<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): August 25, 1998
---------------
Sapient Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
----------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-28074 04-3130648
- ------------------------ ------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
One Memorial Drive
Cambridge, MA 02142
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(617) 621-0200
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Item 7 of the Current Report on Form 8-K, as originally filed on August
31, 1998, is hereby amended and restated in its entirety as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The financial statements of Studio Archetype, Inc. required by this
item are included as Exhibit 99.1 to this Current Report on Form 8-K/A and
incorporated herein by reference.
(b) PRO FORMA FINANCIAL INFORMATION.
The pro forma financial information required by this item is included
as Exhibit 99.2 to this Current Report on Form 8-K/A and incorporated herein by
reference.
(c) EXHIBITS.
See Exhibit Index attached hereto.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 5, 1998 SAPIENT CORPORATION
--------------------------------------
(Registrant)
By: /s/ Susan D. Johnson
----------------------------------
Susan D. Johnson
Chief Financial Officer
-3-
<PAGE> 4
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2* Stock Purchase Agreement, dated as of August 25, 1998, by and
among Sapient Corporation, Studio Archetype, Inc., Clement Mok,
Mark Crumpacker, Peter Rack, Eric Wilson and Todd Holcomb and
Clement Mok as Exchange Agent. (In accordance with SEC rules,
certain schedules and exhibits to the Agreement, which are listed
in the table of contents to the Agreement, are omitted. Such
schedules and exhibits will be furnished supplementally to the SEC
upon request.)
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Financial Statements of Studio Archetype, Inc.
99.2 Pro Forma Financial Information
- ----------
* Previously Filed.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 333-05155, 333-07561, 333-07563, 333-07565,
333-53769 and 333-53777) and Forms S-3 (Nos. 333-43485, 333-63301, 333-62589 and
333-56531) of Sapient Corporation of our report dated March 20, 1998 on the
financial statements of Studio Archetype, Inc. as of and for the year ended
December 31, 1997, which is included in this Current Report on Form 8-K/A dated
November 4, 1998.
PricewaterhouseCoopers LLP
San Jose, California
November 4, 1998
<PAGE> 1
EXHIBIT 99.1
STUDIO ARCHETYPE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder
of Studio Archetype, Inc.
In our opinion, the accompanying balance sheet and the related
statements of operations, of shareholder's equity and of cash flows present
fairly, in all material respects, the financial position of Studio Archetype,
Inc. at December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles. 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 audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
March 20, 1998
1
<PAGE> 3
STUDIO ARCHETYPE, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
(in thousands)
--------------
<S> <C>
ASSETS
Current Assets:
Cash $ 6
Short-term investments 329
Accounts receivable, net 2,780
Other current assets 56
------
Total current assets 3,171
Property and equipment, net 1,996
Other assets 130
------
$5,297
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 842
Accrued expenses 607
Deferred revenue 966
Debt and lease obligations, current 1,024
------
Total current liabilities 3,439
Debt and lease obligations, noncurrent 653
Deferred rent 42
------
4,134
------
Commitments (note 6)
Shareholder's Equity:
Common Stock, no par value; 100,000 shares
authorized; 30,000 shares issued and outstanding 282
Net unrealized gains on investments 302
Retained earnings 579
------
Total shareholder's equity 1,163
------
$5,297
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
STUDIO ARCHETYPE, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(in thousands)
--------------
<S> <C>
Revenues $10,365
Operating expenses:
Project personnel costs 4,593
Selling and marketing 1,016
General and administrative 4,328
-------
Total operating expenses 9,937
-------
Income from operations 428
Interest expense (120)
Other income 15
Gain on sale of investments 648
-------
Income before taxes 971
Provision for income taxes (21)
-------
Net Income $ 950
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
STUDIO ARCHETYPE, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Net
Common Stock Unrealized Total
----------------- Gain on Retained Shareholder's
Shares Amount Investments Earnings Equity
------ -------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 30 $282 $ - $ 457 $ 739
Unrealized gain on investments - - 302 - 302
Shareholder distributions - - - (828) (828)
Net income - - - 950 950
-- ---- ---- ----- ------
Balance at December 31, 1997 30 $282 $302 $ 579 $1,163
== ==== ==== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
STUDIO ARCHETYPE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(in thousands)
--------------
<S> <C>
Cash flows from operating activities:
Net income $ 950
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 503
Provision for doubtful accounts 22
Gain on sale of investments (648)
Changes in current assets and liabilities:
Accounts receivable (1,607)
Other current assets (42)
Other assets (57)
Accounts payable 148
Accrued expenses 183
Deferred revenue 718
Deferred rent 42
-------
Net cash provided by operating activities 212
-------
Cash flows from investing activities:
Sale of investments 687
Purchase of property and equipment (1,173)
-------
Net cash used in investing activities (486)
-------
Cash flows from financing activities:
Shareholder distribution (644)
Proceeds from debt and lease obligations 1,154
Payment of debt and lease obligations (234)
-------
Net cash provided by financing activities 276
-------
Net increase in cash 2
Cash at beginning of year 4
-------
Cash at end of year of year $ 6
=======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 118
=======
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Acquisition of property and equipment on account $ 446
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
STUDIO ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Studio Archetype, Inc., (the "Company") was incorporated in California
on March 7, 1990, and is engaged in corporate identity, brand strategy and web
site development services. The Company was originally incorporated as Clement
Mok Design, Inc. and subsequently reincorporated as Studio Archetype, Inc. in
1996. The Company's headquarters are located in San Francisco and the Company
operates offices in New York and Atlanta. In January and February 1998, the
Company opened satellite offices in Sydney, Australia and Sao Paulo, Brazil.
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
The Company derives its revenues from consulting service contracts.
Service revenues from fixed-price development agreements are recognized
over the period of each engagement under the percentage of completion method
using labor hours incurred as a measure of progress towards completion.
Provisions for contract adjustments and losses are recorded in the periods such
items are identified. Deferred revenues represent the amount of revenues
received in advanced of services being performed. Unbilled revenues represent
revenues recognized in advance of related billings. Revenues from time and
materials agreements are recognized and billed as the services are provided.
INVESTMENTS
The Company classifies all short-term investments as available-for-sale
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities are carried at fair value, with unrealized holding
gains and losses reported as a separate component of shareholder's equity.
Investments in equity securities that do not have readily determinable fair
values are stated at cost, adjusted for impairment, and categorized as other
investments. Realized gains and losses are determined using the specific
identification method based on the trade date of a transaction.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist primarily of cash, short-term investments
and accounts receivable. The Company limits its exposure to credit loss by
depositing its cash with high credit quality financial institutions. The
Company's short-term investments consist primarily of common stock investments
in public corporations. The Company believes the risk with respect to trade
receivables is mitigated, to some extent, by the fact that the Company's
customer base is geographically dispersed and is highly diversified. The Company
has not experienced any significant credit losses to date.
One customer accounted for approximately 40% of total revenues for the
year ended December 31, 1997. Accounts receivable from this customer totaled
approximately $599,000 at December 31, 1997.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Assets held under capital
leases are recorded at the present value of the minimum lease payments at lease
inception. Depreciation and amortization are computed using the straight-
6
<PAGE> 8
STUDIO ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
line method over the estimated useful lives of the assets, generally 3 to 10
years, or the lease term of the respective assets.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with Statement
of Position 93-7, "Reporting on Advertising Costs" and totaled $151,000 for the
year ended December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash, accounts
receivable, accounts payable and short-term borrowings, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments. Investments are carried at fair value except for immaterial equity
securities of private companies for which it is impracticable to estimate fair
value. Notes payable and other long-term debt have carrying amounts which
approximate fair value based on borrowing rates currently available to the
Company for credit facilities with similar terms.
INCOME TAXES
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholder's personal income tax returns. The provision for
income taxes represents the 1.5% franchise tax imposed by the State of
California.
NOTE 2 - BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
(in thousands)
--------------
<S> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $ 2,222
Unbilled revenues 601
-------
2,823
Less: Allowance for doubtful accounts (43)
-------
$ 2,780
=======
PROPERTY AND EQUIPMENT, NET:
Computer equipment $ 2,215
Furniture and fixtures 647
Leasehold improvements 459
-------
3,321
Less: Accumulated depreciation and amortization (1,325)
-------
$ 1,996
=======
</TABLE>
Property and equipment includes $283,000 of computer equipment under
capital leases at December 31, 1997. Accumulated amortization of assets under
capital leases totaled $218,000 at December 31, 1997.
7
<PAGE> 9
STUDIO ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
(in thousands)
--------------
<S> <C>
ACCRUED EXPENSES:
Payroll and related expenses $298
Shareholder distribution payable 184
Other 125
----
$607
====
</TABLE>
NOTE 3 - INVESTMENTS:
Short-term investments at December 31, 1997, consist primarily of Common
Stock investments in public corporations which are classified as
available-for-sale securities. The aggregate fair value and related cost basis
of short-term investments at December 31, 1997 totaled $329,000 and $27,000,
respectively. Other investments do not have readily determinable fair values and
consist of Preferred Stock of a private company. The carrying value of other
investments at December 31, 1997 totaled $36,000 and is included in other
assets. Investment income for the year ended December 31, 1997 consisted of a
realized gain on the sale of a Common Stock investment.
NOTE 4 - RELATED PARTY TRANSACTIONS:
The Company's sole shareholder is also the sole shareholder of CMCD,
Inc. ("CMCD"). The Company provides office space and administrative services to
CMCD. Fees charged to CMCD for these services totaled $7,000 for the year ended
December 31, 1997.
At December 31, 1997, shareholder distributions totalling $184,000
remained unpaid and were included in accrued expenses.
NOTE 5 - BORROWINGS:
SHORT-TERM LOAN
At December 31, 1997, the Company had a $154,000 loan with a bank
secured by investments in Common Stock (see Note 3). The note accrues interest
at 8 7/8% per annum. Principal and accrued interest are payable upon either the
sale of the related investments or a decline in the fair value of the related
investments below the loan amount.
LINE OF CREDIT
At December 31, 1997, the Company had $600,000 outstanding under a line
of credit with a bank. The line of credit provides for borrowings of up to
$600,000 which are secured by equipment and certain specified assets of the
Company, as well as certain personal assets of the Company's sole shareholder.
The line of credit expires in June 1998, and interest is payable monthly at a
rate of prime plus 2 1/2% per annum (11% at December 31, 1997).
8
<PAGE> 10
STUDIO ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTES PAYABLE
Notes payable consists of amounts payable to a bank and are secured by
equipment and certain specified assets of the Company, as well as certain
personal assets of the Company's sole shareholder as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
(in thousands)
--------------
<S> <C>
Construction line of credit subsequently refinanced in February
1998 as a note payable, interest rate of prime plus 2 1/2%
(11% at December 31, 1997), principal and interest payable
monthly, maturing February 2003 $ 250
Notes payable for equipment, interest rates ranging from 9.95%
to 10.55%, principal and interest payable monthly, maturing at
various dates between May and September 2000 391
Note payable, interest rate of prime plus 2 1/4% (10.75% at
December 31, 1997), principal and interest payable monthly,
maturing September 2001 64
Note payable, interest rate of prime plus 2 1/4% (10.75% at
December 31, 1997), principal and interest payable monthly,
maturing September 2003 156
-----
861
Less: current portion (212)
-----
$ 649
=====
</TABLE>
Principal payments under notes payable, including the subsequent
refinancing of the construction line of credit noted above, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (in thousands)
<S> <C>
1998 $ 212
1999 240
2000 186
2001 99
2002 93
Thereafter 31
-----
$ 861
=====
</TABLE>
CAPITAL LEASES
Future minimum lease payments under noncancelable capital leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (in thousands)
<S> <C>
1998 $ 65
1999 4
----
69
Less: amount representing interest (7)
----
Present value of capital line obligations 62
Less: current portion (58)
----
Long-term portion of capital lease obligations $ 4
====
</TABLE>
9
<PAGE> 11
STUDIO ARCHETYPE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - COMMITMENTS:
LEASES
The Company leases office space and equipment under noncancelable
operating and capital leases with various expiration dates through 2006. The
terms of the facility lease provide for rental payments on a graduated scale.
The Company recognizes rent expense on a straight-line basis over the lease
period, and has accrued for rent expense incurred but not paid. Rent expense for
the year ended December 31, 1997 was $743,000.
Future minimum lease payments under noncancelable operating leases,
including lease commitments entered into subsequent to December 31,
1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
(in thousands)
--------------
<S> <C>
1998 $ 796
1999 790
2000 769
2001 751
2002 585
Thereafter 1,315
------
Total minimum lease payments $5,006
======
</TABLE>
NOTE 7. SUBSEQUENT EVENTS (UNAUDITED)
On August 25, 1998, the Company signed a Stock Purchase Agreement whereby the
Company's outstanding common stock was acquired by Sapient Corporation. The
purchase of the Company will be accounted for under the purchase accounting
method in accordance with APB Opinion No. 16.
10
<PAGE> 12
<TABLE>
<CAPTION>
Studio Archetype, Inc.
BALANCE SHEET
AS OF JUNE 30, 1998
(In thousands)
(Unaudited)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 453
Short term investments 133
Accounts receivable, net 2,779
Other current assets 12
------
Current assets 3,377
Property and equipment, net 2,168
Other assets 212
------
$5,757
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,302
Accrued expenses 1,178
Deferred revenues on contracts 391
Debt and lease obligations, current 1,024
------
Total current liabilities 3,895
Debt and lease obligations, noncurrent 941
------
4,836
------
COMMITMENTS
Shareholders' equity:
Common stock, no par value, 100,000 shares
authorized; 30,000 shares issued and
outstanding 282
Net unrealized gains on investments 125
Retained earnings 514
------
Total shareholders' equity 921
------
$5,757
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE> 13
<TABLE>
<CAPTION>
Studio Archetype, Inc.
Income Statement
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In thousands)
(Unaudited)
<S> <C>
Revenues $ 7,685
Operating Expenses:
Project personnel costs 3,596
Selling and marketing 1,062
General and administrative 2,912
-------
Total Operating Expenses 7,570
Income from operations 115
Interest expense (87)
Other Income 10
Gain on sale of investments 336
-------
NET INCOME $ 374
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE> 14
<TABLE>
<CAPTION>
Studio Archetype, Inc.
Statements of Cash Flows
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (In thousands)
(Unaudited)
<S> <C>
Cash flows from operating activities:
Net Income $ 374
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 363
Provision for doubtful accounts 12
Revenue reserves 250
Gain on sale of investments (336)
Changes in current assets and liabilities:
Accounts receivable (261)
Other assets (38)
Accounts payable 460
Accrued expenses 438
Deferred rent (42)
Deferred revenue (575)
-----
Net cash provided by operating activities 645
-----
Investment activities
Sale of investments 355
Purchase of property and equipment (535)
-----
Net cash used in investing activities (180)
-----
Cash flows from financing activities
Shareholder distribution (270)
Proceeds from debt and lease obligations 550
Payment of debt and lease obligations (262)
-----
Net cash provided in financing activities (18)
-----
Net increase in cash 447
Cash at beginning of period 6
-----
Cash at end of period $ 453
=====
SUPPLEMENTAL CASH FLOW INFORMATION: $ 92
=====
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Acquisition of property and equipment on account $ 288
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE> 15
Studio Archetype, Inc.
Notes to Financial Statements
Note 1. Basis of presentation
The unaudited financial statements for as of June 30, 1998 and for the six
months then ended have been prepared in accordance with generally accepted
accounting principles and include all normal recurring adjustments, which in the
opinion of management, are necessary to present fairly the results of operations
for the period then ended. The results of operations for the six month period
ended June 30, 1998 are not necessarily indicative of the results of operations
for the year ending December 31, 1998.
Note 2. Subsequent event
On August 25, 1998, the Company signed a Stock Purchase Agreement whereby the
Company's outstanding common stock was acquired by Sapient Corporation. The
purchase of the Company will be accounted for under the purchase acquisition
accounting method in accordance with APB Opinion No. 16.
14
<PAGE> 1
EXHIBIT 99.2
In August 1998, Sapient Corporation ("Sapient" or "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. 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.
The unaudited Pro Forma Condensed Consolidated Statements of Operations (the
"Pro Forma Statements of Operations") for the year ended December 31, 1997 and
the six months ended June 30, 1998 give effect to the acquisition of Studio as
if it had occurred on January 1, 1997. The Pro Forma Statements of Operations
are based on the historical results of operations of the Company and Studio for
the year ended December 31, 1997 and the six months ended June 30, 1998. The
unaudited Pro Forma Condensed Consolidated Balance Sheet ("Pro Forma Balance
Sheet") give effect to the acquisition of Studio as if it had acquired on June
30, 1998. The Pro Forma Statements of Operations and the Pro Forma Balance
Sheet (the "Pro Forma Financial Information") and the accompanying notes
thereto should be read in conjunction with and are qualified by the historical
consolidated financial statements of the Company and notes thereto.
The Pro Forma Financial Information is intended for informational purposes only
and is not necessarily indicative of the future financial position or future
results of operations of the combined company after the acquisition of Studio,
or of the financial position or results of operations of the combined company
that would have actually occurred had the acquisition of Studio been effected on
January 1, 1997.
In connection with the acquisition of Studio Archetype, Inc. ("Studio"),
Sapient 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 these projects had not yet reached
technological feasibility and the research and development ("R&D") in progress
had no alternative future uses. Accordingly, these costs were expensed as of
the acquisition date.
Sapient used independent third-party appraisers to assess and allocate values
to the in-process research and development. 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 peak in 2002 and
decline rapidly 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 compatability 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 in aggregate 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 R&D. 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 advances that are unknown at this time.
The forecasts used by Sapient in valuing in-process research and development
were based upon assumptions that Sapient believes to be reasonable but which are
inherently uncertain and unpredictable. Sapient'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.
Sapient 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.
Sapient expects to continue their support of these efforts and belives Studio
has a reasonable chance of successfully completing the R&D 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.
If these projects are not successfully developed, the sales and profitability
of Studio may be adversely affected in future periods. Additionally, the value
of the other intangible assets acquired may become impaired. Studio expects to
benefit from the purchased in-process technology beginning in 1999.
<PAGE> 2
SAPIENT CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sapient Studio Pro Forma
Corporation Archetype, Inc. Adjustments Pro Forma
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 68,262 $ 453 $ (250)(a) $ 68,465
Short term investments 16,853 133 (133)(c) 16,853
Accounts receivable, less allowance for
doubtful accounts 22,005 2,638 24,643
Unbilled revenues on contracts 17,647 141 17,788
Other current assets 2,394 12 2,406
Deferred income taxes 35 35
-------- ------ -------- --------
Current assets 127,196 3,377 (383) 130,190
Property and equipment, net 7,659 2,168 9,827
Goodwill 9,663 (b) 9,663
Deferred taxes 5,624 (b) 5,624
Other assets 260 212 (36)(d) 436
-------- ------ -------- --------
Total assets $135,115 $5,757 $ 14,868 $155,740
======== ====== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Accounts payable 1,302 1,302
Accrued expenses 1,533 478 2,335(a) 4,346
Accrued compensation 3,345 700 4,045
Accrued income taxes payable 2,091 2,091
Debt and lease obligations, current 1,024 1,024
Deferred revenues on contracts 4,735 391 5,126
-------- ------ -------- --------
Total current liabilities 11,704 3,895 2,335 17,934
Deferred income taxes 121 121
Long term debt 957 941 1,898
Other long term liabilities
-------- ------ -------- --------
Total liabilities 12,782 4,836 2,335 19,953
Common Stock 252 282 228 (a)
(282)(b) 480
Additional paid-in capital 88,487 22,571 (a) 111,058
Retained earnings 33,594 514 (514)(b)
(9,176)(b)
(133)(c)
(36)(d) 24,249
Unrealized gain on marketable securities 125 (125)(b)
-------- ------ -------- --------
Stockholders' Equity $122,333 $ 921 $ 12,533 $135,787
======== ====== ======== ========
TOTAL LIABILITY AND EQUITY $135,115 $5,757 $ 14,868 $155,740
======== ====== ======== ========
</TABLE>
(a) The pro forma adjustment reflects Sapient's purchase of 100% of the
outstanding common stock of Studio Archetype, Inc. (Studio)
Cash paid by Sapient 250
Restricted Common Stock issued 22,800
Direct Transaction Costs 2,335
Investment in Studio Archetype 25,385
(b) The pro forma adjustment reflects adjustments and the allocation of the
purchase price paid to the assets acquired and liabilities assumed based
on their respective fair values and to eliminate the equity of Studio.
Fair value of identifiable tangible assets and liabilites 921
Purchased in process research and development, net of tax 9,177
Deferred tax benefit resulting from in process R&D 5,624
Goodwill 9,663
Investment in Studio Archetype 25,385
(c) Sale of marketable securities and distribution to shareholders.
(d) Distributions of other assets to shareholders.
<PAGE> 3
SAPIENT CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Sapient Studio Pro Forma
Corporation Archetype, Inc. Adjustments Pro Forma
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $66,080 $7,685 $ $73,765
COSTS AND EXPENSES:
Project personnel costs 31,679 3,596 35,275
Selling and marketing 4,446 1,062 5,508
General and administrative 16,488 2,912 690 (a) 20,090
------- ------ ----- -------
Total Operating Expenses $52,613 $7,570 690 $60,873
------- ------ ----- -------
OPERATING INCOME 13,467 115 (690) 12,892
INTEREST INCOME (EXPENSE) 1,280 (87) (4)(b) 1,189
OTHER INCOME (GAIN ON SALE) 346 346
------- ------ ----- -------
INCOME BEFORE INCOME TAXES 14,747 374 (694) 14,427
INCOME TAX EXPENSE 5,433 (262)(c) 5,313
142 (d)
------- ------ ----- -------
NET INCOME $ 9,314 $ 374 $(574) $ 9,114
======= ====== ===== =======
NET INCOME PER SHARE:
Basic .38 .36
Diluted .34 .33
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 24,740 498 25,238
Diluted 27,539 498 28,037
======= =======
</TABLE>
- ----------
(a) Increase in amortization resulting from goodwill and other intangibles.
(b) Lost interest due to use of cash in acquisition.
(c) Tax benefit of above entries.
(d) Pro-forma tax expense on S corp. earnings of Studio Archetype.
Does not include an in-process research & development charge of $9,177 net of a
deferred tax benefit of $5,624, which will be reflected in the combined
company's third quarter results.
<PAGE> 4
SAPIENT CORPORATION
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Sapient Studio Pro Forma Combined
Corporation Archetype, Inc. Adjustments Pro Forma
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES $90,360 $10,365 $ $100,725
COSTS AND EXPENSES:
Project personnel costs 43,816 4,593 48,409
Selling and Marketing 5,893 1,016 6,909
General and administrative 22,108 4,328 1,381 (a) 27,817
Acquisition Costs 560 560
------- ------- -------- --------
Total Operating Expenses $72,377 $ 9,937 1,381 $ 83,695
------- ------- -------- --------
OPERATING INCOME (LOSS) 17,983 428 (1,381) 17,030
INTEREST INCOME (EXPENSE) 2,078 (120) (9)(b) 1,949
OTHER INCOME (GAIN ON SALE OF INVESTMENTS) 642 642
------- ------- -------- --------
INCOME BEFORE TAXES 20,061 950 (1,390) 19,621
PROVISION FOR INCOME TAXES 7,703 -- (528)(c) 7,536
------- ------- -------- --------
361 (d)
--------
NET INCOME $12,358 $ 950 $ (1,223) $ 12,085
======= ======= ======== ========
NET INCOME PER SHARE:
Basic .52 .17
Diluted .47 .16
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 23,996 498 24,494
Diluted 26,079 498 26,577
</TABLE>
- ----------
(a) Increase in amortization resulting from goodwill and other intangibles.
(b) Lost interest due to use of cash in acquisition.
(c) Tax benefit of above entries.
(d) Pro-forma tax expense on S corp. earnings of Studio Archetype.
Does not include an in-process research & development charge of $9,177 net of a
deferred tax benefit of $5,624, which will be reflected in the combined
company's third quarter results.
