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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 DECEMBER 31, 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
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SCIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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
December 31, 1999 was 70,622,030.
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SCIENT CORPORATION
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements................................ 3
CONDENSED CONSOLIDATED BALANCE SHEETS.............. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS.... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS.... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.......................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
Item 3. Qualitative and Quantitative Disclosures about
Market Risk............................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 10
Item 2. Changes in Securities and Use of Proceeds........... 10
Item 3. Defaults Upon Senior Securities..................... 10
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 10
Item 5. Other Information................................... 10
Item 6. Exhibits and Reports on Form 8-K.................... 10
SIGNATURE................................................... 11
</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>
DECEMBER 31, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED)
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Current assets
Cash and cash equivalents................................. $ 34,398 $ 11,261
Short-term investments.................................... 43,529 16,868
Accounts receivable, net.................................. 36,382 5,876
Prepaid expenses.......................................... 4,660 1,036
Other..................................................... 4,217 93
-------- --------
Total current assets.............................. 123,186 35,134
Long-term investments....................................... 480 --
Notes receivable............................................ -- 160
Property and equipment, net................................. 11,102 3,410
Other....................................................... 145 108
-------- --------
$134,913 $ 38,812
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank borrowings, current.................................. $ 1,235 $ 413
Accounts payable.......................................... 4,288 832
Accrued expenses.......................................... 23,238 4,632
Deferred revenue.......................................... 8,437 524
Capital lease obligations, current........................ 2,365 625
-------- --------
Total current liabilities......................... 39,563 7,026
Bank borrowings, long-term.................................. 1,129 1,129
Capital lease obligations, long-term........................ 2,219 680
-------- --------
Total liabilities................................. 42,911 8,835
-------- --------
Commitments and contingencies
Stockholders' equity
Convertible preferred stock: issuable in series, $0.0001
par value; 10,000 shares authorized; no and 9,012
shares issued and outstanding, respectively............ -- 1
Common stock: $0.0001 par value; 125,000 shares
authorized; 70,622 shares and 33,134 shares issued and
outstanding, respectively.............................. 7 3
Additional paid-in capital.................................. 143,191 70,055
Unearned compensation....................................... (20,088) (27,222)
Accumulated deficit......................................... (31,108) (12,860)
-------- --------
Total stockholders' equity........................ 92,002 29,977
-------- --------
$134,913 $ 38,812
======== ========
</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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
(UNAUDITED) (UNAUDITED)
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Net revenues....................................... $42,677 $ 6,270 $ 89,886 $11,288
Operating expenses:
Professional services............................ 19,859 3,000 42,032 5,738
Selling, general and administrative.............. 23,993 4,852 56,309 7,707
Stock compensation............................... 3,697 2,355 12,219 3,856
------- ------- -------- -------
Total operating expenses................. 47,549 10,207 110,560 17,301
------- ------- -------- -------
Loss from operations............................... (4,872) (3,937) (20,674) (6,013)
Interest income, net............................... 837 196 2,426 461
------- ------- -------- -------
Net loss........................................... $(4,035) $(3,741) $(18,248) $(5,552)
======= ======= ======== =======
Net loss per share:
Basic and diluted................................ $ (0.07) $ (0.28) $ (0.36) $ (0.44)
Weighted average shares.......................... 57,992 13,474 50,400 12,544
</TABLE>
See notes to interim condensed consolidated financial statements.
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- -------
(UNAUDITED)
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Cash flows from operating activities:
Net loss.................................................. $(18,248) $(5,552)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,558 341
Provision for doubtful accounts........................ 1,536 200
Amortization of unearned compensation.................. 12,219 3,856
Changes in assets and liabilities:
Accounts receivable.................................. (32,042) (4,280)
Other assets......................................... (6,975) (116)
Accounts payable..................................... 3,456 129
Accrued expenses..................................... 18,606 1,494
Deferred revenue..................................... 7,913 708
-------- -------
Net cash used in operating activities............. (11,977) (3,220)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment, net................... (5,264) (1,356)
Purchase of investments................................... (27,485) (4,504)
-------- -------
Net cash used in investing activities............. (32,749) (5,860)
-------- -------
Cash flows from financing activities:
Proceeds from bank borrowings............................. 822 1,223
Proceeds from convertible preferred stock, net............ -- 14,741
Proceeds from initial public offering, net................ 62,728 --
Proceeds from exercise of common stock options and
warrants, net.......................................... 5,022 801
Principal payments on capital lease obligations........... (709) (12)
Restricted cash........................................... -- 100
-------- -------
Net cash provided by financing activities......... 67,863 16,853
-------- -------
Increase in cash and cash equivalents....................... 23,137 7,773
Cash and cash equivalents at beginning of period............ 11,261 3,301
-------- -------
Cash and cash equivalents at end of period.................. $ 34,398 $11,074
======== =======
</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
and nine months ended December 31, 1999 and 1998 are unaudited and reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for their fair presentation. These financial statements should be read in
conjunction with Scient's financial statements and notes thereto for the fiscal
year ended March 31, 1999 included in Scient's Registration Statement on Form
S-1 dated January 20, 2000. The results of operations for the interim period
ended December 31, 1999 are not necessarily indicative of results to be expected
for the fiscal full year or any other period.
Certain previously reported amounts have been reclassified to conform with
current presentation format.
2. NET LOSS PER SHARE
Scient computes net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," and SEC
Staff Accounting Bulletin ("SAB") No. 98. Under the provisions of SFAS No. 128
and SAB 98, basic and diluted net loss per share is computed by dividing the net
loss available to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period. The calculation
of diluted net loss per share excludes potential common shares if the effect is
antidilutive. Potential common shares are composed of common stock subject to
repurchase rights and incremental shares of common stock issuable upon the
exercise of stock options, warrants and convertible preferred stock.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Numerator
Net loss...................................... $ (4,035) $ (3,741) $(18,248) $ (5,552)
======== ======== ======== ========
Denominator
Weighted average shares....................... 71,384 27,399 64,469 25,068
Weighted average unvested common shares
subject to repurchase...................... (13,392) (13,925) (14,069) (12,524)
-------- -------- -------- --------
Denominator for basic and diluted
calculation................................ 57,992 13,474 50,400 12,544
======== ======== ======== ========
Net loss per share:
Basic and diluted............................. $ (0.07) $ (0.28) $ (0.36) $ (0.44)
======== ======== ======== ========
</TABLE>
3. INVESTMENTS
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt on Equity Securities", Scient has categorized its marketable securities as
"available-for-sale". At December 31, 1999, amortized cost approximated fair
value and unrealized gains and losses were insignificant.
Short-term investments are generally comprised of variable rate securities
that provide for optional or early redemption within twelve months.
In addition, in July 1999 Scient established a wholly-owned subsidiary,
Scient Capital LLC, which serves as an investment vehicle to make equity
investments in clients who meet certain criteria.
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scient uses the cost method to account for investments in which it has made
a minority interest and does not exercise significant influence.
4. STOCK SPLIT
In November 1999, Scient approved a 2-for-1 stock split of common stock.
The stock split was distributed on December 3, 1999, to holders of record of its
common stock on November 15, 1999. Share information has been adjusted to
reflect the stock split.
5. SUBSEQUENT EVENTS
In January 2000, Scient completed a secondary public offering of 3,091,200
shares of common stock (including an over-allotment option of 391,200 shares) at
$88 per share, of which 1,241,200 shares were sold by selling stockholders.
Proceeds to Scient from this offering, net of issuance costs, were approximately
$154.6 million.
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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 "Liquidity and Capital Resources"
below, as well as "Risk Factors" included in Scient's Registration Statement on
Form S-1 dated January 20, 2000, 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 net 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 net
revenues will be driven primarily by the number and scope of our client
engagements and by our professional services headcount. Net revenues from any
given client will vary from period to period. Additionally, we expect that
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 net 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 December 31, 1999, approximately 93% of net revenues were derived
from time and materials contracts, including completed capped contracts that
were recognized on a time and materials basis. Net revenues pursuant to time and
materials contracts are generally recognized as services are provided. Net
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). Net revenues
exclude reimbursable expenses charged to clients. Substantially all of our
clients were located within North America and all net revenues were denominated
in U.S. dollars. As we expand internationally, we expect to generate a greater
percentage of our net revenues outside of North America and much of those
revenues will be denominated in foreign currencies.
Professional services expenses consist primarily of compensation and
benefits for our employees engaged in the delivery of professional services.
Professional services margins reflect net revenues less professional services
expenses which are incurred regardless of whether or not the employee's time is
billed to a client. We expect that our professional services expenses will
increase over time due to wage increases and inflation. Our professional
services margins are affected by trends in the percentage of professional
services employees' time that is billed to clients, and, will vary in the
future. Any significant decline in fees billed to clients or the loss of a
significant client would materially adversely affect our professional services
margins. Client engagements currently average six to nine months' duration. If a
client engagement ends earlier than we expect, we must re-deploy professional
services personnel. Any resulting unbillable time will adversely affect
professional services margins.
Selling, general and administrative expenses consist of salaries,
commissions, and related expenses for personnel engaged in sales; salaries and
related expenses for recruiting, internal training, human resources, knowledge
management, information technology, finance and administrative personnel; office
facilities and information technology expenditures; professional fees; trade
shows; promotional expenses; and other general corporate expenses. We expect
selling, general and administrative expenses to increase in absolute dollars as
we expand our direct sales force, continue expenditures on knowledge management
and information
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technology infrastructure, open new offices, increase our recruiting efforts and
incur additional costs related to the growth of our business and operations on a
global basis.
Despite growth in our net revenues to date, we have not been profitable.
Our net losses may not decrease proportionately with any future increase in our
net revenues primarily because of likely increased expenses related to the
expansion of the number of our offices, increased investment in our knowledge
management and operations infrastructure, and increased recruiting, marketing
and sales efforts. To the extent that future net revenues do not increase
significantly in the same periods in which operating expenses increase, our
operating results would be adversely affected.
RESULTS OF OPERATIONS
NET REVENUES
Net revenues increased by 581% in the quarter ended December 31, 1999
compared to the quarter ended December 31, 1998. For the first nine months of
fiscal 2000, net revenues increased 696% over the comparable period of the prior
fiscal year. These increases resulted primarily from increases in the number of
clients and the scope of engagements.
OPERATING EXPENSES
Professional Services. Our professional services expenses increased by 562%
in the quarter ended December 31, 1999 compared to the quarter ended December
31, 1998. For the first nine months of fiscal 2000, professional services
expenses increased 633% over the comparable period of the prior fiscal year.
These increases were primarily a result of increases in the number of
professional services personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased by 394% in the quarter ended December 31, 1999 compared to
the quarter ended December 31, 1998. For the first nine months of fiscal 2000,
selling, general and administrative expenses increased 631% over the comparable
period of the prior fiscal year. These increases were primarily due to expenses
related to the addition of sales, marketing, recruiting, knowledge management,
information technology, finance and administration personnel and 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 $3.7 million and $2.4 million in the three months ended
December 31, 1999 and 1998, respectively, and $12.2 million and $3.9 million for
the nine months ended December 31, 1999 and 1998, respectively.
INTEREST INCOME, NET
Interest income, net, increased by 327% in the quarter ended December 31,
1999 compared to the quarter ended December 31, 1998. For the first nine months
of fiscal 2000, interest income, net increased 426% over the comparable period
of the prior fiscal year. These increases were due primarily to higher
interest-bearing balances in the 1999 period resulting from our investing
activities, partially offset by interest expense generated from increased
drawings under our capital equipment line.
PROVISION FOR INCOME TAXES
From inception through December 31, 1999, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of December 31, 1999, 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.
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LIQUIDITY AND CAPITAL RESOURCES
We raised $62.7 million in May 1999 from an initial public offering of
3,450,000 shares of our common stock, net of underwriting discounts, commissions
and issuance costs. The primary purposes of this offering were to obtain
additional equity capital, create a public market for our common stock, and
facilitate future access to public markets. We have used, and expect to continue
to use, the proceeds for general corporate purposes, including working capital.
A portion of the proceeds may also be used for the acquisition of businesses
that are complimentary to ours. Pending such uses, we have invested the net
proceeds of this offering in investment grade, interest-bearing securities.
Prior to our initial public offering, we raised $30.9 million of equity capital
from the sale of preferred stock, net of issuance costs.
Cash used in operating activities for the nine months ended December 31,
1999 and 1998 was $12.0 million and $3.2 million, respectively. As of December
31, 1999 we had $77.9 million in cash, cash equivalents and short-term
investments. We expect that accounts receivable will continue to increase to the
extent our net revenues continue to rise. Any such increase that occurs at a
greater rate than corresponding increases in net revenues can be expected to
reduce cash, cash equivalents and short-term investments.
Cash provided by financing activities was $67.9 million for the nine months
ended December 31, 1999 and consisted primarily of cash received for the sale of
common stock through Scient's initial public offering. Cash provided by
financing activities was $16.9 million for the nine months ended December 31,
1998 and was primarily due to proceeds from a preferred stock offering of $14.7
million.
Capital expenditures for the nine months ended December 31, 1999 and 1998
were approximately $5.3 million and $1.4 million, respectively. These
expenditures were primarily for computer equipment, software, and furniture and
fixtures. We expect that capital expenditures will continue to increase to the
extent we increase our headcount, increase the number of our offices and expand
our operations.
We have a revolving line of credit for $8.0 million with a bank. Borrowings
under this line of credit bear interest at the bank's prime rate plus 0.5%. As
of December 31, 1999, there were no outstanding borrowings under this line of
credit. Ten standby letters of credit totaling $7.4 million have been issued
against this line of credit. We also have a capital equipment line with a bank
for $4.0 million. Borrowings under this capital equipment line bear interest at
the bank's prime rate plus 1.0%. This agreement requires that we maintain
certain financial ratios and levels of tangible net worth, profitability and
liquidity.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE
We incurred net losses of $18.2 million during the nine months ended
December 31, 1999. As of December 31, 1999, we had an accumulated deficit of
$31.1 million. We have not had a profitable quarter and may never achieve
profitability. We also expect to continue to incur increasing sales and
marketing, infrastructure development and general and administrative expenses.
As a result, we will need to generate significant revenues to achieve
profitability. If we do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis in the future. Although
our revenues have grown in recent quarters, we do not believe that we can
sustain our historical growth rates. Accordingly, you should not view our
historical growth rates as indicative of our future revenues.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR
STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results are volatile and difficult to
predict. It is possible that in some future quarter or quarters our operating
results will be below the expectations of public market analysts or investors.
In such event, the market price of our common stock may decline significantly.
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Our quarterly operating results have varied in the past and are likely to
vary significantly from quarter to quarter. As a result, we believe that
period-to-period comparisons of our results of operations are not a good
indication of our future performance. A number of factors are likely to cause
these variations, including:
- Our ability to obtain new and follow-on client engagements;
- The amount and timing of expenditures by our clients for eBusiness
services;
- Our ability to attract, train and retain skilled management, strategic,
technical, design, sales, marketing and support professionals;
- Our employee utilization rate, including our ability to transition
employees quickly to new or other existing engagements;
- The introduction of new services by us or our competitors;
- Changes in our pricing policies or those of our competitors;
- Our ability to manage costs, including personnel costs and support
services costs; and
- Costs related to opening or expanding Scient offices.
We derive all of our revenues from professional services, which we
generally provide on a time and materials basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Since
personnel and related costs constitute the substantial majority of our operating
expenses and since we establish these expenses in advance of any particular
quarter, underutilization of our professional services employees may cause
significant reductions in our operating results for a particular quarter and
could result in losses for such quarter. In addition, we have hired a large
number of personnel in core support services, including knowledge management,
recruiting, technology infrastructure and finance and administration, in order
to support our anticipated growth. As a result, a significant portion of our
operating expenses are fixed in the short term. Therefore, any failure to
generate revenues according to our expectations in a particular quarter could
result in losses or greater than expected losses for the quarter.
Although we have limited historical financial data, we have experienced and
expect to continue to experience seasonality in revenues from our eBusiness
services. These seasonal trends may materially affect our quarter-to-quarter
operating results. Revenues and operating results in our quarter ending December
31 are typically lower relative to our other quarters because there are a lower
number of billable days in this quarter due to holidays and vacation days. In
addition, operating expenses may increase in each quarter ending September 30,
both in absolute terms and as a percentage of revenues, due to the potential
hiring of large numbers of recent college graduates each year, which results in
increased salary expenses before such new employees begin to generate
substantial revenues for Scient.
OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED EMPLOYEES IS CRUCIAL TO
OUR RESULTS OF OPERATIONS AND ANY FUTURE GROWTH
Our future success depends in large part on our ability to hire, train and
retain project and engagement managers, technical architects, strategists,
engineers, design professionals, other technical personnel and sales and
marketing professionals of various experience levels. Any inability to hire,
train and retain a sufficient number of qualified employees could hinder the
growth of our business. Skilled personnel are in short supply, and this shortage
is likely to continue for some time. As a result, competition for these people
is intense, and the industry turnover rate for them is high. In addition, we
believe that prospective employees may perceive that the stock option component
of our compensation package is not as valuable as that component was prior to
our initial public offering. Consequently, we may have more difficulty hiring
our desired numbers of qualified employees. Moreover, even if we are able to
expand our employee base, the resources required to attract and retain such
employees may adversely affect our operating margins. In addition, some
companies have adopted a strategy of suing or threatening to sue former
employees and their new employers. As we hire new employees from our current or
potential competitors we may become a party to one or more lawsuits involving
the former employment of one or more of our employees. Any future litigation
against us or our
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employees, regardless of the outcome, may result in substantial costs and
expenses to us and may divert management's attention away from the operation of
our business.
WE DEPEND ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY
ADVERSELY AFFECT OUR BUSINESS
We believe that our success will depend on the continued employment of our
key management and technical personnel. This dependence is particularly
important to our business because personal relationships are a critical element
of obtaining and maintaining client engagements. If one or more of our key
management or technical personnel were unable or unwilling to continue in their
present positions, such persons would be very difficult to replace and our
business could be seriously harmed. Accordingly, the loss of one or more members
of our senior management team could have a direct adverse impact on our future
sales. In addition, if any of these key employees joins a competitor or forms a
competing company, some of our clients might choose to use the services of that
competitor or new company instead of our own. Furthermore, clients or other
companies seeking to develop in-house eBusiness capabilities may hire away some
of our key employees. This would not only result in the loss of key employees
but could also result in the loss of a client relationship or a new business
opportunity. Any losses of client relationships could seriously harm our
business.
WE HAVE A LIMITED OPERATING HISTORY AND A LIMITED NUMBER OF COMPLETED
ENGAGEMENTS THAT MAKE AN EVALUATION OF OUR BUSINESS DIFFICULT
We were incorporated in November 1997 and began providing services to
clients in February 1998. Our limited operating history makes an evaluation of
our business and prospects very difficult. Companies in an early stage of
development frequently encounter enhanced risks and unexpected expenses and
difficulties. These risks, expenses and difficulties apply particularly to us
because our market, eBusiness services, is new and rapidly evolving. Our
long-term success will depend on our ability to achieve satisfactory results for
our clients and to form long-term relationships with core clients. We have not
been in operation long enough to judge whether our clients will perceive our
work as being beneficial to their businesses or to form any long-term business
relationships. Also, because of our limited operating history, our business
reputation is based on a limited number of client engagements. All of our
clients have only limited experience with the electronic business systems we
have developed for them. Accordingly, there can be no assurance that the limited
number of electronic business systems we have implemented will be successful in
the longer term. If the electronic business systems we have implemented are not
successful, our brand will be harmed and we may incur liability to our clients.
If one or more of our clients for whom we have done substantial work suffers a
significant failure or setback in its eBusiness, our business reputation could
be severely damaged, whether or not such failure or setback was caused by our
work or was within our control. Our ability to obtain new engagements, retain
clients and recruit and retain highly-skilled employees could be seriously
harmed if our work product or our clients' eBusinesses fail to meet the
expectations of our clients.
COMPETITION FROM BIGGER, MORE ESTABLISHED COMPETITORS WHO HAVE GREATER
FINANCIAL RESOURCES OR FROM NEWLY EMERGING COMPETITORS COULD RESULT IN PRICE
REDUCTIONS, REDUCED PROFITABILITY AND LOSS OF MARKET SHARE
Competition in the eBusiness services market is intense. If we fail to
compete successfully against current or future competitors, our business,
financial condition and operating results would be seriously harmed. We compete
against companies selling eBusiness software and services, and the in-house
development efforts of companies seeking to engage in eBusiness. We expect
competition to persist and intensify in the future. We cannot be certain that we
will be able to compete successfully with existing or new competitors.
Because relatively low barriers to entry characterize our market, we also
expect other companies to enter our market. We expect that competition will
continue to intensify and increase in the future. Some large information
technology consulting firms have announced that they have begun to or will soon
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.
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<PAGE> 13
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, commoditized or less customized services or products
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 162 as of
December 31, 1998 to 874 as of December 31, 1999. We do not believe this growth
rate is sustainable for the long-term. In addition, we recently opened several
offices and expect to open additional offices in the future.
Our personnel, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate the increased number of
engagements, number of clients and the increased size of our operations, we will
need to hire, train and retain the appropriate personnel to manage our
operations. We will also need to improve our financial and management controls,
reporting systems and operating systems. We have recently implemented a new
enterprise resource planning software system for human resource functions and
some financial functions. We are currently redesigning several internal systems,
including recruiting and engagement management systems. We may encounter
difficulties in transitioning to or in the operations of the new enterprise
resource planning software system or in developing and implementing other new
systems.
POTENTIAL ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING
RESULTS
We may acquire other businesses in the future, which may complicate our
management tasks. We may need to integrate widely dispersed operations with
distinct corporate cultures. Such integration efforts may not succeed or may
distract our management from servicing existing clients. Our failure to manage
acquisitions successfully could seriously harm our operating results. Also,
acquisition costs could cause our quarterly operating results to vary
significantly. Furthermore, our stockholders would be diluted if we finance the
acquisitions by issuing equity or equity-linked securities.
OUR PLANNED INTERNATIONAL OPERATIONS MAY BE EXPENSIVE AND MAY NOT SUCCEED
We have limited experience in marketing, selling and supporting our
services in foreign countries. Development of such skills may be more difficult
or take longer than we anticipate, especially due to language barriers, currency
exchange risks and the fact that the Internet infrastructure in foreign
countries may be less developed than the United States' Internet infrastructure.
In addition, we believe that our international expansion plans may require us to
enter into strategic relationships with third parties in certain foreign
countries. Thus, our success in these countries will be dependent in part upon
the success of those relationships and the implementation or operation of these
arrangements. We may not establish strategic relationships with third parties in
desired time frames, or at all. Even once these relationships are established,
they may fail to produce desired results. To date, we have not generated
significant revenues from engagements with international clients. We recently
opened offices in London and Singapore and we intend to expand our operations
internationally in future periods by opening other international offices,
entering into
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<PAGE> 14
strategic relationships with a variety of third parties, 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 nine months ended December 31, 1999, our five largest
clients accounted for approximately 31% of our revenues. The volume of work that
we perform for a specific client is likely to vary from period to period, and a
significant client in one period may not use our services in a subsequent
period.
OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS REDUCES THE PREDICTABILITY OF
OUR REVENUES
Our clients retain us on an engagement-by-engagement basis, rather than
under long-term contracts. As a result, our revenues are difficult to predict.
Because we incur costs based on our expectations of future revenues, our failure
to predict our revenues accurately may seriously harm our financial condition
and results of operations. Although it is our goal to design and build complete
eBusiness systems for our clients, we are frequently retained to design and
build discrete segments of an overall eBusiness system on an engagement-
by-engagement basis. Since large client projects involve multiple engagements or
stages, there is a risk that a client may choose not to retain us for additional
stages of a project or that the client will cancel or delay additional planned
projects. Such cancellations or delays could result from factors unrelated to
our work product or the progress of the project, but could be related to general
business or financial conditions of the client. For example, many of our current
or potential clients that are in the early stages of development may be unable
to retain our services because of financial constraints. In addition, our
existing clients can generally reduce the scope of or cancel their use of our
services without penalty and with little or no notice. If a client defers,
modifies or cancels an engagement or chooses not to retain us for additional
phases of a project, we must be able to rapidly redeploy our employees to other
engagements in order to minimize underutilization of employees and the resulting
harm to our operating results. Our operating expenses are relatively fixed and
cannot be reduced on short notice to compensate for unanticipated variations in
the number or size of engagements in progress.
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<PAGE> 15
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.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS
We sometimes agree not to perform services or limit the services for
certain 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 or
limit our services for some of 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 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
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<PAGE> 16
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 OR PREVENT INFRINGEMENT CLAIMS AGAINST US
We cannot guarantee that the steps we have taken or will take to protect
our proprietary rights will be adequate to deter misappropriation of our
intellectual property. In addition, we may not be able to detect unauthorized
use of our intellectual property and take appropriate steps to enforce our
rights. If third parties infringe or misappropriate our trade secrets,
copyrights, trademarks or other proprietary information or intellectual
property, our business could be seriously harmed. In addition, although we
believe that our proprietary rights do not infringe the intellectual property
rights of others, other parties may assert infringement claims against us or
claim that we have violated their intellectual property rights. Such claims,
even if not true, could result in significant legal and other costs and may be a
distraction to management. In addition, protection of intellectual property in
many foreign countries is weaker and less reliable than in the United States, so
as our business continues to expand into foreign countries, risks associated
with protecting our intellectual property will increase.
A FEW INDIVIDUALS OWN MUCH OF OUR STOCK
Our directors, executive officers and their affiliates beneficially own, in
the aggregate, approximately 58% of our outstanding common stock. As a result,
these stockholders are able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, such as acquisitions, and to block an
unsolicited tender offer. Accordingly, this concentration of ownership could
have the effect of delaying or preventing a third party from acquiring control
over us at a premium over the then-current market price of our common stock.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of Scient that a stockholder
may consider favorable. These provisions include:
- "Blank check" preferred stock that could be issued by our board of
directors to increase the number of outstanding shares and thwart a
takeover attempt;
- A classified board of directors with staggered, three-year, terms, which
may lengthen the time required to gain control of our board of directors;
- Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director
candidates;
- Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- Limitations on who may call special meetings of stockholders;
- Prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of the stockholders; and
- Advance notice requirements for nominations of candidates for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
Scient.
INVESTMENTS MADE BY SCIENT CAPITAL MAY CAUSE SOME POTENTIAL CLIENTS TO NOT
USE OUR SERVICES
We make investments in some of our clients through our wholly owned
subsidiary, Scient Capital. Competitors of our clients may be discouraged from
using our services if they perceive these investments as creating a conflict of
interest that would result in us not providing the same level of service to
these
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<PAGE> 17
competitors if they became our clients. If potential clients hold this
perception, we may not be able to increase our customer base as we would
otherwise be able to, which could harm our business and results of operations.
RISKS RELATED TO THE SYSTEMS INNOVATION INDUSTRY
OUR SUCCESS WILL DEPEND ON THE CONTINUED DEVELOPMENT OF A MARKET FOR SYSTEMS
INNOVATION SERVICES
We cannot be certain that a viable market for systems innovation services
will be sustainable. If a viable and sustainable market for our systems
innovation services does not continue to develop, Scient will fail. Even if a
systems innovation services market continues to develop, we may not be able to
differentiate our services from those of our competitors. If we are unable to
differentiate our services from those of our competitors, our revenue growth and
operating margins may decline.
OUR SUCCESS DEPENDS ON INCREASED ADOPTION OF THE INTERNET AS A MEANS FOR
COMMERCE
Our future success depends heavily on the continued use and acceptance of
the Internet as a means for commerce. The widespread acceptance and adoption of
the Internet for conducting business is likely only in the event that the
Internet provides businesses with greater efficiencies and improvements. If
commerce on the Internet does not continue to grow, or grows more slowly than
expected, our growth would decline and our business would be seriously harmed.
Consumers and businesses may reject the Internet as a viable commercial medium
for a number of reasons, including:
- Potentially inadequate network infrastructure;
- Delays in the development of Internet enabling technologies and
performance improvements;
- Delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
- Delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information;
- Changes in, or insufficient availability of, telecommunications services
to support the Internet; and
- Failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.
INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS
We are affected not only by regulations applicable to businesses generally,
but also by laws and regulations directly applicable to eBusiness. Although
there are currently few such laws and regulations, both state, federal and
foreign governments may adopt a number of these laws and regulations. Any such
legislation or regulation could dampen the growth of the Internet and decrease
its acceptance as a communications and commercial medium. If such a decline
occurs, companies may decide in the future not to use our services to create an
electronic business channel. This decrease in the demand for our services would
seriously harm our business and operating results.
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
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<PAGE> 18
Act, federal or state governments may enact, and courts may uphold, similar
legislation in the future. Future legislation could expose companies involved in
Internet commerce to liability.
RISKS RELATED TO THE SECURITIES MARKETS
WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE
We may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional financing on favorable terms or at all. If we
need additional capital and cannot raise it on acceptable terms, we may not be
able to:
- Open new offices in the United States or internationally;
- Create additional market-specific business units;
- Enhance our infrastructure and leveragable assets;
- Hire, train and retain employees;
- Respond to competitive pressures or unanticipated requirements; or
- Pursue acquisition opportunities.
Our failure to do any of these things could seriously harm our financial
condition.
OUR STOCK PRICE IS VOLATILE
Prior to our initial public offering in May 1999, our stock could not be
bought or sold publicly. The market price may vary in response to any of the
following factors, some of which are beyond our control:
- Changes in financial estimates or investment recommendations relating to
our stock by securities analysts;
- Changes in market valuations of other eBusiness software and service
providers or electronic businesses;
- Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- Loss of a major client;
- Additions or departures of key personnel; and
- Fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology sector.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Scient does not belive 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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
27.1.. Financial Data 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.
SCIENT CORPORATION
By: /s/ WILLIAM H. KURTZ
------------------------------------
William H. Kurtz
Chief Financial Officer,
Executive Vice President
Date: February 14, 2000
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
27.1.. Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 34,398
<SECURITIES> 43,529
<RECEIVABLES> 36,382
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,877
<PP&E> 11,102
<DEPRECIATION> 0
<TOTAL-ASSETS> 134,913
<CURRENT-LIABILITIES> 39,563
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 91,995
<TOTAL-LIABILITY-AND-EQUITY> 134,913
<SALES> 0
<TOTAL-REVENUES> 89,886
<CGS> 0
<TOTAL-COSTS> 42,032
<OTHER-EXPENSES> 68,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (18,248)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,248)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,248)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
