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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission file number 0-28074 |
Sapient Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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04-3130648 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
25 First Street, Cambridge, MA 02141
(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
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
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. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Securities Exchange
Act of
1934). Yes þ No o
The aggregate market value of the voting stock held by
non-affiliates of the Company was approximately
$518.4 million on June 30, 2004 based on the last
reported sale price of the Company’s common stock on the
Nasdaq National Market on June 30, 2004.
There were 124,366,892 shares of the Company’s common
stock outstanding as of March 4, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the Annual
Meeting of Stockholders to be held on May 24, 2005 are
incorporated by reference in Items 10, 11, 12, 13 and
14 of Part III of this Report.
SAPIENT CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2004
TABLE OF CONTENTS
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 and Section 21E of the Securities Exchange Act of
1934. All statements included in this Annual Report, other than
statements of historical facts, regarding our strategy, future
operations, financial position, estimated revenues, projected
costs, prospects, plans and objectives 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 II, “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — 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 on 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 expectations change.
1
PART I
General
Sapient Corporation (“Sapient” or the
“Company”) is a leading business consulting and
technology services firm that plans, designs, implements and
manages information technology to improve business performance
for Global 2000 clients. Sapient was founded in 1991 based on a
single promise: to deliver the right business results on time
and on budget. Our model combines industry, design, technology
and process expertise, working together in a creative and
disciplined approach, to provide clients with the highest
business value at the lowest total cost of ownership. Sapient
has offices across the United States and in Canada, Germany,
India and the United Kingdom.
Clients choose Sapient because of our commitment and
determination to do whatever it takes to deliver meaningful
results for them. We have a relentless focus on making an impact
on our clients’ businesses. We are able to deliver superior
returns for our clients by addressing the biggest problem that
most companies face when purchasing business-enabling technology
projects: the majority of technology projects are finished late
or over budget, lack promised capabilities or simply are never
finished. Using our unique
Sapient | Approach
project methodology, we plan, design, implement and manage
technology solutions that are designed to deliver tangible
business value to our clients in the form of increased revenues,
reduced costs and more effective utilization of assets. We
deliver services and solutions for the price and within the time
frame we promise to our clients, further enhancing the return to
the client on its technology investment.
Our clients can enhance their returns on their technology
investments through our Global Distributed
Deliverysm
(GDD) model, which enables us to deliver complex technology
solutions across multiple geographies. Many distributed
development models involve simply building software applications
from a remote location or augmenting domestic project teams with
people that travel from overseas. These models have limited
ability to deliver dynamic, business critical solutions, which
require ongoing business involvement and user input. By
contrast, our GDD model involves a single, coordinated
effort between development teams in a remote location (typically
highly skilled technology specialists in our New Delhi and
Bangalore, India offices) and development and client teams in
North America or Europe. To work effectively in this globally
distributed environment, we have built extensive expertise and
processes in managing business specifications and project
management issues between the various development teams that are
necessary to enable continuous project work. By using our
GDD model, we deliver complex, high-quality solutions to
our clients at a lower cost, and deliver these solutions more
rapidly by working across multiple time zones. In addition to
solution design and implementation, most of our long-term
engagement and outsourcing relationships leverage GDD.
We deliver our services in the United States primarily through
four industry business units: financial services; technology,
education, communications and health; automotive, consumer and
energy; and public services. Outside of the United States, we
deliver our services primarily through our United Kingdom,
Germany and Canada business units. Within our international
business units, we focus our sales and delivery efforts on
certain industry specializations. Both our U.S. and
international business units also include people based in our
India offices. Through our global industry focus, we have
developed an extensive understanding of our clients’
markets and can effectively address the market dynamics and
business opportunities that our clients face. This understanding
further enables us to identify and focus on critical,
industry-specific business processes that are specifically
enabled by technology. Further information about our
international operations and our operating segments is located
in Note 2 in the Notes to Consolidated Financial Statements
included in this Annual Report.
Sapient was incorporated in Delaware in 1991. Our executive
offices are located at 25 First Street, Cambridge, MA 02141, and
our telephone number is (617) 621-0200. Our stock is traded
on the Nasdaq National Market under the symbol “SAPE.”
Our Internet address is http://www.sapient.com. Material
contained on our Web site is not incorporated by reference into
this Annual Report. Unless the context
2
otherwise requires, references in this Annual Report to
“Sapient,” “we,” “us” or
“our” refer to Sapient Corporation and its
subsidiaries.
Our Services
We provide business consulting and technology services that
deliver value throughout the life cycle of our clients’
project investments, as follows:
Planning Business and Technology Investments. We align
business, customer and technology goals to create executable
roadmaps that improve business performance enabled by
technology. We help our clients plan their technology
investments through engagements such as business application
planning, e-business and web strategy consulting, enterprise
architecture planning, governance strategy, outsourcing
strategy, industry business process consulting, and user
research and assessments. Combining our deep expertise in
diverse technologies and our understanding of our clients’
business issues, we can, typically within six to twelve weeks,
clarify and optimize our clients’ application portfolio,
redefine their supporting organizational and business processes
and develop a road map to achieving their desired application
portfolio.
Designing and Implementing Projects. We use our expertise
in business processes, enabling technologies and applications,
and user-centered design to create business and technology
solutions that achieve significant returns on our clients’
investments. The solutions that we design and implement for our
clients include, but are not limited to, redesigned business
processes, data warehousing and business intelligence solutions,
e-business and web-based solutions, creative design solutions,
enterprise architecture and integration and industry-focused
package and custom solutions. We also provide program management
services for our projects and our clients’ other
initiatives. We have expertise in both custom software
development and working with existing software packages such as
application integration packages, content management and
delivery systems, customer relationship management software and
order management systems. Additionally, we are able to fully
integrate our technology solutions with our clients’ legacy
systems.
Managing Applications. We apply our deep expertise in
industry packages and e-business applications to increase
service levels, reduce costs and maximize returns from existing
systems. We manage our clients’ critical technology
applications utilizing our GDD model, both for solutions
that we develop and for third party systems. Our services
include application management, quality assistance and testing
and other long-term outsourcing services. We are increasingly
entering into multi-year outsourcing contracts with our clients
to provide combinations of these services. Our management and
outsourcing services help our clients realize significant
long-term value from their technology investments.
We have many years of experience in planning, designing,
implementing and managing technologies that can improve our
clients’ businesses, including more than 14 years of
experience with client/server and UNIX solutions, more than
12 years of experience integrating package applications
with legacy systems, more than 10 years of experience with
Internet solutions and more than 8 years of experience with
wireless technologies. More recently, we have been an early
implementer of new technologies such as Microsoft.NET, Web
Services, and Business Process Management platforms. We combine
this technology expertise with our design skills and our deep
understanding of user needs to ensure that our client solutions
are effectively adopted by their intended audiences.
The Sapient Approach
Our unique project methodology,
Sapient | Approach is
designed to address the biggest problem that most companies face
when pursuing business-enabling technology projects: the
majority of technology projects are finished late or over
budget, lack promised capabilities or simply are never finished.
We continually iterate on this approach to provide better value
to our clients. Sapient |
Approach enables us to commit to delivering our solutions within
the price and schedule that we have promised to our clients.
Further, our approach enables us to create technology solutions
that bring together business, user and technology requirements
to solve our clients’ business problems. These solutions
are designed to deliver tangible business value to clients in
the form of increased revenues, reduced costs and more effective
utilization of assets. We believe that our
3
approach differentiates us from our competitors, and that our
clients derive substantial benefits from the following elements
of this approach:
We are committed to our clients’ success. We are
passionate about delivering measurable business results to our
clients and helping them succeed. We define our success by
whether we enable our clients to attain their desired business
value. For more than a decade, we have helped many of the
world’s top companies realize significant value from their
technology investments. Our culture is built around client
value. It is collaborative, forthright and characterized by a
determination to do whatever it takes to deliver meaningful
results to our clients.
We hold ourselves accountable to our clients and our
clients’ success in achieving their business
objectives. Therefore, we seek to tie our pricing to our
client’s achievement of their business objectives. We have
developed a strong legacy of delivering our solutions on-time
and on-budget, ever since our formation in 1991. Because of our
extensive experience delivering projects, and our expertise with
large-scale, complex project management, we can successfully
deliver our solutions within the price and time frame we have
promised our clients. Our legacy of helping our clients deliver
on-time and on-budget helps them avoid the lost business value
that occurs when technology projects are finished late or over
budget, lack promised capabilities or are never finished. In
some cases, we further hold ourselves accountable for delivering
business value by aligning our fees with the results our clients
receive, placing our fees at risk and sharing in the rewards
realized by our clients.
We deliver superior returns on our clients’ investments
through our globally distributed model. We offer a fully
integrated, GDD capability that allows us to deliver the
lowest total cost of ownership compared to other delivery
models. Through our GDD model, we are able to create
high-value solutions for our clients quickly and at a
competitive cost advantage, thereby increasing overall value. We
maintain the high quality of our solutions by employing
India’s highly skilled business and technology specialists.
Because these specialists are highly trained in managing complex
projects on a globally distributed basis and are aligned with
our business units in North America and Europe, we successfully
deliver complex technology solutions and ongoing application
management services that typically cannot be accomplished under
traditional remote development models.
We provide industry, process and technology expertise and
assets to ensure success. We have accumulated valuable
assets and expertise that we utilize for the benefit of our
clients. These assets and expertise enable us to develop
innovative solutions, deliver these solutions rapidly, provide
high quality solutions, reduce risk and lower the overall
project cost. These assets and expertise include technology
standards, best practices, techniques, designs, code frameworks
and business software solutions specific to our clients’
business, processes and technology objectives.
For a presentation of the financial information about the
geographic areas in which we conduct our business, please see
Item 7 — “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and Note 2(r) to our audited financial statements. The
principal risks and uncertainties facing our business,
operations and financial condition are discussed in
Part II, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Risk
Factors” on page 35 of this Annual Report.
Strategic Context, People and Culture
We have established and continuously promote a strong corporate
culture, based on core values, that is critical to our success.
Our core values are client-focused delivery, leadership,
relationships, creativity, openness and people growth.
Our unwavering attention to the Company’s “strategic
context” — purpose, vision, goals, core values
and people and client value propositions — has enabled
us to adapt and thrive in a fast-changing market, as we strive
to build a great company that has a long-lasting impact on the
world. This unique element of our business was recognized by
Harvard Business School in a case study on Sapient. The case,
written in 2004, will be taught as part of the Business
School’s organizational and leadership class.
4
To encourage the realization of our core values, we reward
teamwork and evaluate our people’s performance, and promote
people, based on their adoption of and adherence to the core
values. Also, we conduct an intensive orientation program to
introduce new hires to our core values, and conduct internal
communications and training initiatives that define and promote
the core values. Our rate of voluntary turnover was 15.4% for
2004, a decrease from 22.1% in 2003. Our objective is to further
reduce our voluntary turnover rate for 2005, as a result of our
numerous initiatives to enhance the value proposition we offer
to our people.
As of December 31, 2004, we had 2,314 full-time
employees, composed of 1,898 project personnel, 371 general and
administration personnel and 45 sales and marketing personnel.
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 Company’s marketing team strives to create and sustain
clients’ loyalty to Sapient as their preferred business and
technology consultants. To build Sapient’s brand awareness
in markets in which we operate, we conduct marketing initiatives
at both the corporate and industry business unit levels in the
United States, and at the geographic level in other countries in
which we operate.
Our dedicated marketing personnel undertake a variety of
marketing activities, including developing and implementing our
overall marketing strategy, communicating and strengthening
Sapient’s brand and reputation, sponsoring focused
multi-client events to build relationships and share our thought
leadership, cultivating media and industry analyst relations,
conducting market research and analysis, sponsoring and
participating in targeted conferences, creating marketing assets
to assist client-development teams and publishing our Web site,
www.sapient.com.
Our sales professionals are primarily organized along industry
lines, both within our United States business units and our
other international offices. We believe that the industry and
geographic focus of our sales professionals enhances their
knowledge and expertise in these industries and generates
additional client engagements.
We continue to actively build relationships and strategic
alliances with other technology companies and packaged
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 transferring
knowledge 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 clients and
will attract new clients through referrals and joint engagements.
Our written agreements with our clients contain varying terms
and conditions, including, in some instances, the right of the
client to terminate the agreement with limited advance notice or
penalty. We do not believe it is generally appropriate to
characterize these agreements as backlog.
Competition
The markets for the services we provide are highly competitive.
We believe that we currently compete principally with large
systems consulting and implementation firms and clients’
internal information systems departments. We also compete
regularly with offshore outsourcing companies, and we expect
competition from these companies to increase in the future,
especially on development, support and maintenance and
outsourcing engagements. We compete to a lesser extent with
specialized e-business consulting firms, strategy consulting
firms and packaged technology vendors. Some of our competitors
have significantly greater financial, technical and marketing
resources, and generate greater revenues and have greater name
recognition, than we do. These competitors can often offer a
larger and more diversified suite of products and services than
we offer. Consequently, these competitors may win client
engagements by significantly discounting their services in
exchange for a client’s promise to purchase other goods and
services from the competitor either concurrently or in the
future.
5
We believe that the principal competitive factors in our markets
include: ability to solve business problems; expertise and
talent with advanced technologies; global scale; expertise in
delivering complex projects on a globally distributed basis;
quality and speed of delivery; price of solutions; industry
knowledge; understanding of user experiences and sophisticated
project and program management capability.
We believe that we compete favorably when considering these
factors, and that our ability to rapidly deliver business value
to our clients on a fixed-price basis using our GDD model,
and our successful track record in doing so, 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, subcontractors, vendors,
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 often retain ownership of
certain development tools and may be granted a license to use
the solutions for certain purposes. 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.
Where To Find More Information
We make our public filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all exhibits and amendments to these reports,
available free of charge at our Web site,
http://www.sapient.com, as soon as reasonably practicable after
we file such material with the SEC. We also make available on
our Web site reports filed by our executive officers and
Directors on Forms 3, 4 and 5 regarding their ownership of
our securities. These materials are available in the
“Investor Relations” portion of our Web site, under
the link “SEC Filings,” and on the SEC’s Web
site, http://www.sec.gov. You may also read or copy any
materials we file with the SEC at the SEC’s Public
Reference Room at 450 Fifth Street, N.W., Washington, DC
20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
Our headquarters and principal administrative, finance, selling
and marketing operations are located in approximately
28,000 square feet of leased office space in Cambridge,
Massachusetts. We also lease offices in the New York
metropolitan area, the Washington D.C. metropolitan area,
San Francisco, Chicago, Atlanta, Los Angeles, Detroit,
Düsseldorf, London, Munich, New Delhi, Bangalore and
Toronto. Our United States offices are shared by our four U.S.
business units, and our international offices are used by our
applicable geographic business units.
6
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| Item 3. |
Legal Proceedings |
We are not a party to any material legal proceedings.
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| 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 executive officer of Sapient, as of
March 4, 2005. All such persons have been elected to serve
until their successors are elected and qualified or until their
earlier resignation or removal.
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Preston B. Bradford
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Mr. Bradford joined Sapient in September 1994. Mr. Bradford
was appointed as Senior Vice President in April 2000 and as
Executive Vice President in February 2004. Prior to joining
Sapient, Mr. Bradford held various positions with Sprint
Corporation, a telecommunications company, from July 1980
to August 1994. |
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Sheeroy D. Desai
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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, and
has served as Chief Operating Officer since April 2001. |
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Jerry A. Greenberg
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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. |
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Alan J. Herrick
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Mr. Herrick joined Sapient in March 1995. Mr. Herrick was
appointed as Vice President in December 1996 and was appointed
as Executive Vice President in June 2002. |
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Scott J. Krenz
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Mr. Krenz joined Sapient in December 2004 as Chief Financial
Officer. Prior to joining Sapient, Mr. Krenz served as Vice
President and Treasurer of EDS from September 1998 to February
2004, and as Chief Financial Officer for EDS’s Europe,
Middle East and Africa (EMEA) business from July 1994 to August
1998. |
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J. Stuart Moore
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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. |
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Jane E. Owens
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51 |
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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, a consumer
products company, from May 1997 to September 2000. |
7
PART II
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| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
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.
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Low | |
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2003
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First Quarter
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$ |
2.25 |
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$ |
1.53 |
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Second Quarter
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$ |
3.14 |
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$ |
1.55 |
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Third Quarter
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$ |
4.38 |
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$ |
2.80 |
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Fourth Quarter
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$ |
5.95 |
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$ |
3.68 |
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2004
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First Quarter
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$ |
7.19 |
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$ |
5.21 |
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Second Quarter
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$ |
6.54 |
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$ |
4.69 |
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Third Quarter
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$ |
8.44 |
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$ |
4.79 |
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Fourth Quarter
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$ |
9.25 |
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$ |
7.59 |
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On March 4, 2005, the last reported sale price of our
common stock was $7.47 per share. As of March 4, 2005,
there were approximately 368 holders of record of our
common stock and approximately 21,000 beneficial holders of our
common stock.
We have never paid or declared any cash dividends on our common
stock and do not anticipate paying cash dividends in the
foreseeable future.
Issuer Purchases of Equity Securities
None.
8
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| 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, 2004 and 2003 and the Statement of
Operations Data for each of the three years ended
December 31, 2004, 2003 and 2002 have been derived from the
audited Consolidated Financial Statements for such years,
included elsewhere in this Annual Report. The Balance Sheet Data
at December 31, 2002, 2001 and 2000 and the Statement of
Operations Data for each of the two years ended
December 31, 2001 and 2000 have been derived from the
audited Consolidated Financial Statements for such years, not
included in this Annual Report.
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Years Ended December 31, | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
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2000 | |
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(In thousands, except per share data) | |
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Statement of Operations Data(1)(2)(3):
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Service revenues
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$ |
253,936 |
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$ |
184,795 |
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$ |
173,811 |
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$ |
325,165 |
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$ |
502,964 |
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Operating expenses:
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Project personnel costs, before reimbursable expenses
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142,512 |
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111,967 |
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133,275 |
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230,581 |
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247,981 |
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Selling and marketing costs
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15,208 |
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18,501 |
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26,192 |
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27,880 |
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33,743 |
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General and administrative costs
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|
|
71,282 |
|
|
|
57,523 |
|
|
|
79,338 |
|
|
|
128,574 |
|
|
|
134,241 |
|
| |
Restructuring and other related charges
|
|
|
1,108 |
|
|
|
2,135 |
|
|
|
66,885 |
|
|
|
100,079 |
|
|
|
— |
|
| |
Impairment of goodwill and intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
107,430 |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of intangible assets
|
|
|
515 |
|
|
|
1,772 |
|
|
|
4,328 |
|
|
|
28,126 |
|
|
|
11,328 |
|
| |
Stock-based compensation
|
|
|
779 |
|
|
|
1,089 |
|
|
|
3,161 |
|
|
|
4,449 |
|
|
|
2,165 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
22,532 |
|
|
|
(8,192 |
) |
|
|
(246,798 |
) |
|
|
(194,524 |
) |
|
|
73,506 |
|
|
Gain on equity investment change in interest
|
|
|
— |
|
|
|
— |
|
|
|
1,755 |
|
|
|
1,407 |
|
|
|
— |
|
|
Other income (expense)
|
|
|
65 |
|
|
|
2,729 |
|
|
|
33 |
|
|
|
(4,677 |
) |
|
|
(1,250 |
) |
|
Interest income
|
|
|
2,655 |
|
|
|
1,902 |
|
|
|
4,312 |
|
|
|
9,393 |
|
|
|
11,678 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, net equity loss from
investees and loss from discontinued operations
|
|
|
25,252 |
|
|
|
(3,561 |
) |
|
|
(240,698 |
) |
|
|
(188,401 |
) |
|
|
83,934 |
|
|
Income tax provision (benefit)
|
|
|
2,433 |
|
|
|
1,337 |
|
|
|
(18,585 |
) |
|
|
(3,091 |
) |
|
|
33,925 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before net equity loss from investees and loss
from discontinued operations
|
|
|
22,819 |
|
|
|
(4,898 |
) |
|
|
(222,113 |
) |
|
|
(185,310 |
) |
|
|
50,009 |
|
|
Net equity loss from investees
|
|
|
— |
|
|
|
— |
|
|
|
(349 |
) |
|
|
(499 |
) |
|
|
(878 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
22,819 |
|
|
|
(4,898 |
) |
|
|
(222,462 |
) |
|
|
(185,809 |
) |
|
|
49,131 |
|
|
Loss from discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
(6,741 |
) |
|
|
(3,959 |
) |
|
|
(2,171 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
22,819 |
|
|
$ |
(4,898 |
) |
|
$ |
(229,203 |
) |
|
$ |
(189,768 |
) |
|
$ |
46,960 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.78 |
) |
|
$ |
(1.50 |
) |
|
$ |
0.41 |
|
|
Loss from discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
|
$ |
(1.53 |
) |
|
$ |
0.39 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.78 |
) |
|
$ |
(1.50 |
) |
|
$ |
0.37 |
|
|
Loss from discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.05 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
|
$ |
(1.53 |
) |
|
$ |
0.35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
123,040 |
|
|
|
121,188 |
|
|
|
124,961 |
|
|
|
124,256 |
|
|
|
119,191 |
|
|
Weighted average dilutive common share equivalents
|
|
|
5,418 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,573 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and dilutive common share
equivalents
|
|
|
128,458 |
|
|
|
121,188 |
|
|
|
124,961 |
|
|
|
124,256 |
|
|
|
133,764 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
118,684 |
|
|
$ |
143,158 |
|
|
$ |
135,325 |
|
|
$ |
243,699 |
|
|
$ |
318,467 |
|
|
Total assets
|
|
|
269,603 |
|
|
|
226,900 |
|
|
|
262,653 |
|
|
|
474,870 |
|
|
|
604,154 |
|
|
Long-term debt, less current portion
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total stockholders’ equity(4)
|
|
$ |
185,933 |
|
|
$ |
152,412 |
|
|
$ |
155,804 |
|
|
$ |
380,770 |
|
|
$ |
525,400 |
|
|
|
| (1) |
We ceased operations of our Japanese subsidiary in December
2002. As a result, operating results of this subsidiary for 2002
and for all prior periods presented have been collapsed and
reclassified into a single line item under the caption
“Loss from discontinued operations.” See Note 17
in the Notes to Consolidated Financial Statements. |
| |
| (2) |
All share and per share data have been retroactively adjusted to
reflect the two-for-one stock split effected as a
100 percent stock dividend paid on August 28, 2000. |
| |
| (3) |
On January 1, 2002, we adopted Statement of Accounting
Standards No. 142, “Goodwill and Other Intangible
Assets,” and ceased amortizing goodwill. During the years
ended December 31, 2001 and 2000, our operating results
include $18.9 million and $7.5 million, respectively,
of goodwill amortization. In addition, certain amounts in
previously issued financial statements have been reclassified to
conform to the current year presentation. The reclassifications
had no effect on reported net income (loss). |
| |
| (4) |
We have never declared or paid any cash dividends. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
Sapient is a leading business consulting and technology services
firm that plans, designs, implements and manages information
technology to improve business performance for Global 2000
clients. Sapient was founded in 1991 based on a single promise:
to deliver the right business results on time and on budget. Our
fixed-price/fixed-time model, combined with our industry,
design, technology and process expertise, provides clients with
the highest business value at the lowest total cost of
ownership. We have offices across the United States and in
Canada, the United Kingdom, Germany and India.
Throughout 2004 we experienced an increase in demand for our
services as customers continue to invest in the
technology-related business initiatives we provide. In addition,
we see indications that demand for our services will continue to
grow through 2005 as we continue to build and expand on our
relationships with our existing customers. Our service revenues
were $253.9 million for 2004, a 37% increase from service
revenues
10
of $184.8 million for 2003, and a 46% increase from service
revenues of $173.8 million for 2002. We have focused on
increasing our recurring revenues and we have made progress
during 2004 in furtherance of this strategic initiative and will
continue to focus on increasing recurring revenue in 2005. Our
recurring revenues were 25% of our services revenues in 2004
compared to 17% in 2003. Recurring revenues are revenue
commitments of a year or more in which the client has committed
spending levels to Sapient or chosen Sapient as an exclusive
provider of certain services. During 2005, certain of these
recurring revenue agreements will end, while others may be
signed.
As a global company, our revenues are denominated in multiple
currencies and may be significantly affected by currency
exchange-rate fluctuations. The strengthening of various
currencies versus the U.S. dollar has resulted in favorable
currency translation and increased our reported revenues,
operating expenses and operating income. For the year ended
December 31, 2004, service revenues increased 37% compared
to 2003, of which 6% was attributable to the effects of foreign
currency exchange rates. If the U.S. dollar strengthens
against other currencies, the resulting unfavorable currency
translation could result in lower reported U.S. dollar
revenues, operating expenses and operating income and result in
U.S. dollar revenue growth lower than growth in local
currency terms. We cannot predict the volatility of foreign
currency rate fluctuations against the U.S. dollar.
Our annualized service revenues per billable employee declined
during 2004 to $145,000 in the fourth quarter of 2004 from
$153,000, $169,000 and $179,000 for the third, second and first
quarters of 2004, respectively. Our utilization rate for the
fourth quarter of 2004 was 76%, compared to 75%, 77% and 76% for
the third, second and first quarters of 2004, respectively.
Despite our utilization rate remaining relatively flat
throughout the year, the decline in our annualized service
revenue per billable employee can primarily be attributed to a
decline in revenue generated by contractors, which are not
considered employees, from the first quarter of 2004 through the
third quarter of 2004, and a lower utilization amongst our
senior people who were focused on marketing of longer-term deals
in the fourth quarter of 2004 compared to the third quarter of
2004.
As a result of the increase in demand for our services, we have
been increasing the number of our project personnel in order to
effectively staff our client engagements and achieve the desired
staffing mix in terms of experience level and role. Currently,
we are retaining subcontractors in certain cases to fill
specific project needs. If we are not successful in maintaining
effective staffing levels, our ability to achieve our service
revenue and profitability objectives will be adversely affected.
Our ability to effectively staff our engagements and achieve the
desired staffing mix depends heavily on our ability to keep
turnover at appropriate levels. Our annualized 2004 fourth
quarter turnover improved to 15.4 percent compared to
annualized 2003 fourth quarter turnover of 22.1 percent.
Our full year net income was $22.8 million in 2004 compared
to a full year net loss of ($4.9) million in 2003. Our full
year 2004 net income reflects a return to accruing bonus
expense at full bonus levels according to our annual bonus plan,
in contrast to the minimal bonus expense we accrued and paid
throughout 2003. Our operating margin for the full year of 2004
was 9 percent compared to a loss in 2003. The improvement
in operating margin reflects our success in managing costs and
improving leverage for both operating and general and
administrative expenses as well as an increase in our percentage
of projects staffed with people in our India office. The
improvement in general and administrative expenses from 31% of
revenue in 2003 compared to 28% of revenue in 2004 was achieved
despite an increase in spending related to Sarbanes-Oxley
Section 404 compliance efforts.
Our Global Distributed
Deliverysm
(GDD) methodology continues to increase in importance. This
proprietary methodology, which we created in 2000, allows us to
provide high-quality solutions using accelerated work schedules,
by utilizing India’s highly skilled technology specialists,
lower costs and continuous delivery capability resulting from
time differences between India and the countries we serve. We
also employ our GDD methodology to provide application
management services. The billable days, or level of effort,
incurred by our India people as a percentage of total Company
billable days decreased from 53% for the first quarter of 2004
to 52% for the fourth quarter of 2004. Our utilization rate for
our India personnel was 81% for the fourth quarter of 2004, as
compared to 80%, 81% and 77% for the first, second and third
quarters of 2004, respectively. Projects with a GDD component
accounted for 61% of our total service revenues in 2004,
compared to 54% for 2003 and 45% for 2002.
11
Although we are seeing signs of growth in our business, the
economic outlook is still uncertain. We believe that technology
spending by large companies has been increasing since the second
half of 2003, however, we cannot predict for how long, and to
what extent, the improvement in the market for technology
consulting services will continue. Any decline in our service
revenues will have a significant impact on our financial
results, particularly because a significant portion of our
operating costs (such as personnel, rent and depreciation) are
fixed in advance of a particular quarter. In addition, our
future operating segment and overall Company revenues and
operating results 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.
|
|
|
Summary of Critical Accounting Policies; Significant
Judgments and Estimates |
Our discussion and analysis of our financial condition and
results of operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make significant estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities.
These items are regularly monitored and analyzed by management
for changes in facts and circumstances, and material changes in
these estimates could occur in the future. Changes in estimates
are recorded in the period in which they become known. We base
our estimates on historical experience and various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ substantially from our
estimates.
A summary of those accounting policies, significant judgments
and estimates that we believe are most critical to fully
understanding and evaluating our financial results is set forth
below. This summary should be read in conjunction with our
Consolidated Financial Statements and the related Notes included
elsewhere in this Annual Report.
|
|
|
| |
• |
Revenue Recognition and Allowance for Doubtful Accounts.
We recognize revenue from the provision of professional services
under written service contracts with our clients when persuasive
evidence of an arrangement exists, services have been provided
to the customer, the fee is fixed or determinable, and
collectibility is reasonably assured. In instances where the
customer, at their discretion, has the right to reject the
services prior to final acceptance, revenue is deferred until
such acceptance occurs. |
|
|
| |
We recognize revenues from our fixed-price, fixed time
technology implementation consulting contracts using the
percentage-of-completion method pursuant to Statement of
Position 81-1, “Accounting for Performance of Construction
Type and Certain Production Type Contracts.” Revenues
generated from fixed-price, fixed time non-technology
implementation contracts, except for support and maintenance
contracts, are recognized based upon a proportional performance
model in accordance with Staff Accounting Bulletin
(SAB) No. 101, “Revenue Recognition in Financial
Statements,” as amended by SAB No. 104,
“Revenue Recognition.” Our percentage-of-completion
method and our proportional performance method of accounting
calculate revenue based on the percentage of labor hours
incurred to estimated total labor hours. This method is used
because reasonably dependable estimates of the revenues and
costs applicable to various stages of a contract can be made,
based on historical experience and milestones set in the
contract. Revenue from time-and-material contracts is recognized
as services are provided. Revenue generated from fixed-price
support and maintenance contracts is recognized ratably over the
contract term. |
| |
| |
Our project delivery and business unit finance personnel
continually review labor hours incurred and estimated total
labor hours, which may result in revisions to the amount of
recognized revenue for a contract. Certain contracts provide for
revenue to be generated based upon the achievement of certain
performance standards, including $3.4 million and $956,000
of revenue recognized in 2004 and 2003, respectively. No revenue
was recognized in 2002 for performance standards. |
12
|
|
| |
Revenues from contracts with multiple elements are allocated
based on the fair value of the elements in accordance with EITF
Issue No. 00-21 (EITF 00-21), “Revenue
Arrangements with Multiple Deliverables.” For these
arrangements, we evaluate all deliverables in the contract to
determine whether they represent separate units of accounting.
Fair value is determined based on reliable evidence of the fair
value of each deliverable. Revenues are recognized in accordance
with our accounting policies for the separate elements when the
services have value on a stand-alone basis, fair value of the
separate elements exists and, in arrangements that include a
general right of refund relative to the delivered element,
performance of the undelivered element is considered probable
and substantially in our control. This evaluation is performed
at the inception of the arrangement and as each item in the
arrangement is delivered. The evaluation involves significant
judgments regarding the nature of the services and deliverables
being provided, whether these services and deliverables can
reasonably be divided into the separate units of accounting and
the fair value of the separate elements. |
| |
| |
If we do not accurately estimate the resources required or the
scope of work to be performed for a contract or we do not manage
the project properly within the planned time period, then we may
recognize a loss on the contract. 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. We have committed
unanticipated additional resources to complete projects in the
past, which has resulted in lower than anticipated profitability
or losses on those contracts. We expect that we will experience
similar situations in the future. 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, could adversely affect our business, financial
condition and results of operations. |
| |
| |
We recognize revenue for services where collection from the
client is probable, and our fees are fixed or determinable. We
establish billing terms at the time project deliverables and
milestones are agreed. Our normal payment terms are 30 days
from invoice date. Revenues recognized in excess of the amounts
invoiced to clients are classified as unbilled revenues. Amounts
invoiced to clients in excess of revenue recognized are
classified as deferred revenues. Our project delivery and
business unit finance personnel continually monitor timely
payments from our clients and assess any collection issues. We
maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our clients to make required
payments. We base our estimates on our historical collection and
write-off experience, current trends, credit policy, detailed
analysis of specific client situations and percentage of our
accounts receivable by aging category. While such credit losses
have historically been within our expectations and the
allowances we established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have
in the past. If the financial condition of our clients were to
deteriorate, resulting in an impairment of their ability to make
payment, additional allowances may be required. Our failure to
accurately estimate the losses for doubtful accounts and ensure
that payments are received on a timely basis could have a
material adverse effect on our business, financial condition and
results of operations. |
|
|
|
| |
• |
Accounting for Income Taxes. Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes,” requires the establishment of a valuation allowance
to reflect the likelihood of realization of deferred tax assets.
Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against our net
deferred tax assets. We evaluate all available evidence, such as
recent and expected future operating results by tax
jurisdiction, current and enacted tax legislation and other
temporary differences between book and tax accounting, to
determine whether it is more likely than not that some portion
or all of the deferred income tax assets will not be realized.
As a result of operating losses incurred in 2001, 2002 and 2003,
and uncertainty as to the extent and timing of profitability in
future periods, we have recorded a valuation allowance of
approximately $115.0 million as of December 31, 2004
relating primarily to the United States. Having assessed the
realizability of the deferred tax assets in certain foreign
jurisdictions, we believe that future taxable income will be
sufficient to realize the deferred tax benefit of the net
deferred tax assets in Canada and the United Kingdom. The
establishment and amount of the valuation allowance requires
significant estimates and judgment and can materially affect our
results of operations. If the realization of deferred tax assets
in the future is |
13
|
|
|
| |
|
considered more likely than not, an adjustment to the deferred
tax assets would increase net income in the period such
determination was made. Our effective tax rate may vary from
period to period based on changes in estimated taxable income or
loss in each jurisdiction, changes to the valuation allowance,
changes to federal, state or foreign tax laws, 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. |
| |
| |
• |
Valuation of Long-Lived Assets. In accordance with
Financial Accounting Standards Board Statement No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” 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. Factors we consider
important which could trigger an impairment review include: |
|
|
|
| |
• |
significant underperformance relative to historical or projected
future operating results; |
| |
| |
• |
significant negative industry or economic trends; |
| |
| |
• |
significant decline in our stock price for a sustained
period; and |
| |
| |
• |
our market capitalization relative to net book value. |
|
|
| |
If such circumstances exist, we evaluate the carrying value of
long-lived assets, other than goodwill, to determine if
impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets and comparing
that value to the carrying value 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. If the carrying value of the
asset is greater than the estimated future cash flows, the asset
is written down to its estimated fair value. The estimated
undiscounted future cash flows and valuation of long-lived
assets requires significant estimates and assumptions, including
revenue and expense growth projections and fair value estimates
such as estimated replacement cost and relief from royalty.
These estimates contain management’s best estimates, using
appropriate and customary assumptions and projections at the
time. If different estimates or adjustments were used, it is
reasonably possible that our analysis would have generated
materially different results. |
| |
| |
As of December 31, 2004 and 2003, we have no remaining
goodwill balances. In accordance with SFAS 142,
“Goodwill and Other Intangible Assets,” beginning
January 1, 2002, we ceased amortization of goodwill, which
was approximately $101.8 million at that time. We performed
an impairment review of our goodwill as of January 1, 2002,
under the transitional provisions of SFAS 142. During the
second quarter of 2002, we completed the transitional impairment
test of goodwill and concluded that no impairment of the
goodwill had occurred as of January 1, 2002. By
June 30, 2002, our stock price had declined significantly
from January 1, 2002, at which point our market
capitalization, based on our stock price, was below our book
value, and we determined that an interim goodwill impairment
test should be performed. Our stock price at January 2,
2002 was $7.25 per share and declined to $1.06 per
share at June 28, 2002. Based on the analysis at
June 30, 2002, the carrying amount of all reporting units
exceeded their fair values and a goodwill impairment charge of
$101.8 million, representing 100% of the goodwill balance,
was recognized in the statement of operations under the caption
“Impairment of goodwill and intangible assets” for
2002. The impairment analysis requires significant estimates and
assumptions, including the allocation of assets and liabilities
to reporting units and fair value estimates of reporting units
based on a market multiple of revenue approach. These estimates
contain management’s best estimates, using appropriate and
customary assumptions and projections at the time. If different
estimates or adjustments were used, it is reasonably possible
that our analysis would have generated materially different
results. |
|
|
|
| |
• |
Costs Incurred to Develop Computer Software for Internal
Use. We account for costs incurred to develop computer
software for internal use in accordance with Statement of
Position (SOP) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”.
As required by SOP 98-1, the Company capitalizes the costs
incurred during the application development |
14
|
|
|
| |
|
stage, which include costs to design the software configuration
and interfaces, coding, installation and testing. Costs incurred
during the preliminary project stage along with
post-implementation stages of internal use computer software are
expensed as incurred. Capitalized development costs are
amortized over various periods up to three years. The
capitalization and ongoing assessment of recoverability of
development cost requires considerable judgment by management
with respect to certain external factors, including, but not
limited to, technological and economic feasibility, and
estimated economic life. For the year ended December 31,
2004, the Company capitalized computer software costs of
$247,000. During 2005, we estimate that we will incur additional
costs of $700,000 — $900,000 that will be capitalized
under SOP 98-1 associated with our Oracle 11i upgrade.
Amortization has not begun as of December 31, 2004 as the
computer software has not been placed in service. |
| |
| |
• |
Restructuring and Other Related Charges. We established
exit plans for each of the restructuring activities which took
place in 2001 and 2002 and accounted for these plans in
accordance with EITF Issue No. 94-3, “Liability
Recognition for Certain Employee Benefits and Other Costs to
Exit an Activity (including Certain Costs incurred in a
Restructuring).” These exit plans required that we make
estimates as to the nature, timing and amount of the exit costs
that we specifically identified. The consolidation of facilities
required us to make estimates, which included contractual rental
commitments or lease buy-outs for office space vacated and
related costs, offset by estimated sub-lease income. We review
on a regular basis our sub-lease assumptions and lease buy-out
assumptions. These estimates include lease buy-out costs,
anticipated rates to be charged to a sub-tenant, other terms and
conditions in sub-lease contracts, and the timing of these
sub-lease arrangements. If the rental markets continue to
change, our lease buy-out assumptions, sub-lease assumptions and
space requirements may not be accurate and it is possible that
changes in these estimates could materially affect our financial
condition and results of operations. If any future adjustments
are required to the restructuring initiatives recorded under the
provisions of EITF 94-3, such adjustments will be measured
in accordance with EITF 94-3. SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities,” was effective for exit or disposal activities
that are initiated after December 31, 2002. SFAS 146
requires that a liability for a cost that is associated with an
exit or disposal activity be recognized when the liability is
incurred. SFAS 146 supersedes the guidance in EITF Issue
No. 94-3. SFAS 146 includes a rebuttable presumption
that if an entity has a past practice of providing similar
termination benefits to employees, the benefit arrangement is
presumed to be an ongoing benefit arrangement that should be
accounted for under SFAS 112, “Employers’
Accounting for Postemployment Benefits.” SFAS 112
prescribes the accounting for the estimated cost of benefits,
including severance benefits, provided by an employer to former
or inactive employees after employment but before retirement. A
liability is recognized when the severance amounts relate to
prior services rendered, the payment of the amount is probable
and the amount can be reasonably estimated. Since the second
quarter of 2003, we have accounted for severance-related
restructuring charges in accordance with SFAS 112 because
we have a history of paying similar severance benefits since
2001. We have not recorded any liability related to other post
employment benefits, as of December 31, 2004, since the
amounts are neither probable nor reasonably estimable. |
|
|
| |
Our remaining cash lease commitments related to restructured
facilities are approximately $53.0 million at
December 31, 2004, of which 46% is accrued in the
accompanying consolidated balance sheet, and the remaining 54%
relates to sublease assumptions. We have entered into signed
sublease arrangements for approximately $6.2 million, with
the remaining $22.4 million for future estimated sublease
arrangements. If the estimated sublease dates were to be delayed
by six months, based on our current estimates, we would
potentially have to recognize an additional $0.6 million in
our statement of operations for restructuring and other related
charges. Our sublease reserve is sensitive to the level of
sublease rent anticipated and the timing of sublease
commencement. A 10 percent reduction in our sublease rate
would have resulted in an additional $2.5 million of
charges as of the end of 2004. |
|
|
|
| |
• |
Contingent Liabilities. We have certain contingent
liabilities that arise in the ordinary course of our business
activities. We accrue contingent liabilities when it is probable
that future expenditures will be made and such expenditures can
be reasonably estimated. We are subject to various legal claims
totaling approximately $3.6 million and various
administrative audits, each of which have arisen in the |
15
|
|
|
| |
|
ordinary course of our business. We have an accrual at
December 31, 2004 of approximately $0.3 million
related to certain of these items. We intend to defend these
matters vigorously, although the ultimate outcome of these items
is uncertain and the potential loss, if any, may be
significantly higher or lower than the amounts we have
previously accrued. |
|
|
|
Off-Balance Sheet Arrangements |
We have not created, and are not party to, any special-purpose
or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating parts of our business that
are not consolidated into our financial statements, other than
the 50% ownership interest that we held in our joint venture in
Milan, Italy until July 2, 2003, at which time our interest
in the joint venture was acquired by the management team of the
joint venture. See “Equity Investments” in this
Part II, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and
Note 16 to Consolidated Financial Statements included
elsewhere in this Annual Report for a more detailed discussion
of this joint venture. We do not have any other arrangements or
relationships with entities that are not consolidated into our
financial statements that are reasonably likely to materially
affect our financial condition, results of operations,
liquidity, capital expenditures or capital resources.
|
|
|
Effect of Certain Transactions |
|
|
|
Investment in Consolidated Subsidiary |
On January 24, 2003, we increased our ownership percentage
in HWT, Inc. (HWT, formerly HealthWatch Technologies, LLC ), a
consolidated subsidiary by purchasing a total of
587,092 shares of HWT common stock from Jerry A. Greenberg
and J. Stuart Moore, our Co-Chairmen and Co-CEOs, for a total
purchase price of $557,737, in cash, or $0.95 per share,
which represented a substantial loss from their cost basis per
share of $5.00. Messrs. Greenberg and Moore are no longer
shareholders of HWT. We also commenced a tender offer on
January 24, 2003 to purchase the remaining shares of HWT,
for $1.05 per share, in cash, which resulted in the
purchase of 927,395 shares of HWT common stock, for a total
purchase price of $973,765. As a result of these purchases, our
ownership percentage in HWT increased from 55% to 85%. These
acquisitions were accounted for as purchases, and the purchase
price was allocated primarily to customer contracts and
developed technology, which are included in the accompanying
consolidated balance sheet under the caption “Intangible
assets, net.” These assets are being amortized on a
straight line basis over lives of 3 years.
On March 21, 2003, HWT issued 526,190 shares of its
common stock to an executive officer of HWT in connection with
the executive’s initial employment with HWT. Of these
526,190 shares, 50,000 were issued as restricted stock
under the executive’s employment agreement, and the
remaining shares were purchased by the executive for
$1.05 per share in cash. The restricted shares vest ratably
over a period of four years. Our ownership percentage in HWT was
reduced to 79.5% as a result of the March 2003 issuance. We
recorded a gain of $365,000, as a result of the change in equity
interest resulting from the stock issuance to the executive. We
accounted for this gain as a component of stockholders’
equity due to losses incurred by HWT since inception.
As of December 31, 2004, we have no equity investments. On
October 25, 2000, we invested $3.7 million in Dream
Incubator, Inc. (DI), a management consulting company that
develops strategies for e-businesses in Japan, and acquired a
19% interest. Under the terms of our investment agreement with
DI, the Company had one seat on DI’s board of directors,
with special voting rights and other privileges, and, therefore,
used the equity method of accounting for this investment. In
2002 and 2001, our equity ownership percentage in DI was diluted
from approximately 19% to approximately 15.7%, as a result of
subsequent sales of DI’s common stock. Both rounds of
financing by DI were at a higher price per share than what we
previously paid and we recorded non-cash gains of
$1.8 million and $1.4 million for 2002 and 2001,
respectively, as a result of the change in equity interest.
16
During the fourth quarter of 2002, the Company discontinued its
Sapient KK operations in Japan. On November 14, 2002, as
part of the dissolution of Sapient KK, we agreed to unwind the
cross ownership position between DI and Sapient KK in exchange
for DI lifting certain trade restrictions on its common stock
owned by us. In addition, the Company’s designee on
DI’s Board of Directors resigned his position as a Director
of DI in November 2002. From November 2002, we have used the
cost method of accounting, since we no longer have the ability
to significantly influence DI. We sold all of our remaining
interest in DI for net cash proceeds of $8.6 million and
$585,000 in 2003 and 2002, respectively, realizing gains of
approximately $2.8 million and $43,000 in 2003 and 2002,
respectively.
In September 1999, we commenced a joint venture, Sapient S.p.A.,
in Milan, Italy. The joint venture provided business and
technology consulting in Italy. We owned 50% of the voting stock
of this joint venture and used the equity method of accounting
because we had the ability to significantly influence, but not
control, the joint venture. On July 2, 2003, we reached an
agreement with the management team of Sapient S.p.A., pursuant
to which the management team acquired all of the shares of
Sapient S.p.A. from the shareholders of the joint venture and
the joint venture agreement has been terminated. The management
team is the exclusive licensee of Sapient’s intellectual
property in Italy, and we are entitled to a royalty equal to 2%
of the annual revenue of Sapient S.p.A. beginning July 2,
2005. We also have an option to purchase 100% of the
ownership of Sapient S.p.A., based on a formula which estimates
fair value, among other rights. The option is exercisable from
July 2007 through July 2010.
|
|
|
Related Party Transactions |
We recognized approximately $229,000 in net revenues from
consulting services provided to Sapient S.p.A in 2002. In
addition to recognizing revenue for services provided to Sapient
S.p.A., the Company reduced its general and administrative
expenses by approximately $100,000 for start-up and
administrative services billed to the joint venture in 2002. No
amounts were recognized as revenue or reductions to general and
administrative expenses in 2004 and 2003. The Company had no
material receivables or payables outstanding with this entity at
December 31, 2004.
In December 2002, we ceased operations in Japan. Our financial
statements and all financial information included in this report
for 2002 and prior periods reflect the results of operations for
Japan as a single line item listed as “Loss from
discontinued operations.”
17
Results of Operations
The following table sets forth the percentage of revenues of
items included in our consolidated statements of operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Reimbursable expenses
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total gross revenues
|
|
|
105 |
|
|
|
105 |
|
|
|
105 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Project personnel costs, before reimbursable expenses
|
|
|
56 |
|
|
|
61 |
|
|
|
77 |
|
| |
Reimbursable expenses
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total project personnel costs
|
|
|
61 |
|
|
|
66 |
|
|
|
82 |
|
| |
Selling and marketing costs
|
|
|
6 |
|
|
|
10 |
|
|
|
15 |
|
| |
General and administrative costs
|
|
|
28 |
|
|
|
31 |
|
|
|
46 |
|
| |
Restructuring and other related charges
|
|
|
1 |
|
|
|
1 |
|
|
|
38 |
|
| |
Impairment of goodwill and intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
62 |
|
| |
Amortization of intangible assets
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
| |
Stock-based compensation
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
96 |
|
|
|
110 |
|
|
|
247 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9 |
|
|
|
(5 |
) |
|
|
(142 |
) |
|
Gain on equity investment change in interest
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
Other income (expense), net
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
Interest income
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes, net equity loss from
investees and loss from discontinued operations
|
|
|
10 |
|
|
|
(2 |
) |
|
|
(139 |
) |
|
Income tax provision (benefit)
|
|
|
1 |
|
|
|
1 |
|
|
|
(11 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before net equity loss from investees and loss
from discontinued operations
|
|
|
9 |
|
|
|
(3 |
) |
|
|
(128 |
) |
|
Net equity loss from investees
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
9 |
|
|
|
(3 |
) |
|
|
(128 |
) |
|
Loss from discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
9 |
% |
|
|
(3 |
)% |
|
|
(132 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2004 and 2003 |
Our service revenues for 2004 and 2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2004 | |
|
2003 | |
|
Increase | |
|
Increase | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Service revenues
|
|
$ |
253,936 |
|
|
$ |
184,795 |
|
|
$ |
69,141 |
|
|
|
37 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
18
The increase in our recurring revenues combined with the overall
increase in demand for our services were the primary drivers of
the year over year increase in our service revenues. The effects
of foreign currency exchange rates accounted for 6% of the
increase. Our recurring revenues increased to 25% of our service
revenues in 2004 from 17% in 2003. Recurring revenues are
revenue commitments of a year or more in which the client has
committed spending levels to us or chosen us as an exclusive
provider of certain services.
In 2004, our five largest clients accounted for approximately
24% of our revenues in the aggregate; no client accounted for
more than 10% of such revenues and two clients accounted for
more than 5% of such revenues. In 2003, our five largest clients
accounted for approximately 23% 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.
|
|
|
Project Personnel Costs, Before Reimbursable Expenses |
Project personnel costs, before reimbursable expenses, consist
principally of salaries and employee benefits for personnel
dedicated to client projects, independent contractors 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
Increase | |
|
Percentage | |
| |
|
2004 | |
|
2003 | |
|
(Decrease) | |
|
Increase | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Project personnel costs (before reimbursable expenses)
|
|
$ |
142,512 |
|
|
$ |
111,967 |
|
|
$ |
30,545 |
|
|
|
27 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Project personnel costs (before reimbursable expenses) as a
percentage of service revenues
|
|
|
56 |
% |
|
|
61 |
% |
|
|
(5 |
) |
|
|
|
|
The increase in project personnel costs, before reimbursable
expenses, was due to the increase in the number of delivery
people in India relative to the total number of delivery people
in 2004 compared to 2003. We ended 2004 with 1,898 delivery
people, of which, 1,050 were in India compared to a total of
1,176 delivery people, of which 586 delivery people were in
India at the end of 2003. The decrease in project personnel
costs, before reimbursable expenses, as a percentage of revenue
was primarily the result of the shift of our subcontractor usage
to India.
|
|
|
Selling and Marketing Costs |
Selling and marketing costs consist principally of salaries,
employee benefits and travel expenses of selling and marketing
personnel, and promotional costs.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2004 | |
|
2003 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Selling and marketing costs
|
|
$ |
15,208 |
|
|
$ |
18,501 |
|
|
$ |
(3,293 |
) |
|
|
(18 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing costs as a percentage of service revenues
|
|
|
6 |
% |
|
|
10 |
% |
|
|
(4 |
) |
|
|
|
|
Selling and marketing costs decreased in absolute dollars due
primarily to our focus on recurring revenues, which leverages
our existing client relationships. The decrease in percentage of
service revenues is primarily due to our higher revenue base.
The number of selling and marketing personnel decreased to
45 people at the end of 2004 compared to 51 people at
the end of 2003.
If our service revenues do not grow as we expect in 2005,
selling and marketing costs could increase as a percentage of
revenues.
19
|
|
|
General and Administrative Costs |
General and administrative costs relate principally to salaries
and employee benefits associated with our management, legal,
finance, information technology, hiring, training and
administrative groups, and depreciation and occupancy expenses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
Increase | |
|
Percentage | |
| |
|
2004 | |
|
2003 | |
|
(Decrease) | |
|
Increase | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
General and administrative expenses
|
|
$ |
71,282 |
|
|
$ |
57,523 |
|
|
$ |
13,759 |
|
|
|
24 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses as a percentage of service
revenues
|
|
|
28 |
% |
|
|
31 |
% |
|
|
(3 |
) |
|
|
|
|
General and administrative costs decreased as a percentage of
service revenues due to our increased revenue base. The increase
in absolute dollars was primarily due to increased salaries and
employee benefits associated with increased head count, an
increase in consulting costs primarily related to Sarbanes-Oxley
Section 404 compliance and an increase in our audit and tax
expense. During 2004, we incurred costs of approximately
$2.1 million relating to Sarbanes-Oxley Section 404
compliance. We do not anticipate a reduction of Sarbanes-Oxley
Section 404 compliance-related costs in 2005. Due to our
recent growth, the number of general and administrative
personnel increased to 371 people at the end of 2004
compared to 256 people at the end of 2003, primarily in
finance, hiring and administrative groups.
Our general and administrative costs include a foreign currency
translation loss of approximately ($54,000) in 2004, compared to
a foreign currency translation gain of $1.1 million in
2003. These gains and losses were primarily related to
intercompany foreign currency translations that were of a
short-term nature.
|
|
|
Restructuring and Other Related Charges |
As a result of the decline in the demand for technology
consulting services that began in the second half of 2000, and
the resulting decline in our service revenues in 2001 and 2002,
we restructured our workforce and operations in 2001, 2002 and
the second quarter of 2003.
The Company recorded restructuring and other related charges of
approximately $1.1 million during 2004, primarily due to
decreases in estimated sub-lease income in connection with the
restructuring plans previously announced. No employees were
terminated in connection with the restructuring charges recorded
in 2004.
In connection with the restructuring plan implemented in the
second quarter of 2003, we recorded restructuring and other
related charges of approximately $1.4 million. This
restructuring action resulted in the termination of
40 employees. This restructuring action was due to the
skill sets of certain employees not matching our current
business requirements and due to a significant decline in the
demand for our services in our Financial Services business unit
through the second quarter of 2003. In the third quarter of
2003, we recorded restructuring and other related charges of
approximately $0.7 million, primarily due to decreases in
our estimated sub-lease income in connection with the
restructuring plans previously announced.
In connection with the restructuring plans implemented in 2002,
we recorded restructuring and other related charges of
approximately $66.9 million during 2002. The 2002
restructuring plans resulted in the termination of 863
employees. The restructuring plans also included discontinuing
operations in Japan, closing offices in Houston and Denver and
consolidating office space in other cities where we had excess
office space. Estimated costs for the consolidation of
facilities are composed of contractual rental commitments for
office space vacated and related costs, brokerage and related
costs to sublet the office space and leasehold improvement
write-downs, offset by estimated sub-lease income. The total
reduction of office space resulting from these office closings
and consolidations was approximately 391,000 square feet.
20
Charges for restructuring and other related activities as of,
and for the years ended December 31, 2004 and 2003 were as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce | |
|
Facilities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2003
|
|
$ |
242 |
|
|
$ |
40,545 |
|
|
$ |
40,787 |
|
|
Additional charges
|
|
|
(182 |
) |
|
|
1,290 |
|
|
|
1,108 |
|
|
Non-cash, utilized
|
|
|
— |
|
|
|
(2,344 |
) |
|
|
(2,344 |
) |
|
Cash utilized
|
|
|
(49 |
) |
|
|
(13,939 |
) |
|
|
(13,988 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
11 |
|
|
$ |
25,552 |
|
|
$ |
25,563 |
|
| |
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
10,560 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
15,003 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce | |
|
Facilities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2002
|
|
$ |
5,133 |
|
|
$ |
68,443 |
|
|
$ |
73,576 |
|
|
Additional charges
|
|
|
1,572 |
|
|
|
563 |
|
|
|
2,135 |
|
|
Non-cash, utilized
|
|
|
(16 |
) |
|
|
(2,379 |
) |
|
|
(2,395 |
) |
|
Cash utilized
|
|
|
(6,447 |
) |
|
|
(26,082 |
) |
|
|
(32,529 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
$ |
242 |
|
|
$ |
40,545 |
|
|
$ |
40,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
18,237 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
22,550 |
|
| |
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring costs are $25.6 million
at December 31, 2004, of which cash portion is
$24.3 million. The net cash outlay over the next 12-month
period is expected to be $8.3 million and the remainder
will be paid through 2011.
|
|
|
Amortization of Intangible Assets |
During 2004, amortization of intangible assets consisted
primarily of amortization of customer contracts and developed
technology resulting from prior acquisitions and investments in
consolidated subsidiaries. Amortization expense related to the
intangible assets was $515,000 and $1.8 million for 2004
and 2003, respectively. The decrease in amortization of
intangible assets for 2004 as compared to 2003 was primarily due
to various intangible assets becoming fully amortized during
2003. Amortization expense related to intangible assets is
expected to be $515,000 and $128,000 for 2005 and 2006,
respectively.
Stock-based compensation consists of expenses for deferred
compensation associated with the Human Code, Inc. (Human Code)
and The Launch Group Aktiengesellschaft (TLG) acquisitions
and certain grants of restricted stock that we made in 2002 and
2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
Percentage | |
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Stock-based compensation expenses
|
|
$ |
779 |
|
|
$ |
1,089 |
|
|
$ |
(310 |
) |
|
|
(28 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses as a percentage of service
revenues
|
|
|
0.3 |
% |
|
|
0.6 |
% |
|
|
(0.3 |
) |
|
|
|
|
Stock based compensation recorded in connection with the
acquisition of Human Code had been fully amortized or forfeited
as of the end of the second quarter of 2004. The decrease in
stock-based compensation
21
expense was primarily due to the reduction of deferred
compensation related to stock options and shares of restricted
stock forfeited by people that ceased to be employed by the
Company in 2003.
Other income (expense) primarily consisted of realized gain
and loss from disposition of our investment in shares of common
stock of DI in 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2004 | |
|
2003 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Other income (expense)
|
|
$ |
65 |
|
|
$ |
2,729 |
|
|
$ |
(2,664 |
) |
|
|
(98 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Other income decreased due to a realized gain of approximately
$2.8 million from the sale of shares of common stock we
held in DI during 2003. We classify 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
the fair value of the investment declines below cost, we
consider 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 adjusted down to
fair value and the adjustment is included in our consolidated
statement of operations. If the decline is considered temporary
in nature, the adjustment is reflected as a component of other
comprehensive income in the statement of stockholders’
equity. In 2003, we recorded charges of approximately $45,000 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. As of December 31,
2004, we have no equity investments.
Interest income is derived primarily from investments in
U.S. government securities, tax-exempt, short-term
municipal bonds and commercial paper.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2004 | |
|
2003 | |
|
Increase | |
|
Increase | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Interest income
|
|
$ |
2,655 |
|
|
$ |
1,902 |
|
|
$ |
753 |
|
|
|
40 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income increased primarily due to higher prevailing
interest rates and our slightly higher average cash and
marketable investment balances.
|
|
|
Provision (Benefit) for Income Taxes |
We have deferred tax assets which have arisen primarily as a
result of net operating losses incurred in 2001, 2002 and 2003,
as well as other temporary differences between book and tax
accounting. Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes,” requires
the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Significant
management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against the net deferred tax
assets. As a result of net operating losses incurred and
uncertainty as to the extent, jurisdiction and timing of
profitability in future periods, we recorded a valuation
allowance of $115.0 million and $118.0 million at
December 31, 2004 and 2003, respectively. We recorded a net
income tax provision of $2.4 million for 2004, which
related primarily to federal alternative minimum tax, state
minimum taxes and foreign taxes. We recorded a net income tax
provision of $1.3 million for 2003, which related primarily
to state minimum taxes and foreign taxes. Our effective tax rate
may vary from period to period based on changes in estimated
taxable income or loss, changes to the valuation allowance,
changes to federal, state or foreign tax laws, future expansion
into areas with varying country, state,
22
and local income tax rates, deductibility of certain costs and
expenses by jurisdiction and as a result of acquisitions.
|
|
|
Results by Operating Segment |
We are engaged in business activities which involve the
provision of business and technology consulting services,
primarily on a fixed-price basis. We have discrete financial
data by operating segments available based on our method of
internal reporting, which disaggregates our operations on a
business unit basis for our United States operations and on a
geographic basis for our international operations. Operating
segments are defined as components of the Company for which
separate financial information is available that is evaluated
regularly by the chief operating decision maker. Management uses
this information to manage resources and evaluate performance.
Beginning with the fourth quarter of 2003, we combined our
Automotive and Industrial, Consumer and Transportation and
Energy Services business units in the United States into one
business unit called Automotive, Consumer and Energy, and we are
reporting our results by operating segments accordingly. Asset
information by operating segment is not reported to or reviewed
by the chief operating decision maker and, therefore, we have
not disclosed asset information for each operating segment.
We do not allocate certain selling and marketing and general and
administrative expenses to our business unit segments in the
United States, because these activities are managed separately
from the business units. We did not allocate the costs
associated with the 2002 restructuring plans across our
operating segments for internal measurements purposes, given
that the substantial majority of the restructuring costs
represented consolidation of facilities. We did allocate the
workforce reduction costs associated with the restructuring
activity in the second quarter of 2003 across our operating
segments due to the specific identification of terminated
employees to their respective individual operating segment. We
did not allocate the restructuring and other related charges
recorded during 2004 and in the third quarter of 2003 across our
operating segments as these charges resulted primarily from
changes in estimated sub-lease income in connection with the
restructuring plans previously announced.
During 2004, we identified Canada as another reportable segment
based upon quantitative calculations and we are reporting our
results by operating segments accordingly. Results for operating
segments for 2003 have been reclassified to reflect this change.
The tables below present the service revenues and operating
income (loss) attributable to these operating segments for 2004
and 2003. The “all other” category includes HWT and
unallocated costs relating to India.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
Percentage | |
| |
|
December 31, | |
|
December 31, | |
|
Increase | |
|
Increase | |
| Service Revenues |
|
2004 | |
|
2003 | |
|
(Decrease) | |
|
(Decrease) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Financial Services
|
|
$ |
20,480 |
|
|
$ |
19,616 |
|
|
$ |
864 |
|
|
|
4% |
|
|
Public Services
|
|
|
24,771 |
|
|
|
26,535 |
|
|
|
(1,764 |
) |
|
|
(7)% |
|
|
Automotive/ Consumer/ Energy
|
|
|
53,442 |
|
|
|
35,980 |
|
|
|
17,462 |
|
|
|
49% |
|
|
Technology/ Communications
|
|
|
36,722 |
|
|
|
21,947 |
|
|
|
14,775 |
|
|
|
67% |
|
|
United Kingdom
|
|
|
63,770 |
|
|
|
51,211 |
|
|
|
12,559 |
|
|
|
25% |
|
|
Germany
|
|
|
32,089 |
|
|
|
17,784 |
|
|
|
14,305 |
|
|
|
80% |
|
|
Canada
|
|
|
17,013 |
|
|
|
7,610 |
|
|
|
9,403 |
|
|
|
>100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Reportable Segments
|
|
|
248,287 |
|
|
|
180,683 |
|
|
|
67,604 |
|
|
|
37% |
|
|
All other
|
|
|
5,649 |
|
|
|
4,112 |
|
|
|
1,537 |
|
|
|
37% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated Total
|
|
$ |
253,936 |
|
|
$ |
184,795 |
|
|
$ |
69,141 |
|
|
|
37% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
23
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
Increase | |
|
Percentage Increase | |
| Operating Income (Loss) |
|
2004 | |
|
2003 | |
|
(Decrease) | |
|
(Decrease) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Financial Services(1)
|
|
$ |
6,417 |
|
|
$ |
7,179 |
|
|
$ |
(762 |
) |
|
|
(11)% |
|
|
Public Services(1)
|
|
|
9,174 |
|
|
|
4,657 |
|
|
|
4,517 |
|
|
|
97% |
|
|
Automotive/ Consumer/ Energy(1)
|
|
|
18,019 |
|
|
|
11,779 |
|
|
|
6,240 |
|
|
|
53% |
|
|
Technology/ Communications(1)
|
|
|
12,038 |
|
|
|
5,460 |
|
|
|
6,578 |
|
|
|
>100% |
|
|
United Kingdom
|
|
|
6,418 |
|
|
|
(1,830 |
) |
|
|
8,248 |
|
|
|
>100% |
|
|
Germany
|
|
|
6,835 |
|
|
|
2,333 |
|
|
|
4,502 |
|
|
|
>100% |
|
|
Canada
|
|
|
4,647 |
|
|
|
1,558 |
|
|
|
3,089 |
|
|
|
>100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Reportable Segments(1)
|
|
|
63,548 |
|
|
|
31,136 |
|
|
|
32,412 |
|
|
|
>100% |
|
|
All other(1)
|
|
|
3,583 |
|
|
|
1,704 |
|
|
|
1,879 |
|
|
|
>100% |
|
|
Reconciling items(2)
|
|
|
(41,879 |
) |
|
|
(36,401 |
) |
|
|
(5,478 |
) |
|
|
15% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated Total(3)
|
|
$ |
25,252 |
|
|
$ |
(3,561 |
) |
|
$ |
28,813 |
|
|
|
>100% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Reflects only the direct controllable expenses of each business
unit segment. It does not represent the total operating results
for each business unit segment in the United States as it does
not contain an allocation of certain corporate and general and
administrative expenses incurred in support of the business unit
segments. |
| |
| (2) |
Adjustments that are made to the total of the segments’
operating income (loss) in order to arrive at consolidated
income (loss) before income taxes include the following: |
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Restructuring and other related charges
|
|
$ |
1,108 |
|
|
$ |
— |
|
|
Unallocated restructuring and other related charges
|
|
|
— |
|
|
|
737 |
|
|
Amortization of intangible assets
|
|
|
515 |
|
|
|
1,772 |
|
|
Stock-based compensation
|
|
|
779 |
|
|
|
1,089 |
|
|
Other income
|
|
|
(65 |
) |
|
|
(2,729 |
) |
|
Interest income
|
|
|
(2,655 |
) |
|
|
(1,902 |
) |
|
Unallocated expenses
|
|
|
42,197 |
(4) |
|
|
37,434 |
(4) |
| |
|
|
|
|
|
|
| |
|
$ |
41,879 |
|
|
$ |
36,401 |
|
| |
|
|
|
|
|
|
|
|
| (3) |
Represents consolidated income (loss) before income taxes. |
| |
| (4) |
Includes corporate portion of both selling and marketing and
general and administrative costs. |
|
|
|
Service Revenues by Operating Segments |
Consolidated service revenues for our seven reportable operating
segments for 2004 increased 37% from consolidated service
revenues for these segments for 2003, of which 6% was
attributable to the effects of foreign currency exchange rates.
Six of our seven reportable operating segments recorded
increased service revenues during this period. The increase in
our Automotive, Consumer and Energy business unit’s service
revenues of 49%, compared to 2003, was primarily due to
increased demand from clients in the energy and automotive
industries in the United States. The increase in our Technology
and Communications business unit’s service revenues of 67%,
compared to 2003, was primarily due to increased demand from new
and existing clients in the technology and communications
industries in the United States. The increase in our United
Kingdom business unit’s service revenues of 25%, compared
to 2003, was primarily due to increased revenues from large
government, healthcare and energy clients as well as the
strengthening of the Pound Sterling against the
U.S. dollar. Without the effect of foreign exchange
fluctuations, the increase in services
24
revenues for our United Kingdom business unit would have been
11%. The increase in our Germany business unit’s service
revenues of 80%, compared to 2003, was primarily due to
increased demand from clients in the energy industry as well as
the strengthening of the Euro against the U.S. dollar.
Without the effect of foreign currency fluctuations, the
increase in service revenues for our Germany business unit would
have been 66%. The increase in our Canada business unit’s
service revenues of 124%, compared to 2003, was primarily due to
increased demand from clients in the energy and financial
service industry as well as the strengthening of the Canadian
dollar against the U.S. dollar. Without the effect of
foreign currency fluctuations, the increase in service revenues
for our Canada business unit would have been 111%. The increase
in our Financial Services business unit’s service revenues
of 4%, compared to 2003, was primarily due to improved demand
from clients in the financial services industry in the United
States. Service revenues from our Public Services business unit
declined 7%, compared to 2003, primarily due to decline in
service revenues from our federal government clients.
Within our business units, we expect that demand for our
services in our Technology and Communications will increase as a
percentage of revenues, but that our Public Services and German
business units’ revenues will decrease as a percentage of
total revenues in the first quarter of 2005. We expect that the
percentage of revenues in our other business units in the first
quarter of 2005 will not change materially from the fourth
quarter of 2004.
|
|
|
Operating Income (Loss) by Operating Segments |
Operating income for our reportable segments increased
significantly during 2004, compared to 2003, and all of our
reportable segments had profitable operating results. Our Public
Services; Automotive, Consumer and Energy; Technology and
Communications; Germany; United Kingdom; and Canada business
units all reported increases in operating income and
improvements in their operating margin in 2004, compared to
2003. These improvements are primarily the result of the
increase in our recurring revenues and the shift of contractor
mix to India. Although our Public Services business unit had a
decrease in 2004 service revenue compared to 2003, cost
reductions and improvement in staff utilization led to improved
margins, which resulted in a $4.5 million increase in
operating income in 2004. The operating income for our Financial
Services business unit declined slightly in 2004, compared to
2003, primarily due to increases in our project personnel costs.
|
|
|
Years Ended December 31, 2003 and 2002 |
Our service revenues for 2003 and 2002 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Increase | |
|
Increase | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Service revenues
|
|
$ |
184,795 |
|
|
$ |
173,811 |
|
|
$ |
10,984 |
|
|
|
6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our service revenues was attributable to an
increase in the demand for our services towards the end of 2003,
and to the effects of currency changes which accounted for 5% of
the increase. Following stabilization and modest growth in the
demand for our services in the first three quarters of 2003, we
began to see increased growth in the fourth quarter of 2003. The
percentage of our revenues attributable to support and
maintenance projects increased, growing to 13% of our total
service revenues in 2003 from 7% in 2002.
In each of the years 2003 and 2002, our five largest clients
accounted for approximately 23% 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.
25
|
|
|
Project Personnel Costs, Before Reimbursable Expenses |
Project personnel costs, before reimbursable expenses, consist
principally of salaries and employee benefits for personnel
dedicated to client projects, independent contractors 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Project personnel costs (before reimbursable expenses)
|
|
$ |
111,967 |
|
|
$ |
133,275 |
|
|
$ |
(21,308 |
) |
|
|
(16 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Project personnel costs (before reimbursable expenses) as a
percentage of service revenues
|
|
|
61 |
% |
|
|
77 |
% |
|
|
(16 |
) |
|
|
|
|
Project personnel costs, before reimbursable expenses, decreased
both in absolute dollars and as a percentage of service revenues
primarily due to improved utilization of our billable personnel
over the course of the year. Due to the restructuring actions
taken during 2002, project personnel costs decreased over the
course of 2002, remained relatively unchanged in the first three
quarters of 2003, and increased in the fourth quarter to deliver
on the increased demand for our services. Overall, our project
personnel costs declined from 2002 to 2003 as a result of the
restructuring actions taken in 2002.
|
|
|
Selling and Marketing Costs |
Selling and marketing costs consist principally of salaries,
employee benefits and travel expenses of selling and marketing
personnel, and promotional costs.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Selling and marketing costs
|
|
$ |
18,501 |
|
|
$ |
26,192 |
|
|
$ |
(7,691 |
) |
|
|
(29 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing costs as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
percentage of service revenues
|
|
|
10 |
% |
|
|
15 |
% |
|
|
(5 |
) |
|
|
|
|
Selling and marketing costs decreased both in absolute dollars
and as a percentage of services revenues primarily due to our
higher revenue base and a decrease in the average number of
selling and marketing personnel from 78 in 2002 to 58 in 2003
resulting from our restructuring actions, and related decreases
in travel expenses and marketing promotions.
|
|
|
General and Administrative Costs |
General and administrative costs relate principally to salaries
and employee benefits associated with our management, legal,
finance, information technology, recruiting, training and
administrative groups, and depreciation and occupancy expenses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
General and administrative expenses
|
|
$ |
57,523 |
|
|
$ |
79,338 |
|
|
$ |
(21,815 |
) |
|
|
(27 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses as a percentage of service
revenues
|
|
|
31 |
% |
|
|
46 |
% |
|
|
(15 |
) |
|
|
|
|
26
General and administrative costs decreased both in absolute
dollars and as a percentage of services revenues primarily due
to restructurings and other cost-saving actions in 2002 and
2003, and our higher revenue base. As a result of these
restructuring and cost-saving actions, the average number of our
general and administrative personnel decreased from 360 in 2002
to 262 in 2003. These earlier restructuring and cost-saving
actions allowed us to generate increased leverage from our
existing general and administrative resources when our service
revenues began to increase.
|
|
|
Restructuring and Other Related Charges |
As a result of the decline in the demand for technology
consulting services that began in the second half of 2000, and
the resulting decline in our service revenues in 2001 and 2002,
we restructured our workforce and operations in 2001, 2002 and
the second quarter of 2003.
In connection with the restructuring plan implemented in the
second quarter of 2003, we recorded restructuring and other
related charges of approximately $1.4 million. This
restructuring action resulted in the termination of 40
employees. This restructuring action was due to the skill sets
of certain employees not matching our current business
requirements and due to a significant decline in the demand for
our services in our Financial Services business unit through the
second quarter of 2003. In the third quarter of 2003, we
recorded restructuring and other related charges of
approximately $0.7 million, primarily due to decreases in
our estimated sub-lease income in connection with the
restructuring plans previously announced.
In connection with the restructuring plans implemented in 2002,
we recorded restructuring and other related charges of
approximately $66.9 million during 2002. The 2002
restructuring plans resulted in the termination of 863
employees. The restructuring plans also included discontinuing
operations in Japan, closing offices in Houston and Denver and
consolidating office space in other cities where we had excess
office space. In connection with the termination of certain
former TLG employees, we accelerated the vesting of
approximately 138,000 shares of restricted common stock as
a part of their severance packages, resulting in a non-cash
charge of approximately $903,000. Restructuring charges of
$662,000 related to our Japan subsidiary were reported in our
loss from discontinued operations for 2002. Estimated costs for
the consolidation of facilities are composed of contractual
rental commitments for office space vacated and related costs,
brokerage and related costs to sublet the office space and
leasehold improvement write-downs, offset by estimated sub-lease
income. The total reduction of office space resulting from these
office closings and consolidations was approximately
391,000 square feet.
Charges for restructuring and other related activities as of,
and for the years ended December 31, 2003 and 2002 were as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce | |
|
Facilities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2002
|
|
$ |
5,133 |
|
|
$ |
68,443 |
|
|
$ |
73,576 |
|
|
Additional charges
|
|
|
1,572 |
|
|
|
563 |
|
|
|
2,135 |
|
|
Non-cash, utilized
|
|
|
(16 |
) |
|
|
(2,379 |
) |
|
|
(2,395 |
) |
|
Cash utilized
|
|
|
(6,447 |
) |
|
|
(26,082 |
) |
|
|
(32,529 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
$ |
242 |
|
|
$ |
40,545 |
|
|
$ |
40,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
18,237 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
22,550 |
|
| |
|
|
|
|
|
|
|
|
|
27
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Depreciable | |
|
|
| |
|
Workforce | |
|
Facilities | |
|
Assets | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2001
|
|
$ |
1,635 |
|
|
$ |
51,705 |
|
|
$ |
— |
|
|
$ |
53,340 |
|
|
Additional charges
|
|
|
23,883 |
|
|
|
46,393 |
|
|
|
1,797 |
|
|
|
72,073 |
|
|
Adjustments
|
|
|
(643 |
) |
|
|
(3,883 |
) |
|
|
— |
|
|
|
(4,526 |
) |
|
Non-cash, utilized
|
|
|
(903 |
) |
|
|
(3,968 |
) |
|
|
(1,797 |
) |
|
|
(6,668 |
) |
|
Cash utilized
|
|
|
(18,839 |
) |
|
|
(21,804 |
) |
|
|
— |
|
|
|
(40,643 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
$ |
5,133 |
|
|
$ |
68,443 |
|
|
$ |
— |
|
|
$ |
73,576 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,466 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,110 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Intangible Assets |
We ceased the amortization of goodwill from the beginning of
2002 and we recorded an impairment charge of
$101.8 million, which represented the full carrying amount
of our goodwill in 2002. For 2003 and 2002, amortization of
intangible assets consists primarily of amortization of
marketing assets, customer contracts, and developed technology
resulting from our acquisitions. The decrease in amortization of
intangible assets for 2003 as compared to 2002 was primarily due
to an impairment charge of $5.6 million recorded in the
second quarter of 2002, which is partially offset by the
amortization of intangible assets of $1.5 million acquired
from HWT in the first quarter of 2003. Amortization expense
related to the intangible assets was $1.8 million and
$4.3 million for 2003 and 2002, respectively.
Stock-based compensation consists of expenses for deferred
compensation associated with the Human Code and TLG acquisitions
and certain grants of restricted stock that we made in 2002 and
2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Stock-based compensation expenses
|
|
$ |
1,089 |
|
|
$ |
3,161 |
|
|
$ |
(2,072 |
) |
|
|
(66 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expenses as a percentage of service
revenues
|
|
|
1 |
% |
|
|
2 |
% |
|
|
(1 |
) |
|
|
|
|
Stock-based compensation decreased primarily due to the
termination of certain employees to whom the deferred
compensation related.
In connection with the TLG acquisition, in July 2001, we issued
$10.0 million of restricted common stock to the former TLG
employees continuing with us, of which approximately $600,000
had not been amortized as of December 31, 2003. The
stock-based compensation charge for former TLG employees was
approximately $0.9 million and $2.7 million for 2003 and
2002, respectively. In connection with the termination of
certain TLG employees to whom the deferred compensation relates,
approximately $490,000 of deferred compensation was reversed
through additional paid-in-capital during 2003, and
approximately $2.0 million of deferred compensation was
reversed through additional paid-in-capital and approximately
$903,000 was charged to restructuring and other related charges
during 2002. Stock-based compensation for 2002 also includes a
non-recurring catch-up adjustment of approximately $461,000 to
correct the amortization period. We began to amortize the
deferred compensation over a period of 4.75 years,
commencing on the date of acquisition. The period should have
been 4.0 years, which was corrected during the third
quarter of 2002.
We assumed the outstanding options in connection with the
acquisition of Human Code and recorded deferred compensation of
$11.2 million related to the intrinsic value of the
unvested options. As of December 31, 2003, $16,000 had not
been amortized. When the Human Code employees to whom the
28
deferred compensation relates were terminated, $63,000 and
$374,000 of deferred compensation were reversed through
additional paid-in-capital during 2003 and 2002, respectively.
Stock-based compensation was approximately $105,000 and $342,000
in 2003 and 2002, respectively.
On October 23, 2002, we granted 324,500 shares of
restricted common stock to senior executive officers of the
Company, other than Messrs. Greenberg and Moore. Four of
these senior executive officers have since left the Company and
67,500 shares were forfeited as a result. The remaining
shares vest ratably over a period of four years. The related
stock-based compensation charge for 2003 was approximately
$99,000, and approximately $19,000 per quarter for the next
11 quarters, and $5,000 for the final quarter, will be
expensed.
On March 21, 2003, HWT issued 50,000 restricted shares of
its common stock to an executive officer of HWT. The restricted
shares vest ratably over a period of four years. The related
stock-based compensation charge for 2003 was approximately
$10,000, and approximately $3,300 per quarter for the next
13 quarters will be expensed.
|
|
|
Gain on Equity Investment Change in Interest |
In May 2002, our equity ownership percentage in DI was diluted
from approximately 17% to approximately 15.7%, as a result of a
public offering of DI’s common stock. The dilution was due
to the sale by DI of shares to new investors, which occurred at
a higher price per share than we previously paid and we recorded
gains of $1.8 million in 2002. In the fourth quarter of
2002, we ceased using the equity method of accounting for our
investment in DI as a result of the dissolution of Sapient KK,
which resulted in us unwinding our strategic partnership with DI
and resigning our DI board seat. In November 2003, we completed
the sale of all of our remaining interest in DI.
Other income (expense) primarily consists of realized gain and
loss from disposition of our investment in shares of common
stock of DI.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Increase | |
|
Increase | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Other income
|
|
$ |
2,729 |
|
|
$ |
33 |
|
|
$ |
2,696 |
|
|
|
>100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
In 2003 and 2002, we realized gains on the sale of our DI
interest of approximately $2.8 million and $44,000,
respectively. We classify 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
the fair value of the investment declines below cost, we
consider 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 adjusted down to
fair value and the adjustment is included in our consolidated
statement of operations. If the decline is considered temporary
in nature, the adjustment is reflected as a component of other
comprehensive income in the statement of stockholders’
equity. In 2003 and 2002, we recorded charges of approximately
$45,000 and $271,000, respectively, 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.
29
Interest income is derived primarily from investments in
U.S. government securities, tax-exempt, short-term
municipal bonds and commercial paper.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
|
|
Percentage | |
| |
|
2003 | |
|
2002 | |
|
Decrease | |
|
Decrease | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Interest income
|
|
$ |
1,902 |
|
|
$ |
4,312 |
|
|
$ |
(2,410 |
) |
|
|
(56 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income decreased primarily due to the decrease in the
average cash and investment balances and lower interest rates,
offset in part by transferring investment balances to higher
interest bearing taxable securities.
|
|
|
Provision (Benefit) for Income Taxes |
We have deferred tax assets which have arisen primarily as a
result of net operating losses incurred in 2001, 2002 and 2003,
as well as other temporary differences between book and tax
accounting. As a result of net operating losses incurred in
2001, 2002 and 2003 and uncertainty as to the extent,
jurisdiction and timing of profitability in future periods, we
recorded a full valuation allowance of $118.0 million and
$115.8 million at December 31, 2003 and 2002,
respectively. We recorded a net income tax provision of
$1.3 million for 2003, which related primarily to state
minimum taxes and foreign taxes. We recorded a net income tax
benefit of $18.6 million for 2002, of which
$17.2 million relates to the enactment of “The Job
Creation and Worker Assistance Act of 2002,” enacted
March 9, 2002, which allowed us to carry back our tax net
operating loss for U.S. federal purposes for an additional
three years to 1996. Our effective tax rate may vary from period
to period based on changes in estimated taxable income or loss,
changes to the valuation allowance, changes to federal, state or
foreign tax laws, 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.
|
|
|
Net Equity Loss from Investees |
We use the equity method of accounting for investments when we
have an ownership interest of 20% to 50% or the ability to
exercise significant influence over an investee’s operating
activities. Net equity loss from investees for 2002 was
approximately $349,000. This consisted of equity in net losses
from Sapient S.p.A. of approximately $506,000, offset by equity
in net income from DI of approximately $157,000.
In the fourth quarter of 2002, we ceased using the equity method
of accounting for our investment in DI as a result of the
dissolution of Sapient KK, which resulted in us unwinding our
strategic partnership with DI and resigning our DI board seat.
Also, due to losses incurred by Sapient S.p.A. since its
inception, our investment balance was reduced to zero during the
second half of 2002. On July 2, 2003, we reached an
agreement with the management team of Sapient S.p.A., our joint
venture in Milan, Italy, pursuant to which the management team
acquired all of the shares of Sapient S.p.A. from the
shareholders of the joint venture and the joint venture
agreement has been terminated.
|
|
|
Results by Operating Segment |
Beginning with the fourth quarter of 2003, we combined our
Automotive and Industrial, Consumer and Transportation and
Energy Services business units in the United States into one
business unit called Automotive, Consumer and Energy, and we are
reporting our results by operating segments accordingly. Results
for operating segments for 2002 have been reclassified to
reflect these changes. Asset information by operating segment is
not reported to or reviewed by the chief operating decision
maker and, therefore, we have not disclosed asset information
for each operating segment.
We do not allocate certain selling and marketing and general and
administrative expenses to our business unit segments in the
United States, because these activities are managed separately
from the business units. We did not allocate the costs
associated with the 2002 restructuring plans across our
operating segments for
30
internal measurements purposes, given that the substantial
majority of the restructuring costs represented consolidation of
facilities. We did allocate the workforce reduction costs
associated with the restructuring activity in the second quarter
of 2003 across our operating segments due to the specific
identification of terminated employees to their respective
individual operating segment. We did not allocate the
restructuring and other related charges recorded in the third
quarter of 2003 across our operating segments as these charges
resulted primarily from changes in estimated sub-lease income in
connection with the restructuring plans announced in 2001 and
2002.
The table below presents the service revenues and operating
income (loss) attributable to these operating segments for 2003
and 2002. The ‘all other’ category includes HWT and
unallocated costs relating to India. During the first three
quarters of 2002, our “all other’ category also
included our Japanese subsidiary. During the fourth quarter of
2002, we discontinued operations in Japan and classified the
results of operations as discontinued for all periods presented.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
Percentage | |
| |
|
December 31, | |
|
December 31, | |
|
Increase | |
|
Increase | |
| Service Revenues |
|
2003 | |
|
2002 | |
|
(Decrease) | |
|
(Decrease) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Financial Services
|
|
$ |
19,616 |
|
|
$ |
39,382 |
|
|
$ |
(19,766 |
) |
|
|
(50 |
)% |
|
Public Services
|
|
|
26,535 |
|
|
|
20,799 |
|
|
|
5,736 |
|
|
|
28 |
% |
|
Automotive/ Consumer/ Energy
|
|
|
35,980 |
|
|
|
35,115 |
|
|
|
865 |
|
|
|
2 |
% |
|
Technology/ Communications
|
|
|
21,947 |
|
|
|
16,079 |
|
|
|
5,868 |
|
|
|
37 |
% |
|
United Kingdom
|
|
|
51,211 |
|
|
|
39,738 |
|
|
|
11,473 |
|
|
|
29 |
% |
|
Germany
|
|
|
17,784 |
|
|
|
11,102 |
|
|
|
6,682 |
|
|
|
60 |
% |
|
Canada
|
|
|
7,610 |
|
|
|
6,795 |
|
|
|
815 |
|
|
|
12 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Reportable Segments
|
|
|
180,683 |
|
|
|
169,010 |
|
|
|
11,673 |
|
|
|
7 |
% |
|
All other
|
|
|
4,112 |
|
|
|
4,801 |
|
|
|
(689 |
) |
|
|
(14 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated Total
|
|
$ |
184,795 |
|
|
$ |
173,811 |
|
|
$ |
10,984 |
|
|
|
6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
|
|
|
|
| |
|
| |
|
|
|
Percentage | |
| |
|
December 31, | |
|
December 31, | |
|
Increase | |
|
Increase | |
| Operating Income (Loss) |
|
2003 | |
|
2002 | |
|
(Decrease) | |
|
(Decrease) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Financial Services(1)
|
|
$ |
7,179 |
|
|
$ |
3,672 |
|
|
$ |
3,507 |
|
|
|
96 |
% |
|
Public Services(1)
|
|
|
4,657 |
|
|
|
(3,770 |
) |
|
|
8,427 |
|
|
|
>100 |
% |
|
Automotive/ Consumer/ Energy(1)
|
|
|
11,779 |
|
|
|
2,753 |
|
|
|
9,026 |
|
|
|
>100 |
% |
|
Technology/ Communications(1)
|
|
|
5,460 |
|
|
|
(1,311 |
) |
|
|
6,771 |
|
|
|
>100 |
% |
|
United Kingdom
|
|
|
(1,830 |
) |
|
|
(1,466 |
) |
|
|
(364 |
) |
|
|
(25 |
)% |
|
Germany
|
|
|
2,333 |
|
|
|
(3,964 |
) |
|
|
6,297 |
|
|
|
>100 |
% |
|
Canada
|
|
|
1,558 |
|
|
|
768 |
|
|
|
790 |
|
|
|
>100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total Reportable Segments(1)
|
|
|
31,136 |
|
|
|
(3,318 |
) |
|
|
34,454 |
|
|
|
>100 |
% |
|
All other(1)
|
|
|
1,704 |
|
|
|
2,451 |
|
|
|
(747 |
) |
|
|
(30 |
)% |
|
Reconciling items(2)
|
|
|
(36,401 |
) |
|
|
(239,831 |
) |
|
|
203,430 |
|
|
|
85 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Consolidated Total(3)
|
|
$ |
(3,561 |
) |
|
$ |
(240,698 |
) |
|
$ |
237,137 |
|
|
|
99 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Reflects only the direct controllable expenses of each business
unit segment. It does not represent the total operating results
for each business unit segment in the United States as it does
not contain an allocation of certain corporate and general and
administrative expenses incurred in support of the business unit
segments. |
31
|
|
| (2) |
Adjustments that are made to the total of the segments’
operating income (loss) in order to arrive at consolidated
income (loss) before income taxes include the following: |
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
Restructuring and other related charges
|
|
$ |
— |
|
|
$ |
66,885 |
|
|
Unallocated restructuring and other related charges
|
|
|
737 |
|
|
|
— |
|
|
Impairment of goodwill and intangible assets
|
|
|
— |
|
|
|
107,430 |
|
|
Amortization of intangible assets
|
|
|
1,772 |
|
|
|
4,328 |
|
|
Stock-based compensation
|
|
|
1,089 |
|
|
|
3,161 |
|
|
Other income
|
|
|
(2,729 |
) |
|
|
(1,788 |
) |
|
Interest income
|
|
|
(1,902 |
) |
|
|
(4,312 |
) |
|
Unallocated expenses
|
|
|
37,434 |
(4) |
|
|
64,127 |
(4) |
| |
|
|
|
|
|
|
| |
|
$ |
36,401 |
|
|
$ |
239,831 |
|
| |
|
|
|
|
|
|
|
|
| (3) |
Represents consolidated income (loss) before income taxes, net
equity loss from investees and loss from discontinued operations. |
| |
| (4) |
Includes corporate portion of both selling and marketing and
general and administrative costs. |
Consolidated service revenues for 2003 increased 6% from service
revenues for 2002. This was primarily due to increases in our
United Kingdom, Germany, Technology and Communications, and
Public Services business units, offset by declines in our
Financial Services business unit. Our United Kingdom, Germany,
Technology and Communications, and Public Services business
units’ service revenues for 2003 increased
$11.5 million, $6.7 million, $5.9 million and
$5.7 million, respectively, from 2002. These increases were
primarily due to increased revenues from large government,
healthcare, communication, and energy clients and changes in
currency rates in the UK and Germany. Offsetting this increase,
our Financial Services business unit’s service revenues
decreased 50%, from $39.4 million for 2002 to
$19.6 million for 2003. The economic downturn that occurred
in 2001 and 2002 significantly affected our clients in the
financial services industry, and, as a result, many of our
clients in this industry decreased or delayed expenditures for
technology consulting services. Overall, 5% of the increase in
our revenues from 2002 to 2003 was attributable to changes in
currency rates.
Our international service revenues have increased as a
percentage of total service revenues, from 34% in 2002 to 41% in
2003. For 2003 and 2002, Sapient Limited, our UK subsidiary, had
revenues of $51.2 million and $39.7 million,
respectively, or 67% and 68%, respectively, of total
international revenues.
|
|
|
Operating Income (Loss) by Operating Segments |
Operating results for our reportable segments improved
significantly in 2003, from an operating loss of
$4.1 million in 2002 to an operating profit of
$29.6 million in 2003. In 2003, all of our reportable
segments, except our United Kingdom business unit, had
profitable operating results. Operating income for our Financial
Services business increased from $3.7 million in 2002 to
$7.2 million in 2003, despite the decrease in service
revenues for this business unit from 2002. Operating income for
our Automotive, Consumer and Energy business increased from
$2.8 million in 2002 to $11.8 million in 2003 on
revenue growth of $865,000. Operating income for our Canada
business unit increased to $1.6 million in 2003 compared to
$0.8 million in 2002 due to improved utilization and
operating efficiencies. Our Public Services, Technology and
Communications and Germany business units reported operating
income of $4.7 million, $5.5 million and
$2.3 million, respectively in 2003, as compared to
operating losses in 2002. These improvements are primarily the
result of our restructuring and cost cutting actions taken
during 2002 and in the second quarter of 2003, and an increase
in our billable utilization. Our United Kingdom business unit
reported an operating loss of $1.8 million in 2003, as
compared to an operating loss of $1.5 million in 2002,
primarily due to higher than estimated project personnel costs.
32
|
|
|
Loss on Discontinued Operations |
On October 25, 2002, as a result of the decline in the
demand for advanced technology consulting services in Japan and
the resulting declines in Sapient KK’s service revenues, we
announced that we would discontinue our Sapient KK operations in
Japan. In December 2002, Sapient KK ceased its operating
activities and the Japan office was closed. Japan’s
operating results for 2002 and 2001 have been collapsed and
reclassified into a single line item under the caption
“Loss from discontinued operations.”
The table below presents service revenues and pre-tax loss from
discontinued operations for the years ended December 31,
2002 (in thousands):
| |
|
|
|
|
| |
|
2002 | |
| |
|
| |
|
Service revenues
|
|
$ |
2,401 |
|
|
Pre-tax loss from discontinued operations
|
|
$ |
(6,741 |
) |
| |
|
|
|
The $6.7 million pre-tax loss from discontinued operations
for the year ended December 31, 2002, includes losses on
discontinued operations of approximately $1.0 million for a
charge related to the repurchase of minority interest and
approximately $1.1 million for a write-off of cumulative
translation adjustments.
Liquidity and Capital Resources
We have primarily funded our operations from proceeds from our
public stock offerings and, more recently, from cash flows
generated from operations. We invest our excess cash
predominantly in instruments that are highly liquid, investment
grade securities. At December 31, 2004, we had
approximately $175.6 million in cash, cash equivalents,
restricted cash and marketable investments, compared to
$161.2 million at December 31, 2003.
We have deposited approximately $6.6 million with various
banks as collateral for letters of credit and performance bonds,
and have classified this cash as restricted on our consolidated
balance sheet at December 31, 2004.
At December 31, 2004, we had the following contractual
obligations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due By Period | |
| |
|
| |
| |
|
Less than | |
|
|
|
More than | |
|
|
| |
|
One Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating leases
|
|
$ |
6,354 |
|
|
$ |
9,794 |
|
|
$ |
6,579 |
|
|
$ |
4,766 |
|
|
$ |
27,493 |
|
|
Cash outlays for restructuring and other related activities(1)
|
|
|
8,287 |
|
|
|
13,374 |
|
|
|
12,456 |
|
|
|
10,902 |
|
|
|
45,019 |
|
|
Purchase obligations(2)
|
|
|
4,180 |
|
|
|
1,209 |
|
|
|
— |
|
|
|
— |
|
|
|
5,389 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18,821 |
|
|
$ |
24,377 |
|
|
$ |
19,035 |
|
|
$ |
15,668 |
|
|
$ |
77,901 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Cash outlays for restructuring and other related activities
include minimum future lease and related payments for excess
facilities, net of estimated sublease income of
$6.2 million under existing arrangements, excluding
expected sublease arrangements of approximately
$22.4 million. |
| |
| (2) |
Purchase obligations represent minimum commitments due to third
parties, including subcontractor agreements, telecommunication
contracts, IT maintenance contracts in support of internal use
software and hardware and other marketing and consulting
contracts. Contracts for which our commitment is variable based
on volumes, with no fixed minimum quantities, and contracts that
can be cancelled without payment penalties, have been excluded.
Amounts presented also exclude accounts payable and accrued
expenses at December 31, 2004. |
Cash provided by operating activities from continuing operations
was $20.3 million for 2004, including cash used for
previously recorded restructuring activity of
$14.0 million, income from continuing operations of
$22.8 million, increases in unbilled revenue of
$1.7 million and in deferred revenues of $4.9 million,
offset by
33
net non-cash charges of $7.5 million, including
$6.5 million of depreciation and amortization and increases
in accrued expenses of $3.3 million. DSO is calculated
based on actual full year service revenue and year end
receivables balance, therefore, our days sales outstanding (DSO)
for accounts receivable increased from 76 days for 2003 to 81
days for 2004 primarily due to an increase in receivables
directly related to the 37% increase in revenue. We expect DSO
for the first quarter of 2005 to be in the range of 70-75 days.
Cash used in investing activities from continuing operations was
$30.3 million for 2004. This was due primarily to
$20.5 million of net purchase and sale of marketable
investments and capital expenditures of $9.8 million.
Cash provided by financing activities from continuing operations
was $7.7 million for 2004, representing the cash proceeds
provided from the sale of common stock through our employee
stock purchase plan and the exercise of stock options.
The total cash outlay for the restructuring and other related
activities implemented in 2001, 2002 and 2003 is expected to be
approximately $146.0 million. The remaining
$25.6 million of restructuring and other related costs
consists of non-cash charges primarily for asset write-offs and
leasehold improvements for facilities vacated. As of
December 31, 2004, $121.8 million of cash had been
used for restructuring and other related costs, of which
$14.0 million was expended during 2004. Lease termination
payments were $1.4 million and $2.6 million for 2004
and 2003, respectively. Our estimated future restructuring and
other related activities’ cash outlays are included in our
contractual liabilities.
We believe that our existing cash, cash equivalents, restricted
cash and marketable investments will be sufficient to meet our
working capital and capital expenditure requirement and expected
cash outlay for our previously recorded restructuring activities
for at least the next 12 months.
On December 2, 2004, the Board of Directors authorized a
stock repurchase program of up to $25.0 million over a
two-year period. The Company has not made stock repurchases
under this program as of December 31, 2004.
New Accounting Pronouncements
In March 2004, the Financial Accounting Standards Board
(FASB) approved the consensus reached on the Emerging Issues
Task Force (EITF) Issue No. 03-01, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments.” EITF 03-01 provides guidance to
determine when an investment is considered impaired, whether
that impairment is other than temporary, and the measurement of
an impairment loss. EITF 03-01 also provides new disclosure
requirements for other-than-temporary impairments on debt and
equity investments. In September 2004, the FASB delayed
until further notice the effective date of the measurement and
recognition guidance contained in EITF 03-01. The
disclosure requirements of EITF 03-01 are effective for
annual financial statements for fiscal years ending after
December 15, 2003. The adoption of EITF 03-01 is not
expected to have a material impact on our financial position or
results of operations.
In October 2004, the FASB approved the consensus reached on
EITF No. 04-10, “Applying Paragraph 19 of
FASB Statement No. 131, “Disclosures about Segments of
an Enterprise and Related Information,” in Determining
Whether to Aggregate Operating Segments That Do Not Meet the
Quantitative Thresholds.” EITF 04-10 provides guidance
on evaluating the aggregation criteria when determining whether
operating segments that do not meet the quantitative thresholds
may be aggregated in accordance with paragraph 19 of
SFAS 141. The adoption of EITF 04-10 is not expected
to have a material impact on our financial position or results
of operations.
In December 2004, the FASB issued two FASB Staff Position
(FSP) that provide accounting guidance on how companies should
account for the effects of the American Jobs Creation Act of
2004 that was signed into law on October 22, 2004. FSP
FAS 109-1, “Application of FASB Statement
No. 109, “Accounting for Income Taxes,” to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004,” states that the
manufacturers’ deduction provided for under this
legislation should be accounted for as a special deduction
instead of a tax rate change. FSP FAS No. 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act
34
of 2004,” allows a company additional time to evaluate
whether the effects of the legislation on any plan for
reinvestment or repatriation of foreign earnings for purposes of
applying SFAS No. 109, “Accounting for Income
Taxes.” These FSPs are effective December 21, 2004 and
may affect how a company accounts for deferred income taxes. We
are currently evaluating the impact of these FSPs on our results
of operations and financial position.
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payments”, a revision to
SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123R eliminates the alternative to use
Accounting Principles Board (APB) Opinion
No. 25’s intrinsic value method of accounting that was
provided in SFAS No. 123 as originally issued.
SFAS No. 123R requires the use of an option pricing
model for estimating the fair value of employee stock options
and rights to purchase shares under stock participation plans,
which is amortized to expense over the service periods.
SFAS No. 123R is effective for public companies for
all employee awards of share-based payments granted, modified or
settled in any interim or annual reporting period that begins
after June 15, 2005. We are currently evaluating the impact
of SFAS No. 123R on our financial statements.
Risk Factors
The following important factors, among others, could cause our
actual business and financial 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.
|
|
|
The demand for business and technology consulting services
has improved, yet this demand may weaken significantly if the
current improvement in the economic climate does not
continue. |
The market for our consulting services and the technologies used
in our solutions historically has tended to fluctuate in tandem
with economic cycles — particularly those in the
United States and the United Kingdom, where the majority of our
revenues are earned. During economic cycles when many companies
are experiencing financial difficulties or uncertainty, clients
and potential clients may cancel or delay spending on technology
initiatives. Moreover, during the past few years, companies
typically have not exhibited the same sense of urgency to invest
in technology initiatives that they exhibited during the period
of economic expansion, prior to 2000. The economic uncertainty
caused by recent military actions in Iraq, as well as by fallout
from the accounting scandals involving Enron, Worldcom and other
companies, also has depressed technology spending. Although the
economic climate has shown signs of improvement since the third
quarter of 2003, this improvement may not continue for a
meaningful period of time. If the economic climate again
deteriorates, large companies may cancel or delay their business
and technology consulting initiatives. If the rate of
cancellations or delays significantly increases, because of a
weak economic climate or for other reasons, our business,
financial condition and results of operations could be
materially and adversely affected.
|
|
|
Our market is highly competitive and we may not be able to
continue to compete effectively. |
The markets for the services we provide are highly competitive.
We believe that we currently compete principally with large
systems consulting and implementation firms and clients’
internal information systems departments. We also compete
regularly with offshore outsourcing companies, and we expect
competition from these companies to increase in the future,
especially on development, application management services and
outsourcing engagements. We compete to a lesser extent with
specialized e-business consulting firms, strategy consulting
firms and packaged technology vendors. We compete frequently for
client engagements against companies with far higher revenues
and larger numbers of consultants than we have. Recent
consolidations of large consulting companies within our market
have further increased the size and resources of some of these
competitors. These competitors are often able to offer more
scale, which in some instances has enabled them to significantly
discount their services in exchange for revenues in other areas
or at later dates. If we cannot keep pace with the intense
competition in our marketplace, our business, financial
condition and results of operations will suffer.
35
|
|
|
Our international operations and Global Distributed
Delivery model subject us to increased risk. |
We currently have offices in the United Kingdom, Germany, India
and Canada. Our international operations are a significant
percentage of our total revenues, and our Global Distributed
Delivery (GDD) model is a key component of our ability to
successfully deliver our services. International operations are
subject to inherent risks, including:
|
|
|
| |
• |
economic recessions in foreign countries; |
| |
| |
• |
fluctuations in currency exchange rates or impositions of
restrictive currency controls; |
| |
| |
• |
political instability, war or military conflict; |
| |
| |
• |
changes in regulatory requirements; |
| |
| |
• |
complexities and costs in effectively managing multi-national
operations and associated internal controls and procedures; |
| |
| |
• |
significant changes in immigration policies or difficulties in
obtaining required immigration approvals for international
assignments; |
| |
| |
• |
restrictions imposed on the import and export of technologies in
countries where we operate; and |
| |
| |
• |
reduced protection for intellectual property in some countries. |
In particular, our GDD model depends heavily on our offices in
New Delhi and Bangalore, India. Any escalation in the political
or military instability in India or Pakistan or the surrounding
countries could hinder our ability to successfully utilize GDD,
and could result in material adverse effects to our business,
financial condition and results of operations. Furthermore, the
delivery of our services from remote locations causes us to rely
on data, phone, power and other networks which are not as
reliable as those in other countries where we operate. Any
failures of these systems could affect the success of our GDD
model. Remote delivery of our services also increases the
complexity and risk of delivering our services, which could
affect our ability to satisfy our clients’ expectations or
perform our services within the estimated time frame and budget
for each project.
|
|
|
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 depends upon
our ability to attract, retain, train and motivate highly
skilled employees. The improvement in demand for business and
technology consulting services that began in the third quarter
of 2003 has further increased the need for employees with
specialized skills or significant experience in business and
technology consulting. We have been expanding our operations in
all locations and these expansion efforts will be highly
dependent on attracting a sufficient number of highly skilled
people. We may not be successful in attracting enough employees
to achieve our desired expansion or staffing plans. Furthermore,
the industry turnover rates for these types of employees are
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. Such inability
may also force us to increase our hiring of expensive
independent contractors, which could increase our costs and
reduce our profitability on client engagements. We must also
devote substantial managerial and financial resources to
monitoring and managing our workforce and other resources. Our
future success will depend on our ability to manage the levels
and related costs of our workforce and other resources
effectively.
|
|
|
We earn revenues, incur costs and maintain cash balances
in multiple currencies, and currency fluctuations could
adversely affect our financial results. |
We have significant international operations, and we frequently
earn our revenues and incur our costs in various foreign
currencies. Our international segment revenues were
$112.9 million in 2004. Doing business in these foreign
currencies exposes us to foreign currency risks in numerous
areas, including revenues, purchases,
36
payroll and investments. We also have a significant amount of
foreign currency net asset exposures. Certain foreign currency
exposures are naturally offset within an international business
unit, because revenues and costs are denominated in the same
foreign currency, and certain cash balances are held in US
dollar denominated accounts. However, due to the increasing size
and importance of our international operations, fluctuations in
foreign currency exchange rates could materially impact our
financial results. Our GDD model also subjects us to increased
currency risk, because we frequently incur a significant portion
of our project costs in Indian rupees and earn revenue from our
clients in other currencies. Currently, we do not hold any
derivative contracts that hedge our foreign currency risk, but
we may adopt such strategies in the future.
Our cash position includes amounts denominated in foreign
currencies. We manage our worldwide cash requirements
considering available funds from our subsidiaries and the cost
effectiveness with which these funds can be accessed. The
repatriation of cash balances from certain of our subsidiaries
outside the United States could have adverse tax consequences
and be limited by foreign currency exchange controls. However,
those balances are generally available without legal
restrictions to fund ordinary business operations. We have
transferred, and will continue to transfer, cash from those
subsidiaries to the parent company, and to other international
subsidiaries, when it is cost effective to do so. However, any
fluctuations in foreign currency exchange rates could materially
impact the availability and size of these funds for repatriation
or transfer.
|
|
|
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 average size of, or an unanticipated delay in the
scheduling for, 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 or decrease in size or scope 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 have a material adverse effect
on our business, financial condition and results of operations.
Our revenues and earnings may also fluctuate from quarter to
quarter because of such factors as:
|
|
|
| |
• |
the contractual terms and timing of completion of projects,
including achievement of certain business results; |
| |
| |
• |
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; |
| |
| |
• |
loss of key highly skilled personnel necessary to complete
projects; and |
| |
| |
• |
general economic conditions. |
|
|
|
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-time
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-time 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 are increasingly entering into contracts for large projects,
which magnifies this risk. 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. 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, could adversely affect our business,
financial condition and results of operations.
37
|
|
|
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 be liable to our clients for damages caused by our
services or by our failure to remedy system failures. |
Many of our projects involve technology applications or systems
that are critical to the operations of our clients’
businesses and handle very large volumes of transactions. If we
fail to perform our services correctly, we may be unable to
deliver applications or systems to our clients with the promised
functionality or within the promised time frame, or to satisfy
the required service levels for support and maintenance. While
we have taken precautionary actions to create redundancy and
back-up systems, any such failures by us could result in claims
by our clients for substantial damages against us. Although we
attempt to limit the amount and type of our contractual
liability for defects in the applications or systems we provide,
and carry insurance coverage which mitigates this liability in
certain instances, we cannot be assured that these limitations
and insurance coverages will be applicable and enforceable in
all cases. Even if these limitations and insurance coverages are
found to be applicable and enforceable, our liability to our
clients for these types of claims could be material in amount
and affect our business, financial condition and results of
operations.
|
|
|
We put a portion of our fees at risk based on project
results and may not earn these fees if we do not succeed. |
Our business model focuses heavily on delivering measurable
business results for our clients, and increasingly we are
aligning our interests with our client’s interests by
putting a portion of our fees at risk, dependent on our
client’s attainment of the business value we promised. In
2004, we recognized $3.4 million of revenue by achieving
previously agreed measurable business results. Our inability to
deliver the business value that we have promised on a project
could materially affect the profitability of that project,
because we typically will incur the same level of project costs
regardless of whether the promised business value is attained.
We could also experience delays in revenue recognition or
payment because the measurement of business value is often
complex and may involve a verification process between us and
our client. As a result, our failure to deliver the business
value that we promise to our clients could materially affect 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 achievement of key
business metrics by us or our competitors; |
| |
| |
• |
changes in operating results estimates by securities analysts; |
| |
| |
• |
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. |
38
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’s attention and resources.
|
|
|
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, subcontractors, vendors,
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
claims may be successful. A successful claim against us could
materially adversely affect our business, financial condition
and results of operations.
|
|
|
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, own
approximately 33.6% of our common stock in the aggregate. 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 any of our key
personnel could have a material adverse effect on our business,
financial condition and results of operations. In addition, if
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. Although we
require our employees to sign agreements 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 these actions or that courts
or other adjudicative entities will substantially enforce these
agreements. Furthermore, for those employees whom we
involuntarily terminated in connection with our restructuring
actions, we have waived the non-competition clause of their
agreements in exchange for releases of claims. We granted these
waivers only in connection with the restructuring actions, and
our general practice is not to waive the non-competition
obligations of other departing employees.
|
|
|
We may be unable to achieve anticipated benefits from
acquisitions and joint ventures. |
The anticipated benefits from any acquisitions or joint ventures
that we may undertake might not be achieved. For example, if we
acquire a company, we cannot be certain that clients of the
acquired business will continue to conduct business with us, or
that employees of the acquired business will continue their
employment or integrate successfully into our operations and
culture. The identification, consummation and integration of
acquisitions and joint ventures require substantial attention
from management. The diversion of management’s attention,
as well as any difficulties encountered in the integration
process, could have an adverse impact on our business, financial
condition and results of operations. Further, we may incur
significant expenses in completing any such acquisitions, and we
may assume significant liabilities, some of which may be unknown
at the time of such acquisition.
39
|
|
|
The failure to successfully and timely implement an
upgrade of our corporate financial system could harm our
business. |
In April 2004, we commenced an implementation of Oracle lli
Financials to upgrade our current financial systems. The
Oracle lli Financials implementation is anticipated to be
completed in the second and third fiscal quarters of 2005. The
implementation will, among other benefits, increase the
automation of, and ensure greater internal control and
productivity for, our financial processes, as well as enable
centralization of business functions within the company and
improve our data integrity, controls, and the use of our people
and systems. Failure to successfully implement the new system in
a timely, effective and efficient manner could result in the
disruption of our operations, the inability to comply with our
Sarbanes-Oxley obligations and the inability to report our
financial results in a timely manner.
|
|
|
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 a transaction in which stockholders would
receive a premium for their shares. These provisions include the
following:
|
|
|
| |
• |
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; |
| |
| |
• |
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; and |
| |
| |
• |
a Chairman of the Board or a Chief Executive Officer are the
only persons who may call a special meeting of stockholders. |
Provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us.
|
|
| 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. At
December 31, 2004, our exposure to market risk relates
primarily to changes in interest rates on our investment
portfolio. Our marketable investments consist primarily of fixed
income securities. We invest only with high credit quality
issuers and we do not currently use derivative financial
instruments in our investment portfolio. We do not believe that
a significant increase or decrease in interest rates would have
a material adverse impact on the fair value of our investment
portfolio.
Exchange Rate Sensitivity
We face exposure to adverse movements in foreign currency
exchange rates, as a significant portion of our revenues,
expenses, assets, and liabilities are denominated in currencies
other than the U.S. Dollar, primarily the British pound, the
euro, the Indian rupee and the Canadian dollar. These exposures
may change over time as business practices evolve. Currently, we
do not hold any derivative contracts that hedge our foreign
currency risk, but we may adopt such strategies in the future.
For a discussion of the risks we face as a result of foreign
currency fluctuations, please see “Risk Factors” in
Part II — “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
40
|
|
| Item 8. |
Financial Statements and Supplementary Data |
SAPIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
42 |
|
Consolidated Balance Sheets
|
|
44 |
|
Consolidated Statements of Operations
|
|
45 |
|
Consolidated Statements of Changes in Stockholders’ Equity
|
|
46 |
|
Consolidated Statements of Cash Flows
|
|
47 |
|
Notes to Consolidated Financial Statements
|
|
48 |
|
Financial Statement Schedule:
|
|
|
| |
Schedule II — Valuation and Qualifying Accounts
and Reserves
|
|
76 |
41
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Sapient Corporation:
We have completed an integrated audit of Sapient
Corporation’s 2004 consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 8 present fairly, in all
material respects, the financial position of Sapient Corporation
and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements 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.
Internal control over financial reporting
Also, we have audited management’s assessment, included in
Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A, that Sapient Corporation
did not maintain effective internal control over financial
reporting as of December 31, 2004, because the Company
lacked a sufficient complement of senior financial accounting
and reporting personnel possessing competencies commensurate
with the Company’s financial reporting requirements, based
on criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on management’s assessment and on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of
records that,
42
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been identified and included in
management’s assessment. As of December 31, 2004, the
Company lacked a sufficient complement of senior financial
accounting and reporting personnel possessing competencies
commensurate with the Company’s financial reporting
requirements. The lack of sufficient senior financial accounting
and reporting personnel impacts the Company’s ability to
appropriately segregate incompatible financial accounting and
reporting responsibilities and limits the Company’s ability
to effectively monitor and oversee financial accounting and
reporting processes. As a result of this control deficiency, the
Company recorded audit adjustments in its consolidated fourth
quarter financial statements for 2004 resulting from:
(i) not properly accounting for a lease incentive payment
received in the United Kingdom, (ii) not properly accruing
for rent on a straight-line basis during a free rent period on a
lease in India, and (iii) a mathematical error in the
Company’s calculation of its accrual for health insurance
claims incurred but not yet reported. In addition to the actual
fourth quarter audit adjustments described above, this control
deficiency could result in a material misstatement to annual or
interim consolidated financial statements that would not be
prevented or detected. Accordingly, management determined that
this control deficiency constitutes a material weakness. This
material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
2004 consolidated financial statements, and our opinion
regarding the effectiveness of the Company’s internal
control over financial reporting does not affect our opinion on
those consolidated financial statements.
In our opinion, management’s assessment that Sapient
Corporation did not maintain effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established
in Internal Control — Integrated Framework
issued by the COSO. Also, in our opinion, because of the
effect of the material weakness described above on the
achievement of the objectives of the control criteria, Sapient
Corporation has not maintained effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control —
Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts,
March 16, 2005
43
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands, except share | |
| |
|
and per share data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
66,779 |
|
|
$ |
67,592 |
|
| |
Marketable investments
|
|
|
38,172 |
|
|
|
72,961 |
|
| |
Restricted cash
|
|
|
3,168 |
|
|
|
3,174 |
|
| |
Accounts receivable, less allowance for doubtful accounts of
$1,896 and $1,516 at December 31, 2004 and 2003,
respectively
|
|
|
51,278 |
|
|
|
30,078 |
|
| |
Unbilled revenues on contracts
|
|
|
16,875 |
|
|
|
14,387 |
|
| |
Income tax receivable
|
|
|
— |
|
|
|
657 |
|
| |
Prepaid expenses
|
|
|
5,922 |
|
|
|
4,049 |
|
| |
Other current assets
|
|
|
3,130 |
|
|
|
1,577 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
185,324 |
|
|
|
194,475 |
|
|
Marketable investments
|
|
|
64,006 |
|
|
|
9,201 |
|
|
Restricted cash
|
|
|
3,454 |
|
|
|
8,311 |
|
|
Property and equipment, net
|
|
|
14,612 |
|
|
|
13,180 |
|
|
Intangible assets, net
|
|
|
643 |
|
|
|
1,158 |
|
|
Deferred tax asset
|
|
|
815 |
|
|
|
— |
|
|
Other assets
|
|
|
749 |
|
|
|
575 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
269,603 |
|
|
$ |
226,900 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
6,125 |
|
|
$ |
3,882 |
|
| |
Accrued expenses
|
|
|
18,832 |
|
|
|
14,637 |
|
| |
Accrued restructuring costs, current portion
|
|
|
10,560 |
|
|
|
18,237 |
|
| |
Accrued compensation
|
|
|
17,722 |
|
|
|
8,718 |
|
| |
Income taxes payable
|
|
|
4,116 |
|
|
|
1,976 |
|
| |
Deferred revenues on contracts
|
|
|
9,285 |
|
|
|
3,867 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
66,640 |
|
|
|
51,317 |
|
|
Accrued restructuring costs, net of current portion
|
|
|
15,003 |
|
|
|
22,550 |
|
|
Other long term liabilities
|
|
|
2,027 |
|
|
|
621 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
83,670 |
|
|
|
74,488 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock, par value $0.01 per share,
5,000,000 shares authorized and none outstanding at
December 31, 2004 and 2003
|
|
|
— |
|
|
|
— |
|
| |
Common stock, par value $0.01 per share,
200,000,000 shares authorized, 130,482,574 and
129,897,952 shares issued at December 31, 2004 and
2003, respectively
|
|
|
1,304 |
|
|
|
1,299 |
|
| |
Additional paid-in capital
|
|
|
477,669 |
|
|
|
471,653 |
|
| |
Treasury stock, at cost, 6,221,679 and 7,817,942 shares at
December 31, 2004 and 2003, respectively
|
|
|
(7,251 |
) |
|
|
(9,118 |
) |
| |
Deferred compensation
|
|
|
— |
|
|
|
(594 |
) |
| |
Accumulated other comprehensive income
|
|
|
4,090 |
|
|
|
1,870 |
|
| |
Accumulated deficit
|
|
|
(289,879 |
) |
|
|
(312,698 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity
|
|
|
185,933 |
|
|
|
152,412 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
269,603 |
|
|
$ |
226,900 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
44
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Service revenues
|
|
$ |
253,936 |
|
|
$ |
184,795 |
|
|
$ |
173,811 |
|
| |
Reimbursable expenses
|
|
|
12,100 |
|
|
|
9,574 |
|
|
|
8,562 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total gross revenues
|
|
|
266,036 |
|
|
|
194,369 |
|
|
|
182,373 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Project personnel costs, before reimbursable expenses (exclusive
of stock-based compensation of $690, $958 and $2,863 for 2004,
2003, and 2002, respectively)
|
|
|
142,512 |
|
|
|
111,967 |
|
|
|
133,275 |
|
| |
Reimbursable expenses
|
|
|
12,100 |
|
|
|
9,574 |
|
|
|
8,562 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total project personnel costs
|
|
|
154,612 |
|
|
|
121,541 |
|
|
|
141,837 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Selling and marketing costs (exclusive of stock-based
compensation of $0, $59 and $236 for 2004, 2003, and 2002,
respectively)
|
|
|
15,208 |
|
|
|
18,501 |
|
|
|
26,192 |
|
| |
General and administrative costs (exclusive of stock-based
compensation of $89, $72 and $62 for 2004, 2003, and 2002,
respectively)
|
|
|
71,282 |
|
|
|
57,523 |
|
|
|
79,338 |
|
| |
Restructuring and other related charges
|
|
|
1,108 |
|
|
|
2,135 |
|
|
|
66,885 |
|
| |
Impairment of goodwill and intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
107,430 |
|
| |
Amortization of intangible assets
|
|
|
515 |
|
|
|
1,772 |
|
|
|
4,328 |
|
| |
Stock-based compensation
|
|
|
779 |
|
|
|
1,089 |
|
|
|
3,161 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
243,504 |
|
|
|
202,561 |
|
|
|
429,171 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from operations
|
|
|
22,532 |
|
|
|
(8,192 |
) |
|
|
(246,798 |
) |
|
Gain on equity investment change in interest
|
|
|
— |
|
|
|
— |
|
|
|
1,755 |
|
|
Other income (expense), net
|
|
|
65 |
|
|
|
2,729 |
|
|
|
33 |
|
|
Interest income
|
|
|
2,655 |
|
|
|
1,902 |
|
|
|
4,312 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes, net equity loss from
investees and loss from discontinued operations
|
|
|
25,252 |
|
|
|
(3,561 |
) |
|
|
(240,698 |
) |
|
Income tax provision (benefit)
|
|
|
2,433 |
|
|
|
1,337 |
|
|
|
(18,585 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) before net equity loss from investees and loss
from discontinued operations
|
|
|
22,819 |
|
|
|
(4,898 |
) |
|
|
(222,113 |
) |
|
Net equity loss from investees
|
|
|
— |
|
|
|
— |
|
|
|
(349 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
22,819 |
|
|
|
(4,898 |
) |
|
|
(222,462 |
) |
|
Loss from discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
(6,741 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
22,819 |
|
|
$ |
(4,898 |
) |
|
$ |
(229,203 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.78 |
) |
| |
Loss from discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.78 |
) |
| |
Loss from discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
123,040 |
|
|
|
121,188 |
|
|
|
124,961 |
|
|
Weighted average dilutive common share equivalents
|
|
|
5,418 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and dilutive common share
equivalents
|
|
|
128,458 |
|
|
|
121,188 |
|
|
|
124,961 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
Treasury Stock | |
|
|
|
Comprehensive | |
|
Comprehensive | |
|
|
|
Total | |
| |
|
| |
|
Paid-In | |
|
| |
|
Deferred | |
|
Income | |
|
Income | |
|
Accumulated | |
|
Stockholders’ | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Shares | |
|
Amount | |
|
Compensation | |
|
(Loss) | |
|
(Loss) | |
|
Deficit | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at December 31, 2001
|
|
|
126,314 |
|
|
$ |
1,263 |
|
|
$ |
468,447 |
|
|
|
(110 |
) |
|
$ |
(422 |
) |
|
$ |
(8,443 |
) |
|
$ |
— |
|
|
$ |
(1,478 |
) |
|
$ |
(78,597 |
) |
|
$ |
380,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under stock option and purchase plans
|
|
|
1,335 |
|
|
|
13 |
|
|
|
3,532 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,545 |
|
| |
Repurchases of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,757 |
) |
|
|
(5,266 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,266 |
) |
| |
Amortization of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,066 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,066 |
|
| |
Reversal of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
(2,331 |
) |
|
|
— |
|
|
|
— |
|
|
|
3,234 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
903 |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(229,203 |
) |
|
|
— |
|
|
|
(229,203 |
) |
|
|
(229,203 |
) |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Currency translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,352 |
|
|
|
2,352 |
|
|
|
— |
|
|
|
2,352 |
|
| |
Net unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(363 |
) |
|
|
(363 |
) |
|
|
— |
|
|
|
(363 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(227,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
127,649 |
|
|
$ |
1,276 |
|
|
$ |
469,648 |
|
|
|
(5,867 |
) |
|
$ |
(5,688 |
) |
|
$ |
(2,143 |
) |
|
|
|
|
|
$ |
511 |
|
|
$ |
(307,800 |
) |
|
$ |
155,804 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Shares issued under stock option and purchase plans
|
|
|
2,174 |
|
|
|
22 |
|
|
|
2,086 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,108 |
|
| |
Shares issued to non-employees
|
|
|
3 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
| |
Restricted shares issued to employees
|
|
|
72 |
|
|
|
1 |
|
|
|
100 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
101 |
|
| |
Repurchases of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,951 |
) |
|
|
(3,430 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,430 |
) |
| |
Amortization of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
995 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
995 |
|
| |
Gain recognized on change in interest — HWT
|
|
|
— |
|
|
|
— |
|
|
|
365 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
365 |
|
| |
Reversal of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
(554 |
) |
|
|
— |
|
|
|
— |
|
|
|
554 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,898 |
) |
|
|
— |
|
|
|
(4,898 |
) |
|
|
(4,898 |
) |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Currency translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,564 |
|
|
|
1,564 |
|
|
|
— |
|
|
|
1,564 |
|
| |
Net unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(205 |
) |
|
|
(205 |
) |
|
|
— |
|
|
|
(205 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
129,898 |
|
|
$ |
1,299 |
|
|
$ |
471,653 |
|
|
|
(7,818 |
) |
|
$ |
(9,118 |
) |
|
$ |
(594 |
) |
|
|
|
|
|
$ |
1,870 |
|
|
$ |
(312,698 |
) |
|
$ |
152,412 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under stock option and purchase plans
|
|
|
584 |
|
|
|
5 |
|
|
|
5,961 |
|
|
|
1,531 |
|
|
|
1,792 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,758 |
|
| |
Shares issued to non-employees
|
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
| |
Restricted shares issued to employees
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
62 |
|
|
|
72 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
| |
Amortization of deferred compensation
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
594 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
628 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,819 |
|
|
|
— |
|
|
|
22,819 |
|
|
|
22,819 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Currency translation adjustments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,973 |
|
|
|
2,973 |
|
|
|
— |
|
|
|
2,973 |
|
| |
Net unrealized loss on investments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(753 |
) |
|
|
(753 |
) |
|
|
— |
|
|
|
(753 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
130,482 |
|
|
$ |
1,304 |
|
|
$ |
477,669 |
|
|
|
(6,222 |
) |
|
$ |
(7,251 |
) |
|
$ |
— |
|
|
|
|
|
|
$ |
4,090 |
|
|
$ |
(289,879 |
) |
|
$ |
185,933 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
46
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
22,819 |
|
|
$ |
(4,898 |
) |
|
$ |
(222,462 |
) |
|
Adjustments to reconcile net income (loss) from continuing
operations to net cash used in operating activities from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized on write-down of investments
|
|
|
— |
|
|
|
45 |
|
|
|
271 |
|
|
Realized gains on investments
|
|
|
(4 |
) |
|
|
(2,773 |
) |
|
|
(2,034 |
) |
|
Loss recognized on disposition of fixed assets
|
|
|
376 |
|
|
|
— |
|
|
|
456 |
|
|
Depreciation
|
|
|
5,973 |
|
|
|
9,145 |
|
|
|
13,701 |
|
|
Amortization of intangible assets
|
|
|
515 |
|
|
|
1,772 |
|
|
|
4,328 |
|
|
Impairment of goodwill and intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
107,430 |
|
|
Deferred income taxes
|
|
|
(773 |
) |
|
|
— |
|
|
|
— |
|
|
Allowance for doubtful accounts
|
|
|
654 |
|
|
|
624 |
|
|
|
263 |
|
|
Stock-based compensation
|
|
|
779 |
|
|
|
1,089 |
|
|
|
3,161 |
|
|
Non-cash restructuring costs
|
|
|
— |
|
|
|
— |
|
|
|
7,321 |
|
|
Net equity losses from investees
|
|
|
— |
|
|
|
— |
|
|
|
349 |
|
|
Changes in operating assets and liabilities, net of acquired
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restricted cash
|
|
|
5,199 |
|
|
|
(863 |
) |
|
|
(10,622 |
) |
| |
Accounts receivable
|
|
|
(20,118 |
) |
|
|
(1,568 |
) |
|
|
6,539 |
|
| |
Unbilled revenues on contracts
|
|
|
(1,703 |
) |
|
|
(4,029 |
) |
|
|
(179 |
) |
| |
Prepaid expenses
|
|
|
(1,689 |
) |
|
|
393 |
|
|
|
(1,230 |
) |
| |
Other current assets
|
|
|
(1,469 |
) |
|
|
705 |
|
|
|
162 |
|
| |
Other assets
|
|
|
(173 |
) |
|
|
1,463 |
|
|
|
304 |
|
| |
Accounts payable
|
|
|
2,042 |
|
|
|
(123 |
) |
|
|
(1,026 |
) |
| |
Accrued expenses
|
|
|
3,350 |
|
|
|
2,859 |
|
|
|
(306 |
) |
| |
Accrued restructuring costs
|
|
|
(12,976 |
) |
|
|
(30,394 |
) |
|
|
19,583 |
|
| |
Accrued compensation
|
|
|
8,547 |
|
|
|
1,580 |
|
|
|
(61 |
) |
| |
Income taxes
|
|
|
2,668 |
|
|
|
1,448 |
|
|
|
12,526 |
|
| |
Other long term liabilities
|
|
|
1,378 |
|
|
|
(1,100 |
) |
|
|
(1,407 |
) |
| |
Deferred revenues on contracts
|
|
|
4,863 |
|
|
|
(2,043 |
) |
|
|
(2,455 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) operating activities from
continuing operations
|
|
|
20,258 |
|
|
|
(26,668 |
) |
|
|
(65,388 |
) |
| |
|
Net cash used in operating activities from discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
(4,077 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) operating activities
|
|
|
20,258 |
|
|
|
(26,668 |
) |
|
|
(69,465 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of property and equipment
|
|
|
(9,782 |
) |
|
|
(1,632 |
) |
|
|
(4,391 |
) |
| |
Proceeds from sale of equity investment
|
|
|
— |
|
|
|
— |
|
|
|
1,562 |
|
| |
Purchase of minority interest
|
|
|
— |
|
|
|
— |
|
|
|
(991 |
) |
| |
Investments in and advances to affiliates
|
|
|
— |
|
|
|
(1,679 |
) |
|
|
— |
|
| |
Proceeds from sale of investments
|
|
|
— |
|
|
|
8,564 |
|
|
|
55 |
|
| |
Sales and maturities of marketable investments
|
|
|
121,566 |
|
|
|
148,151 |
|
|
|
177,463 |
|
| |
Purchases of marketable investments
|
|
|
(142,040 |
) |
|
|
(151,206 |
) |
|
|
(122,524 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash (used in) provided by investing activities from
continuing operations
|
|
|
(30,256 |
) |
|
|
2,198 |
|
|
|
51,174 |
|
| |
|
Net cash used in investing activities from discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
(120 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash (used in) provided by investing activities
|
|
|
(30,256 |
) |
|
|
2,198 |
|
|
|
51,054 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from stock option and purchase plans
|
|
|
7,708 |
|
|
|
2,108 |
|
|
|
3,444 |
|
| |
Proceeds from sale of common stock of consolidated subsidiary
|
|
|
— |
|
|
|
500 |
|
|
|
— |
|
| |
Repurchases of common stock
|
|
|
— |
|
|
|
(3,430 |
) |
|
|
(5,266 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) financing activities from
continuing operations
|
|
|
7,708 |
|
|
|
(822 |
) |
|
|
(1,822 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
1,477 |
|
|
|
1,655 |
|
|
|
1,718 |
|
|
Decrease in cash and cash equivalents
|
|
|
(813 |
) |
|
|
(23,637 |
) |
|
|
(18,515 |
) |
|
Cash and cash equivalents, beginning of year
|
|
|
67,592 |
|
|
|
91,229 |
|
|
|
109,744 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
66,779 |
|
|
$ |
67,592 |
|
|
$ |
91,229 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
47
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sapient is a leading business consulting and technology services
firm that plans, designs, implements and manages information
technology to improve business performance for Global 2000
clients. Sapient was founded in 1991 based on a single
promise — to deliver the right business results on
time and on budget. The Company’s fixed-price/fixed-time
model, combined with its industry, design, technology and
process expertise, provides clients with the highest business
value at the lowest total cost of ownership. The Company has
offices across the United States and in Canada, the United
Kingdom, Germany and India.
|
|
| (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. In
December 2002, the Company ceased operations in Japan. The
financial statements and financial information included in this
report for 2002 and prior periods reflect the results of
operations for Japan as a single line item listed as “loss
from discontinued operations.” See Note 17.
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
periods. Significant estimates relied upon in preparing these
financial statements include estimated costs to complete long
term contracts, allowances for doubtful accounts, estimated fair
value of investments, including whether any decline in such fair
value is other-than-temporary, expected future cash flows used
to evaluate the recoverability of long-lived assets, estimated
fair values of long-lived assets and reporting units used to
record impairment charges related to intangible assets and
goodwill, restructuring and other related charges, contingent
liabilities and recoverability of the Company’s net
deferred tax assets and related valuation allowance. Although
the Company regularly assesses these estimates, actual results
could differ materially from these estimates. Changes in
estimates are recorded in the period in which they become known.
The Company bases its estimates on historical experience and
various other assumptions that it believes to be reasonable
under the circumstances. Actual results may differ from the
Company’s estimates if past experience or other assumptions
do not turn out to be substantially accurate.
|
|
| (c) |
Foreign Currency Translation and Transactions |
For non-U.S. subsidiaries, which operate in a local
currency environment, assets and liabilities are translated at
period-end exchange rates, and income statement items are
translated at the average exchange rates for the period. The
local currency for all foreign subsidiaries is considered to be
the functional currency and, accordingly, translation
adjustments are reported as a separate component of
stockholders’ equity under the caption “accumulated
other comprehensive income (loss).” In connection with the
closure and dissolution of the Company’s operations in
Japan, $1.1 million of cumulative translation adjustments
were written off and are included in the Company’s 2002
loss from discontinued operations. Gains (losses) of
approximately ($54,000), $1.1 million and $793,000 from
foreign currency transactions are included in general and
administrative costs in the statement of operations for 2004,
2003 and 2002, respectively.
48
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| (d) |
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, 2003, the Company
classified its cash equivalent investments, totaling
approximately $26.3 million as available-for-sale and these
investments are stated at amortized cost, which approximates
fair value. At December 31, 2004 there were no
available-for-sale cash equivalent investments.
|
|
| (e) |
Marketable Investments |
The Company classifies its marketable investments as
available-for-sale, and carries them at fair market value. The
difference between amortized cost and fair market value, net of
tax effect, is recorded as a separate component of
stockholders’ equity. The cost of securities
available-for-sale is adjusted for amortization of premiums and
discounts to maturity. Accretion and amortization of discounts
and premiums 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. The
Company considers available evidence, including the duration and
extent to which declines in fair value compares to cost in
determining whether the unrealized loss is “other than
temporary.” If the decline is considered other than
temporary, the unrealized loss is removed from other
comprehensive income (loss) and recorded as other expense in the
statement of operations.
|
|
| (f) |
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, marketable investments and accounts receivable.
The Company performs 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 2004, 2003 or 2002. In addition, no customer
accounts receivable balance exceeded 10 percent of total
accounts receivable as of December 31, 2004 and 2003.
The fair market values of cash and cash equivalents, restricted
cash, marketable investments, accounts receivable, accounts
payable, accrued expenses and income taxes payable at both
December 31, 2004 and 2003 approximate their carrying
amounts.
|
|
| (g) |
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.
When an item is sold or retired, the cost and related
accumulated depreciation is relieved, and the resulting gain or
loss, if any, is recognized in the statement of operations.
|
|
| (h) |
Costs Incurred to Develop Computer Software for Internal
Use |
The Company accounts for costs incurred to develop computer
software for internal use in accordance with Statement of
Position (SOP) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”.
As required by SOP 98-1, the Company capitalizes the costs
incurred during the application development stage, which include
costs to design the software configuration and interfaces,
coding, installation and testing. Costs incurred during the
preliminary project stage along with post-implementation stages
of internal use computer software are expensed as incurred.
Capitalized development costs are
49
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amortized over various periods up to three years. The
capitalization and ongoing assessment of recoverability of
development cost requires considerable judgment by management
with respect to certain external factors, including, but not
limited to, technological and economic feasibility, and
estimated economic life. For the year ended December 31,
2004, the Company capitalized computer software costs of
$247,000 associated with the Oracle 11i upgrade.
Amortization has not begun as of December 31, 2004 as the
computer software has not been placed in service. No computer
software costs were incurred or capitalized during 2003 and 2002.
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. At December 31, 2004 and 2003, the Company has
no long term investments accounted for using the cost method or
the equity method of accounting.
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
the fair value of the investment declines 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 adjusted down to
fair value and the amount of the adjustment is included in the
Company’s consolidated statement of operations. For the
years ended December 31, 2004, 2003 and 2002, the Company
recorded $0, $45,000 and $271,000, respectively, 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 interest in
its subsidiaries and equity method investees in net income
(loss). If 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, the Company
accounts for the change in interest as a component of
stockholders’ equity.
|
|
| (k) |
Revenue Recognition and Allowance for Doubtful
Accounts |
We recognize revenue from the provision of professional services
under written service contracts with our clients when persuasive
evidence of an arrangement exists, services have been provided
to the customer, the fee is fixed or determinable, and
collectibility is reasonably assured. In instances where the
customer, at their discretion, has the right to reject the
services prior to final acceptance, revenue is deferred until
such acceptance occurs.
We recognize revenues from our fixed-price, fixed time
technology implementation consulting contracts using the
percentage-of-completion method pursuant to Statement of
Position 81-1, “Accounting for Performance of Construction
Type and Certain Production Type Contracts.” Revenues
generated from fixed-price, fixed time non-technology
implementation contracts, except for support and maintenance
contracts, are recognized based upon a proportional performance
model in accordance with Staff Accounting Bulletin
(SAB) No. 101, “Revenue Recognition in Financial
Statements,” as amended by SAB No. 104,
“Revenue Recognition.” Our percentage-of-completion
method and our proportional performance method of accounting
calculate revenue based on the percentage of labor hours
incurred to estimated total labor hours. This method is used
because reasonably dependable estimates of the revenues and
costs applicable to various stages of a contract can be made,
based on historical experience and milestones set in the
contract. Revenue from time-
50
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and-material contracts is recognized as services are provided.
Revenue generated from fixed-price support and maintenance
contracts is recognized ratably over the contract term.
Our project delivery and business unit finance personnel
continually review labor hours incurred and estimated total
labor hours, which may result in revisions to the amount of
recognized revenue for a contract. Certain contracts provide for
revenue to be generated based upon the achievement of certain
performance standards, including $3.4 million and $956,000
of revenue recognized in 2004 and 2003, respectively. No revenue
was recognized in 2002 for performance standards.
Revenue for contracts with multiple elements are allocated based
on the fair value of the elements in accordance with Emerging
Issues Task Force Issue 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables.” For these
arrangements we evaluate all deliverables in the contract to
determine whether they represent separate units of accounting.
Fair value is determined based on reliable evidence of the fair
value of each deliverable. Revenues are recognized in accordance
with our accounting policies for the separate elements when the
services have value on a stand-alone basis, fair value of the
separate elements exists and, in arrangements that include a
general right of refund relative to the delivered element,
performance of the undelivered element is considered probable
and substantially in our control. This evaluation is performed
at the inception of the arrangement and as each item in the
arrangement is delivered. The evaluation involves significant
judgments regarding the nature of the services and deliverables
being provided, whether these services and deliverables can
reasonably be divided into the separate units of accounting and
the fair value of the separate elements.
If we do not accurately estimate the resources required or the
scope of work to be performed for a contract or we do not manage
the project properly within the planned time period, then we may
recognize a loss on the contract. 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. We have committed
unanticipated additional resources to complete projects in the
past, which has resulted in lower than anticipated profitability
or losses on those contracts. We expect that we will experience
similar situations in the future. 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, could adversely affect our business, financial
condition and results of operations.
We recognize revenue for services where collection from the
client is probable, and our fees are fixed or determinable. We
establish billing terms at the time project deliverables and
milestones are agreed. Our normal payment terms are 30 days
from invoice date. Revenues recognized in excess of the amounts
invoiced to clients are classified as unbilled revenues. Amounts
invoiced to clients in excess of revenue recognized are
classified as deferred revenues. Our project delivery and
business unit finance personnel continually monitor timely
payments from our clients and assess any collection issues. We
maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our clients to make required
payments. We base our estimates on our historical collection and
write-off experience, current trends, credit policy, detailed
analysis of specific client situations and percentage of our
accounts receivable by aging category. While such credit losses
have historically been within our expectations and the
allowances we established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have
in the past. If the financial condition of our clients were to
deteriorate, resulting in an impairment of their ability to make
payment, additional allowances may be required. Our failure to
accurately estimate the losses for doubtful accounts and ensure
that payments are received on a timely basis could have a
material adverse effect on our business, financial condition and
results of operations.
|
|
| (l) |
Stock-Based Compensation |
Statement of Financial Accounting Standards No. 123
(SFAS 123), “Accounting for Stock-Based
Compensation,” requires that companies either recognize
compensation expense for grants of employee stock
51
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
options and other equity instruments based on fair value, or
provide pro forma disclosure of net income (loss) and net income
(loss) per share in the notes to the financial statements. At
December 31, 2004, the Company has eight stock-based
compensation plans, which are described more fully in
Note 12. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. Accordingly, no
compensation cost has been recognized under SFAS 123 for
the Company’s employee stock option 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 (loss) and
net income (loss) per share would have been increased to the pro
forma amounts indicated below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands except per share data) | |
|
Net income (loss) as reported
|
|
$ |
22,819 |
|
|
$ |
(4,898 |
) |
|
$ |
(229,203 |
) |
| |
Add back: Stock-based compensation, included in net income
(loss), as reported
|
|
|
759 |
|
|
|
1,081 |
|
|
|
3,161 |
|
| |
Deduct: Stock-based employee compensation expense determined
under fair value based method for all awards
|
|
|
(21,433 |
) |
|
|
(26,311 |
) |
|
|
(44,460 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma net income (loss)
|
|
$ |
2,145 |
|
|
$ |
(30,128 |
) |
|
$ |
(270,502 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
0.02 |
|
|
$ |
(0.25 |
) |
|
$ |
(2.16 |
) |
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
0.02 |
|
|
$ |
(0.25 |
) |
|
$ |
(2.16 |
) |
The stock-based compensation expense appearing in the financial
statements relates to restricted stock of the Company granted to
senior officers of the Company and restricted stock of HWT, Inc.
(HWT, formerly HealthWatch Technologies, LLC) granted to an
executive of HWT, as well as the Human Code, Inc. (Human Code)
and The Launch Group Aktiengesellschaft (TLG) 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 on the date of purchase. In connection with
the TLG acquisition, the Company issued restricted Sapient
stocks to former TLG employees continuing employment with the
Company in July 2001 and these restricted stocks are vested
ratably over four years.
The Company charges the costs of advertising to expense as
incurred, and includes these costs in selling and marketing
costs in the consolidated statements of operations. The amounts
of advertising costs recorded by the Company were immaterial for
all periods presented.
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, and
52
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
operating loss and tax credit carry forwards. 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, operating losses, or tax credit carry
forwards 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. Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes,” requires
the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Significant
management judgment is required in determining the
Company’s provision for income taxes, its deferred tax
assets and liabilities and any valuation allowance recorded
against its net deferred tax assets. The Company evaluates the
weight of all available evidence to determine whether it is more
likely than not that some portion or all of the deferred income
tax assets will not be realized. See Note 10.
|
|
| (o) |
Income (Loss) Per Share |
Under Statement of Financial Accounting Standards No. 128,
“Earnings Per Share”, the Company presents basic
income (loss) per share and diluted income (loss) per share for
each of the following line items: income (loss) from continuing
operations, loss from discontinued operations and net income
(loss). Basic income (loss) per share is based on the weighted
average number of shares outstanding during the period, less
restricted stock which is considered contingently issuable.
Diluted income (loss) per share reflects the per share effect of
dilutive common stock equivalents. Common stock equivalents were
outstanding at December 31, 2003 and 2002 but were not
included in the computation of diluted income (loss) per share
because the Company recorded losses for each of the years then
ended.
|
|
| (p) |
Comprehensive Income (Loss) |
Statement of Financial Accounting Standards No. 130,
“Reporting Comprehensive Income” (SFAS 130)
establishes standards for reporting comprehensive income (loss)
and its components in the body of the financial statements.
Comprehensive income (loss) includes net income (loss) as
currently reported under generally accepted accounting
principles and also considers the effect of other changes to
stockholders’ equity unrelated to stock activity that are
not required to be recorded in determining net income (loss) 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 which are considered temporary as components of
comprehensive income (loss). At December 31, 2004 and 2003,
the Company reported foreign currency translation gains in the
amount of approximately $4.8 million and $1.8 million,
respectively. At December 31, 2004 and 2003, the Company
reported unrealized gains (losses) on investments in the amount
of approximately ($717,000) and $36,000, respectively.
The Company is engaged in business activities which involve the
provision of business and technology consulting services,
primarily on a fixed-price basis. We have discrete financial
data by operating segments available based on our method of
internal reporting, which disaggregates our operations on a
business unit basis for our United States operations and on a
geographic basis for our international operations. Operating
segments are defined as components of the Company for which
separate financial information is available that is evaluated
regularly by the chief operating decision maker. Management uses
this information to manage resources and evaluate performance.
Beginning with the fourth quarter of 2003, we combined our
Automotive and Industrial, Consumer and Transportation and
Energy Services business units in the United States into one
business unit called Automotive, Consumer and Energy, and we are
reporting our results by operating segments accordingly. Asset
information by operating segment is not reported to or reviewed
by the chief operating decision maker and, therefore, we have
not disclosed asset information for each operating segment.
53
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2004, we identified Canada as another reportable segment
based upon quantitative calculations and we are reporting our
results by operating segments accordingly. Results for operating
segments for 2003 have been reclassified to reflect this change.
The Company does not allocate certain selling and marketing and
general and administrative expenses to its business unit
segments in the United States, because these activities are
managed separately from the business units. The Company did not
allocate the costs associated with the 2002 restructuring plans
across its operating segments for internal measurements
purposes, given that the substantial majority of the
restructuring costs represent consolidation of facilities and
other items that are not specific to individual operating
segments. The Company did allocate the workforce reduction costs
associated with restructuring activity in the second quarter of
2003 across its operating segments, due to the specific
identification of terminated employees to their respective
individual operating segment. The Company did not allocate the
restructuring and other related charges recorded in the third
quarter of 2003 across its operating segments as these charges
resulted primarily from changes in estimated sub-lease income in
connection with restructuring plans announced in 2001 and 2002.
The tables below present the service revenues and operating
income (loss) attributable to these operating segments for 2004
and 2003. The “all other” category includes HWT and
unallocated costs relating to India.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
| |
| |
|
December 31, | |
|
December 31, | |
|
December 31, | |
| Service Revenues |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Financial Services
|
|
$ |
20,480 |
|
|
$ |
19,616 |
|
|
$ |
39,382 |
|
|
Public Services
|
|
|
24,771 |
|
|
|
26,535 |
|
|
|
20,799 |
|
|
Automotive/ Consumer/ Energy
|
|
|
53,442 |
|
|
|
35,980 |
|
|
|
35,115 |
|
|
Technology/ Communications
|
|
|
36,722 |
|
|
|
21,947 |
|
|
|
16,079 |
|
|
United Kingdom
|
|
|
63,770 |
|
|
|
51,211 |
|
|
|
39,738 |
|
|
Germany
|
|
|
32,089 |
|
|
|
17,784 |
|
|
|
11,102 |
|
|
Canada
|
|
|
17,013 |
|
|
|
7,610 |
|
|
|
6,795 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Reportable Segments
|
|
|
248,287 |
|
|
|
180,683 |
|
|
|
169,010 |
|
|
All other
|
|
|
5,649 |
|
|
|
4,112 |
|
|
|
4,801 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Consolidated Total
|
|
$ |
253,936 |
|
|
$ |
184,795 |
|
|
$ |
173,811 |
|
| |
|
|
|
|
|
|
|
|
|
54
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
| |
| |
|
December 31, | |
|
December 31, | |
|
December 31, | |
| Operating Income (Loss) |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Financial Services(1)
|
|
$ |
6,417 |
|
|
$ |
7,179 |
|
|
$ |
3,672 |
|
|
Public Services(1)
|
|
|
9,174 |
|
|
|
4,657 |
|
|
|
(3,770 |
) |
|
Automotive/ Consumer/ Energy(1)
|
|
|
18,019 |
|
|
|
11,779 |
|
|
|
2,753 |
|
|
Technology/ Communications(1)
|
|
|
12,038 |
|
|
|
5,460 |
|
|
|
(1,311 |
) |
|
United Kingdom
|
|
|
6,418 |
|
|
|
(1,830 |
) |
|
|
(1,466 |
) |
|
Germany
|
|
|
6,835 |
|
|
|
2,333 |
|
|
|
(3,964 |
) |
|
Canada
|
|
|
4,647 |
|
|
|
1,558 |
|
|
|
768 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Reportable Segments(1)
|
|
|
63,548 |
|
|
|
31,136 |
|
|
|
(3,318 |
) |
|
All other(1)
|
|
|
3,583 |
|
|
|
1,704 |
|
|
|
2,451 |
|
|
Reconciling items(2)
|
|
|
(41,879 |
) |
|
|
(36,401 |
) |
|
|
(239,831 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Consolidated Total(3)
|
|
$ |
25,252 |
|
|
$ |
(3,561 |
) |
|
$ |
(240,698 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Reflects only the direct controllable expenses of each business
unit segment. It does not represent the total operating results
for each business unit segment in the United States as it does
not contain an allocation of certain corporate and general and
administrative expenses incurred in support of the business unit
segments. |
| |
| (2) |
Adjustments that are made to the total of the segments’
operating income (loss) in order to arrive at consolidated
income (loss) before income taxes include the following: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Restructuring and other related charges
|
|
$ |
1,108 |
|
|
$ |
— |
|
|
$ |
66,885 |
|
|
Unallocated restructuring and other related charges
|
|
|
— |
|
|
|
737 |
|
|
|
— |
|
|
Impairment of goodwill and intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
107,430 |
|
|
Amortization of intangible assets
|
|
|
515 |
|
|
|
1,772 |
|
|
|
4,328 |
|
|
Stock-based compensation
|
|
|
779 |
|
|
|
1,089 |
|
|
|
3,161 |
|
|
Other income
|
|
|
(65 |
) |
|
|
(2,729 |
) |
|
|
(1,788 |
) |
|
Interest income
|
|
|
(2,655 |
) |
|
|
(1,902 |
) |
|
|
(4,312 |
) |
|
Unallocated expenses
|
|
|
42,197 |
(4) |
|
|
37,434 |
(4) |
|
|
64,127 |
(4) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
41,879 |
|
|
$ |
36,401 |
|
|
$ |
239,831 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (3) |
Represents consolidated income (loss) before income taxes. |
| |
| (4) |
Includes corporate portion of both selling and marketing and
general and administrative costs. |
55
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Data for the geographic regions in which the Company operates is
presented below for the periods presented in the consolidated
statements of operations and the consolidated balance sheets:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Service revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
141,064 |
|
|
$ |
108,180 |
|
|
$ |
115,487 |
|
| |
International
|
|
|
112,872 |
|
|
|
76,615 |
|
|
|
58,324 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total service revenues
|
|
$ |
253,936 |
|
|
$ |
184,795 |
|
|
$ |
173,811 |
|
| |
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
7,596 |
|
|
$ |
9,208 |
|
|
$ |
16,862 |
|
| |
International
|
|
|
7,659 |
|
|
|
5,130 |
|
|
|
8,786 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total long-lived assets
|
|
$ |
15,255 |
|
|
$ |
14,338 |
|
|
$ |
25,648 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(s) New Accounting Pronouncements |
In March 2004, the Financial Accounting Standards Board
(FASB) approved the consensus reached on the Emerging Issues
Task Force (EITF) Issue No. 03-01, “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments.” EITF 03-01 provides guidance to
determine when an investment is considered impaired, whether
that impairment is other than temporary, and the measurement of
an impairment loss. EITF 03-01 also provides new disclosure
requirements for other-than-temporary impairments on debt and
equity investments. In September 2004, the FASB issued FASB
Staff Position 03-1-1 that delays the effective date of the
measurement and recognition guidance contained in
EITF 03-01 until further notice. The disclosure
requirements of EITF 03-01 are effective for annual
financial statements for fiscal years ending after
December 15, 2003. The adoption of EITF 03-01 is not
expected to have a material impact on our financial position or
results of operations.
In October 2004, the FASB approved the consensus reached on
EITF No. 04-10, “Applying Paragraph 19 of
Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise and Related
Information,” in Determining Whether to Aggregate Operating
Segments That Do Not Meet the Quantitative Thresholds.”
EITF 04-10 provides guidance on evaluating the aggregation
criteria when determining whether operating segments that do not
meet the quantitative thresholds may be aggregated in accordance
with paragraph 19 of SFAS 141. The adoption of
EITF 04-10 is not expected to have a material impact on our
financial position or results of operations.
In December 2004, the FASB issued two FASB Staff Position
(FSP) that provide accounting guidance on how companies should
account for the effects of the American Jobs Creation Act of
2004 that was signed into law on October 22, 2004. FSP
FAS 109-1, “Application of FASB Statement
No. 109, “Accounting for Income Taxes,” to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004,” states that the
manufacturers’ deduction provided for under this
legislation should be accounted for as a special deduction
instead of a tax rate change. FSP FAS No. 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004,” allows a company additional time to
evaluate whether the effects of the legislation on any plan for
reinvestment or repatriation of foreign earnings for purposes of
applying SFAS No. 109, “Accounting for Income
Taxes.” These FSPs are effective December 21, 2004 and
may affect how a company accounts for deferred income taxes. We
are currently evaluating the impact of these FSPs on our results
of operations and financial position.
56
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payments”, a revision to
SFAS No. 123, Accounting for Stock-Based Compensation.
SFAS No. 123R eliminates the alternative to use
Accounting Principles Board (APB) Opinion No. 25’s
intrinsic value method of accounting that was provided in
SFAS No. 123 as originally issued.
SFAS No. 123R requires the use of an option pricing
model for estimating the fair value of employee stock options
and rights to purchase shares under stock participation plans,
which is amortized to expense over the service periods.
SFAS No. 123R is effective for public companies for
all employee awards of share-based payments granted, modified or
settled in any interim or annual reporting period that begins
after June 15, 2005. We are currently evaluating the impact
of SFAS No. 123R on our financial statements.
|
|
| (3) |
Marketable Investments |
At December 31, 2004 and 2003, all of the Company’s
marketable investments were classified as available-for-sale.
Marketable investments are carried on the balance sheet at their
fair market value.
The following tables summarize the Company’s marketable
investments in thousands of dollars:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
|
|
Gross |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized |
|
Unrealized | |
|
Market | |
| |
|
Cost | |
|
Gains |
|
Losses | |
|
Value | |
| |
|
| |
|
|
|
| |
|
| |
|
U.S. government agencies
|
|
$ |
31,024 |
|
|
$ |
— |
|
|
$ |
(113 |
) |
|
$ |
30,911 |
|
|
Municipal notes and bonds
|
|
|
64,557 |
|
|
|
— |
|
|
|
(551 |
) |
|
|
64,006 |
|
|
Corporate debt securities
|
|
|
7,314 |
|
|
|
— |
|
|
|
(53 |
) |
|
|
7,261 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketable investments
|
|
$ |
102,895 |
|
|
$ |
— |
|
|
$ |
(717 |
) |
|
$ |
102,178 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current marketable investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,172 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-current marketable investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,006 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Market | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial paper
|
|
$ |
5,098 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,098 |
|
|
U.S. government agencies
|
|
|
66,012 |
|
|
|
49 |
|
|
|
(18 |
) |
|
|
66,043 |
|
|
Municipal notes and bonds
|
|
|
5,907 |
|
|
|
2 |
|
|
|
— |
|
|
|
5,909 |
|
|
Corporate debt securities
|
|
|
5,109 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
5,112 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketable investments
|
|
$ |
82,126 |
|
|
$ |
56 |
|
|
$ |
(20 |
) |
|
$ |
82,162 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current marketable investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,961 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Non-current marketable investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,201 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
57
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Contractual maturities of marketable investments at
December 31, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
Amortized | |
|
Market | |
| |
|
Cost | |
|
Value | |
| |
|
| |
|
| |
|
Less than one year
|
|
$ |
38,338 |
|
|
$ |
38,172 |
|
|
Due in 1-2 years
|
|
|
64,557 |
|
|
|
64,006 |
|
|
Due in 2-5 years
|
|
|
— |
|
|
|
— |
|
|
Due after 5 years
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Marketable investments
|
|
$ |
102,895 |
|
|
$ |
102,178 |
|
| |
|
|
|
|
|
|
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 2004, 2003 and 2002.
The Company has deposited approximately $6.6 million and
$11.5 million with various banks as collateral for letters
of credit and performance bonds and has classified this cash as
restricted on the accompanying consolidated balance sheet at
December 31, 2004 and December 31, 2003, respectively,
and is reflected in current or non-current assets based on the
expiration of the requirement with the various banks.
|
|
| (5) |
Property and Equipment |
The cost and accumulated depreciation of property and equipment
at December 31, 2004 and 2003 are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Estimated | |
| |
|
2004 | |
|
2003 | |
|
Useful Life | |
| |
|
| |
|
| |
|
| |
|
Leasehold improvements
|
|
$ |
12,404 |
|
|
$ |
17,229 |
|
|
Lesser of lease term or 5 years |
|
Furniture and fixtures
|
|
|
3,429 |
|
|
|
4,772 |
|
|
|
5 years |
|
|
Office equipment
|
|
|
4,032 |
|
|
|
5,648 |
|
|
|
5 years |
|
|
Computer equipment
|
|
|
12,018 |
|
|
|
11,807 |
|
|
|
3 years |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
31,883 |
|
|
|
39,456 |
|
|
|
|
|
| |
Less accumulated depreciation
|
|
|
(17,271 |
) |
|
|
(26,276 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
14,612 |
|
|
$ |
13,180 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Depreciation expense was approximately $6.0 million,
$9.1 million and $13.7 million in 2004, 2003 and 2002,
respectively.
Effective January 1, 2002, the Company adopted
SFAS No. 142, “Goodwill and Other Intangible
Assets” and ceased amortization of goodwill, which was
approximately $101.8 million at that time. The Company
performed an impairment review of its goodwill as of
January 1, 2002, under the transitional provisions of
SFAS 142. The Company identified its reporting units,
allocated assets and liabilities to the reporting units and
performed impairment tests on the goodwill associated with each
of the reporting units by comparing the reporting units’
book value to their estimated fair value. Assets and
liabilities, including
58
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
goodwill, were allocated to reporting units based on factors
such as specific identification, percentage of revenue and
headcount. The fair value of the reporting units was estimated
considering a market multiple of revenue approach. During the
second quarter of 2002, the Company completed the transitional
impairment test of goodwill and concluded that no impairment of
the goodwill had occurred as of January 1, 2002. By
June 30, 2002, the Company’s stock price had declined
significantly from January 1, 2002, at which point the
Company’s market capitalization, based on its stock price,
was below its book value, and the Company performed an interim
goodwill impairment test. The Company’s stock price at
January 2, 2002 was $7.25 per share and declined to
$1.06 per share at June 28, 2002. Based on the
analysis at June 30, 2002, the carrying amount of all
reporting units exceeded their fair values and a goodwill
impairment charge of $101.8 million was recognized in the
statement of operations under the caption “Impairment of
goodwill and intangible assets,” in 2002. This charge
represented 100% of the goodwill balance at January 1,
2002. The valuation of the estimated fair value of reporting
units based on a market multiple of revenue approach required
significant estimates and assumptions. These estimates contain
management’s best estimates, using appropriate and
customary assumptions and projections at the time. If different
estimates or assumptions were used, it is reasonably possible
that the analysis would have generated materially different
results.
|
|
| (7) |
Intangible and Long-lived Assets |
In connection with the acquisition of additional interest in HWT
(see Note 15), intangible assets of $1.5 million,
primarily consisting of customer contracts and developed
technology, were acquired during the first quarter of 2003.
These intangible assets are being amortized on a straight-line
basis over their remaining useful lives, which will become fully
amortized in the first quarter of 2006. The valuation of
long-lived assets requires significant estimates and
assumptions, including fair value estimates such as estimated
replacement cost and relief from royalty. These estimates
contain management’s best estimates, using appropriate and
customary assumptions and projections at the time. If different
estimates or adjustments were used, it is reasonably possible
that the Company’s analysis would have generated materially
different results.
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. Factors the Company considers important
which could trigger an impairment review include:
|
|
|
| |
• |
significant underperformance relative to historical or projected
future operating results; |
| |
| |
• |
significant negative industry or economic trends; |
| |
| |
• |
significant decline in stock price for a sustained
period; and |
| |
| |
• |
market capitalization relative to net book value. |
If such circumstances exist, the Company will evaluate the
carrying value of long-lived assets, other than goodwill, to
determine if impairment exists based upon estimated undiscounted
future cash flows over the remaining useful life of the assets
and comparing that value to the carrying value of the assets. If
the carrying value of the asset is greater than the estimated
future cash flows, the asset is written down to its estimated
fair value. 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. The Company determined that an interim impairment test
of its long-lived assets was necessary at June 30, 2002 due
to the significant decline in the Company’s market
capitalization, as determined by its stock price. Utilizing the
lowest level of identifiable cash flows for each long-lived
asset group, the Company determined that the expected
undiscounted cash flows related to its long-lived asset groups
would not recover the carrying value of the assets over their
remaining useful lives. Accordingly, the Company compared the
carrying amounts of its long-lived assets to their estimated
fair values. Fair values were estimated using methods such as
estimated replacement cost and relief from royalty. Based on the
analysis at June 30, 2002, the fair values of certain
intangible assets were below their carrying values and an
impairment charge of $5.6 million was recognized in the
statement of
59
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
operations under the caption “Impairment of goodwill and
intangible assets,” for 2002. The Company determined that
an impairment test of intangible assets at December 31,
2003 was necessary due to the continued lack of profitability in
the HWT business unit to which the intangible assets pertain.
The Company determined as a result of this test, that the
expected undiscounted cash flows related to HWT were expected to
recover the carrying value of the intangible assets over their
remaining useful lives, and as a result, that no impairment
existed as of December 31, 2003. HWT was profitable during
2004 and the Company completed an impairment test, which
concluded that no impairment exists as of December 31, 2004.
The following is a summary of intangible assets as of
December 31, 2004 and 2003 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Gross Carrying | |
|
Accumulated | |
|
Net Book | |
| |
|
Amount | |
|
Amortization | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketing assets and customer lists
|
|
$ |
17 |
|
|
$ |
(1 |
) |
|
$ |
16 |
|
| |
Customer contracts
|
|
|
648 |
|
|
|
(49 |
) |
|
|
599 |
|
| |
Developed technology
|
|
|
1,454 |
|
|
|
(1,426 |
) |
|
|
28 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
2,119 |
|
|
$ |
(1,476 |
) |
|
$ |
643 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 | |
| |
|
| |
| |
|
Gross Carrying | |
|
Accumulated | |
|
Net Book | |
| |
|
Amount | |
|
Amortization | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketing assets and customer lists
|
|
$ |
2,320 |
|
|
$ |
(2,291 |
) |
|
$ |
29 |
|
| |
Employment agreements
|
|
|
1,000 |
|
|
|
(1,000 |
) |
|
|
— |
|
| |
Customer contracts
|
|
|
1,439 |
|
|
|
(360 |
) |
|
|
1,079 |
|
| |
Developed technology
|
|
|
12,110 |
|
|
|
(12,060 |
) |
|
|
50 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
16,869 |
|
|
$ |
(15,711 |
) |
|
$ |
1,158 |
|
| |
|
|
|
|
|
|
|
|
|
Amortization expense related to the intangible assets was
$515,000, $1.8 million and $4.3 million for 2004, 2003
and 2002, respectively. Amortization expense related to
intangible assets is expected to be $515,000 for 2005. The
remaining balance of $128,000 of amortizable intangible assets
is expected to be fully amortized in the first quarter of 2006.
|
|
| (8) |
Investments and Minority Interest |
On October 25, 2000, the Company invested $3.7 million
in DI, a management consulting company that develops strategies
for e-businesses in Japan, and acquired a 19% interest. Under
the terms of the Company’s investment agreement with DI,
the Company had one seat on DI’s board of directors, with
special voting rights and other privileges, and, therefore, used
the equity method of accounting for this investment. In 2002 and
2001, the Company’s equity ownership percentage in DI was
diluted from approximately 19% to approximately 15.7%, as a
result of subsequent sales of DI’s common stock. Both
rounds of financing by DI were at a higher price per share than
the Company previously paid, and the Company recorded gains of
$1.8 million and $1.4 million for 2002 and 2001,
respectively, as a result of the change in equity interest.
During the fourth quarter of 2002, the Company discontinued its
Sapient KK operations in Japan (See Note 17). On
November 14, 2002, as part of the dissolution of
Sapient KK, the Company and DI agreed to unwind the cross
ownership position between DI and Sapient KK in exchange
for DI lifting certain trade restrictions on its common stock
owned by the Company. In addition, the Company’s designee
on DI’s Board
60
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of Directors resigned his position as a Director of DI in
November 2002. From November 2002, the Company used
the cost method of accounting, since the Company no longer had
the ability to significantly influence DI. The Company has sold
all of its remaining interest in DI for net cash proceeds of
$8.6 million and $585,000 in 2003 and 2002, respectively,
realizing gains of approximately $2.8 million and $44,000
in 2003 and 2002, respectively, which were included in other
income in the accompanying statements of operations.
On July 2, 2003, the Company reached an agreement with the
management team of Sapient S.p.A., formerly the Company’s
joint venture in Milan, Italy, pursuant to which the management
team acquired all of the shares of Sapient S.p.A. from the
shareholders of the joint venture. As a result, the Company no
longer holds any ownership interest in the voting shares of
Sapient S.p.A. and the joint venture agreement has been
terminated. The management team is the exclusive licensee of
Sapient’s intellectual property in Italy and the Company is
entitled to a royalty equal to 2% of the annual revenue of
Sapient S.p.A. beginning July 2, 2005. The Company also has
an option to purchase 100% of the ownership of Sapient
S.p.A., based on a formula which estimates fair value, among
other rights. The option is exercisable from July 2007 through
July 2010.
|
|
| (9) |
Restructuring and Other Related Charges |
As a result of the decline in the demand for advanced technology
consulting services that began in the second half of 2000, and
the resulting decline in the Company’s service revenues in
2001 and 2002, the Company restructured its workforce and
operations in 2001, 2002 and in the second quarter of 2003.
The Company recorded restructuring and other related charges of
approximately $1.1 million during 2004, primarily due to
decreases in estimated sub-lease income in connection with the
restructuring plans previously announced. No employees were
terminated in connection with the restructuring charges recorded
in 2004.
In connection with the restructuring plan implemented in the
second quarter of 2003, the Company recorded restructuring and
other related charges of approximately $1.4 million. This
restructuring action resulted in the termination of 40
employees. This restructuring action was due to the skill sets
of certain employees not matching the Company’s current
business requirements and due to a significant decline in the
demand for the Company’s services in its Financial Services
business unit through the second quarter of 2003. In the third
quarter of 2003, the Company recorded restructuring and other
related charges of approximately $0.7 million, primarily
due to decreases in its estimated sub-lease income in connection
with the restructuring plans previously announced.
In connection with the restructuring plans implemented in 2002,
the Company recorded restructuring and other related charges of
approximately $66.9 million during 2002. The 2002
restructuring plans resulted in the termination of 863
employees. The restructuring plans also included discontinuing
operations in Japan, closing offices in Houston and Denver and
consolidating office space in other cities where the Company had
excess office space. In connection with the termination of
certain former TLG employees, the Company accelerated the
vesting of approximately 138,000 shares of restricted
common stock as a part of their severance packages, resulting in
a non-cash charge of approximately $903,000. Restructuring
charges of $662,000 related to the Company’s Japan
subsidiary was reported in the Company’s loss from
discontinued operations for 2002. Estimated costs for the
consolidation of facilities are comprised of contractual rental
commitments for office space vacated and related costs,
brokerage and related costs to sublet the office space,
leasehold improvement write-downs, offset by estimated sub-lease
income. The total reduction of office space resulting from these
office closings and consolidations was approximately
391,000 square feet.
In connection with the restructuring plans announced in 2001,
the Company recorded restructuring and other related charges of
$100.6 million. The restructuring plans resulted in the
termination of 1,251 employees. The restructuring plans also
included closing the Sydney, Australia office and consolidating
office space in other cities where the Company had multiple
office locations. Included in the restructuring charge is
61
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
approximately $561,000 related to the Company’s Japan
subsidiary which is now included in its loss from discontinued
operations for the year ended December 31, 2001. Estimated
costs for the consolidation of facilities are comprised of
contractual rental commitments for office space vacated and
related costs, brokerage and related costs to sublet the office
space, leasehold improvement write-downs, offset by estimated
sub-lease income. The total reduction of office space resulting
from these office closings and consolidations was approximately
639,000 square feet.
These restructuring charges and accruals require significant
estimates and assumptions, including sub-lease income
assumptions. The consolidation of facilities required the
Company to make estimates, which included contractual rental
commitments or lease buy-outs for office space vacated and
related costs, offset by estimated sub-lease income. The
Company’s sub-lease assumptions include anticipated rates
to be charged to a sub-tenant and the timing of the sub-lease
arrangement. These estimates and assumptions are monitored on at
least a quarterly basis for changes in circumstances. It is
reasonably possible that such estimates could change in the
future, resulting in additional adjustments and these
adjustments could be material. Charges for restructuring and
other related activities as of, and for 2004, 2003 and 2002 were
as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce | |
|
Facilities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2003
|
|
$ |
242 |
|
|
$ |
40,545 |
|
|
$ |
40,787 |
|
|
Additional charges
|
|
|
(182 |
) |
|
|
1,290 |
|
|
|
1,108 |
|
|
Non-cash, utilized
|
|
|
— |
|
|
|
(2,344 |
) |
|
|
(2,344 |
) |
|
Cash utilized
|
|
|
(49 |
) |
|
|
(13,939 |
) |
|
|
(13,988 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
11 |
|
|
$ |
25,552 |
|
|
$ |
25,563 |
|
| |
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
10,560 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
15,003 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Workforce | |
|
Facilities | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2002
|
|
$ |
5,133 |
|
|
$ |
68,443 |
|
|
$ |
73,576 |
|
|
Additional charges
|
|
|
1,572 |
|
|
|
563 |
|
|
|
2,135 |
|
|
Non-cash, utilized
|
|
|
(16 |
) |
|
|
(2,379 |
) |
|
|
(2,395 |
) |
|
Cash utilized
|
|
|
(6,447 |
) |
|
|
(26,082 |
) |
|
|
(32,529 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
$ |
242 |
|
|
$ |
40,545 |
|
|
$ |
40,787 |
|
| |
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
18,237 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
$ |
22,550 |
|
| |
|
|
|
|
|
|
|
|
|
62
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Depreciable | |
|
|
| |
|
Workforce | |
|
Facilities | |
|
Assets | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, December 31, 2001
|
|
$ |
1,635 |
|
|
$ |
51,705 |
|
|
$ |
— |
|
|
$ |
53,340 |
|
|
Additional charges
|
|
|
23,883 |
|
|
|
46,393 |
|
|
|
1,797 |
|
|
|
72,073 |
|
|
Adjustments
|
|
|
(643 |
) |
|
|
(3,883 |
) |
|
|
— |
|
|
|
(4,526 |
) |
|
Non-cash, utilized
|
|
|
(903 |
) |
|
|
(3,968 |
) |
|
|
(1,797 |
) |
|
|
(6,668 |
) |
|
Cash utilized
|
|
|
(18,839 |
) |
|
|
(21,804 |
) |
|
|
— |
|
|
|
(40,643 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
$ |
5,133 |
|
|
$ |
68,443 |
|
|
$ |
— |
|
|
$ |
73,576 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,466 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,110 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Depreciable | |
|
|
| |
|
Workforce | |
|
Facilities | |
|
Assets | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
Original charge
|
|
$ |
11,948 |
|
|
$ |
33,285 |
|
|
$ |
2,109 |
|
|
$ |
47,342 |
|
|
Additional charges
|
|
|
11,691 |
|
|
|
23,549 |
|
|
|
2,769 |
|
|
|
38,009 |
|
|
Adjustments
|
|
|
852 |
|
|
|
13,217 |
|
|
|
1,220 |
|
|
|
15,289 |
|
|
Non-cash, utilized
|
|
|
(67 |
) |
|
|
(6,470 |
) |
|
|
(6,098 |
) |
|
|
(12,635 |
) |
|
Cash utilized
|
|
|
(22,789 |
) |
|
|
(11,876 |
) |
|
|
— |
|
|
|
(34,665 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2001
|
|
$ |
1,635 |
|
|
$ |
51,705 |
|
|
$ |
— |
|
|
$ |
53,340 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,829 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current accrued restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,511 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring costs are $25.6 million
at December 31, 2004, of which the cash portion is
$24.3 million. The net cash outlay over the next 12-month
period is expected to be $8.3 million and the remainder
will be paid through 2011.
The provision (benefit) for income taxes consists of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Federal, current
|
|
$ |
160 |
|
|
$ |
— |
|
|
$ |
(17,217 |
) |
|
State, current
|
|
|
63 |
|
|
|
500 |
|
|
|
201 |
|
|
Foreign, current
|
|
|
2,845 |
|
|
|
837 |
|
|
|
(648 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Subtotal, current income tax provision (benefit)
|
|
|
3,068 |
|
|
|
1,337 |
|
|
|
(17,664 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Federal, deferred
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
State, deferred
|
|
|
— |
|
|
|
— |
|
|
|
(921 |
) |
|
Foreign, deferred
|
|
|
(635 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Subtotal, deferred income tax provision (benefit)
|
|
|
(635 |
) |
|
|
— |
|
|
|
(921 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
$ |
2,433 |
|
|
$ |
1,337 |
|
|
$ |
(18,585 |
) |
| |
|
|
|
|
|
|
|
|
|
No amounts were credited to additional paid-in capital for 2004,
2003 or 2002 relating to the income tax benefit of the employee
stock option compensation expense for tax purposes.
63
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax expense for 2004, 2003 and 2002 differed from the
amounts computed by applying the U.S. statutory income tax
rate to pre-tax income as a result of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Statutory income tax (benefit) rate
|
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
Impact of the Job Creation and Worker Assistance Act of 2002
|
|
|
— |
|
|
|
— |
|
|
|
(6.9 |
) |
|
State income taxes, net of federal benefit
|
|
|
4.4 |
|
|
|
9.1 |
|
|
|
(3.2 |
) |
|
Non-deductible goodwill
|
|
|
— |
|
|
|
— |
|
|
|
13.3 |
|
|
Valuation allowance
|
|
|
22.5 |
|
|
|
63.3 |
|
|
|
23.5 |
|
|
Other, net
|
|
|
(1.5 |
) |
|
|
0.2 |
|
|
|
0.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effective income tax (benefit) rate
|
|
|
(9.6 |
)% |
|
|
37.6 |
% |
|
|
(7.7 |
)% |
| |
|
|
|
|
|
|
|
|
|
At December 31, 2004 and 2003, 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:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Deferred income tax assets (liabilities), current:
|
|
|
|
|
|
|
|
|
| |
Deferred revenue
|
|
$ |
1,028 |
|
|
$ |
782 |
|
| |
Allowance for doubtful accounts
|
|
|
465 |
|
|
|
462 |
|
| |
Other reserves and accruals
|
|
|
4,316 |
|
|
|
2,511 |
|
| |
Unbilled revenue
|
|
|
(3,864 |
) |
|
|
(3,457 |
) |
| |
Restructuring charges
|
|
|
10,077 |
|
|
|
77 |
|
| |
|
|
|
|
|
|
| |
|
Gross deferred income tax assets (liabilities), current
|
|
|
12,022 |
|
|
|
375 |
|
| |
Valuation allowance
|
|
|
(12,022 |
) |
|
|
(375 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred income tax assets (liabilities), current
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Deferred income tax assets (liabilities), non-current:
|
|
|
|
|
|
|
|
|
| |
Property and equipment
|
|
$ |
976 |
|
|
$ |
(409 |
) |
| |
In-process research and development
|
|
|
2,638 |
|
|
|
2,895 |
|
| |
Goodwill and other intangibles
|
|
|
4,995 |
|
|
|
5,079 |
|
| |
Tax credits
|
|
|
4,922 |
|
|
|
4,786 |
|
| |
Unused net operating losses
|
|
|
90,686 |
|
|
|
89,996 |
|
| |
Restructuring charges
|
|
|
— |
|
|
|
15,319 |
|
| |
Other
|
|
|
(479 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Gross deferred income tax assets (liabilities), non-current
|
|
|
103,738 |
|
|
|
117,666 |
|
| |
Valuation allowance
|
|
|
(102,923 |
) |
|
|
(117,666 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred income tax assets (liabilities), non-current
|
|
$ |
815 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
The Company has net operating loss carry-forwards of
approximately $183 million and $191 million for
U.S. federal purposes, $282 million and
$286 million related to state jurisdictions, and
$16 million and $18 million related to foreign
jurisdictions at December 31, 2004 and 2003, respectively.
If not utilized, the federal and state net operating loss
carry-forwards will begin to expire at various times beginning
in 2021 and 2007, respectively. The Company’s federal and
Massachusetts research and development tax credit carry-forwards
for income tax purposes are approximately $4.8 million at
December 31, 2004 and 2003. If not
64
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
utilized, the federal tax credit carry-forwards will begin to
expire in 2017. 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. As a result of operating losses
incurred in 2001, 2002 and 2003 and uncertainty as to the extent
and timing of profitability in future periods, the Company
recorded a valuation allowance of approximately
$115.0 million and $118.0 million at December 31,
2004 and 2003, respectively relating primarily to the United
States. Having assessed the realizability of the deferred tax
assets in certain foreign jurisdictions, the Company believes
that due to projected future taxable income and carryback
provisions in certain foreign jurisdictions, it is more likely
than not that the Company will realize the net deferred tax
assets in Canada and the United Kingdom in the foreseeable
future. The assessment of the valuation allowance requires
significant judgment and can materially affect net income. If
the realization of deferred tax assets in the future becomes
more likely than not, an adjustment to the deferred tax assets
would increase net income in the period such determination is
made.
The Company has a deferred tax asset pertaining to net operating
loss carry-forwards resulting from the exercise of employee
stock options of approximately $4.6 million at
December 31, 2004 and 2003, respectively. When recognized,
the tax benefit of these loss carry-forwards will be accounted
for as a credit to additional paid-in capital.
The Company did not provide for United States income taxes and
foreign withholding taxes on a cumulative total of approximately
$15.9 million and $9.1 million of undistributed
earnings for certain non-United States subsidiaries at
December 31, 2004 and 2003. The Company intends to reinvest
any earnings indefinitely in operations outside the United
States.
Net total income taxes (received) paid in 2004, 2003 and
2002 were approximately $752,000, $(200,000), and
$(33.0) million, respectively.
|
|
| (11) |
Commitments and Contingencies |
The Company maintains its executive offices in Cambridge,
Massachusetts and operating offices in several locations
throughout the United States and abroad. Future minimum rental
commitments under non-cancelable operating leases with initial
or remaining terms in excess of one year at December 31,
2004, net of estimated sublease income of $6.2 million and
$22.4 million under existing sublease arrangements and
expected future sublease arrangements, respectively, were as
follows (in thousands):
| |
|
|
|
|
| |
|
Total | |
| |
|
| |
|
2005
|
|
$ |
15,383 |
|
|
2006
|
|
|
9,251 |
|
|
2007
|
|
|
3,978 |
|
|
2008
|
|
|
6,179 |
|
|
2009
|
|
|
4,392 |
|
|
Thereafter
|
|
|
10,950 |
|
Rent expense for the years ended December 31, 2004, 2003
and 2002 was approximately $8.7 million, $7.2 million
and $10.9 million, respectively.
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 $3.6 million and various
administrative audits, each of which have arisen in the ordinary
course of our business. The Company has an accrual at
December 31, 2004 of approximately $0.3 million
related to certain of these items. The Company intends to defend
these matters vigorously, although the ultimate outcome of these
items is uncertain and the potential loss, if any, may be
significantly higher or lower than the amounts that the Company
has previously accrued.
65
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As permitted under Delaware law, the Company’s Amended and
Restated Certificate of Incorporation provides that the Company
will indemnify its officers and Directors for certain claims
asserted against them in connection with their service as an
officer or Director of the Company. The maximum potential amount
of future payments that the Company could be required to make
under these indemnification provisions is unlimited. However,
the Company has purchased certain Directors’ and
Officers’ insurance policies that reduce its monetary
exposure and enable it to recover a portion of any future
amounts paid. As a result of the Company’s insurance
coverage, the Company believes the estimated fair value of these
indemnification arrangements is minimal.
The Company frequently has agreed to indemnification provisions
in professional services agreements with its clients and in its
real estate leases in the ordinary course of its business.
Pursuant to these provisions, the Company indemnifies the
indemnified party for certain losses suffered or incurred by the
indemnified party. With respect to the Company’s
professional services agreements, these indemnification
provisions typically apply to any claim asserted against its
client for infringement of intellectual property rights, but may
also include claims asserted against its client relating to
personal injury or property damage, violations of law or certain
breaches of the Company’s contractual obligations. With
respect to lease agreements, these indemnification provisions
typically apply to claims asserted against the landlord relating
to personal injury and property damage caused by the Company,
violations of law or to certain breaches of the Company’s
contractual obligations. In each case, the term of these
indemnification provisions generally survives the termination of
the agreement, although the provision has the most relevance
during the contract term and for a short period of time
thereafter. The maximum potential amount of future payments that
the Company could be required to make under these
indemnification provisions is unlimited, although in many cases
the Company’s liability for indemnification is limited to a
specific dollar amount in the applicable contract. The Company
also has purchased insurance policies covering professional
errors and omissions, property damage and general liability that
reduce its monetary exposure for indemnification and enable it
to recover a portion of any future amounts paid. The Company has
never paid any material amounts to defend lawsuits or settle
claims related to these indemnification provisions. Accordingly,
the Company believes the estimated fair value of these
indemnification arrangements is minimal.
The Company frequently warrants that the technology solutions it
develops for its clients will operate in accordance with the
project specifications without defects for a specified warranty
period, subject to certain limitations that the Company believes
are standard in the industry. In the event that defects are
discovered during the warranty period, and none of the
limitations apply, the Company is obligated to remedy the
defects until the solution that the Company provided operates
within the project specifications. The Company is not typically
obligated by contract to provide its clients with any refunds of
the fees they have paid, although a small number of its
contracts provide for the payment of liquidated damages upon
default. The Company has purchased insurance policies covering
professional errors and omissions, property damage and general
liability that reduce its monetary exposure for warranty-related
claims and enable it to recover a portion of any future amounts
paid. The Company typically provides in its contracts for
testing and client acceptance procedures that are designed to
mitigate the likelihood of warranty-related claims, although
there can be no assurance that such procedures will be effective
for each project. The Company has never paid any material
amounts with respect to the warranties for its solutions,
although the Company sometimes commits unanticipated levels of
effort to projects to remedy defects covered by its warranties.
Deferred revenues on contracts related to warranties is
immaterial as of December 31, 2004 and 2003.
|
|
| (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
66
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
awards up to an aggregate of 20,000,000 shares of
non-voting common stock. Since consummation of the
Company’s initial public offering of common stock in April
1996, no further grants or awards may be made pursuant to the
1992 Stock Plan. No options remain outstanding under the 1992
Plan.
|
|
| (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. A total of
19,200,000 shares of common stock may be issued under the
1996 Plan. 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) authorized the issuance of up to
3,600,000 shares of common stock to participating employees
through a series of semi-annual offerings. The maximum number of
shares available in each offering was 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 600,000 shares (plus any unpurchased
shares available from previous offerings) for the eleventh and
twelfth offerings. As of June 30, 2002, all twelve
offerings have occurred, and the Purchase Plan expired. Under
the Purchase Plan, the Company sold 1,198,002 and
856,849 shares of common stock in 2002 and 2001,
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, 2004 and 2003, options to purchase 96,300
and 80,000 shares, respectively, of common stock were
outstanding under the Director Plan.
|
|
| (e) |
1998 Stock Incentive Plan |
The Company’s 1998 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
67
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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) |
Human Code 1994 Stock Option/ Stock Issuance Plan |
Prior to the acquisition of Human Code, 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 assumed these outstanding Human Code stock options and
converted them into options to purchase approximately
471,000 shares of the Company’s common stock at
exercise prices between $1.00 and $32.64 per share. The
options 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, all of which has
been amortized as of December 31, 2004. Stock-based
compensation expense relating to these options was approximately
$16,000, $105,000 and $342,000 for 2004, 2003 and 2002,
respectively. In connection with the termination of certain
Human Code employees to whom the deferred compensation related,
$63,000 were reversed through additional paid-in-capital during
2003. Deferred compensation was fully amortized in the first
quarter of 2004. No further grants may be made pursuant to the
Human Code Plan. Previously outstanding options under the Human
Code Plan remain outstanding, and are exercisable for shares of
the Company’s common stock.
|
|
| (g) |
2001 Stock Option Plan |
The Company’s 2001 Stock Option Plan (the 2001 Plan)
authorizes the Company to grant options to purchase common stock
to employees and directors of, and consultants to, the Company.
The total number of shares of common stock which may be issued
under the 2001 Plan is 12,000,000 shares. The 2001 Plan is
administered by the Board of Directors, or a subcommittee
thereof, which selects the persons to whom stock options are
granted and determines the number of shares, the exercise
prices, the vesting terms and the expiration date. Under the
terms of the 2001 Plan, no stock options, including
non-qualified options, may be granted at exercise prices which
are below the grant date fair market value of the common stock.
Stock options granted under the 2001 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).
|
|
| (h) |
2002 Employee Stock Purchase Plan |
The Company’s 2002 Employee Stock Purchase Plan (the 2002
Purchase Plan) authorizes the issuance of up to
2,700,000 shares of common stock to participating employees
through a series of periodic offerings. The precise length of
each offering, and the maximum number of shares available for
purchase in each offering, are established by the Company’s
Board of Directors in advance of the applicable offering
commencement date. The first offering under the 2002 Purchase
Plan ran from July 1, 2002 until February 28, 2003,
and the maximum number of shares available was
720,000 shares. The second, third and fourth offerings
under the 2002 Purchase Plan ran for six months each, and the
maximum number of shares available in each offering was
540,000 shares (plus any unpurchased shares from previous
offerings). The fifth offering under the 2002 Purchase Plan ran
for four months, and the maximum number of shares available in
the offering was 360,000 shares (plus any unpurchased
shares from previous offerings). The sixth offering will run
from January 1, 2005 through May 31, 2005 and the
maximum number of shares available will be 685,237, which
represent the unpurchased shares from previous offerings. No new
shares were available for the sixth offering. An employee
becomes eligible to participate in the Purchase Plan when he or
she is regularly employed by the
68
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 can 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.
A summary of the status of the Company’s stock option plans
for 2004, 2003 and 2002 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
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
|
|
|
20,018 |
|
|
$ |
11.04 |
|
|
|
23,236 |
|
|
$ |
13.67 |
|
|
|
24,620 |
|
|
$ |
19.55 |
|
|
Granted
|
|
|
4,355 |
|
|
$ |
6.30 |
|
|
|
5,436 |
|
|
$ |
2.98 |
|
|
|
7,432 |
|
|
$ |
2.43 |
|
|
Exercised
|
|
|
(1,292 |
) |
|
$ |
3.17 |
|
|
|
(963 |
) |
|
$ |
0.75 |
|
|
|
(136 |
) |
|
$ |
1.56 |
|
|
Forfeited
|
|
|
(2,564 |
) |
|
$ |
11.40 |
|
|
|
(7,691 |
) |
|
$ |
14.67 |
|
|
|
(8,680 |
) |
|
$ |
19.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
20,517 |
|
|
$ |
10.45 |
|
|
|
20,018 |
|
|
$ |
11.04 |
|
|
|
23,236 |
|
|
$ |
14.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year end
|
|
|
10,599 |
|
|
|
|
|
|
|
9,411 |
|
|
|
|
|
|
|
10,627 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year
|
|
$ |
3.52 |
|
|
|
|
|
|
$ |
1.97 |
|
|
|
|
|
|
$ |
1.92 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
2004, 2003 and 2002: dividend yield of zero percent for each
year; expected volatility ranging from 101 to 108 percent
for 2004, 79 to 119 percent for 2003 and approximately
124 percent for 2002; risk free interest rates ranging from
3.25 to 4.00 percent for 2004, 1.0 to 1.3 percent for
2003 and 1.2 to 1.8 percent for 2002; and expected lives of
4.56 years for 2004 and 4 years for 2003 and 2002. The
pro forma impact on the three years ended December 31, 2004
is not necessarily representative of the pro forma effects which
may be expected in future years.
69
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
|
|
Options Exercisable | |
| |
|
| |
|
|
|
| |
| |
|
|
|
Weighted | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
Average | |
|
|
|
Average | |
| |
|
Number | |
|
Remaining | |
|
Exercise | |
|
Number | |
|
Exercise | |
| Range of Exercise Prices |
|
Outstanding | |
|
Contractual Life | |
|
Price | |
|
Exercisable | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
|
|
(In thousands) | |
|
$ 0.59 to $ 0.59
|
|
|
8 |
|
|
|
1.3 years |
|
|
$ |
0.59 |
|
|
|
8 |
|
|
$ |
0.59 |
|
|
$ 0.71 to $ 1.47
|
|
|
2,486 |
|
|
|
7.4 years |
|
|
$ |
1.44 |
|
|
|
1,292 |
|
|
$ |
1.45 |
|
|
$ 1.53 to $ 1.91
|
|
|
242 |
|
|
|
8.4 years |
|
|
$ |
1.69 |
|
|
|
85 |
|
|
$ |
1.64 |
|
|
$ 1.92 to $ 2.82
|
|
|
3,274 |
|
|
|
8.5 years |
|
|
$ |
2.79 |
|
|
|
639 |
|
|
$ |
2.78 |
|
|
$ 2.91 to $ 5.93
|
|
|
2,219 |
|
|
|
7.0 years |
|
|
$ |
4.91 |
|
|
|
970 |
|
|
$ |
5.09 |
|
|
$ 5.95 to $ 6.00
|
|
|
466 |
|
|
|
8.7 years |
|
|
$ |
5.99 |
|
|
|
55 |
|
|
$ |
5.97 |
|
|
$ 6.01 to $ 6.04
|
|
|
2,239 |
|
|
|
9.4 years |
|
|
$ |
6.04 |
|
|
|
0 |
|
|
$ |
0.00 |
|
|
$ 6.05 to $ 7.25
|
|
|
2,069 |
|
|
|
5.6 years |
|
|
$ |
6.63 |
|
|
|
1,326 |
|
|
$ |
6.60 |
|
|
$ 7.27 to $10.31
|
|
|
2,903 |
|
|
|
5.6 years |
|
|
$ |
9.36 |
|
|
|
2,070 |
|
|
$ |
9.62 |
|
|
$10.33 to $69.28
|
|
|
4,611 |
|
|
|
5.0 years |
|
|
$ |
28.87 |
|
|
|
4,154 |
|
|
$ |
29.11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.59 to $69.28
|
|
|
20,517 |
|
|
|
6.8 years |
|
|
$ |
10.45 |
|
|
|
10,599 |
|
|
$ |
14.97 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $1,250 per employee per
year. Total Company contributions in 2004, 2003 and 2002 were
approximately $0.5 million, $0.6 million and
$1.2 million, respectively.
|
|
| (14) |
Stockholders’ Equity |
|
|
| (a) |
Restricted Common Stock |
On October 23, 2002, the Company granted
324,500 shares of restricted common stock to senior
executive officers of the Company. The Company did not make
grants of restricted shares to Messrs. Greenberg and Moore.
These shares vest ratably over a period of four years from the
grant date. The Company measured the intrinsic value of the
shares based on the market value of the shares on the date of
the grant. Four of these senior executive officers have since
left the Company and 67,500 shares were forfeited as a
result. The stock-based compensation charge will be
approximately $19,000 per quarter for the next 7 quarters,
and $5,000 for the final quarter. On March 21, 2003, HWT
issued 50,000 restricted shares of its common stock to an
executive officer of HWT. The restricted shares vest ratably
over a period of four years. The stock-based compensation charge
will be approximately $3,300 per quarter for the next 9
quarters.
In connection with the TLG acquisition, in July 2001, the
Company issued $10.0 million of restricted common stock to
the former TLG employees continuing with the Company, all of
which has been amortized as of December 31, 2004. The
stock-based compensation charge for former TLG employees was
approximately $0.6 million $0.9 million and
$2.7 million for 2004, 2003 and 2002, respectively. In
connection with the termination of certain TLG employees to whom
the deferred compensation relates, approximately
$0.6 million of deferred compensation was reversed through
additional paid-in-capital during 2003 and approximately
$2.3 million of deferred compensation was reversed through
additional paid-in-capital and approximately $903,000 was
charged to restructuring and other related charges during 2002.
70
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| (b) |
Unrestricted Common Stock |
On August 8, 2004, the Company issued 3,000 shares of
unrestricted common stock under its 1996 Equity Stock Incentive
Plan to a former member of its Board of Directors and a member
of its new advisory board. The shares were 100% vested upon
issuance and the Company recorded stock based compensation in
the amount of approximately $20,000, which was the fair market
value of the shares of common stock on the issuance date.
On August 8, 2003, the Company issued 3,000 shares of
unrestricted common stock under its 1996 Equity Stock Incentive
Plan to a former member of its Board of Directors and a member
of its new advisory board. The shares were 100% vested upon
issuance and the Company recorded stock based compensation in
the amount of approximately $8,000, which was the fair market
value of the shares of common stock on the issuance date.
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. The Company has not issued shares of preferred stock
to date.
The Company uses the cost method to account for its treasury
stock transactions. Treasury stock shares are issued in
connection with the Company’s stock option plans,
restricted stock plans and its employee stock purchase plan
using the average cost basis method.
On September 20, 2001, the Board of Directors authorized a
stock repurchase program of up to $25.0 million over a
one-year period. Under this program, the Company repurchased
5.6 million shares of its common stock for
$5.3 million in 2002. On October 24, 2002, the Company
announced an additional stock repurchase program of up to
$20.0 million over a one year period. Under this program,
the Company repurchased 1.9 million shares of its common
stock for $3.4 million in 2003. Any purchases under either
stock repurchase programs were made from time-to-time, in the
open market, through block trades or otherwise.
In 2002 and 2003, the Company also repurchased
299,696 shares and 75,004 shares, respectively, of
restricted stock for $0.01 per share, as a result of
forfeitures attributable to former TLG employees leaving the
Company prior to vesting.
On December 2, 2004, the Board of Directors authorized a
stock repurchase program of up to $25.0 million over a
two-year period. The Company has not made stock repurchases
under this program as of December 31, 2004.
|
|
| (e) |
Income (Loss) Per Share |
The following information presents the Company’s
computation of basic and diluted income (loss) per share for the
periods presented in the consolidated statements of operations
(in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Income (loss) from continuing operations
|
|
$ |
22,819 |
|
|
$ |
(4,898 |
) |
|
$ |
(222,462 |
) |
|
Loss from discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(6,741 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
22,819 |
|
|
$ |
(4,898 |
) |
|
$ |
(229,203 |
) |
| |
|
|
|
|
|
|
|
|
|
71
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares outstanding
|
|
|
123,040 |
|
|
|
121,188 |
|
|
|
124,961 |
|
| |
Dilutive common share equivalents
|
|
|
5,418 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares and dilutive common share
equivalents
|
|
|
128,458 |
|
|
|
121,188 |
|
|
|
124,961 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Continuing operations
|
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.78 |
) |
| |
Discontinued operations
|
|
$ |
0.00 |
|
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Basic net income (loss) per share
|
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Diluted net income (loss) per share
|
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(1.83 |
) |
| |
|
|
|
|
|
|
|
|
|
Excluded from the above 2004 computation of weighted average
common shares and dilutive common share equivalents for diluted
net income per share were options to
purchase 8.1 million shares of common stock because
their inclusion would have an anti-dilutive effect on diluted
net income per share. Weighted options to purchase approximately
16.3 million and 22.7 million shares of common stock
were outstanding at December 31, 2003 and 2002,
respectively, but were not included in the computation of
diluted loss per share because the Company recorded a net loss
from continuing operations for 2003 and 2002.
|
|
| (15) |
Investment in Consolidated Subsidiary |
On January 24, 2003, the Company increased its ownership
percentage in HWT, a consolidated subsidiary, from 55% to 69% by
purchasing a total of 587,092 shares of HWT common stock
from Jerry A. Greenberg and J. Stuart Moore, its Co-Chairmen and
Co-CEOs, for a total purchase price of $557,737, in cash. The
purchase price per share paid to Messrs. Greenberg and
Moore was $0.95, which represented a substantial loss from their
cost basis per share of $5.00. Messrs. Greenberg and Moore
are no longer shareholders of HWT. The Company also commenced a
tender offer on January 24, 2003 to purchase the remaining
shares of HWT, for $1.05 per share, in cash. The tender
offer period expired on February 24, 2003. As a result of
the tender offer, the Company purchased a total of
927,395 shares of HWT common stock, for a total purchase
price of $973,765, and the Company’s ownership percentage
in HWT increased from 69% to 85%. These acquisitions were
accounted for as purchases, and, the purchase price was
allocated primarily to customer contracts and developed
technology, which are included in the accompanying consolidated
balance sheet under the caption “Intangible assets,
net.” These assets will be amortized on a straight line
basis over lives of 3 years.
On March 21, 2003, HWT issued 526,190 shares of its
common stock to an executive officer of HWT in connection with
the executive’s initial employment with HWT including
50,000 restricted shares issued under the executive’s
employment agreement, and the remaining shares were purchased by
the executive for $1.05 per share in cash. The
Company’s ownership percentage in HWT was reduced to 79.5%
as a result of the March 2003 issuance. The Company recorded a
gain of $365,000, as a result of the change in equity interest
resulting from the stock issuance to the executive. The Company
accounted for this gain as a component of stockholders’
equity due to losses incurred by HWT since inception.
|
|
| (16) |
Related Party Transactions |
On July 2, 2003, the Company reached an agreement with the
management team of Sapient S.p.A., the Company’s joint
venture in Milan, Italy, pursuant to which the management team
acquired all of the shares of Sapient S.p.A. from the
shareholders of the joint venture. As a result, the Company no
longer holds any ownership interest in the voting shares of
Sapient S.p.A. and the joint venture agreement has been
terminated.
72
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The management team is the exclusive licensee of Sapient’s
intellectual property in Italy and the Company is entitled to a
royalty equal to 2% of the annual revenue of Sapient S.p.A.
beginning July 2, 2005. The Company also has an option to
purchase 100% of the ownership of Sapient S.p.A., based on
a formula which estimates fair value, among other rights. The
option is exercisable from July 2007 through July 2010.
During 2002, the Company recognized approximately $229,000 in
net revenues from consulting services provided to Sapient S.p.A.
In addition to recognizing revenue for services provided to
Sapient S.p.A., the Company reduced general and administrative
expenses by approximately $100,000 for start up and
administrative services billed to the joint venture during 2002.
The Company had no material receivables or payables outstanding
with this entity at December 31, 2003, nor did the Company
recognize any revenues or reductions to expenses in 2003. The
Company incurred costs of approximately $9,000 in start up
services provided by DI to Sapient KK in 2002.
|
|
| (17) |
Discontinued Operations |
On October 25, 2002, as a result of the decline in the
demand for advanced technology consulting services in Japan and
the resulting declines in Sapient KK’s service revenues,
the Company announced that it would discontinue its Sapient KK
operations in Japan. In December 2002, Sapient KK ceased its
operating activities and the Japan office was closed.
Japan’s operating results for 2002 have been collapsed and
reclassified into a single line item under the caption
“Loss from discontinued operations.” At
December 31, 2004 and 2003, the Company no longer carries
any asset or liability for Sapient KK in the Company’s
consolidated balance sheet.
The table below presents service revenues and pre-tax loss from
discontinued operations for the year ended December 31,
2002 (in thousands):
| |
|
|
|
|
| |
|
2002 | |
| |
|
| |
|
Service revenues
|
|
$ |
2,401 |
|
|
Pre-tax loss from discontinued operations
|
|
$ |
(6,741 |
) |
| |
|
|
|
The $6.7 million pre-tax loss from discontinued operations
for the year ended December 31, 2002 includes losses on
discontinued operations of approximately $1.0 million for a
charge related to the repurchase of minority interest and
approximately $1.1 million for a write-off of cumulative
translation adjustments. See Note 8.
|
|
| (18) |
Quarterly Financial Results (Unaudited) |
The following tables set forth certain unaudited quarterly
results of operations of the Company for 2004 and 2003. The
quarterly operating results are not necessarily indicative of
future results of operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
(Unaudited) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
58,878 |
|
|
$ |
64,464 |
|
|
$ |
64,193 |
|
|
$ |
66,401 |
|
|
Reimbursable expenses
|
|
|
2,179 |
|
|
|
3,554 |
|
|
|
3,178 |
|
|
|
3,189 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total gross revenues
|
|
|
61,057 |
|
|
|
68,018 |
|
|
|
67,371 |
|
|
|
69,590 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
73
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
(Unaudited) | |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Project personnel costs, before reimbursable expenses
|
|
|
36,326 |
|
|
|
36,218 |
|
|
|
34,385 |
|
|
|
35,583 |
|
| |
Reimbursable expenses
|
|
|
2,179 |
|
|
|
3,554 |
|
|
|
3,178 |
|
|
|
3,189 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total project personnel costs
|
|
|
38,505 |
|
|
|
39,772 |
|
|
|
37,563 |
|
|
|
38,772 |
|
| |
Selling and marketing costs
|
|
|
4,262 |
|
|
|
4,230 |
|
|
|
3,167 |
|
|
|
3,549 |
|
| |
General and administrative costs
|
|
|
16,961 |
|
|
|
17,507 |
|
|
|
18,551 |
|
|
|
18,263 |
|
| |
Restructuring and other related charges
|
|
|
— |
|
|
|
867 |
|
|
|
241 |
|
|
|
— |
|
| |
Amortization of intangible assets
|
|
|
129 |
|
|
|
129 |
|
|
|
128 |
|
|
|
129 |
|
| |
Stock-based compensation
|
|
|
212 |
|
|
|
210 |
|
|
|
224 |
|
|
|
133 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
60,069 |
|
|
|
62,715 |
|
|
|
59,874 |
|
|
|
60,846 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
988 |
|
|
|
5,303 |
|
|
|
7,497 |
|
|
|
8,744 |
|
|
Other income (expense), net
|
|
|
— |
|
|
|
18 |
|
|
|
5 |
|
|
|
42 |
|
|
Interest income
|
|
|
455 |
|
|
|
581 |
|
|
|
721 |
|
|
|
898 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,443 |
|
|
|
5,902 |
|
|
|
8,223 |
|
|
|
9,684 |
|
|
Income tax provision
|
|
|
148 |
|
|
|
232 |
|
|
|
390 |
|
|
|
1,663 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,295 |
|
|
$ |
5,670 |
|
|
$ |
7,833 |
|
|
$ |
8,021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$ |
0.01 |
|
|
$ |
0.05 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
|
Diluted income per share
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.06 |
|
|
$ |
0.06 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
(Unaudited) | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues
|
|
$ |
43,846 |
|
|
$ |
44,439 |
|
|
$ |
44,661 |
|
|
$ |
51,849 |
|
|
Reimbursable expenses
|
|
|
2,354 |
|
|
|
2,347 |
|
|
|
2,265 |
|
|
|
2,608 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total gross revenues
|
|
|
46,200 |
|
|
|
46,786 |
|
|
|
46,926 |
|
|
|
54,457 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Project personnel costs, before reimbursable expenses
|
|
|
28,388 |
|
|
|
27,508 |
|
|
|
25,059 |
|
|
|
31,012 |
|
| |
Reimbursable expenses
|
|
|
2,354 |
|
|
|
2,347 |
|
|
|
2,265 |
|
|
|
2,608 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total project personnel costs
|
|
|
30,742 |
|
|
|
29,855 |
|
|
|
27,324 |
|
|
|
33,620 |
|
| |
Selling and marketing costs
|
|
|
5,151 |
|
|
|
4,824 |
|
|
|
4,328 |
|
|
|
4,198 |
|
| |
General and administrative costs
|
|
|
13,533 |
|
|
|
14,219 |
|
|
|
14,442 |
|
|
|
15,329 |
|
| |
Restructuring and other related charges
|
|
|
— |
|
|
|
1,398 |
|
|
|
737 |
|
|
|
— |
|
| |
Amortization of intangible assets
|
|
|
598 |
|
|
|
727 |
|
|
|
319 |
|
|
|
128 |
|
| |
Stock-based compensation
|
|
|
384 |
|
|
|
305 |
|
|
|
332 |
|
|
|
68 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
50,408 |
|
|
|
51,328 |
|
|
|
47,482 |
|
|
|
53,343 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
74
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
| |
|
(Unaudited) | |
|
Income (loss) from operations
|
|
|
(4,208 |
) |
|
|
(4,542 |
) |
|
|
(556 |
) |
|
|
1,114 |
|
|
Other income (expense), net
|
|
|
(26 |
) |
|
|
(170 |
) |
|
|
1,485 |
|
|
|
1,440 |
|
|
Interest income
|
|
|
502 |
|
|
|
604 |
|
|
|
385 |
|
|
|
411 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,732 |
) |
|
|
(4,108 |
) |
|
|
1,314 |
|
|
|
2,965 |
|
|
Income tax provision
|
|
|
355 |
|
|
|
270 |
|
|
|
305 |
|
|
|
407 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(4,087 |
) |
|
$ |
(4,378 |
) |
|
$ |
1,009 |
|
|
$ |
2,558 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share
|
|
$ |
(0.03 |
) |
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
0.02 |
|
75
SAPIENT CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
Years Ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charge to | |
|
|
|
Balance at | |
| Allowance for Doubtful Accounts |
|
Beginning of Year | |
|
Expense | |
|
Write-Offs | |
|
End of Year | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
December 31, 2002
|
|
$ |
3,220 |
|
|
$ |
263 |
|
|
$ |
(1,237 |
) |
|
$ |
2,246 |
|
|
December 31, 2003
|
|
$ |
2,246 |
|
|
$ |
624 |
|
|
$ |
(1,354 |
) |
|
$ |
1,516 |
|
|
December 31, 2004
|
|
$ |
1,516 |
|
|
$ |
654 |
|
|
$ |
(274 |
) |
|
$ |
1,896 |
|
76
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
|
|
| Item 9A. |
Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the Company’s reports under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to management,
including the Company’s Chief Executive Officers and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. The Company’s management,
with the participation of the Company’s Chief Executive
Officers and Chief Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and
procedures as of the end of the fiscal year covered by this
Annual Report on Form 10-K. As described below under
Management’s Annual Report on Internal Control Over
Financial Reporting, the Company has identified a material
weakness in the Company’s internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)). The Company’s Chief Executive Officers and
Chief Financial Officer have concluded that as a result of the
material weakness, as of the end of the period covered by this
Annual Report on Form 10-K, the Company’s disclosure
controls and procedures were not effective.
Management’s Report on Internal Control over Financial
Reporting
Sapient’s management is responsible for establishing and
maintaining adequate internal control over financial reporting
(as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934). Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management has assessed the effectiveness of Sapient’s
internal control over financial reporting as of
December 31, 2004. In making its assessment of internal
control over financial reporting, management has used the
criteria described in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. As of
December 31, 2004, the company lacked a sufficient
complement of senior financial accounting and reporting
personnel possessing competencies commensurate with the
company’s financial reporting requirements. The lack of
sufficient senior financial accounting and reporting personnel
impacts the Company’s ability to appropriately segregate
incompatible financial accounting and reporting responsibilities
and limits the Company’s ability to effectively monitor and
oversee financial accounting and reporting processes. As a
result of this control deficiency, the Company recorded audit
adjustments in its consolidated fourth quarter financial
statements for 2004 resulting from: (i) not properly
accounting for a lease incentive payment received in the United
Kingdom, (ii) not properly accruing for rent on a
straight-line basis during a free rent period on a lease in
India, and (iii) a mathematical error in the Company’s
calculation of its accrual for health insurance claims incurred
but not yet reported. In addition to the actual fourth quarter
audit adjustments described above, this control deficiency could
result in a material misstatement to annual or interim
consolidated financial statements that would not be prevented or
detected. Accordingly, management determined that this control
deficiency constitutes a material weakness. Because of this
material weakness, we have concluded that the Company did not
maintain effective internal control over financial reporting as
of December 31, 2004, based on the criteria in Internal
Control — Integrated Framework.
Our management’s assessment of the effectiveness of
Sapient’s internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
77
Remediation Plan for Material Weakness in Internal Control
over Financial Reporting
As noted in Management’s Report on Internal Control Over
Financial Reporting, management has concluded that the Company
lacked a sufficient complement of senior financial accounting
and reporting personnel possessing competencies commensurate
with the Company’s financial reporting requirements, which
constitutes a material weakness in internal controls over
financial reporting. During the economic downturn in 2001 and
2002, we restructured our operations and our workforce, which
adversely impacted morale and increased voluntary turnover.
Throughout 2004, as a result of turnover, certain key finance
oversight positions were unstaffed for various periods of time.
Also as a result of turnover, many key financial staff did not
have significant experience in their positions at the Company.
As of December 31, 2004, approximately 39% of our finance
staff was with the Company for less than one year. In addition,
the number of finance staff has not kept pace with the growth of
the Company. Consistent with this recent revenue growth and
return to profitability, we understand that our finance group
must expand to meet the increase in demand for our services. The
following steps will improve our ability to hire experienced,
skilled finance professionals, which we believe will remedy the
material weakness described in Management’s Report on
Internal Control Over Financial Reporting, as follows:
|
|
|
| |
• |
We are aggressively recruiting experienced, skilled finance
professionals using search agencies, expanding our employee
referral program and offering competitive compensation packages |
| |
| |
• |
We continue to foster a work environment that encourages
individual recognition, a fair performance review process and
work-life balance initiatives |
| |
| |
• |
We will continue to focus on sustained profitability, which will
result in monetary bonuses paid to employees, which we believe
helps to increase morale and reduce turnover |
Our hiring initiative efforts have resulted in the addition of
skilled finance professionals since December 31, 2004. We
continue to obtain positive feedback from employees, which was
recently evidenced in our annual Morale Survey.
Changes in Internal Control over Financial Reporting
There was no change to our internal control over financial
reporting during the fourth quarter ended December 31, 2004
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Company |
Directors and Compliance with Section 16(a) of the
Exchange Act
The response to this Item regarding the Directors of the
Company, including the identification of the members of the
Audit Committee of the Company’s Board of Directors and
information regarding audit committee financial experts, will be
contained in the Proxy Statement for the 2005 Annual Meeting of
Stockholders under the caption “Information About Our
Directors” and is incorporated herein. The response to this
Item regarding 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 2005 Annual Meeting
of Stockholders under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” and is
incorporated herein.
Executive Officers of the Company
The response to this Item is contained in Part I, after
Item 4.
Code of Conduct
On January 22, 2003, our Board of Directors approved the
Sapient Corporation Code of Ethics and Conduct. Our Code of
Ethics and Conduct covers all employees, Directors and
independent contractors of the
78
Company, including our Co-Chief Executive Officers and our Chief
Financial Officer. A copy of our Code of Ethics and Conduct is
included as an exhibit to this Annual Report. Any waivers of our
Code of Ethics and Conduct involving our executive officers will
be posted on our Web site, http://www.sapient.com.
|
|
| Item 11. |
Executive Compensation |
The response to this Item will be contained in the Proxy
Statement for the 2005 Annual Meeting of Stockholders under the
captions “Information About Our Directors” and
“Information About Executive Compensation” and is
incorporated herein.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The response to this Item with respect to security ownership of
certain beneficial owners and management will be contained in
the Proxy Statement for the 2005 Annual Meeting of Stockholders
under the caption “Information About Ownership of Our
Common Stock” and is incorporated herein.
The following table summarizes, as of December 31, 2004,
the number of options issued under our equity compensation plans
and the number of awards available for future issuance under
these plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(c) | |
| |
|
|
|
|
|
Number of Securities | |
| |
|
|
|
|
|
Remaining Available for | |
| |
|
(a) | |
|
(b) | |
|
Future Issuance Under | |
| |
|
Number of Securities | |
|
Weighted-Average | |
|
Equity Compensation | |
| |
|
to be Issued Upon | |
|
Exercise Price of | |
|
Plans, Excluding | |
| |
|
Exercise of | |
|
Outstanding | |
|
Securities Reflected | |
| Plan Category |
|
Outstanding Options | |
|
Options | |
|
in Column (a)(1)(2) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
20,517,524 |
|
|
$ |
10.45 |
|
|
|
20,254,175 |
|
|
Equity compensation plans not approved by security holders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20,517,524 |
|
|
$ |
10.45 |
|
|
|
20,254,175 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
17,666,179 of the shares listed in column (c) may be issued
in the form of restricted stock, pursuant to the terms of our
1996 Equity Stock Incentive Plan and our 1998 Stock Incentive
Plan. No shares of restricted stock are available for issuance
under our other stock option plans. |
| |
| (2) |
Column (c) includes 685,237 shares that were available
for issuance under our 2002 Employee Stock Purchase Plan on
December 31, 2004, excluding 163,322 shares that were
purchased in the four-month offering period ended
December 31, 2004. |
|
|
| Item 13. |
Certain Relationships and Related Transactions |
The response to this Item will be contained in the Proxy
Statement for the 2005 Annual Meeting of Stockholders under the
caption “Certain Relationships and Related
Transactions” and is incorporated herein.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The response to this Item will be contained in the Proxy
Statement for the 2005 Annual Meeting of Stockholders under the
caption “Statement of Independent Auditors Fees and
Services” and is incorporated herein.
79
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
15(a)(1) Financial Statements
The Consolidated Financial Statements filed as part of this
report are listed and indexed on page 38. 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.
15(a)(2) Consolidated Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts
and Reserves are included in this report.
15(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.
80
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.
|
|
|
| |
By: |
/s/ Jerry A. Greenberg
|
|
|
| |
|
| |
Jerry A. Greenberg |
| |
Co-Chairman and Co-Chief Executive Officer |
Dated: March 16, 2005
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
Jerry
A. Greenberg |
|
Co-Chairman and
Co-Chief Executive Officer |
|
March 16, 2005 |
| |
/s/ J. Stuart Moore
J.
Stuart Moore |
|
Co-Chairman and
Co-Chief Executive Officer |
|
March 16, 2005 |
|
Principal Financial Officer: |
|
|
|
|
| |
/s/ Scott J. Krenz
Scott
J. Krenz |
|
Chief Financial Officer |
|
March 16, 2005 |
|
Principal Accounting Officer: |
|
|
|
|
| |
/s/ Terry E. Hazel
Terry
E. Hazel |
|
Chief Accounting Officer |
|
March 16, 2005 |
|
Directors: |
|
|
|
|
| |
/s/ Jerry A. Greenberg
Jerry
A. Greenberg |
|
|
|
March 16, 2005 |
| |
/s/ J. Stuart Moore
J.
Stuart Moore |
|
|
|
March 16, 2005 |
| |
/s/ Jeff Cunningham
Jeff
Cunningham |
|
|
|
March 16, 2005 |
| |
/s/ Dennis H.
Chookaszian
Dennis
H. Chookaszian |
|
|
|
March 16, 2005 |
81
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Darius W. Gaskins,
Jr.
Darius
W. Gaskins, Jr. |
|
|
|
March 16, 2005 |
| |
/s/ Gary S. McKissock
Gary
S. McKissock |
|
|
|
March 16, 2005 |
| |
/s/ Bruce D. Parker
Bruce
D. Parker |
|
|
|
March 16, 2005 |
82
EXHIBIT INDEX
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
|
|
Description |
| | |
|
|
|
|
| |
3 |
.1(1) |
|
— |
|
Second Amended and Restated Certificate of Incorporation |
| |
3 |
.2(1) |
|
— |
|
Amended and Restated Bylaws |
| |
4 |
.1(2) |
|
— |
|
Specimen Certificate for Shares of Common Stock, $.01 par value,
of the Company |
| |
10 |
.1(2)† |
|
— |
|
1996 Equity Stock Incentive Plan |
| |
10 |
.2(2)† |
|
— |
|
1996 Director Stock Option Plan |
| |
10 |
.3(3)† |
|
— |
|
1998 Stock Incentive Plan |
| |
10 |
.4(4)† |
|
— |
|
2001 Stock Option Plan |
| |
10 |
.5* |
|
— |
|
Director Compensation Matters |
| |
14 |
.1(5) |
|
— |
|
Code of Ethics and Conduct |
| |
21 |
* |
|
— |
|
List of Subsidiaries |
| |
23 |
.1* |
|
— |
|
Consent of PricewaterhouseCoopers LLP |
| |
31 |
.1* |
|
— |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
| |
31 |
.2* |
|
— |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
| |
31 |
.3* |
|
— |
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
| |
32 |
.1* |
|
— |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| |
32 |
.2* |
|
— |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| |
32 |
.3* |
|
— |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
|
| * |
Exhibits filed herewith. |
|
|
| † |
Management contract or compensatory plan or arrangement. |
|
|
| (1) |
Incorporated herein by reference to the Company’s
Form 10-Q for the fiscal quarter ended September 30,
2004 (File No. 000-28074). |
| |
| (2) |
Incorporated herein by reference to the Company’s
Registration Statement on Form S-1 (File No. 333-1586). |
| |
| (3) |
Incorporated herein by reference to the Company’s
Form 10-K for the fiscal year ended December 31, 1998
(File No. 000-28074). |
| |
| (4) |
Incorporated herein by reference to the Company’s Proxy
Statement for the 2001 Annual Meeting of Stockholders (File
No. 000-28074). |
| |
| (5) |
Incorporated herein by reference to the Company’s
Form 10-K for the fiscal year ended December 31, 2002
(File No. 000-28074). |
83