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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
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SCIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 94-3288107
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
</Table>
860 BROADWAY, NEW YORK, NY 10003
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(917) 534-8200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ] .
The number of shares outstanding of the Registrant's Common Stock as of
July 27, 2001 was 73,703,795.
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SCIENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<Table>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets....................... 1
Condensed Consolidated Statements of Operations............. 2
Condensed Consolidated Statements of Cash Flows............. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Qualitative and Quantitative Disclosures about Market
Risk........................................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
SIGNATURE............................................................ 23
</Table>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCIENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<Table>
<Caption>
JUNE 30, MARCH 31,
2001 2001
----------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 68,745 $ 93,601
Restricted cash........................................... 26,683 18,626
Short-term investments.................................... 19,696 48,846
Accounts receivable, net.................................. 10,330 27,139
Prepaid expenses and other................................ 8,477 18,203
--------- ---------
Total current assets.............................. 133,931 206,415
Property and equipment, net................................. 10,942 8,278
Intangibles, net............................................ -- 9,351
--------- ---------
$ 144,873 $ 224,044
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,862 $ 6,357
Accrued compensation and benefits......................... 13,040 15,047
Accrued other expenses.................................... 50,963 57,324
Deferred revenue.......................................... 85 105
Capital lease obligations, current........................ 3,361 3,892
--------- ---------
Total current liabilities......................... 69,311 82,725
Capital lease obligations, long-term........................ 2,019 2,614
--------- ---------
71,330 85,339
--------- ---------
Stockholders' equity:
Common stock: $0.0001 par value; 500,000 authorized;
73,672 and 73,772 shares issued and outstanding,
respectively........................................... 7 7
Additional paid-in capital................................ 312,623 313,866
Unearned compensation..................................... (3,933) (6,321)
Accumulated deficit....................................... (235,154) (168,847)
--------- ---------
Total stockholders' equity........................ 73,543 138,705
--------- ---------
$ 144,873 $ 224,044
========= =========
</Table>
See notes to condensed consolidated financial statements.
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------
2001 2000
-------- -------
(UNAUDITED)
Net revenue................................................. $ 11,306 $91,361
Operating expenses:
Professional services (exclusive of stock-based
compensation of $1,072 and $2,029 for 2001 and 2000)... 13,370 38,094
Selling, general and administrative (exclusive of
stock-based compensation of $129 and $889 for 2001 and
2000).................................................. 14,414 47,790
Restructuring and other related charges................... 50,260 --
Amortization of stock-based compensation.................. 1,201 2,918
-------- -------
Total operating expenses.......................... 79,245 88,802
-------- -------
Income (loss) from operations............................... (67,939) 2,559
Interest and other income, net.............................. 1,632 3,222
-------- -------
Net income/(loss)........................................... $(66,307) $ 5,781
======== =======
Net income/(loss) per share:
Basic..................................................... $ (0.94) $ 0.09
Diluted................................................... $ (0.94) $ 0.07
Weighted average common shares:
Basic..................................................... 70,213 64,035
Diluted................................................... 70,213 81,774
</Table>
See notes to condensed consolidated financial statements.
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SCIENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)......................................... $(66,307) $ 5,781
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................... 1,241 1,949
Provisions for doubtful accounts....................... (444) 1,988
Impairment of intangibles.............................. 9,351 --
Amortization of stock-based compensation............... 1,201 2,918
Change in assets and liabilities:
Accounts receivable.................................. 17,253 (16,862)
Prepaid expenses and other........................... 9,726 (12,156)
Accounts payable..................................... (4,495) (2,233)
Accrued expenses..................................... (8,368) (11,748)
Deferred revenue..................................... (20) 192
-------- --------
Net cash used in operating activities............. (40,862) (30,171)
-------- --------
Cash flows from investing activities:
Purchase of investment, net............................... 29,150 (1,582)
Purchase of property and equipment........................ (5,435) (4,700)
Proceeds from sale of property and equipment.............. 1,530 --
-------- --------
Net cash provided by (used in) investing
activities...................................... 25,245 (6,282)
-------- --------
Cash flows from financing activities:
Principal payments for bank borrowing..................... -- (2,199)
Proceeds from exercise of common stock options, net of
stock repurchases...................................... (80) 5,798
Principal payments on capital lease obligations........... (1,126) (740)
Restricted cash........................................... (8,057) --
-------- --------
Net cash provided by (used in) by financing
activities...................................... (9,263) 2,859
-------- --------
Effect of exchange rate changes on cash..................... 24 66
Decrease in cash and cash equivalents....................... (24,856) (33,528)
Cash and cash equivalents at beginning of period............ 93,601 108,102
-------- --------
Cash and cash equivalents at end of period.................. $ 68,745 $ 74,574
======== ========
</Table>
See notes to condensed consolidated financial statements.
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements 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. All investments under this
method have been considered impaired and written its value to zero according to
our management. The accompanying condensed consolidated financials statements
are unaudited, but in the opinion of management, contain all the adjustments
(consisting of only normal recurring adjustments) considered necessary to
present fairly the financial position, the results of operations and cash flows
for the periods presented in conformity with generally accepted accounting
principles applicable to interim periods. Results of operations are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. The accompanying consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended March 31, 2001 included in Scient's Annual Report on Form 10-K.
2. INCOME/(LOSS) PER SHARE
Basic net income (loss) per share is determined by using the weighed
average number of common shares outstanding during the period. Diluted net
(loss) per share is determined by using the weighted average number of common
shares, unvested common shares subject to repurchase, and common stock
equivalents (representing the dilutive effect of stock options) outstanding
during the period. Scient's net income (loss) has not been adjusted for any
period presented for purposes of computing basic or diluted net loss per share.
For purposes of computing diluted net income (loss) per share, weighted average
common share equivalents do not include stock options with an exercise price
that exceeded the average fair market value of Scient's common stock for that
period.
The following table sets forth the computation of basic and diluted income
(loss) per share for the periods indicated (in thousands, except per share
amounts):
<Table>
<Caption>
THREE MONTHS ENDED
JUNE 30,
-------------------
2001 2000
-------- -------
(UNAUDITED)
Net income (loss)........................................... $(66,307) $ 5,781
======== =======
Basic net income (loss) per share:
Weighted average shares outstanding....................... 70,213 64,035
======== =======
Basic net income (loss) per share......................... $ (0.94) $ 0.09
======== =======
Diluted net income (loss) per share:
Weighted average shares outstanding....................... 70,213 64,035
Weighted average unvested common shares to repurchase..... -- 8,966
Dilutive stock options.................................... -- 8,773
-------- -------
Shares used in computing per share amount................. 70,213 81,774
======== =======
Diluted net income (loss) per share....................... $ (0.94) $ 0.07
======== =======
</Table>
3. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting comprehensive income. Comprehensive income includes net income as
currently reported under generally accepted accounting principles and also
considers the affect of additional economic events that are not required to be
recorded in determining net income but are rather reported as a separate
component of stockholders' equity. Scient
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reports foreign currency translation gains and losses and unrealized gains and
losses on short term investments as components of comprehensive income. For the
three months ended June 30, 2001 and 2000, Scient recorded comprehensive loss of
$66.3 million and comprehensive income of $5.8 million, respectively.
4. RESTRUCTURING AND OTHER RELATED CHARGES
In April 2001, Scient recorded a restructuring and other related charges of
$50 million, consisting of $34 million for headcount reductions, $4 million for
consolidation of facilities and related fixed assets, and $12 million of other
related restructuring 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 and to create a more flexible and
efficient organization. The plan resulted in headcount reductions of
approximately 850 employees, which was made up of 78% professional services
staff and 22% core services staff. The April restructuring included plans to
significantly downsize and modify Scient'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.
Total cash outlay for the restructuring and other related activities that
were announced in December 2000 and April 2001 will be approximately $112
million. The remaining $43 million of restructuring and other related costs
consists of non-cash charges primarily for asset write-offs. As of the end of
the first quarter of fiscal 2002, $67 million of cash has been used for
restructuring and other related costs. An additional $19 million cash outlay is
expected in the second quarter of fiscal 2002, and the remaining cash outlay of
approximately $26 million, primarily related to real estate rental obligations,
is expected to occur over the next 10 years.
Restructuring and other related activities as of June 30, 2001 were as
follow (in millions):
<Table>
<Caption>
SEVERANCE
AND BENEFITS FACILITIES OTHER TOTAL
------------ ---------- ----- -----
Fiscal 2001 provision.......................... $ 14 $ 81 $ 10 $105
Amount utilized in fiscal 2001................. (9) (40) (9) (58)
---- ---- ---- ----
Balance at March 31, 2001...................... 5 41 1 47
---- ---- ---- ----
Fiscal 2002 provision.......................... 34 4 12 50
Amount utilized in first quarter fiscal 2002... (33) (7) (12) (52)
---- ---- ---- ----
Balance at June 30, 2001....................... $ 6 $ 38 $ 1 $ 45
==== ==== ==== ====
</Table>
As a result of the divestiture in the first quarter of 2002 of more than
80% of our French subsidiary, which we acquired in August 2000, Scient wrote off
its remaining goodwill balance related to this acquisition of $9.3 million to
restructuring and other related charges. This charge has been reported on the
statement of operations as a component of restructuring and other related
charges.
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SCIENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BALANCE SHEET COMPONENTS
As of June 30, 2001, the accounts receivable balance detail was as follows:
<Table>
<Caption>
JUNE 30, MARCH 31,
2001 2001
----------- ---------
(UNAUDITED)
Accounts receivable:
Accounts receivable............................... $ 27,762 $ 47,703
Unbilled fees and services........................ 2,112 7,063
-------- --------
29,874 54,766
Less allowances for doubtful accounts............. (19,544) (27,627)
-------- --------
$ 10,330 $ 27,139
======== ========
</Table>
6. RECENT ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations. This Statement addresses financial accounting
and reporting for business combinations and supersedes Accounting Principles
Board ("APB") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting
for Preacquisition Contingencies of Purchased Enterprises. All business
combinations in the scope of this Statement are to be accounted for using one
method, the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001 and all business
combinations accounted for under the purchase method for which the date of
acquisition is July 1, 2001, or later. We have engaged in significant
acquisition activity in the past, including business combinations, and future
business combinations are likely. The provisions of this Statement would require
all future business combinations to be accounted for using the purchase method.
In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangible Assets. This Statement addresses financial accounting and reporting
for i) intangible assets acquired individually or with a group of other assets
(but not those acquired in a business combination) at acquisition and ii)
goodwill and other intangible assets subsequent to their acquisition. This
Statement supersedes APB Opinion No. 17, Intangible Assets. Under the provisions
of this Statement, if an intangible asset is determined to have an indefinite
useful life, it shall not be amortized until its useful life is determined to be
no longer indefinite. An intangible asset that is not subject to amortization
shall be tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the asset might be impaired. Goodwill shall not
be amortized. Goodwill shall be tested for impairment on an annual basis and
between annual tests in certain circumstances at a level of reporting referred
to as a reporting unit. This Statement is required to be applied starting with
fiscal years beginning after December 15, 2001. Goodwill and intangible assets
acquired after June 30, 2001 will be subject immediately to the nonamortization
and amortization provisions of this Statement. Scient is still evaluating the
impact of adopting these pronouncements on the financial statements.
7. SUBSEQUENT EVENT
On July 31, 2001, Scient entered into a definitive agreement with iXL
Enterprises, Inc., providing for a strategic merger of equals, whereby Scient
and iXL will become subsidiaries of a new parent company operating under the
Scient name. Under the terms of the definitive agreement, each share of iXL and
Scient common stock outstanding immediately prior to the effective time of the
merger will be converted into the right to receive 0.25 and 0.31 of a share,
respectively, of the new holding company's common stock. Approximately 34% of
the shareholders of each company have executed voting agreements by which they
have agreed to vote their respective shares in favor of the merger. The merger
agreement, which has been approved by the board of directors for both companies,
is subject to approval by both iXL's and Scient's stockholders, receipt of
required regulatory approvals and other customary conditions. The merger is
expected to close in the December quarter of 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Scient should be read in conjunction with Scient's
consolidated financial statements and notes thereto appearing elsewhere in this
Quarterly Report on Form 10-Q and in Scient's Annual Report on Form 10-K for the
year ended March 31, 2001. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including, but not limited to, those set forth
under "Risk Related to Our Business" and elsewhere in this Quarterly Report on
Form 10-Q.
OVERVIEW
Our net revenue is derived primarily from providing professional services
to clients who are expanding or reevaluating their existing businesses to
integrate eBusiness capabilities. Although until the quarter ending September
30, 2000, we experienced growth in our net revenue, in each quarter since then
we have experienced a sequential decline in net revenue quarter to quarter. We
believe that the decline in net revenue was primarily due to a broad-based
general economic slowdown in which clients have decreased technology budgets,
increased competitive pressure from traditional management consulting,
information technology services and eBusiness service competitors, and a lack of
urgency by Global 2000 companies to immediately fund large eBusiness projects.
We expect that our net revenue 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. We have
experienced significant customer concentration and expect such concentration
will continue for the foreseeable future. Also, net revenue from any given
client will vary from period to period and often do so significantly. To the
extent that any significant client uses less of our services or terminates its
relationship with us, our net revenue could decline substantially. For example,
our net revenue declined in the quarter ended June 30, 2001 compared to the
quarter ended March 31, 2001, and we expect a decline in our net revenue for the
quarter ended September 30, 2001 in part due to certain clients delaying or
stopping the use of our professional services. In particular, upon completion of
our engagement with one client who accounted for approximately 31% of our gross
net revenue in the quarter ended March 31, 2001, we experienced a significant
decline in net revenue generated from that client in the quarter ending June 30,
2001. The loss of this or any other significant client could seriously harm our
business and results of operations.
We generally provide our services on a time and materials basis. For the
quarter ended June 30, 2001, approximately 91% of net revenue was derived from
time and materials contracts, including completed capped fee engagements that
were billed and recognized on a time and materials basis. Net revenue pursuant
to time and materials contracts are generally recognized as services are
provided. Net revenue 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). Net revenue excludes 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 net revenue 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 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, and such margins will vary in the future.
Billability for the three months ended June 30, 2001 and 2000 was 11% and 75%,
respectively. This decline was primarily due to overcapacity of professional
services 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 the level of client demand for our
services with our professional services capacity without a corresponding decline
in professional services expenses, 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
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increase in this activity in a particular quarter would have a material adverse
effect on professional service margins. Client engagements currently average
three to six months' duration. At the end of any engagement, we must re-deploy
professional services personnel. Any resulting unbillable time from such
re-deployments 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.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of net revenue and selected statements of operational data as a
percentage of net revenue:
<Table>
<Caption>
THREE MONTHS
ENDED
JUNE 30,
------------
2001 2000
---- ----
(UNAUDITED)
Net revenue................................................. 100% 100%
Operating expenses:
Professional services..................................... 118 42
Selling, general and administrative....................... 127 52
Restructuring and other related charges................... 445 --
Amortization of stock-based compensation.................. 11 3
---- ---
Total operating expenses.................................... 701 97
---- ---
Income (loss) from operations............................... (601) 3
Interest and other income, net.............................. 14 3
---- ---
Net income/(loss)........................................... (587)% 6%
==== ===
</Table>
NET REVENUE
Net revenue decreased 88% in the quarter ended June 30, 2001 compared to
the quarter ended June 30, 2000. This decrease resulted primarily from 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
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,
we saw a significant decrease in the number of clients and the scope of
engagements. For the three months ended June 30, 2001, our five largest clients
accounted for approximately 49% of our net revenue, compared to 30% of net
revenue for the three months ended June 30, 2000. During the three months ended
June 30, 2001 and 2000, one client accounted for 13% and 6% of net revenue,
respectively. Our net revenue for the quarter ended June 30, 2001 declined 58%
compared to our net revenue for the quarter ended March 31, 2001. We believe
that the decline in net revenue was primarily due to the factors cited above.
OPERATING EXPENSES
Professional Services. Our professional service expenses decreased 65% in
the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000.
This decrease was primarily a result of our restructuring activities in December
2000 and April 2001, which resulted in a significant decrease in professional
services colleagues in response to the declines in the number of our clients and
the scope of our engagements during that time frame. Professional services
expenses as a percentage of net revenue increased to 118% for the three
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months ended June 30, 2001 from 42% for the three months ended June 30, 2000,
due primarily to lower utilization of professional services colleagues and
significantly lower net revenue.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 70% in the quarter ended June 30, 2001 compared to the
quarter ended June 30, 2000. This decrease was also primarily due to our
restructuring activities in December 2000 and April 2001, which resulted in a
significant decrease in our core service colleagues and general administrative
expenses incurred by our core service departments. Selling, general and
administrative expenses as a percentage of net revenue increased to 127% for the
three months ended June 30, 2001, as compared to 52% for the three months ended
June 30, 2000, due to net revenue for the quarter ending June 30, 2001 being
lower than was expected at the outset of the quarter.
Restructuring and Other Related Charges. In April 2001, Scient recorded a
restructuring and other related charges of $50 million, consisting of $34
million for headcount reductions, $4 million for consolidation of facilities and
related fixed assets, and $12 million of other related restructuring 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 and to create a more flexible and efficient organization. The plan
resulted in headcount reduction of approximately 850 colleagues, which was made
up of 78% professional services staff, and 22% core services staff. The April
2001 restructuring included plans to significantly downsize and modify Scient'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.
Total cash outlays for the December 2000 and April 2001 restructuring and
other related activities will be approximately $112 million. The remaining $43
million of restructuring and other related costs consists of non-cash charges
primarily for asset write-offs. As of the end of the first quarter of fiscal
2002, $67 million of cash has been used for restructuring and other related
costs. An additional $19 million cash outlay is expected in the second quarter
of fiscal 2002, and the remaining cash outlay of approximately $26 million,
primarily related to real estate rental obligations, is expected to occur over
the next 10 years.
Amortization of Stock-Based 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 $1.2 million and $2.9 million in
the three months ended June 30, 2001 and 2000 respectively.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, decreased 49% in the quarter ended June 30,
2001 compared to the quarter ended June 30, 2000. This decrease was due
primarily to lower average balances of investment funds and interest bearing
funds in the quarter ended June 30, 2001 compared to the quarter ended June 30,
2000. These lower balances resulted primarily from our restructuring activities
and declining business environment, which required significant expenditures of
cash since the quarter ended June 30, 2000.
PROVISION FOR INCOME TAXES
Scient has incurred losses from inception through quarter ended June 30,
2001. As of June 30, 2001, we had federal and state net operating loss
carryforwards to offset future taxable income which expire in varying amounts
beginning in 2020 and 2008, respectively. Management believes that, based on the
history of such losses and other factors, 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. 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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LIQUIDITY AND CAPITAL RESOURCES
We have primarily funded our operations from cash flow generated from
operations and the proceeds from our public stock offerings. Cash used in
operating activities for the three months ended June 30, 2001 and 2000 was $40.9
million and $30.2 million, respectively. As of June 30, 2001 we had $115.1
million in cash and cash equivalents, restricted cash and short-term investments
compared to $161.1 million at March 31, 2001.
Cash provided in investing activities was $25.2 million for the three
months ended June 30, 2001. This was due primarily to capital expenditures of
approximately $5.4 million offset by sale of assets of $1.5 million and maturity
or sale of short-term investments, net of $29.2 million. Cash used in investing
activities was $6.3 million for the three months ended June 30, 2000 consisting
of the purchase of investments of $1.6 million and capital expenditures of
approximately $4.7 million. We invest predominantly in instruments that are
highly liquid, investment grade securities and have maturity of less than one
year. These expenditures were primarily for leasehold improvement and furniture
and fixtures.
Cash used by financing activities was $9.3 million for the three months
ended June 30, 2001 and primarily consisted of capital lease payments of $1.1
million and an increase in restricted cash balance of $8.1 million. Cash
provided by financing activities was $2.9 million for the three months ended
June 30, 2000 and was primarily derived from proceeds from the exercise of
common stock options of $5.8 million, offset by repayment of our outstanding
loan balance of $2.2 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 June 30, 2001, there were no outstanding
borrowings under this line of credit. Fifteen standby letters of credit totaling
$39.6 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 has increased significantly from the year earlier
period primarily as a result of lower average daily sales and longer payment
time of our customers.
We believe that our current cash balance and cash generated from operations
will be sufficient to fund our current anticipated cash needs through 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.
PROPOSED MERGER WITH IXL ENTERPRISES, INC.
On July 31, 2001, Scient entered into a definitive agreement with iXL
Enterprises, Inc., providing for a strategic merger of equals, whereby Scient
and iXL will become subsidiaries of a new parent company operating under the
Scient name. Under the terms of the definitive agreement, each share of iXL and
Scient common stock outstanding immediately prior to the effective time of the
merger will be converted into the right to receive 0.25 and 0.31 of a share,
respectively, of the new holding company's common stock. Approximately 34% of
the shareholders of each company have executed voting agreements by which they
have agreed to vote their respective shares in favor of the merger. The merger
agreement, which has been approved by the board of directors for both companies,
is subject to approval by both iXL's and Scient's stockholders, receipt of
required regulatory approvals and other customary conditions. The merger is
expected to close in the December quarter of 2001. Copies of the merger
agreement and the voting agreements are attached hereto as Exhibits 2.2 and made
a part hereof.
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OTHER FACTORS AFFECTING OPERATING RESULTS
RISKS RELATED TO OUR BUSINESS
WE HAVE EXPERIENCED, AND EXPECT IN THE FUTURE TO EXPERIENCE, A DECLINE IN OUR
NET REVENUE, WHICH WILL NEGATIVELY IMPACT OUR FINANCIAL RESULTS
Our net revenue for the quarter ended June 30, 2001 declined 58% compared
to our net revenue for the quarter ended March 31, 2001. We believe the decline
in net revenue 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 competitors and a lack of urgency by
Global 2000 companies to immediately fund large eBusiness projects. We expect
net revenue for the quarter ended September 30, 2001 to decline compared to our
net revenue for the quarter ended June 30, 2001. 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. In April 2001, we
announced a further restructuring that during the quarter ended June 30, 2001
resulted in the reduction of approximately 850 additional positions, the closing
of Los Angeles and New Jersey offices, the divestiture of 80% of our French and
Japanese subsidiaries and the move of our headquarters from San Francisco to New
York. As part of the April 2001 restructuring we also plan to reduce our San
Francisco, Chicago, and Boston locations to smaller sales offices. We will be
required to further reduce our headcount, close more offices or further reduce
expenses if our net revenue continues to decline or continue to be insufficient
to support our cost structure. Our ability to generate net revenue will be
impaired to the extent we have reduced our professional services resources and
our core services support functions. 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 net revenue 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 quarters ended June 30, 2001 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 $66.3 million for the quarter ended June 30, 2001. As of June 30,
2001, we had an accumulated deficit of $235.2 million. As a result, we will need
to increase net revenue 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.
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OUR QUARTERLY AND ANNUAL NET REVENUE AND OPERATING RESULTS ARE VOLATILE AND MAY
CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly net revenue and operating results are volatile and difficult
to predict. Our net revenue 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, decreased 66% for the quarter ended March 31, 2001, and
decreased 58% for the quarter ended 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.
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;
- Costs related to the closing, opening, shrinking, or expanding of Scient
office;
- Our employee utilization rate, including our ability to transition
employees quickly from completed projects to new engagements, for which
we typically receive little or no notice;
- Changes in our pricing policies or those of our competitors;
- 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;
and
- Our ability to manage costs, including personnel costs and support
services costs.
Our net revenue is 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. Net revenue 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. Even
if we decide to further reduce our professional services and core services
headcount, the financial benefit of such reductions will likely be delayed by up
to a quarter due to legal requirements regarding notice and payments to effected
colleagues. As a result a significant portion of our operating expenses is fixed
in the short term. Therefore, any failure to generate net revenue 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 net revenue from our eBusiness
services. These seasonal trends may materially affect our quarter-to-quarter
operating results. Net revenue 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.
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THE IMPACT OF OUR RESTRUCTURING EFFORTS MAY ADVERSELY AFFECT OUR OPERATING
RESULTS
In response to the recent decline in demand for our services and the
resulting decline in our net revenue in the past several quarters, we
implemented the reduction of our headcount by approximately 460 personnel in the
quarter ended December 31, 2000 and approximately another 850 personnel in the
quarter ended June 30, 2001 to reduce overcapacity in geographic areas and
markets where demand for our services did not support our staffing levels. 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. As a result of office closings, Scient continues to pay
for office space that it is not currently using. In addition, Scient has
committed to future office space leases that it does not expect to need under
its current business plan. Certain of these excess obligations, which extend for
periods ranging from 2 to 20 years, are secured by cash security deposits or
letters of credit, represent a significant portion of Scient's operating
expenses on an ongoing basis and thus may have a material impact on its
liquidity and ability to borrow funds. Scient's ability to sublease, assign or
otherwise divest itself of its surplus office space for at least break-even rent
could be adversely affected by depressed real estate market conditions in the
relevant cities. Scient's failure to dispose of its surplus office space and to
recover the security deposits and obtain the cancellation of the letters of
credit may have a material adverse effect on its business, operating results and
financial condition.
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 some 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.
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.
FAILURE TO MANAGE OUR BUSINESS FOR CHANGES IN DEMAND MAY ADVERSELY 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 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
approximately 850 additional personnel to reduce overcapacity in geographic
areas and markets where demand for our services did not support our staffing
levels. If we do not attain increases in net revenue levels and productivity,
our business, operating results and financial condition could be seriously
harmed.
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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.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CLIENTS FOR
A SIGNIFICANT PORTION OF OUR NET REVENUE
The loss of any significant client could seriously harm our business,
financial condition and operating results. For the three months ended June 30,
2001, our five largest clients accounted for approximately 49% of our net
revenue, and two clients accounted for over 10% of our net revenue. We currently
derive and expect to continue to derive a significant portion of our net revenue
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 net revenue
could decline substantially. For example, our net revenue continued to decline
in the quarter ended June 30, 2001 compared to the quarter ended March 31, 2001
and we might experience further declines in our net revenue for the subsequent
quarters in part due to certain clients delaying or stopping the use of our
services. In particular, upon completion of our engagement with one client, who
accounted for approximately 31% of our gross revenue in the quarter ended March
31, 2001, we experienced a significant decline in the net revenue generated from
that client. 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
NET REVENUE
Our clients retain us on an engagement-by-engagement basis, rather than
under long-term contracts. As a result, our net revenue is difficult to predict.
Because we incur costs based on our expectations of future net revenue, our
failure to predict our net revenue 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 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 success of
our business. In light of our recent restructurings and reductions in headcount,
as well as the fact that many of our employees hold options with exercise prices
above the current market price of our stock, our ability to retain our employees
or to recruit and hire new employees may be difficult. 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
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one or more lawsuits involving the former employment of one of our employees.
Any future litigation against us or our employees, regardless of the outcome,
may result in substantial costs and expenses to us and may divert management's
attention away from the operation of our business.
WE DEPEND ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY ADVERSELY
AFFECT OUR BUSINESS
We believe that our success will depend on the continued employment of our
senior management team. 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. Bill Kurtz resigned from his position of
Chief Financial Officer of Scient effective June 30, 2001 and that position has
not yet been filled. The loss of this or other members of our senior management
team could have a direct adverse impact on our net revenue. 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 and has become more
so with the general market decline in the demand for our services. 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. Since the
decline in demand for our services and our restructurings, potential clients
have increasingly viewed the size of a service provider as a more important
buying factor, which has often hurt us since we are smaller than many of our
competitors. Also, our comparatively small size 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.
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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.
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 net 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 net revenue
in that particular market.
INTERNATIONAL OPERATIONS ARE EXPENSIVE AND MAY NOT SUCCEED
Our international operations accounted for approximately 36% of our total
net revenue for the quarter ended June 30, 2001 and approximately 16% of our
total net revenue for the fiscal 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 net revenue from international operations.
We may be unable to successfully market, sell, deliver and support our
services internationally. For example, we recently divested 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:
- The impact of recessions in economies outside the United States;
- 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;
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- 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 our 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; 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 net revenue 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
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 net
revenue 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
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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;
- 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.
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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 net revenue 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.
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
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- 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 closing stock price during the twelve months ended June 30, 2001 was
$71.50, while the 52-week low was $0.91. 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.
WE MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET WHICH COULD HAVE AN ADVERSE
EFFECT ON THE LIQUIDITY OF OUR COMMON STOCK
Scient's stock has closed below $1.00 per share since June 28, 2001. On
August 9, 2001, we received a notice from Nasdaq that our Common Stock has
failed to maintain a bid price of $1.00 over the preceding 30 consecutive
trading days as required for continued listing on the Nasdaq National Market. As
a result, Nasdaq provided us with 90 calendar days to regain compliance with
this requirement or be delisted from trading. The notice states that if at any
time prior to November 5, 2001, the closing bid price of our Common Stock is not
sustained at $1.00 or more for at least 10 consecutive trading days, Nasdaq will
reevaluate our compliance with the listing qualification. Prior to any actual
delisting, we will have an opportunity to request a hearing. If we request such
a hearing, we will have the ability to present a plan demonstrating that we can
come into compliance with the continued listing requirements. If we fail to
prevail at the hearing, however, we will not be able prevent a delisting.
If our Common Stock is delisted, it will be more difficult to buy or sell
our common stock or to obtain timely and accurate quotations to buy or sell our
Common Stock. Stock trading on the over-the-counter market are typically less
liquid and trade with bigger variations between the bid and ask price.
Therefore, the delisting could result in a decline in the trading market for our
Common Stock that could depress our stock
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price and could have an adverse effect on the liquidity of our Common Stock and
your ability to sell our Common Stock.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Scient cash equivalents and short-term investments are exposed to financial
market risk due to fluctuation in interest rates, which may affect our interest
income and the fair market value of our investments. We manage the exposure to
financial market risk by performing ongoing evaluations of our investment
portfolio and investing in short-term investment-grade securities. These
securities are highly liquid and generally mature within 12 months from our
purchase date. Due to the short maturities of our investments, the carrying
value approximates the fair value. In addition, we do not use our investments
for trading or other speculative purposes.
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in interest and foreign currency exchange rates. The
effect of such rate changes is not expected to be material to our results of
operations, cash flows or financial condition.
As of June 30, 2001, our cash included money market securities. Due to the
short duration of our investment portfolio, an immediate 10% change in interest
rates would not have a material effect on the fair market value of our
portfolio. Therefore, we would not expect our operating results or cash flows to
be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.2.. Merger agreement and voting agreements, dated July 31, 2001,
for the proposed merger with iXL Enterprises, incorporated
herein by reference to Exhibit 2.1, 99.2 and 99.3 to the
Company's Registration Statement on Form 8-K filed August 3,
2001 (File No. 333-74731).
</Table>
(b) Reports on Form 8-K.
On August 3, 2001, Scient filed a current report on Form 8-K announcing the
proposed merger with iXL Enterprises, Inc.
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SCIENT CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCIENT CORPORATION
Date: August 13, 2001 By: /s/ STEPHEN A. MUCCHETTI
------------------------------------
Stephen A. Mucchetti
President and Chief Operating
Officer
By: /s/ MICHAEL HAND
------------------------------------
Michael Hand
Vice President, Corporate
Controller,
and Corporate Secretary
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