10-K 1 f73765e10-k.txt FORM 10-K 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITY AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ . COMMISSION FILE NUMBER 000-25893 SCIENT CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3288107 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 860 BROADWAY NEW YORK, NY 10003 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(917) 534-8200 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.0001 PAR VALUE PER SHARE (TITLE OF CLASS) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Company was approximately $79,401,552 on May 31, 2001 based on the last reported sale price of the Company's common stock on the Nasdaq National Market System on May 31, 2001. There were 73,519,956 shares of common stock outstanding as of May 31, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on August 24, 2001 are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Report. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 SCIENT CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2001 TABLE OF CONTENTS

i 3 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements in this Annual Report on Form 10-K, constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include those listed under Part I "Business -- Risk Factors". Forward-looking statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements include but are not limited to statements regarding: our ability to compete favorably in the eBusiness services market and the anticipated success of our market strategy; our beliefs regarding the anticipated growth and size of the market for our services; the results of our services and attendant benefits of those services for our clients; our plans regarding changes to our pricing models and our expectations regarding the impact of those changes; the impact of our restructuring efforts; the impact of our knowledge management system and framework development on the delivery of our services and our operational results; the anticipated results of our Engineer Acceleration Center and the competitive benefits of our delivery model; the development and protection of our intellectual property; factors, including client mix, that may impact our future revenues; our ability to attract and retain appropriately skilled personnel; our expectations regarding amount and type of future expenses and/or our method of accounting for those expenses; and our expectations regarding future revenues, profitability, and other operating and financial results. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined under Part I "Business -- Risk Factors". These factors may cause our actual results to differ materially from any forward-looking statement. ii 4 PART I ITEM 1. BUSINESS Scient is a leading provider of a category of professional services called systems innovation. Scient provides integrated eBusiness strategy and technology implementation services on a global basis to enterprise clients who want to fully leverage eBusiness technologies as part of their overall business strategy. Scient's service offering includes strategy consulting, systems architecture and design, application and technology infrastructure development, and eBusiness management. Our services are designed to improve a client's competitive position and increase efficiency through the development of innovative business strategies enabled by the integration of emerging and existing technologies. SERVICES Scient uses eBusiness as a catalyst to help its clients unlock the value hidden in their enterprises. Our process leverages our expertise in strategy, customer experience and technology to help clients create new sources of revenue and eliminate cost. Scient also works with clients to increase their organization's abilities to anticipate and capitalize on changes in their business environment. Our service offering includes strategy consulting, architecture and design services, application and technology infrastructure development, and eBusiness management. The following descriptions highlight the primary services that we offer. Strategy Consulting. We work with clients to tailor a business strategy designed to provide them with measurable results. Our goal is to leverage the industry and eBusiness experience and knowledge base of our professionals along with the experiences of our clients' senior executives to formulate innovative, executable and flexible eBusiness strategies. Architecture and Design. In addition to strategy, Scient offers architecture and design capabilities to its clients. Using a variety of technologies, we architect eBusiness applications and technology infrastructure for clients. Recognizing that the technical infrastructure becomes the foundation for any future application development, our technology infrastructure design services focus on enabling eBusiness applications to be reliable, robust, secure, scalable and extensible. Additionally, Scient offers customer experience design to its clients. Because Scient considers the user interface to be more than just visual design, we incorporate our abilities in information architecture, user interface engineering, editorial services, and usability research to develop systems with innovative customer experience. Application and Technology Infrastructure Development. We build and implement innovative eBusiness applications and technology infrastructure that take into account the current and future business needs of our clients. This can be accomplished through our Engineer Acceleration Center (EAC), with teams located either on the client's site or in our dedicated facilities in Dallas, Texas. Our EAC was established to provide deeply skilled teams, an integrated customer experience and technology process, along with dedicated technology to provide the most efficient, effective and highest quality solutions to our clients. The EAC offers a pre-configured development environment to our clients that is intended to establish processes, project management structures, and standards that reduce overall project risks. All of this results in a reduced cost of development and a potential accelerated return on investment for our clients. We recognize that new types of communications devices are proliferating, network usage is expanding, and the future of eBusiness will be dependent upon the development and integration of a variety of technologies. We build applications and technology infrastructure intended to accommodate these changes in the eBusiness environment. Our applications and technology infrastructure development services utilize our capabilities in application software, networks, systems, security and infrastructure architecture. Scient develops applications and technology infrastructure to be robust and to serve as the foundation for eBusiness innovations that can link to existing systems and technologies. eBusiness management. Upon completion of engagements, we offer our clients eBusiness management to help them operate and extend their eBusinesses. These services include remote systems management, application management, performance management, content management, and system security management 1 5 and are provided on a monthly subscription basis with established service level agreements. Our extended capabilities leverage the iterative nature of the Scient Approach methodology to provide the framework and business structure for continuous re-innovation of an eBusiness. THE SCIENT APPROACH(TM) METHODOLOGY The Scient Approach methodology is a well-defined process that helps us efficiently and successfully deliver our services. This methodology provides a framework that facilitates the distribution of knowledge within an engagement and across all parts of our firm. The Scient Approach methodology is designed to allow us to provide consistent quality across engagements and to deliver high value to clients in all aspects of our services. The key to the Scient Approach methodology is the iterative improvement of the eBusiness innovations that we deliver. Because the needs of our clients are dynamic, we have designed the Scient Approach methodology with built-in feedback and iteration processes in order to improve the services delivered to clients and to enhance the approach itself. These processes serve as a critical feedback tool that assists Scient in designing and extending eBusinesses for its clients. The Scient Approach methodology has four general stages: Conceive, Architect, Engineer and Operate. Each of these stages includes the critical decisions our clients must make in order to build an eBusiness. The methodology also includes two foundational elements: Launch and Innovate, which are interwoven throughout the approach. Conceive. During the Conceive stage of the approach, Scient works closely with the client to define the overall business strategy for the eBusiness, including market positioning and value offering. The five components of the Conceive stage include Assessing, Visioning, Conceptualizing, Prototyping, and Defining. Upon completion of the Conceive stage, Scient should have the information necessary to define key business success factors and to prioritize the client's eBusiness initiatives based on a common understanding of the client's eBusiness objectives. Architect. In the Architect stage, Scient defines the scope of the eBusiness to be developed and designs applications to enable clients to meet their objectives. Scient also scopes and designs the underlying infrastructure to integrate the software, network and hardware components necessary to support the applications. This stage includes the evaluation of any third party software. The architect stage occurs in two phases, Architect-Scope and Architect-Design. - Architect-Scope. The goal of this phase is to collect application and process requirements to develop a baseline for the Architect-Design phase. - Architect-Design. During this phase, Scient defines the processes, components and timeline necessary to realize the application goals. The goal of this phase is to create a complete plan that allows the applications to be constructed, tested and implemented on time and within budget. After the Architect stage, the client has a "blueprint" for its eBusiness development. This blueprint identifies in detail the tasks necessary to meet the objectives and overall strategy goals as defined in the Conceive stage. Engineer. In this stage, Scient iteratively builds and delivers the eBusiness, which may include the incorporation or integration of third party software or devices. Within this stage are three phases that are focused on successfully implementing the applications defined during the Architect stage. Scient has established the Engineer Acceleration Center (EAC) in Dallas, Texas to provide world class software engineering. The EAC provides deeply skilled teams, integrated customer experience and technology processes, and dedicated technology to achieve the most efficient, effective, and highest quality solutions for our clients. - Transition to the EAC. In this phase, the Scient project team and EAC transition team work to transition the project into the EAC by understanding the major project components, identify gaps and 2 6 risks, develop solutions and risk mitigation plans, and establish project responsibilities to ensure the successful delivery of the project. - Engineer-Detailed Design. In this phase, Scient works with the client to finalize specific details of the requirements, including all customer interaction interfaces and detailed technical designs. - Engineer-Construct. In this phase, the modules of the application are built, refined and unit tested. This phase is aimed at producing the tangible results for the client that were identified in the earlier stages of the Scient Approach methodology. Development and QA environments are constructed, software development is completed, code reviews are performed, and unit testing takes place. - Engineer-Test. In this phase, applications are tested to ensure they meet functional, technical and user requirements. This phase intends to ensure that the engineered applications perform in accordance with the requirements defined in the Architect stage. The EAC offers a full suite of functional, integration, and system testing to ensure the overall quality and robustness of the delivered system. - Engineer-Deploy. In this phase, the system is deployed into a production environment, providing the necessary support and rapid issue resolution. The Engineer-Deploy phase will deliver the eBusiness system in its production environment typically employing performance, security, user acceptance, and limited volume beta test, followed by a full-scale introduction to the complete target user population. Upon completion of the Engineer stage, Scient delivers the system to the client. During the transition to operate phase, the Scient team completes all final deliverables, produces the final distribution media, and conducts formal transition meetings with the appropriate client operations team. Operate. In the Operate stage, Scient manages and measures the eBusiness technical operations and provides a framework for ongoing re-innovation of the client's eBusiness. By utilizing Scient for the ongoing management and innovation of its eBusiness systems, the client can focus on its core competencies. The Operate stage centers around two separate but related sets of activities. - eSolution Management. This area focuses on the day-to-day operations of the eBusiness, allowing our client to focus on their core competencies. The eSolution Management has three steps: - Implement. In this step, the client's operational requirements and architecture are assessed. A high availability management solution is then implemented. - Manage. In this step, the client's ongoing eBusiness systems are managed including application management, performance management, content management and system security management. - Transition. In this step, Scient transfers knowledge and techniques enabling the client to maintain and manage their eBusiness. - eBusiness Management. This area focuses on the strategic planning of an eBusiness solution and extending it into new versions with improved capabilities. This involves continued re-innovation and improvement in the eBusiness solution, implemented via a series of new releases with enhanced capabilities. SALES AND MARKETING Through our global direct sales force and marketing organization, we market and sell our services to clients who are creating eBusinesses or are rethinking or expanding their existing businesses to integrate eBusiness capabilities. Our sales professionals are aligned within global business units. We currently target five principal markets: - Financial Services Markets, including financial products and services providers such as investment and commercial banks, securities firms, insurance companies, credit card companies, and online brokerages and lending institutions; - Enterprise Markets, which includes Global 1000 companies facing the challenges of adapting their businesses' traditional procurement and distribution networks to take advantage of eBusiness capabili- 3 7 ties including industrial products, consumer packaged goods, manufacturing, energy, transportation and logistics; - Telecommunications and Utilities Markets, including large international telecommunications companies, competitive local exchange carriers, internet service providers, telecommunications equipment providers, and entities delivering voice, data and video services to their customers through various delivery technologies, and the utility marketplace including gas, electric, and water companies; - Health and Wellness Markets, which includes pharmaceuticals, biotechnology, genomes, medical products and technology and consumer wellness, and diagnostics; and - Media and Entertainment Markets, including diversified media companies, advertiser-supported media companies, entertainment service providers, professional sports leagues, suppliers of recorded entertainment, suppliers of live entertainment, information service companies and book publishers. As of March 31, 2001, our global sales and marketing organization consisted of 47 professionals. We employ a team selling approach, whereby our sales people collaborate with our business unit professionals and management to identify prospects, conduct sales and manage client relationships. Due to the strategic nature of our engagements, we typically negotiate with the senior business and technical management personnel of our current and potential clients. Our marketing efforts are focused on creating awareness of the systems innovation category, establishing Scient as the leader in this category and building the Scient brand on a global basis. Scient uses a broad mix of programs to accomplish these goals, including market research, brochures, information pieces published for industry forums, public relations activities, marketing programs, seminars and speaking engagements and website marketing. CLIENTS We have performed professional services for a variety of clients in many industries around the world. We are currently focused on serving companies in the Financial Services, Enterprise, Telecommunications and Utilities, Health and Wellness, and Media and Entertainment markets. From inception through March 31, 2001, Scient has served over 165 clients and has helped its clients launch approximately 50 eBusinesses. In the year ended March 31, 2001, our five largest clients accounted for approximately 36% of our revenues. We generally enter into contracts with our clients on a time and materials basis, though we sometimes work on a fixed-fee basis or cap the amounts we may invoice. In the future, we anticipate an increasing percentage of our client engagements will be under arrangements with fixed-fee components. If we miscalculate the resources or time we need to complete engagements with capped or fixed fees, our operating results could be seriously harmed. Because of the strategic and competitively sensitive nature of the engagements we perform for some of our clients, we sometimes agree not to perform services for our clients' competitors or in a particular field for limited periods of time. These non-compete agreements reduce the number of our prospective clients and reinforce the importance of our client selection. INNOVATION CENTERS Scient's professional services colleagues are organized into areas of expertise and core competencies called Innovation Centers. Our Innovation Centers are designed to address the full range of expertise and competencies needed in order to address the eBusiness needs of clients in our targeted markets. When we deliver services to our clients, we typically build an integrated team of professionals from several or all of our Innovation Centers. In addition, the Innovation Centers promote the development of specialized knowledge, techniques and experience and foster the training, mentoring and professional development of its members. Each of Scient's professional service colleagues is in one of the following Innovation Centers: - Business Strategy and Architecture Innovation Center -- Provides consulting services to define and implement the strategic business, organization, market and brand direction for an eBusiness. Includes 4 8 strategy consultants and industry experienced managers, each of whom is focused on one of Scient's targeted markets; - Customer Experience Innovation Center -- Integrates the disciplines of branding and identity systems, information architecture, content strategy and editorial systems, creative strategy and visual design, user interface engineering, front-end technology and qualitative user testing to deliver integrated brand and user experience to eBusinesses; - Technology Innovation Center -- Delivers the technical skills and expertise necessary to manage, strategize, analyze, architect and engineer the applications and infrastructure of eBusinesses, including project management, databases, security, network infrastructure, applications, software development, testing and quality assurance. The Technology Innovation Center includes the management of Scient's relationships with technology vendors; and - Asset Services Innovation Center -- Defines and manages the eBusiness assets Scient delivers to clients on a subscription, annuity or service bureau basis. The Asset Services Innovation Center works with other Innovation Centers, global business units, operations, finance and management to package and subsequently manage those aspects of Scient's assets that can be offered on subscription, annuity or service bureau basis. NEIGHBORHOODS Scient has established neighborhoods, or organized communities of interest, that pursue and develop ideas, focus on quality and efficiency improvements, and establish points of view to improve colleague and client satisfaction. Our neighborhoods span across our global business units, innovation centers and core services units to minimize redundancies and maximize colleague team-building, participation and innovation. As of March 31, 2001, Scient had over 20 neighborhoods, spanning areas of interest such as emerging technologies, eOrganizational issues and customer relationship management. KNOWLEDGE MANAGEMENT Our knowledge management processes and systems, which we refer to as Knowledge Management, enable the development and re-use of Scient's intellectual capital. We have found that while there are unique features to each client engagement, there is often a degree of commonality. Scient's focus on particular industries, business processes and technologies creates intellectual capital that can be adapted for use in different industries and applications provided that it is not proprietary to a client. Through the Scient Approach methodology and our iterative process, we expect to capture this common intellectual capital and develop common frameworks, processes, and technology to use in the delivery of our services. Knowledge Management is designed to enable each engagement team to bring the experiences of our entire company to bear on each client engagement. Knowledge Management facilitates access to the Scient Approach methodology and helps our colleagues determine what services to deliver to clients and when to perform the services during the different steps of the approach. Resources available through Knowledge Management include tutorial materials, templates, expert contacts and sample outputs for the different process steps. We have invested significantly in Knowledge Management with the intent that such expenditures will allow us to use our intellectual capital in order to accelerate the delivery of our services, reduce our costs and leverage our industry experience. However, we cannot guarantee that Knowledge Management will help us achieve these goals or will be adequate to support our future operations. CORE ENGINEERING LABS We have established Core Engineering Labs that are responsible for identifying and evaluating new hardware and software products and emerging technologies. The Core Engineering Labs exist within the EAC in Dallas and at the client's site. They support engagement teams during the initial implementation of new products and technologies. In addition, the Core Engineering Labs are responsible for integrating new 5 9 products and technologies into the Scient Approach methodology in order to help us manage the risk to clients of working with new products and emerging technologies. We believe that gaining experience with these new technologies and products in the Core Engineering Labs enables us to develop and implement applications and systems for clients more quickly than we otherwise could and with less interruption to and reliance on clients' systems during engagements. COMPETITION Competition in the eBusiness services market is intense. We compete against companies selling electronic commerce software and services, including those offering such products and services on a hosted basis, and the in-house development efforts of companies seeking to engage in electronic commerce. Our current competitors include the following: - Systems integrators that primarily engage in fixed-time/fixed-fee contracts, such as Sapient, Cambridge Technology Partners, and Viant; - Large systems integrators, such as Accenture and the consulting arms of the "Big Five" accounting firms; - The professional services groups of computer equipment companies, such as IBM; - Outsourcing firms, such as Computer Sciences Corporation and Electronic Data Systems; - Web consulting firms and online agencies, such as Agency.com, iXL, Proxicom, and Razorfish; - General management consulting firms, such as Bain & Company, Booz Allen & Hamilton, Boston Consulting Group and McKinsey & Company; and - Internal IT departments of current and potential clients. Because relatively low barriers to entry characterize our market, we also expect other companies to enter our market. We believe that the principal competitive factors in our industry are: - Value of services provided compared to the price of services. - The quality of services and deliverables, technical and strategic expertise, project management capabilities, reputation and experience of professionals delivering the service; - The effectiveness of sales and marketing efforts, brand recognition, and the size of the firm. We believe that we presently compete favorably with respect to most of these factors. In particular, we believe that we offer an integrated set of strategic consulting and customer experience skills and technological expertise that many existing service providers are not well suited to provide. However, the market for eBusiness services is highly competitive and we cannot be certain that we will compete successfully in the future. We expect that competition will continue to intensify in the future, particularly as large IT consulting firms focus more resources on eBusiness opportunities. Because we contract with our clients on an engagement-by-engagement basis, we compete for engagements at each stage of our methodology. There is no guarantee that we will be retained by our existing or future clients on later stages of work. See "Risk Factors -- Competition from Bigger, More Established Competitors Who Have Greater Financial Resources Has Resulted and Could in the Future Result, in Price Reductions, Reduced Profitability and Loss of Market Share." PROPRIETARY RIGHTS We have developed detailed tools, processes and methodologies underlying the Scient Approach methodology and software code, scripts, libraries, data models, applications, business processes, frameworks, and other technology used internally and in client engagements. We currently seek to protect our proprietary rights and our other intellectual property through a combination of copyrights, trademarks and trade secret 6 10 protection, as well as through contractual protections such as proprietary information agreements and nondisclosure agreements. We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property, and we may not be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. See "Risk Factors -- We May Not Be Able to Protect Our Intellectual Property and Proprietary Rights." COLLEAGUES AND CORPORATE CULTURE Colleagues We generally use the term "colleagues" instead of "employees" to reinforce our one-firm concept and collegial culture. As of March 31, 2001, we had a total of 1,333 colleagues. Of these, 964 were in professional services, 47 in sales and marketing, 27 in recruiting and 295 in core services, including Knowledge Management, Technology, People, Finance and Administration. We have offices in San Francisco, New York, Dallas, Chicago, Boston, Paris, Tokyo, London, and Singapore. Subsequently, we have undertaken restructuring efforts to reduce our workforce and our offices; these activities are discussed in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. Our future success will depend in part on our ability to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. None of our colleagues is represented by any collective bargaining unit, and we have never experienced a work stoppage. We believe our relations with our colleagues are good. Corporate Culture We believe that developing a rich environment and a one-firm concept with a shared culture is critical to Scient becoming an employer of choice for management, strategic, technical, design, sales, marketing and support professionals of all levels. We actively foster a set of core values that were developed jointly by management and Scient's colleagues. These values include a dedication to maintaining an innovative and empowering environment where we work as a team to achieve total client satisfaction and provide our colleagues with personal and professional growth opportunities. In addition, we believe that by linking employee compensation to the success of Scient through our incentive compensation program, we encourage an owner attitude, which we believe results in decisions that benefit our clients, our colleagues and our company. We believe that our ability to attract and retain high-caliber colleagues will be in large part dependent on our adherence to a one-firm culture supported by the following values: ~~- Spirit - Growth - Community - Innovation - Excellence - Urgency~~

RISK FACTORS The risks described below are not the only ones that we face. Any of the following risks could seriously harm our business, financial condition or results of operations. The following risk factors could cause our actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K or presented elsewhere by management from time to time. RISKS RELATED TO OUR BUSINESS WE HAVE EXPERIENCED, AND EXPECT IN THE FUTURE TO EXPERIENCE, A DECLINE IN OUR REVENUES, WHICH WILL NEGATIVELY IMPACT OUR FINANCIAL RESULTS Our revenues for the quarter ended March 31, 2001 declined 66% compared to our revenues for the quarter ended December 31, 2000, and we expect that we will experience a further decline in revenues for the quarter ending June 30, 2001. We believe the decline in revenues was primarily due to a broad-based general economic slowdown in which clients have significantly tightened technology budgets, increased competitive pressure from traditional management consulting, information technology services and eBusiness service 7 11 competitors and a lack of urgency by Global 2000 companies to immediately fund large eBusiness projects. As a result of the decline in demand for our services, in the quarter ended December 31, 2000 we reduced our headcount from 1,868 colleagues to 1,492 colleagues and closed offices in Sunnyvale, California and Austin, Texas, and in January 2001, we closed our office in Munich, Germany. In the quarter ended March 31, 2001, our headcount further decreased from 1,492 colleagues to 1,333 colleagues, and in April 2001, we implemented the reduction of up to 850 additional positions, the closing or significant reduction of our San Francisco, Los Angeles, Boston, Chicago, and New Jersey offices, as well as similar actions in our international offices, and the move of our headquarters from San Francisco to New York. We will be required to further reduce our headcount, close more offices or reduce expenses in other areas if our revenues continue to decline or are not sufficient to support our cost structure. Our ability to generate revenues will be impaired to the extent we have reduced our operations. In addition, if demand for our services increases in the future, we may not be able to expand our operations, including hiring additional colleagues, to meet this demand in a timely fashion or at all. If we cannot increase our revenues in future periods, our financial results will suffer. WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO RETURN TO PROFITABILITY Prior to the quarter ended March 31, 2000, we had a history of successive quarterly losses, and we had losses for the quarter ended December 31, 2000 and March 31, 2001. We incurred net losses of $16.0 million for the year ended March 31, 2000, net losses of $140.0 million for the year ended March 31, 2001 and a net loss of $90.2 million for the quarter ended March 31, 2001. As of March 31, 2001, we had an accumulated deficit of $168.8 million. As a result, we will need to increase revenues and manage expenses in order to return to profitability. WE HAVE A LIMITED OPERATING HISTORY AND A LIMITED NUMBER OF COMPLETED ENGAGEMENTS THAT MAKE AN EVALUATION OF OUR BUSINESS DIFFICULT We were incorporated in November 1997 and began providing services to clients in February 1998. Our limited operating history and fluctuating operating results makes an evaluation of our business and prospects very difficult. Companies in an early stage of development frequently encounter enhanced risks and unexpected expenses and difficulties. These risks, expenses and difficulties apply particularly to us because our market is new and rapidly evolving. Our long-term success will depend on our ability to achieve satisfactory results for our clients and to form long-term relationships with core clients on a global basis. Some of our clients have limited experience with the eBusinesses we have developed for them. Accordingly, we cannot assure that the eBusinesses we have implemented will be successful or that our services will provide the expected value to our clients. Some of our clients for whom we have done substantial work have suffered a significant failure, problem or setback in their eBusinesses, and/or the related technology, and may continue to do so in the future. As a result, our business reputation has been damaged, whether or not these failures, problems or setbacks were caused by our work or were within our control. Our ability to obtain new engagements, retain clients and recruit and retain highly skilled employees could be seriously harmed if our work product or our services fail to meet the expectations of our clients. OUR QUARTERLY AND ANNUAL REVENUES AND OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO FLUCTUATE Our quarterly revenues and operating results are volatile and difficult to predict. Our revenues increased on a quarter-to-quarter basis through the quarter ended September 30, 2000 and then decreased 22% for the quarter ended December 31, 2000 and decreased 66% for the quarter ending March 31, 2001. We expect that we will experience a further decline in revenues for the quarter ending June 30, 2001. It is likely that in future periods our operating results will continue to be below the expectations of public market analysts or investors. The market price for our common stock has decreased significantly in recent months, and if our future operating results are below the expectations of public market analysts or investors, the market price of our common stock may decline further. 8 12 Our quarterly operating results have varied in the past and are likely to vary significantly from quarter to quarter. As a result, we believe that period-to-period comparisons of our results of operations are not a good indication of our future performance. A number of factors are likely to cause these variations, including: - Our ability to obtain new and follow-on client engagements; - Failure or delay by clients in paying our invoiced fees and expenses; - Our ability to retain clients on a long-term basis; - The amount and timing of expenditures by our clients on a global basis for eBusiness services and variations in budget cycles of our large enterprise clients; - Our employee utilization rate, including our ability to transition employees quickly from completed projects to new engagements, for which we typically receive little or no notice; - Our ability to attract, train and retain skilled management, strategic, technical, design, sales, marketing and support professionals; - The introduction of new services or products by us or our competitors; - Changes in our pricing policies or those of our competitors; - Our ability to manage costs, including personnel costs and support services costs; and - Costs related to the closing, opening, shrinking or expanding of Scient offices. Our revenues are derived primarily from professional services, which we generally provide on a time and materials basis, although we have in the past and expect in the future to provide professional services on a fixed-fee basis and on a time and materials basis with a cap on the amount of fees we may invoice without client consent. Revenues pursuant to time and materials contracts are generally recognized as services are provided. Since personnel and related costs constitute the substantial majority of our operating expenses and since we establish these expenses in advance of any particular quarter, underutilization of our professional services employees or an inability to bill a client for all or a portion of the services we provide may cause significant reductions in our operating results for a particular quarter and could result in losses for such quarter. In addition, we have provided and may provide in the future limited services to clients on a non-billable basis. Any increase in such activity could have a negative impact on our margins and other operating results. A significant percentage of our employees are in core support services, including technology infrastructure, human resources, and finance and administration, in order to support our expected growth over time. As a result, a significant portion of our operating expenses is fixed in the short term. Therefore, any failure to generate revenues according to our expectations in a particular quarter could result in losses for the quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although we have limited historical financial data, we have experienced and expect to continue to experience seasonality in revenues from our eBusiness services. These seasonal trends may materially affect our quarter-to-quarter operating results. Revenues and operating results in our quarter ending December 31 are typically lower relative to our other quarters because there are a lower number of billable days in this quarter due to holidays and vacation days. FAILURE TO MANAGE OUR GROWTH MAY ADVERSELY AFFECT OUR BUSINESS We have experienced periods of rapid growth and may in the future resume growing both by hiring new employees and serving new business and geographic markets. Our historical growth has placed, and our plans for future growth will continue to place, a significant strain on our management and our operating and financial systems. We do not believe our past growth rate is sustainable for the long-term. Our growth has required and will continue to require us to make substantial expenditures for capital equipment, training, recruiting, and other expansion-related costs, the amount and timing of which has and will affect our financial results. Our business requires substantial managerial attention to ensure that our colleagues and offices operate at an appropriate level of productivity. Failure to effectively manage the productivity and work quality of our 9 13 colleagues and offices and the corresponding market demand for our services could seriously harm our operations and financial condition. For example, we reduced our headcount by approximately 460 personnel in the quarter ended December 31, 2000 and in April 2001 we implemented plans to further reduce our headcount by up to 850 personnel to reduce overcapacity in certain areas where market demand had slowed or declined. If we do not attain the revenue levels and productivity, our business, operating results and financial condition could be seriously harmed. Our personnel, systems, procedures and controls may be inadequate to support our future operations. In order to accommodate changing client needs and other engagement management requirements, we will need to update, change, and maintain our various internal systems to support the business and to hire, train and retain the appropriate personnel to manage our operations. We will also need to improve our financial and management controls, reporting systems and operating systems. We may encounter difficulties in developing, maintaining, and implementing these and other systems. OUR CLIENTS MAY BECOME UNABLE OR UNWILLING TO PAY US FOR SERVICES PERFORMED We assume a certain level of credit risk with our clients in order to do business. Conditions affecting any of our clients could cause them to become unable or unwilling to pay us in a timely manner, or at all, for services we have already provided them. In the past we have experienced significant collection delays from certain clients, and we cannot predict whether we will continue to experience similar or more severe delays. In particular, as our client base has shifted to larger enterprise clients with longer billing cycle times and/or unpredictable budget processes, our collections cycle time, and problems in collecting invoiced amounts has increased and may continue to increase in the future. If one or more of our clients fails or refuses to pay us in a timely manner or at all, or if we are unable to collect a number of large accounts receivable, it could have a material adverse effect on business, operating results and financial condition. THE IMPACT OF OUR RESTRUCTURING EFFORTS MAY ADVERSELY AFFECT OUR OPERATING RESULTS In response to the recent decline in our revenues in the past several quarters, we implemented the reduction of our headcount by approximately 460 personnel in the quarter ended December 31, 2000, and in April and May 2001 we implemented plans to further reduce our headcount by up to 850 personnel to reduce overcapacity in certain areas where market demand had slowed or declined. We also implemented plans to close, divest or reduce the size of offices in the U.S. and internationally and to move our corporate headquarters from San Francisco to New York. We expect that these actions may have an adverse impact on our ability to obtain new clients and to retain and hire qualified personnel. For example, our Chief Financial Officer, Bill Kurtz, announced his resignation from the company in connection with the move of our headquarters. In addition, in conjunction with these restructuring efforts, we will need to attempt to sublease, assign or otherwise divest ourselves of significant obligations under various real estate leases. These leases represent a significant portion of our operating expenses on an ongoing basis. If we are unable to decrease these expenses in the anticipated time frame, it could have a material adverse effect on our business, operating results and financial condition. OUR CLIENTS MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL NEEDED TO RETAIN OUR SERVICES OR PAY US FOR SERVICES PERFORMED Some of our current and potential clients, particularly those clients funded primarily by venture capital, need to raise additional funds in order to continue their business and operations as planned. We cannot be certain that these companies will be able to obtain sufficient financing on favorable terms or at all. As a result of an inability to raise necessary financing, some clients may be unable to retain our services or to pay us for services we have already provided them or they may terminate our services earlier than we expect, any of which could seriously harm our business, financial condition and operating results. In particular, some of our current and potential clients funded by venture capital have recently encountered greater difficulty obtaining needed financing and therefore have had difficulty in retaining our services and in paying amounts owed for services provided. 10 14 WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CLIENTS FOR A SIGNIFICANT PORTION OF OUR REVENUES The loss of any significant client could seriously harm our business, financial condition and operating results. For the three months ended March 31, 2001, our five largest clients accounted for approximately 62% of our revenues, and three clients individually accounted for over 10% of our revenues. We currently derive and expect to continue to derive a significant portion of our revenues from a limited number of clients. To the extent that any significant client uses less of our services or terminates its relationship with us, our revenues could decline substantially. For example, our revenues declined in the quarter ended March 31, 2001 compared to the quarter ended December 31, 2000 and we expect that we will experience a decline in our revenues for the quarter ended June 30, 2001 in part due to certain clients delaying or stopping the use of our services. In particular, we expect to experience a significant decline in revenue generated from one client, who accounted for approximately 31% of our revenues in the quarter ended March 31, 2001. The volume of work that we perform for a specific client is likely to vary from period to period, and a significant client in one period may not use our services in a subsequent period. OUR LACK OF LONG-TERM CONTRACTS WITH CLIENTS REDUCES THE PREDICTABILITY OF OUR REVENUES Our clients retain us on an engagement-by-engagement basis, rather than under long-term contracts. As a result, our revenues are difficult to predict. Because we incur costs based on our expectations of future revenues, our failure to predict our revenues accurately may seriously harm our financial condition and results of operations. Although it is our goal to provide the full range of our eBusiness services to our clients, we are generally retained to design and perform discrete segments of work on an engagement-by-engagement basis. Since large client projects involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of a project or that the client will cancel or delay additional planned projects. For example, many of our current or potential clients that are in the early stages of development may be unable to retain our services because of financial constraints, and many of our potential Global 2000 customers have recently shown a lack of urgency to pursue large eBusiness initiatives and a number of our clients have recently slowed or stopped altogether the use of our services. In addition, our existing clients can generally reduce the scope of or cancel their use of our services without penalty and with little or no notice. If a client defers, modifies or cancels an engagement or chooses not to retain us for additional phases of a project, we must be able to rapidly redeploy our employees to other engagements in order to minimize underutilization of employees and the resulting harm to our operating results. Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variations in the number or size of engagements in progress. ATTRACTING, TRAINING, AND RETAINING QUALIFIED EMPLOYEES WILL BECOME MORE DIFFICULT FOLLOWING OUR HEADCOUNT REDUCTIONS Our success depends in large part on our ability to hire, train and retain project and engagement managers, technical architects, strategists, engineers, design professionals, other technical personnel and sales and marketing professionals of various experience levels. Any inability to hire, train and retain a sufficient number of qualified employees could hinder the growth and success of our business. In light of our recent restructuring and reduction in headcount, as well as the fact that many of our employees hold options priced above the market price of our stock, our ability to retain our employees or to recruit and hire new employees may be difficult. Skilled personnel are in short supply, and this shortage is likely to continue for some time. As a result, competition for these people is intense, and the industry turnover rate for them is high. Consequently, we may have difficulty hiring our desired numbers of qualified employees. Moreover, even if we are able to expand our employee base, the expenditure of resources required to attract and retain such employees may adversely affect our operating margins. In addition, some companies have adopted a strategy of suing or threatening to sue former employees and their new employers. As we hire new employees from our current or potential competitors we are more likely to become a party to one or more lawsuits involving the former employment of one of our employees. Any future litigation against us or our employees, regardless of the 11 15 outcome, may result in substantial costs and expenses to us and may divert management's attention away from the operation of our business. WE DEPEND ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY ADVERSELY AFFECT OUR BUSINESS We believe that our success will depend on the continued employment of our senior management team. This dependence is particularly important to our business because personal relationships are a critical element of obtaining and maintaining client engagements. If one or more members of our senior management team or key technical personnel were unable or unwilling to continue in their present positions, such persons may be very difficult to replace and our business could be seriously harmed. Our Chief Financial Officer, Bill Kurtz, announced his resignation from the company effective June 30, 2001. The loss of this or other members of our senior management team could have a direct adverse impact on our revenues. In addition, if any of these key employees joins a competitor or forms a competing company, some of our clients might choose to use the services of that competitor or new company instead of our own. Furthermore, clients or other companies seeking to develop in-house eBusiness capabilities may hire away some of our key employees. This would not only result in the loss of key employees but could also result in the loss of a client relationship or a new business opportunity. Any losses of client relationships could seriously harm our business. COMPETITION FROM BIGGER, MORE ESTABLISHED COMPETITORS WHO HAVE GREATER FINANCIAL RESOURCES HAS RESULTED, AND COULD IN THE FUTURE RESULT, IN PRICE REDUCTIONS, LARGER LOSSES AND LOSS OF MARKET SHARE Competition in the eBusiness services market is intense. If we fail to compete successfully against current or future competitors, our business, financial condition and operating results would be seriously harmed. We compete against companies selling electronic commerce software and services, including those offering such software and services on a hosted basis, and the in-house development efforts of companies seeking to engage in electronic commerce. We expect competition to persist and intensify in the future. We cannot be certain that we will be able to compete successfully with existing or new competitors. Because relatively low barriers to entry characterize our market, we expect more companies to enter our market. We expect that competition will continue to intensify and increase in the future. Some large management consulting firms and information technology firms, such as Accenture, IBM, and CSC, have focused more resources on eBusiness opportunities. In addition, companies which offer electronic commerce services and products on a hosted platform, such as Loudcloud, NaviSite, and Genuity, have entered the market for eBusiness services, and we may compete for business with these new entrants. Because we contract with our clients on an engagement-by-engagement basis, we compete for engagements at each stage of our methodology. There is no guarantee that we will be retained by our existing or future clients on later stages of work. Many of our current competitors have longer operating histories, larger client bases, larger professional staffs, greater brand recognition and greater financial, technical, marketing and other resources than we do. This has in the past placed us, and may continue to place us at a disadvantage in responding to our competitors' pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. In addition, many of our competitors have well-established relationships with our current and potential clients and have extensive knowledge of our industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and they may also be able to devote more resources to the development, promotion and sale of their services than we can. Competitors that offer more standardized or less customized services than we do may have a substantial cost advantage, which could force us to lower our prices, adversely affecting our operating margins. Current and potential competitors also have established or may establish cooperative relationships among themselves or with third parties to increase their ability to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, some of our competitors may develop services that are superior to, or have greater market acceptance than, the services that we offer. 12 16 POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS In August 2000, we acquired AXIDIA, a French eBusiness service firm and we may acquire other businesses in the future, which may complicate our management tasks. We may need to integrate widely dispersed operations with distinct corporate cultures. Such integration efforts may not succeed or may distract our management from servicing existing clients. Our failure to successfully manage current and future acquisitions could seriously harm our operating results. Also, acquisition costs could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we finance the acquisitions by issuing equity or equity linked securities. WE MAY LOSE MONEY ON FIXED-FEE OR SIMILAR CONTRACTS To date, we have generally entered into contracts with our clients on a time and materials basis, though we have in the past and expect in the future to enter into contracts to perform work on a fixed-fee basis, to cap the amount of fees we may invoice on time and material contracts without client consent or to provide other rate structures for selected clients that deviate from time and materials arrangements. If we miscalculate the resources or time needed to complete engagements with capped or fixed fees or fee structures other than straight time and materials arrangements, our operating results could be seriously harmed. The risk of such miscalculations for us is high because we work with complex technologies in compressed timeframes, and therefore it is difficult to judge the time and resources necessary to complete a project. WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS We sometimes agree not to perform services for competitors of our clients for limited periods of time. These non-compete agreements reduce the number of our prospective clients and the number of potential sources of revenue. In addition, these agreements increase the significance of our client selection process because many of our clients compete in markets where only a limited number of players gain meaningful market share. If we agree not to perform services for a particular client's competitors and our client fails to capture a significant portion of its market, we are unlikely to receive future revenues in that particular market. INTERNATIONAL OPERATIONS ARE EXPENSIVE AND MAY NOT SUCCEED Our international operations accounted for approximately 16.4% of our total revenues for the year ended March 31, 2001. We have limited experience in marketing, selling and supporting our services in foreign countries. Development of such skills may be more difficult or take longer than we anticipate, especially due to language barriers, currency exchange risks and the fact that the Internet infrastructure in foreign countries may be less advanced than the United States' Internet infrastructure. We have only recently begun to generate revenues from international operations. We may be unable to continue to successfully market, sell, deliver and support our services internationally. For example, we recently closed our German office because we were unable to generate any significant revenues there, and as we announced in April 2001, we plan to take similar steps with respect to our other international operations that fail to generate adequate revenue resulting in the divestiture of 80% of our interests in each of our French and Tokyo subsidiaries. If we are unable to conduct our international operations successfully, our business, financial condition and operating results could be seriously harmed. We need to devote significant management and financial resources to our international operations. In particular, we must attract and retain experienced management, strategic, technical, design, sales, marketing and support personnel for our international offices. Competition for such personnel is intense, and we may be unable to attract and retain qualified personnel. Moreover, international operations are subject to a variety of additional risks that could seriously harm our financial condition and operating results. These risks include the following: - Problems in collecting accounts receivable; - The impact of recessions in economies outside the United States; 13 17 - Longer payment cycles than those in the United States; - Local laws or regulations that may impact our operating results or financial condition, such as maximum working hour requirements, overtime laws or other labor or employment restrictions; - Restrictions on the import and export of certain sensitive technologies, including data security and encryption technologies that we may use or other local laws or regulations impacting ecommerce, such as privacy and data exchange laws; - Seasonal reductions in business activity in certain parts of the world, such as during the summer months in Europe; - Changes in regulatory requirements which could raise the cost of doing business or even prevent doing business, or restrict Scient's ability to remove funds or its investments from a country; - Changes in currency exchange rates, which could significantly decrease the profitability of operations where payment is in local currency; - Difficulties in staffing and managing foreign operations; - Difficulties in using equity incentives for employees, which we rely on but which are often less understood outside the United States; and - Differences in business customs. OUR EFFORTS TO DEVELOP BRAND AWARENESS OF OUR SERVICES MAY NOT BE SUCCESSFUL An important element of our business strategy is to develop and maintain widespread awareness of the Scient brand name on a global basis. Our brand may be closely associated with the business success or failure of some of our high-profile clients, many of whom are pursuing unproven business models in competitive markets. As a result, the failure or difficulties of one of our high-profile clients may damage our brand. Specifically, as disclosed above, our business reputation has been negatively impacted by certain failures or problems experienced by some of our clients in the recent past, whether or not these failures, problems, or setbacks were caused by our work or were within our control. If we fail to successfully promote and maintain our brand name or incur significant related expenses, our operating margins and our growth may decline. OUR FAILURE TO MEET CLIENT EXPECTATIONS OR DELIVER ERROR-FREE SERVICES COULD RESULT IN LOSSES AND NEGATIVE PUBLICITY Our client engagements involve the creation, implementation and maintenance of eBusiness and other applications that are often critical to our clients' businesses. Any defects or errors in these applications or failure to meet clients' expectations could result in: - Delayed or lost revenues due to adverse client reaction; - Requirements to refund some or all of the fees paid by a client or to enter into a settlement with a client to accept a lesser amount of fees than we actually billed; - Requirements to provide additional services to a client at no charge; - Negative publicity regarding us and our services, which could adversely affect our ability to attract or retain clients; and - Claims for substantial damages against us, regardless of our responsibility for such failure. Our insurance coverage may not be adequate to cover, or may exclude such claims. Our contracts generally limit our liability for certain amounts or types of damages that may arise from negligent acts, errors, mistakes or omissions in rendering services to our clients. However, we cannot be sure that these contractual provisions will protect us from liability for damages in the event we are sued. Furthermore, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more large claims, or the insurer may disclaim coverage as to any future 14 18 claim. The successful assertion of any such large claim against us could seriously harm our business, financial condition and operating results. OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO KEEP PACE WITH THE LATEST TECHNOLOGICAL CHANGES Our market and the enabling technologies used by our clients are characterized by rapid technological change. Failure to respond successfully to these technological developments, or to respond in a timely or cost-effective way, will result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from creating eBusinesses that are based upon today's leading technologies and that are capable of adapting to future technologies. As a result, our success will depend, in part, on our ability to offer services that keep pace with continuing changes in technology, evolving industry standards and changing client preferences. In addition, we must hire, train and retain technologically knowledgeable professionals so that they can fulfill the increasingly sophisticated needs of our clients. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS We cannot guarantee that the steps we have taken to protect our proprietary rights will be adequate to deter misappropriation of our intellectual property. In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights. If third parties infringe or misappropriate our trade secrets, copyrights, trademarks or other proprietary information, our business could be seriously harmed. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the United States, so as our business continues to expand into foreign countries, risks associated with protecting our intellectual property will increase. In addition, although we believe that our proprietary rights do not infringe the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights. In particular, our development and use of standardized frameworks, processes, and applications may subject us to potential infringement claims by third parties. Our insurance coverage may not be adequate to cover, or may exclude such claims. Such claims, even if not true, could result in significant legal and other costs and may be a distraction to management. A FEW INDIVIDUALS OWN MUCH OF OUR STOCK Our directors, executive officers and their affiliates beneficially own a significant minority of our outstanding common stock. As a result, these stockholders are able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as acquisitions, and to block an unsolicited tender offer. Accordingly, this concentration of ownership could have the effect of delaying or preventing a third party from acquiring control over us at a premium over the then-current market price of our common stock. WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of Scient that a stockholder may consider favorable. These provisions include: - Authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; - A classified board of directors with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors; - Prohibiting cumulative voting in the election of directors, which would otherwise allow less than majority of stockholders to elect director candidates; - Requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws; 15 19 - Limitations on who may call special meetings of stockholders; - Prohibiting stockholder action by written consent, which requires all actions to be taken at a meeting of the stockholders; and - Establishing advance notice requirements for nominations of candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law, our stock incentive plans, including the acceleration of vesting provisions of such plans and our stockholders' rights plan may discourage, delay or prevent a change in control of Scient. RISKS RELATED TO THE MARKET FOR SCIENT SERVICES OUR SUCCESS WILL DEPEND ON THE SUSTAINABILITY OF A GLOBAL MARKET FOR OUR SERVICES We cannot be certain that a viable market for our services will be sustainable. The broad economic slowdown has caused many of our customers and potential customers to significantly reduce their technology spending and our clients to stop or delay the use of our services. If a viable and sustainable market for our services does not develop and/or if we do not accurately predict trends in the market and respond to those trends by providing new services or products, Scient may fail. Even if we develop new services or products, there can be no guarantee that a market will exist for such services and products or that such services and products will adequately respond to market trends. If we invest resources to develop new services and products for which a market does not develop, our business and operating results would be seriously harmed. Even if the market for our services grows, it may not grow at an adequate pace, and we may not be able to differentiate our services from those of our competitors. If we are unable to differentiate our services from those of our competitors, our revenues and operating margins may decline. OUR SUCCESS DEPENDS ON INCREASED ADOPTION OF THE INTERNET AS A MEANS FOR COMMERCE Our future success depends heavily on the acceptance and use of the Internet as a means for commerce. The widespread acceptance and adoption of the Internet for conducting business is likely only in the event that the Internet provides businesses with greater efficiencies and improvements. If commerce on the Internet does not continue to grow, or grows more slowly than expected, it could have a material adverse effect on business, operating results and financial condition. INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS We are affected not only by regulations applicable to businesses generally, but also laws and regulations directly applicable to electronic commerce. Although there are currently few such laws and regulations, both state, federal and foreign governments may adopt a number of these laws and regulations. Any such legislation or regulation could dampen the growth of the Internet and decrease its acceptance as a communications and commercial medium. If such a decline occurs, companies may decide in the future not to use our services to create an electronic business channel. This decrease in the demand for our services would seriously harm our business and operating results. Any new laws and regulations may govern or restrict any of the following issues: - User privacy; - The pricing and taxation of goods and services offered over the Internet; - The content of websites; - Consumer protection; and - The characteristics and quality of products and services offered over the Internet. 16 20 RISKS RELATED TO THE SECURITIES MARKETS WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE We may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms or at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to: - Maintain existing offices or open new offices, in the United States or internationally; - Create additional global business units; - Enhance our infrastructure and leveragable assets; - Hire, train and retain employees; - Respond to competitive pressures or unanticipated requirements; or - Pursue acquisition opportunities. Our failure to do any of these things could seriously harm our operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." OUR STOCK PRICE IS VOLATILE The market price of our stock has fluctuated significantly. The 52-week high of our stock price during fiscal year 2001 was $75.25, while the 52-week low was $1.56. The market price may vary in response to any of the following factors, some of which are beyond our control: - Changes in financial estimates or investment recommendations relating to our stock by securities analysts; - Changes in market valuations of other eBusiness software and service providers or electronic businesses; - Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - Loss of a major client or the inability or unwillingness of our customers to pay for our services; - Additions or departures of key personnel; and - Fluctuations in the stock market price and volume of traded shares generally, especially fluctuations in the traditionally volatile technology, internet, and ecommerce sectors. WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK PRICE VOLATILITY In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to the historical and projected volatility of our stock price, we may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our financial condition and operating results. SHARES BECOMING AVAILABLE FOR SALE COULD AFFECT OUR STOCK PRICE Sales of a substantial number of shares of common stock, which previously were ineligible for sale due to contractual, securities law or other constraints, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. 17 21 ITEM 2. PROPERTIES As of March 31, 2001, Scient's headquarters and principal administrative, finance, sales and marketing operations were located in approximately 83,000 square feet of leased office space in San Francisco, California. In April, 2001, Scient announced the move of its headquarters to 39,000 square feet of leased office space in New York, New York. This transition is expected to be substantially completed by June 30, 2001. As of March 31, 2001, Scient also leased offices in San Francisco, Chicago, Boston, New Jersey, Austin, Dallas, Sunnyvale, Paris, Tokyo, London, and Singapore. ITEM 3. LEGAL PROCEEDINGS We are not party to any claims or actions that we believe could have a material effect on our result of operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of fiscal 2001. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK. Scient's common stock has been quoted on the Nasdaq National Market System under the symbol SCNT since Scient's initial public offering on May 14, 1999. The following table sets forth for the periods indicated the high and low sale prices per share of our common stock as reported on the Nasdaq National Market (as adjusted for our two-for-one stock split effected on December 6, 1999.)

On May 31, 2001, the last reported sales price of our common stock was $1.08. As of May 31, 2001, there were 540 holders of record of our common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, Scient is unable to estimate the total number of stockholders represented by these record holders. RECENT SALE OF UNREGISTERED SECURITIES. None 18 22 DIVIDEND POLICY We have not paid any cash dividends since our inceptions and do not intend to pay any cash dividends in the foreseeable future. Pursuant to the terms of our credit facility, we are unable to pay dividends without first obtaining the written consent of the lender. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is qualified by reference to financial statements and notes thereto and appearing elsewhere in this 10-K filing. The statement of operations data for the period from November 7, 1997 (inception) through March 31, 1998, the years ended March 31, 1999, 2000, and 2001, and the balance sheet data at March 31, 1998, 1999, 2000 and 2001 are derived from, and are qualified by reference to, the audited financial statements of Scient. The historical results are not necessarily indicative of results to be expected in any future period.

--------------- (1) See Note 1 of Notes to Consolidated Financial Statements for a description of computations of net loss per share and weighted average shares. 19 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of Scient should be read in conjunction with "Selected Financial Data" and Scient's financial statements and notes thereto appearing elsewhere in this 10-K filing. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this 10-K filing. OVERVIEW Our revenues are derived primarily from providing professional services to clients who are expanding or reevaluating their existing businesses to integrate eBusiness technologies or capabilities. Although we have historically experienced growth in our revenues, during the second half of fiscal 2001, we experienced a 22% sequential decline in revenues in the December quarter and a 66% sequential decline in the March quarter. We believe that this decline was primarily due to a broad-based general economic slowdown in which clients significantly tightened their technology budgets, increased competitive pressure from traditional management consultants, information technology service providers and eBusiness service competitors and a lack of urgency by Global 2000 companies to immediately fund large eBusiness projects. We expect that our revenues will be driven primarily by the number and scope of our client engagements, our professional services headcount, and our ability to appropriately staff those engagements and price our services. In the year ended March 31, 2001, our five largest clients accounted for 36% of our revenues. While revenues from any given client will vary from period to period, we anticipate that our top five clients will continue to account for a significant percentage of revenue going forward. To the extent that any significant client uses less of our services or terminates its relationship with us, our revenues could be adversely impacted. In particular, we expect to experience a significant decline in revenue generated from one client who accounted for 31% of our revenues for the quarter ended March 31, 2001. As a result, the loss of this or any other significant client could seriously harm our business and results of operations. For the fiscal year ended March 31, 2001, North American clients accounted for 84% of revenues with the remainder generated by international clients. We increased our percentage of enterprise and enterprise backed clients to 94% of revenues for the fiscal year. The remainder was generated by venture capital-backed startups. We generally provide our services on a time and materials basis. For the year ended March 31, 2001, approximately 97% of revenues were derived from time and materials contracts, including capped fee engagements that were billed and recognized on a time and materials basis. Revenues pursuant to time and materials contracts are generally recognized as services are provided. Revenues pursuant to fixed-fee contracts are generally recognized using the percentage-of-completion method of accounting (based on the ratio of costs incurred to total estimated costs). Revenues exclude reimbursable expenses charged to clients. Professional services expenses consist primarily of compensation and benefits for our colleagues involved with the delivery of professional services. Professional services margins reflect revenues for services less professional services expenses. We expect that our per capita professional services expenses will increase over time due to wage increases and inflation. Our professional services margins vary quarter to quarter and are affected by the number of work days in a period and level of billability, defined as the percentage of professional services employees' time that is billed to clients. Billability for the twelve months ending March 31, 2001 was 53%, compared to 71% for the twelve months ended March 31, 2000. This decline was primarily due to overcapacity of professional service personnel in light of decreasing market demand for our services. Any significant decline in fees billed to clients, the loss of one or more significant clients, or the failure to match our professional services capacity and expenses with the level of client demand for our services, would have a material adverse effect on our professional services margins. In addition, as a matter of business development and client relationship management, we have provided and expect to continue to provide, limited services to certain clients without compensation for our professional services fees. Any increase in this activity in a particular quarter would have a material adverse effect on professional service margins. Throughout fiscal 2001, client engagements averaged six to nine months' duration. However, in the 20 24 last half of the fiscal year, several significant projects ended earlier than anticipated or with little advance notice. At the end of any engagement, we must re-deploy professional services personnel. Any resulting unbillable time will adversely affect professional services margins. Selling, general and administrative expenses consist of salaries, commissions, and related expenses for personnel engaged in sales and marketing; salaries and related expenses for recruiting, human resources, knowledge management, information technology, finance, legal and administrative personnel; office facilities and information technology expenditures; professional fees; trade shows; promotional expenses; and other general corporate expenses. FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000 Revenues In fiscal year 2001, Scient reported revenues of $300.2 million, a 93% increase compared to $155.7 million in fiscal year ended March 31, 2000. This increase resulted primarily from growth during the first half of fiscal year 2001 in our client base, broader engagement scopes, and billing rate increases. For the fiscal year ended March 31, 2001, our five largest clients accounted for approximately 36% of our revenues, compared to 27% of revenues for the fiscal year ended March 31, 2000. During the year ended March 31, 2001, one client accounted for 11% of revenues. For the year ended March 31, 2000, no client accounted for more than 10% of revenues. Cost of Professional Services Professional services costs consist primarily of compensation and benefits for our colleagues involved with the delivery of professional services. For the fiscal year ended March 31, 2001, professional services expenses totaled $149.3 million, a 113% increase compared to $70.2 million in fiscal 2000. This increase was primarily a result of our hiring of professional services colleagues in response to greater demand for services earlier in the fiscal year. Billable colleagues grew from 828 at March 31, 2000 to 1,324 at September 30, 2000. Scient ended fiscal year 2001 with 964 billable colleagues, reflecting the restructuring actions taken in December 2000. For the fiscal year ended March 31, 2001, professional services costs as a percentage of revenue increased to 50% compared to 45% for fiscal year 2000. Professional services costs increased at a faster rate than revenue in fiscal 2001, resulting in a reduction in gross margin to 50% compared to 55% for the twelve months ended March 31, 2000. Operating Expenses Selling, General and Administrative. Selling, general and administrative expenses more than doubled in the year ended March 31, 2001 to $182.6 million compared to $90.9 million in the fiscal year ended March 31, 2000. These increases were primarily due to expenses related to the addition of sales, marketing, recruiting, knowledge management, information technology, finance, legal and administration personnel, bad debt expense, and costs of leasing additional office space to support the growth that we experienced in the first half of the fiscal year. Expenses related to bad debt increased significantly for the year ended March 31, 2001. This increase was primarily due to the increased financial problems and lack of funding experienced by our venture- backed clients. Selling, general, and administrative expenses as a percentage of revenue increased to 61% from 58% for the year ended March 31, 2001. Restructuring and Other Related Charges. On December 6, 2000, Scient announced a restructuring initiative designed to reduce capacity and align its business to the rapidly changing market environment. Under this plan, Scient eliminated approximately 460 positions and closed offices in Austin, Texas, Sunnyvale, California and Germany. Subsequently, on April 11, 2001, Scient announced an additional restructuring initiative that included a planned reduction in force of up to approximately 850 people. The April restructuring included plans to significantly downsize and modify the company's geographic footprint and move its corporate headquarters to New York from San Francisco. In addition, Scient closed its Los Angeles and New Jersey offices, divested 80% of its interests in each of its French and Japanese subsidiaries and plans to reduce its San Francisco, Boston, and Chicago locations to smaller sales offices. Scient is in the process of reviewing several 21 25 other offices to determine appropriate actions, including possible closing or downsizing as market conditions warrant. For the year ended March 31, 2001, Scient recorded restructuring and other related charges of $105 million. Of the total restructuring charge of $105 million, $14 million was related to headcount reductions, $81 million was for consolidation and abandonment of facilities and related fixed assets, and $10 million was associated with other restructuring related charges. These restructuring and other related charges were taken to align Scient's cost structure with changing market conditions and decreased demand for Scient's services as well as to create a more flexible and efficient organization. Total cash outlay for the restructuring and other related activities will be approximately $71 million. The remaining $34 million of restructuring and other related costs consists of non-cash charges primarily for asset write-offs. As of the end of the year of fiscal 2001, $25 million of cash was used for restructuring and other related costs. Approximately $11 million cash outlay is expected in the first quarter of fiscal 2002, and the remaining cash outlay of approximately $35 million, primarily related to real estate rental obligations, is expected to occur over the next 10 years. Amortization of Intangibles. Amortization of intangible assets consists of amortization of goodwill resulting from the acquisition of AXIDIA, a French eBusiness services firm, in August 2000. Amortization of these costs for the year ended March 31, 2001 was $4.7 million. There was no amortization cost related to intangible assets for year ended March 31, 2000. Intangible assets related to the AXIDIA acquisition are amortized on a straight line basis over two years. Amortization of intangible assets as a percentage of revenue was 2% for the year ended March 31, 2001, with no amortization in the comparable period of the prior year. Stock Compensation. We have recorded stock compensation for the difference between the exercise price of certain stock option grants and the deemed fair value of our common stock at the time of such grants. We are amortizing this amount over the vesting periods of the applicable options, resulting in amortization expense of $9.4 million and $15.6 million for the year ended March 31, 2001 and 2000, respectively. The actual amounts that we recognize will be reduced to the extent that the affected options are cancelled before they become fully vested. See Note 9 of Notes to Financial Statements. Interest and Other Income, Net Interest and other income, net, increased 116% in the year ended March 31, 2001 compared to the year ended March 31, 2000. This increase was due primarily to larger investment funds and higher interest bearing funds resulting from our investing activities during the quarter ended December 31, 2000. In addition, the average balance of our investment is higher due to proceeds from our public offerings in the prior fiscal year. Provision for Income Taxes From March 31, 2000 through March 31, 2001, we incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of March 31, 2000 and 2001, Scient had approximately $18 million and $44 million of federal net operating loss carryforwards available and $23 million and $50 million of state net operating loss carryforwards available to offset future taxable income which expire in varying amounts beginning in 2020 and 2008, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that Scient may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Scient has incurred losses from inception through March 31, 1998 and for the year ended March 31, 1999, 2000 and 2001. Management believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that Scient will not be able to realize its deferred tax assets and thus a full valuation reserve has been recorded at March 31, 2000 and 2001. The effective income tax rate differs from the statutory federal income tax rate primarily due to the inability to recognize the benefit of net operating losses. 22 26 FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000 Revenues The increase in revenues in the year ended March 31, 2000 compared to March 31, 1999 reflected the increase in the number of clients and wider scope of engagements during the year ended March 31, 2000 as a result of our increased capacity due to increased investment in our sales and professional services organizations. Operating Expenses Professional Services. Our professional services expenses increased in absolute dollars in the year ended March 31, 2000 compared to March 31, 1999 primarily as a result of increases in the number of professional services personnel. Selling, General and Administrative. Selling, general and administrative expenses increased in absolute dollars in the year ended March 31, 2000 compared to March 31, 1999. The increase was primarily due to expenses related to the addition of sales, marketing, recruiting, knowledge management, technology, finance and administration personnel, and the cost of leasing additional office space to support our global growth. Stock Compensation. For the year ended March 31, 1999 and March 31, 2000, we recorded aggregate unearned stock compensation of $35.0 million and $40.2 million, respectively, in connection with stock option grants. Stock compensation expense is being recognized over the vesting period of the related options (generally four years). For the year ended March 31, 1999 and March 31, 2000, we recognized stock compensation of $7.7 million and $15.6 million, respectively. This increase was primarily a result of increases in the number of options granted due to increased hiring of employees and the comparison of a full year period to a partial year period. The actual amounts that we recognize will be reduced to the extent that the affected options are cancelled before they become fully vested. See Note 9 of Notes to Financial Statements. Interest Income and Other, Net Interest income increased in the year ended March 31, 2000 compared to the year ended March 31, 1999. This increase was due primarily to higher interest bearing funds resulting from our public financing activities during fiscal year ended March 31, 2000. Provision for Income Taxes From March 31, 1999 through March 31, 2000, we incurred net losses for federal and state tax purposes and have not recognized any tax provision or benefit. As of March 31, 2000, we had approximately $40.5 million of federal and state net operating loss carryforwards to offset future taxable income which expire in varying amounts beginning in 2019 and 2007, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that Scient may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Scient has incurred losses from inception through March 31, 1998 and for the year ended March 31, 1999, 2000 and 2001. Management believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that Scient will not be able to realize its deferred tax assets and thus a full valuation reserve has been recorded at March 31, 1999 and 2000. The effective income tax rate differs from the statutory federal income tax rate primarily due to the inability to recognize the benefit of net operating losses. 23 27 QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited consolidated quarterly financial data from the periods indicated. We derived this from consolidated financial statements, and, in the opinion of our management, they include all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the financial results for the periods. Results of operations for any previous fiscal quarter do not necessarily indicate what results may be for any future period.

LIQUIDITY AND CAPITAL RESOURCES We have primarily funded our operations from cash flow generated from operations and the proceeds from our public stock offerings. We raised $62.7 million in May 1999 from an initial public offering of 6.9 million shares of our common stock, net of underwriting discounts, commissions and issuance costs. We then raised an additional $154.3 million in January 2000 from a follow-on public offering of 1.85 million shares of our common stock, net of underwriting discounts, commissions and issuance costs. Cash used in operating activities for the year ended March 31, 2001, 2000 and 1999 was $66.3, million $6.6 million, and $4.6 million, respectively. As of March 31, 2001 we had $161.1 million in cash and cash equivalents, restricted cash and short-term investments compared to $229.1 million at March 31, 2000. 24 28 Cash provided by/(used in) investing activities for the year ended March 31, 2001, 2000, and 1999 was $64.5 million, ($118.4) million, and ($19.2) million, respectively. The results for fiscal year 2001 include the net write down of property and equipment for $3.3 million and the sale or maturing of short-term investments, which generated $69.0 million in cash. This was offset by the cash portion of the AXIDIA acquisition of $7.7 million. We invest predominantly in instruments that are highly liquid, investment grade securities and have maturity of less than one year. Capital expenditures for the year ended March 31, 2000 and 1999 was approximate $11.1 million and $2.4 million, respectively. These expenditures were primarily for computer equipment, software, and furniture and fixtures. Cash provided by/(used in) financing activities for the year ended March 31, 2001, 2000, and 1999 was ($13.7) million, $221.8 million, and $31.7 million, respectively. Fiscal year 2001 cash used in financing activities primarily consisted of restricted cash outflow of $18.6 million used as a collateral for our existing line of credit offset by cash received for the exercise of options to acquire common stock of $13.5 million. Cash provided by financing activities for the year ended March 31, 2000 and was primarily derived from proceeds for the sale of common stock through Scient's public offerings of $217.0 million. We have a revolving line of credit of $50.0 million. Borrowings under this line of credit bear interest at either the LIBOR rate plus a range of 2.25% to 2.75% or the bank's prime rate plus up to 0.5% depending on the outstanding balance and the type of draws. As of March 31, 2001, there were no outstanding borrowings under this line of credit. Fourteen standby letters of credit totaling $41.9 million have been issued against this line of credit. We calculate average days' sales outstanding ("DSO") based on average account receivables for the period divided by average daily sales for that equivalent period. Our DSO declined to 53 days in fiscal year 2001 from 67 days in fiscal year 2000. The decrease was due to lower average daily sales in fiscal year 2000. However, DSO increased significantly on a quarter to quarter basis throughout fiscal year 2001 due to increased payment cycle of larger enterprise clients. We anticipate that this trend towards an increase in DSO will continue in the near future as our average daily sales remain flat or decline further. We believe that current cash balance and cash generated from operations will be sufficient to fund our current anticipated cash needs through at least the next 12 months. To the extent we are unable to fund our operations from cash flows, we may need to obtain financing in the form of either additional equity or indebtedness. There can be no assurance that additional financing will be available on terms acceptable to us, if at all. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Hedging Activities, an amendment of FASB Statement No. 133", effective for all interim and annual periods beginning after June 15, 2000. As indicated, SFAS No 138 amends accounting and reporting standards for certain derivative instruments and certain hedging activities. Scient does not expect the adoption of these standards to have a material effect on its results of consolidated operations, financial position, or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Scient does not believe that there is any material risk exposure with respect to derivative or other financial instruments, which would require disclosure under this item. 25 29 ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA The consolidated financial statement of Scient, including Scient's consolidated balance sheets as of March 31, 2000 and 2001, and consolidated statement of operations, consolidated statements of stockholder's equity, and consolidated statements of cash flows for the years ended March 31, 1999, 2000, and 2001 and notes to the consolidated financial statements, together with a report thereon of PriceWaterhouseCoopers, LLP, dated April 23, 2001 appear on pages F-1 through F-20. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The executive officers of Scient, and their ages as of April 1, 2001, are as follows:

Board of Directors The information concerning our directors required by this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading "Election of Directors," and is incorporated herein by reference. Executive Officers Robert M. Howe has served as our Chairman and Chief Executive Officer since April 2000. Mr. Howe joined Scient in February 1998 as President and Chief Executive Officer. He is also a member of our board of directors. Prior to joining Scient, Mr. Howe was General Manager of the IBM Worldwide Banking, Finance and Securities Industry Group from January 1996 to March 1998. From November 1994 to January 1996, Mr. Howe managed IBM's North American Banking, Finance and Securities Industry Group. From March 1991 to November 1994, Mr. Howe founded and ran the IBM Consulting Group. From January 1976 to February 1991, Mr. Howe was a consultant at Booz Allen & Hamilton, a management consulting firm. Mr. Howe is a member of the boards of directors of the Development Bank of Singapore, S.C. Johnson Commercial Markets, and InnoVentry. Mr. Howe received a Bachelor in Business Administration from Southern Methodist University and a Master in Business Administration from the Harvard University Graduate School of Business. Stephen A. Mucchetti has served as our President and Chief Operating Officer since April 2000. Mr. Mucchetti joined Scient as Chief Operating Officer in October 1998. He is also a member of our board of directors. Prior to joining us, Mr. Mucchetti was the General Manager of IBM's Telecommunications and Media Group from October 1992 to October 1998. Prior to joining IBM, Mr. Mucchetti was a Partner in the consulting division of Coopers & Lybrand from January 1984 to November 1989 and was Managing Partner for Coopers & Lybrand's northeast United States region from November 1989 to October 1992. Prior to joining Coopers & Lybrand, he was a consultant at Booz Allen & Hamilton from December 1975 to January 1984. Mr. Mucchetti received a Bachelor of Science in Electrical Engineering from Villanova University. William H. Kurtz has served as our Chief Financial Officer since August 1998. Before joining Scient, Mr. Kurtz served in various capacities at AT&T from July 1983 to August 1998, including Vice President of Cost Management and Chief Financial Officer of AT&T's Business Markets Division. Prior to joining AT&T, he worked at Price Waterhouse from June 1979 to July 1983. Mr. Kurtz is a certified public accountant, sits 26 30 on the board of directors for Redback Networks, Inc. and received a Bachelor of Science in Accounting from Rider University and a Master of Science in Management from the Stanford University Graduate School of Business. Mr. Kurtz will resign as our Chief Financial Officer effective June 30, 2001. ITEM 11. EXECUTIVE COMPENSATION The response to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading "Compensation of Executive Officers and Directors" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item will be contained in the Proxy Statement for the 2001 Annual Meeting of Shareholders under the heading "Certain Relationships and Related Transactions" and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Exhibits

27 31

28 32

(b) Reports on Form 8-K None Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. 29 33 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on this 27th day of June, 2001. SCIENT CORPORATION By: /s/ ROBERT M. HOWE ------------------------------------ Robert M. Howe Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

30 34 SCIENT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Scient Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Scient Corporation and its subsidiaries at March 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Jose, California April 23, 2001 F-2 36 SCIENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS

See notes to consolidated financial statements. F-3 37 SCIENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See notes to consolidated financial statements. F-4 38 SCIENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)

See notes to consolidated financial statements. F-5 39 SCIENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS)

See notes to consolidated financial statements. F-6 40 SCIENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See notes to consolidated financial statements. F-7 41 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Scient Corporation ("Scient") was incorporated in California on November 7, 1997. Scient is a leading provider of the category of professional services called systems innovation. Scient provides integrated eBusiness strategy and technology implementation services on a global basis to clients who are creating eBusinesses or are rethinking or expanding their existing businesses to integrate eBusiness capabilities. These services include strategy consulting, customer experience design, systems architecture, application and technology infrastructure development and eBusiness management. During the second half of fiscal 2001 and the first quarter of fiscal 2002, Scient announced reductions in its workforce, a reduction or closure of certain of its offices, and its intention to relocate its corporate headquarters from San Francisco, CA to New York, NY. As a result, Scient has recorded a charge in the second half of fiscal 2001 of approximately $105 million related to restructuring and other related charges. Scient also expects to take an additional restructuring charge in the first quarter of 2001, see Notes 4 "Restructuring and Other Related Charges" and Note 12 "Subsequent Event." Basis of Presentation The accompanying consolidated financial statements include the accounts of Scient Corporation and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments where Scient does not have the ability to exercise significant influence are accounted for using the cost method. Certain reclassifications have been made to the prior period's financial statements to conform to the current period presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Scient derives its revenues from service agreements. Revenues pursuant to time and materials contracts are generally recognized as services are performed. Revenues pursuant to fixed-fee contracts are generally recognized as services are rendered on the percentage-of-completion method of accounting (based on the ratio of costs incurred to total estimated costs). Revenues exclude reimbursable expenses charged to and collected from clients. Provisions for estimated losses on uncompleted contracts are made on a contract by contract basis and are recognized in the period in which such losses become probable and can be reasonably estimated. Unbilled fees and services on contracts are comprised of costs plus fees on certain contracts in excess of contractual billings on such contracts. Advanced billings and billings in excess of costs plus fees are classified as deferred revenue. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 was effective the first fiscal quarter of fiscal years beginning after December 15, 1999 and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion 20, "Accounting Changes". In June 2000, the SEC F-8 42 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) issued SAB 101B, "Amendment: Revenue Recognition in Financial Statements," which delayed implementation of SAB 101 until Scient's fourth fiscal quarter of 2000. Scient has adopted SAB 101 with no known reportable changes in its consolidated financial position or results of operations. Professional Services Professional services expenses consist primarily of compensation and benefits of Scient's employees engaged in the delivery of professional services. Cash and Cash Equivalents Scient considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash includes a cash collateral account maintained under the terms of a line of credit. In accordance with this agreement, we have created and will maintain a cash collateral account that limits the liquidity of $18.6 million of our cash. (See Note 6) Investments In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," Scient has categorized its marketable securities as "available-for-sale." At March 31, 2000 and 2001, amortized cost approximated fair value and unrealized gains and losses were insignificant. The portfolio of short-term investments (including cash and cash equivalents and restricted cash) consisted of the following (in thousands):

Scient considers all investments with maturities of less than one year as of March 31, 2001 to be short-term investments. Long term investments consist primarily of marketable securities with original maturities of greater than twelve months. In July 1999, Scient established a wholly owned subsidiary, Scient Capital LLC, which serves as an investment vehicle to make equity investments in clients who meet certain criteria. Investments in entities in which Scient has an equity interest of less then 20% and does not have the ability to exercise significant influence are accounted for under the cost method. At each balance sheet date, Scient assesses the fair market value of its cost-based investments and recognizes any identified impairment. As of March 31, 2001, all investments had been written down to zero. (See Note 4.) F-9 43 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concentration of Credit Risk Scient's financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses. At March 31, 2000 and 2001, the fair value of these instruments approximated their financial statement carrying amounts. Credit is extended to customers based on an evaluation of their financial condition, and collateral generally is not required. Scient performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts. Scient is subject to concentrations of credit risk and interest rate risk related to its short-term investments. Scient's credit risk is managed by limiting the amount of investments placed with any one issuer, investing in money market funds, and short-term commercial paper, and A1 rated corporate bonds. The following table summarizes the revenue from clients in excess of 10% of total revenue.

--------------- * Represented less than 10% of total. At March 31, 2001, the client that accounted for more than 10% of Scient's revenue also represented 17% of accounts receivable. At March 31, 2000, no clients accounted for more than 10% of Scient's revenue or accounts receivable. Fair Value of Financial Instruments Scient's financial instruments, including cash equivalents, restricted cash, investments, accounts receivable, accounts payable, debt and capital lease obligations are carried at cost, which approximates fair value, due to the short-term maturity of these instruments. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method ranging from eighteen months to five years for computer equipment and software and furniture and fixtures, which is deemed to be the estimated useful lives of the assets. Leasehold improvements and assets held under capital leases are amortized over the term of the lease or estimated useful lives, whichever is shorter. Stock Compensation Scient accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB 25, unearned compensation is based on the difference, if any, on the date of the grant, between the fair value of Scient's stock and the exercise price. Unearned compensation is amortized and expensed in accordance with Financial Accounting Standards Board Interpretation No. 28. Scient accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." F-10 44 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB 25. This Interpretation clarifies (a) the definition of employee for purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that this Interpretation covers events occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying this Interpretation are recognized on a prospective basis from July 1, 2000. Income Taxes Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in Scient's financial statements or tax returns. The measurements of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. Net Loss Per Share Basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of common stock subject to repurchase rights and incremental shares of common stock issuable upon the exercise of stock options and warrants and upon conversion of Series A, B and C convertible preferred stock. The following table sets forth the computation of basic and dilutive net loss per share for the periods indicated (in thousands, except per share amounts):

F-11 45 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth common stock equivalents that are not included in the diluted net income per share calculation above because to do so would be antidilutive for the periods indicated (in thousands):

Impairment of Long-Lived Assets Scient evaluates the recoverability of our long-lived assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future discounted cash flows attributable to such assets. Scient assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Comprehensive Income Effective April 1, 1998, Scient adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. The adoption of SFAS No. 130 had no impact on Scient's net income or stockholders' equity. Segment Information Scient adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Scient identifies its operating segments based on business activities, management responsibility and geographical location. Scient engages in business activities in one operating segment, which provides integrated eBusiness strategy and technology implementation services to clients who are creating eBusinesses or are rethinking or expanding their existing businesses to integrate eBusiness capabilities. Scient engages in business activities in one operating segment, which provides business and technology consulting and solutions, primarily on a time and material basis. F-12 46 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Data for the geographic regions in which Scient operates is presented below:

Other international consists of the revenues and assets of operations in Europe and Asia Pacific excluding Singapore. Advertising Expenses Scient expenses the cost of advertising and promoting its services as incurred. Such costs are included in selling, general and administrative in the consolidated statements of operations and totaled $470,000, $4.4 million, and $4.9 million for the years ended March 31, 1999, 2000 and 2001, respectively. Foreign Currency The functional currencies of the Scient's international subsidiaries are the local currencies. The financial statements of these subsidiaries are translated to United States dollars using period-end rates of exchange for assets and liabilities and average rates during the period for revenues, cost of revenues, and expenses. Translation gains and losses are accumulated as a component of stockholders' equity. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during the periods presented. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Hedging Activities, an amendment of FASB Statement No. 133", effective for all interim and annual periods beginning after June 15, 2000. As indicated, SFAS No 138 amends accounting and reporting standards for certain derivative instruments and certain hedging activities. Scient does not expect the adoption of these standards to have a material effect on its results of consolidated operations, financial position, or cash flows. 2. BUSINESS COMBINATION In August 2000, Scient acquired AXIDIA, an eBusiness services firm located in France. Under the terms of the acquisition agreement Scient paid cash of approximately $7.7 million, and issued approximately 121,000 F-13 47 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) shares of its common stock in exchange for all of the outstanding common stock of AXIDIA. The acquisition was accounted for as a purchase business combination and accordingly, the results of AXIDIA's operations have been included in Scient's financial statements from August 2000. The total consideration for the transaction was valued approximately $14.5 million, which includes the value of cash paid, common stock issued and other direct acquisition costs. The purchase price has been allocated to the fair value of assets acquired and liabilities assumed and workforce-in-place. The workforce-in-place has been recorded as an intangible asset and is amortized on a straight-line basis over 2 years. The historical results of operations of AXIDIA for the periods ended March 31, 1999 and 2000 were not material to the consolidated results of operations of Scient for the respective periods. 3. BALANCE SHEET COMPONENTS Allowance for doubtful accounts are estimated and established based on specific circumstances of each customer. Additions to the allowance are charged to selling, general and administrative expenses. Accounts receivables are written off against the allowance for doubtful accounts when an account is deemed uncollectible. Recoveries on account receivable previously charged off as uncollectible are credited to the allowance for doubtful accounts. Changes in the account receivable allowance were as follows (in thousands):

--------------- (1) Additions resulting from increase in allowance for revenue reserves were offset against revenues. F-14 48 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Depreciation expense for the years ended March 31, 1999, 2000 and 2001 was $552,000, $3.1 million, and $11.0 million respectively. Accumulated depreciation of assets under capital leases totaled $70,000, $1.4 million and $926,000 at March 31, 1999, 2000 and 2001, respectively. The equipment under capital leases collaterizes the related lease obligations. 4. RESTRUCTURING AND OTHER RELATED CHARGES For the year ended March 31, 2001, Scient recorded restructuring and other related charges of $105 million, consisting of $14 million for headcount reductions, $81 million for consolidation of facilities and related fixed assets, and $10 million of other restructuring related charges. These restructuring and other related charges were taken to align Scient's cost structure with changing market conditions and decreased demand for Scient's services to create a more flexible and efficient organization. The plan resulted in headcount reduction of approximately 460 employees, which was made up of approximately 67% professional services staff, and 33% core services staff. Many of the positions that were eliminated related to the office closures in Austin, Texas and Sunnyvale, California facilities. In January 2001, Scient also closed its office in Munich, Germany, which was contemplated in December with the other restructuring plans. Total cash outlay for the restructuring and other related activities will be approximately $71 million. The remaining $34 million of restructuring and other related costs consists of non-cash charges primarily for asset write-offs. As of the end of the year of fiscal 2001, $25 million of cash was used for restructuring and other related costs. Approximately $11 million cash outlay is expected in the first quarter of 2002, and the remaining cash outlay of approximately $35 million, primarily related to real estate rental obligations, is expected to occur over the next 10 years. F-15 49 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Restructuring and other related activities as of March 31, 2001 were as follow (in millions):

As a result of the deterioration in eBusiness markets, Scient also evaluated the investments held by Scient Capital LLC and determined that these investments had become impaired. Accordingly, an impairment charge of $6.0 million has been recorded to write these investments down to zero, their estimated fair value at March 31, 2001. This charge has been reported on the statement of operations as a component of restructuring and other related charges. Scient does not anticipate making any further investments through Scient Capital. 5. INCOME TAXES At March 31, 2000 and 2001, Scient had approximately $18.0 million and $43.9 million of federal net operating loss carryforwards available and $22.5 million and $49.6 million of state net operating loss carryforwards available to offset future taxable income which expire in varying amounts beginning in 2020 and 2008, respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that Scient may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. Scient has incurred losses for the year ended March 31, 1999, 2000 and 2001. Management believes that, based on the history of such losses and other factors, the weight of available evidence indicates that it is more likely than not that Scient will not be able to realize its deferred tax assets and thus a full valuation reserve has been recorded at March 31, 1999, 2000 and 2001. The effective income tax rate differs from the statutory federal income tax rate primarily due to the inability to recognize the benefit of net operating losses. Deferred tax assets consist of the following (in thousands):

6. BORROWING In May 1998, Scient entered into an equipment lease line and a line of credit under a Loan and Security Agreement. In February 2000, Scient amended the Loan and Security Agreement to increase the equipment lease line to $4.0 million and the line of credit to $9.2 million. The equipment lease line's draw down expires during F-16 50 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the period of May 1999 through September 2000. The amounts available at March 31, 2001 were $1.8 million and $650,000, respectively. Interest will accrue from the date of each draw down at a rate of one percent plus prime per annum and is payable monthly through the expiration date, which is no later than September 2000. The line of credit expires in May 2000 and charges interest at a rate of one-half percent plus prime per annum. Substantially all of the assets of Scient are pledged as collateral for Scient's credit facilities. At March 31, 2000, Scient had $2.2 million balance outstanding under the equipment lease line. Interest rates at March 31, 2000 was 8.75%. Scient paid its outstanding balances on the equipment line of credit in April 2000. In April 2000, Scient entered into a $40.0 million line of credit agreement with a bank. In September 2000, the line of credit was increased to $50.0 million. Borrowings under this line of credit bear interest at either the LIBOR rate plus a range of 2.25% to 2.75% or the bank's prime rate plus up to 0.5% depending on the outstanding balance and the type of draws. Fourteen standby letters of credit totaling $41.9 million have been issued against this line of credit. Under this line of credit, Scient is required to maintain certain financial covenants. At March 31, 2001, Scient was in compliance with all such covenants. In addition, Scient is also required to maintain a certain cash balance in a restricted account to be used as collateral against the letters of credit issued under this line of credit. Substantially all of the assets of Scient are pledged as collateral for Scient's credit facilities. No borrowing is made against this line of credit at March 31, 2001. 7. COMMITMENTS AND CONTINGENCIES Leases Scient leases office space and equipment under noncancelable operating and capital leases with various expiration dates through 2022. Rent expense for the years ended March 31, 1999, 2000 and 2001 was $1.2 million, $5.7 million and $18.6 million, respectively. Sublease income for the years ended March 31, 2000 and 2001 was $463,000 and $1.0 million, respectively. The terms of the facility leases provide for rental payments on a graduated scale. Scient recognizes rent expense on a straight-line basis over the lease period, and has recognized prepaid expense for rent expenditures not incurred but paid. Future minimum lease payments under noncancelable operating and capital leases at March 31, 2001 are as follows (in thousands):

F-17 51 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In April 2001, Scient entered into agreements for leased office to relieve the above commitment by $14.1 million through the year 2010. Letters of Credit Scient has issued letters of credit with various financial institutions in the aggregate amount of $41.9 million as security deposits for certain of its lease commitments. Contingencies From time to time, Scient may have certain contingent liabilities that arise in the ordinary course of its business activities. Scient accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims of which the outcome is expected to result in a material adverse effect in the financial position or results of operations of Scient. 8. TRANSACTIONS WITH ENTITIES RELATED TO DIRECTORS A director and a shareholder of Scient, is also a director and shareholder of two clients from which Scient recognized $3.7 million, $4.9 million, and $14.1 million in revenue for the year ended March 31, 1999, 2000 and 2001, respectively. The terms and conditions of such transactions were normal and customary. Balance due from this clients as of March 31, 2000 and 2001 were $1.0 million and $6.2 million, respectively. 9. COMMON STOCK In March 1999, Scient's Board of Directors authorized, and in April 1999 the stockholders approved, the reincorporation of Scient in the State of Delaware. Following the reincorporation, Scient is authorized to issue 40.0 million shares of $.0001 par value Common Stock and 11.5 million shares of $.0001 par value Preferred Stock. In May 1999, upon the effectiveness of the initial public offering, 125.0 million shares of common stock and 10.0 million shares of undesignated convertible preferred stock were authorized. The Board of Directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. In May 1999, Scient completed an initial public offering of 6.9 million shares of Scient's common stock. Proceeds to Scient, from this initial public offering totaled approximately $62.7 million net of offering cots of $1.5 million. Upon the closing of the initial public offering, Scient's convertible preferred stock converted into 29.5 million shares of common stock. In January 2000, Scient completed a follow-on offering of 1.9 million shares of Scient's common stock. Proceeds to Scient from this additional offering totaled approximately $154.3 million net of offering costs of $779,000. In April 2000, the shareholders approved an increase in its authorized common shares from 125.0 million to 500.0 million. A portion of the shares sold are subject to the right of repurchase by Scient subject to vesting, which is generally over a four year period from the employee hire date until vesting is complete. At March 31, 2000 and 2001, there were 11.6 million and 7.7 million shares subject to repurchase, respectively. Founder's Stock Agreement Certain common stock was issued to the founder of Scient and is subject to repurchase in the event of voluntary termination or involuntary termination with cause. Seventy-five percent of the shares vested over a one-year period. The remaining 25% generally vest over an additional three-year period. In the event of termination without cause, a substantial sale of Scient's assets, or a merger, all remaining shares would F-18 52 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) immediately vest. At March 31, 2000 and 2001, approximately 2.5 million and 1.3 million shares, respectively, of outstanding common stock were subject to repurchase by Scient at the original purchase price of $0.000025. Warrants for Common Stock In May 1999, Scient entered into a 24-month consulting agreement with a company for recruiting services. Scient paid $500,000, issued 300,000 shares of common stock and granted an option to purchase an additional 100,000 shares at $6.00 per share. Scient, using the Black-Scholes pricing model, calculated the fair value of the option on the date of grant, and recognized the total value of the agreement over the service period. Stock Split In December 1999, Scient effected a two-for-one stock-split of its common stock. All data shown in the accompanying consolidated financial statements and notes have been retroactively adjusted to reflect the stock splits. 10. EMPLOYEE BENEFIT PLAN 401(k) Savings Plan Scient has a savings plan (the "Savings Plan") that qualifies as a defined contribution arrangement under Sections 401(a), 401(k) and 501(a) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a percentage (not to exceed 25%) of their eligible pretax earnings up to the Internal Revenue Service's annual contribution limit. Under the Savings Plan, Scient may, but is not obligated to, match a portion of the employee contributions. Scient has not contributed to the Savings Plan to date. 11. STOCK OPTION PLANS 2000 Stock Plan In June 2000, the Board of Directors adopted the 2000 Stock Plan (the "2000 Plan") and reserved 3.0 million shares for issuance thereunder. In January 2001, and every year thereafter, shares reserved for issuance will automatically increase by a number equal to the lesser of 5% of the total number of shares of common stock outstanding or 5.0 million shares. The 2000 Plan authorized the award of options and restricted stock awards. Options granted under the 2000 Plan are nonqualified stock options ("NSO"). Awards may be granted to employees and consultants of Scient and its affiliates. However, members of the Board and individuals who are considered officers of Scient under the rules of the National Association of Securities Dealers are not eligible for the grant. Options under the 2000 Plan generally are granted for periods of up to ten years and vest 25% of the options after one month from the date of grant, with the remaining options vesting in equally monthly installments over the following 36 months. 1999 Equity Incentive Plan In March 1999, the Board of Directors adopted and the stockholders approved, the 1999 Equity Incentive Plan (the "1999 Plan") and reserved 6.4 million shares, as amended in February 2000, plus the aggregate number of shares of common stock available for issuance under the 1997 Stock Option Plan. In January 2000, and every year thereafter, shares reserved for issuance will automatically increase by a number equal to the lesser of 10%, as amended in February 2000, of the total number of shares of common stock outstanding or 10.0 million shares. The 1999 Plan authorized the award of options, restricted stock awards and stock bonuses. No person will be eligible to receive more than 2.0 million shares in any fiscal year pursuant to the 1999 Plan other than a new employee of Scient or one of its affiliates, who will be eligible to receive no more than F-19 53 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4.0 million shares in the fiscal year in which such employee commences employment. Options granted under the 1999 Plan may be either incentive stock options ("ISO") or NSOs. ISOs may be granted only to employees of Scient and its affiliates (including officers and directors of Scient who are also employees). NSOs and other awards may be granted to outside directors of Scient and to employees and consultants of Scient and its affiliates. Options under the 1999 Plan generally are granted for periods of up to ten years and vest 25% of the options after one year from the date of grant, with the remaining options vesting in equally monthly installments over the following 36 months. 1997 Stock Option Plan In December 1997, Scient adopted the Scient Corporation 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan provides for the granting of stock options and stock awards to outside directors of Scient and to employees and consultants of Scient and its affiliates. Options granted under the 1997 Plan may be either ISOs or NSOs. Scient reserved 13.4 million shares of common stock for issuance under the 1997 Plan. The 1997 Plan provided that the options should be exercisable over a period not to exceed ten years from the date of the grant. Options are generally exercisable immediately and are subject to repurchase by Scient, with the repurchase restriction lapsing at such times and under such conditions as determined by the Board of Directors. Options granted to date generally vest 25% of the options after one year from date of grant, with the remaining options vesting in equal monthly installments over the following 36 months. 1999 Employee Stock Purchase Plan In April 1999, the board of directors and stockholders adopted the 1999 Employee Stock Purchase Plan (the "ESPP"), which became effective immediately prior to the effective date of Scient's initial public offering. The ESPP reserved 2.0 million shares of Common Stock for issuance thereunder. On each May 1 beginning in 2000, the aggregate number of shares reserved for issuance under the ESPP will be increased automatically to 2.0 million shares. Employees generally will be eligible to participate in the ESPP if they customarily are employed by Scient or one of its participating subsidiaries for more than 20 hours per week and more than five months in a calendar year and are not (and would not become as a result of being granted an option under the ESPP) 5% stockholders of Scient or any parent or subsidiary. Under the ESPP, eligible employees may select a rate of payroll deduction up to 15% of their cash compensation subject to certain maximum purchase limitations. The first offering period began on the first business day on which price quotations for Scient's common stock were available on The Nasdaq National Market. The first purchase period was less than six months long. Offering Periods thereafter will begin on May 1 and November 1. Purchases will occur on April 30 and October 31, or the last day of trading prior to these dates. The price at which the common stock is purchased under the ESPP is 85% of the lesser of the fair market value of Scient's Common Stock on the first day of the applicable offering period or on the last day of that purchase period. F-20 54 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following summarizes stock option activity for Scient option grants (in thousands, except weighted average exercise price)

The following table summarizes the information about stock options outstanding and exercisable at March 31, 2001:

Fair Value Disclosures Scient applies the measurement principles of APB No. 25 in accounting for its stock option plan. Had compensation expense for options granted for the years ended March 31, 1999, 2000 and 2001 been F-21 55 SCIENT CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) determined based on the fair value at the grant dates as prescribed by SFAS No. 123, Scient's net loss would have been increased to the pro forma amounts indicated below:

Scient calculated the minimum fair value of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using the following assumptions:

Because additional option grants are expected to be made each year, the pro-forma impact for the years ended March 31, 1999, 2000 and 2001 is not representative of the pro-forma effects which may be expected in future years. Unearned Stock-based Compensation In connection with certain stock option grants for the years ended March 31, 1999, 2000, and 2001, Scient recognized unearned stock-based compensation totaling $33.4 million, $5.2 million, and $(1.3 million), respectively, which is being amortized over the vesting periods, generally four years, of the related options. Amortization expense recognized for the years ended March 31, 1999, 2000 and 2001 totaled approximately $7.7 million, $15.6 million, and $9.4 million, respectively. 12. SUBSEQUENT EVENTS On April 11, 2001, Scient announced an additional restructuring initiative that included a reduction in force of up to 850 people. The restructuring included plans to downsize and modify the company's geographic footprint and move its corporate headquarters to New York from San Francisco. In addition, Scient closed its Los Angeles and New Jersey offices and plans to reduce its San Francisco, Boston, and Chicago locations to smaller offices. As part of the restructuring initiative, in June 2001 Scient divested itself 80.1% of its interest in Scient S.A., its French subsidiary, and 81% of its interest in Scient K.K., its Japanese subsidiary. Scient also licensed the use of the Scient trademark to the French company for 120 days and to the Japanese company for one year in order to allow the businesses to transition to new branding. F-22 56 EXHIBIT INDEX

SCIENT CORP 10-K