<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 SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-28074
SAPIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3130648
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MEMORIAL DRIVE, CAMBRIDGE, MA 02142
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
617-621-0200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 20, 1999, there were 56,134,319 shares of the registrant's
Common Stock, $.01 par value, outstanding.
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<PAGE> 2
SAPIENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998........................................... 2
Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Months Ended September 30, 1999 and
1998........................................................ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998........................... 4
Notes to Consolidated Financial Statements.................. 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7-11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 12
Item 2. Changes in Securities and Use of Proceeds................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signatures............................................................ 13
</TABLE>
<PAGE> 3
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 30,713 $ 39,320
Short term investments.................................... 69,207 52,500
Accounts receivable, less allowance for doubtful accounts
of $612 and $550, respectively......................... 66,010 42,797
Unbilled revenues on contracts............................ 13,530 10,306
Deferred income taxes..................................... 3,973 3,973
Prepaid expenses and other current assets................. 4,507 3,734
-------- --------
Total current assets.............................. 187,940 152,630
Property and equipment, net................................. 21,036 14,447
Deferred income taxes....................................... 5,702 5,702
Intangible assets........................................... 11,532 13,729
Due from employees.......................................... 250 764
Other assets................................................ 333 430
-------- --------
Total assets...................................... $226,793 $187,702
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,527 $ 1,182
Accrued expenses.......................................... 2,893 3,743
Accrued compensation...................................... 5,103 8,633
Accrued income taxes payable.............................. 1,136 2,217
Deferred income taxes..................................... 4,170 4,170
Deferred revenues on contracts............................ 13,871 10,907
-------- --------
Total current liabilities......................... 28,700 30,852
Deferred income taxes....................................... 773 773
Other long term liabilities................................. 1,568 1,263
-------- --------
Total liabilities................................. 31,041 32,888
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
shares authorized and none issued and outstanding at
September 30, 1999 and December 31, 1998............... -- --
Common stock, par value $.01 per share, voting,
100,000,000 shares authorized, 56,073,900 issued and
outstanding at September 30, 1999 and 54,212,586 shares
issued and outstanding at December 31, 1998............ 561 542
Additional paid-in capital................................ 141,601 122,513
Deferred compensation..................................... (798) (2,178)
Accumulated other comprehensive income.................... (356) 26
Retained earnings......................................... 54,744 33,911
-------- --------
Total stockholders' equity........................ 195,752 154,814
-------- --------
Total liabilities and stockholders' equity........ $226,793 $187,702
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE> 4
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................................. $73,029 $43,066 $195,021 $111,081
------- ------- -------- --------
Operating expenses:
Project personnel costs............................ 35,669 21,102 94,621 53,833
Selling and marketing.............................. 5,927 3,061 15,312 7,569
General and administrative......................... 17,527 10,681 48,394 27,680
Stock compensation charge.......................... 110 -- 1,919 --
Amortization of intangible assets.................. 462 128 1,550 128
Charge for in-process research and development..... -- 11,100 -- 11,100
Acquisition costs.................................. -- -- 2,340 --
------- ------- -------- --------
Total operating expenses................... 59,695 46,072 164,136 100,310
Income (loss) from operations........................ 13,334 (3,006) 30,885 10,771
Interest income...................................... 970 941 2,649 2,207
------- ------- -------- --------
Income (loss) before income taxes.................... 14,304 (2,065) 33,534 12,978
Income tax expense (benefit)......................... 5,436 (668) 12,701 4,765
------- ------- -------- --------
Net income (loss).......................... $ 8,868 $(1,397) $ 20,833 $ 8,213
======= ======= ======== ========
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)........... 66 -- (19) --
Unrealized holding loss on short term
investments..................................... (163) -- (202) --
------- ------- -------- --------
Other comprehensive income (loss), net of tax........ $ 8,771 $(1,397) $ 20,612 $ 8,213
======= ======= ======== ========
Basic net income (loss) per share.................... $ 0.16 $ (0.03) $ 0.38 $ 0.16
======= ======= ======== ========
Diluted net income (loss) per share.................. $ 0.14 $ (0.03) $ 0.33 $ 0.14
======= ======= ======== ========
Weighted average common shares....................... 55,728 52,863 55,101 51,670
Weighted average common share equivalents............ 6,351 -- 7,244 5,253
------- ------- -------- --------
Weighted average common shares and common share
equivalents........................................ 62,079 52,863 62,345 56,923
======= ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1999 1998
------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $20,833 $ 8,213
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 5,577 2,361
Charge for in-process research and development.......... -- 11,100
Amortization of intangible assets....................... 1,550 128
Deferred compensation................................... 1,919 --
Deferred income taxes................................... -- (4,039)
Changes in assets and liabilities:
Increase in accounts receivable....................... (23,212) (12,498)
Increase in unbilled revenues on contracts............ (3,224) (2,313)
Increase in prepaid expenses and other current
assets............................................... (876) (1,203)
Decrease in other assets.............................. 97 39
Increase in accounts payable.......................... 345 1,270
Decrease in accrued expenses.......................... (100) (1,584)
Decrease in accrued compensation...................... (3,530) (95)
(Decrease) increase in accrued income taxes payable... (1,081) 2,319
(Decrease)increase in deferred revenues on
contracts............................................ 2,963 (423)
Increase in other long term liabilities............... 305 70
------- --------
Net cash provided by operating activities............. 1,566 3,345
------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (12,166) (7,462)
Net cash received from acquisition........................ -- 561
Purchase (maturities) of short term investments........... (17,089) (45,533)
------- --------
Net cash used in investing activities................. (29,255) (52,434)
------- --------
Cash flows from financing activities:
(Advances to)repayment from employees for notes
receivable.............................................. 514 (3,788)
Proceeds from exercise of stock options................... 14,031 1,311
Proceeds from public stock offering....................... -- 29,091
Proceeds from employee stock purchase plan................ 4,537 2,810
Principal payments on notes payable to bank............... -- (2,909)
------- --------
Net cash provided by financing activities............. 19,082 26,515
------- --------
Decrease in cash and cash equivalents....................... (8,607) (22,574)
Cash and cash equivalents, at beginning of period........... 39,320 47,314
------- --------
Cash and cash equivalents, at end of period................. $30,713 $ 24,740
======= ========
Supplemental disclosures for cash flow information:
Cash paid during the period for income taxes.............. $16,679 $ 6,484
======= ========
Net assets and liabilities recognized upon acquisition
from Studio:
Cash and cash equivalents............................... -- 811
Accounts receivable, less allowance for doubtful
accounts of $100....................................... -- 2,578
Unbilled revenues on contracts.......................... -- 629
Prepaid expenses and other current assets............... -- 34
Property and equipment, net............................. -- 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............. -- 22,800
======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 6
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Sapient Corporation (the "Company" or "Sapient") pursuant to the
rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 included in the Company's Annual Report on Form 10-K. The accompanying
consolidated financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three and nine month period ended September
30, 1999 are not necessarily indicative of the results to be expected for any
future period or the full fiscal year.
On March 9, 1998, the Company distributed a two-for-one stock split
effected as a 100% stock dividend. On October 21, 1999, the Board of Directors
declared an additional two-for-one stock split to be effected as a 100% stock
dividend, to be paid on or about November 5, 1999 to shareholders of record on
November 1, 1999. The Company's financial statements have been restated for all
periods presented to reflect the effect of these stock dividends.
On March 29, 1999, the Company acquired all of the outstanding common stock
of Adjacency, Inc. ("Adjacency") in exchange for 1,581,348 shares of Common
Stock. The Company's financial statements have been restated for all periods
presented to reflect the acquisition of Adjacency, which was accounted for as a
pooling of interests.
(2) CONTINGENT LIABILITIES
The Company has certain contingent liabilities that arise in the ordinary
course of its business activities. The Company accrues liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated.
In August 1999, the Company settled the legal proceedings brought against
it in April 1996 by John Adler, a former employee, who alleged, among other
things, wrongful termination of his employment. The suit was previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. In connection with the settlement, Mr. Adler received 24,000
shares of the Company's Common Stock and the parties released each other from
all future claims relating to the matter. The shares Mr. Adler received in the
settlement were originally issued into escrow in 1996 when this lawsuit
originated. The issuance of these shares has no effect on the Company's
operating results or financial condition.
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for reporting
comprehensive income and its components in the body of the financial statements.
Comprehensive income includes net income as currently reported under Generally
Accepted Accounting Principles and also considers the effect of additional
economic events that are not required to be recorded in determining net income
but are rather reported as a separate component of stockholders' equity. Sapient
reports foreign currency translation gains and losses and unrealized gains and
losses on short-term investments as components of comprehensive income.
(4) ACQUISITIONS
On March 29, 1999, the Company acquired all of the outstanding common stock
of Adjacency in exchange for 1,581,348 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
5
<PAGE> 7
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition approximated $2.3 million,
have been reflected in the consolidated statements of income and comprehensive
income for the nine months ended September 30, 1999.
On August 25, 1998, the Company acquired Studio Archetype, Inc. ("Studio")
in exchange for 996,628 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.
(5) RELATED PARTY TRANSACTIONS
During the three and nine-month periods ended September 30, 1999, Sapient
recognized approximately $235,000 and $3,600,000, respectively, in net revenues
from consulting services provided to related parties in which the Company has
received non-controlling equity interests. In addition, certain members of
management of the Company have provided funding to these companies.
6
<PAGE> 8
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading e-services consultancy providing Internet strategy
consulting and sophisticated Internet-based solutions to Global 1000 companies
and startup businesses. These solutions focus on large scale and complex
business-to-consumer and business-to-business electronic commerce, digital
customer relationship management, supply chain optimization, electronic markets
and Internet portals. The Company provides end-to-end solutions to its clients
using multidisciplinary teams. The Company delivers its solutions through five
industry business units and on a fixed-price, fixed-timeframe basis.
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 large clients/projects may constitute a significant
portion of the Company's total revenues in a particular period.
On August 25, 1998, the Company acquired Studio in exchange for 996,628
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 1,581,348 shares of the Company's Common Stock. The
Company's financial statements have been restated for all periods presented to
reflect the acquisition of Adjacency, which has been accounted for as
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition approximated $2.3 million,
have been reflected in the consolidated statements of income and comprehensive
income for the nine months ended September 30, 1999.
On March 9, 1998, the Company distributed a two-for-one stock split
effected as a 100% stock dividend. On October 21, 1999, the Board of Directors
declared an additional two-for-one stock split to be effected as a 100% stock
dividend, to be paid on or about November 5, 1999 to shareholders of record on
November 1, 1999. The Company's financial statements have been restated for all
periods presented to reflect the effect of these stock dividends.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's consolidated statements of income:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues.................................................... 100% 100% 100% 100%
Operating expenses:
Project personnel costs................................... 49 49 48 48
Selling and marketing..................................... 8 7 8 7
General and administrative................................ 24 25 25 25
Stock compensation charge................................. -- -- 1 --
Amortization of intangible assets......................... 1 -- 1 --
Charge for in-process research and development............ -- 26 -- 10
Acquisition costs......................................... -- -- 1 --
--- --- --- ---
Total operating expenses........................... 82 107 84 90
Income (loss) from operations............................... 18 (7) 16 10
Interest income............................................. 1 2 1 1
Income taxes................................................ 7 (2) 6 4
--- --- --- ---
Net income (loss)........................................... 12% (3)% 11% 7%
=== === === ===
</TABLE>
7
<PAGE> 9
Revenues
Revenues for the three months ended September 30, 1999 increased 70% over
revenues for the three months ended September 30, 1998. For the nine months
ended September 30, 1999, revenues increased 76% over the nine months ended
September 30, 1998. The increase in revenues reflects increases in both the
average size and number of client projects. During the three months ended
September 30, 1999, the Company's five largest clients accounted for
approximately 23% of its revenues, compared to 32% of revenues for the three
months ended September 30, 1998. During the nine months ended September 30,
1999, the Company's five largest clients accounted for approximately 26% of
revenues, compared to 33% of revenues for the nine months ended September 30,
1998. During the three and nine months ended September 30, 1999 and the nine
months ended September 30, 1998, no client accounted for more than 10% of
revenues. During the three months ended September 30, 1998, one client accounted
for 10% of revenues.
Project Personnel Costs
Project personnel costs consist primarily of salaries and employee benefits
for personnel dedicated to client assignments and direct expenses incurred to
complete projects that were not reimbursed by the client. These costs represent
the most significant expense the Company incurs in providing its services. The
increase in project personnel costs for the three and nine-month periods ended
September 30, 1999 was primarily due to an increase in project personnel from
1,129 at September 30, 1998 to 1,564 at September 30, 1999. Project personnel
costs remained constant as a percentage of revenues at 49% for the three months
ended September 30, 1999 and 1998 and 48% for the nine months ended September
30, 1999 and 1998.
Selling and Marketing
Selling and marketing costs consist primarily of salaries, employee
benefits, travel expenses of selling and marketing personnel and promotional
costs. Selling and marketing costs increased as a percentage of revenues from 7%
for the three months ended September 30, 1998 to 8% for the three months ended
September 30, 1999. For the first nine months of 1999, selling and marketing
costs increased as a percentage of revenues to 8% from 7% for the first nine
months of 1998. The increases were primarily due to investments made by the
Company in a new brand identity during the second quarter of 1999 and also to
higher compensation for sales personnel. Selling and marketing personnel
increased from 47 employees at September 30, 1998 to 65 employees at September
30, 1999.
General and Administrative
General and administrative costs consist primarily of expenses associated
with the Company's management, finance and administrative groups, including
personnel devoted to recruiting and training project personnel, and occupancy
costs. The increase in general and administrative costs for the three and nine
month periods ended September 30, 1999 was primarily due to an increase in the
number of employees hired during 1999, an increase in occupancy costs related to
significant expansion of the Company's office space, and increased depreciation
costs related to the Company's increased investments in property and equipment.
The Company's total headcount increased from 1,383 at September 30, 1998 to
1,939 at September 30, 1999. As a percentage of revenues, general and
administrative costs decreased to 24% for the third quarter of 1999 compared to
25% for the third quarter of 1998. This decrease was primarily a result of
improved utilization of office space. General and administrative costs remained
constant at 25% for the nine-month periods ending September 30, 1999 and
September 30, 1998.
Stock Compensation Charge
Stock compensation charges consist of expenses associated with Adjacency
stock options that were granted, prior to the Company's acquisition of
Adjacency, at below deemed fair market value. The Company expects the amount of
this charge to be approximately $100,000 per quarter for each quarter during the
next two years.
8
<PAGE> 10
Amortization of Intangible Assets
Amortization of intangible assets consist primarily of amortization of
marketing assets and customer lists, assembled workforce and goodwill resulting
from the acquisition of Studio. Amortization periods range from five to seven
years.
Interest Income
Interest income for the three and nine month periods ended September 30,
1999 was derived primarily from the Company's investments of the proceeds from
its previous public stock offerings, which were invested in tax-exempt,
short-term municipal bonds, high grade commercial paper and U.S. government
securities.
Provision for Income Taxes
Income tax expense represents combined federal and state income taxes at an
effective rate during the quarter ended September 30, 1999 and 1998 of 38.0% and
32.3%, respectively. The increase in the tax rate resulted from the
non-deductibility of Adjacency acquisition costs in 1999. For the nine months
ended September 30, 1999 and 1998, the effective tax rate was 37.9% and 36.7%,
respectively. Our effective tax rate may vary from period to period based on our
future expansion into areas with varying country, state and local income tax
rates.
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
September 30, 2000, bear interest at the bank's prime rate. The line of credit
includes covenants relating to the maintenance of certain financial ratios, and
limits the payment of dividends. At September 30, 1999, the Company had no bank
borrowings outstanding and no material capital commitments.
The Company invests predominantly in instruments that are highly liquid,
investment grade and have maturities of less than one year. At September 30,
1999, the Company had approximately $99.9 million in cash, cash equivalents and
short-term investments compared to $91.8 million at December 31, 1998.
Cash provided by operating activities was $1.6 million for the nine months
ended September 30, 1999 and resulted primarily from net income of $20.8 million
and non-cash charges of $9.0 million, offset by increases in accounts receivable
of $23.2 million and increases of $3.2 million in unbilled revenues on contracts
due to increases in revenues. Cash provided by operating activities was $3.3
million for the nine months ended September 30, 1998 due to net income of $8.2
million and non-cash charges of $9.6 million, offset by increases in accounts
receivables of $12.5 million and unbilled revenue on contracts of $2.3 million.
Cash used in investing activities was $29.3 million for the nine months
ended September 30, 1999. Purchases (net of maturities) of short term
investments during the period were $17.1 million and capital expenditures were
$12.2 million. Increased capital expenditures were due to the significant
expansion in the Company's office space. Cash used in investing activities was
$52.4 million for the nine months ended September 30, 1998, and was primarily
due to an increase in short term investments from the proceeds of a public stock
offering and capital expenditures of $7.5 million.
Cash provided by financing activities was $19.1 million for the nine months
ended September 30, 1999 and consisted primarily of cash received from the sale
of Common Stock through the Company's employee stock purchase plan and upon
exercise of stock options. Cash provided by financing activities was $26.5
million for the nine months ended September 30, 1998, and was primarily due to
proceeds from a public stock offering of $29.1 million.
The Company believes that its existing cash, cash equivalents and
short-term investments at September 30, 1999 together with cash provided from
operations and borrowings available under its revolving line of credit will be
sufficient to meet the Company's working capital and capital expenditure
requirements for at least the next 18 months.
9
<PAGE> 11
YEAR 2000 READINESS
The following disclosure shall be considered Year 2000 Readiness Disclosure
to the maximum extent allowed under the Year 2000 Information and Readiness
Disclosure Act.
Sapient has developed a phased Year 2000 readiness plan to help it identify
and resolve Year 2000 issues associated with Sapient's internal systems and the
services provided by Sapient. The plan includes development of corporate
awareness, assessment, implementation (including remediation and upgrading of
certain product versions), validation testing and contingency planning. Since
Sapient has installed nearly all of its 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. The
manufacturers of Sapient's computer hardware platforms, principally servers,
have indicated that the versions currently used by Sapient are Year 2000
compliant. Sapient has obtained written assurances from many third-party vendors
stipulating that their products are Year 2000 compliant and is in the process of
seeking written assurances from all of its vendors.
Sapient believes that it is approximately 85% complete in installing
patches and upgrades to its third party software and hardware. Sapient has
contracted with two consultants to assist in the remediation and testing phase
of its Year 2000 compliance plan and expects to be completed with its Year 2000
program by November 30, 1999.
While Sapient does not separately track internal costs incurred for its
Year 2000 projects, it believes that it may have to expend additional funds to
utilize third party resources to complete its assessment procedures and
implement any required fixes. Sapient does not expect such expenditures to be
material. If compliance efforts are not completed on time, or additional
compliance efforts are required of which Sapient is not currently aware, or the
cost of any required updating or modification of our IT systems exceeds our
estimates, the Year 2000 issue could have a material adverse effect on Sapient's
business, results of operations and financial condition.
Sapient is developing a comprehensive contingency plan to address the
situations that may result if it is unable to achieve Year 2000 readiness of the
Company's major IT and non-IT systems. Sapient expects to complete this
contingency plan by November 30, 1999. 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 is
devising contingency plans in an attempt to ameliorate the negative effects on
Sapient's major IT systems in the event the Year 2000 issue results in the
unavailability of services. Sapient expects to complete these contingency plans
by November 30, 1999. 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 Internet and software applications for its clients. In addition,
Sapient has recommended, implemented and customized various third-party
technology and software packages for its clients, certain of which may not be
Year 2000 compliant. Former, present and future clients may assert that certain
services performed by Sapient involved or are affected by the Year 2000 issue.
Because Sapient has designed, developed and implemented software and systems for
a large number of clients since 1991, there can be no way of assuring that all
such software programs and systems will be Year 2000 compliant. This uncertainty
is magnified by the fact that in many cases Sapient's clients retain the right
to maintain, alter and modify the systems developed and implemented by Sapient
after the completion of an engagement. Due to the potential significance of the
Year 2000 issue upon client operations, upon any failure of critical client
systems or processes that may be directly or indirectly connected or related to
systems or software analyzed, designed, developed, or implemented by Sapient,
Sapient may be subjected to claims regardless of whether the failure is related
to the services provided by Sapient. If asserted, such claims (and the
associated defense costs) could have a material adverse effect on the Sapient's
business, results of operations and financial condition.
Sapient's policy has been to attempt to include provisions in its client
contracts that, among other things, disclaim implied warranties, limit the
duration of express warranties, limit Sapient's liability to the amount of fees
paid by the client to Sapient in connection with the project, and disclaim any
liability arising from third-party software that is implemented, customized or
installed by Sapient. There can be no assurance that Sapient will be able to
obtain these contractual protections in agreements concerning future projects,
or that any contractual provisions governing current and completed projects will
prevent clients from asserting claims against Sapient with respect to the Year
2000 issue. There also can be no assurance that the contractual protections, if
any, obtained by Sapient will effectively operate to protect the Company from,
or limit the amount of, any liability arising from claims asserted against
Sapient.
The foregoing discussion of Sapient's Year 2000 readiness contains forward
looking statements including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting Sapient and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the ability of Sapient to identify and correct all Year 2000 problems and
the success of third parties with whom Sapient does business in addressing their
Year 2000 issues.
The foregoing section of the Company's Form 10-Q entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements that involve risks and uncertainties. The
Company's actual performance and results may differ materially due to many
important factors, including, but not limited to, the risks associated with
acquisitions, the Company's ability to attract and retain high quality
employees, accurately set fees for and timely complete its current and future
client projects, the continued acceptance of the Company's services, the ability
of the Company to manage its growth and prices effectively, general economic
conditions and similar factors. As a result of these and other factors, there
can be no assurances that the Company will not experience material fluctuations
in future operating results on a quarterly or annual basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which would
require disclosure under this item.
11
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 1999, the Company settled the legal proceedings brought against
it in April 1996 by John Adler, a former employee, who alleged, among other
things, wrongful termination of his employment. The suit was previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. In connection with the settlement, Mr. Adler received 24,000
shares of the Company's Common Stock and the parties released each other from
the current proceedings and all future claims relating to the matter. The shares
Mr. Adler received in the settlement were originally issued into escrow in 1996
when this lawsuit originated. The issuance of these shares has no effect on the
Company's operating results or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In connection with the Company's acquisition of Adjacency, the Company
issued a total of 1,581,348 shares of its Common Stock on March 29, 1999 to the
former stockholders of Adjacency as consideration for all of the outstanding
capital stock of Adjacency. This transaction was exempt from registration
requirements pursuant to Section 4(2) and Rule 506 of the Securities Act of
1933, as amended.
There has been no change to the information previously provided by the
Company on Form SR for the period ended July 3, 1996, as amended, relating to
securities sold by the Company pursuant to Registration Statements on Form S-1
(Registration Nos. 333-1586 and 333-3204).
ITEM 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 July 26, 1999, the Company filed a Current Report on Form 8-K dated July
21, 1999 reporting its change of Company's auditors from KPMG LLP to
PricewaterhouseCoopers LLP.
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<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: October 21, 1999 By: /s/ JERRY A. GREENBERG
------------------------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Date: October 21, 1999 By: /s/ SUSAN D. JOHNSON
------------------------------------------
Susan D. Johnson
Chief Financial Officer
</TABLE>
13
<PAGE> 1
EXHIBIT 11.1
SAPIENT CORPORATION
ARTICLE 6.01 OF REGULATION S-K
COMPUTATION OF SHARES USED IN COMPUTING BASIC AND DILUTED NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income .............................................. $ 8,868 $(1,397) $20,833 $ 8,213
------- ------- ------- -------
Basic Net Income per Share:
Weighted average common shares outstanding ......... 55,728 52,863 55,101 51,670
Shares used in computing per share amount .......... 55,728 52,863 55,101 51,670
------- ------- ------- -------
Basic net income per share ......................... $ 0.16 $ (0.03) $ 0.38 $ 0.16
======= ======= ======= =======
Diluted Net Income per Share:
Weighted average common shares outstanding ......... 55,728 52,863 55,101 51,670
Dilutive stock options ............................. 6,351 -- 7,244 5,253
------- ------- ------- -------
Shares used in computing per share amount .......... 62,079 52,863 62,345 56,923
------- ------- ------- -------
Diluted net income per share ....................... $ 0.14 $ (0.03) $ 0.33 $ 0.14
======= ======= ======= =======
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 30,713 30,713
<SECURITIES> 69,207 69,207
<RECEIVABLES> 66,622 66,622
<ALLOWANCES> 612 612
<INVENTORY> 0 0
<CURRENT-ASSETS> 187,940 187,940
<PP&E> 36,836 36,836
<DEPRECIATION> 15,800 15,800
<TOTAL-ASSETS> 226,793 226,793
<CURRENT-LIABILITIES> 28,700 28,700
<BONDS> 0 0
0 0
0 0
<COMMON> 561 561
<OTHER-SE> 195,191 195,191
<TOTAL-LIABILITY-AND-EQUITY> 226,793 226,793
<SALES> 73,029 195,021
<TOTAL-REVENUES> 73,029 195,021
<CGS> 0 0
<TOTAL-COSTS> 59,695 164,136
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 970 2,649
<INCOME-PRETAX> 14,304 33,534
<INCOME-TAX> 5,436 12,701
<INCOME-CONTINUING> 8,868 20,833
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,868 20,833
<EPS-BASIC> 0.16 0.38
<EPS-DILUTED> 0.14 0.33
</TABLE>
