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SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 2001
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.)
860 BROADWAY
NEW YORK, NY 10003
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(917) 534-8200
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 $79,401,552 on May 31, 2001 based on the last
reported sale price of the Company's common stock on the Nasdaq National Market
System on May 31, 2001. There were 73,519,956 shares of common stock outstanding
as of May 31, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on August 24, 2001 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, 2001
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters..................................................... 18
Item 6. Selected Consolidated Financial Data........................ 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 25
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of the Company............. 26
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 27
Signatures............................................................ 30
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: our ability to compete favorably in the
eBusiness services market and the anticipated success of our market strategy;
our beliefs regarding the anticipated growth and size of the market for our
services; the results of our services and attendant benefits of those services
for our clients; our plans regarding changes to our pricing models and our
expectations regarding the impact of those changes; the impact of our
restructuring efforts; the impact of our knowledge management system and
framework development on the delivery of our services and our operational
results; the anticipated results of our Engineer Acceleration Center and the
competitive benefits of our delivery model; the development and protection of
our intellectual property; factors, including client mix, that may impact our
future revenues; our ability to attract and retain appropriately skilled
personnel; 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 enterprise clients who want to
fully leverage eBusiness technologies as part of their overall business
strategy. Scient's service offering includes strategy consulting, systems
architecture and design, application and technology infrastructure development,
and eBusiness management. Our services are designed to improve a client's
competitive position and increase efficiency through the development of
innovative business strategies enabled by the integration of emerging and
existing technologies.
SERVICES
Scient uses eBusiness as a catalyst to help its clients unlock the value
hidden in their enterprises. Our process leverages our expertise in strategy,
customer experience and technology to help clients create new sources of revenue
and eliminate cost. Scient also works with clients to increase their
organization's abilities to anticipate and capitalize on changes in their
business environment. Our service offering includes strategy consulting,
architecture and design services, application and technology infrastructure
development, and eBusiness management. The following descriptions highlight the
primary services that we offer.
Strategy Consulting. We work with clients to tailor a business strategy
designed to provide them with measurable results. 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.
Architecture and Design. In addition to strategy, Scient offers
architecture and design capabilities to its clients. Using a variety of
technologies, we architect eBusiness applications and technology infrastructure
for clients. 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. Additionally, 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.
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. This can
be accomplished through our Engineer Acceleration Center (EAC), with teams
located either on the client's site or in our dedicated facilities in Dallas,
Texas. Our EAC was established to provide deeply skilled teams, an integrated
customer experience and technology process, along with dedicated technology to
provide the most efficient, effective and highest quality solutions to our
clients. The EAC offers a pre-configured development environment to our clients
that is intended to establish processes, project management structures, and
standards that reduce overall project risks. All of this results in a reduced
cost of development and a potential accelerated return on investment for 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
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and are provided on a monthly subscription basis with established service level
agreements. Our extended 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 deliver our services. This methodology provides a
framework that facilitates the distribution of knowledge within an engagement
and across all parts of our firm. The Scient Approach methodology is designed to
allow us to provide consistent quality across engagements and to deliver high
value to clients in all aspects of our services.
The key to the Scient Approach methodology is the iterative improvement of
the eBusiness innovations that we deliver. Because the needs of our clients are
dynamic, we have designed the Scient Approach methodology with built-in feedback
and iteration processes in order to improve the services delivered to clients
and to enhance the 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 of the approach, Scient works closely
with the client to define the overall business 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.
Scient has established the Engineer Acceleration Center (EAC) in Dallas,
Texas to provide world class software engineering. The EAC provides deeply
skilled teams, integrated customer experience and technology processes, and
dedicated technology to achieve the most efficient, effective, and highest
quality solutions for our clients.
- Transition to the EAC. In this phase, the Scient project team and EAC
transition team work to transition the project into the EAC by
understanding the major project components, identify gaps and
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risks, develop solutions and risk mitigation plans, and establish project
responsibilities to ensure the successful delivery of the project.
- Engineer-Detailed Design. In this phase, Scient works with the client to
finalize specific details of the requirements, including all customer
interaction interfaces and detailed 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 were identified in the earlier
stages of the Scient Approach methodology. Development and QA
environments are constructed, software development is completed, code
reviews are performed, and unit testing takes place.
- 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. The EAC offers a full suite
of functional, integration, and system testing to ensure the overall
quality and robustness of the delivered system.
- Engineer-Deploy. In this phase, the 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 employing performance, security, user
acceptance, and 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 system to the
client. During the transition to operate phase, the Scient team completes all
final deliverables, produces the final distribution media, and conducts formal
transition meetings with the appropriate client operations team.
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 five principal markets:
- Financial Services Markets, including financial products and services
providers such as investment and commercial banks, securities firms,
insurance companies, credit card companies, and online brokerages and
lending institutions;
- Enterprise Markets, which includes Global 1000 companies facing the
challenges of adapting their businesses' traditional procurement and
distribution networks to take advantage of eBusiness capabili-
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ties including industrial products, consumer packaged goods,
manufacturing, energy, transportation and logistics;
- Telecommunications and Utilities 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, and the utility marketplace
including gas, electric, and water companies;
- Health and Wellness Markets, which includes pharmaceuticals,
biotechnology, genomes, medical products and technology and consumer
wellness, and diagnostics; and
- Media and Entertainment Markets, including diversified media companies,
advertiser-supported media companies, entertainment service providers,
professional sports leagues, suppliers of recorded entertainment,
suppliers of live entertainment, information service companies and book
publishers.
As of March 31, 2001, our global sales and marketing organization consisted
of 47 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 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, Enterprise, Telecommunications and Utilities, Health and
Wellness, and Media and Entertainment markets. From inception through March 31,
2001, Scient has served over 165 clients and has helped its clients launch
approximately 50 eBusinesses. In the year ended March 31, 2001, our five largest
clients accounted for approximately 36% 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. These
non-compete agreements reduce the number of our prospective clients and
reinforce the importance of our client selection.
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:
- Business Strategy and Architecture Innovation Center -- Provides
consulting services to define and implement the strategic business,
organization, market and brand direction for an eBusiness. Includes
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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. The
Technology Innovation Center 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, focus on quality and efficiency improvements, 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, 2001, Scient had over 20
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.
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 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 exist within the EAC in Dallas and at
the client's site. They support engagement teams during the initial
implementation of new products and technologies. In addition, the Core
Engineering Labs are responsible for integrating new
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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 Sapient, Cambridge Technology Partners, and Viant;
- Large systems integrators, such as Accenture and the consulting arms of
the "Big Five" accounting firms;
- The professional services groups of computer equipment companies, such as
IBM;
- Outsourcing firms, such as Computer Sciences Corporation and Electronic
Data Systems;
- Web consulting firms and online agencies, such as Agency.com, iXL,
Proxicom, and Razorfish;
- General management consulting firms, such as Bain & Company, Booz Allen &
Hamilton, Boston Consulting Group and McKinsey & Company; and
- Internal IT departments of current and potential clients.
Because relatively low barriers to entry characterize our market, we also
expect other companies to enter our market.
We believe that the principal competitive factors in our industry are:
- Value of services provided compared to the price of services.
- 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, and
the size of the firm.
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 and customer experience skills and technological expertise
that many existing service providers are not well suited to provide. However,
the market for eBusiness services is highly competitive and we cannot be certain
that we will compete successfully in the future. We expect that competition will
continue to intensify 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 Has Resulted and Could in the Future 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
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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 CORPORATE CULTURE
Colleagues
We generally use the term "colleagues" instead of "employees" to reinforce
our one-firm concept and collegial culture. As of March 31, 2001, we had a total
of 1,333 colleagues. Of these, 964 were in professional services, 47 in sales
and marketing, 27 in recruiting and 295 in core services, including Knowledge
Management, Technology, People, Finance and Administration. We have offices in
San Francisco, New York, Dallas, Chicago, Boston, Paris, Tokyo, London, and
Singapore. Subsequently, we have undertaken restructuring efforts to reduce our
workforce and our offices; these activities are discussed in more detail in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" below. 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.
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 ability to attract and retain 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 EXPERIENCED, AND EXPECT IN THE FUTURE TO EXPERIENCE, A DECLINE IN OUR
REVENUES, WHICH WILL NEGATIVELY IMPACT OUR FINANCIAL RESULTS
Our revenues for the quarter ended March 31, 2001 declined 66% compared to
our revenues for the quarter ended December 31, 2000, and we expect that we will
experience a further decline in revenues for the quarter ending June 30, 2001.
We believe the decline in revenues was primarily due to a broad-based general
economic slowdown in which clients have significantly tightened technology
budgets, increased competitive pressure from traditional management consulting,
information technology services and eBusiness service
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competitors and a lack of urgency by Global 2000 companies to immediately fund
large eBusiness projects. As a result of the decline in demand for our services,
in the quarter ended December 31, 2000 we reduced our headcount from 1,868
colleagues to 1,492 colleagues and closed offices in Sunnyvale, California and
Austin, Texas, and in January 2001, we closed our office in Munich, Germany. In
the quarter ended March 31, 2001, our headcount further decreased from 1,492
colleagues to 1,333 colleagues, and in April 2001, we implemented the reduction
of up to 850 additional positions, the closing or significant reduction of our
San Francisco, Los Angeles, Boston, Chicago, and New Jersey offices, as well as
similar actions in our international offices, and the move of our headquarters
from San Francisco to New York. We will be required to further reduce our
headcount, close more offices or reduce expenses in other areas if our revenues
continue to decline or are not sufficient to support our cost structure. Our
ability to generate revenues will be impaired to the extent we have reduced our
operations. In addition, if demand for our services increases in the future, we
may not be able to expand our operations, including hiring additional
colleagues, to meet this demand in a timely fashion or at all. If we cannot
increase our revenues in future periods, our financial results will suffer.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO RETURN TO PROFITABILITY
Prior to the quarter ended March 31, 2000, we had a history of successive
quarterly losses, and we had losses for the quarter ended December 31, 2000 and
March 31, 2001. We incurred net losses of $16.0 million for the year ended March
31, 2000, net losses of $140.0 million for the year ended March 31, 2001 and a
net loss of $90.2 million for the quarter ended March 31, 2001. As of March 31,
2001, we had an accumulated deficit of $168.8 million. As a result, we will need
to increase revenues and manage expenses in order to return to profitability.
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 and fluctuating
operating results 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 is new and rapidly
evolving. Our long-term success will depend on our ability to achieve
satisfactory results for our clients and to form long-term relationships with
core clients on a global basis. Some of our clients have limited experience with
the eBusinesses we have developed for them. Accordingly, we cannot assure that
the eBusinesses we have implemented will be successful or that our services will
provide the expected value to our clients. Some of our clients for whom we have
done substantial work have suffered a significant failure, problem or setback in
their eBusinesses, and/or the related technology, and may continue to do so in
the future. As a result, our business reputation has been damaged, whether or
not these failures, problems or setbacks were caused by our work or were 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 services fail to meet the expectations of our clients.
OUR QUARTERLY AND ANNUAL 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. Our revenues increased on a quarter-to-quarter basis through the
quarter ended September 30, 2000 and then decreased 22% for the quarter ended
December 31, 2000 and decreased 66% for the quarter ending March 31, 2001. We
expect that we will experience a further decline in revenues for the quarter
ending June 30, 2001. It is likely that in future periods our operating results
will continue to be below the expectations of public market analysts or
investors. The market price for our common stock has decreased significantly in
recent months, and if our future operating results are below the expectations of
public market analysts or investors, the market price of our common stock may
decline further.
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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;
- Failure or delay by clients in paying our invoiced fees and expenses;
- Our ability to retain clients on a long-term basis;
- The amount and timing of expenditures by our clients on a global basis
for eBusiness services and variations in budget cycles of our large
enterprise clients;
- 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;
- Our ability to attract, train and retain skilled management, strategic,
technical, design, sales, marketing and support professionals;
- 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 closing, opening, shrinking or expanding of Scient
offices.
Our revenues are derived primarily from professional services, which we
generally provide on a time and materials basis, although we have in the past
and expect in the future to provide professional services on a fixed-fee basis
and on a time and materials basis with a cap on the amount of fees we may
invoice without client consent. 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 or an inability to bill
a client for all or a portion of the services we provide may cause significant
reductions in our operating results for a particular quarter and could result in
losses for such quarter. In addition, we have provided and may provide in the
future limited services to clients on a non-billable basis. Any increase in such
activity could have a negative impact on our margins and other operating
results. A significant percentage of our employees are in core support services,
including technology infrastructure, human resources, and finance and
administration, in order to support our expected growth over time. As a result,
a significant portion of our operating expenses is 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.
FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT OUR BUSINESS
We have experienced periods of rapid growth and may in the future resume
growing both by hiring new employees and serving new business and geographic
markets. Our historical growth has placed, and our plans for future growth will
continue to place, a significant strain on our management and our operating and
financial systems. We do not believe our past growth rate is sustainable for the
long-term. 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 has and will affect our
financial results.
Our business requires substantial managerial attention to ensure that our
colleagues and offices operate at an appropriate level of productivity. Failure
to effectively manage the productivity and work quality of our
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colleagues and offices and the corresponding market demand for our services
could seriously harm our operations and financial condition. For example, we
reduced our headcount by approximately 460 personnel in the quarter ended
December 31, 2000 and in April 2001 we implemented plans to further reduce our
headcount by up to 850 personnel to reduce overcapacity in certain areas where
market demand had slowed or declined. If we do not attain the revenue levels and
productivity, our business, operating results and financial condition could be
seriously harmed.
Our personnel, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate changing client needs and
other engagement management requirements, we will need to update, change, and
maintain our various internal systems to support the business and 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 may encounter difficulties in developing, maintaining, and
implementing these and other systems.
OUR CLIENTS MAY BECOME UNABLE OR UNWILLING TO PAY US FOR SERVICES PERFORMED
We assume a certain level of credit risk with our clients in order to do
business. Conditions affecting any of our clients could cause them to become
unable or unwilling to pay us in a timely manner, or at all, for services we
have already provided them. In the past we have experienced significant
collection delays from certain clients, and we cannot predict whether we will
continue to experience similar or more severe delays. In particular, as our
client base has shifted to larger enterprise clients with longer billing cycle
times and/or unpredictable budget processes, our collections cycle time, and
problems in collecting invoiced amounts has increased and may continue to
increase in the future. If one or more of our clients fails or refuses to pay us
in a timely manner or at all, or if we are unable to collect a number of large
accounts receivable, it could have a material adverse effect on business,
operating results and financial condition.
THE IMPACT OF OUR RESTRUCTURING EFFORTS MAY ADVERSELY AFFECT OUR OPERATING
RESULTS
In response to the recent decline in our revenues in the past several
quarters, we implemented the reduction of our headcount by approximately 460
personnel in the quarter ended December 31, 2000, and in April and May 2001 we
implemented plans to further reduce our headcount by up to 850 personnel to
reduce overcapacity in certain areas where market demand had slowed or declined.
We also implemented plans to close, divest or reduce the size of offices in the
U.S. and internationally and to move our corporate headquarters from San
Francisco to New York. We expect that these actions may have an adverse impact
on our ability to obtain new clients and to retain and hire qualified personnel.
For example, our Chief Financial Officer, Bill Kurtz, announced his resignation
from the company in connection with the move of our headquarters. In addition,
in conjunction with these restructuring efforts, we will need to attempt to
sublease, assign or otherwise divest ourselves of significant obligations under
various real estate leases. These leases represent a significant portion of our
operating expenses on an ongoing basis. If we are unable to decrease these
expenses in the anticipated time frame, it could have a material adverse effect
on our business, operating results and financial condition.
OUR CLIENTS MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NEEDED TO RETAIN OUR
SERVICES OR PAY US FOR SERVICES PERFORMED
Some of our current and potential clients, particularly those clients
funded primarily by venture capital, need to raise additional funds in order to
continue their business and operations as planned. We cannot be certain that
these companies will be able to obtain sufficient financing on favorable terms
or at all. As a result of an inability to raise necessary financing, some
clients may be unable to retain our services or to pay us for services we have
already provided them or they may terminate our services earlier than we expect,
any of which could seriously harm our business, financial condition and
operating results. In particular, some of our current and potential clients
funded by venture capital have recently encountered greater difficulty obtaining
needed financing and therefore have had difficulty in retaining our services and
in paying amounts owed for services provided.
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WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CLIENTS FOR
A SIGNIFICANT PORTION OF OUR REVENUES
The loss of any significant client could seriously harm our business,
financial condition and operating results. For the three months ended March 31,
2001, our five largest clients accounted for approximately 62% of our revenues,
and three clients individually accounted for over 10% 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. For example, our revenues declined in the
quarter ended March 31, 2001 compared to the quarter ended December 31, 2000 and
we expect that we will experience a decline in our revenues for the quarter
ended June 30, 2001 in part due to certain clients delaying or stopping the use
of our services. In particular, we expect to experience a significant decline in
revenue generated from one client, who accounted for approximately 31% of our
revenues in the quarter ended March 31, 2001. The volume of work that we perform
for a specific client is likely to vary from period to period, and a significant
client in one period may not use our services in a subsequent period.
OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS REDUCES THE PREDICTABILITY OF OUR
REVENUES
Our clients retain us on an engagement-by-engagement basis, rather than
under long-term contracts. As a result, our revenues are difficult to predict.
Because we incur costs based on our expectations of future revenues, our failure
to predict our revenues accurately may seriously harm our financial condition
and results of operations. Although it is our goal to provide the full range of
our eBusiness services to our clients, we are generally retained to design and
perform discrete segments of work 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. 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, and many of our potential Global 2000 customers have recently shown
a lack of urgency to pursue large eBusiness initiatives and a number of our
clients have recently slowed or stopped altogether the use of our services. 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.
ATTRACTING, TRAINING, AND RETAINING QUALIFIED EMPLOYEES WILL BECOME MORE
DIFFICULT FOLLOWING OUR HEADCOUNT REDUCTIONS
Our 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 and
success of our business. In light of our recent restructuring and reduction in
headcount, as well as the fact that many of our employees hold options priced
above the market price of our stock, our ability to retain our employees or to
recruit and hire new employees may be difficult. Skilled personnel are in short
supply, and this shortage is likely to continue for some time. As a result,
competition for these people is intense, and the industry turnover rate for them
is high. Consequently, we may have difficulty hiring our desired numbers of
qualified employees. Moreover, even if we are able to expand our employee base,
the expenditure of 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 more likely to become a party to one or more lawsuits involving the former
employment of one of our employees. Any future litigation against us or our
employees, regardless of the
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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. 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 may be very difficult to replace and our
business could be seriously harmed. Our Chief Financial Officer, Bill Kurtz,
announced his resignation from the company effective June 30, 2001. The loss of
this or other members of our senior management team could have a direct adverse
impact on our revenues. In addition, if any of these key employees joins a
competitor or forms a competing company, some of our clients might choose to use
the services of that competitor or new company instead of our own. Furthermore,
clients or other companies seeking to develop in-house eBusiness capabilities
may hire away some of our key employees. This would not only result in the loss
of key employees but could also result in the loss of a client relationship or a
new business opportunity. Any losses of client relationships could seriously
harm our business.
COMPETITION FROM BIGGER, MORE ESTABLISHED COMPETITORS WHO HAVE GREATER FINANCIAL
RESOURCES HAS RESULTED, AND COULD IN THE FUTURE RESULT, IN PRICE REDUCTIONS,
LARGER LOSSES 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 expect
more companies to enter our market. We expect that competition will continue to
intensify and increase in the future. Some large management consulting firms and
information technology firms, such as Accenture, IBM, and CSC, have focused more
resources on eBusiness opportunities. In addition, companies which offer
electronic commerce services and products on a hosted platform, such as
Loudcloud, NaviSite, and Genuity, have entered the market for eBusiness
services, and we may compete for business with these new entrants. Because we
contract with our clients on an engagement-by-engagement basis, we compete for
engagements at each stage of our methodology. There is no guarantee that we will
be retained by our existing or future clients on later stages of work.
Many of our current competitors have longer operating histories, larger
client bases, larger professional staffs, greater brand recognition and greater
financial, technical, marketing and other resources than we do. This has in the
past placed us, and may continue to 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.
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POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS
In August 2000, we acquired AXIDIA, a French eBusiness service firm and 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 successfully manage
current and future acquisitions 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.
WE MAY LOSE MONEY ON FIXED-FEE OR SIMILAR CONTRACTS
To date, we have generally entered into contracts with our clients on a
time and materials basis, though we have in the past and expect in the future to
enter into contracts to perform work on a fixed-fee basis, to cap the amount of
fees we may invoice on time and material contracts without client consent or to
provide other rate structures for selected clients that deviate from time and
materials arrangements. If we miscalculate the resources or time needed to
complete engagements with capped or fixed fees or fee structures other than
straight time and materials arrangements, 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.
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. 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.
INTERNATIONAL OPERATIONS ARE EXPENSIVE AND MAY NOT SUCCEED
Our international operations accounted for approximately 16.4% of our total
revenues for the year ended March 31, 2001. We have limited experience in
marketing, selling and supporting our services in foreign countries. Development
of such skills may be more difficult or take longer than we anticipate,
especially due to language barriers, currency exchange risks and the fact that
the Internet infrastructure in foreign countries may be less advanced than the
United States' Internet infrastructure. We have only recently begun to generate
revenues from international operations.
We may be unable to continue to successfully market, sell, deliver and
support our services internationally. For example, we recently closed our German
office because we were unable to generate any significant revenues there, and as
we announced in April 2001, we plan to take similar steps with respect to our
other international operations that fail to generate adequate revenue resulting
in the divestiture of 80% of our interests in each of our French and Tokyo
subsidiaries. If we are unable to conduct our international operations
successfully, our business, financial condition and operating results could be
seriously harmed. We need to devote significant management and financial
resources to our international operations. In particular, we must attract and
retain experienced management, strategic, technical, design, sales, marketing
and support personnel for our international offices. Competition for such
personnel is intense, and we may be unable to attract and retain qualified
personnel.
Moreover, international operations are subject to a variety of additional
risks that could seriously harm our financial condition and operating results.
These risks include the following:
- Problems in collecting accounts receivable;
- The impact of recessions in economies outside the United States;
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- Longer payment cycles than those in the United States;
- 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;
- Seasonal reductions in business activity in certain parts of the world,
such as during the summer months in Europe;
- 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 we rely on
but which are often less understood outside the United States; and
- Differences in business customs.
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. Our brand may
be closely associated with the business success or failure of some of our
high-profile clients, many of whom are pursuing unproven business models in
competitive markets. As a result, the failure or difficulties of one of our
high-profile clients may damage our brand. Specifically, as disclosed above, our
business reputation has been negatively impacted by certain failures or problems
experienced by some of our clients in the recent past, whether or not these
failures, problems, or setbacks were caused by our work or were within our
control. 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 refund some or all of the fees paid by a client or to
enter into a settlement with a client to accept a lesser amount of fees
than we actually billed;
- 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 certain amounts or types of
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
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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.
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 significant control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, such as acquisitions, and to block an
unsolicited tender offer. Accordingly, this concentration of ownership could
have the effect of delaying or preventing a third party from acquiring control
over us at a premium over the then-current market price of our common stock.
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of Scient that a stockholder
may consider favorable. These provisions include:
- Authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- A classified board of directors with staggered, three-year terms, which
may lengthen the time required to gain control of our board of directors;
- Prohibiting cumulative voting in the election of directors, which would
otherwise allow less than majority of stockholders to elect director
candidates;
- Requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
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- 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, our stock
incentive plans, including the acceleration of vesting provisions of such plans
and our stockholders' rights plan may discourage, delay or prevent a change in
control of Scient.
RISKS RELATED TO THE MARKET FOR SCIENT SERVICES
OUR SUCCESS WILL DEPEND ON THE SUSTAINABILITY OF A GLOBAL MARKET FOR OUR
SERVICES
We cannot be certain that a viable market for our services will be
sustainable. The broad economic slowdown has caused many of our customers and
potential customers to significantly reduce their technology spending and our
clients to stop or delay the use of our services. If a viable and sustainable
market for our services does not develop and/or if we do not accurately predict
trends in the market and respond to those trends by providing new services or
products, Scient may fail. Even if we develop new services or products, there
can be no guarantee that a market will exist for such services and products or
that such services and products will adequately respond to market trends. If we
invest resources to develop new services and products for which a market does
not develop, our business and operating results would be seriously harmed. Even
if the market for our services grows, it may not grow at an adequate pace, and
we may not be able to differentiate our services from those of our competitors.
If we are unable to differentiate our services from those of our competitors,
our revenues and operating margins may decline.
OUR SUCCESS DEPENDS ON INCREASED ADOPTION OF THE INTERNET AS A MEANS FOR
COMMERCE
Our future success depends heavily on the acceptance and use of the
Internet as a means for commerce. The widespread acceptance and adoption of the
Internet for conducting business is likely only in the event that the Internet
provides businesses with greater efficiencies and improvements. If commerce on
the Internet does not continue to grow, or grows more slowly than expected, it
could have a material adverse effect on business, operating results and
financial condition.
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.
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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:
- Maintain existing offices or open new offices, in the United States or
internationally;
- Create additional global business units;
- Enhance our infrastructure and leveragable assets;
- Hire, train and retain employees;
- Respond to competitive pressures or unanticipated requirements; or
- Pursue acquisition opportunities.
Our failure to do any of these things could seriously harm our 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 of our stock has fluctuated significantly. The 52-week
high of our stock price during fiscal year 2001 was $75.25, while the 52-week
low was $1.56. 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 or the inability or unwillingness of our customers
to pay for our services;
- 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 historical and projected 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, which previously
were ineligible for sale due to contractual, securities law or other
constraints, 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.
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ITEM 2. PROPERTIES
As of March 31, 2001, Scient's headquarters and principal administrative,
finance, sales and marketing operations were located in approximately 83,000
square feet of leased office space in San Francisco, California. In April, 2001,
Scient announced the move of its headquarters to 39,000 square feet of leased
office space in New York, New York. This transition is expected to be
substantially completed by June 30, 2001. As of March 31, 2001, Scient also
leased offices in San Francisco, Chicago, Boston, New Jersey, Austin, Dallas,
Sunnyvale, Paris, Tokyo, London, and Singapore.
ITEM 3. LEGAL PROCEEDINGS
We are not party to any claims or actions that we believe could have a
material effect on our result of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal 2001.
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.)
HIGH LOW
------ ------
FISCAL YEAR ENDING MARCH 31, 2001:
First Quarter.............................................. $75.25 $33.88
Second Quarter............................................. $71.50 $20.75
Third Quarter.............................................. $22.63 $ 2.00
Fourth Quarter............................................. $ 4.38 $ 1.56
HIGH LOW
------- ------
FISCAL YEAR ENDING MARCH 31, 2000:
First Quarter (beginning May 14, 1999).................... $ 25.06 $15.13
Second Quarter............................................ $ 41.56 $19.31
Third Quarter............................................. $100.50 $33.47
Fourth Quarter............................................ $130.00 $66.50
On May 31, 2001, the last reported sales price of our common stock was
$1.08. As of May 31, 2001, there were 540 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
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DIVIDEND POLICY
We have not paid any cash dividends since our inceptions and do not intend
to pay any cash dividends in the foreseeable future. Pursuant to the terms of
our credit facility, we are unable to pay dividends without first obtaining the
written consent of the lender.
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, 2000, and 2001, and the balance sheet data at
March 31, 1998, 1999, 2000 and 2001 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.
YEAR ENDED MARCH 31, NOVEMBER 7, 1997
--------------------------------- (INCEPTION) THROUGH
2001 2000 1999 MARCH 31, 1998
--------- --------- ------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 300,177 $ 155,729 $20,675 $ 179
Operating Expenses:
Professional services................ 149,334 70,207 10,028 102
Selling, general and
administrative.................... 182,624 90,854 15,315 1,228
Restructuring and other related
charges........................... 104,799 -- -- --
Amortization of intangible assets.... 4,667 -- -- --
Stock compensation................... 9,402 15,636 7,679 64
--------- --------- ------- -------
Total operating expenses............... 450,826 176,697 33,022 1,394
--------- --------- ------- -------
Loss from operations................... (150,649) (20,968) (12,347) (1,215)
Interest income and other, net......... 10,677 4,953 646 56
--------- --------- ------- -------
Net loss............................... $(139,972) $ (16,015) $(11,701) $(1,159)
========= ========= ======= =======
Net loss per share:
Basic and diluted(1)................. $ (2.13) $ (0.29) $ (0.89) $ (0.10)
Weighted average shares(1)........... 65,583 54,590 13,198 11,894
AS OF MARCH 31,
-----------------------------------------
2001 2000 1999 1998
-------- -------- ------- ------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents, restricted cash, and
short-term investments........................... $161,073 $229,148 $28,129 $3,301
Working capital.................................... 122,492 235,525 28,108 3,299
Total assets....................................... 224,044 313,754 38,812 4,225
Bank borrowings and capital lease obligations,
long-term........................................ 2,614 2,917 1,809 26
Total stockholders' equity......................... $138,705 $252,036 $29,977 $3,805
- ---------------
(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 expanding or reevaluating their existing businesses to integrate
eBusiness technologies or capabilities. Although we have historically
experienced growth in our revenues, during the second half of fiscal 2001, we
experienced a 22% sequential decline in revenues in the December quarter and a
66% sequential decline in the March quarter. We believe that this decline was
primarily due to a broad-based general economic slowdown in which clients
significantly tightened their technology budgets, increased competitive pressure
from traditional management consultants, information technology service
providers and eBusiness service competitors and a lack of urgency by Global 2000
companies to immediately fund large eBusiness projects.
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, 2001, our five largest clients accounted for 36% of our
revenues. While revenues from any given client will vary from period to period,
we anticipate that our top five clients will continue to account for a
significant percentage of revenue going forward. To the extent that any
significant client uses less of our services or terminates its relationship with
us, our revenues could be adversely impacted. In particular, we expect to
experience a significant decline in revenue generated from one client who
accounted for 31% of our revenues for the quarter ended March 31, 2001. As a
result, the loss of this or any other significant client could seriously harm
our business and results of operations. For the fiscal year ended March 31,
2001, North American clients accounted for 84% of revenues with the remainder
generated by international clients. We increased our percentage of enterprise
and enterprise backed clients to 94% of revenues for the fiscal year. The
remainder was generated by venture capital-backed startups.
We generally provide our services on a time and materials basis. For the
year ended March 31, 2001, approximately 97% of revenues were derived from time
and materials contracts, including capped fee engagements that were billed and
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 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.
Professional services expenses consist primarily of compensation and
benefits for our colleagues involved with the delivery of professional services.
Professional services margins reflect revenues for services less professional
services expenses. We expect that our per capita professional services expenses
will increase over time due to wage increases and inflation. Our professional
services margins vary quarter to quarter and are affected by the number of work
days in a period and level of billability, defined as the percentage of
professional services employees' time that is billed to clients. Billability for
the twelve months ending March 31, 2001 was 53%, compared to 71% for the twelve
months ended March 31, 2000. This decline was primarily due to overcapacity of
professional service personnel in light of decreasing market demand for our
services. Any significant decline in fees billed to clients, the loss of one or
more significant clients, or the failure to match our professional services
capacity and expenses with the level of client demand for our services, would
have a material adverse effect on our professional services margins. In
addition, as a matter of business development and client relationship
management, we have provided and expect to continue to provide, limited services
to certain clients without compensation for our professional services fees. Any
increase in this activity in a particular quarter would have a material adverse
effect on professional service margins. Throughout fiscal 2001, client
engagements averaged six to nine months' duration. However, in the
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last half of the fiscal year, several significant projects ended earlier than
anticipated or with little advance notice. At the end of any engagement, we must
re-deploy professional services personnel. Any resulting unbillable time will
adversely affect professional services margins.
Selling, general and administrative expenses consist of salaries,
commissions, and related expenses for personnel engaged in sales and marketing;
salaries and related expenses for recruiting, human resources, knowledge
management, information technology, finance, legal and administrative personnel;
office facilities and information technology expenditures; professional fees;
trade shows; promotional expenses; and other general corporate expenses.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
Revenues
In fiscal year 2001, Scient reported revenues of $300.2 million, a 93%
increase compared to $155.7 million in fiscal year ended March 31, 2000. This
increase resulted primarily from growth during the first half of fiscal year
2001 in our client base, broader engagement scopes, and billing rate increases.
For the fiscal year ended March 31, 2001, our five largest clients accounted for
approximately 36% of our revenues, compared to 27% of revenues for the fiscal
year ended March 31, 2000. During the year ended March 31, 2001, one client
accounted for 11% of revenues. For the year ended March 31, 2000, no client
accounted for more than 10% of revenues.
Cost of Professional Services
Professional services costs consist primarily of compensation and benefits
for our colleagues involved with the delivery of professional services. For the
fiscal year ended March 31, 2001, professional services expenses totaled $149.3
million, a 113% increase compared to $70.2 million in fiscal 2000. This increase
was primarily a result of our hiring of professional services colleagues in
response to greater demand for services earlier in the fiscal year. Billable
colleagues grew from 828 at March 31, 2000 to 1,324 at September 30, 2000.
Scient ended fiscal year 2001 with 964 billable colleagues, reflecting the
restructuring actions taken in December 2000. For the fiscal year ended March
31, 2001, professional services costs as a percentage of revenue increased to
50% compared to 45% for fiscal year 2000. Professional services costs increased
at a faster rate than revenue in fiscal 2001, resulting in a reduction in gross
margin to 50% compared to 55% for the twelve months ended March 31, 2000.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses more than doubled in the year ended March 31, 2001 to $182.6 million
compared to $90.9 million in the fiscal year ended March 31, 2000. These
increases were primarily due to expenses related to the addition of sales,
marketing, recruiting, knowledge management, information technology, finance,
legal and administration personnel, bad debt expense, and costs of leasing
additional office space to support the growth that we experienced in the first
half of the fiscal year. Expenses related to bad debt increased significantly
for the year ended March 31, 2001. This increase was primarily due to the
increased financial problems and lack of funding experienced by our venture-
backed clients. Selling, general, and administrative expenses as a percentage of
revenue increased to 61% from 58% for the year ended March 31, 2001.
Restructuring and Other Related Charges. On December 6, 2000, Scient
announced a restructuring initiative designed to reduce capacity and align its
business to the rapidly changing market environment. Under this plan, Scient
eliminated approximately 460 positions and closed offices in Austin, Texas,
Sunnyvale, California and Germany. Subsequently, on April 11, 2001, Scient
announced an additional restructuring initiative that included a planned
reduction in force of up to approximately 850 people. The April restructuring
included plans to significantly downsize and modify the company's geographic
footprint and move its corporate headquarters to New York from San Francisco. In
addition, Scient closed its Los Angeles and New Jersey offices, divested 80% of
its interests in each of its French and Japanese subsidiaries and plans to
reduce its San Francisco, Boston, and Chicago locations to smaller sales
offices. Scient is in the process of reviewing several
21
25
other offices to determine appropriate actions, including possible closing or
downsizing as market conditions warrant. For the year ended March 31, 2001,
Scient recorded restructuring and other related charges of $105 million. Of the
total restructuring charge of $105 million, $14 million was related to headcount
reductions, $81 million was for consolidation and abandonment of facilities and
related fixed assets, and $10 million was associated with other restructuring
related charges. These restructuring and other related charges were taken to
align Scient's cost structure with changing market conditions and decreased
demand for Scient's services as well as to create a more flexible and efficient
organization.
Total cash outlay for the restructuring and other related activities will
be approximately $71 million. The remaining $34 million of restructuring and
other related costs consists of non-cash charges primarily for asset write-offs.
As of the end of the year of fiscal 2001, $25 million of cash was used for
restructuring and other related costs. Approximately $11 million cash outlay is
expected in the first quarter of fiscal 2002, and the remaining cash outlay of
approximately $35 million, primarily related to real estate rental obligations,
is expected to occur over the next 10 years.
Amortization of Intangibles. Amortization of intangible assets consists of
amortization of goodwill resulting from the acquisition of AXIDIA, a French
eBusiness services firm, in August 2000. Amortization of these costs for the
year ended March 31, 2001 was $4.7 million. There was no amortization cost
related to intangible assets for year ended March 31, 2000. Intangible assets
related to the AXIDIA acquisition are amortized on a straight line basis over
two years. Amortization of intangible assets as a percentage of revenue was 2%
for the year ended March 31, 2001, with no amortization in the comparable period
of the prior year.
Stock Compensation. We have recorded stock compensation for the difference
between the exercise price of certain stock option grants and the deemed fair
value of our common stock at the time of such grants. We are amortizing this
amount over the vesting periods of the applicable options, resulting in
amortization expense of $9.4 million and $15.6 million for the year ended March
31, 2001 and 2000, respectively. 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 and Other Income, Net
Interest and other income, net, increased 116% in the year ended March 31,
2001 compared to the year ended March 31, 2000. This increase was due primarily
to larger investment funds and higher interest bearing funds resulting from our
investing activities during the quarter ended December 31, 2000. In addition,
the average balance of our investment is higher due to proceeds from our public
offerings in the prior fiscal year.
Provision for Income Taxes
From March 31, 2000 through March 31, 2001, we incurred net losses for
federal and state tax purposes and have not recognized any tax provision or
benefit. As of March 31, 2000 and 2001, Scient had approximately $18 million and
$44 million of federal net operating loss carryforwards available and $23
million and $50 million of state net operating loss carryforwards available to
offset future taxable income which expire in varying amounts beginning in 2020
and 2008, 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, 2000 and 2001. 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, 2000 and 2001. 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.
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26
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL 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. 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 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, 2000 and 2001. 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, 1999 and 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.
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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.
MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000 2000 2000 1999 1999
--------- ------------ ------------- -------- --------- ------------ -------------
Revenues................... $ 27,060 $ 79,751 $102,005 $91,361 $65,843 $42,677 $30,805
Operating expenses:
Professional services.... 25,866 39,542 45,832 38,094 28,175 19,859 14,233
Selling, general and
administrative......... 32,940 52,894 49,000 47,790 34,545 23,993 19,212
Restructuring and other
related charges........ 57,579 47,220 -- -- -- -- --
Amortization of
intangible assets...... 1,750 1,750 1,167 -- -- -- --
Stock compensation....... 1,662 2,081 2,741 2,918 3,418 3,697 4,173
-------- -------- -------- ------- ------- ------- -------
Total operating
expenses......... 119,797 143,487 98,740 88,802 66,138 47,549 37,618
-------- -------- -------- ------- ------- ------- -------
Income (loss) from
operations............... (92,737) (63,736) 3,265 2,559 (295) (4,872) (6,813)
Interest income and other,
net...................... 2,524 2,552 2,379 3,222 2,528 837 992
-------- -------- -------- ------- ------- ------- -------
Income (loss) before income
taxes.................... (90,213) (61,184) 5,644 5,781 2,233 (4,035) (5,821)
Provision for income
taxes.................... -- (2,258) 2,258 -- -- -- --
-------- -------- -------- ------- ------- ------- -------
Net income (loss).......... $(90,213) $(58,926) $ 3,386 $ 5,781 $ 2,233 $(4,035) $(5,821)
======== ======== ======== ======= ======= ======= =======
Net income (loss) per
share:
Basic.................... $ (1.31) $ (0.88) $ 0.05 $ 0.09 $ 0.04 $ (0.07) $ (0.10)
Diluted.................. $ (1.31) $ (0.88) $ 0.04 $ 0.07 $ 0.03 $ (0.07) $ (0.10)
Weighted average shares
Basic.................... 68,840 67,276 65,664 64,035 61,781 57,992 55,848
Diluted.................. 68,840 67,276 80,766 81,774 83,413 57,992 55,848
AS A PERCENTAGE OF
REVENUES:
Revenues................... 100% 100% 100% 100% 100% 100% 100%
Operating expenses:
Professional services.... 96 50 45 42 43 47 46
Selling, general and
administrative......... 121 66 48 52 52 56 62
Restructuring and other
related charges........ 213 59 -- -- -- -- --
Amortization of
intangible assets...... 6 2 1 -- -- -- --
Stock compensation....... 6 3 3 3 5 9 14
-------- -------- -------- ------- ------- ------- -------
Total operating
expenses......... 442 180 97 97 100 112 122
Income (loss) from
operations............... (342) (80) 3 3 (0) (12) (22)
Interest income and other,
net...................... 9 3 2 3 4 2 3
-------- -------- -------- ------- ------- ------- -------
Net income (loss).......... (333)% (77)% 5% 6% 4% (10)% (19)%
======== ======== ======== ======= ======= ======= =======
JUNE 30,
1999
--------
Revenues................... $ 16,404
Operating expenses:
Professional services.... 7,940
Selling, general and
administrative......... 13,105
Restructuring and other
related charges........ --
Amortization of
intangible assets...... --
Stock compensation....... 4,348
--------
Total operating
expenses......... 25,393
--------
Income (loss) from
operations............... (8,989)
Interest income and other,
net...................... 596
--------
Income (loss) before income
taxes.................... (8,393)
Provision for income
taxes.................... --
--------
Net income (loss).......... $ (8,393)
========
Net income (loss) per
share:
Basic.................... $ (0.23)
Diluted.................. $ (0.23)
Weighted average shares
Basic.................... 36,810
Diluted.................. 36,810
AS A PERCENTAGE OF
REVENUES:
Revenues................... 100%
Operating expenses:
Professional services.... 48
Selling, general and
administrative......... 80
Restructuring and other
related charges........ --
Amortization of
intangible assets...... --
Stock compensation....... 27
--------
Total operating
expenses......... 155
Income (loss) from
operations............... (55)
Interest income and other,
net...................... 4
--------
Net income (loss).......... (51)%
========
LIQUIDITY AND CAPITAL RESOURCES
We have primarily funded our operations from cash flow generated from
operations and the proceeds from our public stock offerings. We raised $62.7
million in May 1999 from an initial public offering of 6.9 million shares of our
common stock, net of underwriting discounts, commissions and issuance costs. We
then raised an additional $154.3 million in January 2000 from a follow-on public
offering of 1.85 million shares of our common stock, net of underwriting
discounts, commissions and issuance costs. Cash used in operating activities for
the year ended March 31, 2001, 2000 and 1999 was $66.3, million $6.6 million,
and $4.6 million, respectively. As of March 31, 2001 we had $161.1 million in
cash and cash equivalents, restricted cash and short-term investments compared
to $229.1 million at March 31, 2000.
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Cash provided by/(used in) investing activities for the year ended March
31, 2001, 2000, and 1999 was $64.5 million, ($118.4) million, and ($19.2)
million, respectively. The results for fiscal year 2001 include the net write
down of property and equipment for $3.3 million and the sale or maturing of
short-term investments, which generated $69.0 million in cash. This was offset
by the cash portion of the AXIDIA acquisition of $7.7 million. We invest
predominantly in instruments that are highly liquid, investment grade securities
and have maturity of less than one year. Capital expenditures for the year ended
March 31, 2000 and 1999 was approximate $11.1 million and $2.4 million,
respectively. These expenditures were primarily for computer equipment,
software, and furniture and fixtures.
Cash provided by/(used in) financing activities for the year ended March
31, 2001, 2000, and 1999 was ($13.7) million, $221.8 million, and $31.7 million,
respectively. Fiscal year 2001 cash used in financing activities primarily
consisted of restricted cash outflow of $18.6 million used as a collateral for
our existing line of credit offset by cash received for the exercise of options
to acquire common stock of $13.5 million. Cash provided by financing activities
for the year ended March 31, 2000 and was primarily derived from proceeds for
the sale of common stock through Scient's public offerings of $217.0 million.
We have a revolving line of credit of $50.0 million. Borrowings under this
line of credit bear interest at either the LIBOR rate plus a range of 2.25% to
2.75% or the bank's prime rate plus up to 0.5% depending on the outstanding
balance and the type of draws. As of March 31, 2001, there were no outstanding
borrowings under this line of credit. Fourteen standby letters of credit
totaling $41.9 million have been issued against this line of credit.
We calculate average days' sales outstanding ("DSO") based on average
account receivables for the period divided by average daily sales for that
equivalent period. Our DSO declined to 53 days in fiscal year 2001 from 67 days
in fiscal year 2000. The decrease was due to lower average daily sales in fiscal
year 2000. However, DSO increased significantly on a quarter to quarter basis
throughout fiscal year 2001 due to increased payment cycle of larger enterprise
clients. We anticipate that this trend towards an increase in DSO will continue
in the near future as our average daily sales remain flat or decline further.
We believe that current cash balance and cash generated from operations
will be sufficient to fund our current anticipated cash needs through at least
the next 12 months. To the extent we are unable to fund our operations from cash
flows, we may need to obtain financing in the form of either additional equity
or indebtedness. There can be no assurance that additional financing will be
available on terms acceptable to us, if at all.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
SFAS No. 138 "Accounting for Certain Hedging Activities, an amendment of FASB
Statement No. 133", effective for all interim and annual periods beginning after
June 15, 2000. As indicated, SFAS No 138 amends accounting and reporting
standards for certain derivative instruments and certain hedging activities.
Scient does not expect the adoption of these standards to have a material effect
on its results of consolidated operations, financial position, or cash flows.
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.
25
29
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The consolidated financial statement of Scient, including Scient's
consolidated balance sheets as of March 31, 2000 and 2001, and consolidated
statement of operations, consolidated statements of stockholder's equity, and
consolidated statements of cash flows for the years ended March 31, 1999, 2000,
and 2001 and notes to the consolidated financial statements, together with a
report thereon of PriceWaterhouseCoopers, LLP, dated April 23, 2001 appear on
pages F-1 through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of Scient, and their ages as of April 1, 2001, are
as follows:
NAME AGE POSITION
---- --- --------
Robert M. Howe................ 56 Chairman and Chief Executive Officer
Stephen A. Mucchetti.......... 58 President and Chief Operating Officer
William H. Kurtz.............. 44 Chief Financial Officer and Executive Vice President
Board of Directors
The information concerning our directors required by this item will be
contained in the Proxy Statement for the 2001 Annual Meeting of Shareholders
under the heading "Election of Directors," and is incorporated herein by
reference.
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. He is also a member of our board of directors. 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
26
30
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. Mr. Kurtz
will resign as our Chief Financial Officer effective June 30, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item will be contained in the Proxy Statement for the
2001 Annual Meeting of Shareholders under the heading "Compensation of Executive
Officers and Directors" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item will be contained in the Proxy Statement for the
2001 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
2001 Annual Meeting of Shareholders under the heading "Certain Relationships and
Related Transactions" and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) 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).
27
31
EXHIBIT
NO. DESCRIPTION
------- -----------
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).
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).
28
32
EXHIBIT
NO. DESCRIPTION
------- -----------
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 -- incorporated herein by reference to Exhibit 10.20 to
the Company's Registration Statement on Form 10-K filed June
29, 2000 (File No. 333-74731)
10.22 Amended and Restated Bylaws of Scient, dated July 18,
2000 -- incorporated herein by reference to Exhibit 3.3 to
the Company's Registration Statement on Form 10-Q filed
August 9, 2000 (File No. 333-74731).
10.23 2000 Stock Plan, dated February 16, 2000 (see page S-1).
21.1 List of subsidiaries. (see page S-14)
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants (see page S-15).
(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.
29
33
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 27th day of June, 2001.
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 June 27, 2001
- ----------------------------------------------------- Officer (Principal Executive
Robert M. Howe Officer)
/s/ STEPHEN A. MUCCHETTI President, Chief Operating June 27, 2001
- ----------------------------------------------------- Officer, and Director
Stephen A. Mucchetti
/s/ WILLIAM H. KURTZ Chief Financial Officer and June 27, 2001
- ----------------------------------------------------- Executive Vice President
William H. Kurtz (Principal Financial and
Accounting Officer)
/s/ ERIC GREENBERG Chairman Emeritus and Founder June 27, 2001
- -----------------------------------------------------
Eric Greenberg
/s/ DAVID M. BEIRNE Director June 27, 2001
- -----------------------------------------------------
David M. Beirne
/s/ FREDERICK W. GLUCK Director June 27, 2001
- -----------------------------------------------------
Frederick W. Gluck
/s/ DOUGLAS LEONE Director June 27, 2001
- -----------------------------------------------------
Douglas Leone
30
34
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
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Scient Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Scient Corporation and its subsidiaries at March 31, 2000 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
San Jose, California
April 23, 2001
F-2
36
SCIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
MARCH 31,
---------------------
2001 2000
--------- --------
Current assets:
Cash and cash equivalents................................. $ 93,601 $108,102
Restricted cash........................................... 18,626 --
Short-term investments.................................... 48,846 121,046
Accounts receivable, net.................................. 27,139 56,021
Prepaid expenses.......................................... 4,196 4,929
Other..................................................... 12,809 4,228
--------- --------
Total current assets.............................. 205,217 294,326
Long-term investments....................................... -- 3,146
Property and equipment, net................................. 8,278 16,063
Intangibles, net............................................ 9,351 --
Other....................................................... 1,198 219
--------- --------
$ 224,044 $313,754
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings, current.................................. $ -- $ 1,334
Accounts payable.......................................... 6,357 5,023
Accrued compensation and benefits......................... 15,047 33,976
Accrued expenses.......................................... 57,324 9,265
Deferred revenue.......................................... 105 6,579
Capital lease obligations, current........................ 3,892 2,624
--------- --------
Total current liabilities......................... 82,725 58,801
Bank borrowings, long-term.................................. -- 865
Capital lease obligations, long-term........................ 2,614 2,052
--------- --------
85,339 61,718
--------- --------
Commitments and contingencies (Note 7)
Stockholders' equity:
Convertible preferred stock; issuable in series, $.0001
par value; 10,000 shares authorized; no shares issued
and outstanding........................................ -- --
Common stock; $.0001 par value; 125,000 shares authorized;
73,772 and 72,491 shares issued and outstanding,
respectively........................................... 7 7
Treasury stock............................................ (2,225) --
Additional paid-in capital................................ 315,638 297,735
Accumulated other comprehensive loss...................... 453 (47)
Unearned compensation..................................... (6,321) (16,784)
Accumulated deficit....................................... (168,847) (28,875)
--------- --------
Total stockholders' equity........................ 138,705 252,036
--------- --------
$ 224,044 $313,754
========= ========
See notes to consolidated financial statements.
F-3
37
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
---------------------------------
2001 2000 1999
--------- -------- --------
Revenues.................................................. $ 300,177 $155,729 $ 20,675
Operating expenses:
Professional services (exclusive of stock-based
compensation of $2,962, $8,684, and $5,698 for 1999,
2000, and 2001 respectively)......................... 149,334 70,207 10,028
Selling, general and administrative (exclusive of
stock-based compensation of $4,717, $6,952, and
$3,704 for 1999, 2000, and 2001 respectively)........ 182,624 90,854 15,315
Restructuring and other related charges................. 104,799 -- --
Amortization of intangible assets....................... 4,667 -- --
Amortization of stock-based compensation................ 9,402 15,636 7,679
--------- -------- --------
Total operating expenses........................ 450,826 176,697 33,022
--------- -------- --------
Loss from operations...................................... (150,649) (20,968) (12,347)
Interest income and other, net............................ 10,677 4,953 646
--------- -------- --------
Net loss.................................................. $(139,972) $(16,015) $(11,701)
========= ======== ========
Net loss per share:
Basic and diluted....................................... $ (2.13) $ (0.29) $ (0.89)
========= ======== ========
Weighted average shares................................. 65,583 54,590 13,198
========= ======== ========
See notes to consolidated financial statements.
F-4
38
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
--------------- --------------- PAID-IN SUBSCRIPTION TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STOCK
------ ------ ------ ------ ---------- ------------ --------
Balance at March 31, 1998................ 5,333 $ 1 21,868 $ 1 $ 6,497 $ -- $ --
Net 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 stock-based compensation........ -- -- -- -- 33,366 -- --
Amortization of unearned stock-based
compensation........................... -- -- -- -- -- -- --
Exercise of stock options................ -- -- 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 stock-based compensation........ -- -- -- -- 5,198 -- --
Amortization of unearned stock-based
compensation........................... -- -- -- -- -- -- --
Exercise of stock options and warrants,
net.................................... -- -- 841 -- 3,681 -- --
------ --- ------ --- -------- ----- -------
Balance at March 31, 2000................ -- -- 72,491 7 297,735 -- --
Component of comprehensive loss:
Net loss............................... -- -- -- -- -- -- --
Currency translation adjustment........ -- -- -- -- -- -- --
Comprehensive loss...................
Issuance of common stock................. -- -- 455 -- 12,935 -- --
Repurchased of common stock.............. -- (100) -- -- -- (2,225)
Unearned stock-based compensation........ -- -- -- -- (1,300) -- --
Amortization of unearned stock-based
compensation........................... -- -- -- -- -- -- --
Exercise of stock options, net........... -- -- 926 -- 6,268 -- --
------ --- ------ --- -------- ----- -------
Balance at March 31, 2001................ -- $-- 73,772 $ 7 $315,638 $ -- $(2,225)
====== === ====== === ======== ===== =======
See notes to consolidated financial statements.
F-5
39
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE UNEARNED ACCUMULATED STOCKHOLDERS'
LOSS COMPENSATION DEFICIT EQUITY
------------- ------------ ----------- -------------
Balance at March 31, 1998..................... $ -- $ (1,535) $ (1,159) $ 3,805
Component of comprehensive loss:
Net loss.................................... -- -- (11,701) (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 stock-based compensation............. -- (33,366) -- --
Amortization of unearned stock-based
compensation................................ -- 7,679 -- 7,679
Exercise of stock options..................... -- -- -- 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..... -- -- -- 62,716
Issuance of common stock in follow-on offering
net of issuance cost of $779................ -- -- -- 154,288
Issuance of common stock...................... -- -- -- 1,800
Unearned stock-based compensation............. -- (5,198) -- --
Amortization of unearned stock-based
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
Component of comprehensive loss:
Net loss.................................... -- -- (139,972) (139,972)
Currency translation adjustment............. 500 -- -- 500
---------
Comprehensive loss....................... (139,472)
Issuance of common stock...................... -- -- -- 12,935
Repurchase of common stock.................... -- -- -- (2,225)
Unearned stock-based compensation............. -- 1,300 -- --
Amortization of unearned stock-based
compensation................................ -- 9,163 -- 9,163
Exercise of stock options, net.............. -- -- -- 6,268
---- -------- --------- ---------
Balance at March 31, 2001..................... $453 $ (6,321) $(168,847) $ 138,705
==== ======== ========= =========
See notes to consolidated financial statements.
F-6
40
SCIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
---------------------------------------
2001 2000 1999
----------- ----------- ---------
Cash flows from operating activities:
Net loss........................................... $ (139,972) $ (16,015) $ (11,701)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 15,170 3,082 622
Provision for doubtful accounts................. 28,376 1,583 200
Amortization of unearned stock-based
compensation.................................. 9,402 15,636 7,679
Loss on investments............................. 5,993 -- --
Changes in assets and liabilities:
Accounts receivable........................... 1,265 (51,728) (5,920)
Prepaid expenses.............................. 733 (4,118) (674)
Other assets.................................. (9,449) (3,861) (376)
Accounts payable.............................. 1,183 4,191 481
Accrued expenses.............................. 27,534 38,609 4,600
Deferred revenue.............................. (6,509) 6,055 524
----------- ----------- ---------
Net cash used in operating activities...... (66,274) (6,566) (4,565)
----------- ----------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net............ 3,275 (11,053) (2,360)
Cash paid for acquisition.......................... (7,685) -- --
Purchase of investments............................ (1,391,669) (1,391,669) (246,505)
Sale of investments................................ 1,460,628 1,284,345 229,637
----------- ----------- ---------
Net cash provided by (used in) investing
activities............................... 64,549 (118,377) (19,228)
----------- ----------- ---------
Cash flows from financing activities:
Proceeds (payments) from bank borrowing, net....... (2,199) 657 1,542
Proceeds from convertible preferred stock, net..... -- -- 26,116
Proceeds from issuance of common stock, net........ -- 218,804 --
Proceeds from exercise of common stock options and
warrants, net................................... 13,455 3,681 4,077
Purchase of common stock........................... (2,225) -- --
Principal payments on capital lease obligations.... (4,075) (1,334) (82)
Restricted cash.................................... (18,626) -- 100
----------- ----------- ---------
Net cash provided by (used in) financing
activities............................... (13,670) 221,808 31,753
----------- ----------- ---------
Effect on cash of changes in exchange rates.......... 894 (24) --
Net increase (decrease) in cash and cash
equivalents........................................ (14,501) 96,841 7,960
Cash and cash equivalents at beginning of period..... 108,102 11,261 3,301
----------- ----------- ---------
Cash and cash equivalents at end of period........... $ 93,601 $ 108,102 $ 11,261
=========== =========== =========
Supplemental cash flow information:
Cash paid for interest............................. $ 562 $ 373 $ 85
Supplemental non-cash financing activity:
Property and equipment acquired under capital
leases.......................................... $ 5,470 $ 4,705 $ 1,350
See notes to consolidated financial statements.
F-7
41
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.
During the second half of fiscal 2001 and the first quarter of fiscal 2002,
Scient announced reductions in its workforce, a reduction or closure of certain
of its offices, and its intention to relocate its corporate headquarters from
San Francisco, CA to New York, NY. As a result, Scient has recorded a charge in
the second half of fiscal 2001 of approximately $105 million related to
restructuring and other related charges. Scient also expects to take an
additional restructuring charge in the first quarter of 2001, see Notes 4
"Restructuring and Other Related Charges" and Note 12 "Subsequent Event."
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Scient Corporation and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Investments where
Scient does not have the ability to exercise significant influence are accounted
for using the cost method. Certain reclassifications have been made to the prior
period's financial statements to conform to the current period presentation.
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. 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.
In December 1999, the Securities and Exchange Commission ("SEC") 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 a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion 20, "Accounting Changes". In June 2000, the
SEC
F-8
42
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
issued SAB 101B, "Amendment: Revenue Recognition in Financial Statements," which
delayed implementation of SAB 101 until Scient's fourth fiscal quarter of 2000.
Scient has adopted SAB 101 with no known reportable changes in its consolidated
financial position or results of operations.
Professional Services
Professional services expenses consist primarily of compensation and
benefits of Scient's employees engaged in the delivery of professional services.
Cash and Cash Equivalents
Scient considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash includes a cash collateral account maintained under the
terms of a line of credit. In accordance with this agreement, we have created
and will maintain a cash collateral account that limits the liquidity of $18.6
million of our cash. (See Note 6)
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, 2000
and 2001, amortized cost approximated fair value and unrealized gains and losses
were insignificant.
The portfolio of short-term investments (including cash and cash
equivalents and restricted cash) consisted of the following (in thousands):
MARCH 31,
--------------------
2001 2000
-------- --------
Cash................................................... $ 13,103 $ 9,192
Commercial paper....................................... 85,120 89,892
Government securities.................................. 15,018 54,023
Foreign securities..................................... 13,268 22,519
Term notes............................................. 16,677 47,829
Corporate bonds........................................ 17,887 2,557
Certificate of deposit................................. -- 3,136
-------- --------
$161,073 $229,148
======== ========
Scient considers all investments with maturities of less than one year as
of March 31, 2001 to be short-term investments. Long term investments consist
primarily of marketable securities with original maturities of greater than
twelve months. 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. As of March 31, 2001, all investments had been written
down to zero. (See Note 4.)
F-9
43
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000 and 2001, 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.
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 MARCH 31,
--------------------
2001 2000 1999
---- ---- ----
Company A............................................... * * 13%
Company B............................................... * * 11%
Company C............................................... * * 11%
Company D............................................... 11% * *
- ---------------
* Represented less than 10% of total.
At March 31, 2001, the client that accounted for more than 10% of Scient's
revenue also represented 17% of accounts receivable. At March 31, 2000, no
clients accounted for more than 10% of Scient's revenue or accounts receivable.
Fair Value of Financial Instruments
Scient's financial instruments, including cash equivalents, restricted
cash, 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 stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
25, unearned compensation is based on the difference, if any, on the date of the
grant, between the fair value of Scient's stock and the exercise price. Unearned
compensation is amortized and expensed in accordance with Financial Accounting
Standards Board Interpretation No. 28. Scient accounts for stock-based
compensation issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
F-10
44
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.
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.
Net Loss Per Share
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):
YEAR ENDED MARCH 31,
---------------------------------
2001 2000 1999
--------- -------- --------
Numerator
Net loss........................................ $(139,972) $(16,015) $(11,701)
========= ======== ========
Denominator
Weighted average shares......................... 73,263 66,194 26,750
Weighted average unvested common stock subject
to repurchase................................ (7,680) (11,604) (13,552)
--------- -------- --------
Denominator for basic and diluted calculation... 65,583 54,590 13,198
========= ======== ========
Net loss per share:
Basic and diluted............................... $ (2.13) $ (0.29) $ (0.89)
========= ======== ========
F-11
45
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth common stock equivalents that are not
included in the diluted net income per share calculation above because to do so
would be antidilutive for the periods indicated (in thousands):
YEAR ENDED MARCH 31,
--------------------------
2001 2000 1999
------ ------ ------
Weighted average effect of common stock equivalents:
Convertible preferred stock............................ -- -- 28,476
Common stock warrants.................................. -- -- 126
Unvested common stocks subject to repurchase........... 7,680 11,604 13,552
Employee stock options................................. 8,967 8,866 4,702
------ ------ ------
16,647 20,470 46,856
====== ====== ======
Impairment of Long-Lived Assets
Scient evaluates the recoverability of our long-lived assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future discounted cash flows attributable to such assets. Scient
assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable.
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.
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 engages in business activities in one operating segment, which
provides business and technology consulting and solutions, primarily on a time
and material basis.
F-12
46
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Data for the geographic regions in which Scient operates is presented
below:
YEAR ENDED MARCH 31,
-------------------------------
2001 2000 1999
-------- -------- -------
Revenues:
North America..................................... $250,843 $151,317 $20,675
Singapore......................................... 30,648 2,889 --
Other international............................... 18,686 1,523 --
-------- -------- -------
Total revenues:........................... $300,177 $155,729 $20,675
======== ======== =======
Long-lived assets:
North America..................................... $ 15,887 $ 17,982 $ 3,410
Singapore......................................... 1,132 1,155 --
Other international............................... 610 72 --
-------- -------- -------
Total long-lived assets:.................. $ 17,629 $ 19,209 $ 3,410
======== ======== =======
Other international consists of the revenues and assets of operations in
Europe and Asia Pacific excluding Singapore.
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 $470,000, $4.4 million, and
$4.9 million for the years ended March 31, 1999, 2000 and 2001, 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
SFAS No. 138 "Accounting for Certain Hedging Activities, an amendment of FASB
Statement No. 133", effective for all interim and annual periods beginning after
June 15, 2000. As indicated, SFAS No 138 amends accounting and reporting
standards for certain derivative instruments and certain hedging activities.
Scient does not expect the adoption of these standards to have a material effect
on its results of consolidated operations, financial position, or cash flows.
2. BUSINESS COMBINATION
In August 2000, Scient acquired AXIDIA, an eBusiness services firm located
in France. Under the terms of the acquisition agreement Scient paid cash of
approximately $7.7 million, and issued approximately 121,000
F-13
47
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares of its common stock in exchange for all of the outstanding common stock
of AXIDIA. The acquisition was accounted for as a purchase business combination
and accordingly, the results of AXIDIA's operations have been included in
Scient's financial statements from August 2000.
The total consideration for the transaction was valued approximately $14.5
million, which includes the value of cash paid, common stock issued and other
direct acquisition costs. The purchase price has been allocated to the fair
value of assets acquired and liabilities assumed and workforce-in-place. The
workforce-in-place has been recorded as an intangible asset and is amortized on
a straight-line basis over 2 years.
The historical results of operations of AXIDIA for the periods ended March
31, 1999 and 2000 were not material to the consolidated results of operations of
Scient for the respective periods.
3. 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 account receivable previously charged off as
uncollectible are credited to the allowance for doubtful accounts. Changes in
the account receivable allowance were as follows (in thousands):
BALANCE,
BEGINNING END OF
BALANCE ADDITIONS(1) WRITEOFFS PERIOD
--------- ------------ --------- -------------
YEAR ENDED MARCH 31, 1999:
Allowance for doubtful accounts....... $ -- $ 200 $ -- $ 200
Allowance for revenue reserves........ -- -- -- --
------ ------- ------- -------
$ -- $ 200 $ -- $ 200
====== ======= ======= =======
YEAR ENDED MARCH 31, 2000:
Allowance for doubtful accounts....... $ 200 $ 1,583 $ -- $ 1,783
Allowance for revenue reserves........ -- -- -- --
------ ------- ------- -------
$ 200 $ 1,583 $ -- $ 1,783
====== ======= ======= =======
YEAR ENDED MARCH 31, 2001:
Allowance for doubtful accounts....... $1,783 $12,249 $(2,532) $11,500
Allowance for revenue reserves........ -- 16,127 -- 16,127
------ ------- ------- -------
$1,783 $28,376 $(2,532) $27,627
====== ======= ======= =======
- ---------------
(1) Additions resulting from increase in allowance for revenue reserves were
offset against revenues.
F-14
48
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31,
---------------------
2001 2000
-------- ---------
(IN THOUSANDS)
Accounts receivable:
Accounts receivable................................... $47,703 $ 27,848
Unbilled fees and services............................ 7,063 29,956
------- --------
54,766 57,804
Less allowance for doubtful accounts.................. (27,627) (1,783)
------- --------
$27,139 $ 56,021
======= ========
Other current assets:
Billable expenses..................................... $11,148 $ 2,339
Deposits.............................................. 736 1,294
Other................................................. 925 595
------- --------
$12,809 $ 4,228
======= ========
Property and equipment:
Computer equipment and software....................... $ 9,778 $ 6,004
Equipment under capital leases........................ 6,392 6,022
Furniture and fixtures................................ 2,078 2,412
Leasehold improvements................................ 7,836 5,564
------- --------
20,002 26,084
Less accumulated depreciation and amortization........ (17,806) (3,939)
------- --------
$ 8,278 $ 16,063
======= ========
Depreciation expense for the years ended March 31, 1999, 2000 and 2001 was
$552,000, $3.1 million, and $11.0 million respectively. Accumulated depreciation
of assets under capital leases totaled $70,000, $1.4 million and $926,000 at
March 31, 1999, 2000 and 2001, respectively. The equipment under capital leases
collaterizes the related lease obligations.
4. RESTRUCTURING AND OTHER RELATED CHARGES
For the year ended March 31, 2001, Scient recorded restructuring and other
related charges of $105 million, consisting of $14 million for headcount
reductions, $81 million for consolidation of facilities and related fixed
assets, and $10 million of other restructuring related charges. These
restructuring and other related charges were taken to align Scient's cost
structure with changing market conditions and decreased demand for Scient's
services to create a more flexible and efficient organization. The plan resulted
in headcount reduction of approximately 460 employees, which was made up of
approximately 67% professional services staff, and 33% core services staff. Many
of the positions that were eliminated related to the office closures in Austin,
Texas and Sunnyvale, California facilities. In January 2001, Scient also closed
its office in Munich, Germany, which was contemplated in December with the other
restructuring plans.
Total cash outlay for the restructuring and other related activities will
be approximately $71 million. The remaining $34 million of restructuring and
other related costs consists of non-cash charges primarily for asset write-offs.
As of the end of the year of fiscal 2001, $25 million of cash was used for
restructuring and other related costs. Approximately $11 million cash outlay is
expected in the first quarter of 2002, and the remaining cash outlay of
approximately $35 million, primarily related to real estate rental obligations,
is expected to occur over the next 10 years.
F-15
49
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restructuring and other related activities as of March 31, 2001 were as
follow (in millions):
SEVERANCE
AND BENEFITS FACILITIES OTHER TOTAL
------------ ---------- ----- -----
Provision for fiscal 2001...................... $14 $ 81 $10 $105
Amount utilized in fiscal 2001................. (9) (40) (9) (58)
--- ---- --- ----
Balance at March 31, 2001...................... $ 5 $ 41 $ 1 $ 47
=== ==== === ====
As a result of the deterioration in eBusiness markets, Scient also
evaluated the investments held by Scient Capital LLC and determined that these
investments had become impaired. Accordingly, an impairment charge of $6.0
million has been recorded to write these investments down to zero, their
estimated fair value at March 31, 2001. This charge has been reported on the
statement of operations as a component of restructuring and other related
charges. Scient does not anticipate making any further investments through
Scient Capital.
5. INCOME TAXES
At March 31, 2000 and 2001, Scient had approximately $18.0 million and
$43.9 million of federal net operating loss carryforwards available and $22.5
million and $49.6 million of state net operating loss carryforwards available to
offset future taxable income which expire in varying amounts beginning in 2020
and 2008, 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 for the year ended March 31, 1999, 2000 and
2001. 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, 1999, 2000 and 2001. 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 consist of the following (in thousands):
YEAR ENDED MARCH 31,
------------------------------
2001 2000 1999
------- ------- --------
Deferred tax assets:
Research and development credit...................... $ 428 $ 199 $ --
Net operating loss carryforwards..................... 17,826 7,304 1,877
Accruals and reserves................................ 14,821 1,323 123
Restructuring reserves............................... 33,722 -- --
Fixed assets......................................... 97 -- --
------- ------- --------
66,894 8,826 2,000
Less valuation allowance............................. (66,894) (8,826) (2,000)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
6. BORROWING
In May 1998, Scient entered into an equipment lease line and a line of
credit under a Loan and Security Agreement.
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
F-16
50
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the period of May 1999 through September 2000. The amounts available at March
31, 2001 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, which is no later than September
2000. The line of credit expires in May 2000 and charges interest at a rate of
one-half percent plus prime per annum. Substantially all of the assets of Scient
are pledged as collateral for Scient's credit facilities.
At March 31, 2000, Scient had $2.2 million balance outstanding under the
equipment lease line. Interest rates at March 31, 2000 was 8.75%. Scient paid
its outstanding balances on the equipment line of credit in April 2000.
In April 2000, Scient entered into a $40.0 million line of credit agreement
with a bank. In September 2000, the line of credit was increased to $50.0
million. Borrowings under this line of credit bear interest at either the LIBOR
rate plus a range of 2.25% to 2.75% or the bank's prime rate plus up to 0.5%
depending on the outstanding balance and the type of draws. Fourteen standby
letters of credit totaling $41.9 million have been issued against this line of
credit. Under this line of credit, Scient is required to maintain certain
financial covenants. At March 31, 2001, Scient was in compliance with all such
covenants. In addition, Scient is also required to maintain a certain cash
balance in a restricted account to be used as collateral against the letters of
credit issued under this line of credit. Substantially all of the assets of
Scient are pledged as collateral for Scient's credit facilities. No borrowing is
made against this line of credit at March 31, 2001.
7. COMMITMENTS AND CONTINGENCIES
Leases
Scient leases office space and equipment under noncancelable operating and
capital leases with various expiration dates through 2022. Rent expense for the
years ended March 31, 1999, 2000 and 2001 was $1.2 million, $5.7 million and
$18.6 million, respectively. Sublease income for the years ended March 31, 2000
and 2001 was $463,000 and $1.0 million, 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, 2001 are as follows (in thousands):
CAPITAL OPERATING
YEAR ENDED MARCH 31, LEASES LEASES
-------------------- ------- ---------
2002..................................................... $4,278 $ 28,774
2003..................................................... 2,240 32,534
2004..................................................... 490 34,543
2005..................................................... 38 33,501
2006..................................................... -- 29,936
Thereafter............................................... -- 248,279
------ --------
Total minimum lease payments................... $7,046 $407,567
========
Less amount representing interest........................ 540
------
Present value of capital lease obligations............... $6,506
Less current portion..................................... 3,892
------
Capital lease obligations, long-term..................... $2,614
======
F-17
51
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In April 2001, Scient entered into agreements for leased office to relieve
the above commitment by $14.1 million through the year 2010.
Letters of Credit
Scient has issued letters of credit with various financial institutions in
the aggregate amount of $41.9 million 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.
8. TRANSACTIONS WITH ENTITIES RELATED TO DIRECTORS
A director and a shareholder of Scient, is also a director and shareholder
of two clients from which Scient recognized $3.7 million, $4.9 million, and
$14.1 million in revenue for the year ended March 31, 1999, 2000 and 2001,
respectively. The terms and conditions of such transactions were normal and
customary. Balance due from this clients as of March 31, 2000 and 2001 were $1.0
million and $6.2 million, respectively.
9. COMMON STOCK
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 40.0
million shares of $.0001 par value Common Stock and 11.5 million shares of
$.0001 par value Preferred Stock. In May 1999, upon the effectiveness of the
initial public offering, 125.0 million shares of common stock and 10.0 million
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.
In May 1999, Scient completed an initial public offering of 6.9 million
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 29.5 million shares of common stock.
In January 2000, Scient completed a follow-on offering of 1.9 million
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.
In April 2000, the shareholders approved an increase in its authorized
common shares from 125.0 million to 500.0 million. 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, 2000 and 2001, there were 11.6 million and 7.7 million
shares subject to repurchase, respectively.
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. Seventy-five percent 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
F-18
52
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
immediately vest. At March 31, 2000 and 2001, approximately 2.5 million and 1.3
million shares, respectively, of outstanding common stock were subject to
repurchase by Scient at the original purchase price of $0.000025.
Warrants for Common Stock
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 recognized the total value of
the agreement over the service period.
Stock Split
In December 1999, Scient effected a two-for-one stock-split of its common
stock. All data shown in the accompanying consolidated financial statements and
notes have been retroactively adjusted to reflect the stock splits.
10. 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.
11. STOCK OPTION PLANS
2000 Stock Plan
In June 2000, the Board of Directors adopted the 2000 Stock Plan (the "2000
Plan") and reserved 3.0 million shares for issuance thereunder. In January 2001,
and every year thereafter, shares reserved for issuance will automatically
increase by a number equal to the lesser of 5% of the total number of shares of
common stock outstanding or 5.0 million shares. The 2000 Plan authorized the
award of options and restricted stock awards. Options granted under the 2000
Plan are nonqualified stock options ("NSO"). Awards may be granted to employees
and consultants of Scient and its affiliates. However, members of the Board and
individuals who are considered officers of Scient under the rules of the
National Association of Securities Dealers are not eligible for the grant.
Options under the 2000 Plan generally are granted for periods of up to ten
years and vest 25% of the options after one month from the date of grant, with
the remaining options vesting in equally monthly installments over the following
36 months.
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 6.4
million shares, as amended in February 2000, plus the aggregate number of shares
of common stock available for issuance under the 1997 Stock Option Plan. 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 shares of common stock outstanding or 10.0
million shares. The 1999 Plan authorized the award of options, restricted stock
awards and stock bonuses. No person will be eligible to receive more than 2.0
million shares in any fiscal year pursuant to the 1999 Plan other than a new
employee of Scient or one of its affiliates, who will be eligible to receive no
more than
F-19
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SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4.0 million shares in the fiscal year in which such employee commences
employment. Options granted under the 1999 Plan may be either incentive stock
options ("ISO") or NSOs. ISOs may be granted only to employees of Scient and its
affiliates (including officers and directors of Scient who are also employees).
NSOs and other awards may be granted to outside directors of Scient and to
employees and consultants of Scient and its affiliates.
Options under the 1999 Plan generally are granted for periods of up to ten
years and 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
and stock awards to outside directors of Scient and to employees and consultants
of Scient and its affiliates. Options granted under the 1997 Plan may be either
ISOs or NSOs. Scient reserved 13.4 million 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 2.0 million 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 2.0 million shares. Employees
generally will be eligible to participate in the ESPP if they customarily are
employed by Scient or one of its participating subsidiaries 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 or any parent or subsidiary. 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-20
54
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
----------------- ----------- ----------------
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
------- -------
Authorized............................. 8,000
Granted................................ (20,616) 20,616 14.53
Exercised.............................. -- (1,733) 3.74
Canceled............................... 7,061 (7,061) 29.36
Repurchased............................ 807 -- --
------- -------
Balance at March 31, 2001................ 3,901 26,456 $16.39
======= =======
The following table summarizes the information about stock options
outstanding and exercisable at March 31, 2001:
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
--------------------------------- ----------------------------------------------------
WEIGHTED AVERAGE NUMBER
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE VESTED AND WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- -------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
$ 0.03 - 0.80.. 1,594 7.4 years $ 0.64 1,345 $ 0.61
$ 1.66 - 6.00.. 15,072 9.0 years $ 3.11 5,632 $ 3.63
$10.00 - 26.38.. 3,652 8.5 years $17.98 1,414 $13.72
$32.00 - 45.63.. 3,375 8.5 years $38.13 1,028 $37.41
$50.06 - 68.75.. 1,760 8.7 years $60.13 363 $63.19
$75.25 - 112.81.. 1,003 8.8 years $88.36 245 $91.26
------ ------
26,456 8.9 years $16.39 10,027 $12.41
====== ======
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
years ended March 31, 1999, 2000 and 2001 been
F-21
55
SCIENT CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
YEAR ENDED MARCH 31,
--------------------------------
2001 2000 1999
--------- -------- --------
Net loss:
As reported..................................... $(139,972) $(16,015) $(11,701)
========= ======== ========
Pro forma....................................... $(188,621) $(21,322) $(12,265)
========= ======== ========
Net loss per share:
As reported..................................... $ (2.13) $ (0.29) $ (0.89)
========= ======== ========
Pro forma....................................... $ (2.88) $ (0.39) $ (1.86)
========= ======== ========
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 MARCH 31,
--------------------
2001 2000 1999
---- ---- ----
Risk Free Interest Rate..................................... 5.50% 5.65% 5.26%
Expected lives (in years)................................... 4 4 5
Dividend yield.............................................. 0% 0% 0%
Expected volatility......................................... 122% 60% 0%
Because additional option grants are expected to be made each year, the
pro-forma impact for the years ended March 31, 1999, 2000 and 2001 is not
representative of the pro-forma effects which may be expected in future years.
Unearned Stock-based Compensation
In connection with certain stock option grants for the years ended March
31, 1999, 2000, and 2001, Scient recognized unearned stock-based compensation
totaling $33.4 million, $5.2 million, and $(1.3 million), respectively, which is
being amortized over the vesting periods, generally four years, of the related
options. Amortization expense recognized for the years ended March 31, 1999,
2000 and 2001 totaled approximately $7.7 million, $15.6 million, and $9.4
million, respectively.
12. SUBSEQUENT EVENTS
On April 11, 2001, Scient announced an additional restructuring initiative
that included a reduction in force of up to 850 people. The restructuring
included plans to downsize and modify the company's geographic footprint and
move its corporate headquarters to New York from San Francisco. In addition,
Scient closed its Los Angeles and New Jersey offices and plans to reduce its San
Francisco, Boston, and Chicago locations to smaller offices.
As part of the restructuring initiative, in June 2001 Scient divested
itself 80.1% of its interest in Scient S.A., its French subsidiary, and 81% of
its interest in Scient K.K., its Japanese subsidiary. Scient also licensed the
use of the Scient trademark to the French company for 120 days and to the
Japanese company for one year in order to allow the businesses to transition to
new branding.
F-22
56
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.23 Scient Corporation 2000 Stock Plan
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants