<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 September 30, 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 X No
--- ---
As of September 30, 1996, there were 10,945,635 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
September 30, 1996
Statements of Income for the Three and Nine Months 4
Ended September 30, 1995 and 1996
Statements of Cash Flows for the Nine Months 5
Ended September 30, 1995 and 1996
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial 8-11
Condition and Results of Operations
Part II. Other Information
-----------------
Item 1. Legal Proceedings 12
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>
December 31, September 30,
Assets 1995 1996
------ ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 378,019 29,280,852
Short-term investments - 3,015,120
Accounts receivable, less allowance for
doubtful accounts of $150,000 7,357,003 11,798,785
Unbilled revenues on contracts 2,282,011 4,834,502
Income tax receivable 479,892 -
Prepaid expenses and other current assets 129,792 457,106
----------- ----------
Total current assets 10,626,717 49,386,365
Property and equipment, net 1,349,616 2,042,603
Other assets 110,011 61,088
----------- ----------
Total assets $12,086,344 51,490,056
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long term debt $ 55,994 -
Accounts payable 489,481 252,597
Accrued expenses 973,673 1,445,964
Accrued compensation 862,131 1,832,927
Deferred income taxes 2,081,348 773,710
Deferred revenues on contracts 2,374,805 2,706,639
----------- ----------
Total current liabilities 6,837,432 7,011,837
Deferred income taxes - 1,560,000
Other long term liabilities 37,421 573,661
----------- ----------
Total liabilities 6,874,853 9,145,498
----------- ----------
Stockholders' equity:
Preferred stock, par value $.01 per share, none authorized or
outstanding at December 31, 1995; 5,000,000 authorized and
none outstanding at September 30, 1996 -
Common stock, par value $.01 per share, voting, 5,000,000 shares
authorized and issued at December 31, 1995; 40,000,000 shares
authorized, and 10,945,635 shares issued at September 30, 1996 50,000 109,456
Common stock, par value $.01 per share, nonvoting, 5,200,000 shares
authorized, 3,831,730 shares issued at December 31, 1995;
none authorized or outstanding at September 30, 1996 38,317
Additional paid-in capital 110,683 32,649,373
Retained earnings 5,087,491 9,610,729
Notes receivable from stockholders (75,000) (25,000)
----------- ----------
Total stockholders' equity 5,211,491 42,344,558
----------- ----------
Total liabilities and stockholders' equity $12,086,344 51,490,056
=========== ==========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
SAPIENT CORPORATION
<TABLE>
Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 5,904,909 11,500,896 14,089,657 31,128,409
Operating Expenses:
Project Personnel Costs 2,880,874 5,378,551 6,613,873 14,699,577
Selling and Marketing 341,740 478,560 630,877 1,520,114
General and Administrative 1,400,386 3,187,641 3,909,047 8,126,689
----------- ---------- ---------- ----------
Total operating expenses 4,623,000 9,044,752 11,153,797 24,346,380
Income from operations 1,281,909 2,456,144 2,935,860 6,782,029
Interest (expense) income (1,225) 328,077 28,626 625,788
----------- ---------- ---------- ----------
Income before income taxes 1,280,684 2,784,221 2,964,486 7,407,817
Income taxes 523,673 1,086,141 1,213,903 2,884,579
----------- ---------- ---------- ----------
Net Income $ 757,011 1,698,080 1,750,583 4,523,238
=========== ========== ========== ==========
Net income per share $ .07 .14 .17 .40
=========== ========== ========== ==========
Weighted average common shares and
equivalents outstanding 10,280,748 12,103,645 10,280,748 11,445,636
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
SAPIENT CORPORATION
<TABLE>
Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
----------------------------------
September 30, September 30,
1995 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,750,583 4,523,238
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 330,458 700,979
Deferred income taxes 107,001 (1,307,638)
Changes in assets and liabilities:
Increase in accounts receivable (2,519,086) (4,441,782)
Increase in unbilled revenues on contracts (2,265,999) (2,552,491)
Increase in prepaid expenses and other
current assets (541,392) (327,314)
Decrease in income tax receivable - 479,892
Decrease in other assets - 48,923
Decrease in accounts payable (242,753) (236,884)
Increase in accrued expenses 781,878 472,291
Increase in accrued compensation 432,108 970,796
Increase in non-current deferred income taxes - 1,560,000
(Decrease) increase in other long term liabilities (18,055) 573,661
(Decrease) increase in deferred revenues on contracts (765,469) 331,834
----------- ----------
Net cash (used in) provided by operating activities (2,950,726) 795,505
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (754,006) (1,393,966)
Purchase of short-term investments - (3,015,120)
----------- ----------
Net cash used for investing activities (754,006) (4,409,086)
----------- ----------
Cash flows from financing activities:
Decrease in notes receivable stockholder - 50,000
Exercise of stock options 11,496 156,479
Proceeds from initial public offering - 32,403,350
Principal payments on notes payable to related parties (131,644) -
Advances from (principal payments on) notes payable to bank 1,169,281 (93,415)
----------- ----------
Net cash provided by financing activities 1,049,133 32,516,414
----------- ----------
(Decrease) increase in cash and cash equivalents (2,655,599) 28,902,833
Cash and cash equivalents, at beginning of period 2,655,599 378,019
----------- ----------
Cash and cash equivalents, at end of period $ - 29,280,852
=========== ==========
</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. 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 and nine month periods ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full fiscal
year.
(2) SHORT-TERM INVESTMENTS
Short-term investments are available-for-sale securities, which are
recorded at fair market value. The difference between fair market value
and cost is not material. Realized gains and losses from sales of
available-for-sale securities were not material for any period
presented.
(3) 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, for all
periods prior to the Company's initial public offering, 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.
(4) 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
meritorious defenses. In August 1996, the Company's motion to compel
arbitration on these claims was allowed. The Company plans to vigorously
contest these claims. Although the Company does not expect the claim to
6
<PAGE> 7
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. In addition, revenues from a large client may constitute a
significant portion of the Company's total revenues in a particular quarter.
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth the percentage of revenues of certain items
included in the Company's statements of income:
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Operating expenses:
Project personnel costs 48 47 47 47
Selling and marketing 6 4 4 5
General and administrative 24 28 28 26
--- --- --- ---
Total operating expenses 78 79 79 78
Income from operations 22 21 21 22
Interest income - 3 - 2
Income taxes 9 9 9 9
--- --- --- ---
Net income 13% 15% 12% 15%
=== === === ===
</TABLE>
8
<PAGE> 9
REVENUES
Revenues for the third quarter of 1996 increased 95% over revenues for
the third quarter of 1995. For the first nine months of the year, revenues
increased 121% over the comparable period of the prior year. 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 December 31,
1995 to $4.8 million at September 30, 1996 was primarily due to the increase
in revenues in 1996, as well as to contractual billing and payment terms on
certain projects which are more heavily weighted toward the end of projects. In
the first nine months of 1996, the Company's five largest clients accounted for
approximately 61% of its revenues. During this period, two clients each
accounted for more than 10% of such revenues.
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 for the three and nine month
periods ended September 30, 1996 was primarily due to an increase in project
personnel from 188 at September 30, 1995 to 350 at September 30, 1996. Project
personnel costs remained constant as a percentage of revenues at 47% for the
first nine months of 1995 and 1996, while decreasing slightly from 48% to 47%
for the quarters ended September 30, 1995 and 1996, respectively.
SELLING AND MARKETING
Selling and marketing costs consist primarily of salaries, employee
benefits, travel expenses and promotional costs. In the third quarter and first
nine months of 1996, selling and marketing costs as a percentage of revenues
were 4% and 5%, respectively, compared to 6% and 4%, respectively, in the third
quarter and first nine months of 1995. The decrease between 1995 and 1996 third
quarter resulted because of costs incurred for an outside consultant who was
used in 1995 to help build the Company's new marketing team, as well as costs
incurred in 1995 for redesigning the Company's marketing materials. The increase
over the first nine months between 1995 and 1996 was primarily the result of
the Company's decision to expand its selling and marketing group, which grew
from 9 employees at September 30, 1995 to 20 employees at September 30, 1996.
9
<PAGE> 10
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, 1996 was primarily due to an increase
in the incremental costs associated with the additional employees hired during
1996. The Company's total headcount increased from 225 at September 30, 1995 to
431 at September 30, 1996. As a percentage of revenues, general and
administrative costs were 28% in the third quarter of 1996, and 26% for the
first nine months of 1996, compared to 24% in the third quarter of 1995, and 28%
for the first nine months of 1995. The increase as a percentage of revenues in
the third quarter of 1996 was primarily a result of increased relocation
expenses associated with new hires, training costs, and salaries, principally
for employees engaged in the hiring process. The decrease as a percentage of
revenues in the first nine months of 1996 was a result of the growth in
revenues combined with a decline in the administrative staff as a percent of
total staff, lower travel related expenses and improved office space
utilization.
INTEREST INCOME
Interest income for the three and nine month periods ended September
30, 1996 consisted of interest earned on the proceeds of the Company's initial
public offering, which were invested primarily in tax-exempt, short-term
municipal bonds.
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal and state taxes at an
effective rate of 39% for 1996 and 41% for 1995. The decrease in the effective
tax rate primarily represents a reduction in the effective federal tax rate due
to excess cash being invested in tax-exempt municipal bonds.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company 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 September 30,
1996, the Company had no bank borrowings outstanding and no material capital
commitments.
Cash and cash equivalents increased to $29.3 million at September 30,
1996, from $0.4 million at December 31, 1995. The increase was primarily due to
cash provided as a result of the completion of the Company's initial public
offering and cash provided by operations.
10
<PAGE> 11
During the third quarter of 1996, the proceeds of the initial public offering
were invested primarily in tax-exempt, short-term municipal bonds.
The Company believes that the cash provided from operations, borrowings
available under its revolving line of credit and the net proceeds of its initial
public offering will be sufficient to meet the Company's working capital and
capital expenditure requirements for at least the next 18 months.
11
<PAGE> 12
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
As indicated in the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1996 and June 30, 1996, a former employee of the
Company has filed a suit against the Company and certain of its executive
officers alleging, among other things, wrongful termination of his employment.
In August 1996, the court allowed the Company's motion to compel arbitration of
the Plaintiff's claims. The Plaintiff has indicated that he will submit his
claims to arbitration. 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, operating income 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 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
11.1 Computation of weighted average number of shares
outstanding used in determining primary and fully
diluted earnings per share.
27.1 Financial data schedule.
(b) Reports on Form 8-K.
-------------------
The Company did not file any Reports on Form 8-K during the
quarter ended September 30, 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: October 7, 1996 By: /s/ JERRY A. GREENBERG
--------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Co-Chairman of the Board
Date: October 7, 1996 By: /s/ SUSAN D. JOHNSON
-------------------------
Susan D. Johnson
Chief Financial Officer
13
<PAGE> 1
<TABLE>
Exhibit 11.1
Sapient Corporation
Article 6.01 of Regulation S-K
Computation of Shares Used in Computing Net Income Per Share
<CAPTION>
For the Three Months For the Nine Months
------------------------ -------------------------
ended September 30, ended September 30,
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock, beginning of period 8,648,335 9,231,390 8,548,425 8,831,730
Options exercised during the period 80,650 17,670 180,560 420,330
Weighted average options outstanding
other than exercised during the period
using the treasury stock method 1,032,238 1,159,585 1,032,238 1,082,202
Weighted average shares related to initial
public offering - 1,695,000 - 1,111,374
Cheap stock relating to SAB No. 83(1) 519,525 - 519,525 -
---------- ---------- ---------- ----------
10,280,748 12,103,645 10,280,748 11,445,636
---------- ---------- ---------- ----------
<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>
14
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 29,280,852 29,280,852
<SECURITIES> 3,015,120 3,015,120
<RECEIVABLES> 11,948,785 11,948,785
<ALLOWANCES> 150,000 150,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 49,386,365 49,386,365
<PP&E> 3,496,302 3,496,302
<DEPRECIATION> 1,453,699 1,453,699
<TOTAL-ASSETS> 51,490,056 51,490,056
<CURRENT-LIABILITIES> 7,011,837 7,011,837
<BONDS> 0 0
<COMMON> 109,456 109,456
0 0
0 0
<OTHER-SE> 42,235,102 42,235,102
<TOTAL-LIABILITY-AND-EQUITY> 51,490,056 51,490,056
<SALES> 0 0
<TOTAL-REVENUES> 11,500,896 31,128,409
<CGS> 0 0
<TOTAL-COSTS> 9,044,752 24,346,380
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
[INTEREST-INCOME] (328,077) (625,788)
<INCOME-PRETAX> 2,784,221 7,407,817
<INCOME-TAX> 1,086,141 2,884,579
<INCOME-CONTINUING> 1,698,080 4,523,238
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,698,080 4,523,238
<EPS-PRIMARY> .14 .40
<EPS-DILUTED> .14 .40
</TABLE>
