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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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
SCIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3288107
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE FRONT STREET, 28TH FLOOR,
SAN FRANCISCO, CA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 733-8200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.0001 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Company (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Company was approximately $1,123,423,560 on May 31, 2000 based on the last
reported sale price of the Company's common stock on the Nasdaq National Market
System on May 31, 2000. There were 73,154,704 shares of common stock outstanding
as of May 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on August 18, 2000 are incorporated by reference in
Items 10, 11, 12 and 13 of Part III of this Report.
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SCIENT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 4
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters..................................................... 21
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28
PART III
Item 10. Directors and Executive Officers of the Company............. 29
Item 11. Executive Compensation...................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 31
Signatures............................................................ 34
Index to Consolidated Financial Statements............................ F-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K, constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
factors include those listed under Part I "Business -- Risk Factors".
Forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology. These statements include but are
not limited to statements regarding: the results of our services and attendant
benefits of those services for our clients; our plans regarding future changes
to our pricing models and our expectations regarding the impact of those
changes; the impact of our knowledge management system and framework development
on the delivery of our services and our operational results; the development and
protection of our intellectual property; changes in the competitive environment;
factors, including client mix, that may impact our future revenues; our
expectations regarding amount and type of future expenses and/or our method of
accounting for those expenses; and our expectations regarding future revenues,
profitability, and other operating and financial results. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under Part I "Business -- Risk Factors". These factors may
cause our actual results to differ materially from any forward-looking
statement.
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PART I
ITEM 1. BUSINESS
Scient is a leading provider of a category of professional services called
systems innovation. Scient provides integrated eBusiness strategy and technology
implementation services on a global basis to clients who are creating
eBusinesses or are rethinking or expanding their existing businesses to
integrate eBusiness capabilities. These services include strategy consulting,
customer experience design, systems architecture, application and technology
infrastructure development, and eBusiness management. Our services are designed
to rapidly improve a client's competitive position through the development of
innovative business strategies enabled by the integration of emerging and
existing technologies. Our Scient Approach methodology provides a framework for
each stage of a client engagement from helping the client conceive its strategy
to architecting, engineering and operating its eBusiness.
SERVICES
We offer professional services to build and enhance eBusinesses. These
services include strategy consulting, customer experience design, systems
architecture, application and technology infrastructure development, and
eBusiness management. Recognizing that all clients have different needs at
different times, we use our proprietary methodology, the Scient Approach
methodology to customize our service offerings based on each client's
requirements. The following descriptions highlight the primary services that we
offer.
Strategy Consulting. We work with clients to tailor an eBusiness strategy
designed to provide them with a measurable competitive advantage in a short
timeframe. Our goal is to leverage the industry and eBusiness experience and
knowledge base of our professionals along with the experiences of our clients'
senior executives to formulate innovative, executable and flexible eBusiness
strategies.
Customer Experience Design. In addition to strategy, Scient offers customer
experience design to its clients. Because Scient considers the user interface to
be more than just visual design, we incorporate our abilities in information
architecture, user interface engineering, editorial services and usability
research to develop systems with innovative customer experience. In addition to
offering these services directly to our clients, Scient also sometimes partners
with third-party design firms to achieve our clients' specific visual design
requirements.
Systems Architecture. Using the Internet and emerging technologies, we
architect and design eBusiness applications and technology infrastructure for
clients in rapid timeframes. We offer application designs that range from
intranet solutions to complex business-to-business and business-to-consumer
innovations. Recognizing that the technical infrastructure becomes the
foundation for any future application development, our technology infrastructure
design services focus on enabling eBusiness applications to be reliable, robust,
secure, scalable and extensible.
Application and Technology Infrastructure Development. We build and
implement innovative eBusiness applications and technology infrastructure that
take into account the current and future business needs of our clients. We
recognize that new types of communications devices are proliferating, network
usage is expanding, and the future of eBusiness will be dependent upon the
development and integration of a variety of technologies. We build applications
and technology infrastructure intended to accommodate these changes in the
eBusiness environment. Our applications and technology infrastructure
development services utilize our capabilities in application software, networks,
systems, security and infrastructure architecture. Scient develops applications
and technology infrastructure to be robust and to serve as the foundation for
eBusiness innovations that can link to existing systems and technologies.
eBusiness Management. Upon completion of engagements, we offer our clients
eBusiness Management to help them operate and extend their eBusinesses. These
services include remote systems management, application management, performance
management, content management, and system security management and are provided
on a monthly subscription basis with established service level agreements. Our
extended
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capabilities leverage the iterative nature of the Scient Approach methodology to
provide the framework and business structure for continuous re-innovation of an
eBusiness.
THE SCIENT APPROACH(TM) METHODOLOGY
The Scient Approach methodology is a well-defined process that helps us
efficiently and successfully delivers our innovative services. This methodology
provides a framework that facilitates the distribution of knowledge within an
engagement and across all parts of our firm. The Scient Approach methodology is
designed to allow us to provide consistent quality across engagements and to
deliver high value to clients in all aspects of our services.
The key to the Scient Approach methodology is the iterative improvement of
the eBusiness innovations that we deliver. Because the needs of our clients are
dynamic, we have designed the Scient Approach methodology with built-in feedback
and iteration processes in order to improve the services delivered to clients
and to enhance the approach itself. These processes serve as a critical feedback
tool that assists Scient in designing and extending eBusinesses for its clients.
The Scient Approach methodology has four general stages: Conceive,
Architect, Engineer and Operate. Each of these stages includes the critical
decisions our clients must make in order to build an eBusiness. The methodology
also includes two foundational elements: Launch and Innovate, which are
interwoven throughout the approach.
Conceive. During the Conceive stage, Scient works closely with the client
to define the overall strategy for the eBusiness, including market positioning
and value offering. The five components of the Conceive stage include Assessing,
Visioning, Conceptualizing, Prototyping, and Defining. Upon completion of the
Conceive stage, Scient should have the information necessary to define key
business success factors and to prioritize the client's eBusiness initiatives
based on a common understanding of the client's eBusiness objectives.
Architect. In the Architect stage, Scient defines the scope of the
eBusiness to be developed and designs applications to enable clients to meet
their objectives. Scient also scopes and designs the underlying infrastructure
to integrate the software, network and hardware components necessary to support
the applications. This stage includes the evaluation of any third party
software. The architect stage occurs in two phases, Architect-Scope and
Architect-Design.
- Architect-Scope. The goal of this phase is to collect application and
process requirements to develop a baseline for the Architect-Design
phase.
- Architect-Design. During this phase, Scient defines the processes,
components and timeline necessary to realize the application goals. The
goal of this phase is to create a complete plan that allows the
applications to be constructed, tested and implemented on time and within
budget.
After the Architect stage, the client has a "blueprint" for its eBusiness
development. This blueprint identifies in detail the tasks necessary to meet the
objectives and overall strategy goals as defined in the Conceive stage.
Engineer. In this stage, Scient iteratively builds and delivers the
eBusiness, which may include the incorporation or integration of third party
software or devices. Within this stage are three phases that are focused on
successfully implementing the applications defined during the Architect stage.
- Engineer-Detailed Design. In this phase Scient works with the client to
add more specific details to the requirements, including the user
interface and key technical designs.
- Engineer-Construct. In this phase the modules of the application are
built, refined and unit tested. This phase is aimed at producing the
tangible results for the client that was identified in the earlier stages
of the Scient Approach methodology. During the Engineer-Construct phase,
Scient also trains both internal and external users on the newly built
applications.
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- Engineer -- Test. In this phase applications are tested to ensure they
meet functional, technical and user requirements. This phase intends to
ensure that the engineered applications perform in accordance with the
requirements defined in the Architect stage.
- Engineer-Deploy. In this phase, the eBusiness system is deployed into a
production environment, providing the necessary support and rapid issue
resolution. The Engineer-Deploy phase will deliver the eBusiness system
in its production environment typically for a limited volume beta test,
followed by a full-scale introduction to the complete target user
population.
Upon completion of the Engineer stage, Scient delivers the eBusiness to the
client and works with the client to launch the eBusiness.
Operate. In the Operate stage, Scient manages and measures the eBusiness
technical operations and provides a framework for ongoing re-innovation of the
client's eBusiness. By utilizing Scient for the ongoing management and
innovation of its eBusiness systems, the client can focus on its core
competencies. The Operate stage centers around two separate but related sets of
activities.
- eSolution Management. This area focuses on the day-to-day operations of
the eBusiness, allowing our client to focus on their core competencies.
The eSolution Management has three steps:
- Implement. In this step the client's operational requirements and
architecture are assessed. A high availability management solution is
then implemented.
- Manage. In this step the client's ongoing eBusiness systems are managed
including application management, performance management, content
management and system security management.
- Transition. In this step Scient transfers knowledge and techniques
enabling the client to maintain and manage their eBusiness.
- eBusiness Management. This area focuses on the strategic planning of an
eBusiness solution and extending it into new versions with improved
capabilities. This involves continued re-innovation and improvement in
the eBusiness solution, implemented via a series of new releases with
enhanced capabilities.
SALES AND MARKETING
Through our global direct sales force and marketing organization, we market
and sell our services to clients who are creating eBusinesses or are rethinking
or expanding their existing businesses to integrate eBusiness capabilities. Our
sales professionals are aligned within global business units. We currently
target six principal markets:
- Financial Services Markets, including financial products and services
providers such as banks, brokerage firms, capital markets and securities
firms and insurance companies;
- Electronic Markets, which we define as companies whose business models
rely primarily on new electronic delivery channels;
- Enterprise Markets, which includes Global 1000 companies facing the
challenges of adapting their businesses' traditional procurement and
distribution networks to take advantage of eBusiness capabilities;
- Telecommunications Markets, including large international
telecommunications companies, competitive local exchange carriers,
internet service providers, telecommunications equipment providers, and
entities delivering voice, data and video services to their customers
through various delivery technologies;
- Retail and Consumer Products Markets, which includes traditional
companies that are adding direct-to-consumer channel extensions and
implementing business-to-business strategies; and
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- Media and Entertainment Markets, including diversified media companies,
advertiser-supported media companies, entertainment service providers,
suppliers of recorded entertainment, suppliers of live entertainment,
information service companies and book publishers.
As of March 31, 2000, our global sales and marketing organization consisted
of 40 professionals. We employ a team selling approach, whereby our sales people
collaborate with our business unit professionals and management to identify
prospects, conduct sales and manage client relationships. Due to the strategic
nature of our engagements, we typically negotiate with the senior business and
technical management personnel of our current and potential clients.
Our marketing efforts are focused on creating awareness of the systems
innovation category, establishing Scient as the leader in this new category and
building the Scient brand on a global basis. Scient uses a broad mix of programs
to accomplish these goals, including market research, brochures, information
pieces published for industry forums, public relations activities, marketing
programs, seminars and speaking engagements and website marketing.
CLIENTS
We have performed professional services for a variety of clients in many
industries around the world. We are currently focused on serving companies in
the Financial Services, Electronic Markets, Enterprise, Telecommunications,
Retail and Consumer Products and Media and Entertainment markets. From inception
through March 31, 2000, Scient has served over 100 clients and has helped its
clients launch over 20 eBusinesses.
We provided professional services to clients who are creating eBusinesses
or are rethinking or expanding their existing businesses to integrate eBusiness
capabilities. In the year ended March 31, 2000, our five largest clients
accounted for approximately 27% of our revenues.
We generally enter into contracts with our clients on a time and materials
basis, though we sometimes work on a fixed-fee basis or cap the amounts we may
invoice. In the future, we anticipate an increasing percentage of our client
engagements will be under arrangements with fixed-fee components. If we
miscalculate the resources or time we need to complete engagements with capped
or fixed fees, our operating results could be seriously harmed. Because of the
strategic and competitively sensitive nature of the engagements we perform for
some of our clients, we sometimes agree not to perform services for our clients'
competitors or in a particular field for limited periods of time which to date
have been as long as two years. These non-compete agreements reduce the number
of our prospective clients and reinforce the importance of our client selection.
Scient Capital
In July 1999 we established a wholly owned subsidiary, Scient Capital,
which serves as an investment vehicle for us to make equity investments in
clients or selected business partners who meet certain criteria. We believe that
such equity investments may provide an opportunity to enhance our long-term
relationships with these clients and may allow us to share in the potential
appreciation of such clients' market value, which we believe may be enhanced by
the services we provide to these clients. Scient Capital will be funded entirely
by Scient on an as-needed basis. In general, we expect to make investments in
clients of Scient for a minority stake where a venture capital firm or private
equity investor takes a lead role and establishes the terms and valuation of the
financing round. We may also make investments in other venture capital and
private equity funds, which we believe will provide a synergy with our business.
It is our policy not to accept equity in place of standard engagement fees and
not to discount standard engagement fees based on the opportunity to invest in a
client. As of March 31, 2000, we have made minority investments in 12 of our
clients.
Scient Accelerator Program
Scient established the Scient Accelerator Program as an additional sales
channel to attract early-stage clients and support them in formalizing their
business plans, soliciting venture capital funding and achieving
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rapid time-to-market. The Scient Accelerator Program combines Scient's
full-service offering along with infrastructure, facilities and administrative
support in exchange for standard engagement fees and minority equity ownership.
INNOVATION CENTERS
Scient's professional services colleagues are organized into areas of
expertise and core competencies called Innovation Centers. Our Innovation
Centers are designed to address the full range of expertise and competencies
needed in order to address the eBusiness needs of clients in our targeted
markets. When we deliver services to our clients, we typically build an
integrated team of professionals from several or all of our Innovation Centers.
In addition, the Innovation Centers promote the development of specialized
knowledge, techniques and experience and foster the training, mentoring and
professional development of its members. Each of Scient's professional service
colleagues is in one of the following Innovation Centers:
- Consulting Innovation Center -- Provides consulting services to define
and implement the strategic business, organization, market and brand
direction for an eBusiness. Includes strategy consultants and industry
experienced managers, each of whom is focused on one of Scient's targeted
markets;
- Customer Experience Innovation Center -- Integrates the disciplines of
branding and identity systems, information architecture, content strategy
and editorial systems, creative strategy and visual design, user
interface engineering, front-end technology and qualitative user testing
to deliver integrated brand and user experience to eBusinesses;
- Technology Innovation Center -- Delivers the technical skills and
expertise necessary to manage, strategize, analyze, architect and
engineer the applications and infrastructure of eBusinesses, including
project management, databases, security, network infrastructure,
applications, software development, testing and quality assurance.
Includes the management of Scient's relationships with technology
vendors; and
- Asset Services Innovation Center -- Defines and manages the eBusiness
assets Scient delivers to clients on a subscription, annuity or service
bureau basis. The Asset Services Innovation Center works with other
Innovation Centers, global business units, operations, finance and
management to package and subsequently manage those aspects of Scient's
assets that can be offered on subscription, annuity or service bureau
basis.
NEIGHBORHOODS
Scient has established neighborhoods, or organized communities of interest,
that pursue and develop ideas and establish points of view to improve colleague
and client satisfaction. Our neighborhoods span across our global business
units, innovation centers and core services units to minimize redundancies and
maximize colleague team-building, participation and innovation. As of March 31,
2000, Scient had 14 neighborhoods, spanning areas of interest such as emerging
technologies, eOrganizational issues and customer relationship management.
KNOWLEDGE MANAGEMENT
Our knowledge management processes and systems, which we refer to as
Knowledge Management, enable the development and re-use of Scient's intellectual
capital. We have found that while there are unique features to each client
engagement, there is often a degree of commonality. Scient's focus on particular
industries, business processes and technologies creates intellectual capital
that can be adapted for use in different industries and applications provided
that it is not proprietary to a client. Through the Scient Approach methodology
and our iterative process, we expect to capture this common intellectual capital
and develop common frameworks, processes, and technology to use in the delivery
of our services. Knowledge Management is designed to enable each engagement team
to bring the experiences of our entire company to bear on each client
engagement.
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Knowledge Management facilitates access to the Scient Approach methodology
and helps our colleagues determine what services to deliver to clients and when
to perform the services during the different steps of the approach. Resources
available through Knowledge Management include tutorial materials, templates,
expert contacts and sample outputs for the different process steps. We are also
constructing an interactive, dynamic environment, the Approach Workspace, which
is being designed to provide our colleagues with a comprehensive context for
creating client deliverables. In addition, we are developing a system to help us
staff engagements that will query our Scient Approach methodology process
database to determine what skills are needed for an engagement and examine our
skills inventory to identify available colleagues with the appropriate skills.
An explicit goal of each engagement is knowledge transfer to our clients.
Through the development of our extranet we intend to share information online in
a secure way with each of our clients.
We have invested significantly in Knowledge Management with the intent that
such expenditures will allow us to use our intellectual capital in order to
accelerate the delivery of our services, reduce our costs and leverage our
industry experience. However, we cannot guarantee that Knowledge Management will
help us achieve these goals or will be adequate to support our future
operations.
CORE ENGINEERING LABS
We have established Core Engineering Labs that are responsible for
identifying and evaluating new hardware and software products and emerging
technologies. The Core Engineering Labs also support engagement teams during the
initial implementations of new products and technologies. In addition, the Core
Engineering Labs are responsible for integrating new products and technologies
into the Scient Approach methodology, in order to help us manage the risk to
clients of working with new products and emerging technologies. We believe that
gaining experience with these new technologies and products in the Core
Engineering Labs enables us to develop and implement applications and systems
for clients more quickly than we otherwise could and with less interruption to
and reliance on clients' systems during engagements.
COMPETITION
Competition in the eBusiness services market is intense. We compete against
companies selling electronic commerce software and services, including those
offering such products and services on a hosted basis, and the in-house
development efforts of companies seeking to engage in electronic commerce.
Our current competitors include the following:
- Systems integrators that primarily engage in fixed-time/fixed-fee
contracts, such as Cambridge Technology Partners, Sapient and Viant;
- Large systems integrators, such as Andersen Consulting and the consulting
arms of the "Big Five" accounting firms;
- Web consulting firms and online agencies, such as Agency.com, iXL,
MarchFirst, Proxicom, and Razorfish;
- The professional services groups of computer equipment companies, such as
IBM;
- Outsourcing firms, such as Computer Sciences Corporation and Electronic
Data Systems;
- General management consulting firms, such as Bain & Company, Booz Allen &
Hamilton, Boston Consulting Group and McKinsey & Company; and
- Internal IT departments of current and potential clients.
Because relatively low barriers to entry characterize our market, we also
expect other companies to enter our market.
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We believe that the principal competitive factors in our industry are:
- The speed of development and implementation of eBusinesses;
- The quality of services and deliverables, technical and strategic
expertise, project management capabilities, reputation and experience of
professionals delivering the service;
- The effectiveness of sales and marketing efforts, brand recognition, size
of firm and value of the services provided compared to the price of such
services.
We believe that we presently compete favorably with respect to most of
these factors. In particular, we believe that we offer an integrated set of
strategic consulting skills and technological expertise that many existing
service providers are not well suited to provide. However, the market for
eBusiness services is evolving and we cannot be certain that we will compete
successfully in the future. We expect that competition will continue to
intensify and increase in the future, particularly as large IT consulting firms
focus more resources on eBusiness opportunities. Because we contract with our
clients on an engagement-by-engagement basis, we compete for engagements at each
stage of our methodology. There is no guarantee that we will be retained by our
existing or future clients on later stages of work. See "Risk
Factors -- Competition from Bigger, More Established Competitors Who Have
Greater Financial Resources Could Result in Price Reductions, Reduced
Profitability and Loss of Market Share."
PROPRIETARY RIGHTS
We have developed detailed tools, processes and methodologies underlying
the Scient Approach methodology and software code, scripts, libraries, data
models, applications, business processes, frameworks, and other technology used
internally and in client engagements. We currently seek to protect our
proprietary rights and our other intellectual property through a combination of
copyrights, trademarks and trade secret protection, as well as through
contractual protections such as proprietary information agreements and
nondisclosure agreements. We cannot guarantee that the steps we have taken to
protect our proprietary rights will be adequate to deter misappropriation of our
intellectual property, and we may not be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights. See "Risk
Factors -- We May Not Be Able to Protect Our Intellectual Property and
Proprietary Rights."
COLLEAGUES AND RECRUITING
Colleagues
We generally use the term "colleagues" instead of "employees" to reinforce
our one-firm concept and collegial culture. As of March 31, 2000, we had a total
of 1,180 colleagues. Of these, 828 were in professional services, 40 in sales
and marketing, 32 in recruiting and 280 in core services, including Knowledge
Management, Technology, People, Finance and Administration. We have offices in
San Francisco, New York, Irving, Sunnyvale, Los Angeles, Chicago, Boston,
Austin, London, Munich, and Singapore. Our future success will depend in part on
our ability to attract, retain and motivate highly qualified technical and
management personnel, for whom competition is intense. None of our colleagues is
represented by any collective bargaining unit, and we have never experienced a
work stoppage. We believe our relations with our colleagues are good.
RECRUITING
We dedicate significant resources to our recruiting efforts and manage it
similar to a sales function. As of March 31, 2000, we employed 32 professionals
that focused full-time on recruiting. Our recruiting efforts are targeted at
three levels: executive, technical and college recruiting. In addition to the
efforts of our in-house recruiting group, we seek to meet our hiring needs
through referrals from existing Scient colleagues and through technical and
executive search firms. While recruiting personnel are responsible for screening
candidates, business, functional or administrative managers make hiring
decisions for their own groups in order to help ensure high-quality hires.
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CAREER DEVELOPMENT
We believe that our continuous focus on career development will help us
retain our colleagues. Upon joining our company, each new colleague participates
in a full week training program that covers a broad range of topics, including
technology, consulting and the Scient culture. During their first year with
Scient, recent college graduates typically receive four weeks of training and
experienced hires typically receive one to two weeks of training. We have also
created a sponsorship program where experienced colleagues provide ongoing
career development, mentorship and training to less-experienced colleagues. Our
existing colleagues attend professional development and training programs and
keep apprised of technological advances and developments through on-the-job
exposure to relevant technology and the efforts of our Tech Center.
CORPORATE CULTURE
We believe that developing a rich environment and a one-firm concept with a
shared culture is critical to Scient becoming an employer of choice for
management, strategic, technical, design, sales, marketing and support
professionals of all levels. We actively foster a set of core values that were
developed jointly by management and Scient's colleagues. These values include a
dedication to maintaining an innovative and empowering environment where we work
as a team to achieve total client satisfaction and provide our colleagues with
personal and professional growth opportunities. In addition, we believe that by
linking employee compensation to the success of Scient through our incentive
compensation program, we encourage an owner attitude, which we believe results
in decisions that benefit our clients, our colleagues and our company. We
believe that our growth and success in attracting and retaining high-caliber
colleagues will be in large part dependent on our adherence to a one-firm
culture supported by the following values:
- - Spirit - Growth
- - Community - Innovation
- - Excellence - Urgency
RISK FACTORS
The risks described below are not the only ones that we face. Any of the
following risks could seriously harm our business, financial condition or
results of operations. The following risk factors could cause our actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time.
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 March 31, 2000, we had an accumulated deficit of $28.9 million. 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 on an annual basis. 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. See "Selected Financial Data"
and "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.
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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 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.
We derive all of our revenues from professional services, which we
generally provide on a time and materials basis. Revenues pursuant to time and
materials contracts are generally recognized as services are provided. Since
personnel and related costs constitute the substantial majority of our operating
expenses and since we establish these expenses in advance of any particular
quarter, underutilization of our professional services employees may cause
significant reductions in our operating results for a particular quarter and
could result in losses for such quarter. In addition, we have hired a large
number of personnel in core support services, including knowledge management,
technology infrastructure and finance and administrative, in order to support
our anticipated growth. As a result, a significant portion of our operating
expenses are fixed in the short term. Therefore, any failure to generate
revenues according to our expectations in a particular quarter could result in
losses for the quarter. 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 and as a result of European holidays.
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 that we target 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
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
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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 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 on a global
basis. 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 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 ecommerce services and products on a hosted platform, have entered the
market and we may compete for business with these new entrants. Because
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we contract with our clients on an engagement-by-engagement basis, we compete
for engagements at each stage of our methodology. There is no guarantee that we
will be retained by our existing or future clients on later stages of work.
The majority of our current competitors have longer operating histories,
larger client bases, larger professional staffs, greater brand recognition and
greater financial, technical, marketing and other resources than we do. This may
place us at a disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives. In addition, many of our competitors have well-established
relationships with our current and potential clients and have extensive
knowledge of our industry. As a result, our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements and they may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors that
offer more standardized or less customized services than we do may have a
substantial cost advantage, which could force us to lower our prices, adversely
affecting our operating margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT OUR BUSINESS
We have grown rapidly and expect to continue to grow rapidly both by hiring
new employees and serving new business and geographic markets. Our growth has
placed, and will continue to place, a significant strain on our management and
our operating and financial systems. Our headcount has grown from 260 as of
March 31, 1999 to 1,180 as of March 31, 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 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. We currently plan to redesign 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 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
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
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advanced than the United States' Internet infrastructure. We have only recently
begun to generate significant 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 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;
- 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; and
- 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.
- 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 year ended March 31, 2000, our five largest clients
accounted for approximately 27% 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
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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.
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
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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.
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.
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A FEW INDIVIDUALS OWN MUCH OF OUR STOCK
Our directors, executive officers and their affiliates beneficially own a
significant minority of our outstanding common stock. As a result, these
stockholders are able to exercise control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, such as acquisitions, and to block an unsolicited tender
offer. Accordingly, this concentration of ownership could have the effect of
delaying or preventing a third party from acquiring control over us at a premium
over the then-current market price of our common stock.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of Scient that a stockholder
may consider favorable. These provisions include:
- Authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- A classified board of directors with staggered, three-year, terms, which
may lengthen the time required to gain control of our board of directors;
- Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than majority of stockholders to elect director
candidates;
- Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- Limitations on who may call special meetings of stockholders;
- Prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of the stockholders; and
- Establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law and our
stock incentive plans may discourage, delay or prevent a change in control of
Scient.
INVESTMENTS MADE BY SCIENT CAPITAL MAY CAUSE SOME POTENTIAL CLIENTS TO NOT USE
OUR SERVICES
We hold minority investments in some of our clients through our
wholly-owned subsidiary, Scient Capital. Competitors of our clients may be
discouraged from using our services if they perceive these investments as
creating a conflict of interest that would result in us not providing the same
level of service to these competitors if they became our clients. If potential
clients hold this perception, we may not be able to increase our customer base
as we would otherwise be able to, which could harm our business and results of
operations.
RISKS RELATED TO THE SYSTEMS INNOVATION INDUSTRY
OUR SUCCESS WILL DEPEND ON THE CONTINUED DEVELOPMENT AND SUSTAINABILITY 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, 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.
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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. 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 laws and regulations directly applicable to electronic commerce.
Although there are currently few such laws and regulations, both state, federal
and foreign governments may adopt a number of these laws and regulations. Any
such legislation or regulation could dampen the growth of the Internet and
decrease its acceptance as a communications and commercial medium. If such a
decline occurs, companies may decide in the future not to use our services to
create an electronic business channel. This decrease in the demand for our
services would seriously harm our business and operating results.
Any new laws and regulations may govern or restrict any of the following
issues:
- User privacy;
- The pricing and taxation of goods and services offered over the Internet;
- The content of websites;
- Consumer protection; and
- The characteristics and quality of products and services offered over the
Internet.
For example, the Telecommunications Act of 1996 prohibits the transmission
of certain types of information and content over the Internet. The scope of the
Act's prohibition is currently unsettled. In addition, although courts held
unconstitutional substantial portions of the Communications Decency Act, federal
or state governments may enact, and courts may uphold, similar legislation in
the future. Future legislation could expose companies involved in Internet
commerce to liability.
RISKS RELATED TO THE SECURITIES MARKETS
WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE
We may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional financing on favorable terms or at all. If we
need additional capital and cannot raise it on acceptable terms, we may not be
able to:
- Open new offices, in the United States or internationally;
- Create additional 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 2. PROPERTIES
Scient's headquarters and principal administrative, finance, sales and
marketing operations are located in approximately 136,000 square feet of leased
office space in San Francisco, California. Scient also leases offices in New
York, Irving, Sunnyvale, Los Angeles, Chicago, Boston, Austin, Munich, London,
and Singapore.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK.
Scient's common stock has been quoted on the Nasdaq National Market System
under the symbol SCNT since Scient's initial public offering on May 14, 1999.
The following table sets forth for the periods indicated the high and low sale
prices per share of our common stock as reported on the Nasdaq National Market
(as adjusted for our two-for-one stock split effected on December 6, 1999.)
1999 HIGH LOW
---- ------- ------
First Quarter (beginning May 14, 1999)...................... $ 25.06 $15.13
Second Quarter.............................................. $ 41.56 $19.31
Third Quarter............................................... $100.50 $33.47
Fourth Quarter.............................................. $130.00 $66.50
On May 31, 2000, the last reported sales price of our common stock was $42.875.
As of May 31, 2000, there were 514 holders of record of our common stock.
Because many of such shares are held by brokers and other institutions on behalf
of stockholders, Scient is unable to estimate the total number of stockholders
represented by these record holders.
RECENT SALE OF UNREGISTERED SECURITIES.
None
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable futures. Pursuant to the terms of
our credit facility, we are unable to pay dividends without first obtaining the
written consent of our bank, which will not be unreasonably withheld.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and is qualified by reference to financial statements and notes
thereto and appearing elsewhere in this 10-K filing. The statement of operations
data for the period from November 7, 1997 (inception) through March 31, 1998,
the years ended March 31, 1999, and 2000 and the balance sheet data at March 31,
1999 and 2000 are derived from, and are qualified by reference to, the audited
financial statements of Scient. The historical results are not necessarily
indicative of results to be expected in any future period.
NOVEMBER 7, 1997 YEAR ENDED MARCH 31,
(INCEPTION) THROUGH --------------------
MARCH 31, 1998 1999 2000
------------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Revenues............................................. $ 179 $ 20,675 $155,729
Operating Expenses:
Professional services.............................. 102 10,028 70,207
Selling, general and administrative................ 1,228 15,315 90,854
Stock compensation................................. 64 7,679 15,636
------- -------- --------
Total operating expenses................... 1,394 33,022 176,697
------- -------- --------
Loss from operations................................. (1,215) (12,347) (20,968)
Interest income and other, net....................... 56 646 4,953
------- -------- --------
Net loss............................................. $(1,159) $(11,701) $(16,015)
======= ======== ========
Net loss per share:
Basic and diluted(1)............................... $ (0.10) $ (0.89) $ (0.29)
======= ======== ========
Weighted average shares(1)......................... 11,894 13,198 54,590
======= ======== ========
AS OF MARCH 31,
-----------------------------
1998 1999 2000
------ ------- --------
(IN THOUSANDS)
Balance Sheet Data:
Cash, cash equivalents and short-term investments........... $3,301 $28,129 $229,148
Working capital............................................. 3,299 28,108 235,525
Total assets................................................ 4,225 38,812 313,754
Bank borrowings and capital lease obligations, long-term.... 26 1,809 2,917
Total stockholders' equity.................................. $3,805 $29,977 $252,036
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of computations of net loss per share and weighted average shares.
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ITEM 7. 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 "Selected
Financial Data" and Scient's financial statements and notes thereto appearing
elsewhere in this 10-K filing. 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 Factors" and elsewhere in this 10-K
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. In the year ended
March 31, 2000, our five largest clients accounted for approximately 27% of our
revenues. Revenues from any given client will vary from period to period;
however, we expect that significant customer concentration will continue for the
foreseeable future. To the extent that any significant client uses less of our
services or terminates its relationship with us, our revenues could decline
substantially. As a result, the loss of any significant client could seriously
harm our business and results of operations.
We generally provide our services on a time and materials basis. For the
year ended March 31, 2000, approximately 86% 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 may have fixed-fee components in
the future. Substantially all clients were located within North America and all
revenues were denominated in U.S. dollars.
Professional services expenses consist primarily of compensation and
benefits of our 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. In addition, these cash expenses may increase
because prospective employees that we target 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. 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 Factors -- 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; salaries and
related expenses for executive 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 and operation as a public company.
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Stock compensation expenses consist of non-cash compensation expenses
arising from option grants. We have recorded aggregate unearned stock
compensation totaling $35.0 million and $40.2 million in connection with certain
stock option grants through March 31, 1999 and March 31, 2000, respectively.
This stock compensation expense will be recognized over a period ending March
31, 2004, which is the end of the vesting period for the related options.
Despite growth in our revenues, we have not been profitable on an annual
basis. Our net losses may not decrease proportionately with the increase in our
revenues primarily because of increased expenses related to the expansion of the
number of 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 in which operating expenses increase, our operating results would
be adversely affected. See "Risk Factors -- We Have a History of Losses and
Expect to Incur Losses in the Future."
INCEPTION PERIOD AND YEAR ENDED MARCH 31, 1999
Revenues
The increase in revenues in the year ended March 31, 1999 compared to the
Inception Period reflected the introduction of our eBusiness professional
services in February 1998, the increase in the number of clients and wider scope
of engagements during the year ended March 31, 1999 compared to the Inception
Period, our increased capacity due to increased investment in our sales and
professional services organizations, and the comparison of a full year period to
a partial year period.
Operating Expenses
Professional Services. Our professional services expenses increased in
absolute dollars in the year ended March 31, 1999 compared to the Inception
Period, primarily as a result of increases in the number of professional
services personnel, and the comparison of a full year period to a partial year
period.
Selling, General and Administrative. Selling, general and administrative
expenses increased in absolute dollars in the year ended March 31, 1999 compared
to the Inception Period. The increase was primarily due to expenses related to
the addition of sales, marketing, recruiting, knowledge management, technology,
finance and administration personnel, the costs associated with leasing
additional office space to support our global growth, and the comparison of a
full year period to a partial year period.
Stock Compensation. In the Inception Period and the year ended March 31,
1999, we recorded aggregate unearned stock compensation of $1.6 million and
$33.4 million, respectively, in connection with stock option grants. This
increase was primarily a result of increases in the number of options granted
due to the increased hiring of employees and the comparison of a full year
period to a partial year period. Stock compensation expense is being recognized
over the vesting period of the related options (generally four years). During
the Inception Period and the year ended March 31, 1999, we recognized stock
compensation of $64,000 and $7.7 million, respectively. This increase was
primarily a result of increases in the number of options granted due to
increased hiring of employees and the comparison of a full year period to a
partial year period. We expect to recognize stock compensation expense relating
to options that were granted during the Inception Period and the year ended
March 31, 1999 to range from $2.7 million to $4.4 million per quarter during
fiscal year 2000, from $1.5 million to $2.3 million per quarter during fiscal
year 2001, from $647,000 to $1.3 million per quarter during fiscal year 2002 and
from $86,000 to $485,000 per quarter during fiscal year 2003. The actual amounts
that we recognize will be reduced to the extent that the affected options are
cancelled before they become fully-vested. See Note 9 of Notes to Financial
Statements.
Interest Income and Other, Net
Interest income increased in the year ended March 31, 1999 compared to the
Inception Period. This increase was due primarily to interest income earned over
a full year period versus a partial year period and
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higher interest bearing funds in the full year period resulting from our private
financing activities during 1998 and 1999.
Provision for Income Taxes
From inception through March 31, 1999, we incurred net losses for federal
and state tax purposes and have not recognized any tax provision or benefit. As
of March 31, 1999, we had approximately $5.5 million of federal and state net
operating loss carryforwards to offset future taxable income which expire in
varying amounts beginning in 2018 and 2006, respectively. Given our limited
operating history, losses incurred to date, and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax asset meets the criteria required by generally
accepted accounting principles. Accordingly, a 100% valuation allowance has been
recorded. See Note 3 of Notes to Financial Statements.
YEAR ENDED MARCH 31, 1999 AND YEAR ENDED MARCH 31, 2000
Revenues
The increase in revenues in the year ended March 31, 2000 compared to March
31, 1999 reflected the increase in the number of clients and wider scope of
engagements during the year ended March 31, 2000 as a result of our increased
capacity due to increased investment in our sales and professional services
organizations.
Operating Expenses
Professional Services. Our professional services expenses increased in
absolute dollars in the year ended March 31, 2000 compared to March 31, 1999
primarily as a result of increases in the number of professional services
personnel.
Selling, General and Administrative. Selling, general and administrative
expenses increased in absolute dollars in the year ended March 31, 2000 compared
to March 31, 1999. The increase was primarily due to expenses related to the
addition of sales, marketing, recruiting, knowledge management, technology,
finance and administration personnel, and the cost of leasing additional office
space to support our global growth.
Stock Compensation. For the year ended March 31, 1999 and March 31, 2000,
we recorded aggregate unearned stock compensation of $35.0 million and $40.2
million, respectively, in connection with stock option grants. Stock
compensation expense is being recognized over the vesting period of the related
options (generally four years). For the year ended March 31, 1999 and March 31,
2000, we recognized stock compensation of $7.7 million and $15.6 million,
respectively. This increase was primarily a result of increases in the number of
options granted due to increased hiring of employees and the comparison of a
full year period to a partial year period. We expect to recognize stock
compensation expense relating to options that were granted to range from $1.8
million to $2.9 million per quarter during fiscal year 2001, from $840,000 to
$1.6 million per quarter during fiscal year 2002, from $170,000 to $685,000 per
quarter during fiscal year 2003 and from $18,000 to $87,000 per quarter during
fiscal year 2004. The actual amounts that we recognize will be reduced to the
extent that the affected options are cancelled before they become fully-vested.
See Note 9 of Notes to Financial Statements.
Interest Income and Other, Net
Interest income increased in the year ended March 31, 2000 compared to the
year ended March 31, 1999. This increase was due primarily to higher interest
bearing funds resulting from our public financing activities during fiscal year
ended March 31, 2000.
Provision for Income Taxes
From March 31, 1999 through March 31, 2000, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of March 31, 2000, we had approximately $40.5 million of federal and
state net operating loss carryforwards to offset future taxable income which
expire
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in varying amounts beginning in 2019 and 2007, respectively. Given our limited
operating history, losses incurred to date, and the difficulty in accurately
forecasting our future results, we do not believe that the realization of the
related deferred income tax asset meets the criteria required by generally
accepted accounting principles. Accordingly, a 100% valuation allowance has been
recorded. See Note 3 of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated quarterly financial
data from the periods indicated. We derived this from consolidated financial
statements, and, in the opinion of our management, they include all adjustments,
which consist only of normal recurring adjustments, necessary to present fairly
the financial results for the periods. Results of operations for any previous
fiscal quarter do not necessarily indicate what results may be for any future
period.
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999
-------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
Revenue....................... $ 1,924 $ 3,094 $ 6,270 $ 9,387 $16,404
Operating expenses:
Professional services....... 942 1,796 3,000 4,290 7,940
Selling, general and
administrative............ 1,225 1,630 4,852 7,608 13,105
Stock compensation.......... 358 1,143 2,355 3,823 4,348
------- ------- ------- ------- -------
Total operating
expenses............ 2,525 4,569 10,207 15,721 25,393
------- ------- ------- ------- -------
Loss from operations.......... (601) (1,475) (3,937) (6,334) (8,989)
Interest income and other,
net......................... 78 187 196 185 596
------- ------- ------- ------- -------
Net income (loss)............. $ (523) $(1,288) $(3,741) $(6,149) $(8,393)
======= ======= ======= ======= =======
Net income (loss) per share:
Basic....................... $ (0.04) $ (0.10) $ (0.28) $ (0.40) $ (0.23)
Diluted..................... $ (0.04) $ (0.10) $ (0.28) $ (0.40) $ (0.23)
Weighted average shares
Basic....................... 12,096 12,310 13,474 15,246 36,810
Diluted..................... 12,096 12,310 13,474 15,246 36,810
======= ======= ======= ======= =======
AS A PERCENTAGE OF REVENUE:
Revenue....................... 100% 100% 100% 100% 100%
Operating expenses:
Professional services....... 49 58 48 46 48
Selling, general and
administrative............ 64 53 77 81 80
Stock compensation.......... 18 37 38 41 27
------- ------- ------- ------- -------
Total operating
expenses............ 131 148 163 168 155
Income (loss) from
operations.................. (31) (48) (63) (68) (55)
Interest income (expense),
net......................... 4 6 3 2 4
------- ------- ------- ------- -------
Net income (loss)............. (27)% (42)% (60)% (66)% (51)%
======= ======= ======= ======= =======
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 2000
------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
Revenue....................... $30,805 $42,677 $65,843
Operating expenses:
Professional services....... 14,233 19,859 28,175
Selling, general and
administrative............ 19,212 23,993 34,545
Stock compensation.......... 4,173 3,697 3,418
------- ------- -------
Total operating
expenses............ 37,618 47,549 66,138
------- ------- -------
Loss from operations.......... (6,813) (4,872) (295)
Interest income and other,
net......................... 992 837 2,528
------- ------- -------
Net income (loss)............. $(5,821) $(4,035) $ 2,233
======= ======= =======
Net income (loss) per share:
Basic....................... $ (0.10) $ (0.07) $ 0.04
Diluted..................... $ (0.10) $ (0.07) $ 0.03
Weighted average shares
Basic....................... 55,848 57,992 61,781
Diluted..................... 55,848 57,992 83,413
======= ======= =======
AS A PERCENTAGE OF REVENUE:
Revenue....................... 100% 100% 100%
Operating expenses:
Professional services....... 46 47 43
Selling, general and
administrative............ 62 56 52
Stock compensation.......... 14 9 5
------- ------- -------
Total operating
expenses............ 122 112 100
Income (loss) from
operations.................. (22) (12) (0)
Interest income (expense),
net......................... 3 2 4
------- ------- -------
Net income (loss)............. (19)% (10)% 4%
======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
We raised $62.7 million in May 1999 from an initial public offering of
6,900,000 shares of our common stock, net of underwriting discounts, commissions
and issuance costs.
We raised an additional $154.3 million in January 2000 from a secondary
public offering on 1,850,000 shares of our common stock, net of underwriting
discounts, commissions and issuance costs.
Cash used in operations for the Inception Period and year ended March 31,
1999 and 2000 were $1.2 million, $4.6 million, and $6.6 million, respectively.
As of March 31, 2000 we had $229.1 million in cash, cash equivalents and
short-term investments. We expect that accounts receivable will continue to
increase to
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the extent our revenues continue to rise. Any such increase that occurs at a
greater rate than increases in revenues can be expected to reduce cash, cash
equivalents and investments.
Cash provided by financing activities was $4.8 million, $31.8 million, and
$221.8 million, respectively, for the Inception Period, years ended March 31,
1999 and 2000 and consisted primarily of cash received for the sale of common
stock through Scient's initial public offering and follow-on offering.
We have a revolving line of credit for $9.2 million with a bank. Borrowings
under this line of credit bear interest at the bank's prime rate. As of March
31, 2000, there were no outstanding borrowings under this line of credit. Twelve
standby letters of credit totaling $8.5 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.
As of March 31, 2000, borrowings under this capital equipment line were
approximately $2.2 million.
Capital expenditures for the Inception Period and each of the years ended
March 31, 1999 and 2000 were approximately $334,000, $3.7 million and $16.0
million, respectively. These expenditures were primarily for computer equipment
and software, including equipment acquired under capital leases, and furniture
and fixtures. We expect that capital expenditures will continue to increase to
the extent we continue to increase our headcount or expand our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133", respectively. SFAS 133 is effective for all fiscal quarters beginning with
the quarter ending June 30, 2000. SFAS 133 establishes accounting and reporting
standards of derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Scient will adopt SFAS
133 in its quarter ending June 30, 2000 and does not expect such adoption to
have an impact on Scient's results of operations, financial position or cash
flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board opinion 20, "Accounting Changes." In March 2000, the SEC issued SAB 101A
"Amendment: Revenue Recognition in Financial Statement," which delays
implementation of SAB 101 until Scient's first fiscal quarter of 2001. In June
2000, the SEC issued SAB 101B "Second Amendment: Revenue Recognition in
Financial Statements," which delays the implementation of SAB 101 until Scient's
fourth fiscal quarter of 2001. Scient will adopt SAB 101 and is currently in the
process of evaluating the impact, if any, SAB 101 will have on its financial
position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Scient does not believe that there is any material risk exposure with
respect to derivative or other financial instruments, which would require
disclosure under this item.
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ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The consolidated financial statements of Scient, including Scient's
consolidated balance sheets as of March 31, 1999 and 2000, and consolidated
statement of operations, consolidated statements of stockholder's equity, and
consolidated statements of cash flows for the years ended March 31, 1998, 1999,
and 2000 and notes to the consolidated financial statements, together with a
report thereon of PricewaterhouseCoopers, LLP, dated April 24, 2000 appear on
pages F-1 through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of Scient, and their ages as of April 1, 2000, are
as follows:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
Robert M. Howe.............. 55 Chairman and Chief Executive Officer
Stephen A. Mucchetti........ 57 President, Chief Operating Officer and Executive Vice President
William H. Kurtz............ 43 Chief Financial Officer, Executive Vice President, and
Secretary
Board of Directors
The information concerning our directors required by this item is
incorporated by reference to the Proxy Statement for the 2000 Annual Meeting of
Shareholders under the heading "Election of Directors."
Executive Officers
Robert M. Howe has served as our Chairman and Chief Executive Officer since
April 2000. Mr. Howe joined Scient in February 1998 as President and Chief
Executive Officer. He is also a member of our board of directors. Prior to
joining Scient, Mr. Howe was General Manager of the IBM Worldwide Banking,
Finance and Securities Industry Group from January 1996 to March 1998. From
November 1994 to January 1996, Mr. Howe managed IBM's North American Banking,
Finance and Securities Industry Group. From March 1991 to November 1994, Mr.
Howe founded and ran the IBM Consulting Group. From January 1976 to February
1991, Mr. Howe was a consultant at Booz Allen & Hamilton, a management
consulting firm. Mr. Howe is a member of the boards of directors of the
Development Bank of Singapore, S.C. Johnson Commercial Markets, and Innoventry.
Mr. Howe received a Bachelor in Business Administration from Southern Methodist
University and a Master in Business Administration from the Harvard University
Graduate School of Business.
Stephen A. Mucchetti has served as our President and Chief Operating
Officer since April 2000. Mr. Mucchetti joined Scient as Chief Operating Officer
in October 1998. Prior to joining us, Mr. Mucchetti was the General Manager of
IBM's Telecommunications and Media Group from October 1992 to October 1998.
Prior to joining IBM, Mr. Mucchetti was a Partner in the consulting division of
Coopers & Lybrand from January 1984 to November 1989 and was Managing Partner
for Coopers & Lybrand's northeast United States region from November 1989 to
October 1992. Prior to joining Coopers & Lybrand, he was a consultant at Booz
Allen & Hamilton from December 1975 to January 1984. Mr. Mucchetti received a
Bachelor of Science in Electrical Engineering from Villanova University.
William H. Kurtz has served as our Chief Financial Officer since August
1998. Before joining Scient, Mr. Kurtz served in various capacities at AT&T from
July 1983 to August 1998, including Vice President of Cost Management and Chief
Financial Officer of AT&T's Business Markets Division. Prior to joining AT&T, he
worked at Price Waterhouse from June 1979 to July 1983. Mr. Kurtz is a certified
public accountant, sits on the board of directors for Redback Networks, Inc. and
received a Bachelor of Science in Accounting from Rider University and a Master
of Science in Management from the Stanford University Graduate School of
Business.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item will be contained in the Proxy Statement for the
2000 Annual Meeting of Shareholders under the heading "Compensation of Executive
Officers and Directors" and is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item will be contained in the Proxy Statement for the
2000 Annual Meeting of Shareholders under the heading "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item will be contained in the Proxy Statement for the
2000 Annual Meeting of Shareholders under the heading "Certain Relationships and
Related Transactions" and is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger, dated May 5, 1999, for the
reincorporation of Scient Corporation, a California
corporation, into Scient Corporation, a Delaware
corporation -- incorporated herein by reference to Exhibit
2.1 to the Company's Registration Statement on Form S-1
filed March 19, 1999 (File No. 333-74731).
3.1 Amended and Restated Certificate of Incorporation of Scient,
filed with the Secretary of State of Delaware on April 15,
1999 -- incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-1 filed March
19, 1999 (File No. 333-74731).
3.2 Form of Second Amended and Restated Certificate of
Incorporation of Scient filed after the closing of the
offering made pursuant to this Registration
Statement -- incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 filed
March 19, 1999 (File No. 333-74731).
3.3 Amended and Restated Bylaws of Scient -- incorporated herein
by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
3.4 Amended Certificate of Incorporation -- incorporated herein
by reference to the Company's Preliminary 14A filed March
17, 2000 (File No. 333-74731)
4.1 Amended and Restated Investor Rights Agreement, dated
February 16, 1999, among Scient and the investors and
founder named therein, as amended -- incorporated herein by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
4.2 Specimen Certificate of Scient's common
stock -- incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-1 filed March
19, 1999 (File No. 333-74731).
10.1 Form of Indemnification Agreement entered into between
Scient and its directors and officers -- incorporated herein
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.2 1997 Stock Plan -- incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 filed March 19, 1999 (File No. 333-74731).
10.3 1999 Equity Incentive Plan (as amended and restated
effective November 15, 1999 -- incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 filed January 19, 2000 (File No.
333-93441).
10.4 1999 Employee Stock Purchase Plan -- incorporated herein by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.5 Employment Agreement between Scient and Eric Greenberg,
dated December 10, 1997 -- incorporated herein by reference
to Exhibit 10.5 to the Company's Registration Statement on
Form S-1 filed March 19, 1999 (File No. 333-74731).
10.6 Employment Agreement between Scient, Eric Greenberg and
Robert M. Howe, dated February 9, 1998 -- incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
31
32
EXHIBIT
NO. DESCRIPTION
------- -----------
10.7 Employment Agreement between Scient and William H. Kurtz,
dated June 12, 1998 -- incorporated herein by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-1 filed March 19, 1999 (File No. 333-74731).
10.8 Employment Agreement between Scient and Stephen A.
Mucchetti, dated September 14, 1998 -- incorporated herein
by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.9 Stock Repurchase Agreement between Scient and Robert M.
Howe, dated December 22, 1998 -- incorporated herein by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.10 Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated August 20, 1998 -- incorporated
herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.11 Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998 -- incorporated
herein by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.12 Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998 -- incorporated
herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.13 Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab &
Co., Inc., dated October 7, 1998 -- incorporated herein by
reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.14 Standard Form of Loft Lease between Scient and Lautob Realty
Company, dated October 28, 1998 -- incorporated herein by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.15 Agreement to Sub-Sublease between Scient and Northpoint
Communications, Inc., dated October 16, 1998 -- incorporated
herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.16 Full-Recourse Promissory Note between Scient and Aron Dutta,
dated January 28, 1999 -- incorporated herein by reference
to Exhibit 10.16 to the Company's Registration Statement on
Form S-1 filed March 19, 1999 (File No. 333-74731).
10.17 Sublease between Scient and Robins, Kaplan, Miller & Ciresi,
LLP, dated April 13, 1999 -- incorporated herein by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.18 Sub-Sub-Sub-Sublease between Scient and Charles Schwab &
Co., Inc., dated October 1, 1998 -- incorporated herein by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.19 Addendum to Sub-Sub-Sub-Sublease and
Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab &
Co., Inc., dated October 8, 1998 -- incorporated herein by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.20 Lease between Scient and Pembroke Real Estate, Inc., dated
May 1, 1999 -- incorporated herein by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-1
filed March 19, 1999 (File No. 333-74731).
10.21 1999 Equity Incentive Plan Restatement, dated February 16,
2000. (see page S-1)
21.1 List of subsidiaries (see page S-23).
32
33
EXHIBIT
NO. DESCRIPTION
------- -----------
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants (see page S-24).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
33
34
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
FRANCISCO, STATE OF CALIFORNIA, ON THIS 28TH DAY OF JUNE, 2000.
SCIENT CORPORATION
By: /s/ ROBERT M. HOWE
------------------------------------
Robert M. Howe
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT M. HOWE Chairman and Chief Executive Officer June 28, 2000
- ------------------------------------------------ (Principal Executive Officer)
Robert M. Howe
/s/ STEPHEN A. MUCCHETTI President, Chief Operating Officer, June 28, 2000
- ------------------------------------------------ and Director
Stephen A. Mucchetti
/s/ WILLIAM H. KURTZ Chief Financial Officer and Executive June 28, 2000
- ------------------------------------------------ Vice President (Principal Financial
William H. Kurtz and Accounting Officer)
/s/ ERIC GREENBERG Chairman Emeritus and Founder June 28, 2000
- ------------------------------------------------
Eric Greenberg
/s/ DAVID M. BEIRNE Director June 28, 2000
- ------------------------------------------------
David M. Beirne
/s/ FREDERICK W. GLUCK Director June 28, 2000
- ------------------------------------------------
Frederick W. Gluck
/s/ DOUGLAS LEONE Director June 28, 2000
- ------------------------------------------------
Douglas Leone
/s/ KENICHI OHMAE Director June 28, 2000
- ------------------------------------------------
Kenichi Ohmae
34
35
SCIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to the Consolidated Financial Statements.............. F-8
F-1
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Scient Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Scient Corporation and its subsidiaries at March 31, 1999 and 2000, and the
results of their operations and their cash flows for the period from November 7,
1997 (Inception) through March 31, 1998 and for the years ended March 31, 1999
and 2000 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 24, 2000
F-2
37
SCIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
MARCH 31
--------------------
1999 2000
-------- --------
Current assets:
Cash and cash equivalents................................. $ 11,261 $108,102
Short-term investments.................................... 16,868 121,046
Accounts receivable, net.................................. 5,876 56,021
Prepaid expenses.......................................... 811 4,929
Other..................................................... 318 4,228
-------- --------
Total current assets.............................. 35,134 294,326
Long-term investments....................................... -- 3,146
Property and equipment, net................................. 3,410 16,063
Other....................................................... 268 219
-------- --------
$ 38,812 $313,754
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings, current.................................. $ 413 $ 1,334
Accounts payable.......................................... 832 5,023
Accrued compensation and benefits......................... 2,554 33,976
Accrued expenses.......................................... 2,078 9,265
Deferred revenue.......................................... 524 6,579
Capital lease obligations, current........................ 625 2,624
-------- --------
Total current liabilities......................... 7,026 58,801
Bank borrowings, long-term.................................. 1,129 865
Capital lease obligations, long-term........................ 680 2,052
-------- --------
8,835 61,718
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock; issuable in series, $.0001
par value; 10,000 shares authorized; 9,012 and no
shares issued and outstanding, respectively............ 1 --
Common stock: $.0001 par value; 125,000 shares authorized;
33,134 and 72,491 shares issued and outstanding,
respectively........................................... 3 7
Additional paid-in capital................................ 70,055 297,735
Accumulated other comprehensive loss...................... -- (47)
Unearned compensation..................................... (27,222) (16,784)
Accumulated deficit....................................... (12,860) (28,875)
-------- --------
Total stockholders' equity........................ 29,977 252,036
-------- --------
$ 38,812 $313,754
======== ========
See notes to consolidated financial statements.
F-3
38
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOVEMBER 7, 1997 YEAR ENDED MARCH 31,
(INCEPTION) THROUGH --------------------
MARCH 31, 1998 1999 2000
------------------- -------- --------
Revenues............................................... $ 179 $ 20,675 $155,729
Operating expenses:
Professional services................................ 102 10,028 70,207
Selling, general and administrative.................. 1,228 15,315 90,854
Stock compensation................................... 64 7,679 15,636
------- -------- --------
Total operating expenses..................... 1,394 33,022 176,697
------- -------- --------
Loss from operations................................... (1,215) (12,347) (20,968)
Interest income and other, net......................... 56 646 4,953
------- -------- --------
Net loss............................................... $(1,159) $(11,701) $(16,015)
======= ======== ========
Net loss per share:
Basic and diluted.................................... $ (0.10) $ (0.89) $ (0.29)
======= ======== ========
Weighted average shares.............................. 11,894 13,198 54,590
======= ======== ========
See notes to consolidated financial statements.
F-4
39
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
--------------- --------------- PAID-IN SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
------ ------ ------ ------ ---------- ------------
Component of comprehensive loss:
Net loss............................................... -- $-- -- $-- $ -- $ --
Comprehensive loss............................... -- -- -- -- -- --
------ --- ------ --- -------- -----
Issuance of common stock to founder...................... -- -- 17,068 -- -- --
Issuance of Series A convertible preferred stock, net of
issuance cost of $20................................... 5,333 1 -- -- 4,779 --
Unearned compensation.................................... -- -- -- -- 1,599 --
Amortization of unearned compensation.................... -- -- -- -- -- --
Exercise of stock options................................ -- -- 4,800 1 119 --
Balance at March 31, 1998................................ 5,333 1 21,868 1 6,497 --
Component of comprehensive loss:
Net loss............................................... -- -- -- -- -- --
Comprehensive loss............................... -- -- -- -- -- --
------ --- ------ --- -------- -----
Issuance of Series A convertible preferred stock......... 950 -- -- -- 1,425 (873)
Issuance of Series B convertible preferred stock, net of
issuance cost of $38................................... 2,240 -- -- -- 14,189 --
Issuance of Series C convertible preferred stock, net of
issuance cost of $54................................... 1,051 -- -- -- 11,346 --
Repurchase of Series A convertible preferred stock by
canceling the stock subscription receivable............ (562) -- -- -- (844) 873
Unearned compensation.................................... -- -- -- -- 33,366 --
Amortization of unearned compensation.................... -- -- -- -- -- --
Exercise of stock options and warrants, net.............. -- -- 11,266 2 4,076 --
Balance at March 31, 1999................................ 9,012 1 33,134 3 70,055 --
Component of comprehensive loss:
Net loss............................................... -- -- -- -- -- --
Currency translation adjustment........................ -- -- -- -- -- --
Comprehensive loss............................... -- -- -- -- -- --
------ --- ------ --- -------- -----
Conversion of convertible preferred stock to common
stock.................................................. (9,012) (1) 29,466 3 (2) --
Issuance of common stock in initial public offering, net
of issuance cost of $1,455............................. -- -- 6,900 1 62,727 --
Issuance of common stock in follow-on offering, net of
issuance cost of $779.................................. -- -- 1,850 -- 154,276 --
Issuance of common stock................................. -- -- 300 -- 1,800 --
Unearned compensation.................................... -- -- -- -- 5,198 --
Amortization of unearned compensation.................... -- -- -- -- -- --
Exercise of stock options and warrants, net.............. -- -- 841 -- 3,681 --
Balance at March 31, 2000................................ -- $-- 72,491 $ 7 $297,735 $ --
====== === ====== === ======== =====
See notes to consolidated financial statements.
F-5
40
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE UNEARNED ACCUMULATED STOCKHOLDERS'
LOSS COMPENSATION DEFICIT EQUITY
------------- ------------ ----------- -------------
Component of comprehensive loss:
Net loss.................................................. $ -- $ -- $ (1,159) $ (1,159)
--------
Comprehensive loss.................................. -- -- -- (1,159)
Issuance of common stock to founder......................... -- -- -- --
Issuance of Series A convertible preferred stock, net of
issuance cost of $20...................................... -- -- -- 4,780
Unearned compensation....................................... -- (1,599) -- --
Amortization of unearned compensation....................... -- 64 -- 64
Exercise of stock options................................... -- -- -- 120
Balance at March 31, 1998................................... -- (1,535) (1,159) 3,805
Comprehensive loss:
Net loss.................................................. -- -- (11,701) (11,701)
--------
Component of comprehensive loss..................... -- -- -- (11,701)
Issuance of Series A convertible preferred stock............ -- -- -- 552
Issuance of Series B convertible preferred stock, net of
issuance cost of $38...................................... -- -- -- 14,189
Issuance of Series C convertible preferred stock, net of
issuance cost of $54...................................... -- -- -- 11,346
Repurchase of Series A convertible preferred stock by
canceling the stock subscription receivable............... -- -- -- 29
Unearned compensation....................................... -- (33,366) -- --
Amortization of unearned compensation....................... -- 7,679 -- 7,679
Exercise of stock options and warrants, net................. -- -- -- 4,078
Balance at March 31, 1999................................... -- (27,222) (12,860) 29,977
Component of comprehensive loss:
Net loss.................................................. -- -- (16,015) (16,015)
Currency translation adjustment........................... (47) -- -- (47)
--------
Comprehensive loss.................................. -- -- -- (16,062)
Conversion of convertible preferred stock to common stock... -- -- -- --
Issuance of common stock in initial public offering net of
issuance cost of $1,455................................... -- -- -- 62,728
Issuance of common stock in follow-on offering net of
issuance cost of $779..................................... -- -- -- 154,276
Issuance of common stock.................................... -- -- -- 1,800
Unearned compensation....................................... -- (5,198) -- --
Amortization of unearned compensation....................... -- 15,636 -- 15,636
Exercise of stock options and warrants, net................. -- -- -- 3,681
---- -------- -------- --------
Balance at March 31, 2000................................... $(47) $(16,784) $(28,875) $252,036
==== ======== ======== ========
See notes to consolidated financial statements.
F-6
41
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NOVEMBER 7, 1997 YEAR ENDED MARCH 31,
(INCEPTION) THROUGH ---------------------
MARCH 31, 1998 1999 2000
------------------- -------- ---------
Cash flows from operating activities:
Net loss.......................................... $(1,159) $(11,701) $ (16,015)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 12 622 3,082
Provision for doubtful accounts................ -- 200 1,583
Amortization of unearned compensation.......... 64 7,679 15,636
Changes in assets and liabilities:
Accounts receivable.......................... (155) (5,920) (51,728)
Prepaid expenses............................. (137) (674) (4,118)
Other assets................................. (210) (376) (3,861)
Accounts payable............................. 351 481 4,191
Accrued expenses............................. 32 4,600 38,609
Deferred revenue............................. -- 524 6,055
------- -------- ---------
Net cash used in operating activities..... (1,202) (4,565) (6,566)
------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net........... (297) (2,360) (11,053)
Purchase of investments, net...................... -- (16,868) (107,324)
------- -------- ---------
Net cash used in investing activities..... (297) (19,228) (118,377)
------- -------- ---------
Cash flows from financing activities:
Proceeds from initial public offering, net........ -- -- 62,728
Proceeds from follow-on offering, net............. -- -- 154,276
Proceeds from bank borrowing...................... -- 1,542 657
Proceeds from convertible preferred stock, net.... 4,780 26,116 --
Proceeds from issuance of common stock............ -- -- 1,800
Proceeds from exercise of common stock options and
warrants, net.................................. 120 4,077 3,681
Principal payments on capital lease obligations... -- (82) (1,334)
Restricted cash................................... (100) 100 --
------- -------- ---------
Net cash provided by financing
activities.............................. 4,800 31,753 221,808
------- -------- ---------
Effect on cash of changes in exchange rate.......... -- -- (24)
Increase in cash and cash equivalents............... 3,301 7,960 96,841
Cash and cash equivalents at beginning of period.... -- 3,301 11,261
------- -------- ---------
Cash and cash equivalents at end of period.......... $ 3,301 $ 11,261 $ 108,102
======= ======== =========
Supplemental cash flow information:
Cash paid for interest............................ $ 1 $ 85 $ 373
======= ======== =========
Supplemental non-cash financing activity:
Property and equipment acquired under capital
leases......................................... $ 37 $ 1,350 $ 4,705
======= ======== =========
See notes to consolidated financial statements.
F-7
42
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Scient Corporation ("Scient") was incorporated in California on November 7,
1997. Scient is a leading provider of the category of professional services
called systems innovation. Scient provides integrated eBusiness strategy and
technology implementation services on a global basis to clients who are creating
eBusinesses or are rethinking or expanding their existing businesses to
integrate eBusiness capabilities. These services include strategy consulting,
customer experience design, systems architecture, application and technology
infrastructure development and eBusiness management.
Reincorporation
In March 1999, Scient's Board of Directors authorized, and in April 1999
the stockholders approved, the reincorporation of Scient in the State of
Delaware. Following the reincorporation, Scient is authorized to issue
40,000,000 shares of $.0001 par value Common Stock and 11,500,000 shares of
$.0001 par value Preferred Stock. In May 1999, upon the effectiveness of the
initial public offering, 125,000,000 shares of common stock and 10,000,000
shares of undesignated convertible preferred stock were authorized. The Board of
Directors has the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof. Share information for the period from November 7, 1997 (Inception)
through March 31, 1998 and for the years ended March 31, 1999 and 2000, has been
retroactively adjusted to reflect the reincorporation and increase in shares
authorized.
Consolidation
The consolidated financial statements include the accounts of Scient and
its wholly owned subsidiaries after elimination of intercompany balances and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Scient derives its revenues from service agreements. Revenues pursuant to
time and materials contracts are generally recognized as services are performed.
Revenues pursuant to fixed-fee contracts are generally recognized as services
are rendered on the percentage-of-completion method of accounting (based on the
ratio of costs incurred to total estimated costs). Revenues exclude reimbursable
expenses charged to and collected from clients.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
become probable and can be reasonably estimated. To date, such losses have been
insignificant. Unbilled fees and services on contracts are comprised of costs
plus fees on certain contracts in excess of contractual billings on such
contracts. Advanced billings and billings in excess of costs plus fees are
classified as deferred revenue.
F-8
43
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating Expenses
Professional Services. Professional services expenses consist primarily of
compensation and benefits of Scient's employees engaged in the delivery of
professional services.
Stock Compensation. Scient amortizes unearned compensation recorded in
connection with certain stock option grants over the vesting periods of the
related options.
Cash and Cash Equivalents
Scient considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Investments
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," Scient has
categorized its marketable securities as "available-for-sale." At March 31, 1999
and 2000, amortized cost approximated fair value and unrealized gains and losses
were insignificant.
The portfolio of short-term investments (including cash and cash
equivalents) consisted of the following (in thousands):
YEAR ENDED MARCH 31,
---------------------
1999 2000
-------- ---------
Cash.................................................... $ 2,251 $ 9,192
Commercial paper........................................ 5,956 89,892
Government securities................................... 10,582 54,023
Foreign securities...................................... 3,176 22,519
Term notes.............................................. 6,164 47,829
Corporate bonds......................................... -- 2,557
Certificate of deposit.................................. -- 3,136
------- --------
$28,129 $229,148
======= ========
Scient considers all investments with maturities of less than one year as
of March 31, 2000 to be short-term investments. Long term investments consist
primarily of marketable securities with original maturities of greater than
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.
Investments in entities in which Scient has an equity interest of less then
20% and does not have the ability to exercise significant influence are
accounted for under the cost method. At each balance sheet date, Scient assesses
the fair market value of its cost-based investments and recognizes any
identified impairment.
Concentration of Credit Risk
Scient's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, and accrued
expenses. At March 31, 1999 and 2000, the fair value of these instruments
approximated their financial statement carrying amounts.
Credit is extended to customers based on an evaluation of their financial
condition, and collateral generally is not required. Scient performs ongoing
credit evaluations of its customers and maintains an allowance for doubtful
accounts.
F-9
44
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scient is subject to concentrations of credit risk and interest rate risk
related to its short-term investments. Scient's credit risk is managed by
limiting the amount of investments placed with any one issuer, investing in
money market funds, and short-term commercial paper, and A1 rated corporate
bonds.
The following table summarizes the revenue from clients in excess of 10% of
total revenue.
YEAR ENDED
NOVEMBER 7, 1997 MARCH 31,
(INCEPTION) THROUGH -----------
MARCH 31, 1998 1999 2000
------------------- ---- ----
Company A................................................ 60% * *
Company B................................................ 35% * *
Company C................................................ * 13% *
Company D................................................ * 11% *
Company E................................................ * 11% *
- ---------------
* Represented less than 10% of total.
At March 31, 1999, three clients represented 31%, 21% and 12% of accounts
receivable. At March 31, 2000, three clients represented 7% each of accounts
receivable.
Fair Value of Financial Instruments
Scient's financial instruments, including cash equivalents, investments,
accounts receivable, accounts payable, debt and capital lease obligations are
carried at cost, which approximates fair value, due to the short-term maturity
of these instruments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed using the straight-line method ranging from
eighteen months to five years for computer equipment and software and furniture
and fixtures, which is deemed to be the estimated useful lives of the assets.
Leasehold improvements and assets held under capital leases are amortized over
the term of the lease or estimated useful lives, whichever is shorter.
Stock Compensation
Scient accounts for employee stock compensation arrangements in accordance
with provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), and complies with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25, compensation
expense is based on the difference, if any, on the date of grant between the
fair value of Scient's stock and the exercise price.
Income Taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in Scient's financial statements or tax returns. The
measurements of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated.
F-10
45
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Loss Per Share
Scient computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share," and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Potential common shares
are composed of common stock subject to repurchase rights and incremental shares
of common stock issuable upon the exercise of stock options and warrants and
upon conversion of Series A, B and C convertible preferred stock.
The following table sets forth the computation of basic and dilutive net
loss per share for the periods indicated (in thousands, except per share
amounts):
NOVEMBER 7, 1997 YEAR ENDED MARCH 31,
(INCEPTION) THROUGH --------------------
MARCH 31, 1998 1999 2000
------------------- -------- --------
Numerator
Net loss................................... $(1,159) $(11,701) $(16,015)
======= ======== ========
Denominator
Weighted average shares.................... 17,066 26,750 66,194
Weighted average unvested common shares to
repurchase.............................. (5,172) (13,552) (11,604)
------- -------- --------
Denominator for basic and diluted
calculation............................. 11,894 13,198 54,590
======= ======== ========
Net loss per share:
Basic and diluted.......................... $ (0.10) $ (0.89) $ (0.29)
======= ======== ========
The following table sets forth common stock equivalents that are not
included in the diluted net income per share calculation above because to do so
would be antidilutive for the periods indicated (in thousands):
NOVEMBER 7, 1997 YEAR ENDED MARCH 31,
(INCEPTION) THROUGH --------------------
MARCH 31, 1998 1999 2000
------------------- -------- --------
Weighted average effect of common stock
equivalents:
Series A convertible preferred stock......... 17,360 24,600 --
Series B convertible preferred stock......... -- 3,622 --
Series C convertible preferred stock......... -- 254 --
Common stock warrants........................ 30 126 --
Unvested common shares subject to
repurchase................................ 5,172 13,552 11,604
Employee stock options....................... 1,944 4,702 8,866
------ ------- -------
24,506 46,856 20,470
====== ======= =======
Comprehensive Income
Effective April 1, 1998, Scient adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The adoption of SFAS No. 130 had no
impact on Scient's net income or stockholders' equity.
F-11
46
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment Information
Scient adopted the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Scient identifies its operating
segments based on business activities, management responsibility and
geographical location. Scient engages in business activities in one operating
segment, which provides integrated eBusiness strategy and technology
implementation services to clients who are creating eBusinesses or are
rethinking or expanding their existing businesses to integrate eBusiness
capabilities. Scient's services are delivered to clients primarily in North
America, and Scient's long-lived assets are located primarily in North America.
Revenues derived from Scient's international subsidiaries have been
insignificant to date.
Advertising Expenses
Scient expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative in the
consolidated statements of operations and totaled $51,000, $470,000, and $4.4
million for the period ended from November 7, 1997 (Inception) through March 31,
1998, and the years ended March 31, 1999 and 2000, respectively.
Foreign Currency
The functional currencies of the Scient's international subsidiaries are
the local currencies. The financial statements of these subsidiaries are
translated to United States dollars using period-end rates of exchange for
assets and liabilities and average rates during the period for revenues, cost of
revenues, and expenses. Translation gains and losses are accumulated as a
component of stockholders' equity. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations
and were not significant during the periods presented.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recent Accounting Pronouncements
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133", respectively. SFAS 133 as amended by SFAS 137, is effective for all fiscal
quarters beginning with the quarter ending June 30, 2001. SFAS 133 establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Scient will adopt SFAS 133 in its quarter ending June 30, 2000 and does not
expect such adoption to have an impact on Scient's results of operations,
financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB 101"), Revenue Recognition in Financial Statements
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board opinion 20, "Accounting Changes." In March 2000, the SEC issued SAB 101A
"Amendment: Revenue Recognition in Financial Statement," which delays
implementation of SAB 101 until Scient's first fiscal quarter of 2001. In June
2000, the SEC issued SAB 101B "Second Amendment: Revenue Recognition in
Financial Statements," which delays the implementation of SAB 101 until Scient's
fourth fiscal quarter of 2001. Scient will adopt SAB 101 and management of
Scient anticipates that the adoption of SAB 101 will not have a material impact
on Scient's financial position or its results of operations.
F-12
47
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000.
2. BALANCE SHEET COMPONENTS
Allowance for doubtful accounts are estimated and established based on
specific circumstances of each customer. Additions to the allowance are charged
to selling, general and administrative expenses. Accounts receivables are
written off against the allowance for doubtful accounts when an account is
deemed uncollectible. Recoveries on accounts receivable previously charged off
as uncollectible are credited to the allowance for doubtful accounts. Changes in
the allowance for doubtful accounts were as follows (in thousands):
YEAR ENDED
MARCH 31,
(INCEPTION) THROUGH --------------
MARCH 31, 1998 1999 2000
------------------- ---- ------
Beginning balance................................. $-- $ -- $ 200
Additions......................................... -- 200 1,583
Writeoffs......................................... -- -- --
--- ---- ------
Balance, end of period............................ $-- $200 $1,783
=== ==== ======
YEAR ENDED MARCH 31,
---------------------
1999 2000
-------- ---------
(IN THOUSANDS)
Accounts receivable:
Accounts receivable....................................... $3,701 $27,848
Unbilled fees and services................................ 2,375 29,956
------ -------
6,076 57,804
Less allowance for doubtful accounts...................... (200) (1,783)
------ -------
$5,876 $56,021
====== =======
Property and equipment:
Computer equipment and software........................... $1,775 $ 6,004
Equipment under capital leases............................ 1,387 6,022
Furniture and fixtures.................................... 524 2,412
Leasehold improvements.................................... 358 5,564
------ -------
4,044 20,002
Less accumulated depreciation and amortization............ (634) (3,939)
------ -------
$3,410 $16,063
====== =======
Depreciation expense from inception through March 31, 1998 and for the
years ended March 31, 1999 and 2000 was $12,000, $552,000, and $3,082,000
respectively. Accumulated depreciation of assets under capital leases totaled
$70,000 and $1,370,000 at March 31, 1999 and 2000, respectively. The equipment
under capital leases collaterizes the related lease obligations.
F-13
48
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
At March 31, 1999 and 2000, Scient had approximately $2,626,000 and
$17,956,000 of federal net operating loss carryforwards available and $2,842,000
and $22,543,000 of state net operating loss carryforwards available to offset
future taxable income which expire in varying amounts beginning in 2019 and
2007, respectively. Under the Tax Reform Act of 1986, the amounts of and
benefits from net operating loss carryforwards may be impaired or limited in
certain circumstances. Events which cause limitations in the amount of net
operating losses that Scient may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over a
three year period.
Scient has incurred losses from inception through March 31, 1998 and for
the year ended March 31, 1999 and March 31, 2000. Management believes that,
based on the history of such losses and other factors, the weight of available
evidence indicates that it is more likely than not that Scient will not be able
to realize its deferred tax assets and thus a full valuation reserve has been
recorded at March 31, 1998, March 31, 1999, and March 31, 2000. The effective
income tax rate differs from the statutory federal income tax rate primarily due
to the inability to recognize the benefit of net operating losses.
Deferred tax assets and liabilities consist of the following (in
thousands):
YEAR ENDED MARCH 31,
--------------------
1999 2000
-------- --------
Deferred tax assets:
Research and development credit.......................... $ -- $ 199
Net operating loss carryforwards......................... 1,877 7,304
Accruals and reserves.................................... 123 1,323
------- -------
2,000 8,826
Less valuation allowance................................. (2,000) (8,826)
------- -------
$ -- $ --
======= =======
4. BORROWING
In May 1998, Scient entered into a $1,400,000 equipment lease line and a
$1,000,000 line of credit under a Loan and Security Agreement. The equipment
line draw down expired in May 1999. Interest accrued from the date of each draw
down at a rate of one percent plus prime per annum and was payable monthly
through May 15, 1999. Equipment drawdowns that were outstanding on May 15, 1999
were payable in 36 equal monthly principal installments, plus all accrued
interest, beginning on June 15, 1999. The line of credit charges interest at a
rate of one-half percent plus prime per annum.
In February 2000, Scient amended the Loan and Security Agreement to
increase the equipment lease line to $4.0 million and the line of credit to $9.2
million. The equipment lease line's draw down expires during the period of May
1999 through September 2000. The amounts available at March 31, 2000 were $1.8
million and $650,000, respectively. Interest will accrue from the date of each
draw down at a rate of one percent plus prime per annum and is payable monthly
through the expiration date. The line of credit expires in May 2000 and charges
interest at a rate of one-half percent plus prime per annum. The assets of
Scient are pledged as collateral for Scient's credit facilities.
At March 31, 1999 and 2000, Scient had $1,542,000 and $2,199,000
outstanding under the equipment lease line, respectively. Interest rates at
March 31, 1999 and 2000 were 8.3% and 8.75%, respectively. Under the lines of
credit, Scient is required to maintain certain financial covenants. At March 31,
2000, Scient was in compliance with all such covenants.
F-14
49
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Leases
Scient leases office space and equipment under noncancelable operating and
capital leases with various expiration dates through 2010. Rent expense from
inception through March 31, 1998 and for the years ended March 31, 1999 and 2000
was $72,000, $1,156,000 and $5,745,000, respectively. There was no sublease
income for the period from inception through March 31, 1998 and sublease income
for the years ended March 31, 1999 and 2000 was $181,000 and $463,000,
respectively. The terms of the facility leases provide for rental payments on a
graduated scale. Scient recognizes rent expense on a straight-line basis over
the lease period, and has recognized prepaid expense for rent expenditures not
incurred but paid.
Future minimum lease payments under noncancelable operating and capital
leases at March 31, 2000 are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDED MARCH 31, LEASES LEASES
-------------------- ------- ---------
2001........................................................ $2,939 $14,263
2002........................................................ 1,723 7,810
2003........................................................ 277 7,582
2004........................................................ 136 7,385
2005........................................................ 27 6,703
Thereafter.................................................. -- 10,708
------ -------
Total minimum lease payments...................... 5,102 $54,451
=======
Less amount representing interest........................... 426
------
Present value of capital lease obligations.................. 4,676
Less current portion........................................ 2,624
------
Capital lease obligations, long-term........................ $2,052
======
Letters of Credit
Scient has issued letters of credit with various financial institutions in
the aggregate amount of $8,550,000 as security deposits for certain of its lease
commitments.
Contingencies
From time to time, Scient may have certain contingent liabilities that
arise in the ordinary course of its business activities. Scient accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
Scient.
F-15
50
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock at March 31, 1999 consisted of the following,
(in thousands):
LIQUIDATION PROCEEDS
SHARES AMOUNT NET OF
------------------------- LIQUIDATION PER ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT SHARE COSTS
------ ---------- ----------- ----------- ----------- --------
A.................................. 6,283 5,721 $ 5,149 $ 0.90 $ 5,360
B.................................. 2,241 2,240 14,224 6.35 14,189
C.................................. 1,382 1,051 11,403 10.85 11,346
Undersignated...................... 1,594 -- -- --
------ ----- ------- -------
Total.................... 11,500 9,012 $30,776 $30,895
====== ===== ======= =======
In May 1999, in connection with Scient's initial public offering, all
shares of preferred stock were converted into common stock. As of March 31,
2000, there were no outstanding shares of preferred stock.
Stock Subscription Receivable
In May 1998, Scient entered into a full-recourse note receivable (the
"Note") with a Director of Scient for approximately $844,000 bearing interest at
5.5% per annum with principal and accrued interest payable annually over three
years. The Note was secured by convertible preferred stock. In October 1998,
Scient entered into a Stock Restriction Agreement with the Director that
provided Scient the right to repurchase of the Convertible Preferred Stock
purchased with the Note upon the Director's resignation upon certain criteria.
In March 1999, upon the Director's resignation, Scient repurchased the 562,500
shares of Convertible Preferred Stock at $1.50 per share, the original issuance
price, by canceling the note receivable.
Transactions with Entities Related to Directors
A director and a shareholder of Scient, is also a director and shareholder
of four clients from which Scient recognized $3,695,000 and $4,924,000 in
revenue for the year ended March 31, 1999 and 2000. The terms and conditions of
such transactions were normal and customary. No revenue was recognized for those
clients during the period from inception through March 31, 1998.
In addition, such director and another director of Scient hold equity
interests exceeding ten percent individually of the total outstanding equity of
several of Scient's clients.
7. COMMON STOCK
In May 1999, Scient completed an initial public offering of 6,900,000
shares of Scient's common stock. Proceeds to Scient, from this initial public
offering totaled approximately $62.7 million net of offering cots of $1.5
million. Upon the closing of the initial public offering, Scient's convertible
preferred stock converted into 29,466,000 shears of common stock.
In January 2000, Scient completed a follow-on offering of 1,850,000 shares
of Scient's common stock. Proceeds to Scient from this additional offering
totaled approximately $154.3 million net of offering costs of $779,000.
Scient's Certificate of Incorporation, as amended, authorize Scient to
issue 125,000,000 shares of $.0001 par value common stock. In April 2000, the
shareholders approved an increase in its authorized common shares from
125,000,000 to 500,000,000. A portion of the shares sold are subject to the
right of repurchase by Scient subject to vesting, which is generally over a four
year period from the employee hire date until vesting is complete. At March 31,
1999 and 2000, there were 13,552,000 and 11,604,000 shares subject to
repurchase, respectively.
F-16
51
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Founder's Stock Agreement
Certain common stock was issued to the founder of Scient and is subject to
repurchase in the event of voluntary termination or involuntary termination with
cause. 75% of the shares vested over a one-year period. The remaining 25%
generally vest over an additional three-year period. In the event of termination
without cause, a substantial sale of Scient's assets, or a merger, all remaining
shares would immediately vest. At March 31, 1999 and 2000, approximately
3,088,000 and 2,527,129 shares, respectively, of outstanding common stock were
subject to repurchase by Scient at the original purchase price of $.000025.
Employee Loan
At March 31, 1999, Scient had a full-recourse note receivable with an
employee of Scient for $160,000 bearing interest at 4.64% per annum. As of March
31, 2000, the principal amount of the note and all interest was fully paid.
Warrants for Common Stock
In March 1998, Scient issued a warrant to purchase 160,000 shares of common
stock for $.05 per share to a company affiliated with a member of the Board of
Directors of Scient in exchange for services rendered. Scient, using the
Black-Scholes option pricing model, determined that the fair value of the
warrant at the date of issuance was nominal. The warrant was exercised in
September 1998.
In May 1998, Scient issued a warrant to purchase 50,000 shares of common
stock for $.13 per share to a non-employee of Scient in exchange for services
rendered. Scient, using the Black-Scholes option pricing model, determined that
the fair value of the warrant at the date of issuance was nominal. The warrant
was exercised in April 1999.
In January 1999, Scient issued a warrant to purchase 15,750 shares of
common stock for $.38 per share to a company affiliated with a member of the
Board of Directors of Scient in exchange for services rendered. Scient, using
the Black-Scholes option pricing model, determined that the fair value of the
warrant at the date of issuance was nominal. The warrant was exercised in May
1999.
In May 1999, Scient entered into a 24-month consulting agreement with a
company for recruiting services. Scient paid $500,000, issued 300,000 shares of
Common Stock and granted an option to purchase an additional 100,000 shares at
$6.00 per share. Scient, using the Black-Scholes pricing model, calculated the
fair value of the option on the date of grant, and will recognize the total
value of the agreement over the service period.
Stock Split
In April 1998 and December 1999, Scient effected two-for-one stock-splits
of its common stock. All data shown in the accompanying consolidated financial
statements and notes have been retroactively adjusted to reflect the stock
splits.
8. EMPLOYEE BENEFIT PLAN
401(k) Savings Plan
Scient has a savings plan (the "Savings Plan") that qualifies as a defined
contribution arrangement under Sections 401(a), 401(k) and 501(a) of the
Internal Revenue Code. Under the Savings Plan, participating employees may defer
a percentage (not to exceed 25%) of their eligible pretax earnings up to the
Internal Revenue Service's annual contribution limit. Under the Savings Plan,
Scient may, but is not obligated to, match a portion of the employee
contributions. Scient has not contributed to the Savings Plan to date.
F-17
52
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK-BASED COMPENSATION
1999 Equity Incentive Plan
In March 1999, the Board of Directors adopted and the stockholders
approved, the 1999 Equity Incentive Plan (the "1999 Plan") and reserved
6,400,000 shares as amended in February 2000 plus the aggregate number of shares
available under the 1997 Stock Option Plan of common stock for issuance
thereunder. In January 2000, and every year thereafter, shares reserved for
issuance will automatically increase by a number equal to the lesser of 10% as
amended in February 2000 of the total number of common stock outstanding or
10,000,000 shares. The 1999 Plan authorized the award of options, restricted
stock awards and stock bonuses (the "Award"). No person will be eligible to
receive more than 1,000,000 shares in any calendar year pursuant to the 1999
Plan other than a new employee of Scient who will be eligible to receive no more
than 2,000,000 shares in the calendar year in which such employee commences
employment. Options granted under the 1999 Plan may either be incentive stock
options ("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only
to Scient's employees (including officers and directors who are also employees).
NSOs may be granted to Scient's employees, outside directors, and consultants of
Scient.
Options under the 1999 Plan may be granted for periods of up to ten years
and generally vest 25% of the options after one year from the date of grant,
with the remaining options vesting in equally monthly installments over the
following 36 months.
1997 Stock Option Plan
In December 1997, Scient adopted the Scient Corporation 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan provides for the granting of stock options
to employees, outside directors, and consultants of Scient. Options granted
under the 1997 Plan may either be incentive stock options or nonqualified stock
options. Scient reserved 13,430,000 shares of common stock for issuance under
the 1997 Plan.
The 1997 Plan provided that the options should be exercisable over a period
not to exceed ten years from the date of the grant.
Options are generally exercisable immediately and are subject to repurchase
by Scient, with the repurchase restriction lapsing at such times and under such
conditions as determined by the Board of Directors. Options granted to date
generally vest 25% of the options after one year from date of grant, with the
remaining options vesting in equal monthly installments over the following 36
months.
1999 Employee Stock Purchase Plan
In April 1999, the board of directors and stockholders adopted the 1999
Employee Stock Purchase Plan (the "ESPP"), which became effective immediately
prior to the effective date of Scient's initial public offering. The ESPP
reserved 2,000,000 shares of Common Stock for issuance thereunder. On each May 1
beginning in 2000, the aggregate number of shares reserved for issuance under
the ESPP will be increased automatically to 2,000,000 shares. Employees
generally will be eligible to participate in the ESPP if they are employed by
Scient for more than 20 hours per week and more than five months in a calendar
year and are not (and would not become as a result of being granted an option
under the ESPP) 5% stockholders of Scient. Under the ESPP, eligible employees
may select a rate of payroll deduction up to 15% of their cash compensation
subject to certain maximum purchase limitations. The first offering period began
on the first business day on which price quotations for Scient's common stock
were available on The Nasdaq National Market. The first purchase period was less
than six months long. Offering Periods thereafter will begin on May 1 and
November 1. Purchases will occur on April 30 and October 31, or the last day of
trading prior to these dates. The price at which the common stock is purchased
under the ESPP is 85% of the lesser of the fair market value of Scient's Common
Stock on the first day of the applicable offering period or on the last day of
that purchase period.
F-18
53
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following summarizes stock option activity for Scient option grants (in
thousands, except weighted average exercise price):
OPTIONS OUTSTANDING
-------------------------------
OPTIONS AVAILABLE OUTSTANDING WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
----------------- ----------- ----------------
Authorized............................. 33,260 -- $ --
Granted................................ (7,164) 7,164 0.03
Exercised.............................. -- (4,800) 0.03
Canceled............................... -- -- --
------- -------
Balance at March 31, 1998................ 26,096 2,364 0.03
------- -------
Granted................................ (15,836) 15,836 0.77
Exercised.............................. -- (11,392) 0.36
Canceled............................... 904 (904) 0.11
Repurchased............................ 286 -- 0.03
------- -------
Balance at March 31, 1999................ 11,450 5,904 1.36
------- -------
Authorized............................. 6,784
Granted................................ (10,640) 10,640 33.48
Awarded................................ (300) -- --
Exercised.............................. -- (890) 2.54
Canceled............................... 1,020 (1,020) 12.35
Repurchased............................ 335 -- --
------- -------
Balance at March 31, 2000................ 8,649 14,634 $23.86
======= =======
The following table summarizes the information about stock options
outstanding and exercisable at March 31, 2000:
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
--------------------------------- ----------------------------------------------------
WEIGHTED AVERAGE NUMBER VESTED
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE AND WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
-------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
$ 0.03 - 0.80...... 3,718 8.5 years $ 0.59 3,083 $ 0.54
$ 3.25 - 6.00...... 3,272 9.0 years $ 5.34 3,083 $ 5.35
$10.00 - 25.00...... 2,453 9.2 years $ 14.05 1,693 $10.00
$26.17 - 60.91...... 3,506 9.5 years $ 42.84 18 $31.06
$68.75 - 112.81...... 1,685 10.0 years $112.81 50 $89.04
------ -----
14,634 9.1 years $ 23.86 7,927 $ 5.05
====== =====
F-19
54
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value Disclosures
Scient applies the measurement principles of APB No. 25 in accounting for
its stock option plan. Had compensation expense for options granted for the
period ended March 31, 1998 and the years ended March 31, 1999 and 2000 been
determined based on the fair value at the grant dates as prescribed by SFAS
No. 123, Scient's net loss would have been increased to the pro forma amounts
indicated below:
NOVEMBER 7, 1997 YEAR ENDED MARCH 31,
(INCEPTION) THROUGH --------------------
MARCH 31, 1998 1999 2000
------------------- -------- --------
Net loss:
As reported................................ $(1,159) $(11,701) $(16,015)
======= ======== ========
Pro forma.................................. $(1,159) $(12,265) $(21,322)
======= ======== ========
Net loss per share:
As reported................................ $ (0.10) $ (0.89) $ (0.29)
======= ======== ========
Pro forma.................................. $ (0.19) $ (1.86) $ (0.39)
======= ======== ========
Scient calculated the minimum fair value of each option grant on the date
of grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:
YEAR ENDED
NOVEMBER 7, 1997 MARCH 31,
(INCEPTION) THROUGH ------------
MARCH 31, 1998 1999 2000
------------------- ---- ----
Risk-free interest rate.............................. 5.52% 5.26% 5.65%
Expected lives (in years)............................ 5 5 4
Dividend yield....................................... 0% 0% 0%
Expected volatility.................................. 0% 0% 60%
Because additional option grants are expected to be made each year, the
pro-forma impact for the period from November 7, 1997 (Inception) through March
31, 1998 and for the years ended March 31, 1999 and 2000 is not representative
of the pro-forma effects which may be expected in future years.
Unearned Compensation
In connection with certain stock option grants from inception through March
31, 1998 and the years ended March 31, 1999, and 2000, Scient recognized
unearned compensation totaling $1,599,000 and $33,366,000, and $5,198,000
respectively, which is being amortized over the vesting periods, generally four
years, of the related options. Amortization expense recognized from inception
through March 31, 1998, the years ended March 31, 1999 and 2000 totaled
approximately $64,000, $7,679,000, and $15,636,000, respectively.
10. SUBSEQUENT EVENTS
In April 2000, Scient entered into a $40,000,000 line of credit agreement
with a bank. Additionally, Scient paid its outstanding balances on the equipment
line of credit.
In April 2000, Scient entered into a capital lease agreement to purchase
equipment totaling approximately $470,000. Principal and interest under the
capital lease are payable in 24 equal monthly installments.
On June 20, 2000, Scient, through it's wholly owned subsidiary Scient
International, entered into a definitive agreement to acquire Axidia, a French
consulting company, for approximately $14.5 million. The acquisition will be
paid with cash in the amount of $7,685,000 with the remaining balance be paid in
Scient common stock. The acquisition will be accounted for using the purchase
method.
F-20
55
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, dated May 5, 1999, for the
reincorporation of Scient Corporation, a California
corporation, into Scient Corporation, a Delaware
corporation -- incorporated herein by reference to Exhibit
2.1 to the Company's Registration Statement on Form S-1
filed March 19, 1999 (File No. 333-74731).
3.1 Amended and Restated Certificate of Incorporation of Scient,
filed with the Secretary of State of Delaware on April 15,
1999 -- incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form S-1 filed March
19, 1999 (File No. 333-74731).
3.2 Form of Second Amended and Restated Certificate of
Incorporation of Scient filed after the closing of the
offering made pursuant to this Registration
Statement -- incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 filed
March 19, 1999 (File No. 333-74731).
3.3 Amended and Restated Bylaws of Scient -- incorporated herein
by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
3.4 Amended Certificate of Incorporation -- incorporated herein
by reference to the Company's Preliminary 14A filed March
17, 2000 (File No. 333-74731)
4.1 Amended and Restated Investor Rights Agreement, dated
February 16, 1999, among Scient and the investors and
founder named therein, as amended -- incorporated herein by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
4.2 Specimen Certificate of Scient's common
stock -- incorporated herein by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-1 filed March
19, 1999 (File No. 333-74731).
10.1 Form of Indemnification Agreement entered into between
Scient and its directors and officers -- incorporated herein
by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.2 1997 Stock Plan -- incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 filed March 19, 1999 (File No. 333-74731).
10.3 1999 Equity Incentive Plan (as amended and restated
effective November 15, 1999 -- incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 filed January 19, 2000 (File No.
333-93441).
10.4 1999 Employee Stock Purchase Plan -- incorporated herein by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.5 Employment Agreement between Scient and Eric Greenberg,
dated December 10, 1997 -- incorporated herein by reference
to Exhibit 10.5 to the Company's Registration Statement on
Form S-1 filed March 19, 1999 (File No. 333-74731).
10.6 Employment Agreement between Scient, Eric Greenberg and
Robert M. Howe, dated February 9, 1998 -- incorporated
herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.7 Employment Agreement between Scient and William H. Kurtz,
dated June 12, 1998 -- incorporated herein by reference to
Exhibit 10.7 to the Company's Registration Statement on Form
S-1 filed March 19, 1999 (File No. 333-74731).
56
10.8 Employment Agreement between Scient and Stephen A.
Mucchetti, dated September 14, 1998 -- incorporated herein
by reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.9 Stock Repurchase Agreement between Scient and Robert M.
Howe, dated December 22, 1998 -- incorporated herein by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.10 Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated August 20, 1998 -- incorporated
herein by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.11 Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998 -- incorporated
herein by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.12 Recruiting Letter Agreement between Scient and Ramsey/Beirne
Associates, Inc., dated February 25, 1998 -- incorporated
herein by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.13 Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab &
Co., Inc., dated October 7, 1998 -- incorporated herein by
reference to Exhibit 10.13 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.14 Standard Form of Loft Lease between Scient and Lautob Realty
Company, dated October 28, 1998 -- incorporated herein by
reference to Exhibit 10.14 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.15 Agreement to Sub-Sublease between Scient and Northpoint
Communications, Inc., dated October 16, 1998 -- incorporated
herein by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1 filed March 19, 1999
(File No. 333-74731).
10.16 Full-Recourse Promissory Note between Scient and Aron Dutta,
dated January 28, 1999 -- incorporated herein by reference
to Exhibit 10.16 to the Company's Registration Statement on
Form S-1 filed March 19, 1999 (File No. 333-74731).
10.17 Sublease between Scient and Robins, Kaplan, Miller & Ciresi,
LLP, dated April 13, 1999 -- incorporated herein by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.18 Sub-Sub-Sub-Sublease between Scient and Charles Schwab &
Co., Inc., dated October 1, 1998 -- incorporated herein by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.19 Addendum to Sub-Sub-Sub-Sublease and
Sub-Sub-Sub-Sub-Sublease between Scient and Charles Schwab &
Co., Inc., dated October 8, 1998 -- incorporated herein by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1 filed March 19, 1999 (File No.
333-74731).
10.20 Lease between Scient and Pembroke Real Estate, Inc., dated
May 1, 1999 -- incorporated herein by reference to Exhibit
10.20 to the Company's Registration Statement on Form S-1
filed March 19, 1999 (File No. 333-74731).
10.21 1999 Equity Incentive Plan Restatement, dated February 16,
2000. (see page S-1)
21.1 List of subsidiaries (see page S-23).
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants (see page S-24).
27.1 Financial Data Schedule
57
(b) Reports on Form 8-K
None
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.