10-Q 1 f67306e10-q.txt 10-Q FOR THE QUARTERLY REPORT ENDED 09/30/2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM____ TO____ COMMISSION FILE NUMBER 000-25893 _________________ SCIENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-3288107 (State of incorporation) (IRS Employer Identification No.) ONE FRONT STREET, 28TH FLOOR, SAN FRANCISCO, CALIFORNIA 94111 (Address of Principal Executive Offices, Including Zip Code) (415) 733-8200 (Registrant's Telephone Number, Including Area Code) NONE (Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report) _________________ 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 September 30, 2000 was 73,569,048. ================================================================================ 2 SCIENT CORPORATION INDEX

~~JUNE~~PART ~~30,~~I. ~~MARCH~~FINANCIAL ~~31,~~INFORMATION ~~2000~~Item ~~2000~~1. ~~-----------~~Financial ~~---------~~Statements ~~(UNAUDITED)~~CONDENSED ~~Current~~CONSOLIDATED ~~assets~~BALANCE ~~Cash and cash equivalents~~SHEETS................................. ~~$ 74,574 $108,102 Short-term investments~~............................................1 ~~122,342~~CONDENSED ~~121,046~~CONSOLIDATED ~~Accounts~~STATEMENTS ~~receivable,~~OF ~~net~~OPERATIONS.................................. ~~70,895 56,021 Prepaid expenses and other~~.................................2 ~~21,177~~CONDENSED ~~9,157~~CONSOLIDATED ~~--------~~STATEMENTS ~~--------~~OF ~~Total~~CASH ~~current assets~~FLOWS.............................. ~~288,988 294,326 Long-term investments~~....................................... 3~~,432~~ ~~3,146~~NOTES ~~Property~~TO ~~and~~CONDENSED ~~equipment,~~CONSOLIDATED ~~net~~FINANCIAL STATEMENTS................................. ~~20,163 16,063 Other~~.............................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................6 ~~276~~Item ~~219~~3. ~~--------~~Qualitative ~~--------~~and ~~$312,859~~Quantitative ~~$313,754~~Disclosures ~~========~~about ~~========~~Market ~~LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Bank borrowings, current~~Risk.................................................17 $PART --II. $OTHER INFORMATION Item 1~~,334~~. ~~Accounts~~Legal ~~payable~~Proceedings.......................................... ~~2,790 5,023 Accrued expenses~~................................................18 ~~31,493~~Item ~~43,241~~2. ~~Deferred~~Changes ~~revenue~~in Securities and Use of Proceeds..................................................................18 ~~6,771~~Item ~~6,579~~3. ~~Capital~~Defaults ~~lease~~Upon ~~obligations,~~Senior ~~current~~Securities............................................................................18 ~~3,096~~Item ~~2,624~~4. ~~--------~~Submission ~~--------~~of ~~Total~~Matters ~~current~~to ~~liabilities~~a Vote of Security Holders........................................................18 ~~44,150~~Item ~~58,801~~5. ~~Bank~~Other ~~borrowings, long-term~~Information.................................. ~~-- 865 Capital lease obligations, long-term~~........................................................18 ~~2,189~~Item ~~2,052 -------- -------- 46,339 61,718 -------- -------- Stockholders' equity Common stock: $0~~6.~~0001~~ ~~par~~Exhibits ~~value; 500,000 authorized; 73,245~~ and ~~72,491~~Reports ~~shares~~on ~~issued~~Form ~~and outstanding, respectively~~8-K........................................... ~~7 7 Additional paid-in capital~~................................18 ~~303,803 297,688 Unearned compensation~~SIGNATURE..................................... ~~(14,196) (16,784) Accumulated deficit~~....................................... ~~(23,094) (28,875) -------- -------- Total stockholders' equity~~........................ ~~266,520 252,036 -------- -------- $312,859 $313,754 ======== ========~~......19

3 SCIENT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) ASSETS

~~THREE~~September ~~MONTHS~~30, ~~ENDED~~March ~~JUNE 30~~31, 2000 2000 ------------------ ~~2000 1999~~ ------- ---------- (~~UNAUDITED~~unaudited) ~~Revenues....................................................~~Current ~~$91,361~~assets ~~$16,404~~Cash ~~Operating~~and ~~expenses:~~cash ~~Professional~~equivalents ~~services.....................................~~$ 3890,~~094~~421 7$ 108,~~940~~102 ~~Selling~~Short-term investments 102,112 ~~general~~121,046 ~~and~~Accounts ~~administrative.......................~~receivable, 47net 82,~~790~~175 1356,~~105~~021 ~~Stock~~Prepaid ~~compensation........................................~~expenses 2and other 23,~~918~~532 49,~~348~~376 ------- ---------- ~~Total operating expenses.......................... 88,802 25,393~~ ------- ---------- ~~Income~~Total ~~(loss)~~current ~~from~~assets ~~operations............................... 2~~298,~~559~~240 (8294,~~989)~~545 ~~Interest~~Long-term ~~income~~investments ~~and other~~5,352 ~~net..............................~~ 3,~~222~~146 ~~596~~Property ~~-------~~and ~~-------~~equipment, ~~Net~~net ~~income~~26,090 ~~(loss)...........................................~~16,063 ~~$ 5~~Intangibles,~~781~~ ~~$(8~~net 12,~~393)~~852 - ================= ================= ~~Net income (loss) per share: Basic.....................................................~~ $ ~~0.09~~342,534 $ ~~(0.23) Diluted................................................... $ 0.07 $ (0.23) Weighted average common shares: Basic..................................................... 64~~313,~~035~~754 ~~36,810~~================= ~~Diluted................................................... 81,774 36,810~~=================

LIABILITIES AND STOCKHOLDERS' EQUITY

~~THREE~~Current ~~MONTHS~~liabilities ~~ENDED~~Bank ~~JUNE~~borrowings, 30current $ - $ 1,334 Accounts payable 4,764 5,023 Accrued expenses 46,682 43,241 Deferred revenue 6,645 6,579 Capital lease obligations, current 3,849 2,624 -----------------~~---~~ ~~2000 1999~~ -------- --------- ~~(UNAUDITED)~~Total ~~Cash~~current ~~flows~~liabilities ~~from operating activities: Net income (loss)......................................... $ 5~~61,~~781~~940 ~~$ (8~~58,~~393)~~801 ~~Adjustments~~Bank ~~to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization.......................... 1~~borrowings,~~949~~ ~~413~~long-term ~~Provisions~~- ~~for~~865 ~~doubtful~~Capital ~~accounts.......................~~lease 1obligations,~~988~~ ~~341~~long-term ~~Amortization of unearned compensation..................~~ 2,~~918~~609 4,348 Change in assets and liabilities: Accounts receivable.................................. (16,862) (8,268) Prepaid expenses and other........................... (12,156) (3,335) Accounts payable..................................... (2,~~233)~~052 ~~613 Accrued expenses..................................... (11,748) 2,582 Deferred revenue..................................... 192 750~~ -------- --------- ~~Net cash used in operating activities............. (30,171) (10,949)~~ -------- --------- ~~Cash~~$ ~~flows from investing activities: Purchase of investments~~64,549 ~~net..............................~~$ (161,~~582)~~718 ~~(63,919) Purchase of property and equipment........................ (4,700) (858)~~ -------- --------- ~~Net cash used in investing activities............. (6,282) (64,777)~~ -------- --------- ~~Cash~~Stockholders' ~~flows~~equity ~~from~~Common ~~financing activities~~stock: ~~Proceeds~~$0.0001 ~~from~~par ~~initial~~value; ~~public offering~~500,000 ~~net................~~authorized; ~~-- 62~~73,~~832~~569 ~~Proceeds~~and ~~from bank borrowing.............................. (2~~72,~~199)~~491 ~~627~~shares ~~Proceeds~~issued ~~from~~and ~~exercise~~outstanding, ofrespectively ~~common~~7 ~~stock~~7 ~~options~~Additional ~~and~~paid-in ~~warrants,~~capital ~~net.......................................... 5~~309,~~798~~261 2297,~~690~~688 ~~Principal~~Unearned ~~payments~~compensation on(11,575) ~~capital~~(16,784) ~~lease~~Accumulated ~~obligations...........~~deficit (~~740~~19,708) (~~146~~28,875) -------- --------- ~~Net cash provided by financing activities......... 2,859 66,003~~ -------- -------- ~~Effect of exchange rate changes on cash..................... 66~~ -- ~~Decrease~~Total instockholders' ~~cash~~equity ~~and cash equivalents....................... (33~~277,~~528)~~985 (9252,~~723)~~036 ~~Cash and cash equivalents at beginning of period............ 108,102 11,261~~ ----------------- ----------------- ~~Cash and cash equivalents at end of period..................~~ $ 74342,~~574~~534 $ 1313,~~538~~754 ======== ========= ~~Supplemental cash flow information: Cash paid for interest.................................... $ 130 $ 59~~ ======== ========= ~~Supplemental~~See ~~non-cash~~notes ~~financing~~to ~~activity:~~interim ~~Property~~condensed ~~and~~consolidated ~~equipment~~financial ~~acquired under capital leases~~statements.~~..... $ 1,349 $ 149 ======== ========~~

1 4 SCIENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~JUNE~~Six Months Ended September 30, September 30, -------------------------- -------------------------- 2000 1999 2000 1999 ----------- ---------- ----------- ---------- (~~UNAUDITED~~unaudited) ~~Net income~~ (~~loss~~unaudited)~~........................................~~ Revenues $ 5102,~~781~~005 $(8 30,~~393)~~805 ~~=======~~$ ~~=======~~193,366 ~~Basic~~$ ~~net~~47,209 ~~income~~Operating ~~(loss)~~expenses ~~per~~Professional ~~share:~~services ~~Weighted~~45,832 ~~average~~14,233 ~~shares~~83,926 ~~outstanding....................~~22,173 64Selling,~~035~~ 36general and administrative 49,~~810~~000 ~~=======~~19,212 ~~=======~~96,790 ~~Basic~~32,315 ~~net~~Amortization ~~income~~of ~~(loss)~~intangible ~~per~~assets ~~share......................~~1,167 $- ~~0.09~~1,167 $- Stock compensation 2,741 4,173 5,659 8,522 ----------- ---------- ----------- ---------- Total operating expenses 98,740 37,618 187,542 63,010 ----------- ---------- ----------- ---------- Income (~~0.23~~loss) ~~=======~~from ~~=======~~operations ~~Diluted~~3,265 ~~net~~(6,813) ~~income~~5,824 (~~loss~~15,801) ~~per~~Interest ~~share:~~and ~~Weighted~~other ~~average~~income, ~~shares~~net ~~outstanding....................~~2,379 64992 5,~~035~~601 361,~~810~~588 ~~Weighted~~----------- ~~average~~---------- ~~unvested~~----------- ~~common~~---------- ~~shares~~Income to(loss) ~~repurchase..........................................~~before 8income taxes 5,~~966~~644 --(5,821) ~~Dilutive~~11,425 ~~stock~~(14,213) ~~options.................................~~Provision 8for income taxes 2,~~773~~258 - 2,258 - ----------- ---------- ~~Shares~~----------- ~~used~~---------- inNet ~~computing~~income ~~per~~(loss) ~~share~~$ ~~amount..............~~3,386 81$ (5,~~774~~821) 36$ 9,~~810~~167 $ (14,213) =========== ========== ~~Diluted~~=========== ~~net~~========== Net income (loss) per share: Basic $ 0.05 $ (0.10) $ 0.14 $ (0.30) Diluted $ 0.04 $ (0.~~..............~~10) $ 0.0711 $ (0.2330) ~~=======~~Weighted ~~=======~~average common shares: Basic 65,664 55,848 64,673 46,828 Diluted 80,766 55,848 81,406 46,828 See notes to interim condensed consolidated financial statements.

2 5 SCIENT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)

~~EXHIBIT~~Six ~~NUMBER~~Months ~~DESCRIPTION~~Ended September 30, 2000 1999 --------------- --------------- (unaudited) Cash flows from operating activities: Net income (loss) $ 9,167 $(14,213) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 5,528 1,147 Provision for doubtful accounts 6,217 1,896 Amortization of unearned compensation 5,659 8,522 Loss on investments 541 - Change in assets and liabilities: Accounts receivable (31,639) (24,398) Prepaid expenses and other (15,446) (4,762) Accounts payable (419) 926 Accrued expenses 2,922 11,206 Deferred revenue 31 903 --------------- --------------- Net cash used in operating activities (17,439) (18,773) --------------- --------------- Cash flows from investing activities: Purchase/sale of investments, net 15,793 (41,236) Cash payment for acquisition (7,685) - Purchase of property and equipment (10,959) (3.3,129) ~~Amended~~--------------- --------------- Net cash used in investing activities (2,851) (44,365) --------------- --------------- Cash flows from financing activities: Proceeds from initial public offering, net - 62,728 Proceeds from bank borrowing (2,199) 988 Proceeds from exercise of common stock options and ~~Restated~~warrants, ~~Bylaws~~net 8,378 2,714 Purchase of ~~Scient.~~common ~~27.~~stock (2,225) - Principal payments on capital lease obligations (1,560) ~~Financial~~(276) ~~Statement~~--------------- ~~Schedule~~--------------- Net cash provided by financing activities 2,394 66,154 --------------- --------------- Effect of exchange rate changes on cash 215 - Increase (decrease) in cash and cash equivalents (17,681) 3,016 Cash and cash equivalents at beginning of period 108,102 11,261 =============== =============== Cash and cash equivalents at end of period $ 90,421 $ 14,277 =============== =============== See notes to interim condensed consolidated financial statements.

3 6 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. 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, 2000 included in Scient's Annual Report on Form 10-K. Certain reclassifications have been made to the prior period's financial statements to conform to the current period presentation. 2. EARNINGS (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 income (loss) per share is determined by using the weighted average number of common shares and 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 income (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 earnings (loss) per share for the periods indicated (in thousands, except per share amounts):

~~EXHIBIT~~Three ~~NUMBER~~Months ~~DESCRIPTION~~Ended Six Months Ended September 30, September 30, ----------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------- ------------ ------------- (unaudited) (unaudited) Net income (loss) $ 3,386 $ (5,821) $ 9,167 $ (14,213) ============ ============= ============ ============= Basic net income (loss) per share: Weighted average shares of common stock outstanding 65,664 55,848 64,673 46,828 ============ ============= ============ ============= Basic net income (loss) per share $ 0.305 ~~Amended~~$ ~~and~~(0.10) ~~Restated~~$ ~~Bylaws~~0.14 $ (0.30) ============ ============= ============ ============= Diluted net income (loss) per share: Weighted average shares of ~~Scient~~common stock outstanding 65,664 55,848 64,673 46,828 Weighted average unvested common shares to repurchase 7,829 - 8,546 - Dilutive stock options 7,273 - 8,187 - ------------ ------------- ------------ ------------- Shares used in computing per share amount 80,766 55,848 81,406 46,828 ============ ============= ============ ============= Diluted net income (loss) per share $ 0.04 27$ (0.110) ~~Financial~~$ ~~Statement~~0.11 ~~Schedule~~$ (0.30) ============ ============= ============ =============

4 7 SCIENT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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 September 30, 2000 and 1999, Scient recorded comprehensive income of $2.8 million and comprehensive loss of $5.8 million, respectively. For the six months ended September 30, 2000 and 1999, Scient recorded comprehensive income of $8.5 million and comprehensive loss of $14.2 million, respectively. 4. ACQUISITION In August 2000, Scient closed its acquisition of 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 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 its useful economic life of 2 years. 5 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of Scient should be read in conjunction with Scient's consolidated financial statements and notes thereto appearing elsewhere in Scient's Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Related to Our Business" and elsewhere in this 10-Q filing. OVERVIEW Our revenues are derived primarily from providing professional services to clients who are creating eBusinesses or are rethinking or expanding their existing businesses to integrate eBusiness capabilities. We expect that our revenues will be driven primarily by the number and scope of our client engagements, our professional services headcount, and our ability to appropriately staff those engagements and price our services. Revenues from any given client will vary from period to period; however, we expect that significant customer concentration will continue for the foreseeable future. To the extent that any significant client uses less of our services or terminates its relationship with us, our revenues could decline substantially. As a result, the loss of any significant client could seriously harm our business and results of operations. We generally provide our services on a time and materials basis. For the quarter ended September 30, 2000, approximately 90% of revenues were derived from time and materials contracts, including completed 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. In the future we anticipate that a larger percentage of revenues may be derived from contracts that have fixed-fee components. 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 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. Any significant decline in fees billed to clients or the loss of a significant client, without a corresponding decline in professional services expenses, would materially adversely affect our professional services margins. Client engagements currently average six to twelve months' duration. At the end of any engagements, we must re-deploy professional services personnel. Any resulting unbillable time will adversely affect professional services margins. See "Risk Related to Our Business--Our Quarterly Revenues and Operating Results Are Volatile and May Cause Our Stock Price to Fluctuate." Selling, general and administrative expenses consist of salaries, commissions, and related expenses for personnel engaged in sales and marketing; salaries and related expenses for recruiting, human resources, knowledge management, information technology, finance, legal and administrative personnel; office facilities and information technology expenditures; professional fees; trade shows; promotional expenses; and other general corporate expenses. We expect selling, general and administrative expenses to increase in absolute dollars as we expand our direct sales force, continue expenditures on knowledge management and information technology infrastructure, open new offices and building out existing offices on a global basis, increase our recruiting efforts and incur additional costs related to the growth of our global business. Despite growth in our revenues, our net income may not increase proportionately with the increase in our revenues primarily because of increased expenses related to the expansion of the number of our offices, building out our existing offices, increased investment in our knowledge management and operations infrastructure, and increased marketing and sales efforts. To the extent that future revenues do not increase in the same periods in which operating expenses increase, our operating results would be adversely affected. See "Risk Related to Our Business--We Have a History of Losses." 6 9 RESULTS OF OPERATIONS The following table presents, for the periods indicated, the relative composition of revenues and selected statements of operational data as a percentage of revenues:

REVENUES Revenues increased 231% in the quarter ended September 30, 2000 compared to the quarter ended September 30, 1999. For the first six months of fiscal 2001, revenues increased 310% over the comparable period of the prior fiscal year. This increase resulted primarily from increases in the number of clients, the scope of engagements, and billing rate increases. For the three months ended September 30, 2000, our five largest clients accounted for approximately 42% of our revenues, compared to 37% of revenues for the three months ended September 30, 1999. For the six months ended September 30, 2000, our five largest clients accounted for approximately 34% of our revenues, compared to 38% of revenues for the six months ended September 30, 1999. During the three and six months ended September 30, 2000, one client accounted for 13% and 11% of revenues, respectively. For the three and six months ended September 30, 1999, one client accounted for 12% and 13% of revenues, respectively. OPERATING EXPENSES Professional Services. Our professional services expenses increased 222% in the quarter ended September 30, 2000 compared to the quarter ended September 30, 1999. For the first six months of fiscal 2001, professional services increased 279% over the comparable period of the prior fiscal year. This increase was primarily a result of an increase in the number of professional services colleagues. Professional services expenses as a percentage of revenue decreased to 45% from 46% for the three months ended September 30, 2000, as compared to the three months ended September 30, 1999, and to 43% from 47% for the six months ended September 30, 2000, as compared to the six months ended September 30, 1999. This decrease is attributed to revenue increasing at a higher rate than professional services costs. 7 10 Selling, General and Administrative. Selling, general and administrative expenses increased 155% in the quarter ended September 30, 2000 compared to the quarter ended September 30, 1999. For the first six months of fiscal 2001, selling, general, and administrative expenses increased 200% over the comparable period of the prior fiscal year. This increase was 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. Selling, general and administrative expenses as a percentage of revenue decreased to 48% from 62% for the three months ended September 30, 2000, as compared to the three months ended September 30, 1999, and to 50% from 69% for the six months ended September 30, 2000, as compared to the six months ended September 30, 1999. This decrease is attributed to revenue increasing at a higher rate than selling, general and administration expenses. Stock Compensation. We have recorded stock compensation for the difference between the exercise price of certain stock option grants and the deemed fair value of our common stock at the time of such grants. We are amortizing this amount over the vesting periods of the applicable options, resulting in amortization expense of $2.7 million and $4.2 million in the three months ended September 30, 2000 and 1999, respectively, and $5.7 million and $8.5 million for the six months ended September 30, 2000 and 1999, respectively. 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 three and six months ended September 30, 2000 was $1.2 million. There was no amortization cost related to intangible assets for the three and six months ended September 30, 1999. Intangible assets related to the AXIDIA acquisition will be amortized over two years. Amortization of intangible assets as a percentage of revenue was 1% for the three months ended September 30, 2000, and 1% for the six months ended September 30, 2000, with no amortization in comparable periods of the prior year. INTEREST AND OTHER INCOME, NET Interest and other income, net, increased 140% in the quarter ended September 30, 2000 compared to the quarter ended September 30, 1999. For the first six months of fiscal 2001, interest and other income, net increased 253% over the comparable period of the prior fiscal year. This increase was due primarily to higher interest bearing funds resulting from our investing activities during the quarter ended September 30, 2000. In addition, the average balance of our investment is also higher due to proceeds from our public offerings in the prior fiscal year. PROVISION FOR INCOME TAXES Provision for income tax for the three and six months ended September 30, 2000 is $2.3 million. There was no provision for the comparable periods ended September 30, 1999. This provision represents combined federal, state, and foreign income taxes at an effective rate of 40% and 20%, respectively. We have recorded our income tax provision based on estimates of the effective tax rate expected to be applicable for the full fiscal year. Estimated effective rates recorded during interim periods may be periodically revised if necessary to reflect current estimates. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities for the six months ended September 30, 2000 and 1999 was $17.4 million and $18.8 million, respectively. As of September 30, 2000 we had $192.5 million in cash, cash equivalents and short-term investments. We expect that accounts receivable will increase to the extent our revenues rise. Any such increase that occurs at a greater rate than corresponding increases in revenues can be expected to reduce cash, cash equivalents and short-term investments. Cash used in investing activities was $2.9 million for the six months ended September 30, 2000. This was due to capital expenditures of approximately $11.0 million and the cash portion of the AXIDIA acquisition for $7.7 million, offset by maturity or sale of short-term investments, net of $15.8 million. Capital expenditures for the six months ended September 30, 2000 and 1999 were approximately $11.0 million and $3.1 million respectively. These expenditures were primarily for computer equipment, software, and furniture and fixtures. We expect that capital expenditures will continue to increase to the extent we increase our headcount, increase the number of our offices and expand our operations. Cash used in investing activities was $44.4 million for the six months ended September 30, 1999 consisting of the purchase of short-term investments of $41.2 million after Scient's initial public offering. 8 11 Cash provided by financing activities was $2.4 million for the six months ended September 30, 2000 and primarily consisted of cash received for the exercise of options to acquire common stock of $8.4 million. Cash provided by financing activities was $66.2 million for the six months ended September 30, 1999 and was primarily derived from proceeds from the sale of common stock through Scient's initial public offering of $62.7 million. We have a revolving line of credit for $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 September 30, 2000, there were no outstanding borrowings under this line of credit. Ten standby letters of credit totaling $39.8 million have been issued against this line of credit. OTHER FACTORS AFFECTING OPERATING RESULTS RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO SUSTAIN PROFITABILITY Prior to the quarter ended March 31, 2000, we had a history of successive quarterly losses. We incurred net losses of $16.0 million during the year ended March 31, 2000. As of September 30, 2000, we had an accumulated deficit of $19.7 million. We also expect to continue to incur increasing sales and marketing, infrastructure, development, and general and administrative expenses. As a result, we will need to continue generating significant revenues and manage expenses to maintain profitability. If we do achieve profitability on an annual basis, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. Although our revenues have grown in recent quarters, we do not believe that we can sustain our historical growth rates. Accordingly, you should not view our historical growth rates as indicative of our future revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE HAVE A LIMITED OPERATING HISTORY AND A LIMITED NUMBER OF COMPLETED ENGAGEMENTS THAT MAKE AN EVALUATION OF OUR BUSINESS DIFFICULT We were incorporated in November 1997 and began providing services to clients in February 1998. Our limited operating history makes an evaluation of our business and prospects very difficult. Companies in an early stage of development frequently encounter enhanced risks and unexpected expenses and difficulties. These risks, expenses and difficulties apply particularly to us because our market is new and rapidly evolving. Our long-term success will depend on our ability to achieve satisfactory results for our clients and to form long-term relationships with core clients on a global basis. Some of our clients have only limited experience with the eBusinesses we have developed for them. Accordingly, we cannot assure that the eBusinesses we have implemented will be successful in the longer term. If the eBusinesses we have implemented are not successful, our brand will be harmed and we may incur liability to our clients. If one or more of our clients for whom we have done substantial work suffers a significant failure or setback in its eBusiness, our business reputation could be severely damaged, whether or not such failure or setback was caused by our work or within our control. Our ability to obtain new engagements, retain clients and recruit and retain highly-skilled employees could be seriously harmed if our work product or our clients' eBusinesses fail to meet the expectations of our clients. OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE Our quarterly revenues and operating results are volatile and difficult to predict. It is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors. In such event, the market price of our common stock may decline significantly. Our quarterly operating results have varied in the past and are likely to vary significantly from quarter to quarter. As a result, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance. A number of factors are likely to cause these variations, including: o Our ability to obtain new and follow-on client engagements; o Changes in the financial condition of our clients which may cause them to make late payments of fees to us or to be unable to pay some or all of our fees; o our ability to retain clients on a long-term basis; 9 12 o 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; o Our ability to attract, train and retain skilled management, strategic, technical, design, sales, marketing and support professionals; o 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; o The introduction of new services or products by us or our competitors; o Changes in our pricing policies or those of our competitors; o Our ability to manage costs, including personnel costs and support services costs; and o Costs related to the opening or expansion of Scient offices. Our revenues are derived primarily from professional services, which we generally provide on a time and materials basis. Revenues pursuant to time and materials contracts are generally recognized as services are provided. Since personnel and related costs constitute the substantial majority of our operating expenses and since we establish these expenses in advance of any particular quarter, underutilization of our professional services employees may cause significant reductions in our operating results for a particular quarter and could result in losses for such quarter. In addition, we have hired a large number of personnel in core support services, including knowledge management, technology infrastructure and finance and administration, in order to support our anticipated growth. As a result, a significant portion of our operating expenses are fixed in the short term. Therefore, any failure to generate revenues according to our expectations in a particular quarter could result in losses for the quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although we have limited historical financial data, we have experienced and expect to continue to experience seasonality in revenues from our eBusiness services. These seasonal trends may materially affect our quarter-to-quarter operating results. Revenues and operating results in our quarter ending December 31 are typically lower relative to our other quarters because there are a lower number of billable days in this quarter due to holidays and vacation days. In addition, operating expenses may increase in each quarter ending September 30, both on absolute terms and as a percentage of revenues, due to the potential hiring of large numbers of recent college graduates, which results in increased salary expenses before such new employees begin to generate substantial revenues for Scient. FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT OUR BUSINESS We have grown rapidly and expect to continue to grow over time both by hiring new employees and serving new business and geographic markets. Our growth has placed, and will continue to place, a significant strain on our management and our operating and financial systems. Our headcount has grown from 661 as of September 30, 1999 to 1,868 as of September 30, 2000. We do not believe this 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 will affect our financial results. Our growth requires substantial managerial attention to ensure that our colleagues and offices operate at an appropriate level of productivity. Failure to manage effectively the productivity and work quality of our colleagues and offices could seriously harm our operations and financial condition. In addition, we recently opened several additional offices and we expect to open additional offices in the future. If we do not attain the revenue levels and productivity necessary to support such growth, our business, operating results and financial condition could be seriously harmed. 10 13 Our personnel, systems, procedures and controls may be inadequate to support our future operations. In order to accommodate the increased number of engagements, number of clients and the increased size of our operations, we will need to hire, train and retain the appropriate personnel to manage our operations. We will also need to improve our financial and management controls, reporting systems and operating systems. Currently, we are redesigning several internal systems, including recruiting and engagement management systems. We may encounter difficulties in developing and implementing these and other new 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. If one or more of our clients fails or refuses to pay us in a timely manner, 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. WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CLIENTS FOR A SIGNIFICANT PORTION OF OUR REVENUES We currently derive and expect to continue to derive a significant portion of our revenues from a limited number of clients. To the extent that any significant client uses less of our services or terminates its relationship with us, our revenues could decline substantially. As a result, the loss of any significant client could seriously harm our business, financial condition and operating results. For the three months ended September 30, 2000, our five largest clients accounted for approximately 42% of our revenues, and one client accounted for over 10% of our revenues. The volume of work that we perform for a specific client is likely to vary from period to period, and a significant client in one period may not use our services in a subsequent period. OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS REDUCES THE PREDICTABILITY OF OUR REVENUES Our clients retain us on an engagement-by-engagement basis, rather than under long-term contracts. As a result, our revenues are difficult to predict. Because we incur costs based on our expectations of future revenues, our failure to predict our revenues accurately may seriously harm our financial condition and results of operations. Although it is our goal to provide the full range of our eBusiness services to our clients, we are generally retained to design and build discrete segments of an overall eBusiness on an engagement-by-engagement basis. Since large client projects involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of a project or that the client will cancel or delay additional planned projects. Such cancellations or delays could result from factors unrelated to our work product or the progress of the project, but could be related to general business or financial conditions of the client. For example, many of our current or potential clients that are in the early stages of development may be unable to retain our services because of financial constraints. In addition, our existing clients can generally reduce the scope of or cancel their use of our services without penalty and with little or no notice. If a client defers, modifies or cancels an engagement or chooses not to retain us for additional phases of a project, we must be able to rapidly redeploy our employees to other engagements in order to minimize underutilization of employees and the resulting harm to our operating results. Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of engagements in progress. 11 14 OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED EMPLOYEES IS CRUCIAL TO OUR RESULTS OF OPERATIONS AND ANY FUTURE GROWTH 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 of our business. Skilled personnel are in short supply, and this shortage is likely to continue for some time. As a result, competition for these people is intense, and the industry turnover rate for them is high. Consequently, we may have difficulty hiring our desired numbers of qualified employees. 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 likely to become a party to one or more lawsuits involving the former employment of one of our employees. Any future litigation against us or our employees, regardless of the outcome, may result in substantial costs and expenses to us and may divert management's attention away from the operation of our business. WE DEPEND ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY ADVERSELY AFFECT OUR BUSINESS We believe that our success will depend on the continued employment of our senior management team and key technical personnel. This dependence is particularly important to our business because personal relationships are a critical element of obtaining and maintaining client engagements. If one or more members of our senior management team or key technical personnel were unable or unwilling to continue in their present positions, such persons would be very difficult to replace and our business could be seriously harmed. Accordingly, the loss of one or more members of our senior management team could have a direct adverse impact on our 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 COULD RESULT IN PRICE REDUCTIONS, REDUCED PROFITABILITY AND LOSS OF MARKET SHARE Competition in the eBusiness services market is intense. If we fail to compete successfully against current or future competitors, our business, financial condition and operating results would be seriously harmed. We compete against companies selling electronic commerce software and services, including those offering such software and services on a hosted basis, and the in-house development efforts of companies seeking to engage in electronic commerce. We expect competition to persist and intensify in the future. We cannot be certain that we will be able to compete successfully with existing or new competitors. Because relatively low barriers to entry characterize our market, we expect more companies to enter our market. We expect that competition will continue to intensify and increase in the future. Some large information technology consulting firms are focusing more resources on eBusiness opportunities. In addition, companies, which offer certain electronic commerce services and products on a hosted platform, have entered the market and we may compete for business with these new entrants. Because we contract with our clients on an engagement-by-engagement basis, we compete for engagements at each stage of our methodology. There is no guarantee that we will be retained by our existing or future clients on later stages of work. Many of our current competitors have longer operating histories, larger client bases, larger professional staffs, greater brand recognition and greater financial, technical, marketing and other resources than we do. This may place us at a disadvantage in responding to our competitors' pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. In addition, many of our competitors have well-established relationships with our current and potential clients and have extensive knowledge of our industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and they may also be able to devote more resources to the development, promotion and sale of their services than we can. Competitors that offer more standardized or less customized services than we do may have a substantial cost advantage, which could force us to lower our prices, adversely affecting our operating margins. 12 15 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. 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 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. To date, we have generally entered into contracts with our clients on a time and materials basis, though we sometimes work on a fixed-fee basis, cap the amount of fees we may invoice on time and material contracts without client consent or provide other rate structures for selected clients that deviate from time and materials-arrangements. In the future our strategy is to increase the percentage of our client engagements subject to arrangements with fixed-fee or other similar components, because we believe they have the potential to be more profitable. WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS We sometimes agree not to perform services for competitors of our clients for limited periods of time, which have been as long as two years. These non-compete agreements reduce the number of our prospective clients and the number of potential sources of revenue. In addition, these agreements increase the significance of our client selection process because many of our clients compete in markets where only a limited number of players gain meaningful market share. If we agree not to perform services for a particular client's competitors and our client fails to capture a significant portion of its market, we are unlikely to receive future revenues in that particular market. OUR PLANNED EXPANSION OF INTERNATIONAL OPERATIONS MAY BE EXPENSIVE AND MAY NOT SUCCEED We have limited experience in marketing, selling and supporting our services in foreign countries. Development of such skills may be more difficult or take longer than we anticipate, especially due to language barriers, currency exchange risks and the fact that the Internet infrastructure in foreign countries may be less advanced than the United States' Internet infrastructure. We have only recently begun to generate revenues from international operations. We have offices outside the United States, and we intend to expand our operations internationally in future periods by opening other international offices and hiring international management, strategic, technical, design, sales, marketing and support personnel. We may be unable to continue to successfully market, sell, deliver and support our services internationally. If we are unable to expand our international operations successfully and in a timely manner, our business, financial condition and operating results could be seriously harmed. We will need to devote significant management and financial resources to our international expansion. In particular, we will have to attract and retain experienced management, strategic, technical, design, sales, marketing and support personnel for our international offices. Competition for such personnel is intense, and we may be unable to attract and retain qualified personnel. Moreover, international operations are subject to a variety of additional risks that could seriously harm our financial condition and operating results. These risks include the following: o Problems in collecting accounts receivable; o The impact of recessions in economies outside the United States; o Longer payment cycles than those in the United States; 13 16 o 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; o 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; o Seasonal reductions in business activity in certain parts of the world, such as during the summer months in Europe; o 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; o Changes in currency exchange rates, which could significantly decrease the profitability of operations where payment is in local currency; o Difficulties in staffing and managing foreign operations; o Difficulties in using equity incentives for employees, which Scient relies on but which are often less understood outside the U.S; and o 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. To promote our brand name, we have increased and plan to continue to increase our marketing expenses, which may cause our operating margins to decline. Moreover, our brand may be closely associated with the business success or failure of some of our high-profile clients, many of whom are pursuing unproven business models in competitive markets. As a result, the failure or difficulties of one of our high-profile clients may damage our brand. If we fail to successfully promote and maintain our brand name or incur significant related expenses, our operating margins and our growth may decline. OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD RESULT IN LOSSES AND NEGATIVE PUBLICITY Our client engagements involve the creation, implementation and maintenance of eBusiness and other applications that are often critical to our clients' businesses. Any defects or errors in these applications or failure to meet clients' expectations could result in: o Delayed or lost revenues due to adverse client reaction; o 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; o Requirements to provide additional services to a client at no charge; o Negative publicity regarding us and our services, which could adversely affect our ability to attract or retain clients; and o Claims for substantial damages against us, regardless of our responsibility for such failure. Our insurance coverage may not be adequate to cover, or may exclude such claims. Our contracts generally limit our liability for damages that may arise from negligent acts, errors, mistakes or omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. Furthermore, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may 14 17 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. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our trade secrets, copyrights, trademarks or other proprietary information, our business could be seriously harmed. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the United States, so as our business continues to expand into foreign countries, risks associated with protecting our intellectual property will increase. In addition, although we believe that our proprietary rights do not infringe the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. In particular, our development and use of standardized frameworks, processes, and applications may subject us to potential infringement claims by third parties. Our insurance coverage may not be adequate to cover, or may exclude such claims. Such claims, even if not true, could result in significant legal and other costs and may be a distraction to management. A FEW INDIVIDUALS OWN MUCH OF OUR STOCK Our directors, executive officers and their affiliates beneficially own a controlling minority of our outstanding common stock. As a result, these stockholders are able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as acquisitions, and to block an unsolicited tender offer. Accordingly, this concentration of ownership could have the effect of delaying or preventing a third party from acquiring control over us at a premium over the then-current market price of our common stock. WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of Scient that a stockholder may consider favorable. These provisions include: o 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; o A classified board of directors with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors; o Prohibiting cumulative voting in the election of directors, which would otherwise allow less than majority of stockholders to elect director candidates; o Requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws; o Limitations on who may call special meetings of stockholders; o Prohibiting stockholder action by written consent, which requires all actions to be taken at a meeting of the stockholders; and o Establishing advance notice requirements for nominations of candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law and our stock incentive plans and our recently adopted stockholders' rights 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 CONTINUED SUSTAINABILITY OF A GLOBAL MARKET FOR OUR SERVICES 15 18 We cannot be certain that a viable market for our services will be sustainable. If a viable and sustainable market for our services does not continue to develop and/or if Scient does not accurately predict trends in the market and respond to those trends by providing new services or products, Scient may fail. Even if a market for our services continues to develop, 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 revenue growth and operating margins may decline. 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: o User privacy; o The pricing and taxation of goods and services offered over the Internet; o The content of websites; o Consumer protection; and o 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: o Open new offices, in the United States or internationally; o Create additional global business units; o Enhance our infrastructure and leveragable assets; o Hire, train and retain employees; o Respond to competitive pressures or unanticipated requirements; or o 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 16 19 The market price of our stock has fluctuated significantly in recent months. The market price may vary in response to any of the following factors, some of which are beyond our control: o Changes in financial estimates or investment recommendations relating to our stock by securities analysts; o Changes in market valuations of other eBusiness software and service providers or electronic businesses; o Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; o Loss of a major client or the inability of our customers to pay for our services; o Additions or departures of key personnel; and o 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. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Scient does not believe that we have any material market risk exposure with respect to derivative or other financial instruments which would require disclosure under this item. 17 20 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. Scient held its Annual Meeting of Stockholders on August 18, 2000. There were 73,245,379 shares of common stock outstanding as of the record date for, and entitled to vote at, the 2000 annual meeting of which 56,551,981 votes were actually present. The following matters were voted upon: 1) Scient solicited and obtained the approval of its shareholders to approve the election of three directors (Frederick W. Gluck, Kenichi Ohmae, and Stephen A. Mucchetti) to serve until Scient's 2003 Annual Meeting or until their successors are elected and qualified. The numbers of shareholders giving their consent for each individual Director was 56,523,159, representing 99.9% of the 56,551,981 shares present at that time. 2) Scient solicited and obtained the approval of its shareholders to approve the appointment of PricewaterhouseCoopers LLP as Scient's independent public accountants for the fiscal year ending March 31, 2001. The numbers of shareholders giving their consent was 56,535,530, representing 99.9 % of the 56,551,981 shares present at that time. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. EXHIBIT NO. DESCRIPTION ----------- ----------- 27.1 Financial Statement Schedule. (b) Reports on Form 8-K. On July 20, 2000, Scient filed a current report on Form 8-K announcing its adoption of a shareholder rights plan which approved by the Board of Directors the declaration of a dividend distribution of one Preferred Share Purchase Right on each outstanding share of its common stock. 18 21 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: November 14, 2000 By: /S/ WILLIAM H. KURTZ ------------------------- William H. Kurtz Chief Financial Officer, Executive Vice President 19

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