<PAGE> 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 March 31, 1996 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 (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 No X
--- ---
As of May 15, 1996, there were 10,883,640 shares of Common Stock, $.01 par
value, outstanding.
<PAGE> 2
SAPIENT CORPORATION
INDEX
-----
Part I. Financial Information Page Number
--------------------- -----------
Item 1. Balance Sheets as of December 31, 1995 and 3
March 31, 1996
Statements of Income for the Three Months Ended 4
March 31, 1995 and 1996
Statements of Cash Flows for the Three Months Ended 5
March 31, 1995 and 1996
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial 8-10
Condition and Results of Operations
Part II. Other Information
-----------------
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit 11.1 14
Exhibit 27.1 15
2
<PAGE> 3
SAPIENT CORPORATION
<TABLE>
Balance Sheets
(Unaudited)
<CAPTION>
Pro Forma
December 31, March 31, March 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 378,019 $ 1,430,888 $ 34,001,698
Accounts receivable, less allowance for doubtful accounts of $150,000 7,357,003 7,154,074 7,154,074
Unbilled revenues on contracts 2,282,011 3,815,917 3,815,917
Income tax receivable 479,892 -- --
Prepaid expenses and other current assets 129,792 491,000 323,540
----------- ----------- -----------
Total current assets 10,626,717 12,891,879 45,295,229
Property and equipment, net 1,349,616 1,493,315 1,493,315
Other assets 110,011 61,088 61,088
----------- ----------- -----------
Total assets $12,086,344 $14,446,282 $46,849,632
=========== =========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long term debt $ 55,994 $ 2,016 $ 2,016
Accounts payable 489,481 140,317 140,317
Accrued expenses 973,673 2,243,491 2,243,491
Accrued compensation 862,131 807,914 807,914
Deferred income taxes 2,081,348 2,384,710 2,384,710
Deferred revenues on contracts 2,374,805 2,421,234 2,421,234
----------- ----------- -----------
Total current liabilities 6,837,432 7,999,682 7,999,682
Long term debt, less current portion 37,421 -- --
----------- ----------- -----------
Total liabilities 6,874,853 7,999,682 7,999,682
----------- ----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, none authorized or outstanding
actual 5,000,000 shares authorized, none outstanding
pro forma --
Common stock, par value $.01 per share, voting, 5,000,000 shares
authorized and issued at December 31, 1995; 30,000,000 shares authorized,
5,000,000 shares issued at March 31, 1996; 40,000,000 shares authorized
and 10,798,420 shares issued pro forma 50,000 50,000 107,984
Common stock, par value $.01 per share, nonvoting, 5,200,000 shares
authorized, 3,831,730 shares issued at December 31, 1995; 10,000,000 shares
authorized at March 31, 1996 and 4,103,420 shares issued at March 31, 1996;
none authorized or outstanding pro forma 38,317 41,034 --
Additional paid-in capital 110,683 118,693 32,505,093
Retained earnings 5,087,491 6,311,873 6,311,873
Notes receivable from stockholders (75,000) (75,000) (75,000)
----------- ----------- -----------
Total stockholders' equity 5,211,491 6,446,600 38,849,950
----------- ----------- -----------
Total liabilities and stockholders' equity $12,086,344 $14,446,282 $46,849,632
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
SAPIENT CORPORATION
<TABLE>
Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
1995 1996
---- ----
<S> <C> <C>
Revenues $ 3,617,637 $ 9,267,116
Operating expenses:
Project personnel costs 1,639,500 4,552,035
Selling and marketing 91,158 466,799
General and administrative 1,120,671 2,212,824
----------- -----------
Total expenses 2,851,329 7,231,658
Income from operations 766,308 2,035,458
Interest income, net 26,865 5,178
----------- -----------
Income before income taxes 793,173 2,040,636
Income taxes 325,201 816,254
----------- -----------
Net income $ 467,972 $ 1,224,382
=========== ===========
Net income per share $ .05 $ .12
=========== ===========
Weighted average common shares and equivalents 10,280,748 10,287,254
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
SAPIENT CORPORATION
<TABLE>
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three Months Ended
--------------------------
March 31, March 31,
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 467,972 $ 1,224,382
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 82,942 150,112
Deferred income taxes (800,418) 303,362
Changes in assets and liabilities:
Decrease in accounts receivable 468,256 202,929
(Increase) in unbilled revenues on contracts (823,376) (1,533,906)
Decrease in income tax receivable -- 479,892
(Increase) in prepaid expenses and other
current assets (259,410) (361,208)
Decrease in other assets -- 48,923
(Decrease) in accounts payable (218,908) (349,164)
Increase in accrued expenses 189,079 1,269,818
Increase (decrease) in accrued compensation 139,500 (54,217)
Increase (decrease) in deferred revenue on contracts (595,238) 46,429
----------- -----------
Net cash provided by (used in) operating activities (1,349,601) 1,427,352
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (169,575) (293,811)
----------- -----------
Net cash used for investing activities (169,575) (293,811)
----------- -----------
Cash flows from financing activities:
Decrease (increase) in note receivable stockholder -- --
Exercise of stock options 570 10,727
Proceeds from note payable to bank -- --
Principal payments on notes payable to related parties -- --
Principal payments on notes payable to bank (25,452) (91,399)
----------- -----------
Net cash provided by (used in) financing activities (24,882) (80,672)
----------- -----------
Increase (decrease) in cash and cash equivalents (1,544,058) 1,052,869
Cash and cash equivalents, at beginning of period 2,655,599 378,019
----------- -----------
Cash and cash equivalents, at end of period $ 1,111,541 $ 1,430,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
SAPIENT CORPORATION
Notes to Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Sapient Corporation (the "Company") 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 financial statements and notes thereto
for the year ended December 31, 1995 included in the Company's
Registration Statement on Form S-1 (File No. 333-1586). The
accompanying 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
month period ended March 31, 1996 are not necessarily indicative of
the results to be expected for the full fiscal year. The unaudited pro
forma balance sheet is presented to give pro forma effect to the April
10, 1996 closing of the sale by the Company of 1,695,000 shares of
common stock as described in Note 3.
(2) NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
shares of common stock outstanding and dilutive common equivalent
shares from stock options using the treasury stock method. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletins,
such computations include all common and common equivalent shares
issued within twelve months of the offering date as if they were
outstanding for all periods presented using the treasury stock method
and the initial public offering price ($21.00). Fully diluted and
primary earnings per share are the same for all periods presented.
(3) PRO FORMA BALANCE SHEET
The pro forma balance sheet as of March 31, 1996 is presented to show the
effects of the issuance of 1,695,000 shares of common stock in the
Company's initial public offering which closed on April 10, 1996.
Proceeds to the Company, net of underwriting discounts and costs of
the offering, were approximately $32.4 million. The pro forma
presentation also shows the effect on stockholders' equity of the
conversion of non-voting common stock into an equal number of voting
common stock and the increase in authorized common stock to 40,000,000
shares upon the closing of the initial public offering and the
authorization to issue up to 5,000,000 shares of preferred stock, $.01
par value. Other pro forma effects include a reduction in prepaid
expenses (which were applied against the gross proceeds of the
offering).
(4) CHANGE IN ACCOUNTING PRINCIPLE AND CHANGE IN ESTIMATE
In the first quarter of 1996, the Company changed its method of computing
depreciation and amortization on property and equipment placed in
service in 1996 from accelerated to straight line methods over the
estimated useful lives of the related assets. The impact of
such a change on the financial statements of the Company was not
material. The new method will be used for all newly acquired assets.
The accelerated method will continue to be used for assets placed in
service prior to January 1, 1996. In addition, management's estimate
of useful lives on computer software and equipment placed in service
after December 31, 1995 has been reduced from five to three years.
(Continued)
6
<PAGE> 7
SAPIENT CORPORATION
Notes to Financial Statements
(5) 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 costs will be incurred and such costs
can be reasonably estimated.
The Company is in litigation with a former employee who alleges breach of
certain contractual and other violations resulting from his
termination as an employee. Management denies that it breached any
obligations or duties to this former employee, and asserts that the
Company has no liability resulting from his termination. Management
plans to vigorously contest this litigation. Although the Company does
not expect the suit to have a material adverse effect on the Company's
business, results of operations or financial condition, an adverse
judgment or settlement could have a material adverse effect on the
operating results reported by the Company for the period in which any
such adverse judgment or settlement occurs.
7
<PAGE> 8
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Sapient performs its services on a fixed-price, fixed-timeframe basis. To
determine its proposed fixed price for a project, the Company uses an internally
developed estimation process which takes into account standard billing rates and
the risks associated with the particular project, such as the number and type of
key functions to be developed , the technology environment and application type
to be applied, the project's timetable and the overall technical complexity of
the project. Each fixed-price proposal must be approved by a member of the
Company's senior management team.
The Company's revenues and earnings may fluctuate from quarter to quarter
based on such factors as 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, and general economic
conditions.
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth the percentage of revenues of certain items
included in the Company's statements of income for the three months ended March
31, 1995 and 1996:
<CAPTION>
Percentage of Revenues
for Three Months Ended
March 31, -
----------------------
1995 1996
---- ----
<S> <C> <C>
Revenues ............................ 100% 100%
Operating expenses:
Project personnel costs ........... 45 49
Selling and marketing ............. 3 5
General and administrative ........ 31 24
--- ---
Total operating expenses ... 79 78
--- ---
Income from operations .............. 21 22
Income taxes ........................ 9 9
--- ---
Net Income .......................... 12% 13%
--- ---
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUES
Revenues were $9.3 million for the first quarter of 1996, representing an
increase of 156% over revenues of $3.6 million for the first quarter of 1995.
The increase in revenues reflects increases in both the size and number of
client projects. The increase in "unbilled revenues on contracts" from $2.3
million at March 31, 1995, to $3.8 million at March 31, 1996, was primarily due
to the increase in revenues in the 1996 period compared with the 1995 period, as
well as to contractual billing and payment terms on certain projects which are
more heavily weighted toward the end of projects.
8
<PAGE> 9
PROJECT PERSONNEL COSTS
Project personnel costs consist primarily of salaries and employee benefits
for personnel dedicated to client assignments and fees paid to subcontractors
for work performed in connection with projects. These costs represent the most
significant expense the Company incurs in providing its services. The increase
in project personnel costs in the first quarter of 1996 was primarily due to an
increase in project personnel from 120 at March 31, 1995 to 223 at March 31,
1996. Project personnel costs increased as a percentage of revenues from 45% for
the first quarter of 1995 to 49% for the same period in 1996. The increase was
due to additional provisions for estimated costs on contracts, including
potential losses on certain contracts.
SALES AND MARKETING
Sales and marketing costs consist primarily of salaries, employee benefits,
travel expenses and promotional costs. In the first quarter of 1996, sales and
marketing costs as a percentage of revenues were 5% compared to 3% in the first
quarter of 1995. This increase was primarily the result of the Company's
decision to expand its sales and marketing group, which grew from 5 employees at
March 31, 1995 to 13 employees at March 31, 1996.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of expenses associated
with the Company's management, finance and administrative groups and occupancy
costs. As a percentage of revenues, general and administrative costs were 24% in
the first quarter of 1996, compared to 31% in the first quarter of 1995. The
decrease as a percentage of revenues in the first quarter of 1996 was a result
of the growth in revenues combined with a decline in the administrative staff as
a percent of total staff, as well as improved space utilization.
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal and state taxes at an
effective rate of 40% for 1996 and 41% for 1995. The decrease in the effective
tax rate represents a reduction in the effective state tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and investments in
property and equipment primarily through cash generated from operations, bank
borrowings and capital lease financing. In April 1996, the Company completed an
initial public offering of common stock resulting in net proceeds to the Company
of approximately $32.4 million. 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 June 30, 1997, are collateralized by the Company's
accounts receivable and bear interest at the bank's prime rate. The line of
credit includes covenants relating to the maintenance of certain financial
ratios, such as minimum net worth and profitability, and prohibits the payment
of any dividends. At March 31, 1996, the Company had no significant bank
borrowings outstanding and no material capital commitments.
Cash and cash equivalents increased to $1.4 million at March 31, 1996, from
$.4 million at December 31, 1995. The increase was primarily due to cash
provided from operations. On a pro forma basis giving effect to the
9
<PAGE> 10
completion of the Company's initial public offering, cash and cash equivalents
increased to $34.0 million at March 31, 1996.
The Company believes that the cash provided from operations, borrowings
available under its revolving line of credit and the net proceeds of its recent
initial public offering will be sufficient to meet the Company's working capital
and capital expenditure requirements for at least the next 18 months.
10
<PAGE> 11
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
In April 1996, John Adler, a former employee of the Company (the
"Plaintiff") commenced suit against the Company and certain of its executive
officers, both individually and in their capacities as officers of the Company,
in Middlesex Superior Court, Commonwealth of Massachusetts. The Plaintiff's
complaint alleges, among other things, wrongful termination of his employment.
In addition to seeking unspecified damages, the Plaintiff is demanding that the
Company issue to him 35,000 shares of the Company's common stock pursuant to
certain stock options that had previously been granted to him. In addition, in
May 1996, the Plaintiff informed the Company that he believes he is owed
additional shares of Common stock pursuant to a purported oral option agreement
for fully vested shares. Management denies that it breached any obligations or
duties to the Plaintiff, and believes that the Company has meritorious defenses
(including that a substantial number of the 35,000 shares subject to the stock
options that were granted to the Plaintiff had not vested in accordance with
their terms at the time the Plaintiff's employment was terminated by the
Company). The Company intends to vigorously defend the suit. Although the
Company does not expect the suit to have a material adverse effect on the
Company's business, results of operations or financial condition, an adverse
judgment or settlement could have a material adverse effect on the operating
results reported by the Company for the period in which any such adverse
judgment or settlement occurs.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
Prior to the consummation of the initial public offering the holders of all
of the voting common stock and the holders of 2,355,000 shares, representing a
majority, of the non-voting common, by written action dated March 8, 1996,
approved the following matters:
(1) to amend the Company's Certificate of Incorporation to (a) increase the
authorized number of shares of Voting Common stock from 5,000,000 to 30,000,000,
(b) to increase the authorized number of shares of Non-Voting common stock from
5,200,000 to 10,000,000, (c) to provide for 5,000,000 shares of blank check
preferred stock, (d) to provide that upon the closing of the IPO that all shares
of non-voting common stock then outstanding would automatically convert into an
equal number of voting shares and that the authorized capital stock would
automatically convert into 40,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock, (e) amend the indemnity provisions and limitation of
liability provisions of officers and directors of the Company, (f) provide that
upon the IPO closing that the Company have a staggered Board of Directors, and
(g) provide that upon the IPO closing, stockholders may not take action by
written consent or call special stockholders' meetings.
(2) approved the Amended and Restated Bylaws of the Company.
(3) ratified and approved of the adoption of the 1996 Equity Stock
Incentive Plan.
(4) ratified and approved of the adoption of the 1996 Employee Stock
Purchase Plan.
(5) ratified and approved of the adoption of the 1996 Director Option Plan.
11
<PAGE> 12
(6) elected and classified the Board of Directors as follows: Jerry A.
Greenberg and Bruce D. Parker (Class I); J. Stuart Moore and Darius W. Gaskins,
Jr. (Class (II); and Carl S. Sloane and R. Stephen Cheheyl (Class III).
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
--------
11 Computation of weighted average number of shares outstanding used
in determining primary and fully diluted earnings per share.
27 Financial data schedule.
(b) Reports on Form 8-K.
--------------------
The Company did not file any Reports on Form 8-K during the quarter
ended March 31, 1996.
12
<PAGE> 13
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: May 15, 1996 By: /s/ JERRY A. GREENBERG
------------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Co-Chairman of the Board
Date: May 15, 1996 By: /s/ SUSAN D. JOHNSON
---------------------------
Susan D. Johnson
Chief Financial Officer
13
<PAGE> 1
EXHIBIT 11
<TABLE>
Computation of Shares Used in Computing Net Income Per Share
<CAPTION>
For the Three Months
ended March 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
Common Stock, beginning of period .............................. 8,548,425 8,831,730
Options exercised during the period ............................ 14,025 97,990
Weighed average options outstanding other
than those exercised during the period ...................... 1,350,884 988,555
Cheap stock relating to SAB No. 83(1) .......................... 519,525 519,525
Treasury stock buyback ......................................... (152,111) (150,546)
----------- -----------
10,280,748 10,287,254
=========== ===========
- - -----------
<FN>
(1) In accordance with SEC Staff Accounting Bulletin No. 83 ("SAB No. 83"),
issuances of Common Stock equivalents (common stock and stock options) one year
prior to the initial filing date of the Company's registration statement
(February 22, 1996) at share prices below the public offering price of $21.00
per share ("Cheap Stock"), are considered to have been made in anticipation of
the public offering and have been included as if the shares were outstanding for
all periods presented using the treasury stock method at the public offering
price of $21.00 per share.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,430,888
<SECURITIES> 0
<RECEIVABLES> 7,304,074
<ALLOWANCES> 150,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,891,879
<PP&E> 2,396,175
<DEPRECIATION> 902,860
<TOTAL-ASSETS> 14,446,282
<CURRENT-LIABILITIES> 7,999,682
<BONDS> 0
<COMMON> 91,034
0
0
<OTHER-SE> 6,355,566
<TOTAL-LIABILITY-AND-EQUITY> 14,446,282
<SALES> 0
<TOTAL-REVENUES> 9,267,116
<CGS> 0
<TOTAL-COSTS> 7,231,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,178)
<INCOME-PRETAX> 2,040,636
<INCOME-TAX> 816,254
<INCOME-CONTINUING> 1,224,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,224,382
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
