<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 June 30, 1997 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 August 8, 1997 there were 11,675,783 shares of Common Stock, $.01
par value, outstanding.
<PAGE> 2
SAPIENT CORPORATION
INDEX
Part I. Financial Information Page Number
Item 1. Consolidated Balance Sheets as of December 31, 1996 and 3
June 30, 1997
Consolidated Statements of Income for the Three and 4
Six Months Ended June 30, 1996 and 1997
Consolidated Statements of Cash Flows for the Six Months 5
Ended June 30, 1996 and 1997
Notes to Consolidated 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 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12-13
Signatures 14
Exhibit 11.1 15
Exhibit 27 16
2
<PAGE> 3
SAPIENT CORPORATION
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1996 1997
------ ------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,997,905 $ 51,848,798
Short term investments 9,540,498 6,223,775
Accounts receivable, less allowance for
doubtful accounts of $150,000 and $350,000 for
1996 and 1997, respectively 11,387,576 13,600,254
Unbilled revenues on contracts 4,673,812 5,749,448
Deferred income tax asset 188,534 188,534
Prepaid expenses and other current assets 450,885 1,010,706
------------ ------------
Total current assets 76,239,210 78,621,515
Property and equipment, net 2,256,635 4,535,485
Other assets 61,088 61,088
------------ ------------
Total assets $ 78,556,933 $ 83,218,088
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 72,419 $ 150,368
Accrued expenses 1,554,473 893,220
Accrued compensation 2,162,016 2,086,314
Accrued income taxes payable 1,551,661 425,322
Deferred revenues on contracts 4,915,681 4,993,069
------------ ------------
Total current liabilities 10,256,250 8,548,293
Deferred income taxes 1,296,171 1,296,171
Other long term liabilities 754,484 928,293
------------ ------------
Total liabilities 12,306,905 10,772,757
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000 authorized and
none outstanding at December 31, 1996 and June 30, 1997 -- --
Common stock, par value $.01 per share, voting, 40,000,000 shares
authorized, 11,492,760 issued at December 31, 1996; 40,000,000
shares authorized, 11,594,970 shares issued at June 30, 1997 114,928 115,950
Additional paid-in capital 54,502,520 55,233,458
Retained earnings 11,657,580 17,095,923
Notes receivable from stockholders (25,000) --
------------ ------------
Total stockholders' equity 66,250,028 72,445,331
------------ ------------
Total liabilities and stockholders' equity $ 78,556,933 $ 83,218,088
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
SAPIENT CORPORATION
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $10,360,397 $18,824,354 $19,627,513 $35,328,458
Operating expenses:
Project personnel costs 4,768,991 9,037,372 9,321,026 16,918,603
Selling and marketing 574,755 1,055,311 1,041,554 2,122,855
General and administrative 2,726,224 4,687,173 4,939,048 8,715,759
----------- ----------- ----------- -----------
Total operating expenses 8,069,970 14,779,856 15,301,628 27,757,217
Income from operations 2,290,427 4,044,498 4,325,885 7,571,241
Interest income, net 292,533 582,707 297,711 1,108,203
----------- ----------- ----------- -----------
Income before income taxes 2,582,960 4,627,205 4,623,596 8,679,444
Income taxes 982,184 1,733,314 1,798,438 3,241,104
----------- ----------- ----------- -----------
Net Income $ 1,600,776 $ 2,893,891 $ 2,825,158 $ 5,438,340
=========== =========== =========== ===========
Net income per share $ 0.13 $ 0.23 $ 0.25 $ 0.43
=========== =========== =========== ===========
Weighted average common shares and
equivalents outstanding 12,096,789 12,637,440 11,259,022 12,624,745
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
SAPIENT CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,825,158 $ 5,438,340
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 390,442 820,280
Deferred income taxes 252,362 --
Changes in assets and liabilities:
(Increase) in accounts receivable (668,318) (2,212,678)
(Increase) in unbilled revenues on contracts (2,332,456) (1,075,636)
(Increase) in prepaid expenses and other
current assets (187,396) (559,820)
Decrease in income tax receivable 479,892 --
Decrease in other assets 48,923 --
Increase in accounts payable 99,697 77,949
Increase (decrease) increase in accrued expenses 1,092,018 (661,252)
Increase (decrease) in accrued compensation 445,248 (75,702)
Increase (decrease) in income taxes payable 465,584 (1,126,339)
Increase in deferred revenues on contracts 930,535 77,388
Increase in other long term liabilities 392,836 173,809
------------ ------------
Net cash provided by operating activities 4,234,525 876,339
------------ ------------
Cash flows provided by investing activities:
Purchase of property and equipment (870,623) (3,099,130)
Net proceeds from maturity of short term investments -- 3,316,723
------------ ------------
Net cash provided by (used for) investing activities (870,623) 217,593
------------ ------------
Cash flows provided by financing activities:
Repayment of notes receivable from stockholder 50,000 25,000
Exercise of stock options 129,888 142,450
Proceeds from public stock offering 32,403,350 --
Proceeds from employee stock purchase plan -- 589,511
Principal payments on notes payable to bank (93,415) --
------------ ------------
Net cash provided by financing activities 32,489,823 756,961
------------ ------------
Increase in cash and cash equivalents 35,853,725 1,850,893
Cash and cash equivalents, at beginning of period 378,019 49,997,905
------------ ------------
Cash and cash equivalents, at end of period $ 36,231,744 $ 51,848,798
============ ============
Supplemental disclosures for cash flow information:
Cash paid during the period for income taxes $ 605,600 $ 4,348,635
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
SAPIENT CORPORATION
Notes to Consolidated 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, 1996 included in the Company's Annual
Report on Form 10-K. 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 six month periods ended June
30, 1997 are not necessarily indicative of the results to be expected
for the full fiscal year or for any future period.
(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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." SFAS 128 establishes a different method of
computing net income per share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15. Under SFAS
No.128, the Company will be required to present both basic net income
per share and diluted net income per share. Basic net income per
share is expected to be higher than the currently presented net
income per share as the effect of dilutive stock options will not be
considered in computing basic net income per share. The impact on
diluted net income per share is not expected to be material.
6
<PAGE> 7
The Company plans to adopt SFAS No. 128 in its quarter ending December
31, 1997 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No.
128.
(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 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 designs, develops, integrates and implements client/server and
Web-based information systems that enable clients to rapidly achieve their
business objectives. Sapient delivers its solutions for both enterprise-wide and
departmental initiatives on a fixed-price, fixed-timeframe basis using its
proprietary QUADD(R) (Quality Design and Delivery) process. QUADD is a
workshop-based, rapid development methodology which emphasizes active client
participation to help visualize, prioritize and create time-critical business
and technology solutions.
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.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's statements of income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
--- --- --- ---
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Operating expenses:
Project personnel costs 46 48 48 48
Selling and marketing 6 6 5 6
General and administrative 26 25 25 25
--- --- --- ---
Total operating expenses 78 79 78 79
Income from operations 22 21 22 21
Interest income 2 3 1 3
Income taxes 9 9 9 9
--- --- --- ---
Net income 15% 15% 14% 15%
=== === === ===
</TABLE>
REVENUES
Revenues for the second quarter of 1997 increased 82% over revenues for
the second quarter of 1996. For the first six months of the year, revenues
increased 80% over the comparable period of the prior year. The increase in
revenues reflects increases in both the size and number of client projects.
Unbilled revenues on contracts increased from $4.7 million at December 31, 1996
to $5.7 million at June 30, 1997 due to an increase in revenues in 1997. In the
second quarter of 1997, the Company's five largest clients accounted for
approximately 50% of its revenues. During this period, two clients each
accounted for more than 10% of such revenues. For the six month period ended
June 30, 1997 the Company's five largest clients accounted for approximately
41% of its revenues. During this period, one client 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 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 six month
periods ended June 30, 1997 was primarily due to an increase in project
personnel from 276 at June 30, 1996 to 500 at June 30, 1997. Project personnel
costs increased as a percentage of revenues from 46% in the second quarter of
1996 to 48% for the second quarter of 1997. This increase reflects lower costs
as a percentage of revenues during the quarter ended
9
<PAGE> 10
June 30, 1996 as a result of high staff utilization during the second quarter of
1996. For the first six months of 1996 and 1997 project personnel costs
remained constant at 48% of revenues.
SELLING AND MARKETING
Selling and marketing costs consist primarily of salaries, employee
benefits, travel expenses and promotional costs. In the second quarter of 1996
and 1997, selling and marketing costs as a percentage of revenues was 6%. For
the first six months of 1996 and 1997, selling and marketing costs increased
from 5% to 6% primarily as a result of the Company's decision to expand its
selling and marketing group, which grew from 17 employees at June 30, 1996 to 29
employees at June 30, 1997.
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
month period ended June 30, 1997 was primarily due to an increase in costs
associated with the employees hired during 1997, along with an increase in
occupancy costs related to having three additional offices during the second
quarter of 1997. The Company's total headcount increased from 345 at June 30,
1996 to 621 at June 30, 1997. As a percentage of revenues, general and
administrative costs remained constant at 25% for the first six months of both
1996 and 1997. General and administrative costs as a percentage of revenues
decreased slightly from 26% to 25% for the three month period ended June 30,
1997 compared to June 30, 1996 as a result of improved space utilization.
INTEREST INCOME
Interest income for the three and six month periods ended June 30, 1997
was derived from the Company's investments, which were primarily tax-exempt,
short-term municipal bonds.
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal and state taxes at an
effective rate of 37% for 1997 and 39% for 1996. 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
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. In October 1996, the Company completed a follow-on offering of common
stock resulting in net proceeds of $21.7
10
<PAGE> 11
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, 1998, 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 limits the payment of dividends. At
June 30, 1997, the Company had no bank borrowings outstanding and no material
capital commitments.
Cash and cash equivalents increased to $51.8 million at June 30, 1997,
from $50.0 million at December 31, 1996. The increase was primarily due to cash
generated from operations, along with the proceeds from the exercise of stock
options. At June 30, 1997, $6.2 million was invested in tax-exempt, short-term
municipal bonds which mature in less than 12 months, compared to $9.5 million
which was invested as of December 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 public
offerings of common stock 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 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 7, 1997,
the following proposals were adopted by the vote specified below.
<TABLE>
<CAPTION>
- ----- ------------------------- ------------------ ------------------ ----------------- ------------------
Against or Broker
For Withheld Abstain Non-Votes
- ----- ------------------------- ------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
1. Election of
Directors - Class I
Jerry Greenberg 8,121,722 1,160 0 0
Bruce Parker 8,121,722 1,160 0 0
Directors-Class II
(Terms Expire in 1998)
J. Stuart Moore
Darius Gaskins, Jr.
Directors-Class III
(Terms Expire in 1999)
Carl S. Sloane
R. Stephen Cheheyl
- ----- ------------------------- ------------------ ------------------ ----------------- ------------------
2. Ratification of KPMG
Peat Marwick LLP as
independent auditors 8,121,972 600 310 0
- ----- ------------------------- ------------------ ------------------ ----------------- ------------------
</TABLE>
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.
12
<PAGE> 13
(b) Reports on Form 8-K.
The Company did not file any Reports on Form 8-K during the
quarter ended June 30, 1997.
13
<PAGE> 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: August 12, 1997 By:/ Jerry A. Greenberg
----------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Co-Chairman of the Board
Date: August 12, 1997 By:/ Susan D. Johnson
---------------------
Susan D. Johnson
Chief Financial Officer
14
<PAGE> 1
Exhibit 11.1
Sapient Corporation
Article 6.01 of Regulation S-K
Computation of Shares Used in Computing Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Common Stock, beginning of period 8,929,720 11,576,165 8,831,730 11,492,760
Weighted average options exercised
during the period 64,720 40,393 367,660 92,976
Weighted average options outstanding
other than exercised during the period
using the treasury stock method 962,329 1,020,882 1,231,177 1,039,009
Stock issued for initial public offering 1,620,495 -- 828,455 --
Cheap stock relating to SAB No. 83(1) 519,525 -- -- --
---------- ---------- ---------- ----------
12,096,789 12,637,440 11,259,022 12,624,745
---------- ---------- ---------- ----------
</TABLE>
- -----------
(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.
15
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 51,848,798 51,848,798
<SECURITIES> 6,223,775 6,223,775
<RECEIVABLES> 19,699,702 19,699,702
<ALLOWANCES> 350,000 350,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 78,621,515 78,621,515
<PP&E> 7,198,011 7,198,011
<DEPRECIATION> 2,662,526 2,662,526
<TOTAL-ASSETS> 83,218,088 83,218,088
<CURRENT-LIABILITIES> 8,549,293 8,549,293
<BONDS> 0 0
0 0
0 0
<COMMON> 115,950 115,950
<OTHER-SE> 72,329,381 72,329,381
<TOTAL-LIABILITY-AND-EQUITY> 83,218,088 83,218,088
<SALES> 0 0
<TOTAL-REVENUES> 18,824,354 35,328,458
<CGS> 0 0
<TOTAL-COSTS> 14,779,856 27,757,217
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 582,707 1,108,203
<INCOME-PRETAX> 4,627,205 8,679,444
<INCOME-TAX> 1,733,314 3,241,104
<INCOME-CONTINUING> 2,893,891 5,438,340
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,893,891 5,438,340
<EPS-PRIMARY> .23 .43
<EPS-DILUTED> .23 .43
16
</TABLE>
