<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, 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>
DELAWARE 04-3130648
<S> <C>
(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 November 6, 2000, there were 121,316,776 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 September 30,
2000 and December 31, 1999................................ 2
Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 2000 and
1999................................................ 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 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; Recent
Sales of Unregistered Securities.......................... 13
Item 6. Exhibits and Reports on Form 8-K................... 13
Signatures.................................................. 14
Exhibit 27.1................................................
</TABLE>
<PAGE> 3
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 75,394 $ 51,582
Short term investments.................................... 181,404 144,527
Accounts receivable, less allowance for doubtful accounts
of $4,646 and $1,246, respectively..................... 88,124 75,170
Unbilled revenues on contracts............................ 9,984 13,474
Deferred income taxes..................................... 890 1,311
Prepaid expenses and other current assets................. 10,309 7,928
-------- --------
Total current assets.............................. 366,105 293,992
Property and equipment, net................................. 49,978 23,591
Deferred income taxes....................................... -- 6,296
Intangible assets, net...................................... 146,388 16,582
Other assets................................................ 5,793 2,728
-------- --------
Total assets...................................... $568,264 $343,189
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,561 $ 4,437
Accrued expenses.......................................... 8,268 4,538
Accrued compensation...................................... 18,937 11,682
Accrued income taxes payable.............................. 5,258 948
Deferred revenues on contracts............................ 17,143 15,136
-------- --------
Total current liabilities......................... 53,167 36,741
Deferred income taxes..................................... 1,027 --
Other long term liabilities............................... 4,084 1,489
-------- --------
Total liabilities................................. 58,278 38,230
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
authorized and none issued and outstanding at September
30, 2000 and December 31, 1999......................... -- --
Common stock, par value $.01 per share, voting,
200,000,000 shares authorized, 120,802,982 and
114,947,078 shares issued and outstanding at September
30, 2000 and December 31, 1999, respectively........... 1,208 1,150
Additional paid-in capital................................ 417,215 240,400
Deferred compensation..................................... (11,199) (688)
Accumulated other comprehensive loss...................... (287) (114)
Retained earnings......................................... 103,049 64,211
-------- --------
Total stockholders' equity........................ 509,986 304,959
-------- --------
Total liabilities and stockholders' equity........ $568,264 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $138,057 $ 73,029 $364,160 $195,021
-------- -------- -------- --------
Operating expenses:
Project personnel costs (exclusive of
stock-based compensation of $336 and $537
for the three and nine months ended
September 30, 2000, respectively, and $101
and $905 for the three and nine months
ended September 30, 1999, respectively).... 68,183 35,669 177,079 94,621
Selling and marketing (exclusive of
stock-based compensation of $15 for the
three and nine months ended September 30,
2000, respectively, and $435 for the nine
months ended September 30, 1999)........... 7,986 5,927 23,640 15,312
General and administrative (exclusive of
stock-based compensation of $103 and $122
for the three and nine months ended
September 30, 2000, respectively, and $9
and $579 for the three and nine months
ended September 30, 1999, respectively).... 38,132 17,527 97,138 48,394
Amortization of intangible assets............. 2,935 462 4,576 1,550
Stock-based compensation...................... 454 110 674 1,919
Acquisition costs............................. -- -- -- 2,340
-------- -------- -------- --------
Total operating expenses.............. 117,690 59,695 303,107 164,136
-------- -------- -------- --------
Income from operations.......................... 20,367 13,334 61,053 30,885
Interest income................................. 3,248 970 8,489 2,649
-------- -------- -------- --------
Income before income taxes and equity in net
loss from unconsolidated affiliate............ 23,615 14,304 69,542 33,534
Income taxes.................................... 11,536 5,436 29,982 12,701
-------- -------- -------- --------
Income before equity in net loss from
unconsolidated affiliate...................... 12,079 8,868 39,560 20,833
Equity in net loss from unconsolidated
affiliate..................................... 93 -- 722 --
-------- -------- -------- --------
Net income............................ $ 11,986 $ 8,868 $ 38,838 $ 20,833
======== ======== ======== ========
Basic net income per share...................... $ 0.10 $ 0.08 $ 0.33 $ 0.19
======== ======== ======== ========
Diluted net income per share.................... $ 0.09 $ 0.07 $ 0.29 $ 0.17
======== ======== ======== ========
Weighted average common shares.................. 118,990 111,456 118,325 110,202
Weighted average common share equivalents....... 15,385 12,700 15,864 14,488
-------- -------- -------- --------
Weighted average common shares and common share
equivalents................................... 134,375 124,156 134,189 124,690
======== ======== ======== ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 38,838 $ 20,833
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 9,428 5,577
Amortization of intangible assets...................... 4,576 1,550
Stock-based compensation............................... 674 1,919
Equity in net loss from unconsolidated affiliate....... 722 --
Changes in assets and liabilities:
Increase in accounts receivable...................... (13,392) (23,212)
Decrease (increase) in unbilled revenues on
contracts........................................... 4,450 (3,224)
Increase in prepaid expenses and other current
assets.............................................. (2,228) (876)
(Increase) decrease in other assets.................. (1,623) 97
(Decrease) increase in accounts payable.............. (1,038) 345
Decrease in accrued expenses......................... (2,147) (100)
Increase (decrease) in accrued compensation.......... 7,255 (3,530)
Increase (decrease) in accrued income taxes
payable............................................. 17,110 (1,081)
Increase in deferred revenues on contracts........... 1,903 2,963
Increase in other long term liabilities.............. 2,236 305
-------- --------
Net cash provided by operating activities................... 66,764 1,566
-------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (32,540) (12,166)
Net cash received from acquisitions....................... 435 --
Investments in and advances to affiliates................. (4,304) --
Long term investments..................................... (2,750) --
(Purchases) maturities of short term investments.......... (36,824) 1,812
-------- --------
Net cash used in investing activities..................... (75,983) (10,354)
-------- --------
Cash flows from financing activities:
Repayments from stockholders for notes receivable......... 71 514
Proceeds from stock option and purchase plans............. 32,960 18,568
-------- --------
Net cash provided by financing activities......... 33,031 19,082
-------- --------
Increase in cash and cash equivalents....................... 23,812 10,294
Cash and cash equivalents, at beginning of period........... 51,582 25,720
-------- --------
Cash and cash equivalents, at end of period................. $ 75,394 $ 36,014
======== ========
Schedule of non-cash operating activities:
Tax benefit of disqualifying dispositions of stock
options................................................ $ 12,800 $ --
======== ========
Schedule of non-cash investing and financing activities:
Common stock and stock options issued for acquisition of
Human Code............................................. $131,113 $ --
======== ========
Fair value of net liabilities assumed upon acquisition of
Human Code............................................. $ 2,161 $ --
======== ========
</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 nine months ended September 30, 2000
are not necessarily indicative of the results to be expected for any future
period or the full fiscal year.
On August 28, 2000, the Company distributed a two-for-one stock split
effected as a 100% stock dividend. 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.
(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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income...................................... $ 11,986 $ 8,868 $ 38,838 $ 20,833
Basic net income per share:
Weighted average common shares outstanding.... 118,990 111,456 118,325 110,202
Basic net income per share.................... $ 0.10 $ 0.08 $ 0.33 $ 0.19
======== ======== ======== ========
Diluted net income per share:
Weighted average common shares outstanding.... 118,990 111,456 118,325 110,202
Dilutive stock options........................ 15,385 12,700 15,864 14,488
-------- -------- -------- --------
Shares used in computing diluted per share
amount..................................... 134,375 124,156 134,189 124,690
-------- -------- -------- --------
Diluted net income per share.................. $ 0.09 $ 0.07 $ 0.29 $ 0.17
======== ======== ======== ========
</TABLE>
Options to purchase approximately 1.1 million and 2.8 million shares of
common stock for the three and nine months ended September 30, 2000 and
approximately 0.8 million shares for both the three and nine months ended
September 30, 1999 were outstanding but were not included in the computations of
diluted EPS because the exercise price of the options was greater than the
average market price of the Company's common stock for the period reported.
(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 $12.2 million and $8.8 million
for the three months ended September 30, 2000 and 1999, respectively, and $38.7
million and $20.6 million for the nine months ended September 30, 2000 and 1999,
respectively.
5
<PAGE> 7
(4) ACQUISITIONS
On August 28, 2000, the Company acquired Human Code, Inc. for approximately
$133.1 million in stock and the replacement of existing Human Code stock
options, including direct acquisition costs of approximately $1.9 million. The
Company issued approximately 1,508,000 shares of the Company's common stock and
approximately 471,000 stock options of the Company pursuant to this acquisition.
Human Code is a provider of interactive design services for broadband
applications. 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. Human Code's results of operations are
included in the Company's consolidated statement of income from the date of
acquisition.
A summary of the acquisition follows (in thousands):
<TABLE>
<S> <C>
Common stock................................................ $101,172
Stock options............................................... 29,941
Transaction costs........................................... 1,941
--------
Total consideration......................................... 133,054
Fair value of net liabilities assumed....................... 2,161
--------
Excess of purchase price over fair value of net tangible
assets acquired........................................... $135,215
========
</TABLE>
In connection with the acquisition of Human Code, the Company assumed the
outstanding options granted under the Human Code 1994 Stock Option/Stock
Issuance Plan. Prior to the acquisition, options to purchase approximately
2,864,000 shares of Human Code common stock were outstanding at exercise prices
between $0.10 and $3.25 per share. As a result of the acquisition, the Company
replaced the outstanding Human Code stock options with options to purchase
approximately 471,000 shares of the Company's common stock. The options will
vest ratably over a period up to four years. The Company recorded deferred
compensation of $11.2 million related to the intrinsic value of the unvested
options. The deferred compensation will be charged to operations at the rate of
approximately $1.0 million per quarter for the next seven quarters, and $3.9
million in total thereafter, spread over approximately nine quarters.
The excess of purchase price over fair value of net tangible assets
acquired was as follows (in thousands):
<TABLE>
<S> <C>
Customer contracts.......................................... $ 300
Assembled workforce and employment agreements............... 2,900
Deferred compensation....................................... 11,185
Developed technology........................................ 13,000
Deferred taxes.............................................. (6,480)
Goodwill.................................................... 114,310
--------
Total....................................................... $135,215
========
</TABLE>
The purchase price allocation for intangible assets is based on the report
of an independent appraiser. These assets are being amortized on a straight-line
basis over lives principally ranging from three to seven years. The increase in
the income tax effective rate for the three and nine months ended September 30,
2000 compared to the corresponding prior periods was due to the non-deductible
amortization expenses related to the Human Code acquisition.
6
<PAGE> 8
Pro forma results of operations for the Company and Human Code assuming
that the acquisition of Human Code occurred at the beginning of each period are
shown below (in thousands, except per share data).
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net revenues................................. $377,621 $205,720
Net income................................... $ 17,176 $ 2,723
Basic net income per share................... $ 0.15 $ 0.02
Diluted net income per share................. $ 0.13 $ 0.02
</TABLE>
The unaudited pro forma financial information is not necessarily indicative
of the operating results that would have occurred had this acquisition been
consummated as of January 1, 1999, nor is it necessarily indicative of future
operating results.
On June 30, 2000, the Company invested $2.0 million in HWT, Inc. (formerly
HealthWatch Technologies, L.L.C.) in connection with a recapitalization of HWT.
As a result of this investment and recapitalization, the Company's equity
ownership of HWT is now 55.6%. In prior periods, the Company had a less than 50%
non-controlling ownership interest and accounted for this investment using the
equity method of accounting. The consolidated financial statements include the
accounts of HWT from the date of this additional investment as a purchase. Pro
forma results combining the Company and HWT are not materially different from
the Company's results of operations.
(5) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement was amended by the issuance of SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133," which changed the effective date of
SFAS 133 to all fiscal years beginning after June 15, 2000 (Fiscal 2001 for the
Company) and requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if so,
the type of hedge transaction. Management of the Company anticipates that the
adoption of SFAS 133 will not have a material impact on the Company's financial
position or its results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective for the
Company's fourth quarter of 2000. The Company does not expect the implementation
of SAB 101 to have a material effect on its financial position or results of
operations.
(6) RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 1999, the Company
recognized approximately $0.2 million and $3.6 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 nine months ended September 30, 2000. The
Company had receivables due from these entities of approximately $2.7 million
and $5.2 million at September 30, 2000 and December 31, 1999, respectively. In
addition, certain members of management of the Company have provided funding to
these entities.
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 payment of certain levels of consulting revenues to Sapient
within prescribed timeframes. The notes cannot be converted before May 15, 2002.
7
<PAGE> 9
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading e-services consultancy, 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 28, 2000, we acquired Human Code for approximately $133.1 million
in stock and the replacement of existing Human Code stock options, including
direct acquisition costs of approximately $1.9 million. We issued approximately
1,508,000 shares of our common stock and approximately 471,000 stock options of
the Company pursuant to this acquisition. Human Code is a provider of
interactive design services for broadband applications. 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. Human Code's results of operations are included in our consolidated
statement of income from the date of acquisition.
On August 28, 2000, we distributed a two-for-one stock split effected as a
100% stock dividend. 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 invested $2.0 million in HWT, Inc. (formerly
HealthWatch Technologies, L.L.C.) in connection with a recapitalization of HWT.
As a result of this investment and recapitalization, our equity ownership of 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. The
consolidated financial statements include the accounts of HWT from the date of
this additional investment as a purchase.
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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues.............................................. 100% 100% 100% 100%
------ ------ ------ ------
Operating expenses:
Project personnel costs............................. 49 49 49 48
Selling and marketing............................... 6 8 6 8
General and administrative.......................... 28 24 27 25
Amortization of intangible assets................... 2 1 1 1
Stock-based compensation............................ -- -- -- 1
Acquisition costs................................... -- -- -- 1
------ ------ ------ ------
Total operating expenses.................... 85 82 83 84
------ ------ ------ ------
Income from operations................................ 15 18 17 16
Interest income....................................... 2 1 2 1
------ ------ ------ ------
Income before income taxes and equity in net loss from
unconsolidated affiliate............................ 17 19 19 17
Income taxes.......................................... 8 7 8 6
------ ------ ------ ------
Income before equity in net loss from unconsolidated
affiliate........................................... 9 12 11 11
Equity in net loss from unconsolidated affiliate...... -- -- -- --
------ ------ ------ ------
Net Income............................................ 9% 12% 11% 11%
====== ====== ====== ======
</TABLE>
Revenues
Revenues for the three months ended September 30, 2000 increased 89% over
revenues for the three months ended September 30, 1999. For the nine months
ended September 30, 2000, revenues increased 87% 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 September 30, 2000,
our five largest clients accounted for approximately 29% of our revenues,
compared to 23% of revenues for the three months ended September 30, 1999. For
the nine months ended September 30, 2000, our five largest clients accounted for
approximately 25% of our revenues, compared to 26% of revenues for the nine
months ended September 30, 1999. During the three and nine months ended
September 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 nine months ended September 30, 2000
was primarily due to an increase in the number of project personnel from 1,564
at September 30, 1999 to 2,452 at September 30, 2000 and to higher compensation
for project personnel. Project personnel costs remained constant as a percentage
of revenues at 49% for the three months ended September 30, 2000 and 1999. For
the nine months ended September 30, 2000, project personnel increased slightly
as a percentage of revenues to 49% from 48% for the nine months ended September
30, 1999.
9
<PAGE> 11
Selling and Marketing
Selling and marketing expenses consist principally of salaries, employee
benefits, and travel expenses of selling and marketing personnel and promotional
expenses. The increase in selling and marketing expenses for the three and nine
months ended September 30, 2000 was primarily due to an increase in the number
of selling and marketing personnel from 65 at September 30, 1999 to 141 at
September 30, 2000 and to higher compensation for sales personnel. Selling and
marketing expenses decreased as a percentage of revenues from 8% for the three
and nine months ended September 30, 1999 to 6% for the three and nine months
ended September 30, 2000. The higher percentages of revenue for the three and
nine months ended September 30, 1999 were primarily due to investments we made
in a new brand identity during the second quarter of 1999.
General and Administrative
General and administrative expenses 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
expenses for the three and nine months ended September 30, 2000 was primarily
due to increases in the number of employees hired during the past year,
occupancy expenses related to significant expansion of our office space, and
depreciation expenses related to investments in property and equipment. General
and administrative personnel grew from 310 at September 30, 1999 to 617 at
September 30, 2000. Our total headcount increased from 1,939 at September 30,
1999 to 3,210 at September 30, 2000. As a percentage of revenues, general and
administrative expenses increased to 28% for the three months ended September
30, 2000 compared to 24% for the three months ended September 30, 1999. General
and administrative expenses increased to 27% for the nine months ended September
30, 2000 compared to 25% for the nine months ended September 30, 1999. This
increase was primarily a result of an increase in occupancy expenses. Total
occupancy at September 30, 2000 was approximately 818,000 square feet, compared
to approximately 554,000 square feet at September 30, 1999.
Amortization of Intangible Assets
Amortization of intangible assets consists principally of amortization of
marketing assets, customer lists, assembled workforce and other employee items,
developed technology and goodwill resulting from our acquisitions. The increase
in amortization of intangible assets for the three and nine months ended
September 30, 2000 compared to the comparable periods in 1999 was primarily
related to the Human Code and HWT acquisitions. Amortization periods principally
range from three to seven years.
Stock Compensation Charge
Stock-based compensation consists of expenses for deferred compensation
associated with the Human Code and Adjacency, Inc. acquisitions. In connection
with the acquisition of Human Code, we assumed the outstanding options granted
under the Human Code 1994 Stock Option/Stock Issuance Plan. Prior to the
acquisition, options to purchase approximately 2,864,000 shares of Human Code
common stock were outstanding at exercise prices between $0.10 and $3.25 per
share. As result of the acquisition, we replaced the outstanding Human Code
stock options with options to purchase approximately 471,000 shares of our
common stock. The options will vest ratably over a period up to four years. We
recorded deferred compensation of $11.2 million related to the intrinsic value
of the unvested options. The deferred compensation will be charged to operations
at the rate of approximately $1.0 million per quarter for the next seven
quarters, and $3.9 million in total thereafter, spread over approximately nine
quarters.
Adjacency stock options were granted, prior to our acquisition of Adjacency
in March 1999, at below fair market value. The options were granted in November
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 four quarters.
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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 nine months ended September 30, 1999.
Interest Income
Interest income for the three months ended September 30, 2000 and 1999 was
$3.2 million and $1.0 million, respectively, and for the nine months ended
September 30, 2000 and 1999 was $8.5 million and $2.6 million, respectively.
This interest was derived primarily from investments of the proceeds from our
public stock offerings, which proceeds 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 nine months ended September 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
1999.
Provision for Income Taxes
Income tax expense for the three months ended September 30, 2000 and 1999
was $11.5 million and $5.4 million, respectively, or effective rates of 48.9%
and 38.0%, respectively. For the nine months ended September 30, 2000 and 1999,
income tax expense was $30.0 million and $12.7 million, respectively, or
effective rates of 43.1% and 37.9%, respectively. The increases in effective tax
rates were due primarily to the non-deductible amortization expenses related to
the Human Code acquisition and to expansion into countries and states with
higher tax rates. We expect the effective tax rates to be higher than the
statutory rates in the future due to the non-deductible amortization charges.
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 nine
months ended September 30, 2000 was approximately $93,000 and $722,000,
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% non-controlling 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 September 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 September 30,
2000, we had approximately $256.8 million in cash, cash equivalents and short
term investments compared to $196.1 million at December 31, 1999.
Cash provided by operating activities was $66.8 million for the nine months
ended September 30, 2000 and resulted primarily from net income of $38.8
million, non-cash charges of $15.4 million, increases in accrued compensation of
$7.3 million, increases in accrued income taxes payable of $17.1 million,
decreases in unbilled revenues on contracts of $4.5 million and increases in
other long term liabilities of $2.2 million, offset by increases in accounts
receivable of $13.4 million and increases of $3.9 million in prepaid expenses
and other current and non-current assets, all of which were principally related
to the overall growth of the Company.
Cash used in investing activities was $76.0 million for the nine months
ended September 30, 2000. This was due primarily to capital expenditures of
$32.5 million for significant expansion of the Company's office
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space and computer equipment purchases, purchases (net of maturities) of short
term investments of $36.8 million, investments in and advances to affiliates of
$4.3 million and long term investments of $2.8 million.
Cash provided by financing activities was $33.0 million for the nine months
ended September 30, 2000 and was principally provided from the sale of common
stock through the Company's employee stock purchase plan and the exercise of
stock options under the Company's stock option plans.
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 may seek 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 September 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
This statement was amended by the issuance of SFAS 137, "Deferral of the
Effective Date of FASB Statement No. 133," which changed the effective date of
SFAS 133 to all fiscal years beginning after June 15, 2000 (Fiscal 2001 for the
Company) and requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if so,
the type of hedge transaction. We anticipate that the adoption of SFAS 133 will
not have a material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective for our
fourth quarter of 2000. We do not expect the implementation of SAB 101 to have a
material effect on our 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; RECENT SALES OF UNREGISTERED
SECURITIES
(a) 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).
(b) In connection with our acquisition of Human Code in August 2000, we
issued a total of 1,503,294 shares of our common stock to the former
stockholders of Human Code in exchange for all of the outstanding capital stock
of Human Code. The issuance of such shares was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended,
because it did not involve a public offering of securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial data schedule.
(b) Reports on Form 8-K.
On September 12, 2000, the Company filed a Current Report on Form 8-K dated
August 28, 2000 reporting its acquisition of all of the outstanding stock of
Human Code, Inc. pursuant to an Agreement and Plan of Merger by and among
Sapient, Houston Acquisition Corp. and Human Code dated as of August 9, 2000.
On August 31, 2000, the Company filed a Current Report on Form 8-K dated
July 12, 2000 reporting an amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 100,000,000 to 200,000,000.
On August 17, 2000, the Company filed a Current Report on Form 8-K dated
August 9, 2000 reporting the signing of an Agreement and Plan of Merger among
the Company, Human Code and Houston Acquisition Corp., pursuant to which all of
the outstanding shares of capital stock of Human Code would be exchanged for
shares of common stock of Sapient and Human Code would become a wholly owned
subsidiary of Sapient.
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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: November 13, 2000 By: /s/ JERRY A. GREENBERG
----------------------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Date: November 13, 2000 By: /s/ EDWARD G. GOLDFINGER
----------------------------------------
Edward G. Goldfinger
Chief Financial Officer
</TABLE>
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