-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QNvdo77gksAnL5yuQuy7TlnhmL9pkRrsYHalFmC5qGVF4+2CVNU/0rNaSUbQyLTL IlchgWGCvjUZnHPeeQ4W7Q== 0000950135-99-004810.txt : 19991022 0000950135-99-004810.hdr.sgml : 19991022 ACCESSION NUMBER: 0000950135-99-004810 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991021 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAPIENT CORP CENTRAL INDEX KEY: 0001008817 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 043130648 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28074 FILM NUMBER: 99731786 BUSINESS ADDRESS: STREET 1: ONE MEMORIAL DR CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176210200 MAIL ADDRESS: STREET 1: ONE MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02142 10-Q 1 SAPIENT CORPORATION 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) 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)
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SAPIENT CORPORATION INDEX
PAGE NUMBER ------ 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
3 SAPIENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) 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 ======== ========
See accompanying Notes to Consolidated Financial Statements. 2 4 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 1999 1998 1999 1998 ------- ------- -------- -------- 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 ======= ======= ======== ========
See accompanying Notes to Consolidated Financial Statements. 3 5 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1999 1998 ------- -------- (UNAUDITED) 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 ======= ========
See accompanying Notes to Consolidated Financial Statements. 4 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 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 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:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, -------------- -------------- 1999 1998 1999 1998 ----- ----- ----- ----- 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% === === === ===
7 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 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 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 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 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. 12 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. 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
13 EX-11.1 2 COMPUTATION OF SHARES 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)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 ------- ------- ------- ------- 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 ======= ======= ======= =======
14 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 30,713 30,713 69,207 69,207 66,622 66,622 612 612 0 0 187,940 187,940 36,836 36,836 15,800 15,800 226,793 226,793 28,700 28,700 0 0 0 0 0 0 561 561 195,191 195,191 226,793 226,793 73,029 195,021 73,029 195,021 0 0 59,695 164,136 0 0 0 0 970 2,649 14,304 33,534 5,436 12,701 8,868 20,833 0 0 0 0 0 0 8,868 20,833 0.16 0.38 0.14 0.33
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