<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, 1998 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
(State or Other Jurisdiction
Incorporation or Organization)
ONE MEMORIAL DRIVE, CAMBRIDGE, MA
(Address of Principal Executive Offices)
04-3130648
(I.R.S. Employer
Identification No.)
02142
(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 May 8, 1998 there were 25,097,259 shares of Common Stock, $.01 par
value, outstanding.
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<PAGE> 2
SAPIENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997........................................... 2
Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997..................................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997............................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6-8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 9
Item 6. Exhibits and Reports on Form 8-K............................ 9
Signatures........................................................... 10
Exhibit 11.1
</TABLE>
1
<PAGE> 3
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 37,212,194 $47,314,306
Short term investments.................................... 23,875,397 17,091,604
Accounts receivable, less allowance for doubtful accounts
of $ 425,000 and $225,000, respectively................ 20,369,686 16,217,444
Unbilled revenues on contracts............................ 10,574,193 9,070,470
Deferred income tax asset................................. 34,914 34,914
Prepaid expenses and other current assets................. 2,673,201 1,638,840
------------ -----------
Total current assets................................... 94,739,585 91,367,578
Property and equipment, net................................. 6,958,523 6,315,454
Other assets................................................ 308,003 330,211
------------ -----------
Total assets........................................... $102,006,111 $98,013,243
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 18,441 $ 208,242
Accounts payable.......................................... 37,334 15,004
Accrued expenses.......................................... 2,134,990 1,924,444
Accrued compensation...................................... 2,999,025 3,453,050
Accrued income taxes payable.............................. 3,487,924 3,074,553
Deferred revenues on contracts............................ 4,714,820 6,307,903
------------ -----------
Total current liabilities.............................. 13,392,534 14,983,196
Deferred income taxes....................................... 121,212 121,212
Other long term liabilities................................. 933,051 909,689
------------ -----------
Total liabilities...................................... 14,446,797 16,014,097
------------ -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, 5,000,000
authorized and none outstanding at March 31, 1998 and
December 31, 1997...................................... -- --
Common stock, par value $.01 per share, voting, 40,000,000
shares authorized, 24,416,939 issued at March 31, 1998;
40,000,000 shares authorized, 24,206,570 shares issued
at December 31, 1997................................... 245,580 242,066
Additional paid-in capital................................ 58,773,282 57,478,844
Retained earnings......................................... 28,540,452 24,278,236
------------ -----------
Total stockholders' equity................................ 87,559,314 81,999,146
------------ -----------
Total liabilities and stockholders' equity............. $102,006,111 $98,013,243
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues.................................................... $30,730,464 $18,179,931
Operating expenses:
Project personnel costs................................... 14,711,989 8,674,546
Selling and marketing..................................... 1,815,290 1,121,149
General and administrative................................ 8,015,296 4,574,825
----------- -----------
Total operating expenses............................. 24,542,575 14,370,520
Income from operations................................. 6,187,889 3,809,411
Interest income, net........................................ 578,276 516,943
----------- -----------
Income before income taxes............................. 6,766,165 4,326,354
Income taxes................................................ 2,503,949 1,620,390
----------- -----------
Net income........................................... $ 4,262,216 $ 2,705,964
=========== ===========
Basic net income per share.................................. $ 0.18 $ 0.11
=========== ===========
Diluted net income per share................................ $ 0.16 $ 0.10
=========== ===========
Weighted average common shares.............................. 24,347,399 23,719,836
Weighted average common share equivalents................... 2,623,700 2,120,088
----------- -----------
Weighted average common shares and common share equivalents
outstanding............................................... 26,971,099 25,839,924
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 4,262,216 $ 2,680,964
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 726,734 368,121
Deferred income taxes.................................. -- 203,778
Changes in assets and liabilities:
Increase in accounts receivable...................... (4,152,242) (923,888)
Increase (decrease) in unbilled revenues on
contracts......................................... (1,503,723) 148,053
Increase in prepaid expenses and other current
assets............................................ (1,034,361) (202,565)
Decrease in other assets............................. 22,208 --
Increase in accounts payable......................... 22,331 25,669
Increase (decrease) in accrued expenses.............. 210,546 (558,600)
Decrease in accrued compensation..................... (454,025) (737,165)
Increase (decrease) in income taxes payable.......... 413,370 (687,867)
Decrease in deferred revenues on contracts........... (1,593,083) (796,190)
Increase in other long term liabilities.............. 23,362 82,976
------------ -----------
Net cash used in operating activities............. (3,056,667) (396,714)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment........................ (1,369,803) (2,053,933)
Purchase of short term investments........................ (6,783,793) (2,940,560)
------------ -----------
Net cash used for investing activities............ (8,153,596) (4,994,493)
------------ -----------
Cash flows from financing activities:
Proceeds from stockholders for notes receivable........... -- 25,000
Proceeds from exercise of stock options................... 293,328 60,567
Proceeds from employee stock purchase plan................ 1,004,623 589,511
Principal payments on notes payable to bank............... (189,801) (81,690)
------------ -----------
Net cash provided by financing activities......... 1,108,150 593,388
------------ -----------
(Decrease) in cash and cash equivalents................... (10,102,113) (4,797,819)
Cash and cash equivalents, at beginning of period......... 47,314,307 50,301,285
------------ -----------
Cash and cash equivalents, at end of period............... $ 37,212,194 $45,503,466
============ ===========
Supplemental disclosures for cash flow information:
Cash paid during the year for income taxes................ $ 2,090,111 $ 2,101,635
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<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, 1997 included in the Company's Annual
Report on Form 10K. 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, 1998 are not necessarily indicative of the results to be
expected for any future period of 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) EARNINGS PER SHARE
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 establishes a
different method of computing net income per share than previously required
under the provisions of Accounting Principles Board Opinion No. 15, "Earnings
per Share" and requires restatement of all prior periods presented. Under SFAS
128, the Company presents both basic net income per share and diluted net income
per share. Basic net income per share is based on the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
per share effect of dilutive common stock equivalents.
(4) CAPITAL STOCK
On January 29, 1998 the Company declared a two-for-one stock split effected
as a 100 percent stock dividend distributed March 9, 1998 to all shareholders of
record on February 20, 1998. All financial results and share information have
been restated to reflect the effect of the stock dividend.
(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 arbitration 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. 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.
(6) SUBSEQUENT EVENTS
The Company completed a public offering of Common Stock on April 7, 1998
which resulted in the issuance of 653,125 of common stock, par value $.01 per
share ("Common Stock"). Proceeds to the Company, net of underwriting discounts
and costs of the offering, were approximately $29.1 million.
5
<PAGE> 7
SAPIENT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Sapient is a leading provider of business and information technology
solutions implemented on a fixed price, fixed-timeframe basis. Using
client/server and Web-based technologies, Sapient offers a variety of services
designed to help clients rapidly achieve their business objectives, including
implementation and integration of packaged software solutions, custom software
development, implementation of enterprise resource planning ("ERP") systems,
production support, and business and operational consulting. Sapient targets
clients in information-intensive industries, including Financial Services,
Energy Services, Manufacturing, Communications and Government.
Sapient delivers services using its proprietary QUADD (Quality Design and
Delivery) discipline. QUADD is a workshop-based methodology that emphasizes
active client participation to help visualize, prioritize and create
time-critical business and technology solutions. The Company believes that the
QUADD process is an important competitive differentiator that allows Sapient and
its clients to better understand the clients' business needs, and to design,
develop, integrate and implement solutions that address those needs. The QUADD
process consists of four stages: RIP workshop, Design, Implementation and
Production. The RIP (Rapid Implementation Plan) workshop is designed to rapidly
identify the client's needs and develop a strategy and action plan to meet those
needs. The Design workshop focuses on outlining the proposed process changes and
required information technology solutions. The Implementation stage primarily
involves the development and testing of the new applications or enhancements to
third-party packaged software applications or existing Sapient-developed
solutions. The Production stage primarily involves the maintenance, enhancement
and support of the solution after it is operational.
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 a large client may constitute a significant portion of
the Company's total revenues in a particular quarter.
On December 15, 1997, the Company acquired all of the outstanding common
stock of EXOR in exchange for 611,738 shares of Common Stock. The Company's
financial statements have been restated for all periods presented to reflect the
acquisition of EXOR, which has been accounted for as a pooling of interests.
On January 29, 1998, the Company declared a two-for-one stock split
effected as a 100% stock dividend paid on March 9, 1998 to all stockholders of
record on February 20, 1998. The Company's financial statements have been
restated for all periods presented to reflect the effect of the stock dividend.
On April 7, 1998, the Company completed a public offering of Common Stock
which resulted in the issuance of 653,125 of Common Stock. Proceeds to the
Company, net of underwriting discounts and costs of the offering, were
approximately $29.1 million.
6
<PAGE> 8
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's consolidated statements of income.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------
1998 1997
---- ----
<S> <C> <C>
Revenues.................................................... 100% 100%
Operating expenses:
Project personnel costs................................... 48 48
Selling and marketing..................................... 6 7
General and administrative................................ 26 24
--- ---
Total operating expenses............................... 80 79
Income from operations...................................... 20 21
Interest income............................................. 2 3
Income taxes................................................ 8 9
--- ---
Net income.................................................. 14% 15%
=== ===
</TABLE>
Revenues
Revenues for the first quarter of 1998 increased 69% over revenues for the
first quarter of 1997. The increase in revenues reflects increases in both the
size and number of client projects. Unbilled revenues on contracts increased
from $6.5 million at December 31, 1997 to $10.6 million at March 31, 1998 as a
result of several large projects which began in the fourth quarter of 1997.
Typically the Company requires clients to pay a deposit at the beginning of
projects. By March 31, 1998, the Company had recorded revenue on these new
projects which exceeded the amounts of the deposit received. Future billings of
such amounts are tied to the achievement of contractual milestones. In the first
three months of 1998, the Company's five largest clients accounted for
approximately 41% of its revenues. During this period, there were no clients who
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 month period ended March 31,
1998 was primarily due to an increase in project personnel from 481 at March 31,
1997 to 753 at March 31, 1998. Project personnel costs remained constant as a
percentage of revenues at 48% for the first three months of 1998 and 1997.
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 decreased as a percentage of revenues from 7%
in the first quarter of 1997 to 6% in the first quarter of 1998. The decrease
was primarily due to costs incurred in the first quarter of 1997 related to the
preparation of the Company's first Annual Report to Shareholders. Similar costs
in 1998 were expensed at the end of 1997. The dollar increase over the first
three months between 1997 and 1998 was primarily the result of the increase in
selling and marketing personnel, which grew from 29 employees at March 31, 1997
to 42 employees at March 31, 1998.
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 March 31, 1998 was primarily due to an increase in costs associated
with the employees hired during
7
<PAGE> 9
1998, along with an increase in occupancy costs related to having one additional
office, and significant expansion in three of the Company's exisiting offices
during the first quarter of 1998. The Company's total headcount increased from
599 at March 31, 1997 to 924 at March 31, 1998. As a percentage of revenues,
general and administrative costs increased to 26% from 24% for the three months
ended March 31, 1998 and 1997. The increase as a percentage of revenues was
primarily a result of lower space utilization during the quarter due to the
additional space.
Interest Income
Interest income for the three month period ended March 31, 1998 was derived
from the Company's investments of the proceeds from its public stock offerings,
which were primarily tax-exempt, short-term municipal bonds.
Provision for Income Taxes
Income tax expense represents combined federal and state income taxes at an
effective rate during the first quarter ended March 31, 1998 and 1997 of 37% and
37.5%, respectively. The decrease in the effective income tax rate represents
the impact of the Company's larger investment in tax-exempt, short-term
municipal bonds during 1998.
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 June 30,
1998, 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 March 31, 1998, the Company had no bank borrowings
outstanding and no material capital commitments.
Cash and cash equivalents decreased to $37.2 million at March 31, 1998,
from $47.3 million at December 31, 1997. The decrease was primarily due to cash
invested in additional property and equipment related to office expansions, tax
payments and an increase in accounts receivable. At March 31, 1998, $23.9
million was invested in tax-exempt, short-term municipal bonds which mature in
less than 12 months, compared to $17.1 million which was invested as of December
31, 1997.
On April 6, 1998, the Company completed a public offering of Common Stock
which resulted in the issuance of 653,125 of Common Stock. Proceeds to the
Company, net of underwriting discounts and costs of the offering, were
approximately $29.1 million.
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.
8
<PAGE> 10
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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) and Registration Statement on Form S-3
(Registration No. 333-47889).
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 March 18, 1998 , the Company filed a Current Report on Form 8-K
announcing under Item 5 (Other Items) the revenues and net income from combined
operations for the Company and EXOR Technologies, Inc. for the one month period
ended January 31, 1998.
9
<PAGE> 11
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 11, 1998 By /s/ JERRY A. GREENBERG
-----------------------------------
JERRY A. GREENBERG
CO-CHIEF EXECUTIVE OFFICER
CO-CHAIRMAN OF THE BOARD
Date: May 11, 1998 By /s/ SUSAN D. JOHNSON
-----------------------------------
SUSAN D. JOHNSON
CHIEF FINANCIAL OFFICER
10
<PAGE> 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Net Income.................................................. 4,262,222 2,705,964
Basic Net Income per Share:
Weighted average common shares outstanding............. 24,347,399 23,719,836
Shares used in computing per share amount.............. 24,347,399 23,719,836
---------- ----------
Basic net income per share............................. $0.18 $0.11
---------- ----------
Diluted Net Income per Share:
Weighted average common shares outstanding............. 24,347,399 23,719,836
Dilutive stock options................................. 2,623,700 2,120,088
---------- ----------
Shares used in computing per share amount.............. 26,971,099 25,839,924
---------- ----------
Diluted net income per share........................... $ 0.16 $ 0.10
---------- ----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 37,212,194
<SECURITIES> 23,875,397
<RECEIVABLES> 31,368,882
<ALLOWANCES> 425,000
<INVENTORY> 0
<CURRENT-ASSETS> 94,739,584
<PP&E> 12,333,573
<DEPRECIATION> 5,375,050
<TOTAL-ASSETS> 102,006,111
<CURRENT-LIABILITIES> 13,392,535
<BONDS> 0
0
0
<COMMON> 245,580
<OTHER-SE> 87,313,734
<TOTAL-LIABILITY-AND-EQUITY> 102,006,111
<SALES> 30,730,464
<TOTAL-REVENUES> 30,730,464
<CGS> 0
<TOTAL-COSTS> 24,542,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 578,282
<INCOME-PRETAX> 6,766,171
<INCOME-TAX> 2,503,949
<INCOME-CONTINUING> 4,262,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,262,222
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.16
</TABLE>
