................... 1,594 -- -- --
------ ----- ------- -------
Total.............................. 11,500 9,012 $30,776 $30,895
====== ===== ======= =======
</TABLE>
F-15
<PAGE> 85
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The holders of Series A, B and C Convertible Preferred Stock ("Convertible
Preferred") have various rights and preferences as follows:
Voting
Each share of Convertible Preferred has voting rights equal to an
equivalent number of shares of Common Stock into which it is convertible and
votes together as one class with the Common Stock. Series A, voting together as
a separate class, is entitled to elect two Directors to the Board as long as
750,000 shares originally issued are outstanding at each annual election. The
holders of outstanding Common Stock, voting together as a separate class, are
entitled to elect two Directors. Convertible Preferred (on an as-converted
basis) and Common Stock are entitled to elect any remaining Directors together
as a single class.
Dividends
Holders of Series A, B and C Convertible Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $.072, $.508 and $.868
per share, respectively, or if greater, an amount equal to that paid on any
other shares when and if declared by the Board of Directors. No dividends on
Convertible Preferred or Common Stock have been declared by the Board from
inception through March 31, 1999.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's Common Stock and Convertible Preferred own less than 50% of the
resulting voting power of the surviving entity, the holders of Series C
Convertible Preferred Stock are entitled to receive an amount of $10.85 per
share, plus any declared but unpaid dividends prior to and in preference to any
distribution to the holders of Series A and B Convertible Preferred Stock. The
holders of Series B Convertible Preferred Stock are entitled to receive an
amount of $6.35, per share, plus any declared but unpaid dividends prior to and
in preference to any distribution to the holders of Series A Convertible
Preferred Stock. The holders of Series A Convertible Preferred Stock are
entitled to receive an amount of $.90 per share, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
Common Stock. The remaining assets, if any, shall be distributed to the holders
of Common Stock.
Conversion
Each share of Convertible Preferred Stock was convertible, at the option of
the holder, according to a conversion ratio, subject to adjustment for dilution.
The initial conversion ratio per share for Series A Convertible Preferred Stock
was two shares of common for one share of Convertible Preferred Stock, and for
Series B and C Convertible Preferred Stock was one share of common for one share
of Convertible Preferred Stock. Each share of Series A and B Convertible
Preferred Stock automatically converted into the number of shares of Common
Stock into which such shares were convertible at the then effective conversion
ratio upon the closing of our initial public offering of Common Stock. Each
share of Series C Convertible Preferred Stock automatically converted into the
number of shares of Common Stock into which such shares were convertible at the
then effective conversion ratio upon the closing of our initial public offering
of Common Stock. In addition, each share of Convertible Preferred Stock would
have been automatically converted into shares of Common Stock upon either (1) a
firm commitment underwritten public offering of the Company's Common Stock
approved by all Convertible Preferred
F-16
<PAGE> 86
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock voting together as a single class or (2) upon the vote of Convertible
Preferred Stock as a single class and the vote of Series C Convertible Preferred
Stock voting as a separate class.
In December 1999 (unaudited), upon the 2-for-1 stock split, the initial
conversion ratio of convertible preferred stock changed and has been
retroactively reflected.
Stock Subscription Receivable
In May 1998, the Company entered into a full-recourse note receivable (the
"Note") with a Director of the Company for approximately $844,000 bearing
interest at 5.5% per annum with principal and accrued interest payable annually
over three years. The Note was secured by Convertible Preferred Stock. In
October 1998, the Company entered into a Stock Restriction Agreement with the
Director that provided the Company the right to repurchase of the Convertible
Preferred Stock purchased with the Note upon the Director's resignation upon
certain criteria. In March 1999, upon the Director's resignation, the Company
repurchased the 562,500 shares of Convertible Preferred Stock at $1.50 per
share, the original issuance price, by canceling the note receivable.
Transactions with Entities Related to Director
A director of the Company, who is also a shareholder of the Company, is
also a director and shareholder of four clients for which the Company recognized
$3,695,000 in revenue for the year ended March 31, 1999. The terms and
conditions of such transactions were normal and customary. No revenue was
recognized for those clients during the period from inception through March 31,
1998.
In addition, such director and another director of the Company hold equity
interests exceeding ten percent of the total outstanding equity of several of
the Company's clients.
7. COMMON STOCK
At March 31, 1999, the Company's Certificate of Incorporation, as amended,
authorized the Company to issue 40,000,000 shares of $.0001 par value Common
Stock. A portion of the shares sold are subject to the right of repurchase by
the Company subject to vesting, which is generally over a four year period from
the employee hire date until vesting is complete. At March 31, 1998 and 1999,
there were 4,800,000 and 13,732,000 shares subject to repurchase, respectively.
Founder Stock Agreement
Certain Common Stock was issued to the founder of the Company and is
subject to repurchase in the event of voluntary termination or involuntary
termination with cause. 75% of the shares vested over a one-year period. The
remaining 25% generally vest over an additional three-year period. In the event
of termination without cause, a substantial sale of the Company's assets, or a
merger, all remaining shares would immediately vest. At March 31, 1998 and 1999,
approximately 5,174,000 and 3,088,000 shares, respectively, of outstanding
Common Stock were subject to repurchase by the Company at the original purchase
price of $.000025.
Employee Loan
At March 31, 1999, the Company had a full-recourse note receivable with an
employee of the Company for $160,000 bearing interest at 4.64% per annum.
Interest is payable annually over the next two years on the anniversary date of
the note. The principal is due on January 28, 2001. The note is secured by the
Company's Common Stock.
F-17
<PAGE> 87
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warrants for Common Stock
In March 1998, the Company issued a warrant to purchase 160,000 shares of
Common Stock for $.05 per share to a company affiliated with a member of the
Board of Directors of the Company in exchange for services rendered. The
Company, using the Black-Scholes option pricing model, determined that the fair
value of the warrant at the date of issuance was nominal. In September 1998, the
warrant was exercised.
In May 1998, the Company issued a warrant to purchase 50,000 shares of
Common Stock for $.13 per share to a non-employee of the Company in exchange for
services rendered. The Company, using the Black-Scholes option pricing model,
determined that the fair value of the warrant at the date of issuance was
nominal. Such warrant is outstanding at March 31, 1999 and expires in 2003.
In January 1999, the Company issued a warrant to purchase 15,750 shares of
Common Stock for $.38 per share to a company affiliated with a member of the
Board of Directors of the Company in exchange for services rendered. The
Company, using the Black-Scholes option pricing model, determined that the fair
value of the warrant at the date of issuance was nominal. Such warrant is
outstanding at March 31, 1999 and expires in 2004.
In May 1999 (unaudited), the Company entered into a 24-month consulting
agreement with a company for recruiting services. The Company paid $500,000,
issued 300,000 shares of Common Stock and granted an option to purchase an
additional 100,000 shares at $6.00 per share. The Company, using the
Black-Scholes pricing model, calculated the fair value of the option on the date
of grant, and will recognize the total value of the agreement over the service
period.
At March 31, 1999, the Company had reserved shares of Common Stock for
future issuance as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1999
---------
<S> <C>
Conversion of Series A...................................... 22,884
Conversion of Series B...................................... 4,480
Conversion of Series C...................................... 2,102
Exercise of options under the 1997 Stock Option Plan........ 26,860
Exercise of outstanding warrants............................ 66
Undesignated................................................ 68,608
-------
125,000
=======
</TABLE>
Stock Split
In April 1998, the Company effected a 2-for-1 stock split of Common Stock.
All data shown in the accompanying consolidated financial statements and notes
have been retroactively adjusted to reflect the stock split.
In December 1999 (unaudited), the Company effected a 2-for-1 stock split of
Common Stock. All data shown in the accompanying consolidated financial
statements and notes have been retroactively adjusted to reflect the stock
split.
F-18
<PAGE> 88
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
401(k) Savings Plan
The Company has a savings plan (the "Savings Plan") that qualifies as a
defined contribution arrangement under Section 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the Savings Plan, participating employees may defer
a percentage (not to exceed 25%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. All employees on the
United States payroll of the Company are eligible to participate in the Plan.
The Company will determine its contributions, if any, based on its current
profits and/or retained earnings; however, no contributions have been made since
the inception of the Savings Plan.
1997 Stock Option Plan
In December 1997, the Company adopted the Scient Corporation 1997 Stock
Option Plan (the "Plan"). The Plan provides for the granting of stock options to
employees, outside directors, and consultants of the Company. Options granted
under the Plan may be either incentive stock options or nonqualified stock
options. Incentive stock options ("ISO") may be granted only to Company
employees (including officers and directors who are also employees).
Nonqualified stock options ("NSO") may be granted to Company employees and
consultants. The Company has reserved 13,430,000 shares of Common Stock for
issuance under the Plan.
The Plan provides that the options shall be exercisable over a period not
to exceed ten years from the date of the grant; however, in the case of an ISO
granted to a person owning more than 10% of the combined voting power of all
classes of the stock of the Company, the term of the option will be five years
from the date of the grant.
In accordance with the Plan, the stated exercise price shall not be less
than 85% of the estimated fair value of the shares on the date of grant as
determined by the Board of Directors, provided, however, that (i) the exercise
price of an ISO and NSO shall not be less than 100% and 85% of the estimated
fair value of the shares on the date of grant, respectively, and (ii) the
exercise price of an ISO and NSO granted to a 10% shareholder shall not be less
than 110% of the estimated fair value of the shares on the date of grant,
respectively.
Options are generally exercisable immediately and are subject to repurchase
by the Company, with the repurchase restriction lapsing at such times and under
such conditions as determined by the Board of Directors. Options granted to date
generally vest with respect to 25% of the options after one year from date of
grant, with the remaining options vesting in equal monthly installments over the
following 36 months.
1999 Equity Incentive Plan
In March 1999, effective upon the closing of the Company's initial public
offering, the Board of Directors adopted and the stockholders approved, the 1999
Equity Incentive Plan (the "Plan") and reserved 1,200,000 shares of Common Stock
plus the aggregate number of shares available under the 1997 Stock Option Plan
of Common Stock for issuance thereunder. In January 2000, and every year
thereafter, shares reserved for issuance will automatically increase by a number
equal to the lesser of 8% of the total number of Common Stock outstanding or
5,000,000 shares. The Plan authorized the award of options, restricted stock
awards and stock bonuses (the "Award"). No person will be eligible to receive
more than 1,000,000 shares in any calendar year pursuant to Awards under the
Plan other than a new employee of the Company who will be eligible to receive no
more than 2,000,000 shares in the calendar
F-19
<PAGE> 89
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
year in which such employee commences employment. Options granted under the Plan
may be either incentive stock options ("ISO") or nonqualified stock options
("NSO"). ISOs may be granted only to Company employees (including officers and
directors who are also employees). NSOs may be granted to Company employees,
outside directors, and consultants of the Company.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO may not be less than 100% of the estimated fair value
of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% shareholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. The maximum term of options granted
under the 1999 Plan is ten years.
1999 Employee Stock Purchase Plan
In April 1999, the board of directors and stockholders adopted the 1999
Employee Stock Purchase Plan (the "Plan"), which became effective immediately
prior to the effective date of the Company's initial public offering. The Plan
reserved 1,000,000 shares of Common Stock for issuance thereunder. On each May 1
beginning in 2000, the aggregate number of shares reserved for issuance under
the Plan will be increased automatically to 1,000,000 shares. Employees
generally will be eligible to participate in the Plan if they are employed by
the Company for more than 20 hours per week and more than five months in a
calendar year and are not (and would not become as a result of being granted an
option under the Plan) 5% stockholders of the Company. Under the Plan, eligible
employees may select a rate of payroll deduction up to 15% of their W-2 cash
compensation subject to certain maximum purchase limitations. The first Offering
Period is expected to begin on the first business day on which price quotations
for the Company's common stock are available on The Nasdaq National Market.
Depending on the effective date, the first Purchase Period may be more or less
than six months long. Offering Periods thereafter will begin on May 1 and
November 1. Purchases will occur on April 30 and October 31, or the last day of
trading prior to these dates. The price at which the common stock is purchased
under the Plan is 85% of the lesser of the fair market value of the Company's
Common Stock on the first day of the applicable offering period or on the last
day of that purchase period.
The following summarizes stock option activity under the stock option plans
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
OPTIONS -----------------------------
AVAILABLE WEIGHTED
FOR OUTSTANDING AVERAGE
GRANT SHARES EXERCISE PRICE
--------- ----------- --------------
<S> <C> <C> <C>
Shares authorized.................................. 33,260 -- $ --
Options granted below fair value................. (7,164) 7,164 .03
Options exercised................................ -- (4,800) .03
Options canceled................................. -- -- --
------- -------
Balance at March 31, 1998.......................... 26,096 2,364 .03
------- -------
Options granted below fair value................. (15,836) 15,836 .77
Options exercised................................ -- (11,392) .36
Options canceled................................. 904 (904) .11
Unvested shares repurchased...................... 286 -- .03
------- -------
Balance at March 31, 1999.......................... 11,450 5,904 $1.36
======= =======
</TABLE>
F-20
<PAGE> 90
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The minimum value of options granted from inception through March 31, 1998
and year ended March 31, 1999 was $.01 and $.48, respectively.
The following table summarizes the information about stock options
outstanding and exercisable at March 31, 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND
-------------------------------------- EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED NUMBER WEIGHTED
REMAINING AVERAGE VESTED AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE AND EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .03 - .13 458 9.20 years $ .04 62 $.03
.$33.......... 1,560 9.57 years $ .33 -- $ --
$ .55 - .80 2,666 9.98 years $ .78 26 $.80
$3.25 - 5.00 1,220 10.20 years $4.44 -- $ --
----- --
5,904 9.86 years $1.36 88 $.25
===== ==
</TABLE>
Fair Value Disclosures
The Company applies the measurement principles of APB No. 25 in accounting
for its stock option plan. Had compensation expense for options granted for the
period ended March 31, 1998 and the year ended March 31, 1999 been determined
based on the fair value at the grant dates as prescribed by SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
NOVEMBER 7, 1997
(INCEPTION) THROUGH YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- --------------
<S> <C> <C>
Net loss:
As reported............................... $(1,159) $(11,701)
======= ========
Pro forma................................. $(1,159) $(12,265)
======= ========
Net loss per share:
As reported............................... $ (.10) $ (.89)
======= ========
Pro forma................................. $ (.10) $ (.93)
======= ========
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed by SFAS
No. 123 using the following assumptions:
<TABLE>
<CAPTION>
NOVEMBER 7, 1997
(INCEPTION) THROUGH YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- --------------
<S> <C> <C>
Risk-free interest rates....................... 5.52% 5.26%
Expected lives (in years)...................... 5 5
Dividend yield................................. 0% 0%
Expected volatility............................ 0% 0%
</TABLE>
F-21
<PAGE> 91
SCIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because the determination of fair value of all options granted after such
time as the Company becomes a public entity will include an expected volatility
factor in addition to the factors described in the preceding paragraph, the
above results may not be representative of future periods.
Unearned Compensation
In connection with certain stock option grants from inception through March
31, 1998 and the year ended March 31, 1999, the Company recognized unearned
compensation totaling $1,599,000 and $33,366,000, respectively, which is being
amortized over the vesting periods, generally four years, of the related
options. During the period from inception through March 31, 1999, the weighted
average exercise price of 21,810,000 stock options was $.55 and the weighted
average fair value was $2.16. Amortization expense recognized from inception
through March 31, 1998 and the year ended March 31, 1999 totaled approximately
$64,000 and $7,679,000, respectively. During the period from April 1, 1999
through April 22, 1999, the Company granted options to purchase an aggregate of
671,000 shares of Common Stock at an exercise price of $6 per share, the
estimated fair value of Common Stock.
F-22
<PAGE> 92
[LOGO]
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 61,001
NASD fee.................................................... 25,000
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving...................................... 125,000
Legal fees and expenses of the Company...................... 125,000
Accounting fees and expenses................................ 75,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 151,499
--------
Total............................................. $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article VII of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible indemnification of
employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Amended and Restated Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision in the Amended
and Restated Certificate of Incorporation does not eliminate the directors'
fiduciary duty, and in appropriate circumstances equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a form
of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers and
directors with further indemnification to the maximum extent permitted by the
Delaware General Corporation Law. The Registrant maintains liability insurance
for its directors and officers. Reference is also made to Section 7 of the
underwriting agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities, and Section 1.10 of
the Amended and Restated Investor Rights Agreement contained in Exhibit 4.1
hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.
II-1
<PAGE> 94
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since November 7, 1997 (inception), we have issued and sold the following
unregistered securities (which numbers reflect two-for-one stock splits effected
in May 1998 and December 1999):
1. In December 1997, we issued and sold an aggregate of 17,066,664 shares
of our common stock to Eric Greenberg, our founder, for aggregate
consideration of $427 pursuant to a Restricted Stock Purchase Agreement.
2. We granted stock options to purchase 23,819,600 shares of our common
stock at exercise prices ranging from $.03 to $5.00 per share to
employees, consultants, directors and other service providers pursuant
to our 1997 Stock Plan.
3. On December 11, 1997 and May 11, 1998, we issued and sold an aggregate
of 25,133,336 shares of our Series A Preferred Stock for an aggregate
purchase price of approximately $6,225,000 to a group of investors
pursuant to a stock purchase agreement.
4. On March 5, 1998, we issued a warrant to purchase 160,000 shares of our
common stock with an exercise price of $.05 per share to Ramsey/Beirne
Associates, Inc. The warrant was subsequently exercised and we issued
160,000 shares thereunder.
5. On May 8, 1998, we issued a warrant to purchase 50,000 shares of our
common stock with an exercise price of $.13 per share to Jerry
Michalski. The warrant was subsequently exercised and we issued 50,000
shares thereunder.
6. On June 8, 1998, we issued and sold an aggregate of 4,480,954 shares of
our Series B Preferred Stock for an aggregate purchase price of
approximately $14,227,029 to a group of investors pursuant to a stock
purchase agreement.
7. On January 28, 1999, we issued a warrant to purchase 15,750 shares of
our common stock with an exercise price of $.375 per share to
Ramsey/Beirne Associates, Inc. The warrant was subsequently exercised
and we issued 15,750 shares thereunder.
8. On February 16, 1999, we issued and sold an aggregate of 2,101,298
shares of our Series C Preferred Stock for an aggregate purchase price
of approximately $11,399,542 to a group of investors pursuant to a stock
purchase agreement.
The issuances described in Items 15(a)(2) were deemed exempt from
registration under the Act in reliance upon Rule 701 promulgated under the Act.
The issuances of the securities described in Items 15(a)(1) and 15(a)(3) through
15(a)(8) were deemed to be exempt from registration under the Act in reliance on
Section 4(2) of such Act as transactions by an issuer not involving any public
offering. In addition, the recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with the Registrant, to information about us.
II-2
<PAGE> 95
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of underwriting agreement.
2.1* Agreement and Plan of Merger, dated May 5, 1999, for the
reincorporation of Scient Corporation, a California
corporation, into Scient Corporation, a Delaware
corporation.
3.1** Amended and Restated Certificate of Incorporation of Scient.
3.2*** Amended and Restated Bylaws of Scient.
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.
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to Scient.
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 November 15, 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 June 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.
10.13* 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.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants (see page S-1).
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to Scient. Reference is made to
Exhibit 5.1.
24.1 Power of Attorney (contained on signature page on page
II-5).
</TABLE>
II-3
<PAGE> 96
- -------------------------
(1) Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-74731).
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-1 filed by the Registrant (Reg. No. 333-74731).
(3) Incorporated by reference to Exhibit 3.3 to the Registration Statement on
Form S-1 filed by the Registrant (Reg. No. 333-74731).
+ To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuations and Qualifying accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the Bylaws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the underwriting agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 97
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
FRANCISCO, STATE OF CALIFORNIA, ON THIS 22ND DAY OF DECEMBER, 1999.
SCIENT CORPORATION
By: /s/ ROBERT M. HOWE
------------------------------------
Robert M. Howe
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Robert M. Howe and William H. Kurtz, and each of them, his true and
lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, or any related registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ROBERT M. HOWE President, Chief Executive December 22, 1999
- ----------------------------------------------------- Officer and Director
Robert M. Howe (Principal Executive
Officer)
/s/ ERIC GREENBERG Chairman December 22, 1999
- -----------------------------------------------------
Eric Greenberg
/s/ WILLIAM H. KURTZ Chief Financial Officer, December 22, 1999
- ----------------------------------------------------- Executive Vice President
William H. Kurtz and Secretary (Principal
Financial and Accounting
Officer)
/s/ DAVID M. BEIRNE Director December 22, 1999
- -----------------------------------------------------
David M. Beirne
/s/ FREDERICK W. GLUCK Director December 22, 1999
- -----------------------------------------------------
Frederick W. Gluck
</TABLE>
II-5
<PAGE> 98
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ DOUGLAS LEONE Director December 22, 1999
- -----------------------------------------------------
Douglas Leone
/s/ KENICHI OHMAE Director December 22, 1999
- -----------------------------------------------------
Kenichi Ohmae
</TABLE>
II-6
<PAGE> 99
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1
("Form S-1") of our reports dated April 26, 1999 relating to the financial
statements and financial statement schedule of Scient Corporation, which appear
in such Form S-1. We also consent to the reference to us under the heading
"Experts" in such Form S-1.
/s/ PricewaterhouseCoopers LLP
San Jose, California
December 22, 1999
S-1
<PAGE> 100
SCHEDULE II
SCIENT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS BALANCE AT CHARGED TO COSTS BALANCE AT
YEAR ENDED MARCH 31, BEGINNING OF PERIOD AND EXPENSES DEDUCTIONS-WRITE-OFFS END OF PERIOD
-------------------- -------------------- ---------------- --------------------- -------------
<S> <C> <C> <C> <C>
1998.................... $-- $ -- $-- $ --
1999.................... $-- $200 $-- $200
</TABLE>
S-2
<PAGE> 101
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of underwriting agreement.
2.1* Agreement and Plan of Merger, dated May 5, 1999, for the
reincorporation of Scient Corporation, a California
corporation, into Scient Corporation, a Delaware
corporation.
3.1** Amended and Restated Certificate of Incorporation of Scient.
3.2*** Amended and Restated Bylaws of Scient.
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.
5.1+ Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to Scient.
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 November 15, 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 June 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.
10.13* 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.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants (see page S-1).
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to Scient. Reference is made to
Exhibit 5.1.
24.1 Power of Attorney (contained on signature page on page
II-5).
</TABLE>
- -------------------------
(1) Incorporated by reference to the similarly numbered exhibit to the
Registration Statement on Form S-1 filed by the Registrant (Reg. No.
333-74731).
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-1 filed by the Registrant (Reg. No. 333-74731).
(3) Incorporated by reference to Exhibit 3.3 to the Registration Statement on
Form S-1 filed by the Registrant (Reg. No. 333-74731).
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
______________ SHARES
SCIENT CORPORATION
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
_____________, 1999
Morgan Stanley & Co. Incorporated
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Scient Corporation, a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule II
hereto (the "UNDERWRITERS"), and certain shareholders of the Company (the
"SELLING SHAREHOLDERS") named in Schedule I hereto severally propose to sell to
the several Underwriters, an aggregate of _______________ shares of the Common
Stock, $0.0001 par value per share, of the Company (the "FIRM SHARES"), of which
_____________ shares are to be issued and sold by the Company and _____________
shares are to be sold by the Selling Shareholders, each Selling Shareholder
selling the amount set forth opposite such Selling Shareholder's name in
Schedule I hereto.
The Company also proposes to issue and sell to the several
Underwriters not more than an additional ______________ shares of its Common
Stock, $0.0001 par value per share (the "ADDITIONAL SHARES") if and to the
extent that you, as Managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 3 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES". The
shares of Common Stock, $0.0001 par value per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK". The Company and the Selling Shareholders are
hereinafter sometimes collectively referred to as the "SELLERS."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement, including a prospectus, relating to
the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an
1
<PAGE> 3
abbreviated registration statement to register additional shares of Common Stock
pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION
Statement"), then any reference herein to the term "REGISTRATION STATEMENT"
shall be deemed to include such Rule 462 Registration Statement.
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect; and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain, any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder; and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use in the Registration Statement
or Prospectus.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims.
2
<PAGE> 4
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be sold
by the Selling Shareholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable.
(h) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or
to which any of the properties of the Company or any of its subsidiaries
is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not described or
filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not
3
<PAGE> 5
be an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with
any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license
or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or
failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(q) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(r) Except in each case as described in the Prospectus,
subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) except in the
ordinary course of business, the Company and its subsidiaries have not
incurred any material liability or obligation, direct or contingent;
(ii) the Company and its subsidiaries have not entered into any material
transaction not in the ordinary course of business; (iii) except for
repurchases of shares of its capital stock in connection with the
termination of employees, consultants or directors pursuant to the
Company's 1997 Stock Plan or restricted stock agreements, the Company
has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its
capital stock other than ordinary and customary dividends; and (iv)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its subsidiaries, taken as a
whole.
(s) The Company and its subsidiaries have good and marketable
title to all personal property owned by them which is material to the
business of the Company and
4
<PAGE> 6
its subsidiaries, free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not interfere in any
material respect with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere in any material
respect with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries, in each case except as
described in the Prospectus. The Company does not own any real property.
(t) The Company and its subsidiaries own, or possess adequate
licenses or other rights to use, or can acquire on reasonable terms, all
material patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them
(collectively, the "INTELLECTUAL PROPERTY"), and neither the Company nor
any of its subsidiaries has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
Intellectual Property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a material
adverse affect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company
or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers or
contractors that would have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(v) The Company and its subsidiaries, taken as a whole, are
insured by the insurers of recognized financial responsibility against
such losses and risks and in such amounts as are customary in the
businesses in which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied
for; and neither the Company nor any of its subsidiaries has any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole, except as described in the
Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, except to the extent that the failure to obtain such
certificates, authorizations and permits would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole,
and neither the Company nor any of its subsidiaries has received any
notice of proceedings relating to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would
5
<PAGE> 7
have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described the Prospectus.
(x) The Company and its subsidiaries together maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) The Company and its subsidiaries have implemented a program,
as described in the Prospectus, to analyze and address the risk that the
computer hardware and software used by them and each material supplier,
including financial service organizations, vendor or customer used or
serviced by them may be unable to recognize and properly execute
date-sensitive functions involving certain dates prior to and any dates
after December 31, 1999 (the "YEAR 2000 PROBLEM"), and the Company has
no reason to believe and does not believe that the Year 2000 Problem
will have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(z) To the Company's knowledge, no officer or director of the
Company is in breach or violation of any employment agreement,
non-competition agreement, confidentiality agreement, or other agreement
restricting the nature or scope of employment to which such officer or
director is a party, other than such breaches or violations which could
not reasonably be expected, individually or in the aggregate, to have a
material adverse effect on the Company and its subsidiaries, taken as
whole; to the Company's knowledge, the conduct of the Company's
business, as described in the Registration Statement and Prospectus,
will not result in a breach or violation of any such agreement, other
than such breaches or violations which could not reasonably be expected,
individually or in the aggregate, to have a material adverse effect on
the Company and its subsidiaries, taken as whole.
(aa) There are no outstanding options to acquire shares of
capital stock of the Company except as disclosed in the Registration
Statement and the Prospectus and except as have been granted under the
1997 Stock Plan since March 31, 1999.
2. Representations and Warranties of the Selling Shareholders.
(a) Each of the Selling Shareholders represents and warrants to
and agrees with each of the Underwriters that:
(i) This Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Shareholder.
(ii) The execution and delivery by such Selling
Shareholder of, and the performance by such Selling Shareholder
of its obligations under, this Agreement,
6
<PAGE> 8
the Custody Agreement signed by such Selling Shareholder and
____________, as Custodian, relating to the deposit of the
Shares to be sold by such Selling Shareholder (the "CUSTODY
AGREEMENT") and the Power of Attorney appointing certain
individuals as such Selling Shareholder's attorneys-in-fact to
the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the
"POWER OF ATTORNEY") will not contravene any provision of
applicable law, or the certificate of incorporation or by-laws
of such Selling Shareholder (if such Selling Shareholder is a
corporation), or any agreement or other instrument binding upon
such Selling Shareholder or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over such
Selling Shareholder, and no consent, approval, authorization or
order of, or qualification with, any governmental body or agency
is required for the performance by such Selling Shareholder of
its obligations under this Agreement or the Custody Agreement or
Power of Attorney of such Selling Shareholder, except such as
may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the
Shares.
(iii) Such Selling Shareholder has, and on the Closing
Date will have, valid title to the Shares to be sold by such
Selling Shareholder and the legal right and power, and all
authorization and approval required by law, to enter into this
Agreement, the Custody Agreement and the Power of Attorney and
to sell, transfer and deliver the Shares to be sold by such
Selling Shareholder.
(iv) The Shares to be sold by such Selling Shareholder
pursuant to this Agreement have been duly authorized and are
validly issued, fully paid and non-assessable.
(v) The Custody Agreement and the Power of Attorney have
been duly authorized, executed and delivered by such Selling
Shareholder and are valid and binding agreements of such Selling
Shareholder.
(vi) Delivery of the Shares to be sold by such Selling
Shareholder pursuant to this Agreement will pass title to such
Shares free and clear of any security interests, claims, liens,
equities and other encumbrances.
(b) In addition to the representations and warranties set forth in
Section 2(a) above, each of the Selling Shareholders that is an Insider
(as defined below) represents, warrants and agrees with each of the
Underwriters that (i) the Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Registration
Statement and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder
and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were
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made, not misleading, except that the representations and warranties set
forth in this paragraph 2(g) do not apply to statements or omissions in
the Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein. "Insider" shall mean
Eric Greenberg, Robert M. Howe, Stephen A. Mucchetti and William H.
Kurtz and individual Selling Shareholders that are selling shares that
are beneficially owned (within the meaning of Rule 13d-3 of the Exchange
Act) by Eric Greenberg, Robert M. Howe, Stephen A. Mucchetti and William
H. Kurtz.
3. Agreements to Sell and Purchase. Each Seller, severally and
not jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "PURCHASE
PRICE") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
sell to the Underwriters the Additional Shares, and the Underwriters shall have
a one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 5 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule II hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which
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<PAGE> 10
the Underwriters have been advised in writing, (C) issuances of shares of Common
Stock or options to purchase Common Stock pursuant to the Company's 1997 Stock
Plan, the 1999 Equity Incentive Plan, and the Directors Option Plan, and the
shares of Common Stock issuable upon exercise of any such options, (D) the
issuance by the Company of shares of Common Stock pursuant to the Company's 1999
Employee Stock Purchase Plan or (E) warrants issued in connection with loan or
leasing transactions or (F) transactions by any person other than the Company
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares. In addition,
each Selling Shareholder, agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 90 days after the date of the Prospectus, make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
4. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold
by each Seller shall be made to such Seller in Federal or other funds
immediately available in New York City against delivery of such Firm Shares for
the respective accounts of the several Underwriters at 10:00 a.m., New York City
time, on ____________, 1999, or at such other time on the same or such other
date, not later than _________, 1999, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "CLOSING
DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 3 or at such other time on the same or on such other
date, in any event not later than _______, 2000, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be
in definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations
of the Sellers to sell the Shares to the Underwriters and the several
obligations of the Underwriters to purchase
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<PAGE> 11
and pay for the Shares on the Closing Date are subject to the condition that the
Registration Statement shall have become effective not later than 2:00 p.m. (New
York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any of the Company's securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 6(a)(ii) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct in all material
respects as of the Closing Date and that the Company has complied in all
material respects with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or
before the Closing Date. The officer signing and delivering such
certificate may rely upon the best of his or her knowledge as to
proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, outside counsel for the Company, dated the Closing Date, to the
effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
State of Delaware, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in
good standing as a foreign corporation in California, Maryland,
New York, North Carolina and Texas [add states where company has
offices, if any others];
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(ii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iii) the shares of Common Stock outstanding prior to
the issuance of the Shares have been duly authorized and are
validly issued, non-assessable and, to such counsel's knowledge,
fully paid;
(iv) the Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this
Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights contained in the
Company's charter documents or any agreement filed as an exhibit
to the Registration Statement;
(v) this Agreement has been duly authorized, executed
and delivered by the Company;
(vi) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable
federal law, California law or Delaware corporate law or the
certificate of incorporation or by-laws of the Company or, to
such counsel's knowledge, any agreement filed as an exhibit to
the Registration Statement or other instrument binding upon the
Company that is filed as an exhibit to the Registration
Statement, or, to such counsel's knowledge, any judgment, order
or decree of any governmental body, agency or court having
jurisdiction over the Company, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or governmental agency is required for the
performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer
and sale of the Shares (as to which such counsel need not
opine);
(vii) the statements (A) in the Prospectus under the
captions "Management--Indemnification," "Management--Employment
Agreements and Change of Control Agreements,"
"Management--Employee Stock Plans," "Certain Transactions,"
"Description of Capital Stock" "Shares Eligible" and, to the
extent of the description of this Agreement, "Underwriters" and
(B) in the Registration Statement in Items 14 and 15, in each
case insofar as such statements constitute summaries of the
legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such
legal matters, documents and proceedings and fairly summarize
the matters referred to therein;
(viii) such counsel does not know of any legal or
governmental proceedings pending or threatened to which the
Company is a party or to which any of the properties of the
Company is subject that are required to be described in the
Registration Statement or the Prospectus and are not so
described or, to such counsel's knowledge, of any statutes,
regulations, or contracts or other documents that are required
to be described in the Registration Statement or the
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Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended; and
(x) such counsel (A) shall state that it believes that
the Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data included therein as to which such counsel need not express
any opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Registration Statement and the prospectus included
therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading and (C) has no
reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus at the
time the Registration Statement became effective or on the
Closing Date contained any untrue statement of a material fact
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of _________________, counsel for the Selling Shareholders,
dated the Closing Date, to the effect that:
(i) this Agreement has been duly authorized, executed
and delivered by or on behalf of each of the Selling
Shareholders;
(ii) the execution and delivery by each Selling
Shareholder of, and the performance by such Selling Shareholder
of its obligations under, this Agreement and the Custody
Agreement and Powers of Attorney of such Selling Shareholder
will not contravene any provision of applicable law, or the
certificate of incorporation or by-laws of such Selling
Shareholder (if such Selling Shareholder is a corporation), or,
to the best of such counsel's knowledge, any agreement or other
instrument binding upon such Selling Shareholder or, to the best
of such counsel's knowledge, any judgment, order or decree of
any governmental body, agency or court having jurisdiction over
such Selling Shareholder, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
such Selling Shareholder of its obligations under this Agreement
or the Custody Agreement or Power of Attorney of such Selling
Shareholder, except such as may be required
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<PAGE> 14
by the securities or Blue Sky laws of the various states in
connection with offer and sale of the Shares;
(iii) each of the Selling Shareholders has valid title
to the Shares to be sold by such Selling Shareholder and the
legal right and power, and all authorization and approval
required by law, to enter into this Agreement and the Custody
Agreement and Power of Attorney of such Selling Shareholder and
to sell, transfer and deliver the Shares to be sold by such
Selling Shareholder;
(iv) the Custody Agreement and the Power of Attorney of
each Selling Shareholder have been duly authorized, executed and
delivered by such Selling Shareholder and are valid and binding
agreements of such Selling Shareholder;
(v) delivery of the Shares to be sold by each Selling
Shareholder pursuant to this Agreement will pass title to such
Shares free and clear of any security interests, claims, liens,
equities and other encumbrances; and
(vi) such counsel (A) shall state that it believes that
the Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data included therein as to which such counsel need not express
any opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Registration Statement and the prospectus included
therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading and (C) has no
reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus at the
time the Registration Statement became effective or on the
Closing Date contained any untrue statement of a material fact
or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading.
(e) The Underwriters shall have received on the Closing Date an
opinion of Gray Cary Ware & Freidenrich LLP, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to
in Sections 6(c)(iv), 6(c)(v), 6(c)(vii) (but only as to the statements
in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 6(c)(x) above.
The opinions of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP and _____________ described in Sections 6(c) and 6(d) above (and
any opinions of counsel for any Selling Shareholder referred to in the
immediately preceding paragraph) shall be rendered to the Underwriters at the
request of the Company or one or more of the Selling Shareholders, as the case
may be, and shall so state therein. With respect to Section 6(c)(x) above,
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP and Gray Cary
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Ware & Freidenrich LLP and with respect to Section 6(d)(vi) above, ____________,
may state that their opinion and belief are based upon their participation in
the preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof, but
are without independent check or verification, except as specified. With respect
to Section 6(d) above, _________ may rely upon an opinion or opinions of counsel
for any Selling Shareholders and, with respect to factual matters and to the
extent such counsel deems appropriate, upon the representations of each Selling
Shareholder contained herein and in the Custody Agreement and Power of Attorney
of such Selling Shareholder and in other documents and instruments; provided
that (A) each such counsel for the Selling Shareholders is satisfactory to your
counsel, (B) a copy of each opinion so relied upon is delivered to you and is in
form and substance satisfactory to your counsel, (C) copies of such Custody
Agreements and Powers of Attorney and of any such other documents and
instruments shall be delivered to you and shall be in form and substance
satisfactory to your counsel and (D) _________ shall state in their opinion that
they are justified in relying on each such other opinion.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from PricewaterhouseCoopers LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the Additional
Shares.
7. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, _____ signed copies of
the Registration Statement (including exhibits thereto) and for delivery
to each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in Section 7(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
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(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the
Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending ________, 2000 that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
8. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel, the Company's accountants and counsel for the
Selling Shareholders in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and
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<PAGE> 17
disbursements of counsel to the Underwriters incurred in connection with the
review and qualification of the offering of the Shares by the National
Association of Securities Dealers, Inc., (v) all fees and expenses in connection
with the preparation and filing of the registration statement on Form 8-A
relating to the Common Stock and all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing certificates
representing the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the Company relating
to investor presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the road
show, and (ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made
in this Section. It is understood, however, that except as provided in this
Section, Section 9 entitled "Indemnity and Contribution", and the last paragraph
of Section 11 below, the Underwriters will pay all of their costs and expenses,
including fees and disbursements of their counsel, stock transfer taxes payable
on resale of any of the Shares by them and any advertising expenses connected
with any offers they may make.
The provisions of this Section shall not supersede or otherwise
affect any agreement that the Sellers may otherwise have for the allocation of
such expenses among themselves.
9. Indemnity and Contribution. (a) The Company and the Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter, or any person controlling such
Underwriter, from whom the person asserting any such losses, claims, damages or
liabilities purchased Shares, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities; provided, further,
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however, that the foregoing exception shall not apply if the Company has not
fulfilled its obligations under Section 7(a) hereto. Notwithstanding anything
herein to the contrary, the Underwriters agree that they shall not seek
indemnification under this Section 9(a) from any Selling Shareholder unless the
Underwriters shall first have sought indemnity from the Company under Section
9(a) and the Company has not agreed to satisfy such request for indemnification
in full within 30 days; provided, however, that the Underwriters shall not be
required to effect such initial demand upon the Company and wait such 30-day
period if it would prejudice their right to indemnification from any of the
Selling Shareholders; and provided, further, that the liability of each Selling
Shareholder under this Section 9(a) shall be limited to an amount equal to the
net proceeds to such Selling Shareholder from the sale of the Shares sold by
such Selling Shareholder under this Agreement.
(b) Each Selling Shareholder (other than the Selling
Shareholders that are Insiders) agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls
the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any amendment thereof, any
preliminary prospectus or the Prospectus (as amended or supplemented if
the Company shall have furnished any amendments or supplements thereto),
or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to
information relating to such Selling Shareholder furnished in writing by
or on behalf of such Selling Shareholder expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or
any amendments or supplements thereto; and provided, further, that the
liability of such Selling Shareholder under this Section 9(b) shall be
limited to an amount equal to the net proceeds to such Selling
Shareholder from the sale of the Shares sold by such Selling Shareholder
under this Agreement.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Shareholders, the
directors of the Company, the officers of the Company who sign the
Registration Statement and each person, if any, who controls the Company
or any Selling Shareholder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim)
caused by any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented
if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to
information relating to such Underwriter furnished to the Company in
writing by such
17
<PAGE> 19
Underwriter through you expressly for use in the Registration Statement,
any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c),
such person (the "INDEMNIFIED PARTY") shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the indemnifying party, upon request of the indemnified
party, shall retain counsel reasonably satisfactory to the indemnified
party to represent the indemnified party and any others the indemnifying
party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of
such counsel or (ii) the named parties to any such proceeding (including
any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests
between them. It is understood that the indemnifying party shall not, in
respect of the legal expenses of any indemnified party in connection
with any proceeding or related proceedings in the same jurisdiction, be
liable for (i) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if
any, who control any Underwriter within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act, (ii) the fees
and expenses of more than one separate firm (in addition to any local
counsel) for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either such Section and (iii) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all Selling Shareholders and all persons, if any, who
control any Selling Shareholder within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they
are incurred. In the case of any such separate firm for the Underwriters
and such control persons of any Underwriters, such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated. In the case
of any such separate firm for the Company, and such directors, officers
and control persons of the Company, such firm shall be designated in
writing by the Company. In the case of any such separate firm for the
Selling Shareholders and such control persons of any Selling
Shareholders, such firm shall be designated in writing by the persons
named as attorneys-in-fact for the Selling Shareholders under the Powers
of Attorney. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the
18
<PAGE> 20
indemnified party in accordance with such request prior to the date of
such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder
by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section
9(a), 9(b) or 9(c) is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph,
in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received
by the indemnifying party or parties on the one hand and the indemnified
party or parties on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause 9(e)(i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 9(e)(i) above but also
the relative fault of the indemnifying party or parties on the one hand
and of the indemnified party or parties on the other hand in connection
with the statements or omissions that resulted in such losses, claims,
damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting
discounts and commissions received by the Underwriters, in each case as
set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Shares. The relative fault of the
Sellers on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 9 are several in proportion to the
respective number of Shares they have purchased hereunder, and not
joint.
(f) The Sellers and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to
in Section 9(e). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 9, no Underwriter shall be required to contribute any
amount in excess of the amount by
19
<PAGE> 21
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount
of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section
9 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of
the Company and the Selling Shareholders contained in this Agreement
shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter, any
Selling Shareholder or any person controlling any Selling Shareholder,
or the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
10. Termination. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date, and
the aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule II bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to
20
<PAGE> 22
this Section 11 by an amount in excess of one-ninth of such number of Shares
without the written consent of such Underwriter. If, on the Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the
aggregate number of Firm Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you, the Company and the Selling Shareholders for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholders. In any such
case either you or the relevant Sellers shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and in the Prospectus or
in any other documents or arrangements may be effected. If, on the Option
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased, the non-defaulting Underwriters shall have
the option to (i) terminate their obligation hereunder to purchase Additional
Shares or (ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of any Seller to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
14. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
21
<PAGE> 23
Very truly yours,
SCIENT CORPORATION
By:
----------------------------------------
Name:
Title:
The Selling Shareholders named in Schedule I
hereto, acting severally
By:
----------------------------------------
Name:
Title: Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Acting severally on behalf of themselves and
the several Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:
-----------------------------------
Name:
Title:
22
<PAGE> 24
SCHEDULE I
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDER TO BE SOLD
[NAMES OF SELLING SHAREHOLDERS]
------------------------
Total........
========================
<PAGE> 25
SCHEDULE II
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
[NAMES OF OTHER UNDERWRITERS]
------------------------
Total........
========================
<PAGE> 26
EXHIBIT A
FORM OF LOCK-UP LETTER
December 16, 1999
Morgan Stanley & Co. Incorporated
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
[Lehman Brothers Inc.]
[Merrill Lynch, Pierce, Fenner & Smith Incorporated]
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated ("MORGAN STANLEY") proposes to enter into an Underwriting Agreement
(the "UNDERWRITING AGREEMENT") with Scient Corporation, a Delaware corporation
(the "COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by
the several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of
shares (the "SHARES") of the Common Stock, par value $0.0001 per share, of the
Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 90 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written
<PAGE> 27
consent of Morgan Stanley on behalf of the Underwriters, it will not, during the
period commencing on the date hereof and ending 90 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a
number of factors, including market conditions. Any Public Offering will only be
made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
---------------------------------------------
(Name)
---------------------------------------------
(Address)
<PAGE> 1
EXHIBIT 10.3
SCIENT CORPORATION
1999 EQUITY INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE NOVEMBER 15, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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................................................2
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............................................................3
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..................................................................4
5.4 Exercisability and Term.........................................................4
5.5 Effect of Change in Control.....................................................4
5.6 Modification or Assumption of Options...........................................4
5.7 Buyout Provisions...............................................................5
Article 6. Payment for Option Shares........................................................5
6.1 General Rule....................................................................5
6.2 Surrender of Stock..............................................................5
6.3 Exercise/Sale...................................................................5
6.4 Exercise/Pledge.................................................................5
6.5 Promissory Note.................................................................6
6.6 Other Forms of Payment..........................................................6
Article 7. Automatic Option Grants to Outside Directors.....................................6
7.1 Quarterly Grants................................................................6
7.2 Exercise Price..................................................................6
7.3 Term............................................................................6
7.4 Affiliates of Outside Directors.................................................6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Article 8. Stock Appreciation Rights........................................................6
8.1 SAR Agreement...................................................................6
8.2 Number of Shares................................................................7
8.3 Exercise Price..................................................................7
8.4 Exercisability and Term.........................................................7
8.5 Effect of Change in Control.....................................................7
8.6 Exercise of SARs................................................................7
8.7 Modification or Assumption of SARs..............................................8
Article 9. Restricted Shares................................................................8
9.1 Restricted Stock Agreement......................................................8
9.2 Payment for Awards..............................................................8
9.3 Vesting Conditions..............................................................8
9.4 Voting and Dividend Rights......................................................8
Article 10. Stock Units.....................................................................9
10.1 Stock Unit Agreement...........................................................9
10.2 Payment for Awards.............................................................9
10.3 Vesting Conditions.............................................................9
10.4 Voting and Dividend Rights.....................................................9
10.5 Form and Time of Settlement of Stock Units.....................................9
10.6 Death of Recipient............................................................10
10.7 Creditors' Rights.............................................................10
Article 11. Protection Against Dilution....................................................10
11.1 Adjustments...................................................................10
11.2 Dissolution or Liquidation....................................................11
11.3 Reorganizations...............................................................11
ARTICLE 12. DEFERRAL OF AWARDS.............................................................11
ARTICLE 13. AWARDS UNDER OTHER PLANS.......................................................12
Article 14. Payment of Director's Fees in Securities.......................................12
14.1 Effective Date................................................................12
14.2 Elections to Receive NSOs, Restricted Shares or Stock Units...................12
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.......................................................13
Article 16. Withholding Taxes..............................................................13
16.1 General.......................................................................13
16.2 Share Withholding.............................................................13
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
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....................................................................14
18.3 Reduction of Payments.........................................................14
18.4 Overpayments and Underpayments................................................15
18.5 Related Corporations..........................................................15
Article 19. Definitions....................................................................15
Article 20. Execution......................................................................19
</TABLE>
iii
<PAGE> 5
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
<PAGE> 6
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) 6,400,000(1) 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) 10 million.(2)
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.
- --------
1 Reflects increase approved by the Board on October 13, 1999, and two-for-one
stock split applicable to stockholders of record on November 15, 1999.
2 Reflects two-for-one stock split applicable to stockholders of record on
November 15, 1999.
2
<PAGE> 7
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.
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 two
million(3) 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 four million(4) 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.
- --------
(3) Reflects two-for-one stock split applicable to stockholders of record on
November 15, 1999.
(4) Reflects two-for-one stock split applicable to stockholders of record on
November 15, 1999.
3
<PAGE> 8
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 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:
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<PAGE> 9
(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.
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 5,000(5) 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.
- --------
(5) Reflects two-for-one stock split applicable to stockholders of record on
November 15, 1999.
5
<PAGE> 10
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.
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 two million(6)
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 four million(7) 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
- --------
(6) Reflects two-for-one stock split applicable to stockholders of record on
November 15, 1999.
(7) Reflects two-for-one stock split applicable to stockholders of record on
November 15, 1999.
6
<PAGE> 11
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 "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
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<PAGE> 12
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 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
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<PAGE> 13
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.
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.
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<PAGE> 14
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 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.
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<PAGE> 15
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 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
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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.
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.
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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.
ARTICLE 17. FUTURE OF THE PLAN.
17.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective as of November 15, 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 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).
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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 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
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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.
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
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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
(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.
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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.
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.
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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.
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.
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ARTICLE 20. EXECUTION.
To record the amendment and restatement of the Plan by the Board
effective November 15, 1999, the Company has caused its duly authorized officer
to execute this document in the name of the Company.
SCIENT CORPORATION
By:
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Title:
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