<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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>
<CAPTION>
<S> <C>
DELAWARE 04-3130648
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MEMORIAL DRIVE, CAMBRIDGE, MA 02142
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
617-621-0200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 4, 2000, there were 118,694,548 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>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999......................................... 2
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2000 and 1999.............. 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999.................. 4
Notes to Consolidated Financial Statements......... 5-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8-12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........... 13
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 13
Item 6. Exhibits and Reports on Form 8-K.................... 13
Signatures.................................................. 14
Exhibit 27.1................................................ 15
</TABLE>
<PAGE> 3
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $111,398 $ 51,582
Short term investments.................................... 135,853 144,527
Accounts receivable, less allowance for doubtful accounts
of $3,896 and $1,246, respectively..................... 73,967 75,170
Unbilled revenues on contracts............................ 15,957 13,474
Deferred income taxes..................................... 890 1,311
Prepaid expenses and other current assets................. 11,376 7,928
-------- --------
Total current assets.............................. 349,441 293,992
Property and equipment, net................................. 44,122 23,591
Deferred income taxes....................................... 5,453 6,296
Intangible assets........................................... 18,800 16,582
Other assets................................................ 4,412 2,728
-------- --------
Total assets...................................... $422,228 $343,189
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,398 $ 4,437
Accrued expenses.......................................... 6,786 4,538
Accrued compensation...................................... 23,776 11,682
Accrued income taxes payable.............................. -- 948
Deferred revenues on contracts............................ 20,304 15,136
-------- --------
Total current liabilities......................... 56,264 36,741
Other long term liabilities............................... 4,004 1,489
-------- --------
Total liabilities................................. 60,268 38,230
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
authorized and none issued and outstanding at June 30,
2000 and December 31, 1999............................. -- --
Common stock, par value $.01 per share, voting,
200,000,000 shares authorized, 118,443,320 and
114,947,078 shares issued and outstanding at June 30,
2000 and December 31, 1999, respectively............... 1,184 1,150
Additional paid-in capital................................ 270,636 240,400
Deferred compensation..................................... (468) (688)
Accumulated other comprehensive loss...................... (455) (114)
Retained earnings......................................... 91,063 64,211
-------- --------
Total stockholders' equity........................ 361,960 304,959
-------- --------
Total liabilities and stockholders' equity........ $422,228 $343,189
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 4
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $125,769 $ 64,199 $226,103 $121,992
-------- -------- -------- --------
Operating expenses:
Project personnel costs (exclusive of stock-based
compensation of $101 and $202 for the three and
six months ended June 30, 2000, respectively, and
$101 and $804 for the three and six months ended
June 30, 1999, respectively)..................... 60,321 30,618 108,896 58,952
Selling and marketing (exclusive of stock-based
compensation of $435 for the six months ended
June 30, 1999)................................... 7,769 5,411 15,654 9,384
General and administrative (exclusive of stock-based
compensation of $9 and $18 for the three and six
months ended June 30, 2000, respectively, and $9
and $570 for the three and six months ended June
30, 1999, respectively).......................... 33,753 16,219 59,006 30,868
Amortization of intangible assets................... 757 519 1,641 1,088
Stock-based compensation............................ 110 110 220 1,809
Acquisition costs................................... -- -- -- 2,340
-------- -------- -------- --------
Total operating expenses.................... 102,710 52,877 185,417 104,441
-------- -------- -------- --------
Income from operations................................ 23,059 11,322 40,686 17,551
Interest income....................................... 2,768 859 5,241 1,679
-------- -------- -------- --------
Income before income taxes and equity in net loss from
unconsolidated affiliate............................ 25,827 12,181 45,927 19,230
Income taxes.......................................... 10,589 4,495 18,446 7,266
-------- -------- -------- --------
Income before equity in net loss from unconsolidated
affiliate........................................... 15,238 7,686 27,481 11,964
Equity in net loss from unconsolidated affiliate...... 276 -- 629 --
-------- -------- -------- --------
Net income.................................. $ 14,962 $ 7,686 $ 26,852 $ 11,964
======== ======== ======== ========
Basic net income per share............................ $ 0.13 $ 0.07 $ 0.23 $ 0.11
======== ======== ======== ========
Diluted net income per share.......................... $ 0.11 $ 0.06 $ 0.20 $ 0.10
======== ======== ======== ========
Weighted average common shares........................ 117,926 109,772 117,066 109,176
Weighted average common share equivalents............. 15,076 12,556 15,940 13,136
-------- -------- -------- --------
Weighted average common shares and common share
equivalents......................................... 133,002 122,328 133,006 122,312
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 5
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 26,852 $ 11,964
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 5,281 3,430
Amortization of intangible assets...................... 1,641 1,088
Stock-based compensation............................... 220 1,809
Equity in net loss from unconsolidated affiliate....... 629 --
Changes in assets and liabilities:
Increase in accounts receivable...................... (1,490) (13,366)
Increase in unbilled revenues on contracts........... (2,348) (3,645)
Increase in prepaid expenses and other current
assets.............................................. (1,062) (9,799)
Increase in other assets............................. (1,110) (164)
Increase in accounts payable......................... 798 1,423
Increase in accrued expenses......................... 1,958 448
Increase (decrease) in accrued compensation.......... 12,094 (2,846)
Increase in accrued income taxes payable............. 5,726 4,001
Increase (decrease) in deferred revenues on
contracts........................................... 5,168 (1,430)
Increase in other long term liabilities.............. 2,136 288
-------- --------
Net cash provided by (used in) operating activities......... 56,493 (6,799)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (25,381) (8,332)
Net cash received from acquisition........................ 23 --
Investments in and advances to affiliates................. 731 --
Long term investments..................................... (2,000) --
Maturities of short term investments...................... 8,609 15,878
-------- --------
Net cash provided by (used in) investing activities....... (18,018) 7,546
-------- --------
Cash flows from financing activities:
Repayments from (advances to) stockholders for notes
receivable............................................. 71 (1,547)
Proceeds from stock option and purchase plans............. 21,270 9,603
-------- --------
Net cash provided by financing activities......... 21,341 8,056
-------- --------
Increase in cash and cash equivalents....................... 59,816 8,803
Cash and cash equivalents, at beginning of period........... 51,582 25,720
-------- --------
Cash and cash equivalents, at end of period................. $111,398 $ 34,523
======== ========
Schedule of non-cash financing activities:
Tax benefit of disqualifying dispositions of stock
options................................................ $ 9,000 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these 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, 1999 included in the Company's Annual Report on Form 10-K. The accompanying
consolidated financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three and six months ended June 30, 2000 are
not necessarily indicative of the results to be expected for any future period
or the full fiscal year.
On August 1, 2000, the Board of Directors declared a two-for-one stock
split to be effected as a 100% stock dividend, to be paid on August 28, 2000 to
shareholders of record on August 14, 2000. On November 5, 1999, the Company
distributed a two-for-one stock split effected as a 100% stock dividend. The
Company's financial statements and all of the share numbers contained in this
Quarterly Report have been restated for all periods presented to reflect the
effect of these stock splits.
On June 30, 2000, the Company acquired an additional equity interest in
HWT, Inc. (formerly HealthWatch Technologies, L.L.C.) for $2.0 million. As a
result of this acquisition, as well as certain other equity changes at HWT, the
Company's equity interest in HWT is now 55.6%. In prior periods, the Company had
a less than 50% ownership interest and accounted for this investment using the
equity method of accounting. At June 30, 2000, the consolidated financial
statements include the accounts of HWT. 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. Pro
forma results combining the Company and HWT are not materially different from
the Company's results of operations.
On October 8, 1999, the Company acquired substantially all of the assets of
E.Lab, L.L.C. in exchange for 176,088 shares of common stock and the assumption
of certain liabilities of E.Lab. 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. E.Lab's results of
operations are included in the Company's consolidated statements of income from
the date of acquisition.
On March 29, 1999, the Company acquired all of the outstanding common stock
of Adjacency, Inc. in exchange for 3,162,696 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. Costs, which consisted primarily of investment banking, accounting
and legal fees related to the acquisition and approximated $2.3 million, have
been reflected in the consolidated statements of income for the six months ended
June 30, 1999.
5
<PAGE> 7
(2) EARNINGS PER SHARE
The following information presents the Company's computation of basic and
diluted EPS for the periods presented in the consolidated statements of income
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income............................................ $ 14,962 $ 7,686 $ 26,852 $ 11,964
Basic net income per share:
Weighted average common shares outstanding.......... 117,926 109,772 117,066 109,176
Basic net income per share.......................... $ 0.13 $ 0.07 $ 0.23 $ 0.11
======== ======== ======== ========
Diluted net income per share:
Weighted average common shares outstanding.......... 117,926 109,772 117,066 109,176
Dilutive stock options.............................. 15,076 12,556 15,940 13,136
-------- -------- -------- --------
Shares used in computing per share amount........... 133,002 122,328 133,006 122,312
-------- -------- -------- --------
Diluted net income per share........................ $ 0.11 $ 0.06 $ 0.20 $ 0.10
======== ======== ======== ========
</TABLE>
(3) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") establishes standards for reporting
comprehensive income. 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 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. Comprehensive income was $14.7 million and $7.5 million
for the three months ended June 30, 2000 and 1999, respectively, and $26.5
million and $11.7 million for the six months ended June 30, 2000 and 1999,
respectively.
(4) NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
(5) RELATED PARTY TRANSACTIONS
During the three and six months ended June 30, 1999, the Company recognized
approximately $1.2 million and $3.4 million, respectively in net revenues from
consulting services provided to related parties in which the Company has
non-controlling equity interests. No related party revenues were recognized
during the three and six months ended June 30, 2000. The Company had receivables
due from these entities of approximately $2.7 million and $5.2 million at June
30, 2000 and December 31, 1999, respectively. In addition, certain members of
management of the Company have provided funding to these entities. For the three
and six months ended June 30, 1999, the Company recognized approximately $0.8
million and
6
<PAGE> 8
$2.5 million in net revenues related to HWT, which was accounted for under the
equity method of accounting. The receivable balance at December 31, 1999
includes $3.1 million from HWT.
On January 31, 2000, the Company entered into a strategic relationship with
a client which included, among other things, the Company becoming a preferred
supplier to that client and its affiliated entities. As part of the
relationship, the co-CEOs and co-chairmen of the Board of Directors of the
Company each issued a $10.0 million convertible note to the client. The notes
are convertible into shares of the Company's common stock owned by the co-CEOs
and co-chairmen at a conversion rate equal to the closing price of the Company's
common stock on the date the convertible notes were executed. The client's
ability to convert the notes is subject to certain vesting restrictions, based
upon the client's ability to achieve certain revenue targets to Sapient within
prescribed timeframes. The notes cannot be converted before May 15, 2002.
(6) SUBSEQUENT EVENT
On August 9, 2000, the Company signed an Agreement and Plan of Merger with
Human Code, Inc. whereby the Company will acquire all of the outstanding capital
stock of Human Code in exchange for approximately 1,510,000 shares of the
Company's common stock and the assumption of existing Human Code stock options.
The transaction is scheduled to close by the end of August and is subject to
customary closing conditions. The acquisition will be accounted for as a
purchase.
7
<PAGE> 9
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading creator of New Economy businesses, providing Internet
strategy consulting, sophisticated end-to-end solutions, and launch support to
Global 1000 and startup companies. 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. We provide end-to-end solutions to our clients
using multidisciplinary teams. We deliver our solutions primarily through six
industry business units and primarily on a fixed-price, fixed-timeframe basis.
Our revenues and earnings may fluctuate from quarter to quarter based on
the number, size and scope of projects in which we are 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 use of estimates of resources required to complete
ongoing projects, general economic conditions and other factors. Certain
significant estimates include percentage of completion estimates used for fixed
price contracts and the allowance for doubtful accounts. These items are
frequently monitored and analyzed by management for changes in facts and
circumstances and material changes in these estimates could occur in the future.
On August 1, 2000, the Board of Directors declared a two-for-one stock
split to be effected as a 100% stock dividend, to be paid on August 28, 2000 to
shareholders of record on August 14, 2000. On November 5, 1999, we distributed a
two-for-one stock split effected as a 100% stock dividend. Our financial
statements and all of the share numbers contained in this Quarterly Report have
been restated for all periods presented to reflect the effect of these stock
splits.
On June 30, 2000, we acquired an additional equity interest in HWT, Inc.
(formerly HealthWatch Technologies, L.L.C.) for $2.0 million. As a result of
this acquisition, as well as certain other equity changes at HWT, our equity
interest in HWT is now 55.6%. In prior periods, we had a less than 50% ownership
interest and accounted for this investment using the equity method of
accounting. At June 30, 2000, the consolidated financial statements include the
accounts of HWT. 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. Pro forma results
combining Sapient and HWT are not materially different from our results of
operations.
On November 19, 1999, we completed a public offering of common stock, which
resulted in the issuance of 2,229,200 shares of common stock. Proceeds to
Sapient, net underwriting discounts and costs of the offering, were
approximately $83.3 million.
On October 8, 1999, we acquired substantially all of the assets of E.Lab,
L.L.C. in exchange for 176,088 shares of common stock and the assumption of
certain liabilities of E.Lab. 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. E.Lab's results of
operations are included in our consolidated statements of income from the date
of acquisition.
In September 1999, we commenced a joint venture, Sapient S.p.A., in Milan,
Italy. The joint venture will provide e-services in Italy to Italian-based
businesses.
On March 29, 1999, we acquired all of the outstanding common stock of
Adjacency, Inc. in exchange for 3,162,696 shares of our common stock. Our
financial statements have been restated for all periods presented to reflect the
acquisition of Adjacency, which was accounted for as a pooling-of-interests.
Costs, which consisted primarily of investment banking, accounting and legal
fees related to the acquisition and approximated $2.3 million, have been
reflected in the consolidated statements of income for the six months ended June
30, 1999.
8
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in our consolidated statements of income:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------- -----------
2000 1999 2000 1999
----- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues.................................................... 100% 100% 100% 100%
---- ---- --- ----
Operating expenses:
Project personnel costs................................... 48 48 48 48
Selling and marketing..................................... 6 8 7 8
General and administrative................................ 27 25 26 25
Amortization of intangible assets......................... 1 1 1 1
Stock-based compensation.................................. -- -- -- 1
Acquisition costs......................................... -- -- -- 2
---- ---- --- ----
Total operating expenses.......................... 82 82 82 85
---- ---- --- ----
Income from operations...................................... 18 18 18 15
Interest income............................................. 2 1 2 1
---- ---- --- ----
Income before income taxes and equity in net loss from
unconsolidated affiliate.................................. 20 19 20 16
Income taxes................................................ 8 7 8 6
---- ---- --- ----
Income before equity in net loss from unconsolidated
affiliate................................................. 12 12 12 10
Equity in net loss from unconsolidated affiliate............ -- -- -- --
---- ---- --- ----
Net Income.................................................. 12% 12% 12% 10%
==== ==== === ====
</TABLE>
Revenues
Revenues for the three months ended June 30, 2000 increased 96% over
revenues for the three months ended June 30, 1999. For the six months ended June
30, 2000, revenues increased 85% over the comparable period of the prior year.
The increase in revenues was attributable to an increase in the number and
average size of client projects, billing rate increases, and improved
utilization of project personnel. For the three months ended June 30, 2000, our
five largest clients accounted for approximately 25% of our revenues, compared
to 27% of revenues for the three months ended June 30, 1999. For the six months
ended June 30, 2000, our five largest clients accounted for approximately 23% of
our revenues, compared to 29% of revenues for the six months ended June 30,
1999. During the three and six months ended June 30, 2000 and 1999, no client
accounted for more than 10% of revenues.
Project Personnel Costs
Project personnel costs consist principally of salaries and employee
benefits for personnel dedicated to client projects and direct expenses incurred
to complete projects that were not reimbursed by clients. These costs represent
the most significant expense we incur in providing our services. The increase in
project personnel costs for the three and six months ended June 30, 2000 was
primarily due to an increase in the number of project personnel from 1,413 at
June 30, 1999 to 1,977 at June 30, 2000 and to higher compensation for project
personnel. Project personnel costs remained constant as a percentage of revenues
at 48% for the three and six months ended June 30, 2000 and 1999.
Selling and Marketing
Selling and marketing costs consist principally of salaries, employee
benefits, travel expenses of selling and marketing personnel and promotional
costs. The increase in selling and marketing costs for the three and six months
ended June 30, 2000 was primarily due to an increase in the number of selling
and marketing personnel from 67 at June 30, 1999 to 95 at June 30, 2000 and to
higher compensation for sales personnel. Selling and marketing costs decreased
as a percentage of revenues from 8% for the three months ended
9
<PAGE> 11
June 30, 1999 to 6% for the three months ended June 30, 2000. For the six months
ended June 30, 2000, selling and marketing costs decreased as a percentage of
revenues to 7% from 8% for the six months ended June 30, 1999. The higher
percentages of revenue for the three and six months ended June 30, 1999 were
primarily due to investments made by us in a new brand identity during the
second quarter of 1999.
General and Administrative
General and administrative costs relate principally to salaries and
employee benefits associated with our management, finance and administrative
groups, including personnel devoted to recruiting and training project personnel
and occupancy expenses. The increase in general and administrative costs for the
three and six months ended June 30, 2000 was primarily due to an increase in the
number of employees hired during the past year, an increase in occupancy costs
related to significant expansion of our office space, and increased depreciation
costs related to investments in property and equipment. General and
administrative personnel grew from 310 at June 30, 1999 to 493 at June 30, 2000.
Our total headcount increased from 1,790 at June 30, 1999 to 2,565 at June 30,
2000. As a percentage of revenues, general and administrative costs increased to
27% for the three months ended June 30, 2000 compared to 25% for the three
months ended June 30, 1999. General and administrative costs increased to 26%
for the six months ended June 30, 2000 compared to 25% for the six months ended
June 30, 1999. This increase was primarily a result of an increase in occupancy
costs. Total occupancy at June 30, 2000 was approximately 811,000 square feet,
compared to approximately 539,000 square feet at June 30, 1999.
Amortization of Intangible Assets
Amortization of intangible assets consists principally of amortization of
marketing assets, customer lists, assembled workforce and goodwill resulting
from the acquisitions of Studio Archetype, Inc. and E.Lab. The increase in
amortization of intangible assets for the three and six months ended June 30,
2000 compared to the comparable periods in 1999 was primarily related to the
E.Lab acquisition in the fourth quarter of 1999. Amortization periods range from
four to seven years.
Stock Compensation Charge
Stock-based compensation consists of expenses associated with Adjacency
stock options that were granted, prior to our acquisition of Adjacency, at below
fair market value. The options were granted in November of 1998 with a
three-year vesting schedule commencing on the date of employment. A charge of
approximately $1.7 million was recorded in the first quarter of 1999 and was the
result of change-in-control provisions. We expect this charge to be
approximately $110,000 for the next five quarters.
Acquisition Costs
Costs associated with the Adjacency acquisition, which consisted primarily
of investment banking, accounting and legal fees, were approximately $2.3
million and were charged to expense in the six months ended June 30, 1999.
Interest Income
Interest income for the three months ended June 30, 2000 and 1999 was $2.8
million and $0.9 million, respectively, and for the six months ended June 30,
2000 and 1999 was $5.2 million and $1.7 million, respectively. This interest was
derived primarily from investments of the proceeds from our public stock
offerings which were invested primarily in tax-exempt, short-term municipal
bonds, commercial paper and U.S. government securities. The increase in interest
income for the three and six months ended June 30, 2000 compared to the
comparable periods in 1999 was due to the investment of the proceeds from the
follow-on public offering of our common stock in November of 1999.
Provision for Income Taxes
Income tax expense for the three months ended June 30, 2000 and 1999 was
$10.6 million and $4.5 million, respectively, or effective rates of 41.0% and
36.9%, respectively. For the six months ended June 30, 2000 and 1999, the income
tax expense was $18.4 million and $7.3 million, respectively, or effective rates
of 40.2% and 37.8%, respectively. The increases in effective tax rates were due
primarily to expansion
10
<PAGE> 12
into countries and states with higher tax rates. 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 and deductibility of certain costs
and expenses by jurisdiction and as a result of acquisitions.
Equity in Net Loss from Unconsolidated Affiliate
Equity in net loss from unconsolidated affiliate for the three and six
months ended June 30, 2000 was approximately $276,000 and $629,000,
respectively. In September 1999, we commenced a joint venture, Sapient S.p.A.,
in Milan, Italy. We use the equity method of accounting for this investment in
which we have a 50% interest.
Liquidity and Capital Resources
We have primarily funded our operations from cash flow generated from
operations and the proceeds from our public stock offerings. In addition, we
have a bank revolving line of credit providing for borrowings of up to $5.0
million. Borrowings under this line of credit, which expires on June 30, 2001,
bear interest at the bank's prime rate. The line of credit includes covenants
relating to the maintenance of certain financial ratios, and limits the payment
of dividends. At June 30, 2000, the Company had no bank borrowings outstanding.
We invest predominantly in instruments that are highly liquid, investment
grade securities and have maturities of less than one year. At June 30, 2000, we
had approximately $247.3 million in cash, cash equivalents and short term
investments compared to $196.1 million at December 31, 1999.
Cash provided by operating activities was $56.5 million for the six months
ended June 30, 2000 and resulted primarily from net income of $26.9 million,
non-cash charges of $7.8 million, increases in accrued compensation of $12.1
million, increases in accrued income taxes payable of $5.7 million, increases in
deferred revenues on contracts of $5.2 million and increases in other long term
liabilities of $2.1 million, offset by increases in accounts receivable of $1.5
million and increases of $2.3 million in unbilled revenues on contracts, all of
which were principally related to the overall growth of the Company.
Cash used in investing activities was $18.0 million for the six months
ended June 30, 2000. This was due primarily to capital expenditures of $25.4
million for significant expansion of the Company's office space and computer
equipment purchases and long term investments of $2.0 million, offset by
maturities of short term investments (net of purchases) of $8.6 million.
Cash provided by financing activities was $21.3 million for the six months
ended June 30, 2000 and was principally due to $21.3 million provided from the
sale of common stock through the Company's employee stock purchase plan and the
exercise of stock options.
We have entered into a strategic alliance with Thomas Weisel Capital
Partners, L.P. to help established companies create new businesses to compete
successfully in the New Economy. We have initially committed to invest up to
$100.0 million in these new businesses and expect to raise additional capital
from other strategic partners. Funds for this strategic alliance will be
provided from our existing cash and short term investment balances. There have
been no investments made as of June 30, 2000.
We believe that the cash provided from operations, borrowings available
under our revolving line of credit, existing cash, cash equivalents and short
term investments will be sufficient to meet our working capital, capital
expenditure, and strategic alliance requirements for at least the next 18
months.
SUBSEQUENT EVENT
On August 9, 2000, we signed an Agreement and Plan of Merger with Human
Code, Inc. whereby we will acquire all of the outstanding capital stock of Human
Code in exchange for approximately 1,510,000 shares of our common stock and the
assumption of existing Human Code stock options. The transaction is scheduled to
close by the end of August and is subject to customary closing conditions. The
acquisition will be accounted for as a purchase.
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NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
There has been no change to the information previously provided by the
Company on Form SR for the period ended July 3, 1996, as amended, relating to
securities sold by the Company pursuant to Registration Statements on Form S-1
(Registration Nos. 333-1586 and 333-3204).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 24, 2000, the
following proposals were adopted by the votes specified below:
(i) The election of two Class I Directors (Jerry A. Greenberg and Bruce D.
Parker) to serve until the year 2003. Mr. Greenberg received a total of
86,658,788 shares of common stock voting in favor, with 18,896 withheld from
the vote. Mr. Parker received a total of 86,658,788 shares of common stock
voting in favor, with 18,896 withheld from the vote. In addition to the
directors listed above whom were elected at the meeting, the terms of the
following directors continued after the meeting: J. Stuart Moore, Darius W.
Gaskins, Carl S. Sloane and R. Stephen Cheheyl.
(ii) The approval of an amendment to the Company's Amended and Restated
Certificate of Incorporation increasing the number of authorized shares of
common stock from 100,000,000 to 200,000,000. A total of 86,336,354 shares of
common stock were voted in favor of this proposal, 332,380 shares were voted
against this proposal and 8,950 shares abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
SAPIENT CORPORATION
Date: August 14, 2000 By: /s/ JERRY A. GREENBERG
----------------------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Date: August 14, 2000 By: /s/ EDWARD G. GOLDFINGER
----------------------------------------
Edward G. Goldfinger
Chief Financial Officer
</TABLE>
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