UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-25893
SCIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3288107
(State of incorporation) (IRS Employer Identification No.)
One Front Street, 28th Floor, San Francisco, California 94111
(Address of principal executive offices, including ZIP code)
(415) 733-8200
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No ___, and (2) has
---
been subject to such filing requirements for the past 90 days. Yes ___ No X.
---
The number of shares outstanding of the Registrant's Common Stock as of
June 30, 1999 was 35,094,586
================================================================================
SCIENT CORPORATION
INDEX
Page No.
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Part I. Financial Information
Item 1. Balance Sheets as of June 30, 1999 (unaudited)
and March 31, 1999 1
Statements of Operations for the
Three Months Ended June 30, 1999 and 1998 (unaudited) 2
Statements of Cash Flows for the
Three Months Ended June 30, 1999 and 1998 (unaudited) 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Qualitative and Quantitative Disclosure About Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 21
Exhibit Index 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SCIENT CORPORATION
BALANCE SHEETS
(in thousands, except per share amounts)
June 30, March 31,
1999 1999
------------------ ---------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 1,538 $ 11,261
Short-term investments................................................. 63,701 16,868
Accounts receivable, net............................................... 14,068 6,141
Prepaid expenses and other current assets.............................. 3,999 864
------------------ ---------------
Total current assets............................................... 83,306 35,134
Long-term investments..................................................... 17,086 -
Notes receivable.......................................................... 160 160
Property and equipment, net............................................... 4,004 3,410
Other assets.............................................................. 308 108
------------------ ---------------
$ 104,864 $ 38,812
================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings, current............................................... $ 763 $ 413
Accounts payable....................................................... 1,445 832
Accrued expenses....................................................... 7,214 4,632
Deferred revenue....................................................... 1,274 524
Capital lease obligations, current..................................... 670 625
------------------ ---------------
Total current liabilities.......................................... 11,366 7,026
Bank borrowings, long-term................................................ 1,406 1,129
Capital lease obligations, long-term...................................... 638 680
------------------ ---------------
Total liabilities.......................................... 13,410 8,835
------------------ ---------------
Commitments
Stockholders' equity
Convertible Preferred Stock: issuable in series, $0.0001 par value;
10,000 and 11,500 shares authorized, respectively; no and 9,012
shares issued and outstanding, respectively............................ - 1
Common Stock: $0.0001 par value; 125,000 and 40,000 shares authorized,
respectively; 35,095 shares and 16,567 shares issued and outstanding,
respectively........................................................... 4 2
Additional paid-in capital.............................................. 135,131 70,056
Unearned compensation................................................... (22,428) (27,222)
Accumulated deficit..................................................... (21,253) (12,860)
------------------ ---------------
Total stockholders' equity......................................... 91,454 29,977
------------------ ---------------
$ 104,864 $ 38,812
================== ===============
See accompanying notes to interim financial statements.
1
SCIENT CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended June 30,
---------------------------------------
1999 1998
---------------- -------------------
(unaudited)
Revenues................................................................. $ 16,404 $ 1,924
Operating expenses:
Professional services.................................................. 7,940 942
Selling, general and administrative.................................... 13,105 1,225
Stock compensation..................................................... 4,348 358
---------------- -------------------
Total operating expenses................................................. 25,393 2,525
---------------- -------------------
Loss from operations..................................................... (8,989) (601)
Interest income, net..................................................... 596 78
---------------- -------------------
Net loss................................................................. $ (8,393) $ (523)
================ ===================
Net loss per share:
Basic and diluted...................................................... $ (0.46) $ (0.09)
================ ===================
Weighted average shares................................................ 18,405 6,048
================ ===================
See accompanying notes to interim financial statements.
2
SCIENT CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended June 30,
-----------------------------------------------
1999 1998
--------------------- ----------------------
(unaudited)
Cash flows from operating activities:
Net loss................................................................... $ (8,393) $ (523)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................ 413 41
Provision for doubtful accounts.......................................... 341 43
Amortization of unearned compensation.................................... 4,348 358
Changes in current assets and liabilities:
Accounts receivable..................................................... (8,268) (829)
Prepaid expenses and other current assets............................... (3,135) (44)
Other assets............................................................ (200) (60)
Accounts payable........................................................ 613 (203)
Accrued expenses........................................................ 2,582 214
Deferred revenue........................................................ 750 -
--------------------- ----------------------
Net cash used in operating activities................................. (10,949) (1,003)
--------------------- ----------------------
Cash flows from investing activities:
Purchase of property and equipment, net.................................... (858) (391)
Purchase of short-term investments......................................... (180,698) -
Purchase of long-term investments.......................................... (17,086) -
Sale of short-term investments............................................. 133,865 -
--------------------- ----------------------
Net cash used in investing activities................................. (64,777) (391)
--------------------- ----------------------
Cash flows from financing activities:
Proceeds from bank borrowings.............................................. 627 -
Proceeds from Convertible Preferred Stock, net............................. - 14,173
Proceeds from initial public offering, net................................. 62,832 -
Proceeds from exercise of Common Stock options and warrants, net........... 2,690 113
Principal payments on capital lease obligations............................ (146) -
--------------------- ----------------------
Net cash provided by financing activities............................... 66,003 14,286
--------------------- ----------------------
Increase in cash and cash equivalents........................................ (9,723) 12,892
Cash and cash equivalents at beginning of period............................. 11,261 3,301
--------------------- ----------------------
Cash and cash equivalents at end of period................................... $ 1,538 $ 16,193
===================== ======================
Supplemental cash flow information:
Cash paid for interest..................................................... $ 59 $ 1
===================== ======================
Supplemental non-cash financing activity:
Property and equipment acquired under capital leases....................... $ 149 $ 1
===================== ======================
Issuance of Convertible Preferred Stock
for stock subscription receivable.......................................... $ - $ 849
===================== ======================
See accompanying notes to interim financial statements.
3
SCIENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements for the three months ended June 30,
1999 and 1998 are unaudited and reflect all normal recurring adjustments which
are, in the opinion of management, necessary for their fair presentation. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's Registration Statement on
Form S-1 for the fiscal year ended March 31, 1999. The results of operations for
the interim period ended June 30, 1999 are not necessarily indicative of results
to be expected for the full year or any other period.
2. 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 No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of shares of Common Stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Potential common shares
are composed of Common Stock subject to repurchase rights and incremental shares
of Common Stock issuable upon the exercise of stock options and warrants.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share amounts):
Three Months Ended June 30,
------------------------------------
1999 1998
---------------- ----------------
(unaudited)
Numerator
Net loss............................................................... $ (8,393) $ (523)
================ ================
Denominator
Weighted average shares................................................ 26,397 11,616
Weighted average unvested common shares subject to repurchase.......... (7,992) (5,568)
---------------- ----------------
Denominator for basic and diluted calculation.......................... 18,405 6,048
================ ================
Net loss per share:
Basic and diluted...................................................... $ (0.46) $ (0.09)
================ ================
3. Short-Term and Long-Term Investments
The Company considers all investments with original maturities of less than
one year as the respective balance sheet dates to be short-term investments and
all investments with maturities greater than one year to be long-term
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
June 30, 1999, amortized cost approximated fair value and unrealized gains and
losses were insignificant.
4
4. Borrowings
During 1998 and 1999, the Company entered into three equipment lease lines
totaling $4.0 million and a $4.0 million line of credit under a Loan and
Security Agreement. The equipment lease lines draw down expires in May 1999
through June 2000. Interest will accrue from the date of each draw down at a
rate of one percent plus prime per annum (8.8% at June 30, 1999) and is payable
monthly through the expiration date. Equipment draw downs that are outstanding
on the expiration date are payable in 36 equal monthly principal installments,
plus all accrued interest, beginning the following month. The line of credit
expires in May 2000 and charges interest at a rate of one-half percent plus
prime per annum (8.3% at June 30, 1999). The assets of the Company are pledged
as collateral for the Company's credit facilities.
At June 30, 1999, the Company had $2.2 million outstanding under the
equipment lease line. Under the lines of credit, the Company is required to
maintain certain financial covenants. At June 30, 1999, the Company was in
compliance with all such covenants.
5. Recent Accounting Pronouncements
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" ("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. 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.
6. Balance Sheet Components
June 30, March 31,
1999 1999
---------------- -------------------
(unaudited)
Prepaid expenses and other current assets
Recruiting........................................................... $ 2,695 $ -
Insurance............................................................ 380 -
Rent................................................................. 332 338
Deposits............................................................. 241 53
Professional expenses................................................ - 433
Other Current Assets................................................. 351 40
---------------- -------------------
$ 3,999 $ 864
================ ===================
Accrued expenses:
Accrued compensation and benefits..................................... $ 4,159 $ 2,554
Purchased software.................................................... 1,613 750
Professional expenses................................................. 1,202 735
Other................................................................. 240 593
---------------- -------------------
$ 7,214 $ 4,632
================ ===================
7. Initial Public Offering
In May 1999, the Company completed its initial public offering of 3,450,000
shares of Common Stock (including the exercise of the underwriters'
overallotment option) and realized proceeds, net of underwriting discounts,
commissions and issuance costs, of $62.8 million.
5
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934, as amended. Such statements are based upon
current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. Scient's actual results and the timing of certain
events may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a discrepancy include, but are
not limited to, those discussed in "Other Factors Affecting Operating Results"
and "Liquidity and Capital Resources" below, as well as Risk Factors included in
the Company's Rule 424(b) prospectus dated May 13, 1999, as filed with the
Securities and Exchange Commission. All forward-looking statements in this
document are based on information available to Scient as of the date hereof and
Scient assumes no obligation to update any such forward-looking statements.
Overview
Our revenues are derived primarily from providing professional services to
clients who are creating eBusinesses or are rethinking or expanding their
existing businesses to integrate eBusiness capabilities. We expect that our
revenues will be driven primarily by the number and scope of our client
engagements and by our professional services headcount. In the quarter ended
June 30, 1999, 7 clients accounted for approximately 50% of our revenues, with
The Chase Manhattan Corp accounting for approximately 10% 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, but over time may diversify. 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 market and sell our services through a direct sales force organized by
market-specific business units. We generally provide our services on a time and
materials basis. For the quarter ended June 30, 1999, approximately 81% of
revenues were derived from time and materials contracts, including completed
capped contracts that were appropriately 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. In the quarter ended June 30, 1999, substantially all
clients were located within North America and all revenues were denominated in
U.S. dollars.
Professional services expenses consist primarily of compensation and
benefits of our employees engaged in the delivery of professional services.
Professional services margins reflect revenues less the professional services
expenses whether or not the employee's time is billed to a client. We expect
that our per capita professional services expenses will increase over time due
to wage increases and inflation. Our professional services margins are affected
by trends in client billability, 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 three to six 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 executive recruiting, human resources, knowledge
management, information technology, finance and administrative personnel; office
facilities and information
6
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.
Stock compensation expenses consist of non-cash compensation expenses arising
from option grants. We have recorded aggregate unearned stock compensation
totaling $35.0 million in connection with certain stock option grants through
June 30, 1999. This stock compensation expense will be recognized over a period
ending May 12, 2003, which is the end of the vesting period for the related
options.
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.
Results of Operations
For the three months ended June 30, 1998 and 1999
Revenues
Our revenues increased by 753% in the quarter ended June 30, 1999 compared
to the quarter ended June 30, 1998. This increase principally resulted from
increases in both the number of clients and the scope of engagements and
increased investment in our sales and professional services organizations.
Operating Expenses
Professional Services. Our professional services expenses increased by 743%
in the quarter ended June 30, 1999 compared to the quarter ended June 30, 1998.
This increase was primarily a result of increases in the number of professional
services personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 970% in the quarter ended June 30, 1999 compared to the
quarter ended June 30, 1998. This increase was 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. Stock compensation expenses increased by 1115% in the
quarter ended June 30, 1999 compared to the quarter ended June 30, 1998. This
increase was primarily a result of increases in the number of options granted
since the quarter ended June 30, 1998 due to increased hiring of employees and
larger differences between the market values at the dates of and the exercise
prices at which the options were granted from June 30, 1998 through May 12,
1999.
Interest Income, Net
Interest income, net, increased by 664% in the quarter ended June 30, 1999
compared to the quarter ended June 30, 1998. This increase was due primarily to
higher interest-bearing balances in the 1999 period resulting from our financing
activities, partially offset by interest expense generated from our increased
drawings under our lines of credit.
7
Provision for Income Taxes
From inception through June 30, 1999, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit. As
of June 30, 1999, we had approximately $7.7 million of federal and state net
operating loss carryforwards to offset future taxable income which expire in
varying amounts beginning in 2018 and 2006, respectively. Given our limited
operating history, losses incurred to date, and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax asset meets the criteria required by generally
accepted accounting principles. Accordingly, a full valuation allowance has been
recorded.
Liquidity and Capital Resources
We raised $62.8 million in May 1999 from an initial public offering of
3,450,000 shares of our common stock, net of underwriting discounts, commissions
and issuance costs. The primary purposes of this offering were to obtain
additional equity capital, create a public market for our common stock, and
facilitate future access to public markets. We have used, and continue to expect
to use the proceeds for general corporate purposes, including working capital. A
portion of the proceeds may also be used for the acquisition of businesses that
are complimentary to ours. Pending such uses, we have invested the net proceeds
of this offering in investment grade, interest-bearing securities. Prior to
our initial public offering, we raised $30.9 million of equity capital from the
sale of preferred stock, net of issuance costs.
Cash used in operations for each of the quarters ended June 30, 1998 and
1999 was $1.0 million and $10.9 million, respectively. As of June 30, 1999, we
had $65.2 million in cash, cash equivalents and short-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
short-term investments.
We have a revolving line of credit for $4.0 million with Venture Banking
Group, a subsidiary of Cupertino National Bank and Trust. Borrowings under this
line of credit bear interest at the bank's prime rate plus .5%. As of June 30,
1999, there were no outstanding borrowings under this line of credit. Five
standby letters of credit totaling $1.6 million have been issued against this
line of credit as security for leased space in San Francisco, California, New
York, New York, and Dallas Texas, and for capital lease obligations. We also
have a capital equipment line with Venture Banking Group for $4.0 million.
Borrowings under this capital equipment line bear interest at the bank's prime
rate plus 1.0%. This agreement requires that we maintain certain financial
ratios and levels of tangible net worth, profitability and liquidity. As of June
30, 1999, borrowings under this capital equipment line were approximately $2.2
million. As of June 30, 1999, we had other commitments, which are primarily
comprised of operating leases for office space, totaling $20.0 million.
Capital expenditures for each of the quarters ended June 30, 1998 and 1999
were approximately $391,000 and $858,000, respectively. These expenditures were
primarily for computer equipment and software, including equipment acquired
under capital leases, and furniture and fixtures. We expect that capital
expenditures will continue to increase to the extent we continue to increase our
headcount or expand our operations.
Recent Accounting Pronouncements
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" ("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. 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.
8
Year 2000 Readiness
Many currently installed computer systems and software products are coded
to accept only two-digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may not be able to distinguish 21st century dates from 20th century dates. As a
result, computer systems and software used by many companies, including us, our
clients and our potential clients, may need to be upgraded to comply with such
"Year 2000" requirements.
Although we believe that our principal internal systems are Year 2000
compliant, some of our systems are not yet certified. We have received Year 2000
compliance statements from the suppliers of some of our principal internal
systems, and have sought similar statements from other vendors. Our review of
our Year 2000 readiness programs, including our assessment of our internal
systems as well as those of third parties with whom we have material
interactions, is ongoing and has not yet been completed. We anticipate that our
assessment of such systems will be complete by September 1999. Because we and
our clients are dependent, to a very substantial degree, upon the proper
functioning of our computer systems and those of third parties with whom we have
material interactions in our operations, a failure of such systems to correctly
recognize dates beyond December 31, 1999 could materially disrupt our
operations, which could seriously harm our business, financial condition and
operating results.
The Year 2000 problem may also affect software or code that we develop or
third-party software products that are incorporated into the business systems
that we create for our clients. Although our clients license software directly
from third parties, we generally discuss Year 2000 issues with these suppliers
and sometimes perform internal testing on their products, but we do not
guarantee that the software licensed by these suppliers is Year 2000 compliant.
Any failure on our part to provide Year 2000 compliant eBusiness systems to our
clients could result in financial loss, harm to our reputation and liability to
others and could seriously harm our business, financial condition and operating
results.
We do not currently have any information concerning the general Year 2000
compliance status of our clients, nor do we intend to examine our clients for
general Year 2000 compliance. Our current or potential clients may incur
significant expenses to achieve Year 2000 compliance. If our clients are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential clients could have for purchases
of our services. In addition, we anticipate that many of our financial services
clients will institute a standstill on electronic services spending during the
second half of 1999 as they attend to Year 2000 issues. As a result, our
business, financial condition and operating results could be seriously harmed.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We will incur additional costs related to Year 2000 compliance
for administrative personnel to manage the engagement, outside contractor
assistance, engineering and client satisfaction. In addition, we may experience
material problems and costs with Year 2000 compliance that could seriously harm
our business, financial condition and operating results, including:
. 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.
9
Although it is not yet fully developed, we expect to complete our Year 2000
contingency plan by October 1999. We are designing our Year 2000 contingency
plan to address situations that may result if we are unable to achieve Year 2000
readiness for our critical operations. The cost of developing and implementing
our plan may be material.
Other Factors Affecting Operating Results
Risks Related to Our Business
We Have a History of Losses and Expect to Incur Losses in the Future. We
incurred net losses of $8.4 million during the quarter ended June 30, 1999. As
of June 30, 1999, we had an accumulated deficit of $21.3 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 likely that in some future quarter or
quarters our operating results will be below the expectations of public market
analysts or investors. In such event, the market price of our common stock may
decline significantly.
Our quarterly operating results have varied in the past and are likely to
vary significantly from quarter to quarter. As a result, we believe that period-
to-period comparisons of our results of operations are not a good indication of
our future performance. A number of factors are likely to cause these
variations, including:
. Our ability to obtain new and follow-on client engagements;
. The amount and timing of expenditures by our clients for eBusiness
services;
. Our ability to attract, train and retain skilled management, strategic,
technical, design, sales, marketing and support professionals;
. Our employee utilization rate, including our ability to transition
employees quickly from completed projects to new engagements, for which
we typically receive little or no notice;
. The introduction of new services by us or our competitors;
. Changes in our pricing policies or those of our competitors;
. Our ability to manage costs, including personnel costs and support
services costs; and
. Costs related to the expected opening or expansion of Scient offices.
We derive all of our revenues from professional services, which we
generally provide on a time and materials basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Since
personnel and related costs constitute the substantial majority of our operating
expenses and since we establish these expenses in advance of any particular
quarter, underutilization of our professional services employees may cause
significant reductions in our operating results for a particular quarter and
could result in losses for such quarter. In addition, we have hired a large
number of personnel in core support services, including knowledge management,
technology infrastructure and finance and administrative, in order to support
our anticipated growth. As a result, a significant portion of our operating
expenses are fixed in the short term. Therefore, any failure to generate
revenues according to our expectations in a particular quarter could result in
losses for the quarter.
Although we have limited historical financial data, we have experienced and
expect to continue to experience seasonality in revenues from our eBusiness
services. These seasonal trends may materially affect our
10
quarter-to-quarter operating results. Revenues and operating results in our
quarter ending December 31 are typically lower relative to our other quarters
because there are a lower number of billable days in this quarter due to
holidays and vacation days. In addition, operating expenses may increase in each
quarter ending September 30, both in absolute terms and as a percentage of
revenues, due to the potential hiring of large numbers of recent college
graduates each year, which results in increased salary expenses before such new
employees begin to generate substantial revenues for Scient.
Our Ability to Attract, Train and Retain Qualified Employees Is Crucial to
Our Results of Operations and Any Future Growth. Our future success depends in
large part on our ability to hire, train and retain project and engagement
managers, technical architects, strategists, engineers, design professionals,
other technical personnel and sales and marketing professionals of various
experience levels. Any inability to hire, train and retain a sufficient number
of qualified employees could hinder the growth of our business. Skilled
personnel are in short supply, and this shortage is likely to continue for some
time. As a result, competition for these people is intense, and the industry
turnover rate for them is high. In addition, we believe that prospective
employees may perceive that the stock option component of our compensation
package is not as valuable as that component was prior to our initial public
offering. Consequently, we may have more difficulty hiring our desired numbers
of qualified employees than we did prior to our initial offering. Moreover, even
if we are able to expand our employee base, the resources required to attract
and retain such employees may adversely affect our operating margins. In
addition, some companies have adopted a strategy of suing or threatening to sue
former employees and their new employers. As we hire new employees from our
current or potential competitors we are likely to become a party to one or more
lawsuits involving the former employment of one or more of our employees. Any
future litigation against us or our employees, regardless of the outcome, may
result in substantial costs and expenses to us and may divert management's
attention away from the operation of our business.
We Depend on Our Key Personnel, and the Loss of Any Key Personnel May
Adversely Affect Our Business. We believe that our success will depend on the
continued employment of our senior management team and key technical personnel.
This dependence is particularly important to our business because personal
relationships are a critical element of obtaining and maintaining client
engagements. If one or more members of our senior management team or key
technical personnel were unable or unwilling to continue in their present
positions, such persons would be very difficult to replace and our business
could be seriously harmed. To date, a majority of our revenues have been
generated by the selling efforts of our senior management. Accordingly, the loss
of one or more members of our senior management team could have a direct adverse
impact on our future sales. In addition, if any of these key employees joins a
competitor or forms a competing company, some of our clients might choose to use
the services of that competitor or new company instead of our own. Furthermore,
clients or other companies seeking to develop in-house eBusiness capabilities
may hire away some of our key employees. This would not only result in the loss
of key employees but could also result in the loss of a client relationship or a
new business opportunity. Any losses of client relationships could seriously
harm our business.
We Have a Limited Operating History and a Limited Number of Completed
Engagements that Make an Evaluation of Our Business Difficult. We were
incorporated in November 1997 and began providing services to clients in
February 1998. Our limited operating history makes an evaluation of our business
and prospects very difficult. Companies in an early stage of development
frequently encounter enhanced risks and unexpected expenses and difficulties.
These risks, expenses and difficulties apply particularly to us because our
market, eBusiness services, is new and rapidly evolving. Our long-term success
will depend on our ability to achieve satisfactory results for our clients and
to form long-term relationships with core clients. We have not been in operation
long enough to judge whether our clients will perceive our work as being
beneficial to their businesses or to form any long-term business relationships.
Also, because of our limited operating history, our business reputation is based
on a limited number of client engagements. All of our clients have only limited
experience with the electronic business systems we have developed for them.
Accordingly, there can be no assurance that the limited number of electronic
business systems we have implemented will be successful in the longer 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.
11
Competition from Bigger, More Established Competitors Who Have Greater
Financial Resources Could Result in Price Reductions, Reduced Profitability and
Loss of Market Share. Competition in the eBusiness services market is intense.
If we fail to compete successfully against current or future competitors, our
business, financial condition and operating results would be seriously harmed.
We compete against companies selling electronic commerce software and services,
and the in-house development efforts of companies seeking to engage in
electronic commerce. We expect competition to persist and intensify in the
future. We cannot be certain that we will be able to compete successfully with
existing or new competitors.
Because relatively low barriers to entry characterize our market, we also
expect other companies to enter our market. We expect that competition will
continue to intensify and increase in the future. Some large information
technology consulting firms have announced that they will focus more resources
on eBusiness opportunities. Because we contract with our clients on an
engagement-by-engagement basis, we compete for engagements at each stage of our
methodology. There is no guarantee that we will be retained by our existing or
future clients on later stages of work.
The vast majority of our current competitors have longer operating
histories, larger client bases, larger professional staffs, greater brand
recognition and greater financial, technical, marketing and other resources than
we do. This may place us at a disadvantage in responding to our competitors'
pricing strategies, technological advances, advertising campaigns, strategic
partnerships and other initiatives. In addition, many of our competitors have
well-established relationships with our current and potential clients and have
extensive knowledge of our industry. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements and they may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors that
offer more standardized or less customized services than we do may have a
substantial cost advantage, which could force us to lower our prices, adversely
affecting our operating margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
Failure to Manage Our Growth May Adversely Affect Our Business. We have
grown rapidly and expect to continue to grow rapidly both by hiring new
employees and serving new business and geographic markets. Our growth has
placed, and will continue to place, a significant strain on our management and
our operating and financial systems. Our headcount has grown from 66 as of June
30, 1998 to 415 as of June 30, 1999, and several members of our senior
management team have only recently joined Scient. We do not believe this growth
rate is sustainable for the long-term. In addition, we recently opened offices
in New York and Dallas 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 incurring debt or issuing equity securities.
12
Our Planned International Operations May Be Expensive and May Not Succeed.
We have limited experience in marketing, selling and supporting our services in
foreign countries. Development of such skills may be more difficult or take
longer than we anticipate, especially due to language barriers, currency
exchange risks and the fact that the Internet infrastructure in foreign
countries may be less advanced than the United States' Internet infrastructure.
To date, we have not generated significant revenues from engagements with
international clients. We intend to expand our operations internationally in
future periods by opening international offices and hiring international
management, strategic, technical, design, sales, marketing and support
personnel.
We may be unable to successfully market, sell, deliver and support our
services internationally. If we are unable to expand our international
operations successfully and in a timely manner, our business, financial
condition and operating results could be seriously harmed. We will need to
devote significant management and financial resources to our international
expansion. In particular, we will have to attract and retain experienced
management, strategic, technical, design, sales, marketing and support personnel
for our international offices. Competition for such personnel is intense, and we
may be unable to attract and retain qualified staff.
Moreover, international operations are subject to a variety of additional
risks that could seriously harm our financial condition and operating results.
These risks include the following:
. Problems in collecting accounts receivable;
. The impact of recessions in economies outside the United States;
. Longer payment cycles;
. Fluctuations in currency exchange rates;
. Restrictions on the import and export of certain sensitive technologies,
including data security and encryption technologies that we may use; and
. Seasonal reductions in business activity in certain parts of the world,
such as during the summer months in Europe.
We Have Relied and Expect to Continue to Rely on a Limited Number of
Clients for a Significant Portion of Our Revenues. We currently derive and
expect to continue to derive a significant portion of our revenues from a
limited number of clients. To the extent that any significant client uses less
of our services or terminates its relationship with us, our revenues could
decline substantially. As a result, the loss of any significant client could
seriously harm our business, financial condition and operating results. For the
three months ended June 30, 1999, our seven largest clients accounted for
approximately 50% of our revenues. The volume of work that we perform for a
specific client is likely to vary from period to period, and a significant
client in one period may not use our services in a subsequent period.
Our Lack of Long-Term Contracts with Clients Reduces the Predictability of
Our Revenues. Our clients retain us on an engagement-by-engagement basis, rather
than under long-term contracts. As a result, our revenues are difficult to
predict. Because we incur costs based on our expectations of future revenues,
our failure to predict our revenues accurately may seriously harm our financial
condition and results of operations. Although it is our goal to design and build
complete eBusiness systems for our clients, we are generally retained to design
and build discrete segments of an overall eBusiness system on an engagement-by-
engagement basis. Since large client projects involve multiple engagements or
stages, there is a risk that a client may choose not to retain us for additional
stages of a project or that the client will cancel or delay additional planned
projects. Such cancellations or delays could result from factors unrelated to
our work product or the progress of the project, but could be related to general
business or financial conditions of the client. For example, many of our current
or potential clients that are in the early stages of development may be unable
to retain our services because of financial constraints. In addition, our
existing clients can generally reduce the scope of or cancel their use of our
services without penalty and with little or no notice. If a client defers,
modifies or cancels an engagement or chooses not to retain us for additional
phases of a project, we must be able to rapidly redeploy our employees to other
engagements in order to 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.
13
We May Lose Money on Fixed-Fee Contracts. If we miscalculate the resources
or time we need to complete engagements with capped or fixed fees, our operating
results could be seriously harmed. The risk of such miscalculations for us is
high because we work with complex technologies in compressed timeframes, and
therefore it is difficult to judge the time and resources necessary to complete
a project. To date, we have generally entered into contracts with our clients on
a time and materials basis, though we sometimes work on a fixed-fee basis or cap
the amount of fees we may invoice on time and material contracts without client
consent. In the future our strategy is to increase the percentage of our client
engagements subject to fixed-fee arrangements, because we believe they have the
potential to be more profitable.
We Sometimes Agree Not to Perform Services for Our Clients' Competitors. We
sometimes agree not to perform services for competitors of our clients for
limited periods of time, which have been as long as two years. These non-compete
agreements reduce the number of our prospective clients and the number of
potential sources of revenue. In addition, these agreements increase the
significance of our client selection process because many of our clients compete
in markets where only a limited number of players gain meaningful market share.
If we agree not to perform services for a particular client's competitors and
our client fails to capture a significant portion of its market, we are unlikely
to receive future revenues in that particular market.
Our Efforts to Develop Brand Awareness of Our Services May Not Be
Successful. An important element of our business strategy is to develop and
maintain widespread awareness of the Scient brand name. To promote our brand
name, we plan to increase our advertising and marketing expenditures, which may
cause our operating margins to decline. Moreover, our brand may be closely
associated with the business success or failure of some of our high-profile
clients, many of whom are pursuing unproven business models in competitive
markets. As a result, the failure or difficulties of one of our high-profile
clients may damage our brand. If we fail to successfully promote and maintain
our brand name or incur significant related expenses, our operating margins and
our growth may decline.
Our Failure to Meet Client Expectations or Deliver Error-Free Services
Could Result in Losses and Negative Publicity. Our client engagements involve
the creation, implementation and maintenance of eBusiness systems and other
applications that are often critical to our clients' businesses. Any defects or
errors in these applications or failure to meet clients' expectations could
result in:
. Delayed or lost revenues due to adverse client reaction;
. Requirements to provide additional services to a client at no charge;
. Negative publicity regarding us and our services, which could adversely
affect our ability to attract or retain clients; and
. Claims for substantial damages against us, regardless of our
responsibility for such failure.
Our contracts generally limit our liability for damages that may arise from
negligent acts, errors, mistakes or omissions in rendering services to our
clients. However, we cannot be sure that these contractual provisions will
protect us from liability for damages in the event we are sued. Furthermore, our
general liability insurance coverage may not continue to be available on
reasonable terms or in sufficient amounts to cover one or more large claims, or
the insurer may disclaim coverage as to any future claim. The successful
assertion of any such large claim against us could seriously harm our business,
financial condition and operating results.
Our Business is Dependent on Our Ability to Keep Pace with the Latest
Technological Changes. Our market and the enabling technologies used by our
clients are characterized by rapid technological change. Failure to respond
successfully to these technological developments, or to respond in a timely or
cost-effective way, will result in serious harm to our business and operating
results. We have derived, and we expect to continue to derive, a substantial
portion of our revenues from creating eBusiness systems that are based upon
today's leading technologies and that are capable of adapting to future
technologies. As a result, our success will depend, in part, on our ability to
offer services that keep pace with continuing changes in technology, evolving
industry standards and changing client preferences. In addition, we must hire,
train and retain technologically knowledgeable professionals so that they can
fulfill the increasingly sophisticated needs of our clients.
14
We May Not Be Able to Protect Our Intellectual Property and Proprietary
Rights. We cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to deter misappropriation of our
intellectual property. In addition, we may not be able to detect unauthorized
use of our intellectual property and take appropriate steps to enforce our
rights. If third parties infringe or misappropriate our trade secrets,
copyrights, trademarks or other proprietary information, our business could be
seriously harmed. In addition, although we believe that our proprietary rights
do not infringe the intellectual property rights of others, other parties may
assert infringement claims against us or claim that we have violated their
intellectual property rights. Such claims, even if not true, could result in
significant legal and other costs and may be a distraction to management. In
addition, protection of intellectual property in many foreign countries is
weaker and less reliable than in the United States, so if our business expands
into foreign countries, risks associated with protecting our intellectual
property will increase.
A Few Individuals Own Much of Our Stock. Our directors, executive officers
and their affiliates beneficially own, in the aggregate, approximately 66% of
our outstanding common stock. As a result, these stockholders are able to
exercise control over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, such
as acquisitions, and to block an unsolicited tender offer. Accordingly, this
concentration of ownership could have the effect of delaying or preventing a
third party from acquiring control over us at a premium over the then-current
market price of our common stock.
We Have Various Mechanisms in Place to Discourage Takeover Attempts.
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of Scient that a stockholder
may consider favorable. These provisions include:
. Authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
. A classified board of directors with staggered, three-year, terms, which
may lengthen the time required to gain control of our board of
directors;
. Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than majority of stockholders to elect director
candidates;
. Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
. Limitations on who may call special meetings of stockholders;
. Prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of the stockholders; and
. Establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
Scient.
Risks Related to the Systems Innovation Industry
Our Success Will Depend on the Development of a Market for Systems
Innovation Services. We cannot be certain that a viable market for systems
innovation services will emerge or be sustainable. If a viable and sustainable
market for our systems innovation services does not develop, Scient will fail.
Even if a systems innovation services market develops, we may not be able to
differentiate our services from those of our competitors. If we are unable to
differentiate our services from those of our competitors, our revenue growth and
operating margins may decline.
Our Success Depends on Increased Adoption of the Internet as a Means for
Commerce. Our future success depends heavily on the acceptance and use of the
Internet as a means for commerce. The widespread acceptance and adoption of 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
15
grows more slowly than expected, our growth would decline and our business would
be seriously harmed. Consumers and businesses may reject the Internet as a
viable commercial medium for a number of reasons, including:
. Potentially inadequate network infrastructure;
. Delays in the development of Internet enabling technologies and
performance improvements;
. Delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
. Delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information;
. Changes in, or insufficient availability of, telecommunications services
to support the Internet; and
. Failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.
Increasing Government Regulation Could Affect Our Business. We are subject
not only to regulations applicable to businesses generally, but also laws and
regulations directly applicable to electronic commerce. Although there are
currently few such laws and regulations, both state, federal and foreign
governments may adopt a number of these laws and regulations. Any such
legislation or regulation could dampen the growth of the Internet and decrease
its acceptance as a communications and commercial medium. If such a decline
occurs, companies may decide in the future not to use our services to create an
electronic business channel. This decrease in the demand for our services would
seriously harm our business and operating results.
Any new laws and regulations may govern or restrict any of the following
issues:
. User privacy;
. The pricing and taxation of goods and services offered over the
Internet;
. The content of websites;
. Consumer protection; and
. The characteristics and quality of products and services offered over
the Internet.
For example, the Telecommunications Act of 1996 prohibits the transmission
of certain types of information and content over the Internet. The scope of the
Act's prohibition is currently unsettled. In addition, although courts recently
held unconstitutional substantial portions of the Communications Decency Act,
federal or state governments may enact, and courts may uphold, similar
legislation in the future. Future legislation could expose companies involved in
Internet commerce to liability.
Risks Related to the Securities Markets
We May Need to Raise Additional Capital, Which May Not Be Available. We may
need to raise additional funds, and we cannot be certain that we will be able to
obtain additional financing on favorable terms or at all. If we need additional
capital and cannot raise it on acceptable terms, we may not be able to:
. Open new offices, in the United States or internationally;
. Create additional market-specific business units;
. Enhance our infrastructure and leveragable assets;
. Hire, train and retain employees;
. Respond to competitive pressures or unanticipated requirements; or
16
. Pursue acquisition opportunities.
Our failure to do any of these things could seriously harm our financial
condition.
Our Stock Price May Be Volatile. Prior to our initial public offering in
May 1999, our stock could not be bought or sold publicly. Accordingly, we cannot
give assurance that an active public trading market for our stock will develop
or be sustained. The market price may vary in response to any of the following
factors, some of which are beyond our control:
. Changes in financial estimates or investment recommendations by
securities analysts relating to our stock;
. Changes in market valuations of other electronic commerce software and
service providers or electronic businesses;
. Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. Loss of a major client;
. Additions or departures of key personnel; and
. Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector.
We Are at Risk of Securities Class Action Litigation Due to Our Expected
Stock Price Volatility. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. Due to the potential volatility of our stock
price, we may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our financial condition and operating
results.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Scient's exposure to market risk for changes in interest rates relates
primarily to the Scient's investment portfolio. At June 30, 1999, $65.2 million
of the Scient's cash, cash equivalents and investment portfolio carried
maturities of less than one year. Scient has the ability to hold the portfolio
to maturity, if deemed necessary. The effect of changes in interest rates of +/-
10% over a six month horizon would not have a material effect on the fair market
value of the portfolio.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
The effective date of the Registration Statement for the Company's initial
public offering, filed on Form S-1 under the Securities Act of 1933 (File No.
333-74731), was May 13, 1999. The class of securities registered was Common
Stock. The offering commenced on May 14, 1999. The managing underwriters for the
offering were Morgan Stanley Dean Witter, Hambrecht & Quist and Thomas Weisel
Partners.
Pursuant to the Registration Statement, the Company registered and sold
3,450,000 shares of its Common Stock for an aggregate offering price of $69.0
million. The Company incurred expenses of approximately $6.2 million, of which
approximately $4.8 million represented underwriting discounts and commissions
and approximately $1.4 million represented other expenses related to the
offering. The net offering proceeds to the Company after total expenses was
approximately $62.8 million.
We have used, and continue to expect to use the proceeds for general corporate
purposes, including working capital. A portion of the proceeds may also be used
for the acquisition of businesses that are complimentary to ours. Pending such
uses, we have invested the net proceeds of this offering in investment grade,
interest-bearing securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
In the quarter ended June 30, 1999, the following matters were submitted to
the security holders of the Company:
In May 1999, prior to the Company's initial public offering, the Company
solicited and obtained the approval of its stockholders through a Written
Consent of Stockholders to approve the Company's 1999 Equity Incentive Plan, the
Company's 1999 Employee Stock Purchase Plan and a form of Indemnification
Agreement for indemnification of directors and executive officers. The numbers
of stockholders giving their consent was 22,729,884, representing 71.8% of the
31,639,310 shares outstanding at that time.
In May 1999, prior to the Company's initial public offering, the Company
solicited and obtained the approval of its stockholders through a Written
Consent of Stockholders to amend and restate its Certificate of Incorporation.
The number of stockholder giving their consent was 21,266,212, representing
67.2% of the 31,656,852 shares outstanding at that time.
Upon the consummation of the Company's initial public offering, the Company's
stockholders may no longer act by written consent.
18
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
- -------
No.
- ---
Description
-----------
3.1 Second Amended and Restated Certificate of Incorporation of Scient
filed with the Secretary of State of Delaware on May 19, 1999--
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (File No. 333-74731).
3.2 Amended and Restated Bylaws of Scient--incorporated herein by
reference to Exhibit 3.3 to the Registrant's Registration Statement on
Form S-1 (File No. 333-74731).
4.1* Amended and Restated Investor Rights Agreement, dated February 16,
1999, among Scient and the investors and founder named therein, as
amended.
4.2* Specimen Certificate of Scient's common stock.
10.1* Form of Indemnification Agreement entered into between Scient and its
directors and executive officers.
10.2* 1997 Stock Plan.
10.3* 1999 Equity Incentive Plan.
10.4* 1999 Employee Stock Purchase Plan.
10.5* Employment Agreement between Scient and Eric Greenberg, dated December
10, 1997.
10.6* Employment Agreement between Scient, Eric Greenberg and Robert M.
Howe, dated February 9, 1998.
10.7* Employment Agreement between Scient and William H. Kurtz, dated June
12, 1998.
10.8* Employment Agreement between Scient and Stephen A. Mucchetti, dated
September 14, 1998.
10.9* Stock Repurchase Agreement between Scient and Robert M. Howe, dated
December 22, 1998.
10.10* Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated August 20, 1998.
10.11* Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998.
10.12* Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998.
10.13* Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab & Co.,
Inc., dated October 7, 1998.
10.14* Standard Form of Loft Lease between Scient and Lautob Realty Company,
dated October 28, 1998.
10.15* Agreement to Sub-Sublease between Scient and Northpoint
Communications, Inc., dated October 16, 1998.
10.16* Full-Recourse Promissory Note between Scient and Aron Dutta, dated
January 28, 1999.
19
10.17* Sublease between Scient and Robins, Kaplan, Miller & Ciresi, LLP,
dated April 13, 1999.
10.18* Sub-Sub-Sub-Sublease between Scient and Charles Schwab & Co., Inc.,
dated October 1, 1998.
10.19* Addendum to Sub-Sub-Sub-Sublease and Sub-Sub-Sub-Sub-Sublease between
Scient and Charles Schwab & Co., Inc., dated October 8, 1998.
10.20* Lease between Scient and Pembroke Real Estate, Inc., dated May 1,
1999.
27.1 Financial Statement Schedule.
__________________________________________________________________
* Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on From S-1 (File No. 333-74731).
(b) Reports on Form 8-K.
None.
20
SCIENT CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENT CORPORATION
Date: August 13, 1999
/s/ William H. Kurtz
__________________________________
By: William H. Kurtz
Chief Financial Officer,
Executive Vice President
21
EXHIBIT INDEX
Exhibit
- -------
No.
- ---
Description
-----------
3.1 Second Amended and Restated Certificate of Incorporation of Scient
filed with the Secretary of State of Delaware on May 19, 1999--
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (File No. 333-74731).
3.2 Amended and Restated Bylaws of Scient--incorporated herein by
reference to Exhibit 3.3 to the Registrant's Registration Statement on
Form S-1 (File No. 333-74731).
4.1* Amended and Restated Investor Rights Agreement, dated February 16,
1999, among Scient and the investors and founder named therein, as
amended.
4.2* Specimen Certificate of Scient's common stock.
10.1* Form of Indemnification Agreement entered into between Scient and its
directors and executive officers.
10.2* 1997 Stock Plan.
10.3* 1999 Equity Incentive Plan.
10.4* 1999 Employee Stock Purchase Plan.
10.5* Employment Agreement between Scient and Eric Greenberg, dated December
10, 1997.
10.6* Employment Agreement between Scient, Eric Greenberg and Robert M.
Howe, dated February 9, 1998.
10.7* Employment Agreement between Scient and William H. Kurtz, dated June
12, 1998.
10.8* Employment Agreement between Scient and Stephen A. Mucchetti, dated
September 14, 1998.
10.9* Stock Repurchase Agreement between Scient and Robert M. Howe, dated
December 22, 1998.
10.10* Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated August 20, 1998.
10.11* Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998.
10.12* Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998.
10.13* Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab & Co.,
Inc., dated October 7, 1998.
10.14* Standard Form of Loft Lease between Scient and Lautob Realty Company,
dated October 28, 1998.
10.15* Agreement to Sub-Sublease between Scient and Northpoint
Communications, Inc., dated October 16, 1998.
10.16* Full-Recourse Promissory Note between Scient and Aron Dutta, dated
January 28, 1999.
10.17* Sublease between Scient and Robins, Kaplan, Miller & Ciresi, LLP,
dated April 13, 1999.
10.18* Sub-Sub-Sub-Sublease between Scient and Charles Schwab & Co., Inc.,
dated October 1, 1998.
10.19* Addendum to Sub-Sub-Sub-Sublease and Sub-Sub-Sub-Sub-Sublease between
Scient and Charles Schwab & Co., Inc., dated October 8, 1998.
10.20* Lease between Scient and Pembroke Real Estate, Inc., dated May 1,
1999.
27.1 Financial Statement Schedule.
________________________________________________________________________________
* Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on From S-1 (File No. 333-74731).