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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-93441
PROSPECTUS
2,700,000 Shares
[Scient Logo]
COMMON STOCK
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SCIENT CORPORATION IS OFFERING 1,850,000 SHARES OF ITS COMMON STOCK AND THE
SELLING STOCKHOLDERS ARE OFFERING 850,000 SHARES.
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OUR COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"SCNT." ON JANUARY 20, 2000, THE REPORTED LAST SALE PRICE OF OUR COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $89 3/8 PER SHARE.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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PRICE $88 A SHARE
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS SCIENT CORPORATION STOCKHOLDERS
-------- ------------- ------------------ ------------
Per Share.................. $88.00 $4.18 $83.82 $83.82
Total...................... $237,600,000 $11,286,000 $155,067,000 $71,247,000
Selling stockholders have granted the underwriters the right to purchase up to
an additional 405,000 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
January 26, 2000.
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MORGAN STANLEY DEAN WITTER
CHASE H&Q
LEHMAN BROTHERS
MERRILL LYNCH & CO.
THOMAS WEISEL PARTNERS LLC
January 20, 2000
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TABLE OF CONTENTS
PAGE
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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
PAGE
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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
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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.
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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
consolidated 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, First Union, 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;
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- 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.
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, Austin, 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.
RECENT DEVELOPMENTS
For the quarter ended December 31, 1999, our revenues were $42.7 million,
compared to revenues of $6.3 million for the quarter ended December 31, 1998.
Our net loss for the quarter ended December 31, 1999 was $4.0 million, or $.07
per share, compared to a net loss of $3.7 million, or $.28 per share, for the
quarter ended December 31, 1998.
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THE OFFERING
Common stock offered:
Shares offered by us.......... 1,850,000 shares
Shares offered by the selling
stockholders.................. 850,000 shares
Total........................... 2,700,000 shares
Common stock to be outstanding
after the offering.............. 72,104,204 shares
Over-allotment option granted by
selling stockholders............ 405,000 shares
Use of proceeds................. For general corporate purposes, including
working capital and international expansion.
See "Use of Proceeds."
Nasdaq National Market symbol... SCNT
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, and 1,089,056 shares of common stock available for
issuance under our 1999 Equity Incentive Plan as of September 30, 1999. 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)
NOVEMBER 7,
1997
(INCEPTION) YEAR SIX MONTHS ENDED
THROUGH ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1998 1999 1998 1999
---------------- --------- ------- --------
(UNAUDITED)
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
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 1,850,000 shares of common stock offered by us at an offering price of $88.00
per share, after deducting the underwriting discount and estimated offering
expenses. See "Use of Proceeds" and "Capitalization."
AS OF SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 49,986 $204,533
Long-term investments....................................... 22,160 22,160
Working capital............................................. 62,915 217,482
Total assets................................................ 112,290 266,857
Bank borrowings and capital lease obligations, long-term.... 2,028 2,028
Total stockholders' equity.................................. 89,572 244,139
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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 of our key
management or 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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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
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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
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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
as our business continues to expand 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% 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 a 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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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 not only by regulations applicable to businesses generally,
but also by 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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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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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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USE OF PROCEEDS
The net proceeds to Scient from the sale of the 1,850,000 shares of common
stock offered by us are estimated to be approximately $154.6 million, based on
the offering price of our common stock of $88.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses of
approximately $500,000 payable by Scient. 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.
COMMON STOCK PRICE
-------------------
HIGH LOW
------- ------
FISCAL YEAR ENDED MARCH 31, 2000
First Quarter (beginning May 14, 1999).................... $ 25.06 $15.13
Second Quarter............................................ 41.56 19.31
Third Quarter............................................. 100.50 33.47
Fourth Quarter (through January 20, 2000)................. 90.88 66.50
On January 20, 2000, the reported last sale price of our common stock on
the Nasdaq National Market was $89.38 per share, and on September 30, 1999,
there were approximately 269 holders of record of the common stock.
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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 1,850,000 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.
AS OF SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
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; 72,104 shares outstanding as adjusted(1)....... 7 7
Additional paid-in capital................................ 137,574 292,141
Unearned compensation..................................... (20,935) (20,935)
Accumulated deficit....................................... (27,074) (27,074)
-------- --------
Total stockholders' equity........................... 89,572 244,139
-------- --------
Total capitalization.............................. $ 91,600 $246,167
======== ========
- -------------------------
(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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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 1,850,000 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 $244.1 million or $3.40 per share.
This represents an immediate increase in net tangible book value of $2.13 per
share to existing stockholders and an immediate dilution in net tangible book
value of $84.60 per share to purchasers of common stock in this offering. The
following table illustrates the per share dilution:
Public offering price per share............................. $ 88.00
Net tangible book value per share at September 30, 1999... $ 1.27
Increase per share attributable to new investors.......... 2.13
-------
Net tangible book value per share after this offering....... 3.40
-------
Dilution per share to new investors......................... $ 84.60
=======
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, and
1,089,056 shares of common stock available for issuance under the 1999 Equity
Incentive Plan as of September 30, 1999. To the extent outstanding options are
exercised, or available shares are issued, there will be further dilution to new
investors.
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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.
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)
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
======= ======== ======= ========
AS OF MARCH 31, AS OF
--------------------- SEPTEMBER 30,
1998 1999 1999
--------- --------- -------------
(UNAUDITED)
(IN THOUSANDS)
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
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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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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 for a
minority stake 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 made
minority investments 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:
NOVEMBER 7, 1997 SIX MONTHS ENDED
(INCEPTION) SEPTEMBER 30,
THROUGH YEAR ENDED -------------------
MARCH 31, 1998 MARCH 31, 1999 1998 1999
---------------- -------------- ------- --------
(UNAUDITED)
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)%
======= ======== ======= ========
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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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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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
financial statements and related notes included elsewhere in this prospectus.
Our quarter operating results are not necessarily indicative of future results
of operations.
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THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
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
======= ======= ======= ======= ======= ========
AS A PERCENTAGE OF REVENUES
------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
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)
=== === === === === ===
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.
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
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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 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
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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
or after 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.
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
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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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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, First Union, 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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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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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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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, consisting of 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, Austin, 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 Methodology 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 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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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 methodology 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 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 assists 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 functional,
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 its eMagazine. Scient has been engaged to provide ongoing 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 distributor of advanced cash-management
machines that incorporate biometric face-recognition technologies. These
machines provide self-service check cashing, ATM, money order issuance, bill
payment and other financial services to individuals, and authenticate customers
using the biometric face recognition system to reduce fraud risk for InnoVentry
and enhance security for customers.
InnoVentry collaborated with Scient to design, develop and test its
cash-management machine platform and networking technologies. Scient evaluated
InnoVentry's needs and teamed with it to architect and engineer an integrated
system which employs Internet-based technologies, standards for voice
transmission over the Internet and software that recognizes facial patterns.
Scient helped InnoVentry architect and build a scalable infrastructure to
support additional functionality to meet market demands.
The InnoVentry cash-management machines were piloted in Fall 1999 and are
currently being rolled out in three markets. Scient is assisting InnoVentry with
ongoing innovation and development of the overall system as InnoVentry prepares
to deploy these cash-management machines in additional markets.
THE SCIENT APPROACH METHODOLOGY
The Scient Approach methodology is a well-defined concept 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 methodology itself. The methodology is results-based and
focuses on delivering client-specific economic results that Scient calls the New
Bottom Line results. 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:
FINANCIAL SERVICES EMARKETS ENTERPRISE
------------------ -------- ----------
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
Miadora
PlanetRx.com
PointServe
Sales.com
sephora.com
sixdegrees
WineShopper.com
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. 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 for a
minority stake 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 made
minority investments 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:
- - Spirit - Growth
- - Community - Innovation
- - Excellence - Urgency
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 under a lease that 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 square feet 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 this facility to a subtenant. The lease and corresponding sublease
expire in February 2000. Periodically, we enter short term leases in certain
cities. We currently have offices in Boston, Massachusetts, Austin, Texas,
London and Singapore that have lease obligations under one year.
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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:
NAME AGE POSITION
---- --- --------
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, Assistant Secretary
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
- -------------------------
(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,
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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.
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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 September 1999, and served as Vice President and
General Manager, eMarkets, from July 1998 to September 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
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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 eMarkets 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
and Partner, 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.
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James McKee has served as Vice President and General Manager, Sales,
Recruiting and Delivery since September 1999 and served as Vice President, Sales
from February 1999 to September 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 Wharton School of 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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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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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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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
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES
------------------ UNDERLYING ALL OTHER
SALARY BONUS OPTIONS(1) COMPENSATION(2)
-------- ------- ------------ ---------------
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
- -------------------------
(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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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.
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%
---- ---------- ----------------- --------- ---------- ---------- -----------
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
- -------------------------
(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
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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.
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
----------- -------- -------- ---------- -------- -----------
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
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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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
also became 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
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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.
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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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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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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.
SHARES OF SERIES A
PREFERRED STOCK
------------------
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
=========
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.
SHARES OF SERIES A
PREFERRED STOCK
------------------
Frederick W. Gluck.......................................... 200,000
Morton H. Meyerson.......................................... 750,000
---------
Total Shares.............................................. 950,000
=========
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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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.
SHARES OF SERIES B
PREFERRED STOCK
------------------
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
=========
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.
SHARES OF SERIES C
PREFERRED STOCK
------------------
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
=========
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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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."
In November 1999, a group of Scient colleagues, including all of Scient's
executive officers, and one non-employee director of Scient established a
private investment fund. The fund, which is separate and distinct from Scient
and Scient Capital, may make independent investments in Scient clients, some of
which Scient Capital may also invest in.
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 or has a right to nominate a
member to the board of directors of PlanetRx.com, living.com, E-Physician, eBay,
WebVan and one other client of Scient. During the year ended March 31, 1999 and
the six months ended September 30, 1999, we recognized revenue of $3.8 million
and $1.4 million, respectively, from these companies in connection with our
provision of eBusiness services to them.
Sequoia is also a significant shareholder of or has a right to nominate a
member to the board of directors of BenefitPoint, PlanetRx.com, sales.com,
Miadora and WebVan. During the year ended March 31, 1999 and the six months
ended September 30, 1999, we recognized revenue of $4.4 million and $5.8
million, respectively, from these companies in connection with our provision of
eBusiness services to them.
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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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 72,436,582 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.
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
- ----------------------------------------------- ---------- ------- --------- ---------- -------
Eric Greenberg(1).............................. 11,789,064 16.7% 400,000 11,389,064 15.7%
Entities associated with Benchmark
Capital(2)..................................... 10,523,466 14.9 -- 10,523,466 14.5
David M. Beirne(3)............................. 10,533,466 14.9 -- 10,533,466 14.5
Entities associated with Sequoia Capital(4).... 10,253,902 14.5 -- 10,253,902 14.2
Douglas Leone(5)............................... 10,305,882 14.6 -- 10,305,882 14.2
Robert M. Howe(6).............................. 6,874,000 9.7 200,000 6,674,000 9.2
Stephen A. Mucchetti(7)........................ 1,250,000 1.8 75,000 1,175,000 1.6
William H. Kurtz(8)............................ 1,039,264 1.5 30,000 1,009,264 1.4
Frederick W. Gluck(9).......................... 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(10).............................. 5,000 * -- 5,000 *
All directors and executive officers as a group
(8 persons)(11).............................. 42,810,680 60.2 740,000 42,070,680 57.7
- -------------------------
* Represents ownership of less than one percent.
(1) If the underwriters' over-allotment option is exercised, the underwriters
may purchase an additional 300,000 shares from Mr. Greenberg.
(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
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therein. The address for Benchmark Capital is 2480 Sand Hill Road, Suite
200, Menlo Park, CA 94025.
(3) 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.
(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. The address for Sequoia Capital is 3000
Sand Hill Road, Building 4, Suite 280, Menlo Park, CA 94025.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Includes 219,992 shares held by the Gluck 1997 Irrevocable Trust and
options immediately exercisable for 10,000 shares. If the underwriters'
over-allotment option is exercised, the underwriters may purchase up to an
additional 105,000 shares from Mr. Gluck.
(10) Consists entirely of immediately exercisable options.
(11) Includes options immediately exercisable for 535,000 shares.
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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 72,436,582 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
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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 45,122,252 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 propose 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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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 72,436,582 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:
APPROXIMATE SHARES
DATE ELIGIBLE FOR FUTURE SALE COMMENT
---- ------------------------ -------
On Effectiveness............. 27,676,044 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
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 724,366 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. 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.
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
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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 45,122,252
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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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 2,700,000
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:
NUMBER OF
NAME SHARES
---- ---------
Morgan Stanley & Co. Incorporated........................... 1,012,000
Hambrecht & Quist LLC....................................... 297,000
Lehman Brothers Inc......................................... 297,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................. 297,000
Thomas Weisel Partners LLC.................................. 297,000
CIBC World Markets Corp. ................................... 50,000
Dain Rauscher Wessels, a division of Dain Rauscher.......... 50,000
Deutsche Bank Securities Inc................................ 50,000
First Union Securities, Inc. ............................... 50,000
WR Hambrecht + Co........................................... 50,000
Legg Mason Wood Walker, Incorporated........................ 50,000
PaineWebber Incorporated.................................... 50,000
Prudential Securities Incorporated.......................... 50,000
Soundview Financial Group, Inc. ............................ 50,000
Warburg Dillon Read LLC..................................... 50,000
---------
Total............................................. 2,700,000
=========
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 $2.72 a share under the public offering price. Any underwriters
may allow, and such dealers may reallow, a concession not in excess of $.10 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, Eric Greenberg and Frederick W.
Gluck have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 300,000 additional shares and
105,000 additional shares, respectively, 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
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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 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.
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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.
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.
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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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SCIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
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
F-1
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
72
SCIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, MARCH 31, SEPTEMBER 30,
1998 1999 1999
--------- --------- -------------
(UNAUDITED)
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 5,876 25,882
Prepaid expenses.................................. 137 811 4,010
Other............................................. -- 318 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........... 1 3 7
Additional paid-in capital........................ 6,497 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
======= ======== ========
See notes to consolidated financial statements.
F-3
73
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOVEMBER 7, 1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1998 1999 1998 1999
----------------- -------------------- ------- --------
(UNAUDITED)
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
======= ======== ======= ========
See notes to consolidated financial statements.
F-4
74
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
--------------- --------------- PAID-IN SUBSCRIPTION UNEARNED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT
------ ------ ------ ------ ---------- ------------ ------------ -----------
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 1 119 -- -- --
Net loss..................... -- -- -- -- -- -- -- (1,159)
------ -- ------ -- -------- ----- -------- --------
Balance at March 31, 1998.... 5,333 1 21,868 1 6,497 -- (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 2 4,076 -- -- --
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)
====== == ====== == ======== ===== ======== ========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
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
========
See notes to consolidated financial statements.
F-5
75
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NOVEMBER 7,
1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, ------------------
1998 1999 1998 1999
----------- ---------- ------- --------
(UNAUDITED)
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
======= ======== ======= ========
See notes to consolidated financial statements.
F-6
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
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):
MARCH 31,
1999
---------
Cash........................................................ $ 2,251
Commercial paper............................................ 5,956
Government securities....................................... 10,582
Foreign securities.......................................... 3,176
Term notes.................................................. 6,164
-------
$28,129
=======
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
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:
NOVEMBER 7,
1997
(INCEPTION)
THROUGH YEAR ENDED
MARCH 31, MARCH 31,
1998 1999
----------- ----------
Company A............................................... 60% 7%
Company B............................................... 35 3
Company C............................................... -- 13
Company D............................................... -- 11
Company E............................................... -- 11
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
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):
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)
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)
======= ======== ======== ========
F-10
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):
NOVEMBER 7,
1997
(INCEPTION)
THROUGH YEAR ENDED
MARCH 31, MARCH 31,
1998 1999
----------- ----------
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
====== ======
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
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
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
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
==== ======
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.
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
Accrued expenses:
Accrued compensation and benefits....................... $ 32 $2,554
Professional expenses................................... -- 735
Purchased software...................................... -- 750
Other................................................... -- 593
---- ------
$ 32 $4,632
==== ======
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
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:
MARCH 31, MARCH 31,
1998 1999
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards........................ $ 439 $1,877
Accruals and reserves................................... 7 123
----- ------
446 2,000
Less valuation allowance................................ (446) (2,000)
----- ------
$ -- $ --
===== ======
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
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:
YEAR ENDED CAPITAL OPERATING
MARCH 31, LEASES LEASES
---------- ------- ---------
(IN THOUSANDS)
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
======
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
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):
LIQUIDATION PROCEEDS
SHARES AMOUNT NET OF
------------------------ LIQUIDATION PER ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT SHARE COSTS
------ ---------- ----------- ----------- ----------- --------
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
====== ===== ======= =======
F-15
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
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
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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):
MARCH 31,
1999
---------
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
=======
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
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
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 2,000,000 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 2,000,000 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):
OPTIONS OUTSTANDING
OPTIONS -----------------------------
AVAILABLE WEIGHTED
FOR OUTSTANDING AVERAGE
GRANT SHARES EXERCISE PRICE
--------- ----------- --------------
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
======= =======
F-20
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):
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
- -------------- ----------- ----------- -------- ----------- --------
$ .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
===== ==
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.
NOVEMBER 7, 1997
(INCEPTION) THROUGH YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- --------------
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)
======= ========
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:
NOVEMBER 7, 1997
(INCEPTION) THROUGH YEAR ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- --------------
Risk-free interest rates....................... 5.52% 5.26%
Expected lives (in years)...................... 5 5
Dividend yield................................. 0% 0%
Expected volatility............................ 0% 0%
F-21
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
92
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