<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 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: 0-28074
SAPIENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 04-3130648
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE MEMORIAL DRIVE, CAMBRIDGE, MA 02142
(Address of Principal Executive (Zip Code)
Offices)
617-621-0200
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
</TABLE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
As of November 9, 1998 there were 26,551,708 shares of Common Stock, $.01
par value, outstanding.
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SAPIENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997........................................... 2
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997.................... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997........................... 4-5
Notes to Consolidated Financial Statements.................. 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10-15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures........................................................... 17
Exhibit 11.1.........................................................
Exhibit 27.1.........................................................
</TABLE>
1
<PAGE> 3
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 24,596,599 $47,314,306
Short term investments................................. 62,625,083 17,091,604
Accounts receivable, less allowance for doubtful
accounts of $525,000 and $350,000, respectively....... 30,845,535 16,217,444
Unbilled revenues on contracts......................... 12,012,860 9,070,470
Deferred income tax asset.............................. -- 34,914
Prepaid expenses and other current assets.............. 2,834,831 1,638,840
------------ -----------
Total current assets.............................. 132,914,908 91,367,578
Property and equipment, net................................. 13,358,038 6,315,454
Other assets................................................ 20,179,688 330,211
------------ -----------
Total assets...................................... $166,452,634 $98,013,243
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank.................................. $ -- $ 208,242
Accounts payable....................................... 1,765,767 15,004
Accrued expenses....................................... 3,414,730 1,924,444
Accrued compensation................................... 4,257,461 3,453,050
Accrued income taxes payable........................... 5,663,831 3,074,553
Deferred revenues on contracts......................... 7,009,251 6,307,903
------------ -----------
Total current liabilities......................... 22,111,040 14,983,196
Deferred income taxes....................................... 121,212 121,212
Other long term liabilities................................. 1,021,772 909,689
------------ -----------
Total liabilities................................. 23,254,024 16,014,097
------------ -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
authorized and none outstanding at September 30, 1998
and December 31, 1997................................. -- --
Common stock, par value $.01 per share, voting,
100,000,000 shares authorized, 26,087,821 issued at
September 30, 1998; 40,000,000 shares authorized,
24,206,570 shares issued at December 31, 1997......... 260,878 242,066
Additional paid-in capital............................. 113,312,473 57,478,844
Retained earnings...................................... 29,625,259 24,278,236
------------ -----------
Total stockholders' equity........................ 143,198,610 81,999,146
------------ -----------
Total liabilities and stockholders' equity........ $166,452,634 $98,013,243
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues............................ $41,837,354 $ 24,416,095 $107,918,021 $63,394,421
Operating expenses:
Project personnel costs........ 20,448,735 12,149,504 52,127,683 30,819,173
Selling and marketing.......... 2,990,700 1,544,235 7,437,357 3,803,596
General and administrative..... 10,544,653 5,808,354 27,033,399 15,624,702
Charge for in-process research
and development.............. 14,800,000 -- 14,800,000 --
----------- ------------ ------------ -----------
Total operating
expenses................ 48,784,088 19,502,093 101,398,439 50,247,471
Income (loss) from operations....... (6,946,734) 4,914,002 6,519,582 13,146,950
Interest income..................... 952,081 482,738 2,232,634 1,572,117
----------- ------------ ------------ -----------
Income (loss) before income taxes... (5,994,653) 5,396,740 8,752,216 14,719,067
Income tax expense (benefit)........ (2,025,884) 2,076,630 3,406,982 5,597,017
----------- ------------ ------------ -----------
Net income (loss)......... $(3,968,769) $ 3,320,110 $ 5,345,234 $ 9,122,050
=========== ============ ============ ===========
Basic net income (loss) per share... $ (0.15) $ 0.14 $ 0.21 $ 0.38
=========== ============ ============ ===========
Diluted net income (loss) per
share............................. $ (0.15) $ 0.13 $ 0.19 $ 0.35
=========== ============ ============ ===========
Weighted average common shares...... 25,640,595 23,916,322 25,044,438 23,828,076
Weighted average common share
equivalents....................... -- 2,194,840 2,626,536 2,089,834
----------- ------------ ------------ -----------
Weighted average common shares and
common share equivalents.......... 25,640,595 26,111,162 27,670,974 25,917,910
=========== ============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,345,234 $ 9,122,050
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 2,246,010 1,535,388
Charge for in-process research and development......... 14,800,000 --
Amortization of intangible assets...................... 127,559 --
Deferred income taxes.................................. (5,431,600) (2,355)
Changes in assets and liabilities:
Increase in accounts receivable, net................. (12,050,321) (4,183,518)
Increase in unbilled revenues on contracts........... (2,313,008) (1,926,452)
Increase in prepaid expenses and other current
assets............................................ (387,481) (575,274)
Increase in other assets............................. (680,095) --
Increase in accounts payable......................... 1,305,592 127,659
Decrease in accrued expenses......................... (1,569,245) (423,709)
(Decrease) increase in accrued compensation.......... (76,039) 892,570
Increase (decrease) in income taxes payable.......... 2,318,939 (498,071)
Decrease in deferred revenues on contracts........... (432,982) (2,692,304)
Increase in other long term liabilities.............. 70,487 172,589
------------ ------------
Net cash provided by operating activities................... 3,273,050 1,548,573
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment........................ (7,211,596) (4,382,329)
Net cash received from acquisition........................ 561,306 --
Sale of short term investments............................ -- --
Purchase of short term investments........................ (45,529,503) (8,978,635)
------------ ------------
Net cash (used in) investing activities................... (52,179,793) (13,360,964)
------------ ------------
Cash flows from financing activities:
(Advance to) repayments from stockholders for notes
receivable............................................. (3,788,292) 25,000
Proceeds from exercise of stock options................... 1,311,425 299,838
Proceeds from public stock offering....................... 29,091,297 --
Proceeds from employee stock purchase plan................ 2,645,341 589,511
Proceeds from lease and bank financing.................... -- 165,011
Principal payments on notes payable to bank............... (3,070,735) (189,246)
------------ ------------
Net cash provided by financing activities......... 26,189,036 890,114
------------ ------------
(Decrease) in cash and cash equivalents..................... (22,717,707) (10,922,277)
Cash and cash equivalents, at beginning of period........... 47,314,306 50,301,285
------------ ------------
Cash and cash equivalents, at end of period................. $ 24,596,599 $ 39,379,008
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes.............. $ 6,483,649 $4,348,635
=========== ==========
Net assets and liabilities recognized upon acquisition
from Studio:
Cash and cash equivalents.............................. 811,306 --
Accounts receivable, less allowance for doubtful
accounts of $100,000.................................. 2,577,770 --
Unbilled revenues on contracts......................... 629,382 --
Prepaid expenses and other current assets.............. 34,246 --
Property and equipment, net............................ 2,076,998 --
Other assets........................................... 19,169,382 --
Accounts payable....................................... 445,171 --
Accrued expenses....................................... 724,531 --
Accrued compensation................................... 4,668,760 --
Accrued income taxes payable........................... 270,338 --
Deferred revenues on contracts......................... 1,134,331 --
Deferred income taxes.................................. 2,862,493 --
Other long term liabilities............................ 42,000 --
Supplemental disclosures of non-cash investing activities:
Common stock issued for acquisition of Studio............. 22,800,000 --
===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Sapient Corporation (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K. The accompanying
consolidated financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the results to be expected for any
future period or the full fiscal year.
On August 25, 1998 the Company acquired Studio Archetype, Inc. ("Studio")
for approximately $25.3 million in stock and cash, including direct acquisition
costs of approximately $2.3 million, pursuant to which the Company issued
498,314 shares of Common Stock and paid $250,000 in cash to the Studio
Stockholders. The acquisition was accounted for as a purchase and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values which had an immaterial impact on the
financial statements.
On December 15, 1997, the Company acquired all of the outstanding common
stock of EXOR Technologies, Inc. ("EXOR") in exchange for 611,738 shares of
Common Stock. The Company's financial statements have been restated for all
periods presented to reflect the acquisition of EXOR, which was accounted for as
a pooling of interests.
(2) SHORT TERM INVESTMENTS
Short term investments represent available-for-sale securities, which are
recorded at fair market value. The difference between fair market value and cost
is not material. Realized gains and losses from sales of available-for-sale
securities were not material for any period presented.
(3) EARNINGS PER SHARE
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 establishes a
different method of computing net income per share than previously required
under the provisions of Accounting Principles Board Opinion No. 15, "Earnings
per Share" and requires restatement of all prior periods presented. Under SFAS
128, the Company presents both basic net income per share and diluted net income
per share. Basic net income per share is based on the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
per share effect of dilutive common stock equivalents.
(4) CAPITAL STOCK
The Company's Board of Directors declared a two-for-one stock split on
February 20, 1998, effected as a 100 percent stock dividend, which was
distributed on March 9, 1998. All financial results and share information have
been restated to reflect the effect of the stock dividend.
On April 7, 1998, the Company completed a public offering of Common Stock
which resulted in the issuance of 653,125 shares of Common Stock. Proceeds to
the Company, net of underwriting discounts and costs of the offering, were
approximately $29.1 million.
6
<PAGE> 8
(5) CONTINGENT LIABILITIES
The Company has certain contingent liabilities that arise in the ordinary
course of its business activities. The Company accrues liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated.
The Company is in arbitration with a former employee who alleges breach of
certain contractual and other violations resulting from his termination as an
employee. Management denies that it breached any obligations or duties to this
former employee, and asserts that the Company has meritorious defenses. The
Company plans to vigorously contest these claims. Although the Company does not
expect the claim to have a material adverse effect on the Company's business,
results of operations or financial condition, an adverse judgment or settlement
could have a material adverse effect on the operating results reported by the
Company for the period in which any such adverse judgment or settlement occurs.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting comprehensive income and its
components in the body of the financial statements. Comprehensive income
includes net income as currently reported under Generally Accepted Accounting
Principles and also considers the effect of additional economic events that are
not required to be recorded in determining net income but are rather reported as
a separate component of stockholders' equity. These events include certain
foreign currency transactions and related hedging activities accounted for under
Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" and unrealized gains and losses on investments in marketable
securities accounted for under Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities." The
Company plans to adopt SFAS 130 in 1998. The effect of adopting SFAS 130 and
reporting comprehensive income is not expected to be material to the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This Statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company plans to adopt this Statement in 1998. The adoption of SFAS 131 will
not impact the Company's financial position, results of operations or cash
flows. Management has determined that, at least for the forseeable future, the
adoption of SFAS 131 will not require the Company to materially differ from its
current presentation of its operating results as one business segment.
(7) ACQUISITION ACCOUNTING
On August 25, 1998, the Company acquired Studio for approximately $25.3
million in stock and cash, including direct acquisition costs of approximately
$2.3 million, pursuant to which the Company issued 498,314 shares of the Company
Common Stock and paid $250,000 in cash to the Studio Stockholders. The
acquisition was accounted for as a purchase and accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on their
respective fair values.
In connection with the acquisition of Studio, the Company allocated $14.8
million of the purchase price to in-process research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete projects. At the date of the acquisition, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.
The Company engaged independent third-party appraisers to assess and
allocate values to the in-process research and development projects. The value
assigned to these assets was determined by identifying significant research
projects for which technological feasibility had not been established, including
development, engineering and testing activities associated with the introduction
of Studio's next-generation enterprise-wide suite of development, scheduling,
bug tracking and content management applications.
7
<PAGE> 9
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
Studio and its competitors.
Total revenues attributable to Studio are projected to exceed $100 million
within 5 years, assuming the successful completion and market acceptance of the
major R&D programs. The estimated revenues for the projects are expected to peak
in 2002 and decline in 2003 through 2004 as other new products are expected to
enter the market. These forecasts are based on Studio management's estimates of
market size and growth, expected trends in technology (intranet/extranet
applications, content management solutions, and web graphic development and
authoring tools) and the nature and expected timing of new product introductions
by Studio and its competitors. Studio management indicated that EBIT margins
would increase from historical observations of approximately 5.0% to
approximately 15% by 2001, once the initial and significant development hurdles
had been achieved by 1999. Studio's projected increased profitability is
dependent upon successful introduction of the in-process projects.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products and services principally relate to the
completion of all planning, designing, prototyping, verification, and testing
activities that are necessary to establish that the proposed technologies meet
their design specifications including functional, technical, and economic
performance requirements. The efforts to develop the purchased in-process
technology also include testing of the technology for compatibility and
interoperability with other applications. Expenditures on these projects through
the date of the acquisition of Studio have been approximately $2.5 million, and
estimated costs to complete these projects are expected to total approximately
$625,000 through 2001. These estimates are subject to change, given the
uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur.
The rates utilized to discount the net cash flows to their present value
are based on venture capital rates of return. Due to the nature of the forecast
and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 25.0 to 30.0 percent were utilized for
the business enterprise and for the in-process research and development. These
discount rates are commensurate with Studio's stage of development; the
uncertainties in the economic estimates described above; the inherent
uncertainty surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and, the uncertainty of technological advance that are unknown at
this time.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions that the Company believes to be
reasonable but which are inherently uncertain and unpredictable. The Company's
assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances are likely to occur. For these reasons, actual results may vary
from the projected results and could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results and could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company expects to continue their support of these efforts and believes
Studio has a reasonable chance of successfully completing the research and
development programs. However, there is risk associated with the completion of
the projects and there is no assurance that any will meet with either
technological or commercial success.
Other intangible assets of $9.6 million is comprised of $3.8 million for
marketing assets, $1.6 million for assembled work force and approximately $4.2
million of other goodwill type assets comprising the reputation
8
<PAGE> 10
of Studio which have estimated useful lives of approximately 7 years. However
there are no assurances that the value of these intangible assets acquired will
not become impaired.
Below are the pro forma results of operations for the Company and Studio,
assuming that the acquisition of Studio occurred at the beginning of the nine
month period ended September 30, 1998.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1998
------------------
(UNAUDITED)
<S> <C>
Net Revenues:
Sapient........................................ $107,918,021
Studio......................................... $ 10,098,754
------------
Combined....................................... $118,016,775
============
Net Income (Loss):
Sapient........................................ $ 4,324,762
Studio......................................... (364,695)
------------
Combined....................................... $ (3,960,067)
============
Basic Net Income (loss) Per Share:
Sapient........................................ $ 0.17
Studio......................................... $ (0.01)
------------
Combined....................................... $ 0.16
============
</TABLE>
9
<PAGE> 11
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of business and information technology
solutions implemented on a fixed-price, fixed-timeframe basis. Using
client/server and Web-based technologies, the Company offers a variety of
services designed to help clients rapidly achieve their business objectives,
including implementation and integration of packaged software solutions, custom
software development, implementation of enterprise resource planning ("ERP")
systems, production support, and business and operational consulting. The
Company targets clients in information-intensive industries, including Financial
Services, Energy Services, Manufacturing, Healthcare, Government and
Communications.
The Company delivers services using its proprietary QUADD (Quality Design
and Delivery) discipline. QUADD is a workshop-based methodology that emphasizes
active client participation to help visualize, prioritize and create
time-critical business and technology solutions. The Company believes that the
QUADD discipline is an important competitive differentiator that allows the
Company and its clients to better understand the clients' business needs, and to
design, develop, integrate and implement solutions that address those needs. The
QUADD process consists of four stages: RIP workshop, Design, Implementation and
Production. The RIP (Rapid Implementation Plan) workshop is designed to rapidly
identify the client's needs and develop a strategy and action plan to meet those
needs. The Design workshop focuses on outlining the proposed process changes and
required information technology solutions. The Implementation stage primarily
involves the development and testing of the new applications or enhancements to
third-party packaged software applications or existing Sapient-developed
solutions. The Production stage primarily involves the maintenance, enhancement
and support of the solution after it is operational.
The Company's revenues and earnings may fluctuate from quarter to quarter
based on the number, size and scope of projects in which the Company is engaged,
the contractual terms and degree of completion of such projects, any delays
incurred in connection with a project, employee utilization rates, the adequacy
of provisions for losses, the accuracy of estimates of resources required to
complete ongoing projects, general economic conditions and other factors. In
addition, revenues from a large client may constitute a significant portion of
the Company's total revenues in a particular quarter.
On December 15, 1997, the Company acquired all of the outstanding common
stock of EXOR Technologies, Inc. ("EXOR") in exchange for 611,738 shares of
Common Stock. The Company's financial statements have been restated for all
periods presented to reflect the acquisition of EXOR, which has been accounted
for as a pooling of interests.
The Company's Board of Directors declared a two-for-one stock split on
February 20, 1998 effected as a 100 percent stock dividend which was distributed
on March 9, 1998. The Company's financial statements have been restated for all
periods presented to reflect the effect of the stock dividend.
On April 7, 1998, the Company completed a public offering of Common Stock
which resulted in the issuance of 653,125 shares of Common Stock. Proceeds to
the Company, net of underwriting discounts and costs of the offering, were
approximately $29.1 million.
On August 25, 1998, the Company acquired Studio Archetype, Inc. ("Studio")
for approximately $25.3 million in stock and cash, including direct acquisition
costs of approximately $2.3 million, pursuant to which the Company issued
498,314 shares of Common Stock and $250,000 in cash. The acquisition was
accounted for as a purchase and accordingly, the purchase price was allocated to
the assets acquired and on liabilities assumed based on their respective fair
values.
In connection with the acquisition of Studio the Company allocated $14.8
million of the purchase price to in-process research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete projects. At the date of acquisition, the
development of
10
<PAGE> 12
these projects had not yet reached technological feasibility and the research
and development in progress had no alternative future uses. Accordingly, these
costs were expensed as of the acquisition date.
The Company engaged independent third-party appraisers to assess and
allocate values to the in-process research and development projects. The value
assigned to these assets was determined by identifying significant research
projects for which technological feasibility had not been established, including
development, engineering and testing activities associated with the introduction
of Studio's next-generation enterprise-wide suite of development, scheduling,
bug tracking and content management applications.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on
estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
Studio and its competitors.
Total revenues attributable to Studio are projected to exceed $100 million
within 5 years, assuming the successful completion and market acceptance of the
major R&D programs. The estimated revenues for the projects are expected to peak
in 2002 and decline in 2003 through 2004 as other new products are expected to
enter the market. These forecasts are based on Studio management's estimates of
market size and growth, expected trends in technology (intranet/extranet
applications, content management solutions, and web graphic development and
authoring tools) and the nature and expected timing of new product introductions
by Studio and its competitors. Studio management indicated that EBIT margins
would increase from historical observations of approximately 5.0% to
approximately 15% by 2001, once the initial and significant development hurdles
had been achieved by 1999. Studio's projected increased profitability is
dependent upon successful introduction of the in-process projects.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products and services principally relate to the
completion of all planning, designing, prototyping, verification, and testing
activities that are necessary to establish that the proposed technologies meet
their design specifications including functional, technical, and economic
performance requirements. The efforts to develop the purchased in-process
technology also include testing of the technology for compatibility and
interoperability with other applications. Expenditures on these projects to date
have been approximately $2.5 million, and estimated costs to complete these
projects are expected to total approximately $625,000 through 2001. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur.
The rates utilized to discount the net cash flows to their present value
are based on venture capital rates of return. Due to the nature of the forecast
and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 25.0 to 30.0 percent were utilized for
the business enterprise and for the in-process research and development. These
discount rates are commensurate with Studio's stage of development; the
uncertainties in the economic estimates described above; the inherent
uncertainty surrounding the successful development of the purchased in-process
technology; the useful life of such technology; the profitability levels of such
technology; and, the uncertainty of technological advance that are unknown at
this time.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions that the Company believes to be
reasonable but which are inherently uncertain and unpredictable. The Company's
assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances are likely to occur. For these reasons, actual results may vary
from the projected results and could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the acquisition. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will
11
<PAGE> 13
transpire as estimated. For these reasons, actual results may vary from the
projected results and could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company expects to continue their support of these efforts and believes
Studio has a reasonable chance of successfully completing the research and
development programs. However, there is risk associated with the completion of
the projects and there is no assurance that any will meet with either
technological or commercial success.
Other intangible assets of $9.6 million is comprised of $3.8 million for
marketing assets, $1.6 million for assembled work force and approximately $4.2
million of other goodwill type assets comprising the reputation of Studio which
have estimated useful lives of approximately 7 years. However, there are no
assurances that the value of these intangible assets acquired will not become
impaired.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's consolidated statements of income.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues................................................. 100% 100% 100% 100%
Operating expenses:
Project personnel costs................................ 49 50 48 48
Selling and marketing.................................. 7 6 7 6
General and administrative............................. 25 24 25 25
Charge for in-process research and development......... 35 0 14 0
--- --- --- ---
Total operating expenses............................ 116 80 94 79
(Loss) income from operations............................ (16) 20 6 21
Interest income.......................................... 2 3 2 2
Income taxes............................................. (5) 9 3 9
--- --- --- ---
Net (loss) income........................................ (9)% 14% 5% 14%
=== === === ===
</TABLE>
Revenues
Revenues for the third quarter of 1998 increased 71% over revenues for the
third quarter of 1997. For the first nine months of the year, revenues increased
70% over the comparable period of the prior year. The increase in revenues
reflects increases in both the size and number of client projects. Unbilled
revenues on contracts increased from $9.1 million at December 31, 1997 to $12.0
million at September 30, 1998 primarily as a result of increased volume and the
structure of contract billing schedules. By September 30, 1998, the Company had
billed deposits and reached billing milestones on most of the projects which
were unbilled at June 30,1998. In the third quarter of 1998, the Company's five
largest clients accounted for approximately 32.9% of its revenues. During this
period one client accounted for more than 10% of revenues.
Project Personnel Costs
Project personnel costs consist primarily of salaries and employee benefits
for personnel dedicated to client assignments and direct expenses incurred to
complete projects that were not reimbursed by the client. These costs represent
the most significant expense the Company incurs in providing its services. The
increase in project personnel costs for the three and nine month periods ended
September 30, 1998 was primarily due to an increase in project personnel from
638 at September 30, 1997 to 1,101 at September 30, 1998. Project personnel
costs declined as a percentage of revenues to 49% for the third quarter of 1998
compared to 50% for the third quarter of 1997. The percentage in the third
quarter of 1997 was higher due to lower utilization of
12
<PAGE> 14
resources at Exor prior to the acquisition. These costs remained constant as a
percentage of revenues at 48% for the first nine months of 1998 and 1997.
Selling and Marketing
Selling and marketing costs consist primarily of salaries, employee
benefits, travel expenses of selling and marketing personnel and promotional
costs. Selling and marketing costs increased as a percentage of revenues from 6%
in the third quarter of 1997 to 7% in the third quarter of 1998. For the first
nine months of 1998 and 1997, selling and marketing costs increased as a
percentage of revenues from 6% to 7%. The increase was primarily due to
investments made by the Company in a new corporate identity program, and an
increase in the amount of business development personnel and travel expenses.
The dollar increase in the three and nine month periods ended September 30, 1998
was primarily the result of an increase in the number of selling and marketing
personnel, from 35 employees at September 30, 1997 to 45 employees at September
30, 1998.
General and Administrative
General and administrative costs consist primarily of expenses associated
with the Company's management, finance and administrative groups, including
personnel devoted to recruiting and training project personnel, and occupancy
costs. The increase in general and administrative costs for the three and nine
month periods ended September 30, 1998 was primarily due to an increase in total
costs associated with employees hired during 1998, along with an increase in
occupancy costs related to significant expansion in the Company's office space
and increased depreciation costs related to the Company's increased investments
in property and equipment. The Company's total headcount increased from 778 at
September 30, 1997 to 1,348 at September 30, 1998. As a percentage of revenues,
general and administrative costs increased to 25% for the three months ended
September 30, 1998 from 24% for the comparable period in 1997 due to an increase
in facility related expenses including rent and telephone costs. General and
administrative costs remained constant as a percentage of revenues at 25% for
the nine month period ended September 30, 1998 and September 30, 1997.
Interest Income
Interest income for the three and nine month periods ended September 30,
1998 was derived from the Company's investments of the proceeds from its public
stock offerings, which were invested primarily in tax-exempt, short-term
municipal bonds.
Provision for Income Taxes
Income tax expense represents combined federal and state income taxes at an
effective rate during the quarter ended September 30, 1998 and 1997 of 33.8% and
38.0%, respectively. The impact of the acquisition of Studio created a deferred
tax benefit of $5.4 million.
Liquidity and Capital Resources
The Company has primarily funded its operations from cash flow generated
from operations and the proceeds from its public stock offerings. In addition,
the Company has a bank revolving line of credit providing for borrowings of up
to $5.0 million. Borrowings under this line of credit, which expires on June 30,
2000, bear interest at the bank's prime rate. The line of credit includes
covenants relating to the maintenance of certain financial ratios, and limits
the payment of dividends. At September 30, 1998, the Company had no bank
borrowings outstanding and no material capital commitments.
Cash and cash equivalents decreased to $24.6 million at September 30, 1998,
from $47.3 million at December 31, 1997. The decrease was primarily due to the
investment of excess cash in marketable securities. At September 30, 1998, $62.6
million was invested in tax-exempt, short-term municipal bonds which mature in
less than 12 months, compared to $17.1 million which was invested in similar
instruments as of December 31, 1997.
13
<PAGE> 15
On April 7, 1998, the Company completed a public offering of Common Stock
which resulted in the issuance of 653,125 shares of Common Stock. Proceeds to
the Company, net of underwriting discounts and costs of the offering, were
approximately $29.1 million.
The Company believes that the cash provided from operations, borrowings
available under its revolving line of credit and the net proceeds of its public
offerings of Common Stock will be sufficient to meet the Company's working
capital and capital expenditure requirements for at least the next 18 months.
YEAR 2000 READINESS
The following disclosure shall be considered year 2000 Readiness Disclosure
to the maximum extent allowed under the year 2000 Information and Readiness
Disclosure Act.
The Company has developed a phased Year 2000 readiness plan to help it
identify and resolve Year 2000 issues associated with both the Company's
internal systems and the services provided by the Company. The plan includes
development of corporate awareness, assessment, implementation (including
remediation and upgrading of certain product versions), validation testing and
contingency planning. Since the Company has installed nearly all of its internal
hardware and software systems since January 1997, the Company is not confronted
with the task of having to replace obsolete or legacy systems. Primarily, the
Company's task is to install upgrades and patches to its internally used
software and hardware to make such systems and equipment Year 2000 compliant.
The Company created a company-wide Year 2000 team to oversee the Company's
Year 2000 program. The Company has completed its assessment of its internal and
third party computer systems and its internal non-IT systems (such as building
security, voice mail, telephone and other systems containing embedded
microprocessors). The Company's material internal IT systems consist principally
of financial, accounting and human resources application software created by
third parties, and internally developed sales forecasting and project management
software applications. All of the Company's internally developed applications
are Year 2000 compliant. With respect to the third-party software applications,
the Company believes that, based on oral statements made by manufacturers and/or
statements published on manufacturers' web sites, that such products are Year
2000 compliant other than the versions of Windows 95 and Windows NT operating
systems, for which the manufacturer has indicated that the versions currently
employed by the Company will need to have patches installed in order for the
software to be Year 2000 compliant. The manufacturers of the Company's computer
hardware platforms, principally servers, has indicated that the versions
currently used by the Company are Year 2000 compliant. The Company will seek to
obtain written assurances from each of the third party vendors that their
systems (both IT and non-IT) are Year 2000 compliant.
The Company believes that it is 60% complete in installing patches and
upgrades to its third party software and hardware and expects to be completed
with the implementation stage of its Year 2000 program by the end of the second
quarter of 1999. The Company also expects to have completed testing of all
internally used software and hardware by the second quarter of 1999. Based on
currently available information, the Company believes the expense associated
with these efforts will be approximately $25,000. However, if compliance efforts
are not completed on time, or additional compliance efforts are required of
which the Company is not currently aware, or the cost of any required updating
or modification of the Company's IT systems exceeds the Company's estimates, the
Year 2000 issue could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company has not yet developed a comprehensive contingency plan to
address the situations that may result if the Company is unable to achieve Year
2000 readiness of its major IT and non-IT systems. The Company intends to devise
contingency plans by the end of the second quarter of 1999 to mitigate the
effects on the conduct of the Company's business in the event the Year 2000
issue results in the unavailability of any material IT or non-IT systems. There
can be no assurance that any contingency plans developed by the Company will
prevent any such service interruption.
In addition to the Company's internal systems, the Company relies on third
party relationships in the conduct of its business. For example, the Company
relies on the services of the landlords of its facilities, telecommunication
companies, banks, utilities, and commercial airlines. The Company is currently
seeking assurances from its landlords and material vendors regarding their Year
2000 readiness, and to the extent such
14
<PAGE> 16
assurances are not given, the Company intends to devise contingency plans to
ameliorate the negative effects on the Company in the event the Year 2000 issue
results in the unavailability of services. There can be no assurance that any
contingency plans developed by the Company will prevent any such service
interruption on the part of one or more of the Company's third party vendors or
suppliers from having a material adverse effect on the Company's business,
results of operations or financial condition. In addition, the failure on the
part of the accounting systems of the Company's clients due to the Year 2000
issue could result in a delay in the payment of invoices issued by the Company
for services and expenses. A failure of the accounting systems of a significant
number of the Company's clients would have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's business involves designing, developing and implementing
mission critical software applications for its clients. In addition, the Company
has recommended, implemented and customized various third-party software
packages for its clients, certain of which may not be Year 2000 compliant.
Former, present and future clients may assert that certain services performed by
the Company involved or are affected by the Year 2000 issue. Because the Company
has designed, developed and implemented software and systems for a large number
of clients since 1991, there can be no way of assuring that all such software
programs and systems will be Year 2000 compliant. This uncertainty is magnified
by the fact that in many cases the Company's clients retain the right to
maintain, alter and modify the systems developed and implemented by the Company
after the completion of an engagement. Due to the potential significance of the
Year 2000 issue upon client operations, upon any failure of critical client
systems or processes that may be directly or indirectly connected or related to
systems or software analyzed, designed, developed, or implemented by the
Company, the Company may be subjected to claims regardless of whether the
failure is related to the services provided by the Company. If asserted, such
claims (and the associated defense costs) could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's policy has been to attempt to include provisions in its
client contracts that, among other things, disclaim implied warranties, limit
the duration of express warranties, limit the Company's liability to the amount
of fees paid by the client to the Company in connection with the project, and
disclaim any liability arising from third-party software that is implemented,
customized or installed by the Company. There can be no assurance that the
Company will be able to obtain these contractual protections in agreements
concerning future projects, or that any contractual provisions governing current
and completed projects, will prevent clients from asserting claims against the
Company with respect to the Year 2000 issue. There also can be no assurance that
the contractual protections, if any, obtained by the Company will effectively
operate to protect the Company from, or limit the amount of, any liability
arising from claims asserted against the Company.
The foregoing discussion of the Company's Year 2000 readiness contains
forward looking statements including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting the Company and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the ability of the Company to identify and correct all Year 2000 problems
and the success of third parties with whom the Company does business in
addressing their Year 2000 issues.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This section of the Company's Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual performance and
results may differ materially due to many important factors, including, but not
limited to, the risks associated with acquisitions, the Company's ability to
attract and retain high quality employees, accurately set fees for and timely
complete its current and future client projects, the continued acceptance of the
Company's services, the ability of the Company to manage its growth and prices
effectively, general economic conditions and similar factors. As a result of
these and other factors, there can be no assurances that the Company will not
experience material fluctuations in future operating results on a quarterly or
annual basis.
15
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
There has been no change to the information previously provided by the
Company on Form SR for the period ended July 3, 1996, as amended, relating to
securities sold by the Company pursuant to Registration Statements on Form S-1
(Registration Nos. 333-1586 and 333-3204).
On August 25, 1998, the Company issued 498,314 shares of its Common Stock
to the stockholders of Studio Archetype, Inc. ("Studio") in exchange for all of
the outstanding shares of capital stock of Studio. The issuance of such shares
was exempt from the registration requirements of Section 5 of the Securities Act
of 1933, as amended, pursuant to Rule 506 of Regulation D.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Computation of shares used in computing Basic and Diluted Net
Income per Share.
27.1 Financial data schedule.
(b) Reports on Form 8-K.
On August 31, 1998, the Company filed a Current Report on Form 8-K dated
August 25, 1998 reporting its acquisition of all of the outstanding stock of
Studio ("Studio") pursuant to a Stock Purchase Agreement dated as of August 25,
1998, entered into by and among the Company, Studio and the shareholders of
Studio Archetype.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAPIENT CORPORATION
By /s/ JERRY A. GREENBERG
------------------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Co-Chairman of the Board
Date: November 11, 1998
By /s/ SUSAN D. JOHNSON
------------------------------------
Susan D. Johnson
Chief Financial Officer
Date: November 11, 1998
17
<PAGE> 1
EXHIBIT 11.1
SAPIENT CORPORATION
ARTICLE 6.01 OF REGULATION S-K
COMPUTATION OF SHARES USED IN COMPUTING BASIC AND DILUTED NET INCOME
(LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss)....................... $(3,968,769) $ 3,320,110 $ 5,345,234 $ 9,122,050
Basic net income (loss) per share:
Weighted average common shares
Outstanding...................... 25,640,595 23,916,322 25,044,438 23,828,076
Shares used in computing per share
Amount........................... 25,640,595 23,916,322 25,044,438 23,828,076
----------- ----------- ----------- -----------
Basic net income (loss) per share.. $ (0.15) $ 0.14 $ 0.21 $ 0.38
=========== =========== =========== ===========
Diluted net income (loss) per share:
Weighted average common shares
Outstanding...................... 25,640,595 23,916,322 25,044,438 23,828,076
Dilutive stock options............. -- 2,194,840 2,626,536 2,089,834
----------- ----------- ----------- -----------
Shares used in computing per share
Amount........................... 25,640,595 26,111,162 27,670,974 25,917,910
----------- ----------- ----------- -----------
Diluted net income (loss) per share $ (0.15) $ 0.13 $ 0.19 $ 0.35
============ =========== =========== ===========
</TABLE>
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 24,596,599 24,596,599
<SECURITIES> 62,625,083 62,625,083
<RECEIVABLES> 30,845,535 30,845,535
<ALLOWANCES> 525,000 525,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 132,914,908 132,914,908
<PP&E> 20,230,156 20,230,156
<DEPRECIATION> 6,872,118 6,872,118
<TOTAL-ASSETS> 166,452,634 166,452,634
<CURRENT-LIABILITIES> 22,111,040 22,111,040
<BONDS> 0 0
0 0
0 0
<COMMON> 262,047 262,047
<OTHER-SE> 142,936,563 142,936,563
<TOTAL-LIABILITY-AND-EQUITY> 166,452,634 166,452,634
<SALES> 41,837,354 107,918,021
<TOTAL-REVENUES> 41,837,354 107,918,021
<CGS> 0 0
<TOTAL-COSTS> 48,784,088 101,398,439
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 952,081 2,232,634
<INCOME-PRETAX> (5,994,653) 8,752,216
<INCOME-TAX> (2,025,884) 3,406,982
<INCOME-CONTINUING> (3,968,769) 5,345,234
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,968,769) 5,345,234
<EPS-PRIMARY> (0.15) 0.21
<EPS-DILUTED> (0.15) 0.19
</TABLE>
