<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 MARCH 31, 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 (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 May 10, 1999, there were 27,868,320 shares of Common Stock, $.01 par
value, outstanding.
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<PAGE> 2
SAPIENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998.............................. 2
Consolidated Statements of Income and
Comprehensive Income for the Three Months Ended
March 31, 1999 and 1998............................ 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 2. Changes in Securities and Use of Proceeds.......... 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>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 21,084,423 $ 39,320,129
Short term investments.................................... 67,887,863 52,500,357
Accounts receivable, less allowance for doubtful accounts
of $550,000............................................ 51,130,544 42,796,786
Unbilled revenues on contracts............................ 10,259,106 10,306,251
Deferred income taxes..................................... 3,973,018 3,973,018
Prepaid expenses and other current assets................. 3,058,001 3,733,678
------------ ------------
Total current assets.............................. 157,392,955 152,630,219
Property and equipment, net................................. 17,242,752 14,446,774
Deferred income taxes....................................... 5,702,245 5,702,245
Intangible assets........................................... 13,160,384 13,728,538
Due from shareholders....................................... 49,475 764,457
Other assets................................................ 402,865 429,473
------------ ------------
Total assets...................................... $193,950,676 $187,701,706
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank..................................... $ -- $ 116,794
Accounts payable.......................................... 2,272,212 1,063,946
Accrued expenses.......................................... 5,438,426 3,743,182
Accrued compensation...................................... 3,717,962 8,632,905
Accrued income taxes payable.............................. 1,026,975 2,217,446
Deferred income taxes..................................... 4,170,469 4,170,469
Deferred revenues on contracts............................ 9,344,918 10,906,874
------------ ------------
Total current liabilities......................... 25,970,962 30,851,586
Deferred income taxes....................................... 773,236 773,236
Other long term liabilities................................. 1,201,165 1,262,554
------------ ------------
Total liabilities................................. 27,945,363 32,887,406
============ ============
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
authorized and none outstanding at March 31, 1999 and
December 31, 1998...................................... -- --
Common stock, par value $.01 per share, voting,
100,000,000 shares authorized, 27,419,500 issued and
outstanding at March 31, 1999 and 27,106,293 shares
issued and outstanding at December 31, 1998............ 274,195 271,067
Additional paid-in capital................................ 128,468,468 122,799,903
Deferred compensation..................................... (918,677) (2,177,921)
Accumulated other comprehensive income.................... (18,718) --
Retained earnings......................................... 38,200,045 33,921,251
------------ ------------
Total stockholders' equity........................ 166,005,313 154,814,300
------------ ------------
Total liabilities and stockholders' equity........ $193,950,676 $187,701,706
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $57,793,365 $31,595,356
Operating expenses:
Project personnel costs................................... 28,334,347 15,221,375
Selling and marketing..................................... 3,973,489 1,842,514
General and administrative................................ 15,216,713 8,270,660
Stock compensation charge................................. 1,699,330 --
Acquisition costs......................................... 2,340,000 --
----------- -----------
Total operating expenses.......................... 51,563,879 25,334,549
Income from operations...................................... 6,229,486 6,260,807
Interest income............................................. 819,598 590,030
----------- -----------
Income before income taxes.................................. 7,049,084 6,850,837
Income tax expense.......................................... 2,770,290 2,503,949
----------- -----------
Net income........................................ $ 4,278,794 $ 4,346,888
=========== ===========
Other comprehensive income, net of tax:
Foreign currency translation loss......................... (35,775) --
Unrealized holding gain on marketable securities.......... 8,432 --
----------- -----------
Other comprehensive income, net of tax...................... $ 4,251,451 $ 4,346,888
=========== ===========
Basic net income per share.................................. $ 0.16 $ 0.17
=========== ===========
Diluted net income per share................................ $ 0.14 $ 0.16
=========== ===========
Weighted average common shares.............................. 27,139,284 25,138,074
Weighted average common share equivalents................... 3,434,812 2,623,700
----------- -----------
Weighted average common shares and common share
equivalents............................................... 30,574,096 27,761,774
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,278,794 $ 4,346,888
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation........................................... 1,507,836 747,419
Amortization of intangible assets...................... 568,154 --
Deferred compensation.................................. 1,699,330 --
Changes in assets and liabilities:
Increase in accounts receivable...................... (8,333,757) (4,131,683)
Decrease (increase) in unbilled revenues on
contracts......................................... 47,145 (1,503,723)
Decrease (increase) in prepaid expenses and other
current assets.................................... 675,677 (1,034,361)
Decrease in other assets............................. 31,608 987
Increase in accounts payable......................... 1,208,266 95,180
Increase in accrued expenses......................... 1,695,244 202,620
Decrease in accrued compensation..................... (4,914,943) (472,514)
(Decrease) increase in income taxes payable.......... (1,190,471) 413,370
Decrease in deferred revenues on contracts........... (1,561,956) (1,643,211)
(Decrease) increase in other long term liabilities... (61,389) 23,362
------------ -----------
Net cash used in operating activities....................... (4,350,462) (2,955,666)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment........................ (4,303,814) (1,433,623)
Purchase of short term investments........................ (15,463,938) (6,783,793)
------------ -----------
Net cash used in investing activities..................... (19,767,752) (8,217,416)
------------ -----------
Cash flows from financing activities:
Repayments from stockholders for notes receivable......... 709,982 --
Proceeds from exercise of stock options................... 3,417,976 293,328
Proceeds from employee stock purchase plan................ 1,871,344 1,004,623
Proceeds from lease and bank financing.................... -- 101,051
Principal payments on notes payable to bank............... (116,794) (189,801)
------------ -----------
Net cash provided by financing activities......... 5,882,508 1,209,201
------------ -----------
Decrease in cash and cash equivalents....................... (18,235,706) (9,963,881)
Cash and cash equivalents, at beginning of period........... 39,320,129 47,314,307
------------ -----------
Cash and cash equivalents, at end of period................. $ 21,084,423 $37,350,426
============ ===========
Supplemental disclosures for cash flow information:
Cash paid during the period for income taxes.............. $ 3,960,761 $ 2,090,111
============ ===========
</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 month period ended March 31, 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) 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
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.
(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. 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.
5
<PAGE> 7
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(6) 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 marketable securities as components of comprehensive income.
(7) SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS 131") uses a
management approach to report financial and descriptive information about a
company's operating segments. Operating segments are revenue-producing
components of the enterprise for which separate financial information is
produced internally for management. Under this definition, Sapient operated as a
single segment for all periods presented.
(8) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. Sapient is required to adopt this standard in the
first quarter of 2000. Sapient expects that the adoption of SFAS 133 will not
have a material impact on Sapient's financial position or results of operations.
(9) 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 a
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition approximated $2.4 million,
have been reflected in the consolidated statements of income and comprehensive
income for the quarter ended March 31, 1999.
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.
(10) 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 valued
these investments at zero as there is no readily determinable measure of value
based on the underlying operating performance and future cash flows of the
start-up companies. During the three-month period ended March 31, 1999, Sapient
recognized approximately $2,631,000 in net revenues from consulting services
provided to these companies. In addition, certain members of management of the
company have provided funding to certain of 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 provider of e-business consulting and Internet
commerce solutions. Through the delivery of integrated services, from strategy
and business 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, Healthcare, Government and Communications.
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.
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.
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 a
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition approximated $2.4 million,
have been reflected in the consolidated statements of income and comprehensive
income for the quarter ended March 31, 1999.
7
<PAGE> 9
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
ENDED
MARCH 31,
------------
1999 1998
---- ----
<S> <C> <C>
Revenues.................................................... 100% 100%
Operating expenses:
Project personnel costs................................... 49 48
Selling and marketing..................................... 7 6
General and administrative................................ 26 26
Stock compensation charge................................. 3 0
Acquisition costs......................................... 4 0
--- ---
Total operating expenses............................... 89 80
Income from operations...................................... 11 20
Interest income............................................. 1 2
Income taxes................................................ 5 8
--- ---
Net income.................................................. 7% 14%
=== ===
</TABLE>
Revenues
Revenues for the first quarter of 1999 increased 83% over revenues for the
first quarter of 1998. The increase in revenues reflects increases in both the
average size and number of client projects. Unbilled revenues on contracts
decreased slightly to $10.2 million at March 31, 1999 from $10.3 million at
December 31, 1998. Deferred revenue on contracts decreased to $9.3 million at
March 31, 1999 from $10.9 million at December 31, 1998. In the first quarter of
1999, the Company's five largest clients accounted for approximately 32.1% of
its revenues, compared to 39.9% of revenues for the quarter ended March 31,
1998. During this period 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 month period ended March 31,
1999 was primarily due to an increase in project personnel from 778 at March 31,
1998 to 1,299 at March 31, 1999. Project personnel costs increased as a
percentage of revenues to 49% for the first quarter of 1999 compared to 48% for
the first quarter of 1998. The percentage in the first quarter of 1999 was
higher primarily due to slightly lower utilization rates realized by project
personnel.
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 first quarter of 1998 to 7% in the first quarter of 1999. The increase
was primarily due to investments made by the Company in the amount of business
development personnel and travel expenses. The dollar increase in the three
month period ended March 31, 1999 was primarily the result of an increase in the
amount of business development travel, along with an increase in the number and
seniority of the selling and marketing personnel, from 43 employees at March 31,
1998 to 58 employees at March 31, 1999.
8
<PAGE> 10
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 month
period ended March 31, 1999 was primarily due to an increase in total costs
associated with 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 954 at March 31,
1998 to 1,647 at March 31, 1999. As a percentage of revenues, general and
administrative costs remained constant at 26% for the three months ended March
31, 1999 and 1998.
Stock Compensation Charge
Stock compensation charges consist of expenses associated with Adjacency
stock options that were granted during 1998 at below fair market value and which
vested during the quarter ended March 31, 1999.
Interest Income
Interest income for the three month period ended March 31, 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 March 31, 1999 and 1998 of 39.3% and
36.6%, respectively. The acquisition of Adjacency resulted in non-deductible
acquisition costs which had the impact of increasing the Company's effective tax
rate for the first quarter of 1999.
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 March 31, 1999, the Company had no bank borrowings
outstanding and no material capital commitments.
Cash and cash equivalents decreased to $21.1 million at March 31, 1999,
from $39.3 million at December 31, 1998. The decrease was primarily due to the
investment of excess cash in marketable securities. At March 31, 1999, $67.9
million was invested in tax-exempt, short-term municipal bonds which mature in
less than 12 months, compared to $52.5 million which was invested in similar
instruments as of December 31, 1998.
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.
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 develop-
9
<PAGE> 11
ment 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 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 obtaining written assurances
from all of its vendors.
Sapient believes that it is approximately 60% 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 have completed 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. 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 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
10
<PAGE> 12
Sapient for services and expenses. A failure of the accounting systems of a
significant 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 software applications for its clients. In addition, Sapient 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 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 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) 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 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 February 23, 1999, the Company filed Amendment No. 2 on Form 8-K/A
("Amendment No. 2") to the Current Report on Form 8-K/A as filed on August 31,
1998 and amended on November 4, 1998 ("Amendment No. 1"), for the purpose of
amending and restating the pro forma financial information previously reported
in Amendment No. 1. The Company filed the following financial statements with
Amendment No. 2:
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998
Pro Forma Condensed Consolidated Statement of Operations for the six months
ended June 30, 1998
Pro Forma Condensed Consolidated Statement of Operations for the year ended
December 31, 1997
Notes to the Pro Forma Combined Condensed Financial Statements
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: May 12, 1999 By /s/ JERRY A. GREENBERG
-----------------------------------------------------
Jerry A. Greenberg Co-Chief Executive Officer
Co-Chairman of the Board
Date: May 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Net income ............................ $ 4,278,794 $ 4,346,888
Basic net income per share:
Weighted average common shares
Outstanding .................... 27,139,284 25,138,074
Shares used in computing per share
Amount ......................... 27,139,284 25,138,074
=========== ===========
Basic net income per share ....... $ 0.16 $ 0.17
=========== ===========
Diluted net income per share:
Weighted average common shares
Outstanding .................... 27,139,284 25,138,074
Dilutive stock options ........... 3,434,812 2,623,700
----------- -----------
Shares used in computing per share
Amount ......................... 30,574,096 27,761,774
----------- -----------
Diluted net income per share ..... $ 0.14 $ 0.16
=========== ===========
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 24,114,423
<SECURITIES> 67,887,863
<RECEIVABLES> 51,680,544
<ALLOWANCES> 550,000
<INVENTORY> 0
<CURRENT-ASSETS> 160,422,955
<PP&E> 29,096,632
<DEPRECIATION> 11,853,880
<TOTAL-ASSETS> 196,980,676
<CURRENT-LIABILITIES> 29,000,962
<BONDS> 0
0
0
<COMMON> 274,195
<OTHER-SE> 165,731,118
<TOTAL-LIABILITY-AND-EQUITY> 196,980,676
<SALES> 57,793,365
<TOTAL-REVENUES> 57,793,365
<CGS> 0
<TOTAL-COSTS> 51,563,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 819,598
<INCOME-PRETAX> 7,049,084
<INCOME-TAX> 2,770,290
<INCOME-CONTINUING> 4,278,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,278,794
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.14
</TABLE>
