<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JUNE 30, 1999
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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MEMORIAL DRIVE, CAMBRIDGE, MA 02142
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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)
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 August 9, 1999, there were 27,681,013 shares of the registrant's
Common Stock, $.01 par value, outstanding.
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<PAGE> 2
SAPIENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of June 30, 1999 and December
31, 1998.................................................... 2
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Months Ended June 30, 1999 and
1998........................................................ 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998................................ 4
Notes to Consolidated Financial Statements.................. 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7-11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 2. Changes in Securities and Use of Proceeds................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signatures............................................................ 13
Exhibit 11.1.......................................................... 14
Exhibit 27.1.......................................................... 15
</TABLE>
1
<PAGE> 3
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,983 $ 39,320
Short term investments.................................... 69,686 52,500
Accounts receivable, less allowance for doubtful accounts
of $495 and $550, respectively......................... 56,163 42,797
Unbilled revenues on contracts............................ 13,951 10,306
Deferred income taxes..................................... 3,973 3,973
Prepaid expenses and other current assets................. 13,533 3,734
-------- --------
Total current assets.............................. 172,289 152,630
Property and equipment, net................................. 19,348 14,447
Deferred income taxes....................................... 5,702 5,702
Intangible assets........................................... 12,141 13,729
Due from employees.......................................... 2,257 764
Other assets................................................ 648 430
-------- --------
Total assets...................................... $212,385 $187,702
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,603 $ 1,182
Accrued expenses.......................................... 3,691 3,743
Accrued compensation...................................... 5,787 8,633
Accrued income taxes payable.............................. 6,218 2,217
Deferred income taxes..................................... 4,170 4,170
Deferred revenues on contracts............................ 9,477 10,907
-------- --------
Total current liabilities......................... 31,946 30,852
Deferred income taxes....................................... 773 773
Other long term liabilities................................. 1,552 1,263
-------- --------
Total liabilities................................. 34,271 32,888
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
authorized and none issued and outstanding at June 30,
1999 and December 31, 1998............................. -- --
Common stock, par value $.01 per share, voting,
100,000,000 shares authorized, 28,334,304 issued and
outstanding at June 30, 1999 and 27,106,293 shares
issued and outstanding at December 31, 1998............ 285 271
Additional paid-in capital................................ 132,950 122,800
Deferred compensation..................................... (809) (2,178)
Accumulated other comprehensive income.................... (198) --
Retained earnings......................................... 45,886 33,921
-------- --------
Total stockholders' equity........................ 178,114 154,814
-------- --------
Total liabilities and stockholders' equity........ $212,385 $187,702
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues........................................... $64,199 $36,420 $121,992 $68,015
------- ------- -------- -------
Operating expenses:
Project personnel costs.......................... 30,618 17,510 58,952 32,732
Selling and marketing............................ 5,411 2,666 9,384 4,509
General and administrative....................... 16,219 8,728 30,868 16,998
Stock compensation charge........................ 110 -- 1,809 --
Amortization of intangible assets................ 519 -- 1,088 --
Acquisition costs................................ -- -- 2,340 --
------- ------- -------- -------
Total operating expenses................. 52,877 28,904 104,441 54,239
Income from operations............................. 11,322 7,516 17,551 13,776
Interest income.................................... 859 676 1,679 1,266
------- ------- -------- -------
Income before income taxes......................... 12,181 8,192 19,230 15,042
Income tax expense................................. 4,495 2,929 7,266 5,433
------- ------- -------- -------
Net income............................... $ 7,686 $ 5,263 $ 11,964 $ 9,609
======= ======= ======== =======
Other comprehensive income, net of tax:
Foreign currency translation loss................ (66) -- (103) --
Unrealized holding loss on short term
investments................................... (47) -- (38) --
------- ------- -------- -------
Other comprehensive income, net of tax............. $ 7,573 $ 5,263 $ 11,823 $ 9,609
======= ======= ======== =======
Basic net income per share......................... $ 0.28 $ 0.20 $ 0.44 $ 0.38
======= ======= ======== =======
Diluted net income per share....................... $ 0.25 $ 0.18 $ 0.39 $ 0.34
======= ======= ======== =======
Weighted average common shares..................... 27,443 25,925 27,294 25,531
Weighted average common share equivalents.......... 3,139 2,863 3,284 2,799
------- ------- -------- -------
Weighted average common shares and common share
equivalents...................................... 30,582 28,788 30,578 28,330
======= ======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $11,964 $ 9,609
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation........................................... 3,430 1,629
Amortization of intangible assets...................... 1,088 --
Deferred compensation.................................. 1,809 --
Changes in assets and liabilities:
Increase in accounts receivable...................... (13,366) (6,079)
Increase in unbilled revenues on contracts........... (3,645) (8,577)
Increase in prepaid expenses and other current
assets.............................................. (9,799) (775)
Decrease (increase) in other assets.................. (164) 50
Increase in accounts payable......................... 1,423 38
(Decrease) increase in accrued expenses.............. 448 (399)
Decrease in accrued compensation..................... (2,846) (126)
(Decrease) increase in accrued income taxes
payable............................................. 4,001 (984)
Decrease in deferred revenues on contracts........... (1,430) (1,623)
Increase in other long term liabilities.............. 288 47
------- -------
Net cash used in operating activities....................... (6,799) (7,190)
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (8,332) (3,098)
Purchase (maturities) of short term investments........... (17,262) 239
------- -------
Net cash used in investing activities..................... (25,594) (2,859)
------- -------
Cash flows from financing activities:
Advances to employees for notes receivable................ (1,547) --
Proceeds from exercise of stock options................... 7,732 718
Proceeds from public stock offering....................... -- 29,296
Proceeds from employee stock purchase plan................ 1,871 1,005
------- -------
Net cash provided by financing activities......... 8,056 31,019
------- -------
(Decrease) increase in cash and cash equivalents............ (24,337) 20,970
Cash and cash equivalents, at beginning of period........... 39,320 47,314
------- -------
Cash and cash equivalents, at end of period................. $14,983 $68,284
======= =======
Supplemental disclosures for cash flow information:
Cash paid during the period for income taxes.............. $13,724 $ 6,417
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
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" or "Sapient") 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, 1998 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 six month period ended June 30, 1999
are not necessarily indicative of the results to be expected for any future
period or the full fiscal year.
On March 29, 1999, the Company acquired all of the outstanding common stock
of Adjacency, Inc. ("Adjacency") in exchange for 790,674 shares of Common Stock.
The Company's financial statements have been restated for all periods presented
to reflect the acquisition of Adjacency, which was accounted for as a pooling of
interests.
(2) 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.
In August 1999, the Company settled the legal proceedings brought against
it in April 1996 by John Adler, a former employee, who alleged, among other
things, wrongful termination of his employment. The suit was previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. In connection with the settlement, Mr. Adler received 12,000
(post-split) shares of the Company's Common Stock and the parties released each
other from all future claims relating to the matter. The shares Mr. Adler
received in the settlement were originally issued into escrow in 1996 when this
lawsuit originated. The issuance of these shares has no effect on the Company's
operating results or financial condition.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("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. Sapient
reports foreign currency translation gains and losses and unrealized gains and
losses on short term investments as components of comprehensive income.
(4) ACQUISITIONS
On March 29, 1999, the Company acquired all of the outstanding common stock
of Adjacency in exchange for 790,674 shares of the Company's Common Stock. The
Company's financial statements have been restated for all periods presented to
reflect the acquisition of Adjacency, which has been accounted for as
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition approximated $2.3 million,
have been reflected in the consolidated statements of income and comprehensive
income for the six months ended June 30, 1999.
5
<PAGE> 7
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 liabilities assumed based on their respective fair
values.
In connection with the Company's acquisitions of the capital stock of
Adjacency and Studio, the Company made secured loans to the former stockholders
of these companies to assist them to make transaction related tax payments, as
well as assuming existing loans. These loans are included in Due from employees
on the accompanying balance sheets and comprise a significant portion of such
amounts.
(5) RELATED PARTY TRANSACTIONS
The Company has provided technology services to certain start-up companies.
Sapient has received non-controlling equity interests in such start-up
companies. Due to the start-up nature of these entities, Sapient has During the
three and six-month periods ended June 30, 1999, Sapient recognized
approximately $1,163,000 and $3,369,000, respectively, in net revenues from
consulting services provided to related parties in which the Company has
received non-controlling equity interests. In addition, certain members of
management of the company have provided funding to these companies.
6
<PAGE> 8
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is an innovative e-services consultancy. Through the delivery
of integrated services, from business strategy and organizational transformation
consulting through user-centered design and technology implementation, Sapient
helps emerging and evolving businesses transform themselves into e-businesses.
The Company targets clients in information-intensive industries, including
Financial Services, Energy Services, Manufacturing-Retail and Distribution,
Public Sector and Media-Communications and Entertainment.
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 period.
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 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.
On March 29, 1999, the Company acquired all of the outstanding common stock
of Adjacency in exchange for 790,674 shares of the Company's Common Stock. The
Company's financial statements have been restated for all periods presented to
reflect the acquisition of Adjacency, which has been accounted for as
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition approximated $2.3 million,
have been reflected in the consolidated statements of income and comprehensive
income for the six months ended June 30, 1999.
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues.................................................... 100% 100% 100% 100%
Operating expenses:
Project personnel costs................................... 48 48 48 48
Selling and marketing..................................... 8 7 8 7
General and administrative................................ 25 24 25 25
Stock compensation charge................................. -- 0 2 0
Amortization of intangible assets......................... 1 0 1 0
Acquisition costs......................................... -- 0 2 0
--- --- --- ---
Total operating expenses................................ 82 79 86 80
Income from operations...................................... 18 21 15 20
Interest income............................................. 1 1 1 2
Income taxes................................................ 7 8 6 8
--- --- --- ---
Net income.................................................. 12% 14% 10% 14%
=== === === ===
</TABLE>
7
<PAGE> 9
Revenues
Revenues for the second quarter of 1999 increased 76% over revenues for the
second quarter of 1998. For the first six months of the year, revenues increased
79% over the comparable period of the prior year. The increase in revenues
reflects increases in both the average size and number of client projects. In
the second quarter of 1999, the Company's five largest clients accounted for
approximately 27% of its revenues, compared to 34% of revenues for the quarter
ended June 30, 1998. During the three and six months ended June 30, 1999 and
1998, no 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 six-month periods ended
June 30, 1999 was primarily due to an increase in project personnel from 846 at
June 30, 1998 to 1,413 at June 30, 1999. Project personnel costs remained
constant as a percentage of revenues at 48% for the second quarter of 1999 and
1998 and for the first six months of 1999 and 1998.
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 7%
in the second quarter of 1998 to 8% in the second quarter of 1999. For the first
six months of 1999, selling and marketing costs increased as a percentage of
revenues to 8% from 7% for the first six months of 1998. The increases were
primarily due to investments made by the Company in a new brand identity during
the second quarter of 1999 and also due to higher paid sales personnel. Selling
and marketing personnel increased from 42 employees at June 30, 1998 to 67
employees at June 30, 1999.
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 six
month periods ended June 30, 1999 was primarily due to an increase in the number
of employees hired during 1999, 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 1,035 at June 30, 1998 to 1,790 at
June 30, 1999. As a percentage of revenues, general and administrative costs
increased to 25% for the second quarter of 1999 compared to 24% for the second
quarter of 1998. This increase was primarily a result of an increase in
occupancy costs. General and administrative costs remained constant at 25% for
the six-month periods ending June 30, 1999 and June 30, 1998.
Stock Compensation Charge
Stock compensation charges consist of expenses associated with Adjacency
stock options that were granted, prior to the Company's acquisition of
Adjacency, at below fair market value and which vested during the quarter ended
March 31, 1999.
Amortization of Intangible Assets
Amortization of intangible assets consist primarily of amortization of
marketing assets and customer lists, assembled workforce and goodwill resulting
from the acquisition of Studio. Amortization periods range from five to seven
years.
8
<PAGE> 10
Interest Income
Interest income for the three and six month periods ended June 30, 1999 was
derived primarily 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 June 30, 1999 and 1998 of 36.9% and
35.8%, respectively.
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 June 30, 1999, the Company had no bank borrowings
outstanding and no material capital commitments.
The Company invests predominantly in instruments that are highly liquid,
investment grade and have maturities of less than one year. At June 30, 1999,
the Company had approximately $84.7 in cash, cash equivalents and short term
investments compared to $91.8 at December 31, 1998.
Cash used in operating activities was $6.8 million for the six months ended
June 30, 1999 and resulted primarily from increases in accounts receivable of
$13.4 million and increases of $3.6 million in unbilled revenues on contracts
due to increases in revenues. Also, the decrease in cash was due to increases in
prepaid expenses and other current assets of $9.8 million due to prepayments of
1999 estimated tax payments and decreases in accrued compensation due to 1998
bonus payments in the first quarter. Net income of $12 million and non-cash
charges of $6.3 million offset this decrease in cash. Cash used in operating
activities was $7.2 million for the six months ended June 30, 1998 due to
increases in accounts receivables of $6.1 million and unbilled revenue on
contracts of $8.6 million, offset by net income of $9.6 million and non-cash
charges of $1.6 million.
Cash used in investing activities was $25.6 million for the six months
ended June 30, 1999. Purchases (net of maturities) of short term investments
during the period were $17.3 million and capital expenditures were $8.3 million.
Increased capital expenditures were due to the significant expansion in the
Company's office space. Cash used in investing activities was $2.9 million for
the six months ended June 30, 1998, and was primarily due to capital
expenditures of $3.1 million.
Cash provided by financing activities was $8.1 million for the six months
ended June 30, 1999 and consisted primarily of cash received from the sale of
Common Stock through the Company's employee stock purchase plan and upon
exercise of stock options. Cash provided by financing activities was $31 million
for the six months ended June 30, 1998, and was primarily due to proceeds from a
public stock offering of $29.3 million.
The Company believes that its existing cash and short-term investments at
June 30, 1999, together with cash provided from operations and borrowings
available under its revolving line of credit 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.
Sapient has developed a phased Year 2000 readiness plan to help it identify
and resolve Year 2000 issues associated with Sapient's internal systems and the
services provided by Sapient. The plan includes development of corporate
awareness, assessment, implementation (including remediation and upgrading of
certain product versions), validation testing and contingency planning. Since
Sapient has installed nearly all of its
9
<PAGE> 11
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, Sapient's task is to install upgrades and patches to its internally
used software and hardware to make such systems and equipment Year 2000
compliant.
Sapient has a Company-wide Year 2000 team which oversees its Year 2000
program. Sapient 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),
other than recent replacements of certain non-IT systems which are currently
under assessment. Sapient'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 Sapient's internally developed applications are
Year 2000 compliant. With respect to the third-party software applications,
Sapient believes that, based on oral statements made by manufacturers and/or
statements published on manufacturers' web sites, that such products will be
Year 2000 compliant. At the manufacturer's recommendation, Sapient recently
installed patches in its versions of the Windows 95 and Windows NT operating
systems in order for those operating systems to become Year 2000 compliant.
However, actual testing indicates a further need for modification of some of
these systems to be fully Year 2000 compliant. The manufacturers of Sapient's
computer hardware platforms, principally servers, have indicated that the
versions currently used by Sapient are Year 2000 compliant. Sapient has obtained
written assurances from many third-party vendors stipulating that their products
are Year 2000 compliant and is in the process of seeking written assurances from
all of its vendors.
Sapient believes that it is approximately 70% complete in installing
patches and upgrades to its third party software and hardware. Due to the
acquisition of Adjacency in March 1999 and the integration of company-wide
systems, Sapient now expects to be completed with the implementation stage of
its Year 2000 program by the middle of the third quarter of 1999. Sapient had
expected to complete testing of all internally used software and hardware by the
second quarter of 1999. However, due to recent changes in vendor compliance
criteria, Sapient believes that its testing will be completed by the end of the
third quarter of 1999.
While Sapient does not separately track internal costs incurred for its
Year 2000 projects, it believes that it may have to expend additional funds to
utilize third party resources to complete its assessment procedures and
implement any required fixes. Sapient does not expect such expenditures to be
material. If compliance efforts are not completed on time, or additional
compliance efforts are required of which Sapient is not currently aware, or the
cost of any required updating or modification of our IT systems exceeds our
estimates, the Year 2000 issue could have a material adverse effect on Sapient's
business, results of operations and financial condition.
Sapient is developing a comprehensive contingency plan to address the
situations that may result if it is unable to achieve Year 2000 readiness of the
Company's major IT and non-IT systems. Sapient intends to devise contingency
plans by the end of the third 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 Sapient will prevent any such
service interruption.
In addition to Sapient's internal systems, the Company relies on third
party relationships in the conduct of its business. For example, Sapient relies
on the services of the landlords of its facilities, telecommunication companies,
banks, utilities, and commercial airlines. Sapient is currently seeking
assurances from its landlords and material vendors regarding their Year 2000
readiness, and to the extent such assurances are not given, the Company intends
to devise contingency plans in an attempt to ameliorate the negative effects on
Sapient in the event the Year 2000 issue results in the unavailability of
services. There can be no assurance that any contingency plans developed by
Sapient will be adequate to address 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 Sapient's business, results of operations or
financial condition. In addition, the failure on the part of the accounting
systems of Sapient's clients due to the Year 2000 issue could result in a delay
in the payment of invoices issued by Sapient for services and expenses. A
failure of the accounting systems of a significant
10
<PAGE> 12
number of Sapient's clients would have a material adverse effect on Sapient's
business, results of operations and financial condition.
Sapient's business involves designing, developing and implementing mission
critical Internet and software applications for its clients. In addition,
Sapient has recommended, implemented and customized various third-party
technology and 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 Sapient involved or are affected by the Year 2000 issue.
Because Sapient 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 Sapient's clients retain the right
to maintain, alter and modify the systems developed and implemented by Sapient
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 Sapient,
Sapient may be subjected to claims regardless of whether the failure is related
to the services provided by Sapient. If asserted, such claims (and the
associated defense costs) could have a material adverse effect on the Sapient's
business, results of operations and financial condition.
Sapient'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 Sapient's liability to the amount of fees
paid by the client to Sapient in connection with the project, and disclaim any
liability arising from third-party software that is implemented, customized or
installed by Sapient. There can be no assurance that Sapient 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 Sapient with respect to the Year
2000 issue. There also can be no assurance that the contractual protections, if
any, obtained by Sapient will effectively operate to protect the Company from,
or limit the amount of, any liability arising from claims asserted against
Sapient.
The foregoing discussion of Sapient's Year 2000 readiness contains forward
looking statements including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting Sapient 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 Sapient to identify and correct all Year 2000 problems and
the success of third parties with whom Sapient does business in addressing their
Year 2000 issues.
The foregoing section of the Company's Form 10-Q entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which would
require disclosure under this item.
11
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, the Company settled the legal proceedings brought against
it in April 1996 by John Adler, a former employee, who alleged, among other
things, wrongful termination of his employment. The suit was previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. In connection with the settlement, Mr. Adler received 12,000
(post-split) shares of the Company's Common Stock and the parties released each
other from the current proceedings and all future claims relating to the matter.
The shares Mr. Adler received in the settlement were originally issued into
escrow in 1996 when this lawsuit originated. The issuance of these shares has no
effect on the Company's operating results or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with the Company's acquisition of Adjacency, the Company
issued a total of 790,674 shares of its Common Stock on March 29, 1999 to the
former stockholders of Adjacency as consideration for all of the outstanding
capital stock of Adjacency. This transaction was exempt from registration
requirements pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933, as amended.
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).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 15, 1999, the
following proposals were adopted by the votes specified below:
(i) The election of two Class III Directors (R. Stephen Cheheyl and
Carl S. Sloane) to serve until the year 2002. Mr. Cheheyl received a total
of 23,037,556 shares of Common Stock voting in favor, with 21,280 withheld
from the vote. Mr. Sloane received a total of 23,037,556 shares of Common
Stock voting in favor, with 21,280 withheld from the vote. In addition to
the directors listed above whom were elected at the meeting, the terms of
the following directors continued after the meeting: J. Stuart Moore,
Darius W. Gaskins, Jerry A. Greenberg and Bruce D. Parker.
(ii) The approval of an amendment to the Company's 1998 Stock
Incentive Plan increasing the number of shares of Common Stock reserved for
purchase thereunder from 2,000,000 to 4,500,000. A total of 13,798,840
shares of Common Stock were voted in favor of this proposal, 6,190,660
shares were voted against this proposal and 78,604 shares abstained from
voting.
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 April 7, 1999, the Company filed a Current Report on Form 8-K dated
March 29, 1999 reporting its acquisition of all of the capital stock of
Adjacency, Inc., a San Francisco based consulting firm that provides a broad
range of consulting services including Internet strategy, interactive design,
technology development and management of Internet and e-commerce solutions.
On April 23, 1999, the Company filed a Current Report on Form 8-K dated
April 23, 1999, as amended by Form 8-K/A dated April 23, 1999, reporting
supplemental consolidated financial statements, relating to the acquisition of
all of the capital stock of Adjacency, Inc.
12
<PAGE> 14
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.
<TABLE>
<S> <C>
SAPIENT CORPORATION
Date: August 12, 1999 By: /s/ JERRY A. GREENBERG
------------------------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Date: August 12, 1999 By: /s/ SUSAN D. JOHNSON
------------------------------------------
Susan D. Johnson
Chief Financial Officer
</TABLE>
13
<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 PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net Income.............................. $ 7,686 $ 5,263 $11,964 $ 9,609
Basic Net Income per Share:
Weighted average common shares
outstanding...................... 27,443 25,925 27,294 25,531
------- ------- ------- -------
Shares used in computing per share
amount........................... 27,443 25,925 27,294 25,531
------- ------- ------- -------
Basic net income per share......... $ 0.28 $ 0.20 $ 0.44 $ 0.38
======= ======= ======= =======
Diluted Net Income per Share:
Weighted average common shares
outstanding...................... 27,443 25,925 27,294 25,531
Dilutive stock options............. 3,139 2,863 3,284 2,799
------- ------- ------- -------
Shares used in computing per share
amount........................... 30,582 28,788 30,578 28,330
------- ------- ------- -------
Diluted net income per share....... $ 0.25 $ 0.18 $ 0.39 $ 0.34
======= ======= ======= =======
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 14,983 14,983
<SECURITIES> 69,686 69,686
<RECEIVABLES> 56,658 56,658
<ALLOWANCES> 495 495
<INVENTORY> 0 0
<CURRENT-ASSETS> 172,289 172,289
<PP&E> 33,077 33,077
<DEPRECIATION> 13,729 13,729
<TOTAL-ASSETS> 212,385 212,385
<CURRENT-LIABILITIES> 31,946 31,946
<BONDS> 0 0
0 0
0 0
<COMMON> 285 285
<OTHER-SE> 177,829 177,829
<TOTAL-LIABILITY-AND-EQUITY> 212,385 212,385
<SALES> 64,199 121,992
<TOTAL-REVENUES> 64,199 121,992
<CGS> 0 0
<TOTAL-COSTS> 52,877 104,441
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 859 1,679
<INCOME-PRETAX> 12,181 19,230
<INCOME-TAX> 4,495 7,266
<INCOME-CONTINUING> 7,686 11,964
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,686 11,964
<EPS-BASIC> 0.28 0.44
<EPS-DILUTED> 0.25 0.39
</TABLE>
