Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28074
SAPIENT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3130648
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE MEMORIAL DRIVE, CAMBRIDGE, MA 02142
(Address of Principal Executive Offices) (Zip Code)
(617) 621-0200
Registrant's Telephone Number, Including Area Code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Company (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Company was approximately $782,250,000 on March 19, 2001 based on the last
reported sale price of the Company's common stock on the Nasdaq National Market
on March 19, 2001. There were 122,538,818 shares of common stock outstanding as
of March 19, 2001.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on June 21, 2001 are incorporated by reference in Items
10, 11, 12 and 13 of Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
SAPIENT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Company's Common Equity and Related Stockholder
Matters..................................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 25
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10. Directors and Executive Officers of the Company............. 58
Item 11. Executive Compensation...................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 58
Item 13. Certain Relationships and Related Transactions.............. 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 59
Signatures................................................................. 60
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). All statements, other than
statements of historical facts included in this Annual Report, regarding our
strategy, future operations, financial position, estimated revenues, projected
costs, prospects, plans and objectives of management are forward-looking
statements. When used in this Annual Report, the words "will," "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot guarantee
future results, levels of activity, performance or achievements and you should
not place undue reliance on our forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks described in Part
I "Business -- Risk Factors" and elsewhere in this Annual Report. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or strategic investments. In
addition, any forward-looking statements represent our expectation only as of
the day this Annual Report was first filed with the SEC and should not be relied
upon as representing our expectations as of any subsequent date. While we may
elect to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our estimates change.
3
PART I
ITEM 1. BUSINESS
GENERAL
Sapient is a leading business and technology consultancy that helps large
companies discover and harness the competitive advantages that are possible in
an increasingly digital, networked world. We are focused on delivering business
value to our clients by understanding the key business problems they face and by
solving those problems. We create value for our clients through our combination
of broad skills, fixed price approach, speed and reliability, and our culture.
We are able to successfully deliver our solutions in the form and within the
timeframe we promise to our clients because of our many years of experience with
large-scale program management and fixed-price delivery.
Our global presence enables us to understand and address the business
issues that our clients are facing in both local and global contexts. In
addition to offices in 11 cities throughout the United States, we have offices
in Dusseldorf, London, Munich, New Delhi, Tokyo and Toronto, and we are a 50%
owner of a consulting joint venture in Milan. Our office in New Delhi also
allows us to provide high-quality solutions within accelerated 24-hour delivery
timescales, by utilizing India's highly skilled technology specialists, lower
costs and the time differences between India and many of the countries we serve.
Further information about our international operations is located in Note 2(r)
to the Notes to Consolidated Financial Statements included in this Annual
Report. We employ approximately 2,700 people worldwide.
We deliver our solutions primarily through seven industry business units:
financial services; technology and industrial services; media, entertainment and
communications; travel; retail and consumer products; public services; and
energy services. Through this industry alignment, we have developed an extensive
understanding of our clients' markets that helps us to effectively address the
market dynamics and business opportunities that our clients face.
Sapient was incorporated in Delaware in 1991. Our executive offices are
located at One Memorial Drive, Cambridge, MA 02142, and our telephone number is
(617) 621-0200. Our stock is traded on the Nasdaq National Market under the
symbol "SAPE" and is included in the Standard & Poor's (S&P) 500 Index. Our
Internet address is http://www.sapient.com. Material contained on our website is
not incorporated by reference into this Annual Report. Unless the context
otherwise requires, references in this Annual Report to "Sapient," "we," "us" or
"our" refer to Sapient Corporation and its subsidiaries.
OUR SERVICES AND APPROACH
Our primary focus is to understand the business problems that our clients
are facing and provide the solutions that enable our clients to solve those
problems. Our solutions are designed to deliver tangible business value to
clients in the form of increased revenues and reduced costs. We believe the
following elements of our approach are key to providing effective solutions to
our clients:
We deliver the business value. Our teams and our approach are
designed to quickly and reliably help clients set direction (locate
opportunity for achieving value) and implement (deliver the value).
Speed and reliability. We discover, assess, plan and deliver at
speed. From our industry-specific expertise that provides us with an
understanding of the threats and opportunities clients face, to our focused
approach to project planning and delivery, we have built our capabilities
around rapid delivery. Our rapid and iterative workshop-based approach to
building client consensus and our round-the-clock delivery timescales also
contribute to our ability to work quickly.
Our culture. Sapient's culture is collaborative, forthright and
determined to do whatever it takes to deliver value for our clients.
We understand advanced technology. Through our work in merging the
best of advanced technology with the still-valuable components of legacy
systems, we create value by making the advantages of advanced technologies
real. We have a long history of delivering advanced technology solutions,
including
1
4
ten years' experience with client/server technologies, more than six years'
experience with Internet solutions, more than four years' experience with
wireless and two years' experience with broadband solutions. We also have
extensive experience working with other technology companies and
integrating their solutions.
We understand "the experience." We understand the "human elements"
required to make customer and employee experiences that generate value.
Through our social research, strategy, and experience design capabilities,
we help clients build strong audience relationships.
Fixed price. Since 1991, we have been delivering large, complex
projects primarily on a fixed-price basis. Our extensive experience with
these types of engagements has enabled us to successfully deliver a
solution at the price and within the timeframe we have promised to our
client.
PEOPLE AND CULTURE
We have developed a strong corporate culture that is critical to our
success. Our key values are client-focused delivery, leadership, relationships,
creativity, openness and people growth.
To encourage the achievement of these values, we reward teamwork and
promote individuals who demonstrate these values. Also, we have an intensive
orientation program for new employees to introduce them to our core values, as
well as a number of internal communications and training initiatives defining
and promoting these core values. We believe that our growth, high employee
retention rates and overall success are attributable, in large part, to the high
caliber of our employees and our commitment to maintain the values on which our
success has been based.
As of December 31, 2000, we had 3,360 full-time employees, composed of
2,615 project personnel, 628 employees in general and administration and 117
employees in sales and marketing. As a result of a reduction in our work force
which occurred in March 2001, we had 2,688 full-time employees as of March 15,
2001, composed of 2,003 project personnel, 577 employees in general and
administration and 108 employees in sales and marketing. None of our employees
are subject to a collective bargaining agreement. We believe that we have good
relationships with our employees.
SELLING AND MARKETING
The role of Sapient's marketing program is to create and sustain preference
and loyalty for Sapient as a leading business and technology consultancy.
Marketing is performed at the corporate and industry business unit levels.
Our dedicated marketing personnel undertake a variety of marketing
activities, including sponsoring focused multi-client events to demonstrate our
thought leadership, media and industry analyst outreach, market analysis,
recruitment marketing, sponsoring and participating in targeted conferences,
holding private briefings with individual companies and publishing of our
website, www.sapient.com.
Our sales professionals are primarily organized along our seven industry
business units. We believe that the industry focus of our sales professionals
and of our industry business unit marketing teams enhances their knowledge and
expertise in these industries and serves to generate additional client
engagements.
We are also actively building relationships and strategic alliances with
other technology companies and package technology vendors. These relationships
involve a wide range of joint activities, including working jointly on client
engagements, evaluating and recommending each other's technology solutions to
customers, and training and knowledge transfer regarding each other's solutions.
We believe that these relationships and strategic alliances will enable us to
provide better delivery and value to our existing customers and will attract new
customers through referrals and joint engagements.
Our written agreements with our clients contain varying terms and
conditions, including in some instances the right to terminate the agreement
with limited advance notice or penalty, and we do not generally believe it is
appropriate to characterize these agreements as backlog.
2
5
COMPETITION
The markets for the services we provide are highly competitive. We believe
that we currently compete principally with large accounting and consulting firms
and systems consulting and implementation firms. We compete to a lesser extent
with specialized e-business consulting firms, strategy consulting firms, other
package technology vendors and our clients' own internal information systems
groups. Some of our competitors have significantly greater financial, technical
and marketing resources than we do and generate greater revenues and have
greater name recognition than we do. Other of our competitors have experienced
serious financial difficulties in recent months, which may result in those
companies much more aggressively pursuing business opportunities and reducing
their pricing substantially to obtain those opportunities.
We believe that the principal competitive factors in our markets include:
ability to solve business problems; expertise and talent with advanced
technologies; global presence; quality and speed of delivery; price of
solutions; industry knowledge; and sophisticated project and program management
capability.
We believe that we compete favorably when considering these factors and
that our extensive experience in delivering business value to our clients on a
global basis through advanced technology solutions distinguishes us from our
competitors.
INTELLECTUAL PROPERTY RIGHTS
We rely upon a combination of trade secrets, nondisclosure and other
contractual arrangements, and copyright and trademark laws to protect our
proprietary rights. We enter into confidentiality agreements with our employees,
consultants and clients, and limit access to and distribution of our proprietary
information.
Our services involve the development of business and technology solutions
for specific client engagements. Ownership of these solutions is the subject of
negotiation and is frequently assigned to the client, although we may retain a
license for certain uses. Certain of our clients have prohibited us from
marketing the solutions developed for them for specified periods of time or to
specified third parties, and we anticipate that certain of our clients will
demand similar or other restrictions in the future.
RISK FACTORS
The following important factors, among others, could cause our actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report or presented elsewhere by management from time to
time.
OUR MARKET AND THE DEMAND FOR BUSINESS AND TECHNOLOGY CONSULTING SERVICES ARE
CHANGING RAPIDLY
The market for our consulting services and the technologies used in our
solutions has been changing rapidly over the last three years, and we expect
this level of change to continue. The market for advanced technology consulting
skills expanded rapidly during 1999 and 2000, but has both shifted and declined
significantly over the last several months. These market changes have required
us to shift the nature of our services towards other types of business and
technology consulting services and have also affected our financial results. Our
revenues for the three months ended December 31, 2000 increased less than 1%
from our revenues for the three months ended September 30, 2000, and our net
earnings decreased approximately 32% over the same period. We expect to
experience a further decline in our revenues and earnings for the quarter ended
March 31, 2001, which could continue into future quarters. If we cannot keep
pace with these changes in our marketplace, our business, financial condition
and results of operations will suffer.
Our success will depend, in part, on our ability to develop service
offerings that keep pace with rapid and continuing changes in technology,
evolving industry needs and changing client preferences. Our success will also
depend on our ability to develop and implement ideas that successfully apply
existing and new technologies to deliver tangible value to our clients. We may
not be successful in addressing these developments on a timely basis or in
selling our services in the marketplace.
3
6
OUR CLIENTS MAY CANCEL OR DELAY SPENDING ON BUSINESS AND TECHNOLOGY INITIATIVES
BECAUSE OF THE CURRENT ECONOMIC CLIMATE
Since the second half of 2000, many companies have experienced financial
difficulties or uncertainty, and have begun to cancel or delay spending on
business and technology consulting initiatives as a result. Furthermore, the
severe financial difficulties which many start-up Internet companies have
experienced has further reduced the perceived urgency by larger companies to
begin or continue technology initiatives. If large companies continue to cancel
or delay their business and technology consulting initiatives because of the
current economic climate, or for other reasons, our business, financial
condition and results of operations could be materially adversely affected.
BUSINESSES MAY DECREASE OR DELAY THEIR USE OF ADVANCED TECHNOLOGIES AS A MEANS
FOR CONDUCTING COMMERCE
Our future success depends heavily on the increased acceptance and use of
advanced technologies as a means for conducting commerce and streamlining
operations. We focus our services on the development and implementation of
advanced technology strategies and solutions. If use of these advanced
technologies does not continue to grow, or grows more slowly than expected, our
revenue growth could slow or decline and our business, financial condition and
results of operations could be materially adversely affected. Consumers and
businesses may delay adoption of advanced technologies for a number of reasons,
including:
- inability to implement and sustain profitable business models using
advanced technologies;
- inadequate network infrastructure or bandwidth;
- delays in the development or adoption of new technical standards and
protocols required to handle increased levels of usage;
- delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information; and
- failure of companies to meet their customers' expectations in delivering
goods and services using advanced technologies.
OUR MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO CONTINUE TO COMPETE
EFFECTIVELY
The business and technology consulting market in which we operate includes
a large number of companies and is highly competitive. Our primary competitors
are large accounting and consulting firms and systems consulting and
implementation firms. We compete to a lesser extent with specialized e-business
consulting firms, strategy consulting firms, other package technology vendors
and internal information systems groups. Furthermore, the competitive landscape
is changing rapidly. We have begun competing more often for client engagements
against companies with far larger revenues and numbers of consultants than we
have. These larger competitors may have the ability to offer a wider range of
services and to deploy a large number of professionals more quickly. Certain
other consulting firms that we competed against during 1999 and 2000 have
experienced financial difficulties. These firms may attempt to win new business
by offering large pricing concessions, which could impair our ability to compete
for that business. If we cannot keep pace with the intense competition in our
marketplace, our business, financial condition and results of operations will
suffer.
WE HAVE SIGNIFICANT FIXED OPERATING COSTS, WHICH MAY BE DIFFICULT TO ADJUST IN
RESPONSE TO UNANTICIPATED FLUCTUATIONS IN REVENUES
A high percentage of our operating expenses, particularly personnel, rent
and depreciation, are fixed in advance of any particular quarter. As a result,
an unanticipated decrease in the number, or an unanticipated slowdown in the
scheduling, of our projects may cause significant variations in operating
results in any particular quarter and could have a material adverse effect on
operations for that quarter.
An unanticipated termination of a major project, a client's decision not to
proceed with a project we anticipated or the completion during a quarter of
several major client projects could require us to maintain underutilized
employees and could, therefore, have a material adverse effect on our business,
financial
4
7
condition and results of operations. Our revenues and earnings may also
fluctuate from quarter to quarter based on such factors as:
- the contractual terms and timing of completion of projects;
- any delays incurred in connection with projects;
- the adequacy of provisions for losses and bad debts;
- the accuracy of our estimates of resources required to complete ongoing
projects; and
- general economic conditions.
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CLIENTS
We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of clients for which we perform
large projects. In 2000, our five largest clients accounted for approximately
25% of our revenues in the aggregate, with two clients each accounting for more
than 5% of our revenues. In addition, revenues from a large client may
constitute a significant portion of our total revenues in a particular quarter.
The loss of any principal client for any reason, including as a result of the
acquisition of that client by another entity, our failure to meet that client's
expectations, or that client's decision to reduce spending on technology-related
projects, could have a material adverse effect on our business, financial
condition and results of operations.
OUR CLIENTS COULD UNEXPECTEDLY TERMINATE THEIR CONTRACTS FOR OUR SERVICES
Some of our contracts can be canceled by the client with limited advance
notice and without significant penalty. Termination by any client of a contract
for our services could result in a loss of expected revenues and additional
expenses for staff which were allocated to that client's project. We could be
required to maintain underutilized employees who were assigned to the terminated
contract. The unexpected cancellation or significant reduction in the scope of
any of our large projects could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY LOSE MONEY IF WE DO NOT ACCURATELY ESTIMATE THE COSTS OF FIXED-PRICE
ENGAGEMENTS
Most of our projects are based on fixed-price, fixed-timeframe contracts,
rather than contracts in which payment to us is determined on a time and
materials basis. Our failure to accurately estimate the resources required for a
project, or our failure to complete our contractual obligations in a manner
consistent with the project plan upon which our fixed-price, fixed-timeframe
contract was based, could adversely affect our overall profitability and could
have a material adverse effect on our business, financial condition and results
of operations. We have been required to commit unanticipated additional
resources to complete projects in the past, which has resulted in losses on
those contracts. We will likely experience similar situations in the future and
the consequences could be more severe than in the past, due to the increased
size and complexity of our engagements. In addition, we may fix the price for
some projects at an early stage of the process, which could result in a fixed
price that turns out to be too low and, therefore, would adversely affect our
business, financial condition and results of operations.
WE MAY FAIL TO SATISFY CLIENT EXPECTATIONS BECAUSE OF THE INCREASED SIZE AND
COMPLEXITY OF OUR CLIENT SOLUTIONS, WHICH WOULD DAMAGE OUR REPUTATION AND
BUSINESS
The average cost of our solutions and the size of the team required to
deliver these solutions have grown significantly. As our client engagements
become larger and more complex, managing the development process becomes more
difficult and the likelihood and consequences of any problems or delays
increase. Our inability to complete client solutions in a timely manner, any
defects contained in the solutions we deliver and any other failure by us to
achieve client expectations could have a material adverse effect on our
reputation with the affected client and generally within our industry and could
have a material adverse effect on our business, financial condition and results
of operations.
5
8
INTERNATIONAL EXPANSION OF OUR BUSINESS COULD RESULT IN FINANCIAL LOSSES DUE TO
CHANGES IN FOREIGN ECONOMIC CONDITIONS OR FLUCTUATIONS IN CURRENCY AND EXCHANGE
RATES
We currently have offices in the United Kingdom, Germany, India, Japan and
Canada and we have a joint venture in Italy. We have limited experience in
marketing, selling and providing our services internationally. International
operations are subject to other inherent risks, including:
- recessions in foreign countries;
- fluctuations in currency exchange rates;
- the partially-completed conversion to the euro by most European Union
members;
- difficulties and costs of staffing and managing international operations;
- reduced protection for intellectual property in some countries;
- political instability or changes in regulatory requirements; and
- U.S. imposed restrictions on the import and export of technologies.
IF WE DO NOT ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF, WE MAY NOT BE ABLE
TO ADEQUATELY PERFORM OUR CLIENT ENGAGEMENTS AND COULD BE LIMITED IN ACCEPTING
NEW CLIENT ENGAGEMENTS
Our business is labor intensive and our success will depend upon our
ability to attract, retain, train and motivate highly skilled employees.
Although many specialized e-business and other business and technology companies
have reduced their work forces or slowed their hiring efforts, and we reduced
our work force in March 2001, intense competition still exists for certain
employees who have specialized skills or significant experience in business and
technology consulting. We may not be successful in attracting a sufficient
number of these highly skilled employees in the future. Furthermore, the
industry turnover rates for these types of employees is high, and we may not be
successful in retaining, training and motivating the employees we are able to
attract. Any inability to attract, retain, train and motivate employees could
impair our ability to adequately manage and complete existing projects and to
bid for or accept new client engagements.
WE MAY NOT BE SUCCESSFUL IN MANAGING THE LEVELS OF OUR WORKFORCE AND OUR OTHER
RESOURCES
Until recently, we have experienced significant growth in our revenues,
workforce and other resources. Our revenues increased approximately 82% from
$276.8 million in 1999 to $503.3 million in 2000. Our workforce increased from
2,111 full-time employees at December 31, 1999 to 3,360 at December 31, 2000.
Our growth has slowed significantly over the past six months, and we do not
expect our past rates of growth to be sustainable in the future. Our revenues
for the three months ended December 31, 2000 increased less than 1% from our
revenues for the three months ended September 30, 2000, and our net earnings
decreased approximately 32% over the same period. We expect a further decline in
our revenues and earnings for the quarter ended March 31, 2001, which could
continue into future quarters. Furthermore, in March 2001, we reduced our work
force to address overcapacity in certain areas of our business where the market
demand had declined, and we closed our Sydney, Australia office and will be
consolidating our offices in certain cities in the United States where we
currently have multiple offices.
We must devote substantial managerial and financial resources to monitoring
and managing our workforce and other resources. We have made, and will likely
continue to make, significant expenditures to grow our business in certain
areas, including expenditures for capital equipment, recruiting, training and
other expansion-related costs. We also may be required to expend substantial
managerial and financial resources in identifying and addressing those areas of
our business which are not in sufficient demand by our clients. Our future
success will depend on our ability to manage the levels of our workforce and
other resources effectively. If we are unable to do so, the quality of our
services and products, our ability to retain key personnel and our business,
financial condition and results of operations could be materially adversely
affected.
6
9
WE MAY BE UNABLE TO ACHIEVE ANTICIPATED BENEFITS FROM ACQUISITIONS AND JOINT
VENTURES
During the last four years, we have completed six acquisitions and entered
into one joint venture. The anticipated benefits from these and future
acquisitions and joint ventures may not be achieved. For example, when we
acquire a company, we cannot be certain that customers of the acquired business
will continue to do business with us or that employees of the acquired business
will continue their employment or become well integrated into our operations and
culture. The identification, consummation and integration of acquisitions and
joint ventures require substantial attention from management. The diversion of
this attention from management, as well as any difficulties encountered in the
integration process, could have an adverse impact on our business, financial
condition and results of operations.
OUR STOCK PRICE IS VOLATILE AND MAY RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS
The trading price of our common stock has been subject to wide
fluctuations. Our trading price could continue to be subject to wide
fluctuations in response to:
- quarterly variations in operating results and our achievement of key
business metrics;
- changes in earnings estimates by securities analysts;
- announcements of unexpected operating results or earnings estimates made
by us or our competitors;
- any differences between our reported results and securities analysts'
published or unpublished expectations;
- announcements of new contracts or service offerings made by us or our
competitors;
- announcements of acquisitions or joint ventures made by us or our
competitors; and
- general economic or stock market conditions.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. The commencement of this type of litigation against us could result
in substantial costs and a diversion of management attention and resources.
GOVERNMENT REGULATION COULD INTERFERE WITH THE ACCEPTANCE OF NEW TECHNOLOGIES
Any new laws and regulations applicable to new technologies and electronic
commerce that are adopted by federal, state or international governments could
dampen the growth of new technologies, and decrease their acceptance as
commercial media. If this occurs, a significant number of companies may decide
not to pursue technology initiatives, which could decrease demand for our
services. A decrease in the demand for our services would have a material
adverse effect on our business, financial condition and results of operations.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY METHODOLOGY
Our success depends, in part, upon our proprietary methodology and other
intellectual property rights. We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. We enter into confidentiality agreements
with our employees, consultants and clients, and limit access to and
distribution of our proprietary information. We cannot be certain that the steps
we take in this regard will be adequate to deter misappropriation of our
proprietary information or that we will be able to detect unauthorized use and
take appropriate steps to enforce our intellectual property rights. In addition,
although we believe that our services and products do not infringe on the
intellectual property rights of others, infringement claims may be asserted
against us in the future, and, if asserted, these infringement claims may be
successful. A successful claim against us could materially adversely affect our
business, financial condition and results of operations.
7
10
OUR CO-CHAIRMEN AND CO-CEOS HAVE SIGNIFICANT VOTING POWER AND MAY EFFECTIVELY
CONTROL THE OUTCOME OF ANY STOCKHOLDER VOTE
Jerry A. Greenberg and J. Stuart Moore, our co-Chairmen of the Board of
Directors and co-Chief Executive Officers, together own approximately 34.0% of
our common stock. As a result, they have the ability to substantially influence,
and may effectively control the outcome of corporate actions requiring
stockholder approval, including the election of directors. This concentration of
ownership may also have the effect of delaying or preventing a change in control
of Sapient, even if such a change in control would benefit other investors.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES
Our success will depend in large part upon the continued services of a
number of key employees, including Messrs. Greenberg and Moore. Our employment
arrangements with Messrs. Greenberg and Moore and with our other key personnel
provide that employment is terminable at will by either party. The loss of the
services of either of Messrs. Greenberg or Moore, or of the services of one or
more of our other key employees, could have a material adverse effect on our
business, financial condition and results of operations. In addition, if one or
more of our key employees resign from Sapient to join a competitor or to form a
competing company, the loss of such personnel and any resulting loss of existing
or potential clients to any such competitor could have a material adverse effect
on our business, financial condition and results of operations. Further, in the
event of the loss of any key employees, we may not be able to prevent the
unauthorized disclosure or use of our technical knowledge, practices or
procedures by such employees. Although we require our employees to sign
agreements requiring them to keep company information confidential and
prohibiting them from joining a competitor, forming a competing company or
soliciting our clients or employees for certain periods of time, we cannot be
certain that these agreements will be effective in preventing our key employees
from engaging in such actions or that these agreements will be substantially
enforced by courts or other adjudicative entities.
OUR CORPORATE GOVERNANCE PROVISIONS MAY DETER A FINANCIALLY ATTRACTIVE TAKEOVER
ATTEMPT
Provisions of our charter and by-laws may discourage, delay or prevent a
merger or acquisition that stockholders may consider favorable, including
transactions in which stockholders would receive a premium for their shares.
These provisions include the following:
- any action that may be taken by stockholders must be taken at an annual
or special meeting and may not be taken by written consent;
- stockholders must comply with advance notice requirements before raising
a matter at a meeting of stockholders or nominating a director for
election;
- a Chairman of the Board or a Chief Executive Officer are the only persons
who may call a special meeting of stockholders;
- our Board of Directors is staggered into three classes and the members
may be removed only for cause upon the affirmative vote of holders of at
least two-thirds of the shares entitled to vote; and
- our Board of Directors has the authority, without further action by the
stockholders, to fix the rights and preferences of and issue shares of
preferred stock.
Provisions of Delaware law may also discourage, delay or prevent someone
from acquiring us or merging with us.
ITEM 2. PROPERTIES
Our headquarters and principal administrative, finance, selling and
marketing operations are located in approximately 151,000 square feet of leased
office space in Cambridge, Massachusetts. We also lease offices in New York (3),
San Francisco (4), Chicago (2), Atlanta (2), Austin (3), Dallas, Los Angeles
(2), Washington D.C. (2), Denver, Houston, Dusseldorf, London, Munich, New
Delhi, Sydney, Tokyo and Toronto. In connection with the reduction of 720
personnel announced on March 2, 2001, we will be consolidating office space in
some United States cities where we currently have multiple offices and closing
our office in Sydney.
8
11
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF SAPIENT
Below are the name, age and principal occupations for the last five years
of each current executive officer of Sapient. All such persons have been elected
to serve until their successors are elected and qualified or until their earlier
resignation or removal.
Sheeroy D. Desai............ 35 Mr. Desai joined Sapient in 1991 and has served as
Executive Vice President since September 1994. Mr.
Desai served as Co-Chief Operating Officer from October
1999 until May 2000 when that role was eliminated. Mr.
Desai is responsible for our European, Indian and Latin
American operations.
Paul D. DiGiammarino........ 46 Mr. DiGiammarino joined Sapient in August 1998 as
Senior Vice President, and has served as Executive Vice
President since May 1999. Mr. DiGiammarino is
responsible for our North American operations. Prior to
joining Sapient, Mr. DiGiammarino served as a Vice
President of American Management Systems, Inc. from
1986 until 1998 and was the co-founder and leader of
that company's financial services practice.
Edward G. Goldfinger........ 39 Mr. Goldfinger joined Sapient in November 1999 and has
served as Chief Financial Officer since January 2000.
Prior to joining Sapient, Mr. Goldfinger served as Vice
President and Chief Financial Officer of Pepsi-Cola
International for the South American and Caribbean
regions from October 1997 until November 1999. From
October 1990 to October 1997, Mr. Goldfinger served as
Director of Strategic Planning and in other positions
for Pepsi-Cola International and PepsiCo.
Jerry A. Greenberg.......... 35 Mr. Greenberg co-founded Sapient in 1991 and has served
as Co-Chairman of the Board of Directors and Co-Chief
Executive Officer and as a director since Sapient's
inception.
J. Stuart Moore............. 39 Mr. Moore co-founded Sapient in 1991 and has served as
Co-Chairman of the Board of Directors and Co-Chief
Executive Officer and as a director since Sapient's
inception.
Jane E. Owens............... 47 Ms. Owens joined Sapient in September 2000 as Senior
Vice President, General Counsel and Secretary. Prior to
joining Sapient, Ms. Owens served as Senior Vice
President, General Counsel and Secretary of the Dial
Corporation from May 1997 to September 2000, and as
Vice President, General Counsel and Assistant Secretary
of the Timberland Company from September 1992 to May
1997.
9
12
Bruce D. Parker............. 53 Mr. Parker joined Sapient in December 1999 as an
Executive Vice President. Mr. Parker has been a
director of Sapient since September 1995. From December
1997 until December 1999, Mr. Parker served as Senior
Vice President and Chief Information Officer at United
Airlines, Inc. From September 1994 to December 1997,
Mr. Parker was Senior Vice President -- Management
Information Systems and Chief Information Officer at
Ryder System Inc., a transportation company.
Merle Sprinzen.............. 45 Ms. Sprinzen joined Sapient in February 2000 as Chief
Marketing Officer. Prior to joining Sapient, Ms.
Sprinzen served as Global Director of Marketing and
Communications for Electronic Commerce and in other
capacities for Andersen Consulting (now known as
Accenture, Inc.) from 1995 to 2000.
Desmond P. Varady........... 35 Mr. Varady joined Sapient in October 1993. He became
Executive Vice President in April 1999 and Co-Chief
Operating Officer from October 1999 until May 2000 when
that role was eliminated. Mr. Varady served as a Vice
President from September 1994 to April 1998 and as
Senior Vice President until April 1999. Mr. Varady is
responsible for operational and financial processes in
North America and for the Company's corporate
development activities, including mergers and
acquisitions, strategic alliances and investments.
10
13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price of Common Stock
Our common stock is quoted on the Nasdaq National Market under the symbol
"SAPE". The following table sets forth, for the periods indicated, the high and
low intraday sale prices for our common stock, and has been adjusted to reflect
the two-for-one stock splits effected as 100 percent stock dividends paid on
November 5, 1999 and August 28, 2000.
HIGH LOW
------ ------
1999
First Quarter.................................... $20.72 $12.82
Second Quarter................................... $19.63 $12.75
Third Quarter.................................... $27.19 $11.94
Fourth Quarter................................... $70.63 $20.88
2000
First Quarter.................................... $75.59 $33.06
Second Quarter................................... $60.25 $27.25
Third Quarter.................................... $74.53 $40.06
Fourth Quarter................................... $45.75 $ 8.94
On March 19, 2001, the last reported sale price of our common stock was
$9.8125 per share. As of March 19, 2001, there were approximately 434 holders of
record of our common stock.
(b) Use of Proceeds. There has been no change to the information
previously provided by Sapient on Form SR for the period ended July 3, 1996, as
amended to date, relating to securities sold by Sapient pursuant to Registration
Statements on Form S-1 (Registration Nos. 333-1586 and 333-3204), both of which
were declared effective on April 3, 1996.
11
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report. The Balance Sheet Data at
December 31, 2000 and 1999 and the Statement of Income Data for the years ended
December 31, 2000 and 1999 have been derived from the Consolidated Financial
Statements for such years, which have been audited by PricewaterhouseCoopers
LLP, independent accountants. The Balance Sheet Data at December 31, 1998, 1997
and 1996 and the Statement of Income Data for the years ended December 31, 1998,
1997 and 1996 have been derived from the Consolidated Financial Statements for
such years, which have been audited by KPMG LLP, independent auditors.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA(1)(2):
Revenues............................. $503,339 $276,844 $164,872 $ 92,027 $49,795
Operating expenses:
Project personnel costs............ 249,279 134,638 80,543 44,623 23,329
Selling and marketing.............. 33,903 21,429 11,269 6,074 2,453
General and administrative......... 135,424 69,388 41,675 22,571 14,216
Amortization of intangible
assets.......................... 11,328 2,284 687 -- --
Stock-based compensation........... 2,165 2,029 4,499 -- 260
In-process research and
development..................... -- -- 11,100 -- --
Acquisition costs.................. -- 2,340 -- 560 --
-------- -------- -------- -------- -------
Total operating expenses... 432,099 232,108 149,773 73,828 40,258
-------- -------- -------- -------- -------
Income from operations............... 71,240 44,736 15,099 18,199 9,537
Other expense........................ (1,250) -- -- -- --
Interest income...................... 11,678 4,227 2,925 2,058 1,098
-------- -------- -------- -------- -------
Income before income taxes, net
equity loss from investees and
minority interest.................. 81,668 48,963 18,024 20,257 10,635
Income taxes......................... 33,925 18,506 8,660 7,703 3,936
-------- -------- -------- -------- -------
Income before net equity loss from
investees and minority interest.... 47,743 30,457 9,364 12,554 6,699
Net equity loss from investees....... (878) (157) -- -- --
Minority interest.................... 95 -- -- -- --
-------- -------- -------- -------- -------
Net income........................... $ 46,960 $ 30,300 $ 9,364 $ 12,554 $ 6,699
======== ======== ======== ======== =======
Basic net income per share........... $ 0.39 $ 0.27 $ 0.09 $ 0.13 $ 0.07
======== ======== ======== ======== =======
Diluted net income per share......... $ 0.35 $ 0.24 $ 0.08 $ 0.12 $ 0.07
======== ======== ======== ======== =======
Weighted average common shares....... 119,191 111,418 104,456 99,148 89,688
Weighted average common share
equivalents........................ 14,573 14,208 10,348 8,332 9,700
-------- -------- -------- -------- -------
Weighted average common shares and
common share equivalents........... 133,764 125,626 114,804 107,480 99,388
======== ======== ======== ======== =======
12
15
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital....................... $318,467 $257,251 $121,779 $76,409 $66,369
Total assets.......................... 604,154 343,189 182,955 98,867 80,077
Long-term debt, less current
portion............................. -- -- -- -- --
Total stockholders' equity(3)......... 525,400 304,959 154,814 82,307 66,969
- ---------------
(1) This selected consolidated financial data gives retroactive effect to our
acquisition of Adjacency, Inc. (Adjacency) in March 1999 and EXOR
Technologies, Inc. (EXOR) in December 1997, each of which has been
accounted for as a pooling-of-interests. As a result of these business
combinations, the financial information shown above has been restated to
include the accounts and results of operations of Adjacency and EXOR for
all periods presented. See Note 13 of Notes to Consolidated Financial
Statements.
(2) All share and per share data have been retroactively adjusted to reflect
the two-for-one stock splits effected as 100 percent stock dividends paid
on August 28, 2000, November 5, 1999 and March 9, 1998.
(3) We have never declared or paid any cash dividends.
13
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading business and technology consultancy that helps large
companies discover and harness the competitive advantages that are possible in
an increasingly digital, networked world. We are focused on delivering business
value to our clients by understanding the key business problems they face and by
solving those problems. We create value for our clients through our combination
of broad skills, fixed price approach, speed and reliability, and our culture.
We are able to successfully deliver these solutions in the form and within the
timeframe we promise to our clients because of our many years of experience with
large-scale program management and fixed-price delivery. We currently have
approximately 2,700 employees in offices in Cambridge, Massachusetts, New York,
San Francisco, Chicago, Atlanta, Austin, Dallas, Los Angeles, Washington D.C.,
Denver, Houston, Dusseldorf, London, Munich, New Delhi, Tokyo and Toronto.
Our revenues and earnings may fluctuate from quarter to quarter based on
the number, size and scope of projects in which we are 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 use 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 our total
revenues in a particular quarter.
Our financial statements and all financial information included in this
report have been restated for all periods presented to reflect two-for-one stock
splits distributed as 100% stock dividends on August 28, 2000, November 5, 1999
and March 9, 1998.
On October 25, 2000, we consummated an agreement to acquire The Launch
Group Aktiengesellschaft (TLG), a provider of strategy and business consulting
services in Germany. Upon consummation, we invested approximately $2.2 million
in cash directly into TLG for a 75% ownership position and agreed to pay $5.0
million to the selling shareholders in July 2001 plus $10.0 million in
restricted stock to employees of TLG continuing with the Company. The
acquisition was accounted for as a purchase and, accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on their
respective fair values. The $5.0 million payable in July 2001 has been included
in the overall purchase price and in the accompanying balance sheet as an
acquisition payable. TLG's results of operations are included in our
consolidated statement of income from the date of acquisition.
On October 25, 2000, we acquired a 19% interest in Dream Incubator, Inc.
(DI) for approximately $3.7 million in cash. DI is a management consulting
company that develops strategies for e-businesses in Japan. Under the terms of
our investment agreement with DI, we have a seat on DI's board of directors,
with special voting rights and other privileges, and we use the equity method of
accounting for this investment. On October 25, 2000, DI acquired a 12% equity
interest in Sapient KK, our Japanese subsidiary, for $1.3 million in cash. The
excess cash payment of $347,000 over the Company's carrying value of Sapient KK
was recorded as a component of stockholders' equity, due to the start up nature
of Sapient KK. DI will provide Sapient KK with start up services including
strategy, temporary management, recruiting and other services. Prior to this
transaction, Sapient owned 100% of this subsidiary. DI may put up to 50% of
their shares in Sapient KK in the aggregate on the second through fourth
anniversary of the agreement to the Company for the then fair value. We also
have similar put rights on 50% of our shares in DI in the aggregate. We expect
that in the future there will be changes to our equity investments and, if gain
or loss recognition is appropriate, the amount will be recognized as
non-operating income in our consolidated statement of income.
On August 28, 2000, we acquired all of the outstanding common stock of
Human Code, Inc. (Human Code) for approximately $133.1 million in stock and the
replacement of existing Human Code stock options, including direct acquisition
costs of approximately $1.9 million. We issued approximately 1,508,000 shares of
our common stock and approximately 471,000 stock options pursuant to this
acquisition. The acquisition was accounted for as a purchase and, accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values. Human Code's results of operations are
included in our consolidated statement of income from the date of acquisition.
14
17
On June 30, 2000, we invested $2.0 million in HWT, Inc. (HWT, formerly
HealthWatch Technologies, L.L.C.) in connection with a reorganization of HWT. As
a result of this investment and reorganization, our equity ownership of HWT
increased to approximately 55%. Prior to the reorganization, we had less than a
50%, non-controlling ownership interest in HWT and accounted for this investment
using the equity method of accounting. The consolidated financial statements
include the accounts of HWT from the date of this additional investment. The
investment and reorganization has been accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
On November 19, 1999, we completed a public offering of 2,229,200 shares of
our common stock. Proceeds to Sapient, net of underwriting discounts and costs
of the offering, were approximately $83.3 million.
On October 8, 1999, we acquired substantially all of the assets of E.Lab,
LLC (E.Lab) in exchange for 176,088 shares of common stock and the assumption of
certain liabilities of E.Lab. The acquisition was accounted for as a purchase
and, accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values. E.Lab's results of
operations are included in our consolidated statement of income from the date of
acquisition.
In September 1999, we commenced a joint venture, Sapient S.p.A., in Milan,
Italy. The joint venture provides business and technology consulting in Italy to
Italian-based businesses. We own 50% of this joint venture and use the equity
method of accounting.
On March 29, 1999, we acquired all of the outstanding common stock of
Adjacency, Inc. (Adjacency) in exchange for 3,162,696 shares of common stock.
Our financial statements have been restated for all periods presented to reflect
the acquisition of Adjacency, which has been accounted for as a
pooling-of-interests. Costs, which consist primarily of investment banking,
accounting and legal fees related to the acquisition, approximated $2.3 million
and have been reflected in the consolidated statement of income for the year
ended December 31, 1999.
On August 25, 1998, we acquired Studio Archetype, Inc. (Studio Archetype)
in exchange for 1,993,256 shares of common stock and $250,000 in cash. The
acquisition was accounted for as a purchase and, accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on their
respective fair values. Studio Archetype's results of operations are included in
our consolidated statement of income from the date of acquisition.
In connection with the acquisition of Human Code, we assumed the
outstanding options granted under the Human Code 1994 Stock Option/Stock
Issuance Plan. Prior to the acquisition, options to purchase approximately
2,864,000 shares of Human Code common stock were outstanding at exercise prices
between $0.10 and $3.25 per share. As a result of the acquisition, we replaced
the outstanding Human Code stock options with options to purchase approximately
471,000 shares of our common stock. The options will vest ratably over periods
up to four years. We recorded deferred compensation of $11.2 million related to
the intrinsic value of the unvested options. Stock-based compensation expense,
relating to these options, was approximately $1.4 million for the year ended
December 31, 2000. The deferred compensation will be charged to operations at
the rate of approximately $1.0 million per quarter for the next six quarters,
and $3.8 million in total thereafter, spread over approximately eight quarters.
In connection with the acquisition of Adjacency, we assumed the outstanding
options granted under the Adjacency 1998 Stock Option Plan (the Adjacency Plan).
The Adjacency Plan was originally adopted by Adjacency in 1998 and provided for
the grant of stock options for up to an aggregate of 4,000,000 shares of Class B
common stock of Adjacency. In November 1998, prior to the acquisition, Adjacency
had granted a total of 437,000 options to its employees at exercise prices
between $2.36 and $12.15 per share. The shares vested ratably over three years
starting on the date of employment, except for certain employees who were
granted accelerated vesting upon a change-in-control of Adjacency. The total
compensation charge to be taken over the vesting period is approximately $7.2
million, resulting from the fact that the options were granted at below fair
market value. The charge in the fourth quarter of 1998 of approximately $4.5
million was the result of certain employees being substantially vested by
December 31, 1998. A charge of approximately
15
18
$1.7 million in the first quarter of 1999 was the result of the
change-in-control provisions. We expect this charge to be approximately $82,000
per quarter for the next three quarters. Stock-based compensation expense,
relating to these options, was approximately $440,000 and $2.0 million for the
years ended December 31, 2000 and 1999, respectively. As a result of the
acquisition, we have assumed the obligations related to options to purchase
253,016 shares of our common stock. No further grants may be made pursuant to
the Adjacency Plan. Previously outstanding options under the Adjacency Plan
remain outstanding, and are exercisable for shares of our common stock.
In connection with the acquisition of Studio Archetype in the third quarter
of 1998, the Company allocated $11.1 million to in-process technology and
recorded a corresponding income tax benefit of $4.2 million. This allocation
represents the estimated fair value of such technology based on risk-adjusted
cash flows related to the development of projects that had not reached
technological feasibility at the time of the acquisition and with respect to
which the in-process research and development had no alternative future uses.
Accordingly, this allocation was charged to expense as of the acquisition date.
The Company allocated values to the acquired in-process research and development
projects by identifying significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of Studio Archetype's
next-generation enterprise-wide suite of development, scheduling, bug tracking
and content management applications. The integrated solution is composed of the
following technologies: content management systems (CMS), an Intranet, an
Extranet, an Issues Server and an on-line User Interface Lab (UI Lab), which
together allow developers and clients to access prototypes and trial
deliverables and fully integrate user interface tools with client server,
advanced database and legacy systems. The CMS, Intranet and Extranet components
of the system were released in June 1999. The UI Lab was completed in March 1999
and the Issue Server was completed in September 1999. The integrated solution is
a comprehensive enterprise scale system. All components of the in-process R&D
project acquired by us with the acquisition of Studio Archetype were rolled-out
as an integrated, enterprise-wide solution in 2000. At the time of the
acquisition, expenditures on these projects were approximately $2.5 million, and
estimated costs to complete these projects were expected to total approximately
$625,000. The nature of the efforts to develop the acquired in-process
technology into commercially viable products and services principally related to
the completion of all planning, designing, prototyping, verification, and
testing activities that were necessary to establish that the proposed
technologies met their design specifications including functional, technical,
and economic performance requirements. The efforts to develop the purchased
in-process technology also included testing of the technology for compatibility
and interoperability with other applications. The value assigned to purchased
in-process technology was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from the projects and discounting them to their
present value. The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by Studio Archetype and its competitors. We did not experience any
material variations in costs to complete or completion dates from our initial
assumptions. Following the acquisition of Studio Archetype, Studio Archetype was
fully integrated into our operations, making the isolation of specific revenues
attributable to the in-process technologies difficult. However, nothing has
occurred to materially change our expectations with respect to the underlying
assumptions used in projecting the expected future revenues associated with this
in-process R&D. The rates used to discount the net cash flows to their present
value were based on venture capital rates of return. Due to the nature of the
forecast and the risks associated with the projected growth, profitability and
developmental projects, discount rates of 25 to 30 percent were used for the
business enterprise and for the in-process research and development. The Company
believes that these discount rates were commensurate with Studio Archetype's
stage of development, the uncertainties in the economic estimates described
above, the inherent uncertainty surrounding the successful development of the
purchased in-process technology, the useful life of such technology, the
profitability levels of such technology, and the uncertainty of future
technological advances at that time.
16
19
RESULTS OF OPERATIONS
OVERVIEW
Our revenue is derived from business and technology consulting services.
Although we have historically experienced growth in our revenues, the market for
advanced technology consulting skills has declined significantly over the last
several months. As a result of this decline, our revenues for the three months
ended December 31, 2000 increased less than 1% from our revenues for the three
months ended September 30, 2000, and our net earnings decreased approximately
32% over the same period. We expect to experience a further decline in our
revenues and earnings for the quarter ended March 31, 2001, which could continue
into future quarters.
As of December 31, 2000, we had 3,360 full-time employees, composed of
2,615 project personnel, 628 employees in general and administration and 117
employees in sales and marketing. As a result of a reduction in our work force
which was announced in March 2001, we had 2,688 full-time employees as of March
15, 2001, composed of 2,003 project personnel, 577 employees in general and
administration and 108 employees in sales and marketing. We expect to take a
restructuring charge in the first quarter of 2001 of approximately $35.0 to
$40.0 million, which will consist of severance and related expenses from the
reduction in workforce, and other charges related to the Sydney office closing
and office space consolidation elsewhere. The Company expects cost savings from
these actions of approximately $5.0 million in the first quarter of 2001, and
$60.0 to $65.0 million on an annualized basis.
The following table sets forth the percentage of revenues of some items
included in our Consolidated Statements of Income:
YEARS ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
Revenue................................................. 100% 100% 100%
Operating expenses:
Project personnel costs............................... 50 48 49
Selling and marketing................................. 7 8 7
General and administrative............................ 27 25 25
Amortization of intangible assets..................... 2 1 --
Stock-based compensation.............................. -- 1 3
In process research and development................... -- -- 7
Acquisition costs..................................... -- 1 --
--- --- ---
Total operating expenses...................... 86 84 91
--- --- ---
Income from operations.................................. 14 16 9
Other expense........................................... -- -- --
Interest income......................................... 2 2 2
--- --- ---
Income before income taxes, net equity loss from
investees and minority interest....................... 16 18 11
Income taxes............................................ 7 7 5
--- --- ---
Income before net equity loss from investees and
minority interest..................................... 9 11 6
Net equity loss from investees.......................... -- -- --
Minority interest....................................... -- -- --
--- --- ---
Net income.............................................. 9% 11% 6%
=== === ===
17
20
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues
Revenues for 2000 increased 82% over revenues for 1999. The increase in
revenues was attributable to an increase in the number and average size of
client projects and billing rate increases. In 2000, our five largest clients
accounted for approximately 25% of our revenues in the aggregate; no client
accounted for more than 10% of such revenues and two clients each accounted for
more than 5% of such revenues. In 1999, our five largest clients accounted for
approximately 22% of our revenues in the aggregate; no clients accounted for
more than 10% of such revenues and one client accounted for more than 5% of such
revenues.
Project Personnel Costs
Project personnel costs consist principally of salaries and employee
benefits for personnel dedicated to client projects and direct expenses incurred
to complete projects that were not reimbursed by the client. These costs
represent the most significant expense we incur in providing our services. The
increase in project personnel costs for the year ended December 31, 2000 was
primarily due to an increase in the number of project personnel from 1,666 at
December 31, 1999 to 2,615 at December 31, 2000 and to higher compensation for
project personnel. Project personnel costs increased as a percentage of revenues
to 50% in 2000 from 48% in 1999 due to lower billable utilization of project
personnel. Project personnel costs increased as a percentage of revenues from
48% in the first quarter of 2000 to 52% in the fourth quarter of 2000. This was
due primarily to a decline in revenue growth in the fourth quarter resulting in
lower employee utilization.
Selling and Marketing
Selling and marketing expenses consist principally of salaries, employee
benefits and travel expenses of selling and marketing personnel and promotional
expenses. Selling and marketing expenses decreased as a percentage of revenues
to 7% in 2000 from 8% in 1999. The higher percentage in 1999 was primarily due
to investments that we made in a new brand identity during 1999 and also due to
an advertising campaign launched in the third quarter of 1999. Selling and
marketing personnel grew from 82 employees at December 31, 1999 to 117 employees
at December 31, 2000.
General and Administrative
General and administrative expenses relate principally to salaries and
employee benefits associated with our management, finance and administrative
groups, including personnel devoted to recruiting and training project personnel
and occupancy expenses. The increase in general and administrative expenses for
2000 compared to 1999 was primarily due to an increase in the number of
employees hired during 2000, an increase in occupancy expenses related to
significant expansion of our office space and increased depreciation costs
related to our increased investments in property and equipment. General and
administrative personnel grew from 363 employees at December 31, 1999 to 628
employees at December 31, 2000. Our total headcount increased from 2,111 at
December 31, 1999 to 3,360 at December 31, 2000. Total occupancy at December 31,
2000 was approximately 1.0 million square feet, compared to approximately
613,000 square feet at December 31, 1999. General and administrative costs
increased as a percentage of revenues to 27% in 2000 from 25% in 1999 due
primarily to increases in general and administrative personnel and occupancy
expenses. General and administrative costs increased as a percentage of revenues
from 25% in the first quarter of 2000 to 28% in the fourth quarter of 2000, and
was due primarily to developing support for expected revenue growth which did
not materialize.
Amortization of Intangible Assets
Amortization of intangible assets consists primarily of amortization of
marketing assets, customer lists, assembled workforce and other employee items,
developed technology and goodwill resulting from our acquisitions. The increase
in amortization of intangible assets costs for 2000 compared to 1999 was
primarily related to the Human Code, HWT and TLG acquisitions. Amortization
periods range from three to seven years. Amortization of intangible assets
increased as a percentage of revenues from 1% in the first quarter of
18
21
2000 to 5% in the fourth quarter of 2000, and was primarily due to the Human
Code acquisition which occurred on August 28, 2000.
Stock-Based Compensation
Stock-based compensation consists of expenses for deferred compensation
associated with the Human Code, TLG and Adjacency acquisitions. In connection
with the acquisition of Human Code, we assumed the outstanding options granted
under the Human Code 1994 Stock Option/Stock Issuance Plan. The options vest
ratably over periods up to four years. We recorded deferred compensation of
$11.2 million related to the intrinsic value of the unvested options, of which
$9.8 million has not been amortized as of December 31, 2000. The deferred
compensation will be charged to operations at the rate of approximately $1.0
million per quarter for the next six quarters, and $3.8 million in total
thereafter, spread over approximately eight quarters.
In connection with the TLG acquisition, we will issue $10.0 million of
restricted Sapient common stock. We will amortize the $10.0 million of
restricted stock over the vesting period of 4.75 years commencing on the date of
acquisition. We expect this charge to be approximately $527,000 per quarter for
the next eighteen quarters, or $2.1 million annually.
Prior to our acquisition of Adjacency in March 1999, Adjacency granted
stock options at below fair market value. The options were granted in November
of 1998 with a three-year vesting schedule commencing on the date of employment.
A charge of approximately $1.7 million in the first quarter of 1999 was the
result of change-in-control provisions. We expect the amount of this charge to
be approximately $82,000 per quarter for the next three quarters.
Acquisition Costs
We incurred a charge of approximately $2.3 million in 1999 for costs
associated with the Adjacency acquisition, which consisted primarily of
investment banking, accounting and legal fees.
Other Expense
In 2000, we recorded $1.3 million in charges to write-down certain
investments we made in certain businesses because we considered the decline in
the value of these investments to be other than temporary.
Interest Income
Interest income for 2000 and 1999 was derived primarily from investment of
the proceeds from our public stock offerings, which proceeds were invested
primarily in tax-exempt, short-term municipal bonds, commercial paper and U.S.
government securities. The increase in interest income for the year ended
December 31, 2000 was primarily due to the investment of the proceeds from the
follow-on public offering of our common stock in November 1999.
Provision for Income Taxes
Income tax expense represents combined federal and state income taxes at an
effective rate of 42% for 2000 and 38% for 1999. The increase in the effective
tax rate was due primarily to the non-deductible amortization expenses related
to the Human Code acquisition and to expansion into countries and states with
higher tax rates. We expect the effective tax rates to be higher than the
statutory rates in the future due to the non-deductible amortization charges.
Our effective tax rate may vary from period to period based on our future
expansion into areas with varying country, state, and local income tax rates,
deductibility of certain costs and expenses by jurisdiction and as a result of
acquisitions.
Equity in Net Loss from Unconsolidated Affiliates
Equity in net loss from unconsolidated affiliates for the years ended
December 31, 2000 and 1999 was approximately $878,000 and $157,000,
respectively. In October 2000, we acquired a 19% non-controlling equity interest
in DI, a Japanese company. In September 1999, we commenced a joint venture,
Sapient
19
22
S.p.A., in Milan, Italy, in which we have a 50% non-controlling interest. We use
the equity method of accounting for these investments. The increase in the
equity in net loss from unconsolidated affiliates was due to a full year of
operations for Sapient S.p.A., for which our share of their losses totaled
approximately $918,000, as compared to a partial year of operations in 1999,
offset by equity in net income from DI of approximately $40,000.
Minority Interest
Minority interest for the year ended December 31, 2000 was approximately
$95,000, related to the 12% interest in our Japanese subsidiary acquired by DI
in October 2000.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Revenues for 1999 increased 68% over revenues for 1998. The increase in
revenues was due to an increase in the number and size of client projects. In
1999, our five largest clients accounted for approximately 22% of our revenues
in the aggregate; no client accounted for more than 10% of such revenues and one
client accounted for more than 5% of such revenues. In 1998, our five largest
clients accounted for approximately 30% of our revenues in the aggregate; no
clients accounted for more than 10% of such revenues and four clients each
accounted for more than 5% of such revenues.
Project Personnel Costs
The increase in project personnel costs for the year ended December 31,
1999 was primarily due to an increase in the number of project personnel from
1,188 at December 31, 1998 to 1,666 at December 31, 1999. Project personnel
costs decreased slightly as a percentage of revenues to 48% in 1999 from 49% in
1998.
Selling and Marketing
Selling and marketing expenses increased as a percentage of revenues to 8%
in 1999 from 7% in 1998. The increase was primarily due to investments that we
made in a new brand identity during the second quarter of 1999 and also due to
an advertising campaign launched in the third quarter of 1999. Selling and
marketing personnel grew from 51 employees at December 31, 1998 to 82 employees
at December 31, 1999.
General and Administrative
The increase in general and administrative expenses for 1999 compared to
1998 was primarily due to an increase in the number of employees hired during
1999, an increase in occupancy expenses related to significant expansion of our
office space and increased depreciation costs related to our increased
investments in property and equipment. General and administrative personnel grew
from 253 employees at December 31, 1998 to 363 employees at December 31, 1999.
Our total headcount increased from 1,492 at December 31, 1998 to 2,111 at
December 31, 1999. Total occupancy at December 31, 1999 was approximately
613,000 square feet, compared to approximately 360,000 square feet at December
31, 1998. General and administrative costs as a percentage of revenues remained
constant at 25% for both 1999 and 1998.
Amortization of Intangible Assets
The increase in amortization of intangible assets costs for 1999 compared
to 1998 was primarily due to a full year of amortization expense for Studio
Archetype in 1999 compared to a partial year of expense in 1998. Also,
amortization expense increased due to the E.Lab acquisition in the fourth
quarter of 1999. Amortization periods range from four to seven years.
Stock-Based Compensation
Stock-based compensation consists of expenses associated with Adjacency
stock options that were granted prior to our acquisition of Adjacency at below
fair market value. The options were granted in
20
23
November of 1998 with a three-year vesting schedule commencing on the date of
employment. The charge in the fourth quarter of 1998 of approximately $4.5
million was the result of certain employees being substantially vested by
December 31, 1998. A charge of approximately $1.7 million in the first quarter
of 1999 was the result of change-in-control provisions.
Acquisition Costs
We incurred a charge of approximately $2.3 million in 1999 for costs
associated with the Adjacency acquisition, which consisted primarily of
investment banking, accounting and legal fees.
Interest Income
Interest income for 1999 and 1998 was derived primarily from investments of
the proceeds from our public stock offerings, which were invested in tax exempt,
short-term municipal bonds, commercial paper and U.S. government securities.
Provision for Income Taxes
Income tax expense represents combined federal and state income taxes at an
effective rate of 38% for 1999 and 48% for 1998. The higher effective rate in
1998 was the result of compensation expenses recorded by Adjacency in 1998,
which were not tax deductible by us. Our effective tax rate may vary from period
to period based on the Company's future expansion into areas with varying
country, state, and local income tax rates and deductibility of certain costs
and expenses by jurisdiction.
Equity in Net Loss from Unconsolidated Affiliates
Equity in net loss from unconsolidated affiliates for the year ended
December 31, 1999, was approximately $157,000. In September 1999, we commenced a
joint venture, Sapient S.p.A., in Milan, Italy. We use the equity method of
accounting for this investment in which we have a 50% non-controlling interest.
21
24
QUARTERLY FINANCIAL RESULTS
The following tables set forth a summary of our unaudited quarterly results
of operations for 2000 and 1999. In the opinion of management, this information
has been prepared on the same basis as the audited Consolidated Financial
Statements and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the quarterly information when read in conjunction with the audited Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. The quarterly operating results are not necessarily indicative of
future results of operations.
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................ $100,334 $125,769 $138,057 $139,179
Operating expenses:
Project personnel costs........... 48,575 60,321 68,183 72,200
Selling and marketing............. 7,885 7,769 7,986 10,263
General and administrative........ 25,253 33,753 38,132 38,286
Amortization of intangible
assets......................... 884 757 2,935 6,752
Stock-based compensation.......... 110 110 454 1,491
-------- -------- -------- --------
Total operating
expenses................ 82,707 102,710 117,690 128,992
-------- -------- -------- --------
Income from operations.............. 17,627 23,059 20,367 10,187
Other expense....................... -- -- -- (1,250)
Interest income..................... 2,473 2,768 3,248 3,189
-------- -------- -------- --------
Income before income taxes, net
equity loss from investees and
minority interest................. 20,100 25,827 23,615 12,126
Income taxes........................ 7,857 10,589 11,536 3,943
-------- -------- -------- --------
Income before net equity loss from
investees and minority interest... 12,243 15,238 12,079 8,183
Net equity loss from investees...... (353) (276) (93) (156)
Minority interest................... -- -- -- 95
-------- -------- -------- --------
Net income.......................... $ 11,890 $ 14,962 $ 11,986 $ 8,122
======== ======== ======== ========
Basic net income per share.......... $ 0.10 $ 0.13 $ 0.10 $ 0.07
======== ======== ======== ========
Diluted net income per share........ $ 0.09 $ 0.11 $ 0.09 $ 0.06
======== ======== ======== ========
22
25
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................. $57,793 $64,199 $73,029 $81,823
Operating expenses:
Project personnel costs............ 28,334 30,618 35,669 40,017
Selling and marketing.............. 3,974 5,411 5,927 6,117
General and administrative......... 14,648 16,219 17,527 20,994
Amortization of intangible
assets.......................... 569 519 462 734
Stock-based compensation........... 1,699 110 110 110
Acquisition costs.................. 2,340 -- -- --
------- ------- ------- -------
Total operating expenses... 51,564 52,877 59,695 67,972
------- ------- ------- -------
Income from operations............... 6,229 11,322 13,334 13,851
Interest income...................... 820 859 970 1,578
------- ------- ------- -------
Income before income taxes and net
equity loss from investee.......... 7,049 12,181 14,304 15,429
Income taxes......................... 2,770 4,495 5,436 5,805
------- ------- ------- -------
Income before net equity loss from
investee........................... 4,279 7,686 8,868 9,624
Net equity loss from investee........ -- -- -- (157)
------- ------- ------- -------
Net income........................... $ 4,279 $ 7,686 $ 8,868 $ 9,467
======= ======= ======= =======
Basic net income per share........... $ 0.04 $ 0.07 $ 0.08 $ 0.09
======= ======= ======= =======
Diluted net income per share......... $ 0.03 $ 0.06 $ 0.07 $ 0.07
======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
Revenues.............................. 100% 100% 100% 100%
Operating expenses:
Project personnel costs............. 48 48 49 52
Selling and marketing............... 8 6 6 7
General and administrative.......... 25 27 28 28
Amortization of intangible assets... 1 1 2 5
Stock-based compensation............ -- -- -- 1
--- --- --- ---
Total operating expenses.... 82 82 85 93
--- --- --- ---
Income from operations................ 18 18 15 7
Other expense......................... -- -- -- --
Interest income....................... 2 2 2 2
--- --- --- ---
Income before income taxes, net equity
loss from investees and minority
interest............................ 20 20 17 9
Income taxes.......................... 8 8 8 3
--- --- --- ---
Income before net equity loss from
investees and minority interest..... 12 12 9 6
--- --- --- ---
Net equity loss from investees........ -- -- -- --
Minority interest..................... -- -- -- --
Net income............................ 12% 12% 9% 6%
=== === === ===
23
26
AS A PERCENTAGE OF TOTAL REVENUES
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
Revenues.............................. 100% 100% 100% 100%
Operating expenses:
Project personnel costs............. 49 48 49 49
Selling and marketing............... 7 8 8 7
General and administrative.......... 25 25 24 26
Amortization of intangible assets... 1 1 1 1
Stock-based compensation............ 3 -- -- --
Acquisition costs................... 4 -- -- --
--- --- --- ---
Total operating expenses.... 89 82 82 83
--- --- --- ---
Income from operations................ 11 18 18 17
Interest income....................... 1 1 1 2
--- --- --- ---
Income before income taxes and net
equity loss from.................... 12 19 19 19
investee Income taxes................. 5 7 7 7
--- --- --- ---
Income before net equity loss from
investee............................ 7 12 12 12
Net equity loss from investee......... -- -- -- --
--- --- --- ---
Net income............................ 7% 12% 12% 12%
=== === === ===
LIQUIDITY AND CAPITAL RESOURCES
We have primarily funded our operations from cash flows generated from
operations and the proceeds from our initial and follow-on public stock
offerings. In addition, we have 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, 2001, 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 December 31, 2000, we had no bank
borrowings outstanding, letters of credit of $3.7 million were outstanding under
the agreement. There were no material capital commitments at December 31, 2000.
We invest predominantly in instruments that are highly liquid, investment
grade securities and have maturities of less than one year. At December 31,
2000, we had approximately $280.6 million in cash, cash equivalents and
short-term investments compared to $196.1 million at December 31, 1999.
Cash provided by operating activities was $101.7 million for the year ended
December 31, 2000. This resulted primarily from net income of $47.0 million, net
non-cash charges of $23.7 million, increases in accrued expenses and accrued
compensation of $13.0 million, increases in accrued income taxes payable of
$25.2 million, decreases in unbilled revenues on contracts of $7.4 million and
increases in other long term liabilities of $3.7 million, offset by increases in
accounts receivable of $12.6 million and increases of $6.1 million in prepaid
expenses and other current and non-current assets, all of which were principally
related to the overall growth of the Company. Our days sales outstanding for
accounts receivable has decreased from 81 days at December 31, 1999 to 47 days
at December 31, 2000 due to continued management focus.
Cash used in investing activities was $94.0 million for the year ended
December 31, 2000. This was due primarily to capital expenditures of $43.7
million for significant expansion of the Company's office space and computer
equipment purchases, purchases of short-term investments (net of maturities) of
$38.9 million, investments in and advances to affiliates of $8.0 million and
long term investments of $3.8 million.
Cash provided by financing activities was $38.4 million for the year ended
December 31, 2000 and was principally provided from the sale of common stock
through the Company's employee stock purchase plan and the exercise of stock
options under the Company's stock option plans.
In May 2000, we entered into a strategic alliance with Thomas Weisel
Capital Partners, L.P. (TWP) to help established companies create new businesses
to compete successfully in the new economy. We committed to invest up to $100.0
million in these new businesses, using funds from our existing cash and
24
27
short-term investment balances. There were no investments made with TWP as of
December 31, 2000. We are currently in the process of unwinding this alliance
with TWP after we mutually agreed with TWP that no investments were likely to be
made in the near future.
In addition to normal operating activities and capital expenditures, as a
result of the actions taken in March 2001, we have estimated that we will spend
approximately $30.0 to $35.0 million in cash for restructuring and other related
activities in the year ended December 31, 2001 and beyond.
We believe that the cash provided from operations, borrowings available
under our revolving line of credit, existing cash, cash equivalents and
short-term investments will be sufficient to meet our working capital, capital
expenditure, strategic alliance and restructuring requirements for at least the
next 18 months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This
statement was amended by the issuance of SFAS 137, "Deferral of the Effective
Date of FASB Statement No. 133", which changed the effective date of SFAS 133 to
all fiscal years beginning after June 15, 2000 (fiscal 2001 for the Company) and
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if so, the type of
hedge transaction. We anticipate that the adoption of SFAS 133 will not have a
material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 became effective during the three
months ended December 31, 2000. The implementation of SAB 101 did not have a
material effect on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we have any material market risk exposure with
respect to derivative or other financial instruments which would require
disclosure under this item.
25
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SAPIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants.......................... 27
Consolidated Balance Sheets................................. 29
Consolidated Statements of Income........................... 30
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 31
Consolidated Statements of Cash Flows....................... 32
Notes to Consolidated Financial Statements.................. 34
Financial Statement Schedule:
Reports of Independent Accountants on Financial Statement
Schedule............................................... 55
Schedule II -- Valuation and Qualifying Accounts and
Reserves............................................... 57
26
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Sapient Corporation:
In our opinion, the accompanying consolidated balance sheets as of December
31, 2000 and 1999 and the related consolidated statements of income, of changes
in stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Sapient Corporation and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 2001
27
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sapient Corporation:
We have audited the accompanying consolidated balance sheet (not shown
separately herein) of Sapient Corporation and subsidiaries as of December 31,
1998, and the related consolidated statements of income, stockholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sapient
Corporation and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
April 16, 1999
28
31
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 97,583 $ 51,582
Short-term investments.................................... 182,991 144,527
Accounts receivable, less allowance for doubtful accounts
of $5,433 and $1,246 for 2000 and 1999, respectively... 83,403 75,170
Unbilled revenues on contracts............................ 7,154 13,474
Prepaid expenses.......................................... 5,528 3,893
Other current assets...................................... 6,106 4,035
Deferred income taxes..................................... 8,167 1,311
-------- --------
Total current assets.............................. 390,932 293,992
Property and equipment, net................................. 56,672 23,591
Deferred income taxes....................................... -- 6,296
Intangible assets........................................... 144,956 16,582
Other assets................................................ 11,594 2,728
-------- --------
Total assets...................................... $604,154 $343,189
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,100 $ 4,437
Accrued expenses.......................................... 12,122 4,538
Acquisition payable....................................... 5,573 --
Accrued compensation...................................... 23,358 11,682
Income taxes payable...................................... 10,992 948
Deferred revenues on contracts............................ 18,320 15,136
-------- --------
Total current liabilities......................... 72,465 36,741
Deferred income taxes....................................... 451 --
Other long term liabilities................................. 4,930 1,489
-------- --------
Total liabilities................................. 77,846 38,230
-------- --------
Commitments and contingencies (Note 9)......................
Minority interest........................................... 908 --
Stockholders' equity:
Preferred stock, par value $0.01 per share, 5,000,000
shares authorized and none outstanding at December 31,
2000 and 1999.......................................... -- --
Common stock, par value $0.01 per share, 200,000,000
shares authorized, 121,373,675 and 114,947,078 shares
issued and outstanding at December 31, 2000 and 1999,
respectively........................................... 1,214 1,150
Additional paid-in capital................................ 423,935 240,400
Deferred compensation..................................... (10,058) (688)
Accumulated other comprehensive loss...................... (862) (114)
Retained earnings......................................... 111,171 64,211
-------- --------
Total stockholders' equity........................ 525,400 304,959
-------- --------
Total liabilities and stockholders' equity........ $604,154 $343,189
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
29
32
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $503,339 $276,844 $164,872
Operating expenses:
Project personnel costs (exclusive of stock-based
compensation of $1,397, $1,005 and $3,900 for 2000,
1999, and 1998, respectively)......................... 249,279 134,638 80,543
Selling and marketing (exclusive of stock-based
compensation of $95, $435 and $249 for 2000, 1999, and
1998, respectively)................................... 33,903 21,429 11,269
General and administrative (exclusive of stock-based
compensation of $673, $589 and $350 for 2000, 1999,
and 1998, respectively)............................... 135,424 69,388 41,675
Amortization of intangible assets........................ 11,328 2,284 687
Stock-based compensation................................. 2,165 2,029 4,499
In-process research and development...................... -- -- 11,100
Acquisition costs........................................ -- 2,340 --
-------- -------- --------
Total operating expenses......................... 432,099 232,108 149,773
-------- -------- --------
Income from operations................................... 71,240 44,736 15,099
Other expense.............................................. (1,250) -- --
Interest income............................................ 11,678 4,227 2,925
-------- -------- --------
Income before income taxes, net equity loss from
investees and minority interest....................... 81,668 48,963 18,024
Income taxes............................................... 33,925 18,506 8,660
-------- -------- --------
Income before net equity loss from investees and minority
interest.............................................. 47,743 30,457 9,364
Net equity loss from investees............................. (878) (157) --
Minority interest.......................................... 95 -- --
-------- -------- --------
Net income............................................ $ 46,960 $ 30,300 $ 9,364
======== ======== ========
Basic net income per share................................. $ 0.39 $ 0.27 $ 0.09
======== ======== ========
Diluted net income per share............................... $ 0.35 $ 0.24 $ 0.08
======== ======== ========
Weighted average common shares............................. 119,191 111,418 104,456
Weighted average common share equivalents.................. 14,573 14,208 10,348
-------- -------- --------
Weighted average common shares and common share
equivalents.............................................. 133,764 125,626 114,804
======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
30
33
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL COMPRE- OTHER TOTAL
---------------- PAID-IN DEFERRED HENSIVE COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION INCOME INCOME (LOSS) EARNINGS EQUITY
------- ------ ---------- ------------ ------- ------------- -------- -------------
Balance at December 31,
1997........................ 99,988 $1,000 $ 56,721 $ -- -- $ -- $ 24,586 $ 82,307
Shares issued under stock
option and purchase
plans..................... 3,832 38 5,074 -- -- -- -- 5,112
Proceeds from public
offering.................. 2,612 26 29,065 -- -- -- -- 29,091
Distributions to
stockholders.............. -- -- -- -- -- -- (39) (39)
Common stock issued for
acquisition of Studio
Archetype................. 1,992 20 22,780 -- -- -- -- 22,800
Tax benefit of disqualifying
dispositions of stock
options................... -- -- 1,654 -- -- -- -- 1,654
Deferred compensation....... -- -- 6,677 (2,178) -- -- -- 4,499
Comprehensive income:
Net income.................. -- -- -- -- $9,364 -- 9,364 9,364
Other comprehensive income:
Currency translation
adjustments............. -- -- -- -- 26 26 -- 26
-------
Comprehensive income...... 9,390
------- ------ -------- -------- ======= ----- -------- --------
Balance at December 31,
1998........................ 108,424 1,084 121,971 (2,178) -- 26 33,911 154,814
Shares issued under stock
option and purchase
plans..................... 4,117 42 23,944 -- -- -- -- 23,986
Proceeds from public
offering.................. 2,230 22 83,254 -- -- -- -- 83,276
Common stock issued for
acquisition of E.Lab...... 176 2 4,136 -- -- -- -- 4,138
Tax benefit of disqualifying
dispositions of stock
options................... -- -- 6,556 -- -- -- -- 6,556
Amortization of deferred
compensation.............. -- -- 539 1,490 -- -- -- 2,029
Comprehensive income:
Net income.................. -- -- -- -- 30,300 -- 30,300 30,300
Other comprehensive income:
Currency translation
adjustments............. -- -- -- -- (44) (44) -- (44)
Net unrealized loss on
short-term
investments............. -- -- -- -- (96) (96) -- (96)
-------
Comprehensive income...... 30,160
------- ------ -------- -------- ======= ----- -------- --------
Balance at December 31,
1999........................ 114,947 1,150 240,400 (688) -- (114) 64,211 304,959
Shares issued under stock
option and purchase
plans..................... 4,919 49 36,890 -- -- -- -- 36,939
Change in interest in
subsidiary................ -- -- 347 -- -- -- -- 347
Common stock issued for
acquisition of Human
Code...................... 1,508 15 131,098 (11,185) -- -- -- 119,928
Tax benefit of disqualifying
dispositions of stock
options................... -- -- 15,200 -- -- -- -- 15,200
Amortization of deferred
compensation.............. -- -- -- 1,815 -- -- -- 1,815
Comprehensive income:
Net income.................. -- -- -- -- 46,960 -- 46,960 46,960
Other comprehensive income:
Currency translation
adjustments............. -- -- -- -- (422) (422) -- (422)
Net unrealized loss on
investments............. -- -- -- -- (326) (326) -- (326)
-------
Comprehensive income...... $46,212
------- ------ -------- -------- ======= ----- -------- --------
Balance at December 31,
2000........................ 121,374 $1,214 $423,935 $(10,058) $(862) $111,171 $525,400
======= ====== ======== ======== ===== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
31
34
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- --------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income.............................................. $ 46,960 $ 30,300 $ 9,364
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss recognized on write-down of investments............ 1,250 -- --
Depreciation and amortization........................... 13,949 8,007 3,537
In-process research and development..................... -- -- 11,100
Amortization of intangible assets....................... 11,328 2,284 687
Deferred income taxes................................... (7,923) (2,874) (6,637)
Allowance for doubtful accounts......................... 6,347 1,240 200
Stock-based compensation................................ 2,165 2,029 4,499
Acquisition costs....................................... -- 2,340 --
Equity received for services rendered................... (2,076) -- --
Net equity loss from investees.......................... 878 157 --
Minority interest in net loss of consolidated
subsidiary............................................. (95) -- --
Changes in operating assets and liabilities, net of
acquired assets and liabilities:
Increase in accounts receivable..................... (14,767) (32,982) (23,644)
Decrease (increase) in unbilled revenues on
contracts........................................... 7,371 (3,019) (651)
(Increase) decrease in prepaid expenses............. (1,181) (3,447) 321
Increase in other current assets.................... (2,071) (842) (2,383)
(Increase) decrease in other assets................. (2,807) (39) 70
(Decrease) increase in accounts payable............. (2,730) 3,172 395
Increase (decrease) in accrued expenses............. 1,693 (998) (1,241)
Increase in accrued compensation.................... 11,320 3,049 4,137
Increase in income taxes payable.................... 25,244 5,287 2,493
Increase in other long term liabilities............. 3,730 181 310
Increase in deferred revenues on contracts.......... 3,080 4,229 3,365
--------- --------- --------
Net cash provided by operating activities....... 101,665 18,074 5,922
--------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment...................... (43,748) (16,987) (9,307)
Net cash received from acquisition...................... 435 15 561
Investments in and advances to affiliates............... (8,036) (1,732) --
Long term investments................................... (3,751) (600) --
Cash paid for acquisition costs......................... -- (2,340) --
Sales and maturities of short-term investments.......... 177,850 123,708 133,374
Purchases of short-term investments..................... (216,774) (202,231) (147,232)
--------- --------- --------
Net cash used in investing activities........... (94,024) (100,167) (22,604)
--------- --------- --------
Cash flows from financing activities:
Proceeds from stockholders for notes receivable......... 71 3,826 3,024
Payments to stockholders for notes receivable........... -- (3,133) (3,788)
Proceeds from stock option and purchase plans........... 36,939 23,986 5,112
Net proceeds from follow-on public offering............. -- 83,276 29,091
Distribution to stockholders............................ -- -- (39)
Contributions from minority interest of consolidated
subsidiary............................................. 1,350 -- --
Principal payments on notes payable to bank............. -- -- (3,162)
--------- --------- --------
Net cash provided by financing activities....... 38,360 107,955 30,238
--------- --------- --------
Increase in cash and cash equivalents....................... 46,001 25,862 13,556
Cash and cash equivalents, beginning of year................ 51,582 25,720 12,164
--------- --------- --------
Cash and cash equivalents, end of year...................... $ 97,583 $ 51,582 $ 25,720
========= ========= ========
Schedule of non-cash operating activities:
Tax benefit of disqualifying dispositions of stock
options................................................. $ 15,200 $ 6,556 $ 1,654
========= ========= ========
32
35
YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- --------- --------
(IN THOUSANDS)
Supplemental disclosures of cash flow information:
Net assets and liabilities recognized upon acquisitions:
Cash and cash equivalents............................... $ 435 $ 15 $ 811
Accounts receivable..................................... 1,166 631 2,578
Unbilled revenues on contracts.......................... 1,051 149 629
Prepaid expenses and other current assets............... 454 8 34
Property and equipment.................................. 3,282 164 2,077
Other assets............................................ 137 14 100
Accounts payable........................................ 393 84 445
Accrued expenses........................................ 9,258 1,589 725
Accrued compensation.................................... 356 -- 880
Accrued income taxes payable............................ -- -- 270
Deferred revenues on contracts.......................... 104 -- 1,134
Notes payable to bank................................... -- -- 2,862
Other long term liabilities............................. 133 -- 42
Accrued acquisition costs............................... $ 2,271 $ 875 $ 2,335
Supplemental disclosures of non-cash financing activities:
Common stock issued for acquisition of Studio Archetype... -- -- 22,800
Common stock issued for acquisition of E.Lab.............. -- 4,138 --
Common stock and options issued for acquisition of Human
Code.................................................... 131,113 -- --
Acquisition payable for TLG............................... $ 5,573 -- --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
33
36
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Sapient Corporation (Sapient or the Company) is a leading business and
technology consultancy that helps large companies discover and harness the
competitive advantages that are possible in an increasingly digital, networked
world. The Company is focused on delivering business value to their clients by
understanding the key business problems they face and by solving those problems.
The Company currently has offices in Cambridge, Massachusetts, New York, San
Francisco, Chicago, Atlanta, Austin, Dallas, Los Angeles, Washington D.C.,
Denver, Houston, Dusseldorf, London, Munich, New Delhi, Tokyo, and Toronto.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned and majority-owned, controlled subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
Certain amounts in previously issued financial statements have been
reclassified to conform to the current presentation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates relied upon in preparing these financial
statements include estimated costs to complete long term contracts, allowances
for bad debts, estimated fair value of equity instruments received for services
and from investments made and whether any decline in such fair value is other
than temporary, and expected future cash flows used to evaluate the
recoverability of long-lived assets. Although the Company regularly assesses
these estimates, actual results could differ from those estimates. Changes in
estimates are recorded in the period in which they become known.
(c) Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or
less are considered cash equivalents. Cash and cash equivalent balances consist
of deposits and repurchase agreements with a large U.S. commercial bank and
high-grade commercial paper. At December 31, 2000 and 1999, the Company has
classified its cash equivalent investments, totaling approximately $2.0 million
and $19.2 million respectively, as available-for-sale. These investments are
stated at amortized costs, which approximates fair value.
(d) Short-Term Investments
Short-term investments are available-for-sale securities which are recorded
at fair market value. The difference between amortized cost and fair market
value, net of tax effect, is shown as a separate component of stockholders'
equity. The cost of securities available-for-sale is adjusted for amortization
of premiums and discounts to maturity. Interest and amortization of premiums and
discounts for all securities are included in interest income. Realized gains and
losses from sales of available-for-sale securities were not material for any
period presented.
34
37
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Financial Instruments and Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. No customer accounted for greater than 10
percent of total revenues in 2000, 1999 or 1998. One customer accounted for 14
percent of accounts receivable at December 31, 1998.
The fair market values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses at both December 31, 2000 and 1999
approximate their carrying amounts.
(f) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related assets,
which range from three to five years. Leasehold improvements are amortized over
the lesser of the estimated useful lives of the assets or the lease term.
(g) Goodwill and Other Purchased Intangibles
Goodwill and other purchased intangibles are being amortized on a
straight-line basis over estimated useful lives ranging from three to seven
years.
(h) Impairment of Long-Lived Assets
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the carrying value of intangible assets and other long-lived
assets is reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest impairment. If
such circumstances exist, the Company evaluates the carrying value of long-lived
assets to determine if impairment exists based upon estimated undiscounted
future cash flows over the remaining useful life of the assets. In determining
expected future cash flows, assets are grouped at the lowest level for which
cash flows are identifiable and independent of cash flows from other asset
groups. To date, no such impairment has been indicated. Should there be an
impairment in the future, the Company will measure the amount of the impairment,
if any, based on the fair value of the impaired assets. The cash flow estimates
that are used contain management's best estimates, using appropriate and
customary assumptions and projections at the time.
(i) Other Assets
Other assets include long term investments recorded under both the cost and
equity methods of accounting. The Company uses the equity method of accounting
for investments when it has an ownership interest of 20% to 50% or the ability
to exercise significant influence over an investee's operating activities.
Investments accounted for under the equity method and cost method amounted to
approximately $3.8 million and $4.4 million at December 31, 2000, respectively,
and approximately $1.6 million and $600,000 at December 31, 1999, respectively.
The Company classifies all cost method equity investments of publicly
traded companies as available-for-sale. Available-for-sale investments are
reported at fair value as of each balance sheet date. Fair value is determined
based on market quotations. Investments in equity securities for which fair
value is not readily determinable are carried at cost. If any adjustment to fair
value reflects a decline in the value of the
35
38
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment below cost, the Company considers available evidence, including the
duration and extent to which the market value has been less than cost, to
evaluate the extent to which the decline is "other than temporary". If the
decline is considered other than temporary, the cost basis of the investment is
written down to fair value as a new cost basis and the amount of the writedown
is included in the Company's consolidated statement of income. For the year
ended December 31, 2000, the Company recorded $786,000 of unrealized holding
losses in stockholders' equity. For the year ended December 31, 2000, the
Company recorded $1.3 million in charges to write down certain investments
because the decline in the value of these investments was considered to be other
than temporary.
(j) Change in Interest Gains and Losses
The Company includes gains and losses on changes in its interest in the
Company's subsidiaries and equity method investees in net income unless the
change in interest is a gain and the subsidiary or equity method investee is a
research and development, start-up or development stage company or an entity
whose viability as a going-concern is under consideration. In those situations,
the Company accounts for the change in interest as a component of stockholders'
equity.
(k) Revenue Recognition
All revenue generated from fixed-price contracts is recognized on the
percentage-of-completion method of accounting based on the ratio of costs
incurred to total estimated costs. All revenue generated from time and material
contracts is recognized as services are provided. In some instances during 2000,
services were provided to clients in exchange for equity instruments of the
client. The Company measures the fair value of the equity instrument on the date
the parties come to a mutual understanding of the terms of the arrangement and a
commitment for performance by the Company to earn the equity instruments is
reached, or when the equity is earned, whichever occurs earlier. For the year
ended December 31, 2000, $2.1 million of equity was received for services
rendered. Subsequent changes in the value of equity are measured as indicated in
the "other assets" policy above.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
are determined. Unbilled revenues on contracts comprise costs plus earnings on
contracts in excess of contractual billings on such contracts. Billings in
excess of revenue recognized are classified as deferred revenues.
(l) Research and Development Costs
Substantially all research and development activities of the Company
(except those incurred in connection with purchased business combinations) have
been pursuant to customer contracts and, accordingly, have been charged to
project costs as incurred. The Company has not capitalized any internally
developed software development costs since such costs have not been significant.
(m) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 (SFAS 123) requires
that companies either recognize compensation expense for grants of stock, stock
options, and other equity instruments based on fair value, or provide pro forma
disclosure of net income and net income per share in the notes to the financial
statements. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
under SFAS 123 for the Company's stock option plans, and footnote disclosure is
provided in Note 10.
The stock-based compensation expense appearing in the financial statements
relates to the Human Code, Inc, (Human Code), The Launch Group
Aktiengesellschaft (TLG) and Adjacency, Inc. (Adjacency)
36
39
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisitions. The Company assumed the Human Code options granted to Human Code
employees which vest ratably over periods up to four years. Deferred
compensation expense relates to the intrinsic value of the unvested options. TLG
employees will be granted $10.0 million of restricted Sapient stock, to be
issued in 2001. The $10.0 million is being amortized over a period of 4.75 years
commencing on the date of acquisition. Adjacency stock options were granted,
prior to the acquisition by the Company, at below fair market value. The
deferred compensation is being amortized on a straight-line basis over the
vesting period of three years. Certain employees completed their vesting upon
the acquisition of Adjacency described in Note 10(f).
(n) Advertising Costs
The Company expenses the cost of advertising as incurred. Such costs are
included in selling and marketing in the consolidated statements of income and
totaled approximately $1.1 million, $542,000 and $463,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
(o) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(p) Earnings Per Share
Under Statement of Financial Accounting Standards No. 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 stock options.
(q) Comprehensive Income
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting comprehensive income and its components in
the body of the financial statements. Comprehensive income includes net income
as currently reported under generally accepted accounting principles and also
considers the effect of additional economic events that are not required to be
recorded in determining net income but are rather reported as a separate
component of stockholders' equity. The Company reports foreign currency
translation gains and losses and unrealized gains and losses on investments as a
component of comprehensive income.
(r) Segment Reporting
The Company engages in business activities in one operating segment, which
provides business and technology consulting and solutions, primarily on a
fixed-price, fixed-timeframe basis.
37
40
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Data for the geographic regions in which the Company operates is presented
below:
2000 1999 1998
-------- -------- --------
Revenues:
North America....................................... $459,460 $265,187 $164,124
International....................................... 43,879 11,657 748
-------- -------- --------
Total Revenues................................... $503,339 $276,844 $164,872
======== ======== ========
Long-lived assets:
North America....................................... $196,367 $ 37,536 $ 27,945
International....................................... 5,261 2,637 231
-------- -------- --------
Total long-lived assets.......................... $201,628 $ 40,173 $ 28,176
======== ======== ========
During the year ended December 31, 2000, Sapient Ltd, the Company's UK
subsidiary, had $33.8 million of revenue, or 77% of total international
revenues.
(s) Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This
statement was amended by the issuance of SFAS 137, "Deferral of the Effective
Date of FASB Statement No. 133", which changed the effective date of SFAS 133 to
all fiscal years beginning after June 15, 2000 and requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if so, the type of hedge transaction. Management of the
Company anticipates that the adoption of SFAS 133 will not have a material
impact on the Company's financial position or its results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 became effective during the three
months ended December 31, 2000. The implementation of SAB 101 did not have a
material effect on the Company's financial position or its results of
operations.
(3) SHORT-TERM INVESTMENTS
At December 31, 2000 and 1999, all of the Company's short-term investments
were classified as available-for-sale. Short-term investments are carried on the
balance sheet at their fair market value.
The following tables summarize the Company's short-term investments in
thousands of dollars:
DECEMBER 31, 2000
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Commercial paper.............. $ 29,554 $ -- $ (13) $ 29,541
U.S. government agencies...... 9,560 11 -- 9,571
Municipal notes and bonds..... 137,923 336 (34) 138,225
Corporate debt securities..... 5,590 64 -- 5,654
-------- ---- ----- --------
Short-term investments...... $182,627 $411 $ (47) $182,991
======== ==== ===== ========
38
41
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Commercial paper.............. $ 16,840 $ 4 $ (2) $ 16,842
U.S. government agencies...... 68,780 -- (35) 68,745
Municipal notes and bonds..... 55,903 16 (97) 55,822
Corporate debt securities..... 3,100 18 -- 3,118
-------- --- ----- --------
Short-term investments...... $144,623 $38 $(134) $144,527
======== === ===== ========
Contractual maturities of short-term investments at December 31, 2000:
AMORTIZED MARKET
COST VALUE
--------- --------
Less than one year..................................... $ 93,804 $ 93,947
Due in 1-2 years....................................... 25,334 25,502
Due in 2-5 years....................................... 8,584 8,592
Due after 5 years...................................... 54,905 54,950
-------- --------
Short-term investments............................... $182,627 $182,991
======== ========
Actual maturities may differ from contractual maturities because some
borrowers have the right to call or prepay obligations. Gross realized gains and
losses on the sale of securities are calculated using the specific
identification method and were not material to the Company's consolidated
results of operations for the years ended 2000, 1999 and 1998.
(4) PROPERTY AND EQUIPMENT
The cost and accumulated depreciation of property and equipment at December
31, 2000 and 1999 are as follows:
ESTIMATED
USEFUL
2000 1999 LIFE
------- ------- -------------
(IN THOUSANDS)
Lesser of
lease term or
Leasehold improvements.................... $25,270 $10,995 life of asset
Furniture and fixtures.................... 8,291 4,282 5 years
Office equipment.......................... 8,765 4,860 5 years
Computer equipment........................ 46,959 21,959 3 years
------- -------
89,285 42,096
Less accumulated depreciation........... (32,613) (18,505)
------- -------
Property and equipment, net............... $56,672 $23,591
======= =======
Depreciation and amortization expense was approximately $14.0 million, $8.0
million and $3.5 million for the years ended 2000, 1999 and 1998, respectively.
39
42
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INTANGIBLE ASSETS
Certain intangible assets were acquired in connection with the Company's
acquisitions which were accounted for as purchases. The following table
summarizes the cost and accumulated amortization of intangible assets at
December 31, 2000 and 1999:
ESTIMATED
USEFUL
2000 1999 LIFE
-------- ------- -------------
(IN THOUSANDS)
Marketing assets and customer lists...... $ 4,100 $ 3,800 7 Years
Assembled work force and employment
agreements............................. 5,278 2,203 4 Years
Developed technology..................... 16,161 -- 3 Years
Goodwill................................. 133,716 13,550 7 Years
-------- -------
159,255 19,553
Less accumulated amortization............ (14,299) (2,971)
-------- -------
Intangible assets, net................... $144,956 $16,582
======== =======
(6) INVESTMENT AND MINORITY INTEREST
On October 25, 2000, the Company acquired a 19% interest in Dream Incubator
(DI) for approximately $3.7 million in cash. DI is a management consulting
company, developing strategies for e-businesses in Japan. Under the terms of the
Company's investment agreement with DI, the Company has one seat on DI's board
of directors, with special voting rights and other privileges and uses the
equity method of accounting for this investment. On October 25, 2000, DI
acquired a 12% equity interest in Sapient KK, the Company's Japanese subsidiary,
for $1.3 million in cash. The excess cash payment of $347,000 over the Company's
carrying value of Sapient KK was recorded as a component of stockholders'
equity, due to the start up nature of Sapient KK. DI will provide Sapient KK
with start up services including strategy, temporary management, recruiting and
other services. Prior to this transaction, the Company owned 100% of this
subsidiary. DI may put up to 50% of their shares in Sapient KK on the second
through fourth anniversary of the agreement to the Company for the then fair
value. The Company has similar put rights on 50% of their shares of DI.
(7) BANK LOAN FACILITY
The Company has a $5.0 million loan facility with a bank, which expires on
June 30, 2001. Borrowings under this agreement bear interest at the bank's prime
rate. The Company had no borrowings under this facility at December 31, 2000 or
1999, letters of credit of $3.7 million and $975,000 were outstanding under the
agreement at December 31, 2000 and 1999, respectively. The facility contains
various financial covenants, including limitations on the payment of cash
dividends and maintenance of certain financial ratios.
40
43
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The provision for income taxes consists of the following:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Federal, current.............................. $31,320 $19,166 $11,768
State, current................................ 4,741 2,131 3,529
Foreign, current.............................. 1,534 83 --
------- ------- -------
Subtotal, current income tax provision... 37,595 21,380 15,297
------- ------- -------
Federal, deferred............................. (3,174) (2,816) (4,902)
State, deferred............................... (496) (440) (1,353)
Foreign, deferred............................. -- 382 (382)
------- ------- -------
Subtotal, deferred income tax benefit.... (3,670) (2,874) (6,637)
------- ------- -------
Income tax provision.......................... $33,925 $18,506 $ 8,660
======= ======= =======
The income tax benefits of the employee stock option compensation expense
for tax purposes in excess of amounts recognized for financial reporting
purposes credited to additional paid-in capital was $15.2 million, $6.6 million
and $1.7 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
Income tax expense for the years ended December 31, 2000, 1999 and 1998
differed from the amounts computed by applying the U.S. statutory income tax
rate to pre-tax income as a result of the following:
2000 1999 1998
---- ---- ----
Statutory income tax rate............................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit............ 5.2 5.6 6.3
Non-deductible goodwill............................... 2.4 -- --
S Corporation loss (income)........................... -- -- 9.3
Tax exempt interest................................... (2.0) (1.4) (4.1)
Other, net............................................ 0.9 (1.4) 1.5
---- ---- ----
Effective income tax rate............................. 41.5% 37.8% 48.0%
==== ==== ====
41
44
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000 and 1999, deferred income tax assets and liabilities
resulted from differences in the recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of these temporary
differences are presented below:
2000 1999
------- -------
(IN THOUSANDS)
Deferred income tax assets, current:
Deferred revenue....................................... $ 7,560 $ 3,811
Allowance for doubtful accounts........................ 1,951 464
Other reserves and accruals............................ 1,395 1,138
Unbilled revenue....................................... (2,739) (4,102)
------- -------
Net deferred income tax assets, current........... $ 8,167 $ 1,311
======= =======
Deferred income tax assets (liabilities), non-current:
Property and equipment................................... $ 2,395 $ 813
In-process research and development...................... 3,793 4,192
Deferred taxes relating to the use of cash method of
accounting for tax purposes prior to 1996.............. -- (75)
Goodwill and other intangibles........................... (5,430) 489
Deferred taxes relating to partnership investment........ (1,310) --
Other.................................................... 101 56
Deferred compensation.................................... -- 821
------- -------
Net deferred income tax assets (liabilities),
non-current.................................... $ (451) $ 6,296
======= =======
In assessing the realizability of deferred income tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The Company has sufficient
taxable income in the federal carryback period and anticipates sufficient future
taxable income over the periods in which the differences which created the
deferred income tax assets are deductible, therefore, the ultimate realization
of deferred income tax assets for federal and state income tax purposes is
considered more likely than not.
Total income taxes paid in 2000, 1999 and 1998 were approximately $16.4
million, $16.0 million and $12.4 million, respectively.
(9) COMMITMENTS AND CONTINGENCIES
The Company maintains its executive office in Cambridge, Massachusetts and
operating offices in several locations throughout the United States and abroad.
Future minimum rental commitments under noncancelable operating leases with
initial or remaining terms in excess of one year were as follows at December 31,
2000:
(IN THOUSANDS)
--------------
2001........................................................ $31,028
2002........................................................ 34,333
2003........................................................ 32,433
2004........................................................ 27,327
2005........................................................ 22,806
Thereafter.................................................. 95,785
42
45
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $25.6 million, $14.4 million and $8.9 million, respectively.
The Company has issued letters of credit with a bank in the aggregate
amount of approximately $3.7 million as security deposits for certain of its
lease commitments.
The Company has certain contingent liabilities that arise in the ordinary
course of its business activities. The Company accrues contingent liabilities
when it is probable that future expenditures will be made and such expenditures
can be reasonably estimated. The Company is subject to various legal claims
totaling approximately $4.0 million which have arisen in the ordinary course of
its business. The Company believes that these claims are without merit and
intends to defend them vigorously. Although the Company does not consider an
unfavorable outcome to these claims probable, the Company cannot accurately
predict the ultimate outcome of these claims or the potential loss, if any.
(10) STOCK PLANS
(a) 1992 Stock Option Plan
During 1992, the Company approved the 1992 Stock Plan (the 1992 Plan) for
its employees. The 1992 Plan provided for the Board of Directors to grant stock
options, stock purchase authorizations and stock bonus awards up to an aggregate
of 20,000,000 shares of non-voting common stock. Since consummation of its
initial public offering of common stock in April 1996, no further grants or
awards may be made pursuant to the 1992 Stock Plan (previously outstanding
awards remain outstanding but are exercisable for voting common stock).
Most stock options granted under the 1992 Plan qualify as Incentive Stock
Options (ISO) under Section 422 of the Internal Revenue Code. The price at which
shares may be purchased with an option was specified by the Board at the date
the option was granted, but in the case of an ISO, was not less than the fair
market value of the Company's common stock on the date of grant. The duration of
any option was specified by the Board, but no option designated as an ISO can be
exercised beyond ten years from the date of grant. Stock options granted under
the 1992 Plan generally become exercisable over a four-year period, are
nontransferable, and expire six years after the date of grant (subject to
earlier termination in the event of the termination of the optionee's employment
or other relationship with the Company).
(b) 1996 Equity Stock Incentive Plan
The Company's 1996 Equity Stock Incentive Plan (the 1996 Plan) authorizes
the Company to grant options to purchase common stock, to make awards of
restricted common stock, and to issue certain other equity-related awards to
employees and directors of, and consultants to, the Company. The total number of
shares of common stock which may be issued under the 1996 Plan is 19,200,000
shares. The 1996 Plan is administered by the Compensation Committee of the Board
of Directors, which selects the persons to whom stock options and other awards
are granted and determines the number of shares, the exercise or purchase
prices, the vesting terms and the expiration dates of options granted.
Non-qualified stock options may be granted at exercise prices which are above,
equal to or below the grant date fair market value of the common stock. The
exercise price of options qualifying as Incentive Stock Options may not be less
than the fair market value of the common stock on the grant date. Stock options
granted under the 1996 Plan are nontransferable, generally become exercisable
over a four-year period and expire ten years after the date of grant (subject to
earlier termination in the event of the termination of the optionee's employment
or other relationship with the Company).
(c) 1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the Purchase Plan)
authorizes the issuance of up to 2,640,000 shares of common stock to
participating employees through a series of semi-annual offerings. The
43
46
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum number of shares available in each offering is 200,000 shares (plus any
unpurchased shares available from previous offerings) for the first six
offerings, 240,000 shares (plus any unpurchased shares available from previous
offerings) for the seventh through ninth offerings, 480,000 shares (plus any
unpurchased shares available from previous offerings) for the tenth offering,
and 120,000 shares (plus any unpurchased shares available from previous
offerings) for the eleventh and twelfth offerings. An employee becomes eligible
to participate in the Purchase Plan when he or she is regularly employed by the
Company for at least 20 hours a week and for more than five months in a calendar
year on the first day of the applicable offering. The price at which employees
may purchase common stock in an offering is 85 percent of the closing price of
the common stock on the Nasdaq National Market on the day the offering commences
or on the day the offering terminates, whichever is lower. Approximately 58
percent, 55 percent and 61 percent of eligible employees participated in at
least one of the two offerings under the Purchase Plan during the years ended
December 31, 2000, 1999 and 1998, respectively. Under the Purchase Plan, the
Company sold 377,044, 387,680 and 422,536 shares of common stock in 2000, 1999
and 1998, respectively.
(d) 1996 Director Stock Option Plan
The Company's 1996 Director Stock Option Plan (the Director Plan)
authorizes the issuance of 240,000 shares of common stock. Each non-employee
director elected to the Board of Directors after the adoption of the Director
Plan will, upon his or her election, automatically be granted an option to
purchase 40,000 shares of common stock at an exercise price equal to the fair
market value of the Company's common stock on the grant date. Options granted
pursuant to the Directors Plan vest in four equal annual installments commencing
on the first anniversary of the date of grant and generally expire ten years
after the date of grant. As of December 31, 2000, options to purchase 40,000
shares of common stock had been granted, and as of December 31, 1999, no options
had been granted, under the Director Plan.
(e) 1998 Stock Incentive Plan
The Company's 1998 Equity Stock Incentive Plan (the 1998 Plan) authorizes
the Company to grant options to purchase common stock, to make awards of
restricted common stock, and to issue certain other equity-related awards to
employees and directors of, and consultants to, the Company. The total number of
shares of common stock which may be issued under the 1998 Plan is 18,000,000
shares. The 1998 Plan is administered by the Compensation Committee of the Board
of Directors, which selects the persons to whom stock options and other awards
are granted and determines the number of shares, the exercise or purchase
prices, the vesting terms and the expiration date. Non-qualified stock options
may be granted at exercise prices which are above, equal to or below the grant
date fair market value of the common stock. The exercise price of options
qualifying as Incentive Stock Options may not be less than the fair market value
of the common stock on the grant date. Stock options granted under the 1998 Plan
are nontransferable, generally become exercisable over a four-year period and
expire ten years after the date of grant (subject to earlier termination in the
event of the termination of the optionee's employment or other relationship with
the Company).
(f) Adjacency, Inc. 1998 Stock Option Plan
In connection with the acquisition of Adjacency, the Company assumed the
outstanding options granted under the Adjacency 1998 Stock Option Plan (the
Adjacency Plan). The Adjacency Plan was originally adopted by Adjacency in 1998
and provided for the grant of stock options up to an aggregate of 4,000,000
shares of Class B common stock of Adjacency. In November 1998, prior to the
acquisition, Adjacency had granted a total of 437,000 options to its employees
at exercise prices between $2.36 and $12.15 per share. The shares vested ratably
over three years starting on the date of employment, except for certain
employees who were granted accelerated vesting upon a change-in-control of
Adjacency. The total compensation charge to be taken over the vesting period is
approximately $7.2 million, since the options were granted at below fair market
value. The charge in the fourth quarter of 1998 of approximately $4.5 million
was the result of certain employees being substantially vested by December 31,
1998. A charge of approximately $1.7 million in the
44
47
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first quarter of 1999 was the result of the change-in-control provisions. The
Company expects the compensation expense to be approximately $82,000 per quarter
for the next three quarters. Stock-based compensation expense, relating to these
options, was approximately $440,000 and $2.0 million for the years ended
December 31, 2000 and 1999, respectively. As a result of the acquisition, the
Company has assumed the obligations related to options to purchase 253,016
shares of the Company's common stock. No further grants may be made pursuant to
the Adjacency Plan, and previously outstanding options remain outstanding, and
are exercisable for shares of the Company's common stock.
(g) Human Code 1994 Stock Option/Stock Issuance Plan
In connection with the acquisition of Human Code, the Company assumed the
outstanding options granted under the Human Code 1994 Stock Option/Stock
Issuance Plan (the Human Code Plan). Prior to the acquisition, options to
purchase approximately 2,864,000 shares of Human Code common stock were
outstanding at exercise prices between $0.10 and $3.25 per share. As a result of
the acquisition, the Company replaced the outstanding Human Code stock options
with options to purchase approximately 471,000 shares of the Company's common
stock. The options will vest ratably over periods up to four years. The Company
recorded deferred compensation of $11.2 million related to the intrinsic value
of the unvested options. Stock-based compensation expense, relating to these
options, was approximately $1.4 million for the year ended December 31, 2000.
The deferred compensation will be charged to operations at the rate of
approximately $1.0 million per quarter for the next six quarters, and $3.8
million in total thereafter, spread over approximately 8 quarters. No further
grants may be made pursuant to the Human Code Plan.
A summary of the status of the Company's six stock option plans as of
December 31, 2000, 1999 and 1998 and changes during the years then ended is
presented below:
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Outstanding at beginning of
year......................... 25,048 $11.14 23,500 $ 6.41 17,532 $3.62
Granted........................ 10,471 $36.67 8,934 $18.62 9,940 $9.88
Exercised...................... (4,681) $ 6.33 (4,118) $ 4.13 (2,594) $1.66
Forfeited...................... (2,804) $22.97 (3,268) $ 9.88 (1,378) $5.91
------- ------- -------
Outstanding at end of year..... 28,034 $23.27 25,048 $10.77 23,500 $6.41
======= ======= =======
Options exercisable at year
end.......................... 6,963 5,048 3,768
======= ======= =======
Weighted average grant date
fair value of options granted
during the year.............. $ 37.26 $ 10.81 $ 7.10
======= ======= =======
Weighted average grant date
fair value of options granted
during the year below fair
value (see Note 10(f) and
10(g) relating to the
Adjacency and Human Code
Plan)........................ $ 38.38 $ 10.97 $ 8.71
======= ======= =======
45
48
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
DECEMBER 31, 2000 AVERAGE AVERAGE AVERAGE
- ---------------------------- NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------------------- -------------- ---------------- -------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$0.00 to $5.97.............. 3,024 4.6 years $ 2.83 2,313 $ 2.56
$5.98 to $6.47.............. 3,101 6.9 years $ 6.37 1,172 $ 6.33
$6.48 to $10.25............. 3,701 7.5 years $ 9.49 1,413 $ 9.48
$10.26 to $13.01............ 2,861 8.1 years $ 11.82 588 $11.66
$13.02 to $15.63............ 2,948 8.4 years $ 14.65 630 $14.57
$15.64 to $32.00............ 3,289 8.9 years $ 22.70 457 $20.22
$32.01 to $41.38............ 2,918 9.2 years $ 38.76 370 $36.36
$41.39 to $51.94............ 2,914 9.5 years $ 48.79 8 $43.06
$51.95 to $61.00............ 2,839 9.2 years $ 53.98 7 $53.15
$61.01 to $69.28............ 439 9.4 years $ 65.21 5 $64.30
------ -----
$0.00 to $69.28............. 28,034 8.0 years $ 23.27 6,963 $ 9.56
====== =====
The Company has seven stock-based compensation plans, which are described
above. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Had compensation cost for the awards under those plans
been determined based on the grant date fair values consistent with the method
required under SFAS 123, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net income (loss)
As reported............................................... $ 46,960 $30,300 $ 9,364
Pro forma................................................. $(10,806) $(9,798) $(15,842)
Basic net income (loss) per share
As reported............................................... $ 0.39 $ 0.27 $ 0.09
Pro forma................................................. $ (0.09) $ (0.09) $ (0.15)
Diluted net income (loss) per share
As reported............................................... $ 0.35 $ 0.24 $ 0.08
Pro forma................................................. $ (0.09) $ (0.09) $ (0.15)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following are the weighted
average assumptions for grants in 2000, 1999 and 1998: dividend yield of 0.0
percent for each year, expected volatility of 118.91, 72.5 and 136.8 percent in
2000, 1999 and 1998, respectively, risk free interest rates ranging from 5.0 to
6.2 percent and expected lives of 4 years. Because additional option grants are
expected to be made each year, the pro forma impact on the three years ended
December 31, 2000 is not necessarily representative of the pro forma effects
which may be expected in future years.
(11) RETIREMENT PLANS
The Company established a 401(k) retirement savings plan for employees in
June 1994. Under the provisions of the plan, the Company matches 25 percent of
an employee's contribution, up to a maximum of
46
49
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,250 per employee per year. Total Company contributions in 2000, 1999 and 1998
were approximately $1,920,000, $1,438,000 and $957,000, respectively.
(12) STOCKHOLDERS' EQUITY
(a) Increase in Authorized Common Stock; Stock Splits
At the Company's Annual Meeting of Stockholders held on May 8, 1998, the
stockholders voted to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation which increased the number of authorized shares of
common stock from 40,000,000 to 100,000,000.
On January 29, 1998, the Company declared a two-for-one stock split
effected as a 100 percent stock dividend distributed on March 9, 1998, to all
shareholders of record on February 20, 1998.
On October 21, 1999, the Company declared a two-for-one stock split
effected as a 100 percent stock dividend distributed on November 5, 1999, to all
shareholders of record on November 1, 1999.
At the Company's Annual Meeting of Stockholders held on May 22, 2000, the
stockholders voted to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation which increased the number of authorized shares of
common stock from 100,000,000 to 200,000,000.
On August 1, 2000, the Company declared a two-for-one stock split effected
as a 100 percent stock dividend distributed on August 28, 2000, to all
shareholders of record on August 14, 2000.
The financial statements and all financial information included in this
report have been restated for all periods presented to reflect the two-for-one
stock splits.
(b) Preferred Stock
On February 13, 1996, the Board of Directors authorized an amendment to the
Company's Certificate of Incorporation giving the Board the authority to issue
up to 5,000,000 shares, $0.01 par value, of preferred stock with terms to be
established by the Board at the time of issuance.
(c) Earnings Per Share
The following information presents the Company's computation of basic and
diluted EPS for the periods presented in the consolidated statements of income
(in thousands, except per share data):
2000 1999 1998
------- ------- --------
Net Income................................... $46,960 $30,300 $ 9,364
Basic Net Income per Share:
Weighted average common shares
outstanding............................. 119,191 111,418 104,456
Shares used in computing per share
amount.................................. 119,191 111,418 104,456
------- ------- --------
Basic net income per share................. $ 0.39 $ 0.27 $ 0.09
======= ======= ========
Diluted Net Income per Share:
Weighted average common shares
outstanding............................. 119,191 111,418 104,456
Dilutive stock options..................... 14,573 14,208 10,348
------- ------- --------
Shares used in computing per share
amount.................................. 133,764 125,626 114,804
------- ------- --------
Diluted net income per share............... $ 0.35 $ 0.24 $ 0.08
======= ======= ========
Options to purchase approximately 3.9 million, 298,000 and 840,000 shares
of common stock for the years ended December 31, 2000, 1999 and 1998,
respectively, were outstanding but were not included in the
47
50
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computations of diluted EPS because the exercise price of the options was
greater than the average market price of the Company's common stock for the
period reported.
(13) ACQUISITIONS
On October 25, 2000, the Company consummated an agreement to acquire TLG, a
provider of strategy and business consulting services. Upon consummation, the
Company invested approximately $2.2 million in cash directly into TLG for a 75%
ownership position and agreed to pay $5.0 million to the selling shareholders in
July 2001 plus $10.0 million in restricted stock to employees of TLG continuing
with the Company. The acquisition was accounted for as a purchase and
accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values. The $5.0 million
payable in July 2001 has been included in the overall purchase price and in the
accompanying balance sheet as an acquisition payable. TLG's results of
operations are included in the Company's consolidated statement of income from
the date of acquisition. The Company will amortize the $10.0 million of
restricted Sapient common stock over the vesting period of 4.75 years commencing
on October 25, 2000. The total compensation charge in the fourth quarter of 2000
was approximately $351,000. The Company expects this charge to be approximately
$527,000 for each of the next eighteen quarters, or $2.1 million annually. Pro
forma results combining the Company and TLG are not materially different from
the Company's results of operations.
On August 28, 2000, the Company acquired all of the outstanding common
stock of Human Code for approximately $133.1 million in stock and the
replacement of existing Human Code stock options, including direct acquisition
costs of approximately $1.9 million. The Company issued approximately 1,508,000
shares of the Company's common stock and approximately 471,000 stock options of
the Company pursuant to this acquisition. Human Code is a provider of
interactive design services for broadband applications. The acquisition was
accounted for as a purchase and accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based on their respective fair
values. Human Code's results of operations are included in the Company's
consolidated statement of income from the date of acquisition.
A summary of the acquisition follows (in thousands):
Common stock................................................ $101,172
Stock options............................................... 29,941
Transaction costs........................................... 1,941
--------
Total consideration......................................... 133,054
Fair value of net liabilities assumed....................... 2,161
--------
Excess of purchase price over fair value of net tangible
assets acquired........................................... $135,215
========
The excess of purchase price over fair value of net tangible assets
acquired was allocated as follows
(in thousands):
Customer contracts.......................................... $ 300
Assembled Workforce and employment agreements............... 2,900
Deferred Compensation....................................... 11,185
Developed Technology........................................ 13,000
Deferred Income Taxes....................................... (6,480)
Goodwill.................................................... 114,310
--------
Total....................................................... $135,215
========
48
51
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These assets are being amortized on a straight-line basis over lives
principally ranging from three to seven years.
Below are the pro forma results of operations for the Company and Human
Code assuming that the acquisition of Human Code occurred at the beginning of
each twelve-month period ended December 31, 2000 and 1999.
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net revenues........................................ $516,800 $292,198
Net income.......................................... $ 26,641 $ 6,207
Basic net income per share.......................... $ 0.22 $ 0.06
Diluted net income per share........................ $ 0.20 $ 0.05
The unaudited pro forma financial information is not necessarily indicative
of the operating results that would have occurred had this acquisition been
consummated as of January 1, 2000 and January 1, 1999, respectively, nor is it
necessarily indicative of future operating results.
On June 30, 2000, the Company invested $2.0 million directly in HWT, Inc.
(HWT, formerly HealthWatch Technologies, L.L.C.) in connection with a
reorganization of HWT. As a result of this investment and reorganization, the
Company's equity ownership of HWT increased to approximately 55.0% and the
Company now controls HWT. Prior to the reorganization, the Company had a less
than a 50% non-controlling ownership interest in HWT and accounted for this
investment using the equity method of accounting. The consolidated financial
statements include the accounts of HWT from the date of this additional
investment. The investment and reorganization has been accounted for as a
purchase and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their respective fair values. Pro
forma results combining the Company and HWT are not materially different from
the Company's results of operations.
On October 8, 1999, the Company acquired substantially all of the assets of
E.Lab L.L.C. (E.Lab) for approximately $5.0 million, including acquisition costs
of approximately $875,000. The Company issued 176,088 shares of its common stock
and assumed certain liabilities of E.Lab, a provider of experience modeling
services. The acquisition was accounted for as a purchase and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values. Intangible assets related to the E.Lab
acquisition is comprised of approximately $500,000 for assembled workforce and
$5.2 million for goodwill, which represents the excess of the purchase price
over the fair value of identifiable assets acquired. These intangible assets are
being amortized on a straight-line basis over a period of four to seven years.
Below are the pro forma results of operations for the Company and E. Lab
assuming that the acquisition of E. Lab occurred at the beginning of each
twelve-month period ended December 31, 1999 and 1998.
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net Revenues........................................ $280,018 $168,557
Net Income.......................................... $ 30,094 $ 9,894
Basic net income per share.......................... $ 0.27 $ 0.09
Diluted net income per share........................ $ 0.24 $ 0.09
49
52
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 29, 1999, the Company acquired all of the outstanding capital
stock of Adjacency. This acquisition was accomplished through the issuance of
3,162,696 shares of the Company's common stock for all of the outstanding shares
of Adjacency, a provider of integrated full service e-business solutions. This
acquisition has been accounted for using the pooling of interests method of
accounting and the Company's Consolidated Financial Statements have been
restated for all periods presented to reflect this acquisition. Costs, which
consist primarily of investment banking, accounting and legal fees related to
this acquisition approximated $2.3 million and are included in the accompanying
consolidated statement of income for the year ended December 31, 1999.
During the period from January 1, 1996 through March 29, 1999 (the date of
the Company's acquisition of Adjacency), Adjacency elected to be treated as an
S-Corporation for income tax purposes. Under this election, Adjacency's
individual stockholders are deemed to have received a pro rata distribution of
taxable income (loss) of Adjacency (whether or not an actual distribution was
made), which is included in each stockholder's taxable income. Accordingly,
Adjacency did not provide for income taxes during the period from January 1,
1996 through March 29, 1999. Adjacency's S-Corporation tax reporting status was
terminated on the date of acquisition. Pro forma net income per share data is
presented below to reflect the pro forma decrease to historical income taxes
related to Adjacency as if Adjacency was a C-Corporation for tax reporting
purposes during those periods.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below:
1998
--------------
(UNAUDITED)
(IN THOUSANDS)
Revenues:
Sapient................................................... $160,372
Adjacency................................................. 4,500
--------
Combined.................................................. $164,872
========
Net income (loss):
Sapient................................................... $ 13,699
Adjacency................................................. (4,335)
--------
Combined.................................................. $ 9,364
========
1998
--------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
Pro forma data (unaudited):
Historical income before income taxes..................... $ 18,024
Provision for income taxes:
Historical income taxes................................... 8,660
Pro forma decrease to historical income taxes............. (1,648)
--------
Pro forma net income...................................... $ 11,012
========
Pro forma basic net income per share...................... $ 0.11
Pro forma diluted net income per share.................... $ 0.10
Weighted average number of common shares outstanding...... 104,456
Weighted average number of common and common
equivalent shares outstanding.......................... 114,804
50
53
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 25, 1998, the Company acquired Studio Archetype, Inc. (Studio
Archetype) for approximately $25.3 million in stock and cash, including
acquisition costs of approximately $2.3 million, pursuant to which the Company
issued 1,993,256 shares of the Company's common stock and $250,000 in cash to
the former Studio Archetype stockholders. Studio Archetype was a provider of
user-centered design services. The acquisition was accounted for as a purchase
and accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on their respective fair values.
In connection with the acquisition of Studio Archetype in the third quarter
of 1998, the Company allocated $11.1 million to in-process technology and
recorded a corresponding income tax benefit of $4.2 million. This allocation
represents the estimated fair value of such technology based on risk-adjusted
cash flows related to the development of projects that had not reached
technological feasibility at the time of the acquisition and with respect to
which the in-process research and development had no alternative future uses.
Accordingly, this allocation was charged to expense as of the acquisition date.
The Company allocated values to the acquired in-process research and
development projects by identifying significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of Studio
Archetype's next-generation enterprise-wide suite of development, scheduling,
bug tracking and content management applications. The integrated solution is
comprised of the following technologies: content management systems (CMS), an
Intranet, an Extranet, an Issues Server and an on-line User Interface Lab (UI
Lab) which together allow developers and clients to access prototypes and trial
deliverables that fully integrates user interface tools with client server,
advanced database and legacy systems. The CMS, Intranet and Extranet components
of the system were released in June 1999. The UI Lab was completed in March 1999
and the Issue Server was completed in September 1999. The integrated solution is
a comprehensive enterprise scale system. All components of the in-process R&D
project acquired by the Company with the acquisition of Studio Archetype were
rolled-out as an integrated, enterprise-wide solution in 2000. At the time of
the acquisition, expenditures on these projects were approximately $2.5 million,
and estimated costs to complete these projects were expected to total
approximately $625,000. The nature of the efforts to develop the acquired
in-process technology into commercially viable products and services principally
related to the completion of all planning, designing, prototyping, verification,
and testing activities that were necessary to establish that the proposed
technologies met their design specifications including functional, technical,
and economic performance requirements. The efforts to develop the purchased
in-process technology also included testing of the technology for compatibility
and interoperability with other applications. The value assigned to purchased
in-process technology was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from the projects and discounting the net cash
flows to their present value. The revenue projection used to value the
in-process research and development was based on estimates of relevant market
sizes and growth factors, expected trends in technology and the nature and
expected timing of new product introductions by Studio Archetype and its
competitors. The Company did not experience any material variations in costs to
complete or completion dates from its initial assumptions. Following the
acquisition of Studio Archetype, Studio Archetype was fully integrated into the
Company's operations, making the isolation of specific revenues attributable to
the in-process technologies difficult. However, nothing has occurred to
materially change the Company's expectations with respect to the underlying
assumptions used in projecting the expected future revenues associated with this
in-process R&D. The rates utilized to discount the net cash flows to their
present value were based on venture capital rates of return. Due to the nature
of the forecast and the risks associated with the projected growth,
profitability and developmental projects, discount rates of 25 to 30 percent
were utilized for the business enterprise and for the in-process research and
development. The Company believes that these discount rates were commensurate
with Studio Archetype's stage of development, the uncertainties in the economic
estimates described above, the inherent uncertainty surrounding the successful
development of the
51
54
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchased in-process technology, the useful life of such technology, the
profitability levels of such technology, and the uncertainty of future
technological advances at that time.
Other intangible assets of $14.4 million is comprised of approximately $3.8
million for marketing assets, $1.6 million for assembled work force and $9.0
million of goodwill comprising the reputation of Studio Archetype. These assets
are being amortized on a straight-line basis over lives ranging from 4 to 7
years.
Below are the pro forma results of operations for the Company and Studio
Archetype, assuming that the acquisition of Studio Archetype occurred at the
beginning of the twelve-month period ended December 31, 1998 (in thousands,
except per share data).
1998
-----------
(UNAUDITED)
Net revenues................................................ $174,971
Net income.................................................. $ 7,626
Basic net income per share.................................. $ 0.07
Diluted net income per share................................ $ 0.07
(14) RELATED PARTY TRANSACTIONS
During 2000, 1999 and 1998, the Company recognized approximately $1.4
million, $3.6 million and $2.2 million, respectively, in net revenues from
consulting services provided to related parties in which the Company has
non-controlling equity interests. In addition to recognizing revenue for
services provided to Sapient S.p.A., the Company reduced general and
administrative expenses of approximately $992,000 for start up and
administrative services billed to the joint venture. At December 31, 2000 and
1999, the Company had receivables due from these entities of approximately $2.4
and $5.2 million, respectively. In addition, certain members of management of
the Company have provided funding to these companies. The Company incurred costs
of approximately $863,000 in start up services provided by DI to Sapient KK, of
which approximately $155,000 is included in accounts payable at December 31,
2000.
On January 31, 2000, the Company entered into a strategic relationship with
a client which included, among other things, the Company becoming a preferred
supplier to that client and its affiliated entities. As part of the
relationship, the co-CEOs and co-chairmen of the Board of Directors of the
Company each issued a $10.0 million convertible note to the client. The notes
are convertible into shares of the Company's common stock owned by the co-CEOs
and co-chairmen at a conversion rate equal to the closing price of the Company's
common stock on the date the convertible notes were executed. The client's
ability to convert the notes is subject to certain vesting restrictions, based
upon the client's ability to achieve certain revenue targets to Sapient within
prescribed timeframes. The notes cannot be converted before May 15, 2002.
52
55
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following tables set forth certain unaudited quarterly results of
operations of the Company for 2000 and 1999. The quarterly operating results are
not necessarily indicative of future results of operations.
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues............................ $100,334 $125,769 $138,057 $139,179
Operating expenses:
Project personnel costs........... 48,575 60,321 68,183 72,200
Selling and marketing............. 7,885 7,769 7,986 10,263
General and administrative........ 25,253 33,753 38,132 38,286
Amortization of intangible
assets......................... 884 757 2,935 6,752
Stock-based compensation.......... 110 110 454 1,491
-------- -------- -------- --------
Total operating
expenses................ 82,707 102,710 117,690 128,992
-------- -------- -------- --------
Income from operations.............. 17,627 23,059 20,367 10,187
Other expense....................... -- -- -- (1,250)
Interest income..................... 2,473 2,768 3,248 3,189
-------- -------- -------- --------
Income before income taxes, net
equity loss from investees and
minority interest................. 20,100 25,827 23,615 12,126
Income taxes........................ 7,857 10,589 11,536 3,943
-------- -------- -------- --------
Income before net equity loss from
investees and minority interest... 12,243 15,238 12,079 8,183
Net equity loss from investees...... (353) (276) (93) (156)
Minority interest................... -- -- -- 95
-------- -------- -------- --------
Net income.......................... $ 11,890 $ 14,962 $ 11,986 $ 8,122
======== ======== ======== ========
Basic net income per share.......... $ 0.10 $ 0.13 $ 0.10 $ 0.07
======== ======== ======== ========
Diluted net income per share........ $ 0.09 $ 0.11 $ 0.09 $ 0.06
======== ======== ======== ========
53
56
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................................ $ 57,793 $ 64,199 $ 73,029 $81,823
Operating expenses:
Project personnel costs....................... 28,334 30,618 35,669 40,017
Selling and marketing......................... 3,974 5,411 5,927 6,117
General and administrative.................... 14,648 16,219 17,527 20,994
Amortization of intangible assets............. 569 519 462 734
Stock-based compensation...................... 1,699 110 110 110
Acquisition costs............................. 2,340 -- -- --
-------- -------- ---------- -------
Total operating expenses................... 51,564 52,877 59,695 67,972
-------- -------- ---------- -------
Income from operations.......................... 6,229 11,322 13,334 13,851
Interest income................................. 820 859 970 1,578
-------- -------- ---------- -------
Income before income taxes and net equity loss
from investee................................. 7,049 12,181 14,304 15,429
Income taxes.................................... 2,770 4,495 5,436 5,805
-------- -------- ---------- -------
Income before net equity loss from investee..... 4,279 7,686 8,868 9,624
Net equity loss from investee................... -- -- -- (157)
-------- -------- ---------- -------
Net income...................................... $ 4,279 $ 7,686 $ 8,868 $ 9,467
======== ======== ========== =======
Basic net income per share...................... $ 0.04 $ 0.07 $ 0.08 $ 0.09
======== ======== ========== =======
Diluted net income per share.................... $ 0.03 $ 0.06 $ 0.07 $ 0.07
======== ======== ========== =======
(16) SUBSEQUENT EVENT (UNAUDITED)
On March 2, 2001, the Company announced that it was taking major
cost-related steps to reinforce its position in an increasingly challenging
economic environment. The Company reduced its total workforce by 720 people. The
Company expects to take a restructuring charge in the first quarter of 2001 of
approximately $35.0 to $40.0 million, which will consist of severance and
related expenses from the reduction in workforce, and other charges related to
the Sydney office closing and office space consolidation elsewhere.
54
57
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
Sapient Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 25, 2001 appearing in this Annual Report on Form 10-K also
included an audit of the financial statement schedule listed in Item 14(a) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein for the
years ended December 31, 2000 and 1999 when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 25, 2001
55
58
REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
Sapient Corporation:
Under the date of April 16, 1999, we reported on the consolidated balance
sheet (not shown separately therein)of Sapient Corporation and subsidiaries as
of December 31, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended, which are included
in the Form 10-K for the year ended December 31, 2000. In connection with our
audit of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule listed in Item 14(a) in
the Form 10-K as of and for the year ended December 31, 1998. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
April 16, 1999
56
59
SAPIENT CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
BALANCE AT OTHER BALANCE AT
BEGINNING CHARGE TO ADDITIONS TO END
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF YEAR EXPENSE ALLOWANCES WRITE-OFFS OF YEAR
- --------------------------------------------- ---------- --------- ------------ ---------- ----------
December 31, 1998............................ $ 350 $ 200 $-- $ -- $ 550
====== ====== == ======= ======
December 31, 1999............................ $ 550 $1,246 $-- $ (550) $1,246
====== ====== == ======= ======
December 31, 2000............................ $1,246 $6,347 $-- $(2,160) $5,433
====== ====== == ======= ======
57
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
A. Directors and Compliance with section 16(a) of the Exchange Act
The response to this Item regarding the directors of the Company and
compliance with Section 16(a) of the Exchange Act by the Company's officers and
directors will be contained in the Proxy Statement for the 2001 Annual Meeting
of Shareholders under the captions "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein.
B. Executive Officers of the Company
The response to this Item is contained in Part I, after Item 4.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item will be contained in the Proxy Statement for the
2001 Annual Meeting of Shareholders under the captions "Director Compensation"
and "Compensation of Executive Officers" and is incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item will be contained in the Proxy Statement for the
2001 Annual Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item will be contained in the Proxy Statement for the
2001 Annual Meeting of Shareholders under the caption "Certain Relationships and
Related Transactions" and is incorporated herein.
58
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) Financial Statements
The Consolidated Financial Statements filed as part of this report are
listed and indexed on page 26. Schedules other than those listed in the index
have been omitted because they are not applicable or the required information
has been included elsewhere in this report.
14(a)(2) Consolidated Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and Reserves are included
in this report.
14(a)(3) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in
the Exhibit Index immediately preceding the exhibits. The Company has identified
in the Exhibit Index each management contract and compensation plan filed as an
exhibit to this Annual Report on Form 10-K in response to Item 14(c) of Form
10-K.
14(b) Reports on Form 8-K
On November 17, 2000, the Company filed a Current Report on Form 8-K with
the SEC to update the Company's Registration Statements on Form S-3 to reflect
the change in share numbers resulting from the two-for-one stock split effected
on August 28, 2000.
On November 13, 2000, the Company filed a Current Report on Form 8-K/A with
the SEC which attached as exhibits financial statements and pro forma financial
information relating to the Company's acquisition of Human Code, Inc.
59
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ JERRY A. GREENBERG
------------------------------------
JERRY A. GREENBERG
CO-CHAIRMAN AND
CO-CHIEF EXECUTIVE OFFICER
Dated: March 22, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the following capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICERS:
/s/ JERRY A. GREENBERG Co-Chairman and Co-Chief March 22, 2001
- --------------------------------------------------- Executive Officer
JERRY A. GREENBERG
/s/ J. STUART MOORE Co-Chairman and Co-Chief March 22, 2001
- --------------------------------------------------- Executive Officer
J. STUART MOORE
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ EDWARD G. GOLDFINGER Chief Financial Officer and March 22, 2001
- --------------------------------------------------- Treasurer
EDWARD G. GOLDFINGER
DIRECTORS:
/s/ JERRY A. GREENBERG March 22, 2001
- ---------------------------------------------------
JERRY A. GREENBERG
/s/ J. STUART MOORE March 22, 2001
- ---------------------------------------------------
J. STUART MOORE
/s/ R. STEPHEN CHEHEYL March 22, 2001
- ---------------------------------------------------
R. STEPHEN CHEHEYL
/s/ DARIUS W. GASKINS, JR. March 22, 2001
- ---------------------------------------------------
DARIUS W. GASKINS, JR.
/s/ BRUCE D. PARKER March 22, 2001
- ---------------------------------------------------
BRUCE D. PARKER
/s/ CARL S. SLOANE March 22, 2001
- ---------------------------------------------------
CARL S. SLOANE
/s/ JURGEN WEBER March 22, 2001
- ---------------------------------------------------
JURGEN WEBER
60
63
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1+ Amended and Restated Certificate of Incorporation
3.2+++ Certificate of Amendment of the Amended and Restated
Certificate of Incorporation
3.3** Second Certificate of Amendment of the Amended and Restated
Certificate of Incorporation
3.4+ Amended and Restated Bylaws
4.1+ Specimen Certificate for Shares of Common Stock, $.01 par
value, of the Company
10.1(a)+ Lease dated March 30, 1994 between the Company and One
Memorial Drive Limited Partnership for offices at One
Memorial Drive, Cambridge, MA
10.1(b)++ Second Amendment to Lease dated April 1997 for offices at
One Memorial Drive, Cambridge, MA
10.2++++ Agreement and Plan of Merger by and among Sapient
Corporation, Houston Acquisition Corp. and Human Code, Inc.
dated August 9, 2000
10.3*+ 1992 Stock Plan
10.4*+ 1996 Equity Stock Incentive Plan
10.5*+ 1996 Director Stock Option Plan
10.6*+++ 1998 Stock Incentive Plan
(1)10.7*** 2000 Performance Bonus Incentive Plan
10.8** Revolving Loan Facility with Fleet Boston, N.A., dated June
30, 2000
10.9+++++ Letter Agreement between Sapient Corporation and Bruce D.
Parker dated November 15, 1999
10.10** Letter Agreement between Sapient Corporation and Edward G.
Goldfinger dated November 15, 1999
10.11** Letter Agreement between Sapient Corporation and Merle
Sprinzen dated January 25, 2000
21** List of Subsidiaries
23.1(a)** Consent of PricewaterhouseCoopers LLP
23.1(b)** Consent of KPMG LLP
- ---------------
* Exhibits previously filed pursuant to Item 14(c) of Form 10-K.
** Exhibits filed herewith.
*** Exhibits filed herewith and pursuant to Item 14(c) of Form 10-K.
+ Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 333-1586).
++ Incorporated herein by reference to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1997 (File No. 000-28074)
+++ Incorporated herein by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1998 (File No. 000-28074)
++++ Incorporated herein by reference to the Company's Form 8-K dated August
17, 2000 (File No. 000-28074)
+++++ Incorporated herein by reference to the Company's Form 10-Q for the fiscal
quarter ended March 31, 2000 (File No. 000-28074)
(1) Confidential treatment requested as to certain portions.
61