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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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
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SCIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3288107
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
June 30, 2000 was 73,245,379.
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SCIENT CORPORATION
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets....................... 1
Condensed Consolidated Statements of Operations............. 2
Condensed Consolidated Statements of Cash Flows............. 3
Notes to Condensed Consolidated Financial Statements........ 4
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 6
Qualitative and Quantitative Disclosures about Market
Item 3. Risk........................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities and Use of Proceeds................... 16
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURE............................................................ 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SCIENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
----------- ---------
(UNAUDITED)
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Current assets
Cash and cash equivalents................................. $ 74,574 $108,102
Short-term investments.................................... 122,342 121,046
Accounts receivable, net.................................. 70,895 56,021
Prepaid expenses and other................................ 21,177 9,157
-------- --------
Total current assets.............................. 288,988 294,326
Long-term investments....................................... 3,432 3,146
Property and equipment, net................................. 20,163 16,063
Other....................................................... 276 219
-------- --------
$312,859 $313,754
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings, current.................................. $ -- $ 1,334
Accounts payable.......................................... 2,790 5,023
Accrued expenses.......................................... 31,493 43,241
Deferred revenue.......................................... 6,771 6,579
Capital lease obligations, current........................ 3,096 2,624
-------- --------
Total current liabilities......................... 44,150 58,801
Bank borrowings, long-term.................................. -- 865
Capital lease obligations, long-term........................ 2,189 2,052
-------- --------
46,339 61,718
-------- --------
Stockholders' equity
Common stock: $0.0001 par value; 500,000 authorized;
73,245 and 72,491 shares issued and outstanding,
respectively........................................... 7 7
Additional paid-in capital................................ 303,803 297,688
Unearned compensation..................................... (14,196) (16,784)
Accumulated deficit....................................... (23,094) (28,875)
-------- --------
Total stockholders' equity........................ 266,520 252,036
-------- --------
$312,859 $313,754
======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- -------
(UNAUDITED)
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Revenues.................................................... $91,361 $16,404
Operating expenses:
Professional services..................................... 38,094 7,940
Selling, general and administrative....................... 47,790 13,105
Stock compensation........................................ 2,918 4,348
------- -------
Total operating expenses.......................... 88,802 25,393
------- -------
Income (loss) from operations............................... 2,559 (8,989)
Interest income and other, net.............................. 3,222 596
------- -------
Net income (loss)........................................... $ 5,781 $(8,393)
======= =======
Net income (loss) per share:
Basic..................................................... $ 0.09 $ (0.23)
Diluted................................................... $ 0.07 $ (0.23)
Weighted average common shares:
Basic..................................................... 64,035 36,810
Diluted................................................... 81,774 36,810
</TABLE>
See notes to interim condensed consolidated financial statements.
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
(UNAUDITED)
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Cash flows from operating activities:
Net income (loss)......................................... $ 5,781 $ (8,393)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 1,949 413
Provisions for doubtful accounts....................... 1,988 341
Amortization of unearned compensation.................. 2,918 4,348
Change in assets and liabilities:
Accounts receivable.................................. (16,862) (8,268)
Prepaid expenses and other........................... (12,156) (3,335)
Accounts payable..................................... (2,233) 613
Accrued expenses..................................... (11,748) 2,582
Deferred revenue..................................... 192 750
-------- --------
Net cash used in operating activities............. (30,171) (10,949)
-------- --------
Cash flows from investing activities:
Purchase of investments, net.............................. (1,582) (63,919)
Purchase of property and equipment........................ (4,700) (858)
-------- --------
Net cash used in investing activities............. (6,282) (64,777)
-------- --------
Cash flows from financing activities:
Proceeds from initial public offering, net................ -- 62,832
Proceeds from bank borrowing.............................. (2,199) 627
Proceeds from exercise of common stock options and
warrants, net.......................................... 5,798 2,690
Principal payments on capital lease obligations........... (740) (146)
-------- --------
Net cash provided by financing activities......... 2,859 66,003
-------- --------
Effect of exchange rate changes on cash..................... 66 --
Decrease in cash and cash equivalents....................... (33,528) (9,723)
Cash and cash equivalents at beginning of period............ 108,102 11,261
-------- --------
Cash and cash equivalents at end of period.................. $ 74,574 $ 1,538
======== ========
Supplemental cash flow information:
Cash paid for interest.................................... $ 130 $ 59
======== ========
Supplemental non-cash financing activity:
Property and equipment acquired under capital leases...... $ 1,349 $ 149
======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements for the three
months ended June 30, 2000 and 1999 are unaudited and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for
their fair presentation. These financial statements should be read in
conjunction with Scient's financial statements and notes thereto for the fiscal
year ended March 31, 2000 included in Scient's Annual Report on Form 10-K. The
results of operations for the interim period ended June 30, 2000 are not
necessarily indicative of results to be expected for the full fiscal year or any
other period.
2. EARNINGS (LOSS) PER SHARE
Scient computes earnings (loss) per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," and SEC
Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128
and SAB No. 98, basic and diluted earnings (loss) per share is computed by
dividing the net income (loss) available to common shareholders for the period
by the weighted average number of shares of common stock outstanding during the
period. The calculation of diluted net income (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.
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the periods indicated (in thousands, except per
share amounts):
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<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
2000 1999
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(UNAUDITED)
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Net income (loss)........................................ $ 5,781 $(8,393)
======= =======
Basic net income (loss) per share:
Weighted average shares outstanding.................... 64,035 36,810
======= =======
Basic net income (loss) per share...................... $ 0.09 $ (0.23)
======= =======
Diluted net income (loss) per share:
Weighted average shares outstanding.................... 64,035 36,810
Weighted average unvested common shares to
repurchase.......................................... 8,966 --
Dilutive stock options................................. 8,773 --
------- -------
Shares used in computing per share amount.............. 81,774 36,810
======= =======
Diluted net income (loss) per share.................... $ 0.07 $ (0.23)
======= =======
</TABLE>
3. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting comprehensive income. Comprehensive income includes net income as
currently reported under generally accepted accounting principles and also
considers the effect of additional economic events that are not required to be
recorded in determining net income but are rather reported as a separate
component of stockholders' equity. For the three months ended June 30, 2000 and
1999, Scient recorded comprehensive income of $5.8 million and comprehensive
loss of $8.4 million, respectively.
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION
On June 20, 2000, Scient, through its wholly owned subsidiary Scient
International, entered into a definitive agreement to acquire AXIDIA, a French
eBusiness services firm, for approximately $14.5 million. The acquisition was
paid with cash in the amount of $7.7 million with the remaining balance paid in
Scient common stock. The acquisition will be accounted for using the purchase
method and closed in August 2000.
5. SUBSEQUENT EVENT
In July 2000, Scient approved the declaration of a dividend distribution of
one Preferred Share Purchase Right (a "Right") on each outstanding share of its
common stock. The Rights become exercisable if a person or group hereafter
acquires 15% or more of the common stock of Scient or announces a tender offer
for 15% or more of the common stock. The Board of Directors will be entitled to
redeem the Rights at one cent per Right at any time before any such person
hereafter acquires 15% or more of the outstanding common stock.
The dividend distribution will be payable on August 31, 2000 to
stockholders of record on July 31, 2000. The Rights will expire in ten years,
unless earlier redeemed or exchanged.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the financial condition and
results of operations of Scient should be read in conjunction with Scient's
consolidated financial statements and notes thereto appearing elsewhere in
Scient's Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Related to Our Business" and elsewhere
in this 10-Q filing.
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, our professional services headcount, and our ability to
appropriately staff those engagements and price our services. 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 June 30, 2000, approximately 92% 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 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. We anticipate that a larger percentage
of revenues may be derived from contracts that have fixed-fee components in the
future.
Professional services expenses consist primarily of compensation and
benefits of our colleagues 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 the number of work days in a period and 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
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. See "Risk
Related to Our Business -- Our Quarterly Revenues and Operating Results Are
Volatile and May Cause Our Stock Price to Fluctuate."
Selling, general and administrative expenses consist of salaries,
commissions, and related expenses for personnel engaged in sales and marketing;
salaries and related expenses for recruiting, 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 on a global basis,
increase our recruiting efforts and incur additional costs related to the growth
of our global business.
Despite growth in our revenues, our net income may not increase
proportionately with the increase in our revenues primarily because of increased
expenses related to the expansion of the number of company-owned 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
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in which operating expenses increase, our operating results would be adversely
affected. See "Risk Related to Our Business -- We Have a History of Losses."
RESULTS OF OPERATIONS
REVENUES
Revenues increased 457% in the quarter ended June 30, 2000 compared to the
quarter ended June 30, 1999. This increase resulted primarily from increases in
the number of clients, the scope of engagements, and billing rate increases.
OPERATING EXPENSES
Professional Services. Our professional services expenses increased 380% in
the quarter ended June 30, 2000 compared to the quarter ended June 30, 1999.
This increase was primarily a result of an increase in the number of
professional services personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased 265% in the quarter ended June 30, 2000 compared to the
quarter ended June 30, 1999. This increase was primarily due to expenses related
to the addition of sales, marketing, recruiting, knowledge management,
information technology, finance and administration personnel, bad debt expense,
and costs of leasing additional office space.
Stock Compensation. We have recorded stock compensation for the difference
between the exercise price of certain stock option grants and the deemed fair
value of our common stock at the time of such grants. We are amortizing this
amount over the vesting periods of the applicable options, resulting in
amortization expense of $2.9 million and $4.3 million in the three months ended
June 30, 2000 and 1999, respectively.
INTEREST INCOME, NET
Interest income, net, increased 441% in the quarter ended June 30, 2000
compared to the quarter ended June 30, 1999. This increase was due primarily to
higher interest bearing funds resulting from our investing activities during the
quarter ended June 30, 2000. In addition, the average balance of our investment
is also significantly higher due to proceeds from our public offerings in the
prior fiscal year.
PROVISION FOR INCOME TAXES
From inception through June 30, 2000, we have accumulated losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of June 30, 2000, we had 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
Cash used in operating activities for the three months ended June 30, 2000
and 1999 was $30.2 million and $10.9 million, respectively. As of June 30, 2000
we had $196.9 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
corresponding increases in revenues can be expected to reduce cash, cash
equivalents and short-term investments.
Cash provided by financing activities was $2.9 million for the three months
ended June 30, 2000 and consisted primarily of cash received for the exercise of
common stock. Cash provided by financing activities was $66.0 million for the
three months ended June 30, 1999 and was primarily due to proceeds from the sale
of common stock through Scient's initial public offering of $62.8 million.
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Capital expenditures for the three months ended June 30, 2000 and 1999 were
approximately $4.7 million and $858,000, 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
increase our headcount, increase the number of our offices and expand our
operations.
We have a revolving line of credit for $40.0 million with a bank.
Borrowings under this line of credit bear interest at either the LIBOR rate plus
a range of 2.25% to 2.75% or the bank's prime rate plus up to 0.5% depending on
the outstanding balance and the type of draws. As of June 30, 2000, there were
no outstanding borrowings under this line of credit. Seven standby letters of
credit totaling $34.8 million have been issued against this line of credit.
OTHER FACTORS AFFECTING OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES
We incurred net losses of $16.0 million during the year ended March 31,
2000. As of June 30, 2000, we had an accumulated deficit of $23.1 million. We
also expect to continue to incur increasing sales and marketing, research and
development, and general and administrative expenses. As a result, we will need
to continue generating significant revenues to maintain profitability. If we do
achieve profitability on an annual basis, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 on a global basis
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;
- Changes in the financial condition of our clients which may offset the
timing of their payment or their ability to pay our fees;
- The introduction of new services or products 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.
Our revenues are derived primarily 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
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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 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 for the quarter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 on 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. Consequently, we
may have difficulty hiring our desired numbers of qualified employees in the
future. 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 of our
employees. Any future litigation against us or our employees, regardless of the
outcome, may result in substantial costs and expenses to us and may divert
management's attention away from the operation of our business.
WE DEPEND ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY ADVERSELY
AFFECT OUR BUSINESS
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel. This dependence is
particularly important to our business because personal relationships are a
critical element of obtaining and maintaining client engagements. If one or more
members of our senior management team or key technical personnel were unable or
unwilling to continue in their present positions, such persons would be very
difficult to replace and our business could be seriously harmed. Accordingly,
the loss of one or more members of our senior management team could have a
direct adverse impact on our future revenues. 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.
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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 on a global basis. Some of our
clients have only limited experience with the eBusiness we have developed for
them. Accordingly, we cannot assure you that the limited number of eBusiness we
have implemented will be successful in the longer term. If the eBusiness 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 within our control. Our ability to obtain new
engagements, retain clients and recruit and retain highly-skilled employees
could be seriously harmed if our work product or our clients' eBusinesses fail
to meet the expectations of our clients.
COMPETITION FROM BIGGER, MORE ESTABLISHED COMPETITORS WHO HAVE GREATER FINANCIAL
RESOURCES COULD RESULT IN PRICE REDUCTIONS, REDUCED PROFITABILITY AND LOSS OF
MARKET SHARE
Competition in the eBusiness services market is intense. If we fail to
compete successfully against current or future competitors, our business,
financial condition and operating results would be seriously harmed. We compete
against companies selling electronic commerce software and services, including
those offering such software and services on a hosted basis, 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 are focusing more resources
on eBusiness opportunities. In addition, new business models, which offer
certain electronic commerce services and products on a hosted platform, have
entered the market and we may compete for business with these new entrants.
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.
Many 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 415 as of June
30, 1999 to 1,499 as of June 30, 2000. We do not believe this growth rate is
sustainable for the long-term. Our growth requires substantial managerial
attention to ensure that our colleagues and offices operate at an
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appropriate level of productivity. Failure to manage effectively the
productivity of our colleagues and offices could seriously harm our operations
and financial condition. In addition, we recently opened several additional
offices and expect to open additional offices in the future. Our growth has
required and will continue to require us to make substantial expenditures for
capital equipment, training, recruiting, and other expansion-related costs, the
amount and timing of which will affect our financial results.
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. Currently, we are redesigning several
internal systems, including recruiting and engagement management systems. We may
encounter difficulties in developing and implementing other new systems.
POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS
We have acquired a business and 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 current and future 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 EXPANSION OF 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.
We have only recently begun to generate revenues from international operations.
We have offices outside the United States, 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 continue 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 personnel.
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;
- Local laws or regulations that may impact our operating results or
financial condition, such as maximum working hour requirements, overtime
laws or other labor or employment restrictions;
- Restrictions on the import and export of certain sensitive technologies,
including data security and encryption technologies that we may use or
other local laws or regulations impacting ecommerce, such as privacy and
data exchange laws;
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- Seasonal reductions in business activity in certain parts of the world,
such as during the summer months in Europe;
- Unexpected changes in regulatory requirements which could raise the cost
of doing business, or even prevent doing business, or restrict Scient's
ability to remove funds or its investments from a country;
- Changes in currency exchange rates, which could significantly decrease
the profitability of operations where payment is in local currency;
- Difficulties in staffing and managing foreign operations;
- Difficulties in using equity incentives for employees, which Scient
relies on but which are often less understood outside the U.S; and
- Differences in business customs.
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, 2000, our five largest
clients accounted for approximately 29% 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 CLIENTS MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NEEDED TO RETAIN OUR
SERVICES OR PAY US FOR SERVICES PERFORMED
Some of our current and potential clients, particularly those clients
funded primarily by venture capital, need to raise additional funds in order to
continue their business and operations as planned. We cannot be certain that
these companies will be able to obtain additional financing on favorable terms
or at all. As a result of their inability to raise additional financing, some
clients may be unable to pay us for services we have already provided them or
they may terminate our services earlier than planned, either of which could
seriously harm our business, financial condition and operating results. In
particular, some of our current and potential clients in this category have
recently encountered greater difficulty obtaining needed financing.
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 provide the full range of
our eBusiness services to our clients, we are generally retained to design and
build discrete segments of an overall eBusiness 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.
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WE MAY LOSE MONEY ON FIXED-FEE CONTRACTS
If we miscalculate the resources or time needed 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
arrangements with fixed-fee or other similar components, 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 on a global basis. To promote our
brand name, we have increased and plan to continue to increase our marketing
expenses, 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 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 insurance coverage may not be
adequate to cover, or may exclude such claims.
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.
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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 eBusinesses 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.
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,
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.
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. In particular, our development and use of standardized
frameworks, processes, and applications may subject us to potential infringement
claims by third parties. Our insurance coverage may not be adequate to cover, or
may exclude such claims. Such claims, even if not true, could result in
significant legal and other costs and may be a distraction to management.
A FEW INDIVIDUALS OWN MUCH OF OUR STOCK
Our directors, executive officers and their affiliates beneficially own a
controlling minority of our outstanding common stock. As a result, these
stockholders are able to exercise significant 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;
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<PAGE> 17
- 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 and our recently adopted stockholders rights 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 CONTINUED SUSTAINABILITY OF A GLOBAL 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 may fail. Even if a
systems innovation services market continues to develop, it may not grow at an
adequate pace and 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 grows more slowly than expected, our
growth would decline and our business would be seriously harmed.
INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS
We are affected not only by 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.
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 global business units;
- Enhance our infrastructure and leveragable assets;
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- 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 operations
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
OUR STOCK PRICE IS VOLATILE
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, internet, and ecommerce sectors.
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 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.
SHARES BECOMING AVAILABLE FOR SALE COULD AFFECT OUR STOCK PRICE
Sales of a substantial number of shares of common stock could adversely
affect the market price of our common stock and could impair our ability to
raise capital through the sale of additional equity securities.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Scient does not believe that we have any material market risk exposure with
respect to derivative or other financial instruments which would require
disclosure under this item.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In the quarter ended June 30, 2000, the following matters were submitted to
the security holders of Scient:
In April 2000, Scient solicited and obtained the approval of its
shareholders through a proxy statement to approve an amendment to the Scient's
Amended and Restated Certificate of Incorporation to increase the number of
shares of Common Stock that Scient is authorized to issue from 125,000,000 to
500,000,000. The numbers of shareholders giving their consent was 47,735,259,
representing 96% of the 51,493,345 shares present at that time.
In April 2000, Scient solicited and obtained the approval of its
shareholders through a proxy statement to approve an amendment to the 1999
Equity Incentive Plan to increase the number of shares available for issuance
under the 1999 Equity Incentive Plan from 2,400,000 to 6,400,000 and to revise
the formula for determining annual increases in the number of shares available
for issuance. The numbers of shareholders giving their consent was 45,627,365,
representing 89% of the 51,493,345 shares present at that time.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.3 Amended and Restated Bylaws of Scient.
27.1 Financial Statement Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
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SCIENT CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 8, 2000
SCIENT CORPORATION
By: /s/ WILLIAM H. KURTZ
------------------------------------
William H. Kurtz
Chief Financial Officer,
Executive Vice President
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<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.3 Amended and Restated Bylaws of Scient.
27.1 Financial Statement Schedule.
</TABLE>
