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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: April 23, 1999
Sapient Corporation
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-28074 04-3130648
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(Commission File Number) (I.R.S. Employer Identification No.)
One Memorial Drive
Cambridge, MA 02142
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(Address of Principal Executive Offices) (Zip Code)
(617) 621-0200
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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Due to a printer error, the Form 8-K filed on April 23, 1999 contained
a draft Supplemental Consolidated Financial Statement Note 9. The Registrant is
hereby refiling its Form 8-K in its entirety.
ITEM 5. OTHER EVENTS.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
The 1999 Annual Meeting of the Company's stockholders is scheduled to
be held on June 15, 1999. The Company's by-laws require that the Company be
given advance notice of stockholder nominations for election to the Company's
Board of Directors and of other business which stockholders wish to present for
action at an annual meeting of stockholders (other than matters included in the
Company's proxy statement in accordance with Rule 14a-8). The required notice
must be made in writing and received by the Secretary of the Company at the
principal offices of the Company not less than 60 days nor more than 90 days
prior to the 1999 Annual Meeting; provided, however, that if less than 70 days
notice or prior public disclosure of the date of the 1999 Annual Meeting is
given to stockholders, to be timely, notice must be so received not later than
the close of business on the 10th day following the date on which the notice of
the meeting was mailed or such public disclosure was made, whichever occurs
first. In order to comply with the time periods set forth in the Company's
by-laws with respect to the 1999 Annual Meeting, appropriate notice would need
to be provided no later than May 3, 1999.
SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
On March 29, 1999, the Company acquired all of the capital stock of
Adjacency, Inc. ("Adjacency"), a Wisconsin corporation based in San Francisco
that provides consulting services including Internet strategy, interactive
design, technology development and management of Internet and e-commerce
solutions. In consideration for the Adjacency stock, the Company issued an
aggregate of 790,674 shares of Company common stock. The following supplemental
consolidated financial statements give retroactive effect to the acquisition of
all of the capital stock of Adjacency by the Company. These statements account
for the acquisition as a "pooling of interests".
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SAPIENT CORPORATION
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................................. 4
Supplemental Consolidated Balance Sheets..................................... 5
Supplemental Consolidated Statements of Income and Comprehensive Income...... 6
Supplemental Consolidated Statements of Stockholders' Equity................. 7
Supplemental Consolidated Statements of Cash Flows........................... 8
Notes to Supplemental Consolidated Financial Statements...................... 9
3
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sapient Corporation:
We have audited the accompanying supplemental consolidated balance
sheets of Sapient Corporation and subsidiaries as of December 31, 1998 and 1997,
and the related supplemental consolidated statements of income and comprehensive
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These supplemental consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive
effect to the acquisition by Sapient Corporation of Adjacency, Inc. completed on
March 29, 1999, which has been accounted for as a pooling-of-interests as
described in Note 14 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation.
However, they will become the historical consolidated financial statements of
Sapient Corporation after financial statements covering the date of consummation
of the business combination are issued.
In our opinion, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Sapient Corporation and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles applicable after financial statements
are issued for a period which includes the date of consummation of the business
combination.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boston, Massachusetts
April 16, 1999
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SAPIENT CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 39,320 $47,314
Short term investments ...................................................... 52,500 17,092
Accounts receivable, less allowance for doubtful accounts of
$569 and $350 for 1998 and 1997, respectively ........................... 42,797 16,775
Unbilled revenues on contracts .............................................. 10,306 9,071
Prepaid expenses ............................................................ 438 680
Other current assets ........................................................ 3,296 971
Deferred income taxes ....................................................... 3,973 35
-------- -------
Total current assets ................................................... 152,630 91,938
Property and equipment, net ...................................................... 14,447 6,576
Deferred income taxes ............................................................ 5,702 --
Intangible assets ................................................................ 13,729 --
Due from shareholders ............................................................ 764 --
Other assets ..................................................................... 429 353
-------- -------
Total assets ........................................................... $187,701 $98,867
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank ....................................................... $ 117 $ 444
Accounts payable ............................................................ 1,064 224
Accrued expenses ............................................................ 3,743 1,924
Accrued compensation ........................................................ 8,633 3,454
Income taxes payable ........................................................ 2,217 1,255
Deferred income taxes ....................................................... 4,170 1,820
Deferred revenues on contracts .............................................. 10,907 6,408
-------- -------
Total current liabilities .............................................. 30,851 15,529
Deferred income taxes ............................................................ 773 121
Other long term liabilities ...................................................... 1,263 910
-------- -------
Total liabilities ...................................................... 32,887 16,560
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01 per share; 5,000,000 shares
authorized and none outstanding at December 31, 1998 and 1997 .............. -- --
Common stock, par value $0.01 per share, 100,000,000 shares
authorized, 27,106,293 shares issued and outstanding at
December 31, 1998; 24,997,244 shares issued and
outstanding at December 31, 1997 ........................................... 271 250
Additional paid-in capital .................................................. 122,784 57,471
Deferred Compensation ....................................................... (2,178) --
Accumulated other comprehensive income ...................................... 26 --
Retained earnings ........................................................... 33,911 24,586
-------- -------
Total stockholders' equity ............................................. 154,814 82,307
-------- -------
Total liabilities and stockholders' equity ....................................... $187,701 $98,867
======== =======
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements
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SAPIENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues................................................................. $164,872 $92,027 $49,795
Operating expenses:
Project personnel costs................................................ 84,443 44,623 23,329
Selling and marketing.................................................. 11,518 6,074 2,453
General and administrative............................................. 42,712 22,571 14,476
Charge for in-process research and development......................... 11,100 -- --
Acquisition costs...................................................... -- 560 --
-------- ------- -------
Total operating expenses............................................ 149,773 73,828 40,258
-------- ------- -------
Income from operations................................................. 15,099 18,199 9,537
Interest income.......................................................... 2,925 2,058 1,098
-------- ------- -------
Income before income taxes............................................. 18,024 20,257 10,635
Income taxes............................................................. 8,660 7,703 3,936
-------- ------- -------
Net Income.......................................................... $ 9,364 $12,554 $ 6,699
======== ======= =======
Comprehensive Income
Foreign currency translation gain................................... 26 -- --
-------- ------- -------
Comprehensive income..................................................... $ 9,390 $12,554 $ 6,699
======== ======= =======
Basic net income per share............................................... $ 0.36 $ 0.51 $ 0.30
======== ======= =======
Diluted net income per share............................................. $ 0.33 $ 0.47 $ 0.27
======== ======= =======
Weighted average common shares........................................... 26,114 24,787 22,422
Weighted average common share equivalents................................ 2,587 2,083 2,425
-------- ------- -------
Weighted average common shares and common share equivalents.............. 28,701 26,870 24,847
======== ======= =======
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements
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SAPIENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
VOTING NON-VOTING
COMMON STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................... 11,372 $ 114 7,664 $ 77 $ 29
Notes repaid from stockholders.......................... -- -- -- -- --
Exercised stock options................................. 932 9 -- -- 204
Distributions to stockholders ...........................
Proceeds from public offerings........................... 4,390 44 -- -- 54,053
Conversion of non-voting shares to voting shares......... 7,664 77 (7,664) (77) --
Tax benefit of disqualifying dispositions of
stock options ....................................... -- -- -- -- 108
Stock based compensation................................. 31 -- -- -- 260
Net income............................................... -- -- -- -- --
------ ----- ------ ----- --------
Balance at December 31, 1996............................... 24,389 244 -- -- 54,654
Notes repaid from stockholders........................... -- -- -- -- --
Exercised stock options.................................. 608 6 -- -- 1,783
Distributions to stockholders ...........................
Tax benefit of disqualifying dispositions of
stock options ....................................... -- -- -- -- 1,034
Net income............................................... -- -- -- -- --
------ ----- ------ ----- --------
Balance at December 31, 1997............................... 24,997 $ 250 -- $ -- $ 57,471
Exercised stock options.................................. 958 9 -- -- 5,103
Translation gain......................................... -- -- -- -- --
Proceeds from public offering............................ 653 7 -- -- 29,084
Distributions to stockholders............................ -- -- -- -- --
Common stock issued for acquisition of Studio Archetype.. 498 5 -- -- 22,795
Tax benefit of disqualifying dispositions of
stock options ....................................... -- -- -- -- 1,654
Deferred compensation.................................... -- -- -- -- 6,677
Net income............................................... -- -- -- -- --
------ ----- ------ ----- --------
Balance at December 31, 1998............................... 27,106 $ 271 -- $ -- $122,784
====== ===== ====== ===== ========
<CAPTION>
ACCUMULATED NOTES
OTHER RECEIVABLE TOTAL
COMPREHENSIVE DEFERRED RETAINED FROM STOCKHOLDERS'
INCOME COMPENSATION EARNINGS STOCKHOLDERS EQUITY
------------- ------------ --------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................... $ 5,454 $(75) $ 5,599
Notes repaid from stockholders.......................... -- -- -- 50 50
Exercised stock options................................. -- -- -- -- 213
Distributions to stockholders ........................... (52) (52)
Proceeds from public offerings........................... -- -- -- -- 54,097
Conversion of non-voting shares to voting shares......... -- -- -- -- --
Tax benefit of disqualifying dispositions of
stock options ........................................ -- -- -- -- 108
Stock based compensation................................. -- -- -- -- 260
Net income............................................... -- -- 6,699 -- 6,699
------ ------ -------- ---- --------
Balance at December 31, 1996............................... -- -- 12,101 (25) 66,974
Notes repaid from stockholders........................... -- -- -- 25 25
Exercised stock options.................................. -- -- -- -- 1,789
Distributions to stockholders ........................... (69) (69)
Tax benefit of disqualifying dispositions of
stock options ........................................ -- -- -- -- 1,034
Net income............................................... -- -- 12,554 -- 12,554
------ ------ -------- ---- --------
Balance at December 31, 1997............................... -- -- $ 24,586 $ -- $ 82,307
Exercised stock options.................................. -- -- -- -- 5,112
Translation gain......................................... 26 -- -- 26
Proceeds from public offering............................ -- -- -- 29,091
Distributions to stockholders............................ -- (39) -- (39)
Common stock issued for acquisition of Studio Archetype.. -- -- -- 22,800
Tax benefit of disqualifying dispositions of
stock options ........................................ -- -- -- -- 1,654
Deferred compensation.................................... -- (2,178) -- -- 4,499
Net income............................................... -- -- 9,364 -- 9,364
------ ------- -------- ---- --------
Balance at December 31, 1998............................... $ 26 $(2,178) $ 33,911 $ $154,814
====== ======= ======== ==== ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements
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SAPIENT CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 9,364 $ 12,554 $ 6,704
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................................... 4,224 2,478 1,296
Charge for in-process research and development.......................... 11,100 -- --
Deferred income taxes................................................... (6,638) 786 (1,030)
Allowance for doubtful accounts......................................... 200 275 --
Stock compensation expense.............................................. 4,499 -- 260
Changes in operating assets and liabilities:
Increase in accounts receivable..................................... (23,644) (5,170) (4,262)
Increase in unbilled revenues on contracts.......................... (651) (4,397) (2,392)
Decrease (increase) in prepaid expenses............................. 321 (363) (26)
Increase in other current assets.................................... (2,383) (821) (150)
Decrease in income tax receivable................................... -- -- 480
Decrease (increase) in other assets................................. 70 (285) 49
Increase (decrease) in accounts payable............................. 395 104 (356)
(Decrease) increase in accrued expenses............................. (1,241) 332 546
Increase in accrued compensation.................................... 4,137 1,172 1,419
Increase in income taxes payable.................................... 2,493 738 1,552
Increase in other long term liabilities............................. 311 155 717
Increase in deferred revenues on contracts.......................... 3,365 1,492 2,541
-------- -------- --------
Net cash provided by operating activities....................... 5,922 9,050 7,348
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment...................................... (9,307) (6,356) (2,193)
Net cash received from acquisition...................................... 561 -- --
Sales and maturities of short term investments.......................... 21,043 12,190 --
Purchases of short term investments..................................... (56,451) (19,742) (9,540)
-------- -------- --------
Net cash used in investing activities........................... (44,154) (13,908) (11,733)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stockholders for notes receivable......................... 3,024 25 50
Payments to stockholders for notes receivable........................... (3,788) -- --
Exercise of stock options............................................... 5,112 1,789 213
Net proceeds from initial public offering............................... -- -- 32,403
Net proceeds from follow-on public offering............................. 29,091 -- 21,694
Distribution to stockholders............................................ (39) (69) --
Principal payments on notes payable to bank............................. (3,162) (6) (49)
-------- -------- --------
Net cash provided by financing activities....................... 30,238 1,739 54,311
-------- -------- --------
(Decrease) increase in cash and cash equivalents............................ (7,994) (3,119) 49,926
Cash and cash equivalents, beginning of year................................ 47,314 50,433 507
-------- -------- --------
Cash and cash equivalents, end of year...................................... $ 39,320 $ 47,314 $ 50,433
======== ======== ========
Schedule of non-cash financing activities:
Tax benefit of disqualifying dispositions of stock options................ $ 1,654 $ 1,034 $ 108
======== ======== ========
Supplemental disclosures of cash flow information:
Net assets and liabilities recognized upon acquisition
of Studio Archetype:
Cash and cash equivalents............................................... $ 811 $ -- $ --
Accounts receivable..................................................... 2,578 -- --
Unbilled revenues on contracts.......................................... 629 -- --
Prepaid expenses and other current assets............................... 34 -- --
Property and equipment.................................................. 2,077 -- --
Other assets............................................................ 100 -- --
Accounts payable........................................................ 445 -- --
Accrued expenses........................................................ 725 -- --
Accrued compensation.................................................... 880 -- --
Accrued income taxes payable............................................ 270 -- --
Deferred revenues on contracts.......................................... 1,134 -- --
Notes payable to bank................................................... 2,862 -- --
Other long term liabilities............................................. 42 -- --
Accrued acquisition costs............................................... 2,335 -- --
Supplemental disclosures of non-cash investing activities:
Common stock issued for acquisition of Studio Archetype................... $ 22,800 $ -- $ --
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements
8
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SAPIENT CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF REPORTING
The accompanying supplemental consolidated financial statements of
Sapient Corporation ("Sapient" or the "Company") have been prepared to give
retroactive effect to the acquisition of Adjacency, Inc., ("Adjacency") a San
Francisco-based company that provides e-commerce solutions services including
strategy, design and technology development delivered in a multi-disciplinary,
integrated fashion. Generally accepted accounting principles proscribe giving
effect to consummated business combinations accounted for using the
pooling-of-interests method in financial statements that do not include the date
of consummation. The supplemental consolidated financial statements presented
herein do not extend through the date of consummation, however, they will become
the historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
The accompanying supplemental consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and balances have been eliminated in consolidation.
(2) NATURE OF BUSINESS
Sapient 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 services, Sapient helps emerging and evolving
businesses transform themselves into e-businesses. Founded in 1991 as a Delaware
corporation, the Company currently has more than 1,400 employees in offices in
Cambridge, Massachusetts, New York, San Francisco, Chicago, Atlanta, Dallas, Los
Angeles, London, England and Sydney, Australia.
On March 29, 1999, Sapient acquired all of the outstanding Common Stock
of Adjacency in exchange for 790,674 shares of Sapient Common Stock (See Note
14). Sapient's Supplemental Consolidated 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.
On August 25, 1998, Sapient acquired Studio Archetype, Inc. ("Studio
Archetype") for approximately $25.3 million in stock and cash, including direct
acquisition costs of approximately $2.3 million, pursuant to which Sapient
issued 498,314 shares of Common Stock and paid $250,000 in cash to the former
Studio stockholders. The acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
On December 15, 1997, Sapient acquired all of the outstanding common
stock of EXOR Technologies, Inc. ("EXOR") in exchange for 611,738 shares of
Sapient Common Stock (see Note 14). Sapient's Consolidated Financial Statements
have been restated for all periods presented to reflect the acquisition of EXOR,
which has been accounted for as a pooling of interests.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Sapient
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
(b) Cash and Cash Equivalents
All highly liquid investments with original maturities of three months
or less are considered cash equivalents. Cash and cash equivalent balances
consist of deposits and repurchase agreements with a large U.S. commercial bank
and tax exempt short-term municipal bonds.
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(c) Short-term Investments
Short-term investments are 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.
(d) Property and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight line and accelerated methods over the estimated useful lives of the
related assets, which range from three to seven years. Leasehold improvements
are amortized over the lesser of the estimated useful lives of the assets or the
lease term.
(e) Revenue Recognition
Revenues pursuant to fixed-fee contracts are generally recognized as
services are rendered on the percentage-of-completion method of accounting
(based on the ratio of costs incurred to total estimated costs). Revenues
pursuant to time and material contracts are generally recognized as services are
provided. Revenues from maintenance agreements are recognized ratably over the
terms of the agreements.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
are determined. Unbilled revenues on contracts are comprised of costs, plus
earnings on certain contracts in excess of contractual billings on such
contracts. Billings in excess of costs plus earnings are classified as deferred
revenues.
(f) Income Taxes
Sapient records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(g) Financial Instruments and Concentration of Credit Risk
Financial instruments which potentially subject Sapient to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable.
Sapient performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. Sapient maintains
allowances for potential credit losses and such losses have been within
management's expectations. Write-offs of accounts receivable have not been
material for any of the periods presented.
The fair market values of cash and cash equivalents, accounts
receivable and debt instruments at both December 31, 1998 and 1997 approximate
their carrying amounts.
(h) 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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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(i) Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the carrying value of intangible assets and other
long-lived assets is reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest impairment. To
date, no such impairment has been indicated. Should there be an impairment in
the future, Sapient will measure the amount of the impairment based on
undiscounted expected future cash flows from the impaired assets. The cash flow
estimates that will be used will contain management's best estimates, using
appropriate and customary assumptions and projections at the time.
(j) Research and Development Costs
Research and development expenditures are charged to operations as
incurred. To date, substantially all research and development activities of
Sapient have been pursuant to customer contracts and, accordingly, have been
expensed as project costs. Sapient has not capitalized any software development
costs since such costs have neither been significant nor can the future economic
benefit be reasonably determined.
(k) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
requires that companies either recognize compensation expense for grants of
stock, stock options, and other equity instruments based on fair value, or
provide pro forma disclosure of net income and net income per share in the notes
to the financial statements. Sapient applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized under SFAS 123 for Sapient's stock option plans, and
footnote disclosure is provided in Note 9.
The deferred compensation expense appearing in the financial statements
relates to stock options that were granted to Adjacency employees prior to the
acquisition by Sapient at below fair market value. The deferred compensation is
being amortized on a straight-line basis over the vesting period of three years.
Certain employees completed their vesting upon the business combination
described in Note 1.
(l) Earnings Per Share
Under Statement of Financial Accounting Standards No. 128, Sapient
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 stock options and other dilutive common stock
equivalents.
On January 29, 1998 the Company declared a two-for-one stock split
effected as a 100 percent stock dividend distributed on March 9, 1998, to all
shareholders of record on February 20, 1998.
(m) Comprehensive Income
During 1998, Sapient adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting comprehensive income and its components in
the body of the financial statements. Comprehensive income includes net income
as currently reported under Generally Accepted Accounting Principles and also
considers the effect of additional economic events that are not required to be
recorded in determining net income but are rather reported as a separate
component of stockholders' equity. Sapient reports foreign currency translation
gains and losses as a component of comprehensive income.
(n) Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 uses a management
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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
years presented. The adoption of SFAS 131 did not have a material impact on
Sapient's financial condition or results of operations.
(o) Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles represent the excess of the
purchase price over the fair value of assets acquired. Goodwill and
substantially all other purchased intangibles are being amortized on a
straightline basis over lives ranging from five to seven years.
(p) Recently Issued Accounting Pronouncements
In March, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants, issued SOP 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1") which requires the capitalization of certain internal costs related to
the implementation of computer software obtained for internal use. Sapient is
required to adopt this standard in the first quarter of 1999. It is expected
that the adoption of SOP 98-1 will not have a material impact on Sapient's
financial position or its results of operations.
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. It is expected that the adoption of SFAS 133 will not
have a material impact on Sapient's financial position or its results of
operations.
(4) PROPERTY AND EQUIPMENT
The cost and accumulated depreciation of property and equipment at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements.................................. $ 7,755 $ 3,604
Furniture and fixtures.................................. 2,418 928
Office equipment........................................ 2,706 1,744
Computer equipment...................................... 11,806 5,054
-------- -------
24,685 11,330
Less accumulated depreciation...................... (10,238) (4,754)
-------- -------
Property and equipment, net............................. $ 14,447 $ 6,576
======== =======
</TABLE>
(5) INTANGIBLE ASSETS
Other assets include certain intangible assets that were acquired as
part of the Studio acquisition in August 1998. The following table summarizes
the cost and accumulated amortization of intangible assets at December 31, 1998:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE
---------
(IN THOUSANDS)
<S> <C> <C>
Marketing assets and customer lists...................... $ 3,800 7 Years
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C> <C>
Assembled work force..................................... 1,600 5-7 Years
Goodwill................................................. 9,015 7 Years
-------
14,415
Less accumulated amortization.......................... (686)
-------
Intangible assets, net................................... $13,729
=======
</TABLE>
(6) BANK LOAN
Sapient has a $5,000,000 loan facility with a bank which expires on
June 30, 2000. Borrowings under this agreement bear interest at the bank's prime
rate. Sapient had no borrowings under this facility at December 31, 1998 or
1997. The facility contains various financial covenants, including limitations
on the payment of cash dividends and maintenance of certain financial ratios.
(7) INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal, current............................ $11,768 $5,220 $ 3,951
State, current.............................. 3,529 1,697 1,015
------- ------ -------
15,297 6,917 4,966
Foreign, deferred........................... (382) -- --
Federal, deferred........................... (4,902) 647 (924)
State, deferred............................. (1,353) 139 (106)
------- ------ -------
(6,637) 786 (1,030)
------- ------ -------
Income tax expense.......................... $ 8,660 $7,703 $ 3,936
======= ====== =======
</TABLE>
Income tax expense for the years ended December 31, 1998, 1997 and 1996
differed from the amounts computed by applying the U.S. statutory income tax
rate to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate............................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............ 6.3 6.0 5.7
S Corporation loss (income)........................... 9.3 (0.4) (0.8)
Tax exempt interest................................... (4.1) (3.3) (2.6)
Other, net............................................ 1.5 0.7 (0.3)
---- ---- ----
Effective income tax rate............................. 48.0% 38.0% 37.0%
==== ==== ====
</TABLE>
At December 31, 1998 and 1997, deferred income tax assets and
liabilities resulted from reporting differences in the recognition of income and
expense for income tax and financial reporting purposes. The sources and tax
effects of these temporary differences are presented below:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Deferred revenue...................................... $ 2,831 $ 1,855
Allowance for doubtful accounts....................... 223 60
Accrual for compensation.............................. -- 390
Other accruals........................................ 947 745
Property and equipment................................ 745 548
In-process research and development................... 4,399 --
Goodwill and other intangibles........................ 148 --
Foreign NOL........................................... 382 --
------- -------
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C>
Total gross deferred income tax assets........... $ 9,675 $ 3,598
======= =======
Deferred income tax liabilities:
Deferred taxes relating to the use of cash method
of accounting for tax purposes prior to 1996..... $ (773) $(1,309)
Unbilled revenue...................................... (4,170) (3,652)
Other accruals........................................ -- (543)
------- -------
Total gross deferred income tax liabilities...... $(4,943) $(5,504)
------- -------
Net deferred income tax assets/(liabilities)..... $ 4,732 $(1,906)
======= =======
</TABLE>
In assessing the realizability of deferred income tax assets, Sapient
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. Due to the fact that Sapient
has sufficient taxable income in the federal carryback period and anticipates
sufficient future taxable income over the periods in which deferred income tax
assets are deductible, the ultimate realization of deferred income tax assets
for federal and state income tax purposes appears more likely than not.
Total income tax expense for the years ended December 31, 1998, 1997
and 1996 was allocated as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes from continuing operations.................... $ 8,660 $ 7,703 $ 3,936
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts recognized
for financial statement purposes ....................... (1,654) (1,034) (108)
------- ------- -------
$ 7,006 $ 6,669 $ 3,828
======= ======= =======
</TABLE>
Total income taxes paid in 1998, 1997 and 1996 were approximately
$12,383,000, $6,179,000 and $2,838,000, respectively.
(8) COMMITMENTS AND CONTINGENCIES
Sapient maintains its executive office in Massachusetts and operating
offices in several locations throughout the United States and abroad. Sapient
also leases office equipment under various operating leases. Future minimum
rental commitments under all noncancelable operating leases with initial or
remaining terms in excess of one year were as follows at December 31, 1998:
<TABLE>
(IN THOUSANDS)
--------------
<S> <C>
1999.......................................................... $ 11,392
2000.......................................................... 11,700
2001.......................................................... 11,651
2002.......................................................... 11,549
2003.......................................................... 11,696
Thereafter.................................................... 26,110
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $8,943,000, $4,053,000, and $3,167,000, respectively.
Sapient has issued letters of credit with a bank in the aggregate
amount of $975,000 as security deposits for certain of its lease commitments.
Sapient has certain contingent liabilities that arise in the ordinary
course of its business activities. Sapient accrues contingent liabilities when
it is probable that future expenditures will be made and such expenditures can
be reasonably estimated.
Sapient is in arbitration with a former employee who alleges breach of
certain contractual and other violations resulting from his termination as an
employee. Management denies that it breached any obligations or duties to this
former employee, and believes that Sapient has meritorious defenses. Sapient is
14
<PAGE> 15
vigorously contesting these claims. Although Sapient does not expect the claims
to have a material adverse effect on its business, results of operations or
financial condition, an adverse judgment or settlement could have a material
adverse effect on the operating results reported by Sapient for the period in
which any such adverse judgment or settlement occurs.
(9) STOCK PLANS
(a) 1992 Stock Option Plan
During 1992, Sapient approved the 1992 Stock Plan (the "1992 Plan") for
its employees. The 1992 Plan provided for the Board of Directors to grant stock
options, stock purchase authorizations and stock bonus awards up to an aggregate
of 5,000,000 shares of non-voting Common Stock. Since consummation of its
initial public offering of Common Stock in April 1996, no further grants or
awards may be made pursuant to the 1992 Stock Plan (but previously outstanding
awards remain outstanding but are exercisable for voting Common Stock).
Most stock options granted under the 1992 Plan qualify as Incentive
Stock Options ("ISO") under Section 422 of the Internal Revenue Code. The price
at which shares may be purchased with an option was specified by the Board at
the date the option was granted, but in the case of an ISO, was not less than
the fair market value of Sapient's Common Stock on the date of grant. The
duration of any option was specified by the Board, but no option designated as
an ISO can be exercised beyond ten years from the date of grant. Stock options
granted under the 1992 Plan generally become exercisable over a four-year
period, are nontransferable, and expire six years after the date of grant
(subject to earlier termination in the event of the termination of the
optionee's employment or other relationship with Sapient).
(b) 1996 Equity Stock Incentive Plan
Sapient's 1996 Equity Stock Incentive Plan (the "1996 Plan") authorizes
the Company to grant options to purchase Common Stock, to make awards of
restricted Common Stock, and to issue certain other equity-related awards to
employees and directors of, and consultants to, Sapient. The total number of
shares of Common Stock which may be issued under the 1996 Plan is 4,800,000
shares. The 1996 Plan is administered by the Compensation Committee of the Board
of Directors, which selects the persons to whom stock options and other awards
are granted and determines the number of shares, the exercise or purchase
prices, the vesting terms and the expiration dates of options granted.
Non-qualified stock options may be granted at exercise prices which are above,
equal to or below the grant date fair market value of the Common Stock. The
exercise price of options qualifying as Incentive Stock Options may not be less
than the grant date fair market value of the Common Stock. Stock options granted
under the 1996 Plan are nontransferable, generally become exercisable over a
four-year period and expire ten years after the date of grant (subject to
earlier termination in the event of the termination of the optionee's employment
or other relationship with Sapient).
(c) Employee Stock Purchase Plan
Sapient's 1996 Employee Stock Purchase Plan (the "Purchase Plan")
authorizes the issuance of up to 660,000 shares of Common Stock to participating
employees through a series of semi-annual offerings. The maximum number of
shares available in each offering is 50,000 shares (plus any unpurchased shares
available from previous offerings) for the first six offerings, and 60,000
shares (plus any unpurchased shares available from previous offerings) for the
next six offerings. An employee becomes eligible to participate in the Purchase
Plan when he or she is regularly employed by Sapient for at least 20 hours a
week and for more than five months in a calendar year on the first day of the
applicable offering. The price at which employees may purchase Common Stock in
an offering is 85 percent of the closing price of the Common Stock on the Nasdaq
National Market on the day the offering commences or on the day the offering
terminates, whichever is lower. Approximately 61 percent of eligible employees
participated in the two offerings under the Purchase Plan during the year ended
December 31, 1998. Approximately 57 percent of eligible employees participated
in the two offerings under the Purchase Plan during the year ended December 31,
1997. Approximately 70 percent of eligible employees participated in the first
offering
15
<PAGE> 16
under the Purchase Plan, which terminated on December 31, 1996. Under the
Purchase Plan, Sapient sold 105,634, 93,628 and 33,830 shares of Common Stock in
1998, 1997 and 1996, respectively.
(d) 1996 Directors Stock Option Plan
Sapient's 1996 Directors Stock Option Plan (the "Directors Plan")
authorizes the issuance of 60,000 shares of Common Stock. Each non-employee
director elected to the Board of Directors after the adoption of the Directors
Plan will, upon his or her election, automatically be granted an option to
purchase 10,000 shares of Common Stock at an exercise price equal to the grant
date fair market value of Sapient's Common Stock. Options granted pursuant to
the Directors Plan vest in four equal annual installments commencing on the
first anniversary of the date of grant and generally expire ten years after the
date of grant. As of December 31, 1998 and 1997, no options had been granted
under the Directors Plan.
(e) 1998 Stock Incentive Plan
Sapient's 1998 Equity Stock Incentive Plan (the "1998 Plan") authorizes
Sapient to grant options to purchase Common Stock, to make awards of restricted
Common Stock, and to issue certain other equity-related awards to employees and
directors of, and consultants to, Sapient. The total number of shares of Common
Stock which may be issued under the 1998 Plan is 2,000,000 shares. The 1998 Plan
is administered by the Compensation Committee of the Board of Directors, which
selects the persons to whom stock options and other awards are granted and
determines the number of shares, the exercise or purchase prices, the vesting
terms and the expiration date. Non-qualified stock options may be granted at
exercise prices which are above, equal to or below the grant date fair market
value of the Common Stock. The exercise price of options qualifying as Incentive
Stock Options may not be less than the grant date fair market value of the
Common Stock. Stock options granted under the 1998 Plan are nontransferable,
generally become exercisable over a four-year period and expire ten years after
the date of grant (subject to earlier termination in the event of the
termination of the optionee's employment or other relationship with Sapient). As
of December 31, 1998, no options had been granted under the 1998 Plan.
(f) Adjacency, Inc. 1998 Stock Option Plan
In connection with the acquisition of Adjacency, Inc., the Company
agreed to assume the options granted under the Adjacency, Inc. 1998 Stock
Option Plan (the "Adjacency Plan") that were outstanding at the time of the
acquisition. The Adjacency Plan was originally adopted by Adjacency in 1998 and
provided for the grant of stock options up to an aggregate of 4,000,000 shares
of Class B Common Stock of Adjacency, Inc. As A result of the acquisition, the
Company has assumed the obligations related to options to purchase 63,254
shares of Sapient Common Stock. No further grants may be made pursuant to the
Adjacency Plan (but previously outstanding options remain outstanding but are
exercisable for shares of Sapient Common Stock).
A summary of the status of Sapient's five fixed stock option plans as
of December 31, 1998, 1997 and 1996 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........................ 4,383 $14.49 2,982 $ 5.14 3,018 $ 0.75
Granted................................................. 2,471 $39.52 2,098 $23.59 1,066 $13.18
Exercised............................................... (958) $ 6.65 (608) $ 0.63 (932) $ 0.25
Forfeited............................................... (35) $23.63 (89) $12.27 (170) $ 3.41
------ ------ ------ ------ ------ ------
Outstanding at end of year.............................. 5,861 $25.64 4,383 $14.49 2,982 $ 5.14
====== ====== ======
Options exercisable at year end......................... 942 755 722
====== ====== ======
Weighted average grant date fair market value
of options granted during the year.................... $28.41 $12.67 $ 7.16
====== ====== ======
</TABLE>
16
<PAGE> 17
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
DECEMBER 31, 1998 AVERAGE AVERAGE AVERAGE
- ----------------- NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------ ----------- ---------------- -------- ----------- --------
(IN THOUSANDS) (IN THOUSANDS)
<C> <C> <C> <C> <C> <C>
$ 0.00 to $ 2.50...................... 807 2.8 years $ 1.40 418 $ 1.13
$ 2.51 to $ 7.00...................... 361 3.0 years $ 5.78 77 $ 5.73
$ 7.01 to $20.00...................... 379 8.0 years $17.42 118 $17.62
$20.01 to $25.00...................... 1,092 8.3 years $22.76 294 $22.37
$25.01 to $30.00...................... 1,052 8.8 years $26.16 35 $25.90
$30.01 to $35.00...................... 181 9.7 years $33.48 -- --
$35.01 to $40.00...................... 844 9.5 years $37.87 -- --
$40.01 to $45.00...................... 871 9.4 years $42.00 -- --
$45.01 to $50.00...................... 186 9.5 years $46.62 -- --
$50.01 to $77.38...................... 88 9.4 years $54.31 -- --
----- ---
$ 0.00 to $77.38...................... 5,861 7.7 years $25.64 942 $11.14
</TABLE>
Sapient has five stock-based compensation plans, which are described
above. Sapient applies APB Opinion 25 and related interpretations in accounting
for its plans. No compensation has been recognized relative to grants under
these plans, other than deferred compensation charges of approximately $4.5
million related to the value of stock options that were granted in 1998 under
the Adjacency Plan at below fair market value and which vest in 1998. Had
compensation cost for the awards under those plans been determined based on the
grant date fair values for awards under those plans consistent with the method
required under SFAS 123, Sapient's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income
As reported............................... $ 9,364 $12,554 $6,699
Pro forma................................. $(15,842) $ 5,470 $5,250
Basic net income per share
As reported............................... $ 0.36 $ 0.51 $ 0.30
Pro forma................................. $ (0.61) $ 0.22 $ 0.23
Diluted net income per share
As reported............................... $ 0.33 $ 0.46 $ 0.27
Pro forma................................. $ (0.55) $ 0.20 $ 0.21
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 0.0 percent for each year, expected volatility of 0.0 percent for the 1992
Plan options and 136.8, 64.8 and 104.9 percent in 1998, 1997 and 1996,
respectively, for the 1996 Plan options, risk free interest rates ranging from
5.0 to 5.25 percent for the 1992 Plan options and 5.0 to 5.7 percent for the
1996 Plan options, and expected lives of 4 years for the 1992 Plan and the 1996
Plan options. The assumptions used with respect to Adjacency Plan options were
the same as those used with respect to the 1996 Plan.
Pro-forma compensation cost related to the Purchase Plan is recognized
for the fair value of the employees' purchase rights, which was estimated using
the Black-Scholes model with the following assumptions for the years ended
December 31, 1998, 1997 and 1996: dividend yield of 0.0 percent, expected
volatility of 136.8, 64.8 and 67.5 percent, respectively, risk free interest
rate ranging from 5.7 to 5.0 percent and expected life of 6 months.
Pro forma net income derived as a result of applying SFAS 123 may not
be representative of the effects on reported net income for future years.
(10) SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS
Sapient engages in business activities in one operating segment which
provides e-business consulting and Internet commerce solutions on a fixed-fee,
fixed
17
<PAGE> 18
time-frame basis. The chief operating decision-makers are provided information
about the revenues generated in key client industries. The resources needed to
deliver Sapient's services are not separately reported by industry. Sapient's
services are delivered to clients primarily in North America, and Sapient's
long-lived assets are located primarily in North America.
No customer accounted for greater than 10 percent of total revenues in
1998 or 1997. One customer accounted for 14 percent of accounts receivable at
December 31, 1998. No customer accounted for greater than 10 percent of accounts
receivable at December 31, 1997. Two clients accounted for 19 percent and 15
percent respectively, of total revenues in 1996 and 10 percent of accounts
receivable at December 31, 1996.
(11) RETIREMENT PLANS
Sapient established a 401(k) retirement savings plan for employees in
June 1994. Under the provisions of the plan, Sapient matches 25 percent of an
employee's contribution, up to a maximum of $1,250 per employee per year. Total
Sapient contributions in 1998, 1997 and 1996 were approximately $1,014,000,
$520,000 and $356,000, respectively.
(12) PUBLIC OFFERINGS
Sapient completed its initial public offering (IPO) of Common Stock on
April 10, 1996. The IPO resulted in the issuance of 3,390,000 shares of Common
Stock. Proceeds to Sapient, net of underwriting discounts and costs of the
offering, were approximately $32.4 million.
Sapient completed a follow-on public offering of Common Stock on
October 29, 1996 which resulted in the issuance of 1,000,000 shares of Common
Stock. Proceeds to Sapient, net of underwriting discounts and costs of the
offering, were approximately $21.7 million.
Sapient completed a follow-on public offering of Common Stock on April
7, 1998 which resulted in the issuance of 653,125 shares of Common Stock.
Proceeds to Sapient, net of underwriting discounts and costs of the offering,
were approximately $29.1 million.
(13) CAPITAL STOCK
(a) Increase in Authorized Common Stock; Conversion of Non-Voting
Common Stock
On February 13, 1996, Sapient's Board of Directors authorized an
increase in the authorized number of shares of voting Common Stock to 30,000,000
and non-voting Common Stock to 10,000,000 and provided that, upon the closing of
an IPO, all shares of non-voting Common Stock then outstanding would be
converted automatically into an equal number of shares of voting Common Stock
and the authorized capitalization of Sapient will consist of 40,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock.
At Sapient's Annual Meeting of Stockholders held on May 8, 1998, the
stockholders voted to approve an amendment to Sapient's Amended and Restated
Certificate of Incorporation which increased the number of authorized shares of
Common Stock from 40,000,000 to 100,000,000.
(b) Preferred Stock
On February 13, 1996, the Board of Directors authorized an amendment to
Sapient's Certificate of Incorporation giving the Board the authority to issue
up to 5,000,000 shares, $0.01 par value, of Preferred Stock with terms to be
established by the Board at the time of issuance.
(14) ACQUISITIONS
On March 29, 1999, the Company acquired all of the outstanding capital
stock of Adjacency, Inc. This acquisition was accomplished through the issuance
of 790,674 shares of the Company's common stock for
18
<PAGE> 19
all of the outstanding shares of Adjacency, Inc. This acquisition has been
accounted for using the pooling-of-interests method of accounting. Costs, which
consist primarily of investment banking, accounting and legal fees related to
this acquisition approximated $2.4 million and are not included in the
accompanying supplemental consolidated results of operations as they will be
charged to operating expense in the first quarter of 1999, which is the period
the combination was consummated.
During the period from January 1, 1996 through March 29,1999 (the date
of the Company's acquisition of Adjacency), Adjacency elected to be treated as
an S-Corporation for income tax purposes. Under this election, Adjacency's
individual stockholders are deemed to have received a pro rata distribution of
taxable income of Adjacency (whether or not an actual distribution was made),
which is included in each stockholder's taxable income. Accordingly, Adjacency
did not provide for income taxes during the period from January 1 through March
29, 1999. Adjacency's S-Corporation tax reporting status was terminated on the
date of acquisition. Pro forma net income per share data is presented below to
reflect the pro forma increase or decrease to historical income taxes related to
Adjacency as if Adjacency was a C-Corporation for tax reporting purposes during
those periods.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Pro forma data (unaudited):
Historical income before income taxes 18,024 20,257 10,635
Provision for income taxes:
Historical income taxes 8,660 7,703 3,936
Pro forma (decrease)increase to
historical income taxes (1,648) 74 87
Pro forma net income 11,012 12,480 6,612
Pro forma basic net income per share $ .42 $ .50 $ .29
Pro forma diluted net income per share $ .38 $ .46 $ .27
Weighted average number of common shares
outstanding 26,177 24,850 22,485
Weighted average number of common and
common equivalent shares outstanding 28,755 26,933 24,910
</TABLE>
On August 25, 1998 the Company acquired Studio Archetype 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 Sapient Common Stock and paid $250,000 in cash to the former
Studio stockholders. The acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
In connection with the acquisition of Studio Archetype in the third
quarter of 1998, Sapient allocated $11.1 million to in-process technology and
recorded a corresponding income tax benefit of $4.2 million. This allocation
represents the estimated fair value of such technology based on risk-adjusted
cash flows related to the development of projects that had not reached
technological feasibility at the time of the acquisition and with respect to
which the in-process research and development had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date.
Sapient allocated values to the in-process research and development
projects 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 Archetype
next-generation enterprise-wide suite of development, scheduling, bug tracking
and content management applications. The integrated solution will be a
comprehensive enterprise scale system, allowing developers and clients to access
prototypes and trial deliverables. It will fully integrate user interface tools
with client server,
19
<PAGE> 20
advanced database and legacy systems.
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 Archetype and its competitors. The estimated revenues for the projects
are expected to be realized over a six year period through 2004 when other new
products are expected to enter the market. Studio Archetype projected revenues
are dependent upon successful introduction of the in-process projects.
The nature of the efforts to develop the acquired in-process technology
into commercially viable products and services principally relate to the
completion of all planning, designing, prototyping, verification, and testing
activities that are necessary to establish that the proposed technologies meet
their design specifications including functional, technical, and economic
performance requirements. The efforts to develop the purchased in-process
technology also include testing of the technology for compatibility and
interoperability with other applications. Expenditures on these projects to date
have been approximately $2.5 million, and estimated costs to complete these
projects are expected to total approximately $625,000 through 2001. These
estimates are subject to change, given the uncertainties of the development
process, and no assurance can be given that deviations from these estimates will
not occur. Several milestones have been or are near completion including a
comprehensive needs analysis mapping data, technical and information
architectures and building an integrated prototype.
The rates utilized to discount the net cash flows to their present
value are based on venture capital rates of return. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 25.0 to 30.0 percent were utilized for
the business enterprise and for the in-process research and development. Sapient
believes that 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 the Company 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
materially from the assumed results and could have a material adverse effect on
Sapient's business, results of operations and financial condition.
Sapient believes that the assumptions used in the forecasts were
reasonable. 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 assumed results and could have a
material adverse effect on Sapient's business, results of operations and
financial condition.
Sapient expects to continue its support of these efforts and believes
Studio Archetype has a reasonable chance of successfully completing the research
and development programs. However, there is risk associated with the completion
of the projects and there is no assurance that any of the projects will meet
with either technological or commercial success.
If these projects are not successfully developed, the sales and
profitability of Studio Archetype 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.
Other intangible assets of $14.4 million is comprised of $3.8 million
for marketing assets, $1.6 million
20
<PAGE> 21
for assembled work force and approximately $9.0 million of goodwill comprising
the reputation of Studio Archetype, all of which have estimated useful lives of
approximately 7 years. However there are no assurances that the value of these
intangible assets acquired will not become impaired.
Below are the pro forma results of operations for Sapient and Studio
Archetype, assuming that the acquisition of Studio occurred at the beginning of
the twelve-month period ended December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues....................................... $174,971 $102,386
Net income......................................... $ 7,626 $ 11,954
Basic net income per share......................... $ 0.29 $ 0.48
Diluted net income per share....................... $ 0.27 $ 0.44
</TABLE>
On December 15, 1997, Sapient issued 611,738 shares of Sapient Common
Stock for all of the outstanding shares of common stock of EXOR, a provider of
ERP implementation services using Oracle applications. This business combination
has been accounted for as a pooling of interests and, accordingly, the
Consolidated Financial Statements for the periods prior to the combination have
been restated to include the accounts and results of operations of EXOR.
(15) RELATED PARTY TRANSACTIONS
The Company has provided technology services to certain start-up
companies. As partial payment for services delivered, 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 1998 Sapient
recognized approximately $2,200,000 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.
(16) QUARTERLY FINANCIAL RESULTS
The following tables set forth certain unaudited quarterly results of
operations of Sapient for 1998 and 1997. In the opinion of management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly the quarterly information when read in conjunction with the audited
Consolidated Financial Statements and Notes thereto included elsewhere in this
Annual Report on Form 10-K. The quarterly operating results are not necessarily
indicative of future results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................................. $31,595 $36,420 $43,066 $53,791
Operating expenses:
Project personnel costs................................ 15,221 17,511 21,103 30,608
Selling and marketing.................................. 1,842 2,666 3,061 3,949
General and administrative............................. 8,271 8,726 10,680 14,348
Amortization of intangibles............................ -- -- 128 559
Charge for in-process research and development......... -- -- 11,100 --
Acquisition costs...................................... -- -- -- --
------- ------- ------- -------
Total operating expenses............................ 25,334 28,903 46,072 49,464
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C>
Income (loss) from operations............................ 6,261 7,517 (3,006) 4,327
Interest income.......................................... 590 676 941 718
------- ------- ------- -------
Income (loss) before income taxes........................ 6,851 8,193 (2,065) 5,045
Income taxes............................................. 2,504 2,929 (668) 3,895
------- ------- ------- -------
Net income (loss)........................................ $ 4,347 $ 5,264 $(1,397) $ 1,150
======= ======= ======== =======
Basic net income (loss) per share........................ $ 0.17 $ 0.20 $ (0.05) $ 0.04
======= ======= ======= =======
Diluted net income (loss) per share...................... $ 0.16 $ 0.18 $ (0.05) $ 0.04
======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................................. $18,359 $21,226 $24,914 $27,528
Operating expenses:
Project personnel costs................................ 8,830 10,122 12,359 13,312
Selling and marketing.................................. 1,145 1,184 1,600 2,145
General and administrative............................. 4,669 5,348 5,937 6,617
Amortization of intangibles............................ -- -- -- --
Charge for in-process research and development......... -- -- -- --
Acquisition costs...................................... -- -- -- 560
------- ------- ------- -------
Total operating expenses............................ 14,644 16,654 19,896 22,634
------- ------- ------- -------
Income from operations................................... 3,715 4,572 5,018 4,894
Interest income.......................................... 515 567 479 497
------- ------- ------- -------
Income before income taxes............................... 4,230 5,139 5,497 5,391
Income taxes............................................. 1,620 1,900 2,077 2,106
------- ------- ------- -------
Net income............................................... $ 2,610 $ 3,239 $ 3,420 $ 3,285
======= ======= ======= =======
Basic net income per share............................... $ 0.11 $ 0.13 $ 0.14 $ 0.13
======= ======= ======= =======
Diluted net income per share............................. $ 0.10 $ 0.12 $ 0.13 $ 0.12
======= ======= ======= =======
</TABLE>
22
<PAGE> 23
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: April 22, 1999 SAPIENT CORPORATION
----------------------------------
(Registrant)
By: /s/ Susan D. Johnson
------------------------------
Chief Financial Officer
23
