-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ORvtT9NBQLW9o+1b22RoBW4kzYGSgY6QW8sk5ryZWH7sPqnhXAuL2ikbA6d1WvND tSjqBlMn4Pww+p7RfjZiow== 0000950135-99-005303.txt : 19991117 0000950135-99-005303.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950135-99-005303 CONFORMED SUBMISSION TYPE: 424B4 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAPIENT CORP CENTRAL INDEX KEY: 0001008817 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 043130648 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B4 SEC ACT: SEC FILE NUMBER: 333-89467 FILM NUMBER: 99758217 BUSINESS ADDRESS: STREET 1: ONE MEMORIAL DR CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176210200 MAIL ADDRESS: STREET 1: ONE MEMORIAL DRIVE CITY: CAMBRIDGE STATE: MA ZIP: 02142 424B4 1 SAPIENT CORPORATION 424B4 1 Filed pursuant to Rule 424(b)(4) Registration No. 333-89467 3,500,000 Shares [SAPIENT CORPORATION CORPORATE LOGO] Common Stock ------------------------- Sapient Corporation is offering 1,114,600 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 2,385,400 shares. Sapient will not receive any of the proceeds from the sale of shares being sold by the selling stockholders. The common stock is quoted on the Nasdaq National Market under the symbol "SAPE". The last reported sale price for the common stock on November 15, 1999 was $79.63 per share. See "Risk Factors" beginning on page 5 to read about factors you should consider before buying shares of the common stock. ------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------------
Per Share Total --------- ----- Initial price to public..................................... $78.00 $273,000,000 Underwriting discount....................................... $ 3.22 $ 11,270,000 Proceeds, before expenses, to Sapient....................... $74.78 $ 83,349,788 Proceeds, before expenses, to the selling stockholders...... $74.78 $178,380,212
To the extent that the underwriters sell more than 3,500,000 shares of common stock, the underwriters have the option to purchase up to an additional 525,000 shares from four of the selling stockholders at the initial price to the public, less the underwriting discount. ------------------------- The underwriters expect to deliver the shares against payment in New York, New York on November 19, 1999. GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON MORGAN STANLEY DEAN WITTER FIRST UNION SECURITIES, INC. FRIEDMAN BILLINGS RAMSEY ------------------------- Prospectus dated November 15, 1999. 2 SAPIENT is a leading e-services consultancy providing Internet strategy consulting and sophisticated Internet-based solutions to Global 1000 companies and startup businesses. OUR SERVICES INCLUDE: / / DIGITAL BUSINESS STRATEGY Sapient helps clients launch, or transform themselves into, Internet-based businesses through strategic planning and organizational change management. Inside Cover Artwork: Graphic depicting four overlapping circles representing Sapient's services. Clockwise, the top circle is entitled "Digital Business Strategy". The next circle is entitled "Experience Modeling". The following circle is entitled "Technology" and then one entitled "Creative Design". The circle in the center where these circles overlap is entitled "Integrated Engagement Leadership". / / EXPERIENCE MODELING Sapient's researchers employ a variety in innovative observation techniques to help our clients understand and shape user experience. / / CREATIVE DESIGN Sapient has extensive experience in developing visual and interactive content and creating electronic brand experiences that enhance and extend our clients' relationships with their customers. / / TECHNOLOGY DEVELOPMENT AND SYSTEMS INTEGRATION Using our in-depth knowledge of the Internet and emerging technologies, Sapient translates strategic, creative and business requirements into sophisticated and functional technology platforms in short timeframes. / / INTEGRATED ENGAGEMENT LEADERSHIP Sapient's integrated engagement leadership approach enables us to effectively manage the relationships, complexities and risks associated with large-scale, multidisciplinary engagements. SAPIENT HAS APPROXIMATELY 1900 EMPLOYEES AND OFFICES IN CAMBRIDGE, MASS. (HEADQUARTERS), LONDON, MILAN, SYDNEY, ATLANTA, CHICAGO, DALLAS, LOS ANGELES, NEW YORK, SAN FRANCISCO, AND WASHINGTON, D.C. [LOGO] SAPIENT Architects for the New Economy[TM] 3 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY This summary does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially "Risk Factors" beginning on page 5. SAPIENT CORPORATION Sapient is a leading e-services consultancy providing Internet strategy consulting and sophisticated Internet-based solutions to Global 1000 companies and startup businesses. We help our clients define Internet strategies to improve their competitive position and we design, architect, develop and implement solutions to execute those strategies. These solutions focus on large-scale and complex business-to-consumer and business-to-business electronic commerce, digital customer relationship management, supply chain optimization, electronic markets and Internet portals. We believe that our key strength is our ability to deliver high quality solutions, primarily on a fixed-price, fixed-timeframe basis, through a rapid, effective and integrated process. Our services include: - digital business strategy development; - experience modeling; - creative design; - technology development and systems integration; and - integrated engagement leadership. We provide end-to-end solutions to our clients using multidisciplinary teams composed of business strategists, researchers, creative specialists, technology professionals and program managers. We deliver our solutions primarily through five industry business units: financial services; media, entertainment and communications; manufacturing, retail and distribution; public sector; and energy services. Using this industry alignment helps us accurately define and deliver tailored solutions that effectively address the market dynamics and business opportunities that our clients face. We have been providing Internet solutions for over five years and employ approximately 1,900 people in offices across the United States and in London, Milan and Sydney. OUR MARKET OPPORTUNITY The broad business acceptance of the Internet and electronic commerce has created the need for companies to rapidly formulate Internet strategies and solutions. Few organizations have the internal resources or skills necessary to successfully design and implement Internet solutions. As a result, an increasing number of organizations, from Global 1000 companies to startup Internet businesses, are engaging Internet professional services firms. International Data Corp. forecasts worldwide Internet services spending to grow from $7.8 billion in 1998 to $78.6 billion by 2003, which represents a compound annual growth rate of more than 58%. OUR OFFICES Sapient Corporation was incorporated in Delaware in 1991. Our principal executive offices are located at One Memorial Drive, Cambridge, MA 02142. Our telephone number at that location is 617-621-0200 and our Internet address is www.sapient.com. The information contained on our website is not incorporated by reference in this prospectus. Unless the context otherwise requires, references in this prospectus to "Sapient", "we", "us", and "our" refer to Sapient Corporation and its subsidiaries. - -------------------------------------------------------------------------------- 3 4 - -------------------------------------------------------------------------------- THE OFFERING Shares offered by Sapient......................... 1,114,600 shares Shares offered by the selling stockholders........ 2,385,400 shares Shares to be outstanding after the offering....... 57,188,500 shares Nasdaq National Market symbol..................... SAPE Use of proceeds................................... For general corporate purposes, including working capital and possible acquisitions and investments
The shares of common stock to be outstanding after the offering exclude 12,430,214 shares issuable upon the exercise of outstanding stock options as of September 30, 1999 at a weighted average exercise price of $18.22 per share. All of the information in this prospectus: - gives effect to the two-for-one stock split effected as a 100% stock dividend distributed on November 5, 1999 to stockholders of record on November 1, 1999; and - assumes no exercise of the underwriters' overallotment option. SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) This summary consolidated financial data includes for all periods presented the accounts and operating results of EXOR and Adjacency, which we acquired in transactions accounted for as poolings of interests, as described in Note 13 to our consolidated financial statements. Income from operations for 1998 and for the nine months ended September 30, 1998 include a charge for in-process research and development of $11.1 million incurred in connection with our acquisition of Studio Archetype.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ ---------------------- 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- -------- -------- ----------- CONSOLIDATED STATEMENT OF INCOME DATA: Revenues.................................. $11,796 $24,481 $49,795 $92,027 $164,872 $111,081 $195,021 Income from operations.................... 2,459 4,896 9,537 18,199 15,099 10,771 30,885 Net income................................ $ 1,589 $ 2,914 $ 6,699 $12,554 $ 9,364 $ 8,213 $ 20,833 Basic net income per share................ $ 0.04 $ 0.08 $ 0.15 $ 0.25 $ 0.18 $ 0.16 $ 0.38 Diluted net income per share.............. $ 0.04 $ 0.07 $ 0.13 $ 0.23 $ 0.16 $ 0.14 $ 0.33 Weighted average common shares............ 37,554 36,550 44,844 49,574 52,228 51,670 55,101 Weighted average common shares and common share equivalents....................... 41,683 42,252 49,694 53,740 57,402 56,923 62,345
The following table provides a summary of our consolidated balance sheets. The as adjusted column also reflects our sale of 1,114,600 shares of common stock at a public offering price of $78.00 per share, after deducting the underwriters' discounts and commissions and estimated offering expenses payable by us.
DECEMBER 31, SEPTEMBER 30, 1999 ----------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED ------ ------- ------- ------- -------- -------- ----------- CONSOLIDATED BALANCE SHEET DATA: Working capital........................... $1,894 $ 5,785 $66,369 $76,409 $121,779 $159,240 $242,425 Total assets.............................. 6,898 12,893 80,077 98,867 187,701 226,793 309,978 Total stockholders' equity................ 2,663 5,595 66,969 82,307 154,814 195,752 278,937
- -------------------------------------------------------------------------------- 4 5 RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before purchasing our common stock. If any of the following risks actually occur, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you could lose all or part of your investment. IF BUSINESSES DO NOT INCREASE THEIR USE OF THE INTERNET AS A MEANS FOR CONDUCTING COMMERCE, OUR REVENUES WILL BE ADVERSELY AFFECTED Our future success depends heavily on the increased acceptance and use of the Internet as a means for conducting commerce. We focus our services on the development and implementation of Internet strategies and solutions. If commerce on the Internet does not continue to grow, or grows more slowly than expected, our revenue growth would slow or decline and our business, financial condition and results of operations would be materially adversely affected. Consumers and businesses may reject the Internet as a viable medium for commerce for a number of reasons, including: - inadequate network infrastructure; - delays in the development of Internet enabling technologies and performance improvements; - delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; - delays in the development of security and authentication technology necessary to effect secure transmission of confidential information; - changes in, or insufficient availability of, telecommunications services to support the Internet; and - failure of companies to meet their customers' expectations in delivering goods and services over the Internet. IF WE DO NOT ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF, WE MAY NOT BE ABLE TO ADEQUATELY PERFORM OUR CLIENT ENGAGEMENTS AND COULD NOT ACCEPT NEW CLIENT ENGAGEMENTS Our business is labor intensive and our success will depend in large part upon our ability to attract, retain, train and motivate highly-skilled employees. Because of the rapid growth of the Internet, there is intense competition for employees who have strategic, experience modeling, creative design, technical or program management experience. In addition, the Internet has created many opportunities for people with the skills we seek to form their own companies or join startup companies and these opportunities frequently offer the potential for significant future financial profit through equity incentives which we cannot match. During the third quarter of 1999, our rate of voluntary employee turnover was higher than our target rate. We may not be successful in attracting a sufficient number of highly skilled employees in the future, or 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. IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED Our growth has placed significant demands on our management and other resources. Our revenues increased approximately 79% in 1998 from $92.0 million in 1997 to $164.9 million in 1998. Our revenues for the nine months ended September 30, 1999 increased approximately 76% over the same period for 1998. Our staff increased from 1,383 full-time employees at 5 6 September 30, 1998 to 1,939 at September 30, 1999. Our future success will depend on our ability to manage our growth effectively, including by: - developing and improving our operational, financial and other internal systems; - integrating and managing acquired businesses, joint ventures and strategic investments; - training, motivating and managing our employees; - estimating fixed-price fees and project timeframes accurately; - maintaining high rates of employee utilization; and - maintaining project quality and client satisfaction. Our management has limited experience managing a business of Sapient's current size. If we are unable to manage our growth and projects effectively, the quality of our services and products, our ability to retain key personnel and our business, financial condition and results of operations may be materially adversely affected. 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 and rent, are fixed in advance of any particular quarter. As a result, unanticipated variations in the number, or progress toward completion, of our projects may cause significant variations in operating results in any particular quarter and could result in losses for that quarter. An unanticipated termination of a major project, a client's decision not to proceed with a project we anticipated, or the completion during a quarter of several major client projects could require us to maintain underutilized employees and could therefore have a material adverse effect on our business, financial condition and results of operations. Our revenues and earnings may also fluctuate from quarter to quarter based on such factors as: - the contractual terms and timing of completion of projects; - any delays incurred in connection with projects; - the adequacy of provisions for losses; - the accuracy of our estimates of resources required to complete ongoing projects; and - general economic conditions. THE INCREASED SIZE AND COMPLEXITY OF THE SOLUTIONS WE ARE IMPLEMENTING MAKES IT MORE LIKELY THAT WE WILL FAIL TO SATISFY CLIENT EXPECTATIONS, WHICH WOULD DAMAGE OUR REPUTATION AND BUSINESS The average dollar size of our solutions has grown significantly, while the timeframe for delivering solutions has generally decreased. As our client engagements become larger and more complex and must be completed in shorter timeframes, it becomes more difficult to manage the development process and the likelihood and consequences of any mistakes increase. Any inability by us to complete client solutions in a timely manner, any defects contained in the solutions we deliver and any other failure by us to achieve client expectations, would have a material adverse effect on our reputation with the affected client and generally within our industry and could have a material adverse effect on our business, results of operations or financial condition. 6 7 WE ENTER INTO FIXED-PRICE CONTRACTS AND COULD LOSE MONEY ON THESE CONTRACTS Most of our projects are based on fixed-price, fixed-timeframe contracts, rather than contracts in which payment to us is determined on a time and materials basis. Our failure to accurately estimate the resources required for a project or our failure to complete our contractual obligations in a manner consistent with the project plan upon which our fixed-price, fixed-timeframe contract was based would adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations. We have been required to commit unanticipated additional resources to complete projects in the past, which has resulted in losses on those contracts. We recognize that we will experience similar situations in the future and that the consequences could be more severe than in the past due to the increased size and complexity of our solutions. In addition, for some projects we may fix the price at an early stage of the process, which could result in a fixed price that turns out to be too low and therefore would adversely affect our profitability. WE DEPEND HEAVILY ON A LIMITED NUMBER OF CLIENT PROJECTS, THE LOSS OF ANY OF WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of clients for whom we perform large projects. In 1998, our five largest clients accounted for approximately 30% of our revenues, with four clients each accounting for more than 5% of our revenues. For the nine months ended September 30, 1999, our five largest clients accounted for approximately 26% of our revenues, with three clients each accounting for more than 5% of our revenues. In addition, revenues from a large client may constitute a significant portion of our total revenues in a particular quarter. The loss of any principal client for any reason, including as a result of the acquisition of that client by another entity, could have a material adverse effect on our business, financial condition and results of operations. IF WE ARE UNABLE TO ACHIEVE ANTICIPATED BENEFITS FROM ACQUISITIONS, JOINT VENTURES AND STRATEGIC INVESTMENTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED During the past two years, we have completed four acquisitions and entered into one joint venture. The anticipated benefits from these and future acquisitions, joint ventures and strategic investments may not be achieved. For example, when we acquire a company, we cannot be certain that customers of the acquired business will continue to do business with us or that employees of the acquired business will continue their employment or become well integrated into our operations and culture. The identification, consummation and integration of acquisitions, joint ventures and strategic investments requires substantial attention from management. The diversion of the attention of management relating to these activities, as well as any difficulties encountered in the integration process, could have an adverse impact on our business, financial condition and results of operations. IF CLIENTS UNEXPECTEDLY TERMINATE THEIR CONTRACTS FOR OUR SERVICES, OUR BUSINESS COULD BE ADVERSELY AFFECTED 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. The cancellation or a significant reduction in the scope of a large project could have a material adverse effect on our business, financial condition and results of operations. 7 8 OUR STOCK PRICE IS VOLATILE AND MAY RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES IN THE OFFERING The trading price of our common stock could be subject to wide fluctuations in response to: - quarterly variations in operating results and our achievement of key business metrics; - changes in earnings estimates by securities analysts; - any differences between reported results and securities analysts' published or unpublished expectations; - announcements of new contracts or service offerings by us or our competitors; - market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; and - general economic or stock market conditions unrelated to our operating performance. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This type of litigation could result in substantial costs and a diversion of management attention and resources. IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR COMPETITIVE POSITION WILL SUFFER Our markets and the technologies used in our solutions are characterized by rapid technological change. Failure to respond in a timely and cost-effective way to these technological developments would have a material adverse effect on our business, financial condition and results of operations. We expect to derive a substantial portion of our revenues from providing Internet solutions that are based upon leading technologies and that are capable of adapting to future technologies. As a result, our success will depend on our ability to offer services that keep pace with continuing changes in technology, evolving industry standards and changing client preferences. We may not be successful in addressing future developments on a timely basis. Our failure to keep pace with the latest technological developments would have a material adverse effect on our business, financial condition and results of operations. WE MAY BECOME SUBJECT TO CLAIMS THAT THE SOLUTIONS WE HAVE DESIGNED AND IMPLEMENTED ARE NOT YEAR 2000 COMPLIANT Since 1991, we have designed, developed and implemented solutions for a large number of clients. There can be no way of assuring that all of these solutions will be Year 2000 compliant. We have also recommended, implemented and customized various third-party technology and software packages for our clients, some of which may not be Year 2000 compliant. There can be no assurance that we will not become involved in disputes with clients regarding Year 2000 problems involving solutions we developed or implemented or the interaction of those solutions with other applications. These disputes could require us to incur unanticipated expenses and distract us from our core business and these expenses and distractions could have a material adverse effect on our business, financial condition and results of operations. WE FACE SIGNIFICANT COMPETITION IN MARKETS THAT ARE NEW AND RAPIDLY CHANGING The markets for the services we provide are highly competitive. We believe that we currently compete principally with strategy consulting firms, Internet professional services firms, systems integration firms, technology vendors and internal information systems groups. Many of the companies that provide services in our markets have significantly greater financial, technical and marketing resources than we do and generate greater revenues and have greater name recognition than we do. In addition, there are relatively low barriers to entry into our markets and we have faced, and expect to continue to face competition from new entrants into our markets. 8 9 We believe that the principal competitive factors in our markets include: - ability to integrate strategy, experience modeling, creative design and technology services; - quality of service, speed of delivery and price; - industry knowledge; - sophisticated project and program management capability; and - Internet technology expertise and talent. We believe that our ability to compete also depends in part on a number of competitive factors outside our control, including: - the ability of our competitors to hire, retain and motivate professional staff; - the development by others of Internet services or software that is competitive with our solutions; and - the extent of our competitors' responsiveness to client needs. There can be no assurance that we will be able to compete successfully in our markets. IF CLIENTS REDUCE THEIR BUDGETS FOR THE SERVICES WE PROVIDE DUE TO YEAR 2000 ISSUES OR FOR OTHER REASONS, OUR BUSINESS WOULD BE ADVERSELY AFFECTED During the next several months, the purchasing patterns of clients or potential clients may be affected by the Year 2000 problem, as companies expend significant resources to avoid or correct Year 2000 issues. Similarly, our revenues and results of operations could be influenced from time to time by any other general events or economic conditions which lead clients and potential clients to reduce their information technology budgets. A reduction in client funds available to purchase our services would have a material adverse effect on our business, financial condition and results of operations. GOVERNMENT REGULATION COULD INTERFERE WITH THE ACCEPTANCE OF THE INTERNET AND ELECTRONIC COMMERCE, WHICH WOULD ADVERSELY AFFECT THE DEMAND FOR OUR SERVICES Any new laws and regulations applicable to the Internet and electronic commerce that are adopted by federal, state or foreign governments could dampen the growth of the Internet and decrease its acceptance as a commercial medium. If this occurs, companies may decide in the future not to pursue Internet initiatives, which would decrease demand for our services. A decrease in the demand for our services would have a material adverse effect on our business, financial condition and results of operations. INTERNATIONAL EXPANSION OF OUR BUSINESS COULD RESULT IN FINANCIAL LOSSES DUE TO CHANGES IN FOREIGN ECONOMIC CONDITIONS OR FLUCTUATIONS IN CURRENCY AND EXCHANGE RATES We expect to continue to expand our international operations. We currently have offices in the United Kingdom and Australia and have recently commenced a joint venture in Italy. We have limited experience in marketing, selling and providing our services internationally. International operations are subject to other inherent risks, including: - recessions in foreign countries; - fluctuations in currency exchange rates; - the scheduled conversion to the euro by most European Union members; - difficulties and costs of staffing and managing foreign operations; - reduced protection for intellectual property in some countries; 9 10 - changes in regulatory requirements; and - U.S. imposed restrictions on the import and export of technologies. IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY METHODOLOGY, OUR BUSINESS COULD BE ADVERSELY AFFECTED 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, generally require that our consultants and clients enter into these agreements, and limit access to and distribution of our proprietary information. There can be no assurance 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, there can be no assurance that infringement claims will not be asserted against us in the future, or that if asserted that any infringement claim will be successfully defended. A successful claim against us could materially adversely affect our business, financial condition and results of operations. WE MAY NOT HAVE THE RIGHT TO RESELL OR REUSE SOLUTIONS DEVELOPED FOR SPECIFIC CLIENTS A portion of our business involves the development of technology solutions for specific client engagements. Ownership of these solutions is the subject of negotiation and is frequently assigned to the client, although we may retain a license for certain uses. Some clients have prohibited us from marketing the applications developed for them for specified periods of time or to specified third parties and there can be no assurance that clients will not demand similar or other restrictions in the future. Issues relating to the ownership of and rights to use solutions can be complicated and there can be no assurance that disputes will not arise that affect our ability to resell or reuse these solutions. Any limitation on our ability to resell or reuse a solution could require us to incur additional expenses to develop new solutions for future projects. 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, will beneficially own approximately 36.6% of our common stock after the offering. 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 of control would benefit other investors. WE ARE DEPENDENT ON OUR KEY PERSONNEL Our success will depend in large part upon the continued services of a number of key employees, including Messrs. Greenberg and Moore. Our employment contracts with Messrs. Greenberg and Moore and with our other key personnel provide that employment is terminable at will by either party. The loss of the services of either of Messrs. Greenberg or Moore or of one or more of our other key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, if one or more of our key employees resigns 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. In the event of the loss of any personnel, there can be no assurance that we would 10 11 be able to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel. WE WILL HAVE BROAD DISCRETION OVER THE USE OF THE PROCEEDS OF THE OFFERING AND YOU MAY NOT AGREE WITH HOW WE USE THE PROCEEDS OF THE OFFERING We have not designated any specific uses for the net proceeds of the offering. As a result, our management will have broad discretion in how we use these net proceeds, which may include funding acquisitions of complementary businesses, products or technologies, funding joint ventures or making strategic investments. The failure of management to use the proceeds of the offering effectively could adversely affect our business, financial condition and results of operations. OUR CORPORATE GOVERNANCE PROVISIONS MAY DETER A FINANCIALLY ATTRACTIVE TAKEOVER ATTEMPT Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which stockholders would receive a premium for their shares. These provisions include the following: - any action that may be taken by stockholders must be taken at an annual or special meeting and may not be taken by written consent; - stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders or nominating a director for election; - a chairman of the board or a chief executive officer are the only ones who may call a special meeting of stockholders; - our board of directors is staggered into three classes and the members may be removed only for cause upon the affirmative vote of holders of at least two-thirds of the shares entitled to vote; and - our board of directors has the authority, without further action by the stockholders, to fix the rights and preferences of and issue shares of preferred stock. Provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Charter and Bylaw Provisions." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus includes and incorporates forward-looking statements that are subject to a number of risks and uncertainties. All statements, other than statements of historical facts included or incorporated in this prospectus, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this prospectus, 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 forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. 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 "Risk Factors" and elsewhere in this prospectus. We do not assume any obligation to update any of the forward-looking statements we make. 11 12 USE OF PROCEEDS The net proceeds we will receive from our sale of 1,114,600 shares of common stock will be approximately $83.2 million, based on an offering price to the public of $78.00 per share and after deducting the underwriters' discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. We expect to use the net proceeds from this offering for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire or invest in complementary businesses or to make strategic investments. Except as described in the next paragraph, we have no current commitments or agreements with respect to any acquisition or investment. Pending these uses, the net proceeds of this offering will be invested in interest- bearing, investment-grade securities. Our board of directors has authorized us to make minority investments in startup Internet businesses. We have made one such investment for $500,000 and are evaluating other opportunities. These investments are being made using our existing available funds and are not contingent on the completion of the offering. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock. We presently intend to retain future earnings, if any, to finance the expansion of our business and do not expect to pay any cash dividends. PRICE RANGE 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 as reported on the Nasdaq National Market. These prices reflect the two-for-one stock split distributed on March 9, 1998 and the two-for-one stock split distributed on November 5, 1999 to stockholders of record on November 1, 1999.
HIGH LOW ------ ------ 1997 First Quarter............................................... $12.44 $ 7.78 Second Quarter............................................ $12.38 $ 7.50 Third Quarter............................................. $15.25 $12.13 Fourth Quarter............................................ $15.69 $11.94 1998 First Quarter............................................. $24.00 $14.53 Second Quarter............................................ $28.94 $18.50 Third Quarter............................................. $31.00 $13.69 Fourth Quarter............................................ $34.50 $12.13 1999 First Quarter............................................. $41.44 $25.63 Second Quarter............................................ $39.25 $25.50 Third Quarter............................................. $54.38 $23.88 Fourth Quarter (through November 15, 1999)................ $91.50 $41.75
On November 15, 1999, the closing sale price of our common stock as reported on the Nasdaq National Market was $79.63 per share and we had approximately 300 holders of record of our common stock. 12 13 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999: - on an actual basis, giving effect to the two-for-one stock split effected as a 100% stock dividend and distributed on November 5, 1999 to stockholders of record on November 1, 1999; and - on an as adjusted basis to reflect the net proceeds from our sale of 1,114,600 shares of common stock, at a public offering price of $78.00 per share and after deducting the underwriters' discounts and commissions and estimated offering expenses payable by us. This information excludes 12,430,214 shares of common stock issuable upon the exercise of outstanding stock options as of September 30, 1999 at a weighted average exercise price of $18.22 per share.
SEPTEMBER 30, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Preferred stock, par value, $0.01 per share, 5,000,000 shares authorized; none issued............................ $ -- $ -- Common stock, par value, $0.01 per share, 100,000,000 shares authorized; 56,073,900 shares issued and outstanding, actual; 57,188,500 shares issued and outstanding, as adjusted.................................................... 561 572 Additional paid-in capital.................................. 141,601 224,775 Deferred compensation....................................... (798) (798) Accumulated other comprehensive income...................... (356) (356) Retained earnings........................................... 54,744 54,744 -------- ----------- Total stockholders' equity.................................. 195,752 278,937 -------- ----------- Total capitalization........................................ $195,752 $ 278,937 ======== ===========
13 14 SELECTED CONSOLIDATED FINANCIAL DATA You should read the following selected consolidated financial data along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and notes to those statements and other financial information included or incorporated in this prospectus. This selected consolidated financial data includes for all periods presented the accounts and results of operations of EXOR and Adjacency, which we acquired in transactions accounted for as poolings of interests, as described in Note 13 to our consolidated financial statements. The consolidated balance sheet data at December 31, 1994, 1995, 1996, 1997 and 1998 and the consolidated statement of income data for the fiscal years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from our audited consolidated financial statements. We have derived the consolidated statement of income data for the nine months ended September 30, 1998 and 1999, and the consolidated balance sheet data at September 30, 1999 from unaudited consolidated financial statements that include, in the opinion of our management, all adjustments, consisting of only normal, recurring adjustments, necessary for a fair presentation of that information. The historical results presented below are not necessarily indicative of future results.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ ------------------- 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF INCOME DATA: Revenues................................................ $11,796 $24,481 $49,795 $92,027 $164,872 $111,081 $195,021 Operating expenses: Project personnel costs............................... 4,434 11,723 23,329 44,623 80,543 53,833 94,621 Selling and marketing................................. 268 1,129 2,453 6,074 11,269 7,569 15,312 General and administrative............................ 4,635 6,733 14,216 22,571 41,675 27,680 48,394 Amortization of intangible assets..................... -- -- -- -- 687 128 1,550 Stock-based compensation charge....................... -- -- 260 -- 4,499 -- 1,919 Charge for in-process research and development........ -- -- -- -- 11,100 11,100 -- Acquisition costs..................................... -- -- -- 560 -- -- 2,340 ------- ------- ------- ------- -------- -------- -------- Total operating expenses............................ 9,337 19,585 40,258 73,828 149,773 100,310 164,136 ------- ------- ------- ------- -------- -------- -------- Income from operations.................................. 2,459 4,896 9,537 18,199 15,099 10,771 30,885 Interest income......................................... 9 13 1,098 2,058 2,925 2,207 2,649 ------- ------- ------- ------- -------- -------- -------- Income before income taxes.............................. 2,468 4,909 10,635 20,257 18,024 12,978 33,534 Income taxes............................................ 879 1,995 3,936 7,703 8,660 4,765 12,701 ------- ------- ------- ------- -------- -------- -------- Net income.............................................. $ 1,589 $ 2,914 $ 6,699 $12,554 $ 9,364 $ 8,213 $ 20,833 ======= ======= ======= ======= ======== ======== ======== Basic net income per share.............................. $ 0.04 $ 0.08 $ 0.15 $ 0.25 $ 0.18 $ 0.16 $ 0.38 Diluted net income per share............................ $ 0.04 $ 0.07 $ 0.13 $ 0.23 $ 0.16 $ 0.14 $ 0.33 Weighted average common shares.......................... 37,554 36,550 44,844 49,574 52,228 51,670 55,101 Weighted average common shares and common share equivalents........................................... 41,683 42,252 49,694 53,740 57,402 56,923 62,345
DECEMBER 31, ------------------------------------------------ SEPTEMBER 30, 1994 1995 1996 1997 1998 1999 ------- ------- ------- ------- -------- ------------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital......................................... $ 1,894 $ 5,785 $66,369 $76,409 $121,779 $159,240 Total assets............................................ 6,898 12,893 80,077 98,867 187,701 226,793 Long-term debt, less current portion.................... 132 189 -- -- -- -- Total stockholders' equity.............................. 2,663 5,595 66,969 82,307 154,814 195,752
14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a leading e-services consultancy providing Internet strategy consulting and sophisticated Internet-based solutions to Global 1000 companies and startup businesses. These solutions focus on large-scale and complex business-to-consumer and business-to-business electronic commerce, digital customer relationship management, supply chain optimization, electronic markets and Internet portals. We provide end-to-end solutions to our clients using multidisciplinary teams. We deliver our solutions primarily through five industry business units and on a fixed-price, fixed-timeframe basis. Our revenue and earnings may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of these projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, general economic conditions and other factors. In addition, revenue from a large client project may constitute a significant portion of our total revenue in a particular period. Our financial statements have been restated for all periods presented to reflect a two-for-one stock split distributed on March 9, 1998 and a two-for-one stock split effected as a 100% stock dividend distributed on November 5, 1999 to stockholders of record on November 1, 1999. On December 15, 1997, we acquired all of the outstanding common stock of EXOR Technologies, Inc. in exchange for 1,223,476 shares of our common stock. Our financial statements have been restated for all periods presented to reflect the acquisition of EXOR, which was accounted for as a pooling-of-interests. On August 25, 1998, we acquired all of the outstanding common stock of Studio Archetype, Inc. in exchange for 996,628 shares of common stock and $250,000 in cash. We accounted for this acquisition as a purchase and, accordingly, allocated the purchase price to the assets acquired and the liabilities assumed based on their respective fair values. Studio Archetype's results of operations are included in our results of operations from the date of acquisition. On March 29, 1999, we acquired all of the outstanding common stock of Adjacency, Inc. in exchange for 1,581,348 shares of common stock. Our financial statements have been restated for all periods presented to reflect the acquisition of Adjacency, which has been accounted for as a pooling-of-interests. In September 1999, we expanded our European presence by opening an office in Milan through a joint venture, Sapient & Cuneo SRL. The joint venture will provide e-services in Italy to Italian-based businesses. On October 8, 1999, we acquired substantially all of the assets of E.Lab, L.L.C. in exchange for 88,044 shares of common stock and the assumption of some of E.Lab's liabilities. We will account for this acquisition as a purchase and will allocate the purchase price to the assets acquired and the liabilities assumed based on their respective fair values. 15 16 RESULTS OF OPERATIONS The following table sets forth the percentage of revenues of some items included in our consolidated statements of income:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------------- -------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Revenues................................ 100% 100% 100% 100% 100% Operating expenses: Project personnel costs............... 47 48 49 48 48 Selling and marketing................. 5 7 7 7 8 General and administrative............ 29 25 25 25 25 Amortization of intangibles........... -- -- -- -- 1 Stock-based compensation charge....... -- -- 3 -- 1 Charge for in-process research and development........................ -- -- 7 10 -- Acquisition costs..................... -- -- -- -- 1 --- --- --- --- --- Total operating expenses........... 81 80 91 90 84 --- --- --- --- --- Income from operations.................. 19 20 9 10 16 Interest income......................... 2 2 2 1 1 Income before income taxes.............. 21 22 11 11 17 Income taxes............................ 8 8 5 4 6 --- --- --- --- --- Net income.............................. 13% 14% 6% 7% 11% === === === === ===
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 REVENUES Our revenues for the nine months ended September 30, 1999 increased 76% over our revenues for the same period in 1998. The increase in revenues reflected increases in both the average size and number of client projects. During the nine months ended September 30, 1999, our five largest clients accounted for approximately 26% of our revenues, with no client accounting for more than 10% of such revenues. During the nine months ended September 30, 1998, our five largest clients accounted for approximately 33% of our revenues, with no client accounting for more than 10% of such revenues. PROJECT PERSONNEL COSTS Project personnel costs consist primarily of salaries and employee benefits for personnel dedicated to client projects and direct expenses incurred to complete projects that were not reimbursed by the client. These costs represent the most significant expense we incur in providing our services. The increase in project personnel costs for the nine months ended September 30, 1999 was primarily due to an increase in project personnel from 1,129 at September 30, 1998 to 1,564 at September 30, 1999. Project personnel costs remained constant as a percentage of revenues at 48% for the nine months ended September 30, 1999 and 1998. SELLING AND MARKETING Selling and marketing costs consist primarily of salaries, employee benefits, travel expenses of selling and marketing personnel and promotional costs. Selling and marketing costs increased as a percentage of revenues to 8% from 7% for the nine months ended September 30, 1999 from the nine months ended September 30, 1998. The increase was primarily due to investments 16 17 made by us in a new brand identity during the second quarter of 1999 and also due to higher compensation for sales personnel. Selling and marketing personnel increased from 47 employees at September 30, 1998 to 65 employees at September 30, 1999. GENERAL AND ADMINISTRATIVE General and administrative costs consist primarily of expenses associated with our management, finance and administrative groups, including personnel devoted to recruiting and training project personnel, and occupancy costs. The increase in general and administrative costs for the nine months ended September 30, 1999 was primarily due to an increase in the number of employees hired during 1999, an increase in occupancy costs related to significant expansion of our office space, and increased depreciation costs related to our increased investments in property and equipment. Our total headcount increased from 1,383 at September 30, 1998 to 1,939 at September 30, 1999. General and administrative costs as a percentage of revenues remained constant at 25% for the nine month periods ending September 30, 1999 and September 30, 1998. AMORTIZATION OF INTANGIBLE ASSETS Amortization of intangible assets consists primarily of amortization of marketing assets, customer lists, assembled workforce and goodwill resulting from the acquisition of Studio Archetype. Amortization periods range from five to seven years. STOCK-BASED COMPENSATION CHARGE Stock-based compensation charges consist of expenses associated with Adjacency stock options that were granted, prior to our acquisition of Adjacency, at below fair market value. We expect the amount of this charge to be approximately $100,000 per quarter for each quarter during the next two years. ACQUISITION COSTS We incurred a one-time charge of approximately $2.3 million in 1999 for costs associated with the Adjacency acquisition, which consisted primarily of investment banking, accounting and legal fees. INTEREST INCOME Interest income for the nine months ended September 30, 1999 was derived primarily from investments of the proceeds from our previous public stock offerings, which were invested in tax-exempt, short-term municipal bonds, commercial paper and U.S. government securities. PROVISION FOR INCOME TAXES Income tax expense represents combined federal and state income taxes at an effective rate during the nine months ended September 30, 1999 of 37.9% and during the nine months ended September 30, 1998 of 36.7%. The increase in our tax rate resulted from the non-deductibility of Adjacency acquisition costs in 1999. Our effective tax rate may vary from period to period based on our future expansion into areas with varying country, state, and local income tax rates. 17 18 YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUES Our revenues for 1998 increased 79% over our revenues for 1997. The increase in revenues reflected increases in both the size and number of client projects. The increase in unbilled revenues on contracts from $9.1 million at December 31, 1997 to $10.3 million at December 31, 1998, was primarily a result of increased volume and structure of contract billing schedules. In 1998, our five largest clients accounted for approximately 30% of our revenues, with no client accounting for more than 10% of such revenues. In 1997, our five largest clients accounted for approximately 31% of our revenues, no clients accounted for more than 10% of such revenues and three clients each accounted for more than 5% of such revenues. PROJECT PERSONNEL COSTS Our project personnel costs for 1998 of $80.5 million increased from $44.6 million in 1997. The increase in project personnel costs for 1998 was primarily due to an increase in project personnel from 692 at December 31, 1997 to 1,188 at December 31, 1998. Project personnel costs increased slightly as a percentage of revenues to 49% in 1998 from 48% in 1997. The increase was due to increased training costs during the period. SELLING AND MARKETING Selling and marketing costs as a percentage of revenues remained constant at 7% for both 1998 and 1997. The dollar increase was mainly due to our decision to expand our selling and marketing group through hiring, along with the addition of Studio Archetype's selling and marketing group. Selling and marketing personnel grew from 33 employees at December 31, 1997 to 51 employees at December 31, 1998. GENERAL AND ADMINISTRATIVE General and administrative costs as a percentage of revenues remained constant at 25% for both 1998 and 1997. The dollar increase in general and administrative costs for 1998 compared to 1997 was primarily due to an increase in the incremental costs associated with the additional employees hired during 1998. Our total headcount increased from 838 at December 31, 1997 to 1,492 at December 31, 1998. CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisition of Studio Archetype in the third quarter of 1998, we recorded a charge of $11.1 million for in-process research and development and recorded a corresponding income tax benefit of $4.2 million. This allocation represents the estimated fair value of such technology based on risk-adjusted cash flows related to the development of projects that had not reached technological feasibility at the time of the acquisition and with respect to which the in-process research and development had no alternative future uses. Accordingly, we expensed these costs as of the acquisition date. INTEREST INCOME Interest income for 1998 and 1997 consisted of interest earned on the proceeds of our initial and follow-on public offerings of common stock, which were invested primarily in tax-exempt, short-term municipal bonds. 18 19 PROVISION FOR INCOME TAXES Income tax expense represents combined federal and state income taxes at an effective rate of 48% for 1998 and 38.0% for 1997. The increase in the effective rate in 1998 was the result of compensation expenses recorded by Adjacency, which were not tax deductible by us. YEARS ENDED DECEMBER 31, 1997 AND 1996 REVENUES Our revenues for 1997 of $92.0 million increased 85% over our revenues for 1996. The increase in revenues reflected increases in both the size and number of client projects. The increase in unbilled revenues on contracts from $4.7 million at December 31, 1996 to $9.1 million at December 31, 1997 was primarily due to the increase in our revenues in 1997. In 1997, our five largest clients accounted for approximately 31% of our revenues, with no client accounting for more than 10% of such revenues and three clients each accounting for more than 5% of such revenues. In 1996, our five largest clients accounted for approximately 51% of our revenues, two clients each accounted for more than 10% of such revenues and five clients each accounted for more than 5% of such revenues. PROJECT PERSONNEL COSTS The increase in project personnel costs for the year ended December 31, 1997 was primarily due to an increase in project personnel from 434 at December 31, 1996 to 692 at December 31, 1997. Project personnel costs increased slightly as a percentage of revenues from 47% in 1996 to 48% in 1997. The increase was mainly due to investments in training and higher non-reimbursement travel and relocation fees due to the opening of three additional offices in the beginning of 1997. SELLING AND MARKETING Selling and marketing costs as a percentage of revenues increased from 5% in 1996 to 7% in 1997. This increase, as well as the dollar increase, was mainly due to our decision to expand our selling and marketing group, which grew from 27 employees at December 31, 1996 to 33 employees at December 31, 1997. GENERAL AND ADMINISTRATIVE The increase in general and administrative costs for 1997 compared to 1996 was primarily due to an increase in the incremental costs associated with the additional employees hired during 1997. Our total headcount increased from 537 at December 31, 1996 to 838 at December 31, 1997. As a percentage of revenue, general and administrative costs were 25% in 1997, compared to 29% in 1996. The decrease as a percentage of revenue in 1997 was primarily a result of lower cash compensation bonuses paid to EXOR executives in 1997 and improved space utilization. STOCK-BASED COMPENSATION CHARGE We incurred a one-time charge of approximately $260,000 in 1996 for stock-based compensation paid to an EXOR stockholder in connection with the EXOR acquisition. ACQUISITION COSTS We incurred a one-time charge of approximately $560,000 in the fourth quarter of 1997 for professional services associated with the EXOR acquisition. 19 20 INTEREST INCOME Interest income for 1997 and 1996 consisted of interest earned on the proceeds of our initial and follow-on public offerings of common stock, which were invested primarily in tax-exempt, short-term municipal bonds. PROVISION FOR INCOME TAXES Income tax expenses represents combined federal and state income taxes at an effective rate of 38.0% for 1997 and 37.0% for 1996. 20 21 QUARTERLY RESULTS OF OPERATIONS The following tables set forth a summary of our unaudited quarterly operating results for each of our eight most recently ended fiscal quarters. We have derived this information from our unaudited interim consolidated financial statements, which, in the opinion of our management, have been prepared on a basis consistent with our financial statements contained elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation in accordance with generally accepted accounting principles when read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Our quarterly operating results are not necessarily indicative of future results of operations.
THREE MONTHS ENDED ----------------------------------------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1997 1998 1998 1998 1998 1999 1999 1999 -------- --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues............................. $27,529 $31,595 $36,420 $43,066 $53,791 $57,793 $64,199 $73,029 Operating expenses: Project personnel costs............ 13,312 15,221 17,511 21,101 26,710 28,334 30,618 35,669 Selling and marketing.............. 2,145 1,842 2,666 3,061 3,700 3,974 5,411 5,927 General and administrative......... 6,616 8,271 8,726 10,683 13,995 14,648 16,219 17,527 Amortization of intangibles........ -- -- -- 128 559 569 519 462 Stock-based compensation charge.... -- -- -- -- 4,499 1,699 110 110 Charge for in-process research and development...................... -- -- -- 11,100 -- -- -- -- Acquisition costs.................. 560 -- -- -- -- 2,340 -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses......... 22,633 25,334 28,903 46,073 49,463 51,564 52,877 59,695 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations........ 4,896 6,261 7,517 (3,007) 4,328 6,229 11,322 13,334 Interest income...................... 497 590 676 941 718 820 859 970 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.... 5,393 6,851 8,193 (2,066) 5,046 7,049 12,181 14,304 Income taxes/expense (benefit)....... 2,105 2,504 2,929 (668) 3,895 2,771 4,495 5,436 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).................... $ 3,288 $ 4,347 $ 5,264 $(1,398) $ 1,151 $ 4,278 $ 7,686 $ 8,868 ======= ======= ======= ======= ======= ======= ======= ======= Basic net income (loss) per share.... $ 0.07 $ 0.09 $ 0.10 $ (0.03) $ 0.02 $ 0.08 $ 0.14 $ 0.16 Diluted net income(loss) per share... $ 0.06 $ 0.08 $ 0.09 $ (0.03) $ 0.02 $ 0.07 $ 0.13 $ 0.14
AS A PERCENTAGE OF TOTAL REVENUES ----------------------------------------------------------------------------------------- DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, 1997 1998 1998 1998 1998 1999 1999 1999 -------- --------- -------- --------- -------- --------- -------- --------- Revenues............................. 100% 100% 100% 100% 100% 100% 100% 100% Operating expenses: Project personnel costs............ 48 48 48 49 50 49 48 49 Selling and marketing.............. 8 6 7 7 7 7 8 8 General and administrative......... 24 26 24 25 26 25 25 24 Amortization of intangibles........ -- -- -- -- 1 1 1 1 Stock-based compensation charge.... -- -- -- -- 8 3 -- -- Charge for in-process research and development...................... -- -- -- 26 -- -- -- -- Acquisition costs.................. 2 -- -- -- -- 4 -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses......... 82 80 79 107 92 89 82 82 Income (loss) from operations........ 18 20 21 (7) 8 11 18 18 Interest income...................... 2 2 1 2 1 1 1 2 ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes.... 20 22 22 (5) 9 12 19 20 Income taxes/expense (benefit)....... 8 8 8 (2) 7 5 7 8 ------- ------- ------- ------- ------- ------- ------- ------- Net income (loss).................... 12% 14% 14% (3)% 2% 7% 12% 12% ======= ======= ======= ======= ======= ======= ======= =======
21 22 LIQUIDITY AND CAPITAL RESOURCES We have primarily funded our operations from cash flow generated from operations and the proceeds from our initial and follow-on public offerings. In addition, we have a bank revolving line of credit providing for borrowings of up to $5.0 million. Borrowings under this line of credit, which expires on June 30, 2000, bear interest at the bank's prime rate. The line of credit includes covenants relating to the maintenance of some financial ratios and limits the payment of dividends. At December 31, 1998 and September 30, 1999, we had no bank borrowings outstanding and no material capital commitments. We invest predominantly in instruments that are highly liquid, investment grade securities and have maturities of less than one year. At September 30, 1999, we had approximately $99.9 million in cash, cash equivalents and short-term investments compared to $91.8 million at December 31, 1998. For 1998, the net cash provided by operating activities of $5.9 million was offset by $44.1 million of cash used in investing activities primarily for property and equipment expenditures of $9.3 million and net purchases of short-term investments of $35.4 million. Cash provided by financing activities was $30.2 million for 1998 and consisted primarily of cash received from a follow-on public offering in March 1998. Cash provided by operating activities was $1.6 million for the nine months ended September 30, 1999 and resulted primarily from net income of $20.8 million and non-cash charges of $9.0 million, offset by increases in accounts receivable of $23.2 million and increases of $3.2 million in unbilled revenues on contracts due to increases in revenues. Cash used in investing activities was $29.3 million for the nine months ended September 30, 1999. Purchases of short term investments, net of maturities, during the period were $17.1 million and capital expenditures were $12.2 million. Increased capital expenditures were due to the significant expansion of our office space. Cash provided by financing activities was $19.1 million for the nine months ended September 30, 1999 and consisted primarily of cash received from the sale of our common stock through our employee stock purchase plan and upon exercise of stock options. We believe that the cash provided from operations, borrowings available under our revolving line of credit, existing cash, cash equivalents and marketable securities and the proceeds from the offering will be sufficient to meet our working capital and capital expenditure requirements for at least the next 18 months. RECENT ACCOUNTING PRONOUNCEMENTS During 1998, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting comprehensive income and its components in the body of the financial statements. Comprehensive income includes net income as currently reported under generally accepted accounting principles and also considers the effect of additional economic events that are not required to be recorded in determining net income but are rather reported as a separate component of stockholders' equity. The adoption of SFAS 130 did not have a material impact on our financial condition or results of operations. During 1998, we adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS 131 established standards for reporting information about operating segments in annual and interim financial statements issued to shareholders. This Statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not have a material impact on our financial condition or results of operations. 22 23 In the first quarter of 1999, we adopted SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use," which requires the capitalization of some internal costs related to the implementation of computer software obtained for internal use. The adoption of SOP 98-1 did not have a material impact on our financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting and reporting standards for derivative instruments, including some derivative instruments embedded in other contracts, collectively referred to as derivatives, and for hedging activities. SFAS 133 requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. We are required to adopt this standard in the first quarter of 2000. We expect that the adoption of SFAS 133 will not have a material impact on our financial position or results of operations. YEAR 2000 READINESS The following disclosure shall be considered Year 2000 Readiness Disclosure to the maximum extent allowed under the Year 2000 Information and Readiness Disclosure Act. We have developed a phased Year 2000 readiness plan to help identify and resolve Year 2000 issues associated with our internal systems and the services provided by us. The plan includes: - development of corporate awareness; - assessment; - implementation, including remediation and upgrading of product versions; - validation testing; and - contingency planning. Since we have installed nearly all of our internal hardware and software systems since January 1997, we are not confronted with the task of having to replace obsolete or legacy systems. Primarily, our task is to install upgrades and patches to our internally used software and hardware to make such systems and equipment Year 2000 compliant. We created a company-wide Year 2000 team to oversee our Year 2000 program. We have completed our assessment of our internal and third party computer systems and our internal non-information technology systems, such as building security, voice mail, telephone and other systems containing embedded microprocessors. Our material internal information technology systems consist principally of financial, accounting and human resources application software created by third parties, and internally developed sales forecasting and project management software applications. All of our internally developed applications are Year 2000 compliant. With respect to the third-party software applications, we believe that, based on oral statements made by manufacturers and/or statements published on manufacturers' websites, that such products will be Year 2000 complaint. At the manufacturer's recommendation, we recently installed patches in our versions of the Windows 95 and Windows NT operating systems in order for those operating systems to become Year 2000 compliant. The manufacturers of our computer hardware platforms, principally servers, have indicated that the versions we currently use are Year 2000 compliant. We are in the process of obtaining written assurances from each of our third party vendors that their systems, both information technology and non-information technology, are Year 2000 compliant. We believe that we are approximately 85% complete in installing patches and upgrades to our third party software and hardware. We have contracted with two consultants to assist in the 23 24 remediation and testing phase of our Year 2000 compliance plan and we expect to complete our Year 2000 program by November 30, 1999. While we do not separately track internal costs incurred for our Year 2000 projects, we believe that we may have to expend additional funds to utilize third party resources to complete our assessment procedures and implement any required fixes. We do not expect these expenditures to be material. If compliance efforts are not completed on time, or additional compliance efforts are required of which we are not currently aware, or the costs of any required updating or modification of our information technology systems exceeds our estimates, the Year 2000 issue could have a material adverse effect on our business, results of operations and financial condition. We are developing a comprehensive contingency plan to address the situations that may result if we are unable to achieve Year 2000 readiness of our major information technology and non-information technology systems. We expect to complete this contingency plan by November 30, 1999. There can be no assurance that any contingency plans developed by us will prevent any such service interruption. In addition to our internal systems, we rely on third party relationships in the conduct of our business. For example, we rely on the services of the landlords of our facilities, telecommunication companies, banks, utilities, and commercial airlines. We are currently seeking assurances from our landlords and material vendors regarding their Year 2000 readiness, and to the extent such assurances are not given, we are devising contingency plans to ameliorate the negative effects on our major information technology systems in the event the Year 2000 issue results in the unavailability of services. We expect to complete these contingency plans by November 30, 1999. There can be no assurance that any contingency plans we develop will prevent any such service interruption by one or more of our third party vendors or suppliers from having a material adverse effect on our business, results of operations or financial condition. In addition, the failure on the part of the accounting systems of our clients due to the Year 2000 issue could result in a delay in the payment of invoices issued by us for services and expenses. A failure of the accounting systems of a significant number of our clients would have a material adverse effect on our business, results of operations and financial condition. Our business involves designing, developing and implementing critical business solutions for our clients. In addition, we have recommended, implemented and customized various third-party software packages for our clients, some of which may not be Year 2000 compliant. Former, present and future clients may assert that some services performed by us involved or are affected by the Year 2000 issue. Because we have designed, developed and implemented software and systems for a large number of clients since 1991, there can be no way of assuring that all such software programs and systems will be Year 2000 compliant. This uncertainty is magnified by the fact that in many cases our clients retain the right to maintain, alter and modify the systems developed and implemented by us after the completion of an engagement. Due to the potential significance of the Year 2000 issue upon client operations, upon any failure of critical client systems or processes that may be directly or indirectly connected or related to systems or software we analyzed, designed, developed, or implemented, we may be subject to claims regardless of whether the failure is related to the services we provided. If asserted, such claims and the associated defense costs could have a material adverse effect on our business, results of operations and financial condition. Our policy has been to attempt to include provisions in our client contracts that, among other things, disclaim implied warranties, limit the duration of express warranties, limit our liability to the amount of fees paid by the client to us in connection with the project and disclaim any liability arising from third-party software that we implemented, customized or installed. There can be no assurance that we will be able to obtain these contractual protections in agreements concerning future projects, or that any contractual provisions governing current and completed projects will 24 25 prevent clients from asserting claims against us with respect to the Year 2000 issue. There also can be no assurance that the contractual protections, if any, obtained by us will effectively operate to protect us from, or limit the amount of, any liability arising from claims asserted against us. The foregoing discussion of our Year 2000 readiness contains forward-looking statements including estimates of the timeframes and costs for addressing the known Year 2000 issues confronting us and is based on management's current estimates, which were derived using numerous assumptions. There can be no assurance that these estimates will be achieved and actual events and results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, our ability to identify and correct all Year 2000 problems and the success of third parties with whom we do business in addressing their Year 2000 issues. 25 26 BUSINESS OVERVIEW Sapient is a leading e-services consultancy providing Internet strategy consulting and sophisticated Internet-based solutions to Global 1000 companies and startup businesses. We help our clients define Internet strategies to improve their competitive position and we design, architect, develop and implement solutions to execute those strategies. These solutions focus on large-scale and complex business-to-consumer and business-to-business electronic commerce, digital customer relationship management, supply chain optimization, electronic markets and Internet portals. We believe that our key strength is our ability to deliver high quality solutions, primarily on a fixed-price, fixed-timeframe basis, through a rapid, effective and integrated process. Our services include: - digital business strategy development; - experience modeling; - creative design; - technology development and systems integration; and - integrated engagement leadership. We provide end-to-end solutions to our clients using multidisciplinary teams composed of business strategists, researchers, creative specialists, technology professionals and program managers. We deliver our solutions primarily through five industry business units: financial services; media, entertainment and communications; manufacturing, retail and distribution; public sector; and energy services. Using this industry alignment helps us accurately define and deliver tailored solutions that effectively address the market dynamics and business opportunities that our clients face. We have been providing Internet solutions for over five years and employ approximately 1,900 people in offices across the United States and in London, Milan and Sydney. INDUSTRY BACKGROUND The broad business acceptance of the Internet and electronic commerce has led companies to adopt new business models and use technologies to take advantage of a range of opportunities. These opportunities include selling and marketing over the Internet to businesses and consumers, optimizing the supply chain and creating electronic markets and exchanges. Successfully creating and delivering a comprehensive Internet strategy and solution requires a diversified set of skills. Designing and developing Internet solutions entails careful analysis and definition of the strategic implications of the Internet for an organization, understanding the patterns of user behavior and recognizing the creative possibilities for branding, content and user experience. Additionally, the ability to rapidly deploy Internet solutions requires substantial expertise to evaluate, select and implement appropriate technologies. Given the pace of adoption of the Internet and electronic commerce, businesses are seeking to rapidly formulate their Internet strategies. Few organizations have the internal resources or skills necessary to successfully design and implement Internet solutions. As a result, an increasing number of organizations, from Global 1000 companies to startup Internet businesses, are engaging Internet professional services firms. International Data Corp. forecasts worldwide Internet services spending to grow from $7.8 billion in 1998 to $78.6 billion by 2003, which represents a compound annual growth rate of more than 58%. A number of firms serve this market. Many of these firms have limited industry expertise and possess only some of the core competencies needed to design and implement an end-to-end 26 27 Internet solution. Some firms have grown primarily through acquisitions which may not result in integrated service delivery and management systems or a strong and cohesive corporate culture. Few firms have the experience, ability and size required to rapidly deliver large-scale, business-critical solutions. We believe that companies that want to effectively capitalize on the Internet are seeking an Internet professional services firm with extensive expertise and a track record of delivering fully integrated end-to-end Internet solutions. Furthermore, we believe that enterprises will increasingly select Internet professional services firms that can provide effective program management and industry expertise and quickly and predictably implement large-scale, complex solutions. SAPIENT'S SOLUTION Our extensive experience in managing large-scale initiatives, our multidisciplinary approach to delivering solutions and our in-depth industry knowledge and partnership approach with clients enable us to rapidly deliver Internet strategies and solutions that help our clients transform or launch their businesses. LARGE-SCALE PROGRAM MANAGEMENT. Our methodology and program management approach builds upon over five years of experience implementing Internet solutions. During this time, the size and complexity of our Internet solutions have increased and we expect this trend to continue. During 1999, several of our Internet projects have involved 50 or more team members and exceeded $10 million in size. In addition, we often manage the entire client initiative, which requires the coordination of numerous third-parties such as content providers, technology vendors, infrastructure experts and telecommunications firms. We believe our significant experience in managing large-scale, complex initiatives is essential to achieving high levels of client satisfaction and repeat business. MULTIDISCIPLINARY APPROACH. We deliver end-to-end Internet solutions by combining our five core services: digital business strategy; experience modeling; creative design; technology development and systems integration; and integrated engagement leadership. Multidisciplinary teams are able to quickly communicate new information, identify potential issues and implement solutions. Our integrated approach enables our clients to utilize one Internet professional services firm to manage the delivery of an end-to-end solution. IN-DEPTH INDUSTRY KNOWLEDGE. We have extensive knowledge and experience in five industry sectors: financial services; media, entertainment and communications; manufacturing, retail and distribution; public sector; and energy services. We believe this helps us accurately define and deliver tailored solutions that effectively address the market dynamics and business opportunities that our clients face. As the market for Internet professional services becomes more sophisticated, we believe that clients will increasingly demand in-depth industry expertise. PARTNERING WITH CLIENTS. Our culture and approach have always been based on working with our clients to understand and achieve their business objectives. Client representatives play an active and important role throughout the engagement and are integrated into our project teams. This client involvement helps ensure that the solution accurately reflects our clients' objectives and has the support of critical client constituencies. In most cases, we further align our interests with our clients' interests by entering into fixed-price, fixed-timeframe contracts. Occasionally we enter into bonus arrangements with our clients. These types of contracts and arrangements create incentives for us to complete the project within budgeted timeframes and in a cost-effective manner. RAPID DELIVERY OF RELEVANT SOLUTIONS. Rapid time-to-market is crucial to the effectiveness of an Internet solution. Each element of our solution helps reduce the time required to complete our client engagements and ensures the creation and delivery of strategies and solutions that are responsive to our clients' needs. By delivering our services in an integrated fashion, we reduce 27 28 time-consuming and costly handoffs of project tasks. Our experience in delivering large-scale projects gives us the program management expertise to quickly coordinate numerous aspects of complex engagements. Our industry knowledge reduces our learning curve on new engagements, helps us to develop industry best practices and allows us to implement solutions more efficiently. Substantial client involvement reduces delays caused by difficulties in obtaining critical information and resources from our client and helps ensure that the solution addresses our client's needs. SAPIENT SERVICES We provide the wide range of services required to identify, design, develop and deploy Internet strategies and solutions for Global 1000 companies and startup businesses. Our services enable rapid delivery of complex solutions for business-to-consumer and business-to-business electronic commerce, digital customer relationship management, supply chain optimization, electronic markets and Internet portals. The following descriptions highlight our core services. - DIGITAL BUSINESS STRATEGY. Our digital business strategy development services enable our clients to launch, or transform their existing business into, Internet-based businesses. We help our clients define their Internet strategy, including immediate and long-term objectives for their customers, brands, business models and organizations. We also work with clients to develop change management practices that help align their organizational structure and processes with their Internet strategies. - EXPERIENCE MODELING. An important component in a successful Internet solution is understanding the patterns of behavior that reveal and influence the nature of the users' experience. Our researchers use a wide range of innovative observation techniques to understand both on-line and off-line end-user experiences for our clients. This understanding enables us to deliver strategies to help clients model and plan new customer interaction experiences. We believe that our experience modeling helps our clients compete in the new digital economy by delivering compelling user experiences, effective market positioning and relevant brand identities. Our experience modeling services have been enhanced by our October 1999 acquisition of E.Lab, a leading experience-based research firm. - CREATIVE DESIGN. We have extensive experience in developing visual and interactive content and creating electronic brand experiences that enhance and extend our clients' relationships with their customers. Our creative design services assess and analyze our clients' existing brands, identify opportunities and provide user-focused solutions that are appropriate and relevant to the customer-controlled Internet environment. We believe that this helps our clients build sustainable, long-term relationships with their customers. - TECHNOLOGY DEVELOPMENT AND SYSTEMS INTEGRATION. Using our extensive in-depth knowledge of the Internet and emerging technologies, we translate strategic, creative and business requirements into sophisticated and functional technology platforms in short timeframes. Recognizing that technical infrastructure is the foundation for clients' Internet solutions, we develop infrastructures that are reliable, robust, secure and scalable. Our principal technology services include the design, architecture and development of electronic commerce platforms, digital customer relationship management systems, supply chain collaboration systems, electronic markets and exchanges and Internet portals, as well as the implementation of enterprise middleware and the integration of Internet solutions with legacy systems. - INTEGRATED ENGAGEMENT LEADERSHIP. The execution of large-scale, multidisciplinary Internet solutions in a fixed timeframe requires significant expertise in project and program management. Our integrated engagement leadership approach enables us to effectively manage the relationships, complexities and risks associated with large-scale, multidiscipli- 28 29 nary engagements. This allows us to plan, scope, manage and deliver projects in a coordinated manner. We believe that our integrated engagement leadership results in more successful engagements and enhances client satisfaction with the entire process. Our proprietary methodology, One Team, provides a framework of processes, tools and best practices that we use to deliver our services. We believe that One Team benefits our clients by providing an ability for us and our clients to: - work together as an integrated team to understand and anticipate specific client needs; - work effectively in short timeframes to meet deadlines; - set clearly-defined pricing for each phase of a project; and - successfully manage the project and flow of information through all phases of an engagement. SELLING AND MARKETING As of September 30, 1999, we employed 65 sales and marketing professionals. The role of Sapient's marketing program is to create and sustain preference and loyalty for Sapient as a leading e-services consultancy. Marketing occurs at the corporate and business unit levels. The corporate marketing department has overall responsibility for communications, advertising, public relations and our website and also engineers and oversees central marketing and communications programs for use by each of our business units. Our dedicated marketing personnel within the business units undertake a variety of marketing activities, including sponsoring focused multi-client events to demonstrate our thought leadership, sponsoring and participating in targeted conferences and holding private briefings with individual companies. All of our sales professionals are organized along our five industry business units. We believe that the industry focus of our sales professionals and our business unit marketing personnel enhances their knowledge and expertise in these industries and will generate additional client engagements. We generally enter into written commitment letters with our clients at or around the time we commence work on a project. These commitment letters generally contemplate that Sapient and the client will subsequently enter into a more detailed agreement. These written commitments and subsequent agreements contain varying terms and conditions and we do not generally believe it is appropriate to characterize them as consisting of backlog. In addition, because these written commitments and agreements often provide that the arrangement can be terminated with limited advance notice or penalty, we do not believe the projects in process at any one time are a reliable indicator or measure of expected future revenues. CLIENTS Many large organizations in our target markets have adopted Internet initiatives over the past several years and require the types of services we provide. We target clients who are determined to gain a competitive advantage and increase their value to their customers through the creation of new products, services and business models facilitated by integrated business and technology 29 30 solutions. During the last 18 months, we have worked on Internet solutions for the following clients: Adobe Morgan Stanley Dean Witter Answer Financial Nordstrom BankBoston Peet's Coffee and Tea Bank of America Plum Financial Services Caterpillar SC Johnson E*TRADE Sallie Mae Fidelity Investments SpringStreet First Union Staples Friedman Billings Ramsey State of Maine Goldman Sachs State of New Hampshire Hallmark Steelcase Hewlett-Packard Sunglass Hut Houston Street Exchange United Airlines iWon.com Wells Fargo Janus Capital Williams Companies
PEOPLE AND CULTURE We have developed a strong corporate culture that is critical to our success. Our key values are: - client-focused delivery - leadership - long-term relationships - creativity - openness - professional growth To encourage the achievement of these values, we reward teamwork and promote individuals who demonstrate these values. Also, we have an intensive orientation program for new employees to introduce our core values and a number of internal communications and training initiatives defining and promoting these core values. We believe that our growth and success are attributable in large part to the high caliber of our employees and our commitment to maintain the values on which our success has been based. There is significant competition for employees with the skills required to perform the services we offer. We believe that we have been successful in our efforts to attract and retain employees, in part because of our emphasis on our core values, training and professional growth. We intend to continue to recruit, hire and promote employees who share our values. As of September 30, 1999, we had 1,939 full-time employees, comprised of 1,564 project personnel, 310 employees in general and administration and 65 employees in sales and marketing. None of our employees is subject to a collective bargaining agreement. We believe that our relations with our employees are good. COMPETITION The markets for the services we provide are highly competitive. We believe that we currently compete principally with strategy consulting firms, Internet professional services firms, systems integration firms, technology vendors and internal information systems groups. Many of the companies that provide services in our markets have significantly greater financial, technical and marketing resources than we do and generate greater revenues and have greater name recognition than we do. In addition, there are relatively low barriers to entry into our markets and we have faced, and expect to continue to face competition from new entrants into our markets. 30 31 We believe that the principal competitive factors in our markets include: - ability to integrate strategy, experience modeling, creative design and technology services; - quality of service, speed of delivery and price; - industry knowledge; - sophisticated project and program management capability; and - Internet technology expertise and talent. We believe that we compete favorably when considering these factors and that our extensive experience in managing large-scale initiatives, multidisciplinary approach to delivering solutions, in-depth industry knowledge and partnership approach with clients distinguish 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, generally require that our consultants and clients enter into such agreements, and limit access to and distribution of our proprietary information. There can be no assurance 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. Our business involves the development of technology solutions for specific client engagements. Ownership of these solutions is the subject of negotiation and is frequently assigned to the client, although we may retain a license for certain uses. Some clients have prohibited us from marketing the solutions developed for them for specified periods of time or to specified third parties and there can be no assurance that clients will not demand similar or other restrictions in the future. Issues relating to the ownership of and rights to use solutions can be complicated and there can be no assurance that disputes will not arise that affect our ability to resell or reuse such solutions. OFFICES Our headquarters and principal administrative, finance, selling and marketing operations are located in approximately 110,000 square feet of leased office space in Cambridge, Massachusetts. We also lease offices in: - Atlanta (2) - Chicago (2) - Dallas - Los Angeles - New York (2) - San Francisco (3) - Washington, D.C. - London - Milan - Sydney LEGAL PROCEEDINGS We are not a party to any material legal proceedings. 31 32 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information about our directors and executive officers as of October 31, 1999.
NAME AGE POSITION - ---- --- -------- Jerry A. Greenberg..................... 33 Co-Chairman of the Board of Directors, Co-Chief Executive Officer and Director J. Stuart Moore........................ 37 Co-Chairman of the Board of Directors, Co-Chief Executive Officer and Director Sheeroy D. Desai....................... 33 Co-Chief Operating Officer and Executive Vice President Susan D. Johnson....................... 34 Chief Financial Officer Desmond P. Varady...................... 34 Co-Chief Operating Officer and Executive Vice President R. Stephen Cheheyl..................... 54 Director Darius W. Gaskins, Jr.................. 60 Director Bruce D. Parker........................ 51 Director Carl S. Sloane......................... 62 Director
JERRY A. GREENBERG co-founded Sapient in 1991 and has served as the co-Chairman of the Board of Directors and co-Chief Executive Officer and as a director since Sapient's inception. J. STUART MOORE co-founded Sapient in 1991 and has served as the co-Chairman of the Board of Directors and co-Chief Executive Officer and as a director since Sapient's inception. SHEEROY D. DESAI joined Sapient in 1991 and has served as Executive Vice President since September 1994 and as co-Chief Operating Officer since October 1999. Mr. Desai is responsible for our five industry business units and our two international units. He also oversees the hiring and people strategy organizations. SUSAN D. JOHNSON has served as Sapient's Chief Financial Officer since joining Sapient in February 1994. DESMOND P. VARADY joined Sapient in 1993, became an Executive Vice President in April 1999 and co-Chief Operating Officer in October 1999. Mr. Varady served as a Vice President from September 1994 to April 1999. Mr. Varady is responsible for the strategic direction of Sapient's five core disciplines. He also oversees our integrated multidisciplinary process, One Team methodology and our knowledge management systems. R. STEPHEN CHEHEYL has been a director of Sapient since January 1996. Since his retirement in December 1995, Mr. Cheheyl has been a private investor and independent consultant. From October 1994 until then, Mr. Cheheyl served as Executive Vice President of Bay Networks, Inc., a manufacturer of computer networking products, which was formed through the merger of Wellfleet Communications, Inc. and Synoptics Communications, Inc. Mr. Cheheyl is also a director of Auspex Systems, Inc. and MCMS, Inc. DARIUS W. GASKINS, JR. has been a director of Sapient since September 1995. Mr. Gaskins is a founding partner of Carlisle, Fagan, Gaskins & Wise, Inc., a management consulting firm. Since 1991, Mr. Gaskins has also been a partner of High Street Associates, Inc., which owns and manages a specialty chemical company. Mr. Gaskins is also a director of Anacomp Inc. and Northwestern Steel and Wire Company. BRUCE D. PARKER has been a director of Sapient since September 1995. Since December 1997, Mr. Parker has been Senior Vice President and Chief Information Officer at United 32 33 Airlines, Inc. From September 1994 to December 1997, Mr. Parker was Senior Vice President - Management Information Systems and Chief Information Officer at Ryder System Inc., a transportation company. CARL S. SLOANE has been a director of Sapient since September 1995. Mr. Sloane is the Ernest L. Arbuckle Professor of Business Administration at Harvard University's Graduate School of Business Administration, where he has been a member of the faculty since 1991. Mr. Sloane is also a director of Ionics, Inc., The Pittston Company and Rayonier, Inc. 33 34 SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock as of September 30, 1999 by the selling stockholders. The "Options" columns reflect shares of our common stock subject to options currently exercisable or exercisable within 60 days after September 30, 1999, which are deemed to be outstanding for the purpose of computing the percentage of ownership of the person holding such options, but are not deemed to be outstanding for computing the percentage of ownership of any other person. Except as otherwise indicated in the footnotes to the table, each of the stockholders has sole voting and investment power with respect to the shares of common stock beneficially owned by such stockholders. The address for each of the selling stockholders is c/o Sapient Corporation, One Memorial Drive, Cambridge, Massachusetts 02142.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING ------------------------------ ------------------------------ NUMBER NUMBER OF NUMBER -------------------- SHARES BEING -------------------- NAME OF BENEFICIAL OWNER STOCK OPTIONS PERCENT OFFERED STOCK OPTIONS PERCENT - -------------------------------- ---------- ------- ------- ------------ ---------- ------- ------- Jerry A. Greenberg(1)........... 11,793,360 0 21.0% 1,170,000 10,623,360 0 18.6% J. Stuart Moore(2).............. 11,485,600 0 20.5% 1,170,000 10,315,600 0 18.0% Sheeroy D. Desai................ 528,058 224,700 1.3% 20,000 508,058 224,700 1.3% Susan D. Johnson................ 24,140 33,000 * 4,000 20,140 33,000 * Desmond P. Varady............... 82,480 70,400 * 6,000 76,480 70,400 * Other selling stockholders (3 persons, each of whom owns less than 1% of the outstanding common stock)..... 120,622 0 * 15,400 105,222 0 *
- --------------- * Less than one percent. (1) Includes 4,435,258 shares held in trusts of which Mr. Greenberg is a co-trustee and over which he shares voting and/or investment control. Only shares directly held by Mr. Greenberg will be sold in this offering. If the underwriters exercise their over-allotment option, Mr. Greenberg will sell an additional 262,500 shares of common stock. (2) Includes (a) 3,700,776 shares held in trust, of which Mr. Moore is the sole trustee and over which Mr. Moore has sole voting and investment control, (b) 1,563,680 shares held in trusts of which Mr. Moore is a co-trustee and over which shares Mr. Moore shares investment control, of which 876,426 shares are held by the J. Stuart Moore Remainder Trust, (c) 30,220 shares held in trust of which Mr. Moore's wife is a co-trustee and over which shares Mr. Moore's wife shares voting and/or investment control, and (d) 780,000 shares held by the J. Stuart Moore Gift Trust, over which shares Mr. Moore does not have voting or investment control but in which shares Mr. Moore's children have a beneficial interest. Mr. Moore disclaims beneficial ownership of the shares held by the trusts except to the extent of his proportionate pecuniary interest therein. Of the 1,170,000 shares to be sold, 819,000 shares are to be sold by Mr. Moore directly, 234,000 shares are to be sold by the J. Stuart Moore Gift Trust and 117,000 shares are to be sold by the J. Stuart Moore Remainder Trust. If the underwriters exercise their over-allotment option, Mr. Moore will sell an additional 183,750 shares of common stock, the J. Stuart Moore Gift Trust will sell an additional 52,500 shares of common stock and the J. Stuart Moore Remainder Trust will sell an additional 26,250 shares. In the second quarter of 1999, we began discussions with a potential client regarding a strategic relationship between our two companies, which would include, among other things, Sapient being a preferred supplier to that client and its numerous affiliated entities. As part of the relationship, Messrs. Greenberg and Moore would each issue a $10.0 million convertible note to 34 35 the client. The notes would be convertible into shares of Sapient common stock owned by Messrs. Greenberg and Moore, and included in the above table, at a conversion rate which is 130% of the average closing price of our common stock on the five days prior to the date a definitive agreement is signed. The notes could not be converted prior to February 28, 2002. The extent to which the notes can be converted will depend on the client's ability to meet certain key metrics, including generating at least $20.0 million in revenue for Sapient prior to December 31, 2001. On October 26, 1999, the parties entered into a non-binding letter of interest so that Sapient would be allowed to commence a number of projects for this client. There can be no assurance that this transaction will be completed on the terms described above or at all. 35 36 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 100,000,000 shares of common stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par value $.01 per share. As of September 30, 1999, 56,073,900 shares of our common stock were issued and outstanding and no shares of preferred stock were outstanding. The number of outstanding shares has been adjusted to reflect the two-for-one stock split effected as a 100% stock dividend distributed on November 5, 1999 to stockholders of record on November 1, 1999. The following summary of our securities and provisions of our certificate of incorporation and our bylaws is not intended to be complete and is qualified by reference to the provisions of applicable law and to our certificate of incorporation and bylaws. COMMON STOCK Holders of our common stock are entitled to one vote for each share on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the outstanding shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available therefor, subject to the preferential dividend rights of any preferred stock then outstanding. Upon any liquidation, dissolution or winding-up, holders of common stock are entitled to receive ratably the net assets available for distribution after the payment of all debts and other liabilities and subject to any prior rights of any preferred stock then outstanding. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are, and the shares to be issued by us in the offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that we may designate and issue in the future. PREFERRED STOCK Our board of directors is authorized, subject to any limitations prescribed by law, but without further stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, in one or more series. Each such series of preferred stock may have such number of shares, designations, preferences, voting powers, qualifications, restrictions and special or relative rights or privileges as is determined by our board of directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. Our stockholders have granted the board of directors authority to issue preferred stock and to determine its rights and preferences in order to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Sapient. DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS We are subject to the provisions of Section 203 of the General Corporation Law of Delaware, an antitakeover law. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the 36 37 interested stockholder. Subject to some exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. Our certificate of incorporation and bylaws provide for the division of our board of directors into three classes as nearly equal in size as possible with staggered three-year terms. In addition, our certificate of incorporation and bylaws provide that directors may be removed only for cause by the affirmative vote of the holders of two-thirds of the shares of our capital stock entitled to vote. Under our certificate of incorporation and bylaws, any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of a majority of the directors then in office. The classification of our board of directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of Sapient. Our certificate of incorporation and bylaws also provide that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. Our certificate of incorporation and bylaws further provide that special meetings of the stockholders may only be called by a chairman of the board of directors, a chief executive officer or, if none, a president or by the board of directors. Under our bylaws, in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with requirements regarding advance notice to us. The foregoing provisions could have the effect of delaying until the next stockholders' meeting stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person from making a tender offer for our common stock, because even if such person acquired a majority of our outstanding voting securities it would be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called stockholders' meeting, and not by written consent. Our certificate of incorporation and bylaws require the affirmative vote of the holders of at least 75% of the shares of our capital stock issued and outstanding and entitled to vote to amend or repeal any of the provisions described in the prior two paragraphs. LIMITATION OF LIABILITY Our certificate of incorporation contains provisions: - eliminating a director's liability to us or our stockholders for monetary damages for a breach of fiduciary duty, except in circumstances involving certain wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law; and - obligating us to indemnify our officers and directors to the fullest extent permitted by the General Corporation Law of Delaware. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors. STOCK TRANSFER AGENT The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. 37 38 UNDERWRITING Sapient, the selling stockholders and the underwriters for the offering named below have entered into an underwriting agreement with respect to the shares being offered. Subject to various conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated, First Union Securities, Inc. and Friedman, Billings, Ramsey & Co., Inc. are the representatives of the underwriters.
Underwriters Number of shares ------------ ---------------- Goldman, Sachs & Co...................................... 1,449,000 Credit Suisse First Boston Corporation................... 567,000 Morgan Stanley & Co. Incorporated........................ 567,000 First Union Securities, Inc.............................. 308,500 Friedman, Billings, Ramsey & Co., Inc.................... 308,500 Adams, Harkness & Hill, Inc.............................. 60,000 Deutsche Bank Securities, Inc............................ 60,000 Salomon Smith Barney Inc................................. 60,000 SoundView Technology Group, Inc.......................... 60,000 William Blair & Company, L.L.C........................... 60,000 --------- Total............................................... 3,500,000 =========
If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 525,000 shares from four of the selling stockholders to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by Sapient and the selling stockholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
Paid by Sapient --------------------------- No Exercise Full Exercise ----------- ------------- Per Share....................................... $ 3.22 $ 3.22 Total........................................... $3,589,012 $3,589,012
Paid by the Selling Stockholders --------------------------- No Exercise Full Exercise ----------- ------------- Per Share....................................... $ 3.22 $ 3.22 Total........................................... $7,680,988 $9,371,488
Shares sold by the underwriters to the public will initially be offered at the initial price to public set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $1.92 per share from the initial price to public. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $.10 per share from the initial price to public. If all the shares are not sold at the initial price to public, the representatives may change the offering price and the other selling terms. Sapient, its directors and executive officers and the selling stockholders have agreed with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 90 days after the date of this prospectus, except with the 38 39 prior written consent of the representatives. In addition, Messrs. Greenberg and Moore, and their related trusts, who will hold 20,938,960 shares after the offering, have agreed to the above restrictions for an additional 90-day period. The obligation of Messrs. Greenberg and Moore is subject to exceptions for specified charitable contributions and a pledge of shares of common stock by each in connection with their proposed issuance of a convertible note. This agreement does not apply to any existing employee benefit plans. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. As permitted by Rule 103 under the Exchange Act, certain underwriters and selling group members, if any, may act as "passive market makers" in the common stock, which means they may make bids for or purchases of common stock in the Nasdaq National Market until a stabilizing bid has been made. Rule 103 generally provides: - a passive market maker's net daily purchases of the common stock may not exceed 30% of its average daily trading volume in such securities for the two full consecutive calendar months, or any 60 consecutive days ending within the 10 days, immediately preceding the filing date of the registration statement of which this prospectus forms a part; - a passive market maker may not effect transactions or display bids for the common stock at a price that exceeds the highest independent bid for the common stock by persons who are not passive market makers; and - bids made by passive market makers must be identified as such. Sapient estimates that the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $500,000. Two of the selling stockholders, Jerry A. Greenberg and J. Stuart Moore, will pay a pro rata share of this amount based on the percentage of the number of shares sold by each such selling stockholder to the total number of shares sold in the offering. Sapient and the selling stockholders have agreed to indemnify the several underwriters against some liabilities, including liabilities under the Securities Act of 1933. Sapient has provided services in the ordinary course of business to Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, First Union Securities, Inc., and Friedman, Billings, Ramsey & Co., Inc., four of the representatives. During 1998, Goldman, Sachs & Co. accounted for approximately 5.5% of Sapient's revenues and during the nine months ended September 30, 1999, 3.4% of Sapient's revenues. During the nine months ended September 30, 1999, Morgan Stanley & Co. Incorporated and First Union Securities, Inc. each accounted for less than 1% of Sapient's revenues and Friedman, Billings, Ramsey & Co., Inc. accounted for approximately 1.1% of Sapient's revenues. Sapient's work for all four representatives is ongoing. 39 40 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters for the underwriters will be passed upon by Ropes & Gray, Boston, Massachusetts. EXPERTS Our financial statements as of December 31, 1998, 1997 and 1996 and the consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, have been included and incorporated by reference in this prospectus and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. In July 1999, Sapient replaced KPMG LLP as its independent auditors with PricewaterhouseCoopers LLP. The audit committee of Sapient's board of directors recommended the change of accountants and that action was approved by the board of directors. KPMG's dismissal was not due to or based on any disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. WHERE YOU CAN FIND MORE INFORMATION We file reports, proxy statements and other documents with the Securities and Exchange Commission. You may read and copy any document we file at the SEC's public reference room at Room 1024, Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Sapient's SEC filings are also available to you on the SEC's Internet site at http://www.sec.gov. This prospectus is part of a registration statement we filed with the SEC. The registration statement contains more information than this prospectus regarding us and our common stock, including exhibits and schedules. You can obtain a copy of the registration statement from the SEC at the addresses listed above or from the SEC's Internet site. The SEC allows us to "incorporate" into this prospectus information that we file with the SEC in other documents. This means that we can disclose important information to you by referring to other documents that contain that information. The information incorporated by reference is considered to be part of this prospectus. Information contained in this prospectus and information that we file with the SEC in the future and incorporate by reference in this prospectus automatically updates and supersedes previously filed information. We are incorporating by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the sale of all of the shares covered by this prospectus: (1) Our Annual Report on Form 10-K for the year ended December 31, 1998, filed with the SEC on March 16, 1999, as amended by Form 10-K/A filed with the SEC on April 30, 1999; (2) Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, filed with the SEC on May 14, 1999, as amended by Form 10-Q/A filed with the SEC on May 21, 1999; 40 41 (3) Our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed with the SEC on August 13, 1999; (4) Our Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed with the SEC on October 21, 1999; (5) Our Current Report on Form 8-K/A, filed with the SEC on February 23, 1999; (6) Our Current Report on Form 8-K, filed with the SEC on April 7, 1999; (7) Our Current Report on Form 8-K, filed with the SEC on April 23, 1999, as amended by Form 8-K/A filed with the SEC on April 23, 1999; (8) Our Current Report on Form 8-K, filed with the SEC on July 26, 1999; and (9) The description of our common stock contained in our Registration Statement on Form 8-A, filed with the SEC on March 26, 1996, as amended by Form 8-A/A filed with the SEC on March 28, 1996. You may request a copy of these documents, which will be provided to you at no cost, by contacting: Sapient Corporation, One Memorial Drive, Cambridge, MA 02142, Attention: Investor Relations, (617) 621-0200. 41 42 [This Page Intentionally Left Blank] 43 SAPIENT CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Income and Comprehensive Income.................................................... F-4 Consolidated Statements of Stockholders' Equity............. F-5 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-9
F-1 44 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Sapient Corporation: We have audited the accompanying consolidated balance sheets of Sapient Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sapient Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP -------------------------------------- KPMG LLP Boston, Massachusetts April 16, 1999 F-2 45 SAPIENT CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 47,314 $ 39,320 $ 30,713 Short term investments.................................... 17,092 52,500 69,207 Accounts receivable, less allowance for doubtful accounts of $350, $569 and $612 (unaudited), respectively........ 16,775 42,797 66,010 Unbilled revenues on contracts............................ 9,071 10,306 13,530 Prepaid expenses.......................................... 680 438 2,089 Other current assets...................................... 971 3,296 2,418 Deferred income taxes..................................... 35 3,973 3,973 -------- -------- -------- Total current assets............................... 91,938 152,630 187,940 Property and equipment, net................................. 6,576 14,447 21,036 Deferred income taxes....................................... -- 5,702 5,702 Intangible assets........................................... -- 13,729 11,532 Due from shareholders....................................... -- 764 250 Other assets................................................ 353 429 333 -------- -------- -------- Total assets....................................... $ 98,867 $187,701 $226,793 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to bank..................................... $ 444 $ 117 $ -- Accounts payable.......................................... 224 1,064 1,527 Accrued expenses.......................................... 1,924 3,743 2,893 Accrued compensation...................................... 3,454 8,633 5,103 Income taxes payable...................................... 1,255 2,217 1,136 Deferred income taxes..................................... 1,820 4,170 4,170 Deferred revenues on contracts............................ 6,408 10,907 13,871 -------- -------- -------- Total current liabilities.......................... 15,529 30,851 28,700 Deferred income taxes....................................... 121 773 773 Other long term liabilities................................. 910 1,263 1,568 -------- -------- -------- Total liabilities.................................. 16,560 32,887 31,041 -------- -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, par value $0.01 per share; 5,000,000 shares authorized and none outstanding at December 31, 1998 and 1997........................................... -- -- -- Common stock, par value $0.01 per share, 100,000,000 shares authorized, 49,994,488 shares issued and outstanding at December 31, 1997; 54,212,586 shares issued and outstanding at December 31, 1998; 56,073,900 shares issued and outstanding at September 30, 1999 (unaudited)............................................. 500 542 561 Additional paid-in capital................................ 57,221 122,513 141,601 Deferred compensation..................................... -- (2,178) (798) Accumulated other comprehensive income.................... -- 26 (356) Retained earnings......................................... 24,586 33,911 54,744 -------- -------- -------- Total stockholders' equity......................... 82,307 154,814 195,752 -------- -------- -------- Total liabilities and stockholders' equity......... $ 98,867 $187,701 $226,793 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements F-3 46 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------- 1996 1997 1998 1998 1999 -------- ------- -------- -------- -------- (UNAUDITED) Revenues............................. $ 49,795 $92,027 $164,872 $111,081 $195,021 Operating expenses: Project personnel costs............ 23,329 44,623 80,543 53,833 94,621 Selling and marketing.............. 2,453 6,074 11,269 7,569 15,312 General and administrative......... 14,216 22,571 41,675 27,680 48,394 Amortization of intangible assets.......................... -- -- 687 128 1,550 Stock-based compensation charge.... 260 -- 4,499 -- 1,919 Charge for in-process research and development..................... -- -- 11,100 11,100 -- Acquisition costs.................. -- 560 -- 2,340 -------- ------- -------- -------- -------- Total operating expenses... 40,258 73,828 149,773 100,310 164,136 -------- ------- -------- -------- -------- Income from operations............. 9,537 18,199 15,099 10,771 30,885 Interest income...................... 1,098 2,058 2,925 2,207 2,649 -------- ------- -------- -------- -------- Income before income taxes......... 10,635 20,257 18,024 12,978 33,534 Income taxes......................... 3,936 7,703 8,660 4,765 12,701 -------- ------- -------- -------- -------- Net Income................. $ 6,699 $12,554 $ 9,364 $ 8,213 $ 20,833 ======== ======= ======== ======== ======== Foreign currency translation gain.... -- -- 26 -- (19) Unrealized holding loss on short term investments........................ -- -- -- -- (202) -------- ------- -------- -------- -------- Comprehensive income....... $ 6,699 $12,554 $ 9,390 $ 8,213 $ 20,612 ======== ======= ======== ======== ======== Basic net income per share........... $ 0.15 $ 0.25 $ 0.18 $ 0.16 $ 0.38 ======== ======= ======== ======== ======== Diluted net income per share......... $ 0.13 $ 0.23 $ 0.16 $ 0.14 $ 0.33 ======== ======= ======== ======== ======== Weighted average common shares....... 44,844 49,574 52,228 51,670 55,101 Weighted average common share equivalents........................ 4,850 4,166 5,174 5,253 7,244 -------- ------- -------- -------- -------- Weighted average common shares and common share equivalents........... 49,694 53,740 57,402 56,923 62,345 ======== ======= ======== ======== ========
See accompanying Notes to Consolidated Financial Statements F-4 47 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
VOTING NON-VOTING COMMON STOCK COMMON STOCK ADDITIONAL ---------------- ----------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ------ ------ ------ ------ ---------- Balance at December 31, 1995........... 22,744 $ 227 15,328 $ 153 $ (160) Notes repaid from stockholders....... -- -- -- -- -- Exercised stock options.............. 1,864 19 -- -- 194 Distributions to stockholders........ -- -- -- -- -- Proceeds from public offerings....... 8,780 88 -- -- 54,009 Conversion of non-voting shares to voting shares..................... 15,328 153 (15,328) (153) -- Tax benefit of disqualifying dispositions of stock options..... -- -- -- -- 108 Stock-based compensation............. 62 1 -- -- 259 Net income........................... -- -- -- -- -- ------ ------ ------- ----- -------- Balance at December 31, 1996........... 48,778 488 -- -- 54,410 Notes repaid from stockholders....... -- -- -- -- -- Exercised stock options.............. 1,216 12 -- -- 1,777 Distributions to stockholders........ -- -- -- -- -- Tax benefit of disqualifying dispositions of stock options..... -- -- -- -- 1,034 Net income........................... -- -- -- -- -- ------ ------ ------- ----- -------- Balance at December 31, 1997........... 49,994 500 -- -- 57,221 Exercised stock options.............. 1,916 19 -- -- 5,093 Translation gain..................... -- -- -- -- -- Proceeds from public offering........ 1,306 13 -- -- 29,078 Distributions to stockholders........ -- -- -- -- -- Common stock issued for acquisition of Studio Archetype............... 996 10 -- -- 22,790 Tax benefit of disqualifying dispositions of stock options..... -- -- -- -- 1,654 Deferred compensation................ -- -- -- -- 6,677 Net income........................... -- -- -- -- -- ------ ------ ------- ----- -------- Balance at December 31, 1998........... 54,212 542 -- -- 122,513 ====== ====== ======= ===== ======== Exercised stock options (unaudited).... 1,668 17 -- -- 14,014 Proceeds of Employee Stock Purchase Plan (unaudited)............ 194 2 -- -- 4,535 Translation gain (loss) (unaudited).... -- -- -- -- -- Deferred compensation (unaudited)...... -- -- -- -- 539 Net income (unaudited)................. ------ ------ ------- ----- -------- Balance at September 30, 1999 (unaudited).......................... 56,074 $ 561 -- $ -- $141,601 ====== ====== ======= ===== ========
F-5 48 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -- (CONTINUED) (IN THOUSANDS)
ACCUMULATED NOTES OTHER RECEIVABLE TOTAL COMPREHENSIVE DEFERRED RETAINED FROM STOCKHOLDERS' INCOME COMPENSATION EARNINGS STOCKHOLDERS EQUITY ------------- ------------ -------- ------------ ------------- Balance at December 31, 1995........ -- -- $ 5,454 $ (75) $ 5,599 Notes repaid from stockholders.... -- -- -- 50 50 Exercised stock options........... -- -- -- -- 213 Distributions to stockholders..... -- -- (52) -- (52) Proceeds from public offerings.... -- -- -- -- 54,097 Conversion of non-voting shares to voting shares................... -- -- -- -- -- Tax benefit of disqualifying dispositions of stock options... -- -- -- -- 108 Stock-based compensation.......... -- -- -- -- 260 Net income........................ -- -- 6,699 -- 6,699 ------- --------- --------- ------- ---------- Balance at December 31, 1996........ -- -- 12,101 (25) 66,974 Notes repaid from stockholders.... -- -- -- 25 25 Exercised stock options........... -- -- -- -- 1,789 Distributions to stockholders..... -- -- (69) -- (69) Tax benefit of disqualifying dispositions of stock options... -- -- -- -- 1,034 Net income........................ -- -- 12,554 -- 12,554 ------- --------- --------- ------- ---------- Balance at December 31, 1997........ -- -- 24,586 -- 82,307 Exercised stock options........... -- -- -- -- 5,112 Translation gain.................. 26 -- -- -- 26 Proceeds from public offering..... -- -- -- -- 29,091 Distributions to stockholders..... -- -- (39) -- (39) Common stock issued for acquisition of Studio Archetype....................... -- -- -- -- 22,800 Tax benefit of disqualifying dispositions of stock options... -- -- -- -- 1,654 Deferred compensation............. -- (2,178) -- -- 4,499 Net income........................ -- -- 9,364 -- 9,364 ------- --------- --------- ------- ---------- Balance at December 31, 1998........ 26 (2,178) 33,911 -- 154,814 Exercised stock options (unaudited)....................... -- -- -- -- 14,031 Proceeds from Employee Stock Purchase Plan (unaudited)......... -- -- -- -- 4,537 Translation gain (loss) (unaudited)....................... (382) -- -- -- (382) Deferred compensation (unaudited)... -- 1,380 -- -- 1,919 Net income (unaudited).............. -- -- 20,833 -- 20,833 ------- --------- --------- ------- ---------- Balance at September 30, 1999 (unaudited)....................... $ (356) $ (798) $ 54,744 $ -- $ 195,752 ======= ========= ========= ======= ==========
See accompanying Notes to Consolidated Financial Statements F-6 49 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------- -------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (UNAUDITED) Cash flows from operating activities: Net income................................ $ 6,704 $ 12,554 $ 9,364 $ 8,213 $ 20,833 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........... 1,296 2,478 4,096 2,361 5,577 Charge for in-process research and development........................... -- -- 11,100 11,100 -- Amortization of intangible assets....... -- -- 128 128 1,550 Deferred income taxes................... (1,030) 786 (6,638) (4,039) -- Allowance for doubtful accounts......... -- 275 200 -- -- Stock compensation expense.............. 260 -- 4,499 -- 1,919 Changes in operating assets and liabilities: Increase in accounts receivable....... (4,262) (5,170) (23,644) (12,498) (23,212) Increase in unbilled revenues on contracts........................... (2,392) (4,397) (651) (2,313) (3,224) Decrease (increase) in prepaid expenses............................ (26) (363) 321 (1,203) (876) Increase in other current assets...... (150) (821) (2,383) -- -- Decrease in income tax receivable..... 480 -- -- -- -- Decrease (increase) in other assets... 49 (285) 70 39 97 Increase (decrease) in accounts payable............................. (356) 104 395 1,270 345 (Decrease) increase in accrued expenses............................ 546 332 (1,241) (1,584) (100) Increase in accrued compensation...... 1,419 1,172 4,137 (95) (3,530) Increase in income taxes payable...... 1,552 738 2,493 2,319 (1,081) Increase in other long term liabilities......................... 717 155 311 70 305 Increase in deferred revenues on contracts........................... 2,541 1,492 3,365 (423) 2,963 -------- -------- -------- -------- -------- Net cash provided by operating activities....................... 7,348 9,050 5,922 3,345 1,566 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment...... (2,193) (6,356) (9,307) (7,462) (12,166) Net cash received from acquisition...... -- -- 561 561 -- Sales and maturities of short term investments........................... -- 12,190 21,043 -- -- Purchases of short term investments..... (9,540) (19,742) (56,451) (45,533) (17,089) -------- -------- -------- -------- -------- Net cash used in investing activities....................... (11,733) (13,908) (44,154) (52,434) (29,255) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from stockholders for notes receivable............................ 50 25 3,024 -- 514 Payments to stockholders for notes receivable............................ -- -- (3,788) (3,788) -- Proceeds from Employee Stock Purchase Plan.................................. -- -- -- 2,810 4,537
F-7 50 SAPIENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------- -------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (UNAUDITED) Exercise of stock options............... 213 1,789 5,112 1,311 14,031 Net proceeds from initial public offering.............................. 32,403 -- -- -- -- Net proceeds from follow-on public offering.............................. 21,694 -- 29,091 29,091 -- Distribution to stockholders............ -- (69) (39) -- -- Principal payments on notes payable to bank.................................. (49) (6) (3,162) (2,909) -- -------- -------- -------- -------- -------- Net cash provided by financing activities....................... 54,311 1,739 30,238 26,515 19,082 -------- -------- -------- -------- -------- (Decrease) increase in cash and cash equivalents............................. 49,926 (3,119) (7,994) (22,574) (8,607) Cash and cash equivalents, beginning of year.................................... 507 50,433 47,314 47,314 39,320 -------- -------- -------- -------- -------- Cash and cash equivalents, end of year.... $ 50,433 $ 47,314 $ 39,320 $ 24,740 $ 30,713 ======== ======== ======== ======== ======== Schedule of non-cash financing activities: Tax benefit of disqualifying dispositions of stock options......... $ 108 $ 1,034 $ 1,654 ======== ======== ======== Supplemental disclosures of cash flow information: Net assets and liabilities recognized upon acquisition of Studio Archetype: Cash and cash equivalents............... $ 811 Accounts receivable..................... 2,578 Unbilled revenues on contracts.......... 629 Prepaid expenses and other current assets................................ 34 Property and equipment.................. 2,077 Other assets............................ 100 Accounts payable........................ 445 Accrued expenses........................ 725 Accrued compensation.................... 880 Accrued income taxes payable............ 270 Deferred revenues on contracts.......... 1,134 Notes payable to bank................... 2,862 Other long term liabilities............. 42 Accrued acquisition costs............... 2,335 Supplemental disclosures of non-cash investing activities: Common stock issued for acquisition of Studio Archetype...................... $ 22,800
See accompanying Notes to Consolidated Financial Statements F-8 51 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) NATURE OF BUSINESS Sapient is an innovative provider of e-business consulting and Internet commerce solutions. Through the delivery of integrated services from strategy and business transformation consulting through user-centered design and technology implementation services, Sapient helps emerging and evolving businesses transform themselves into e-businesses. Founded in 1991 as a Delaware corporation, the Company currently has more than 1,400 employees in offices in Cambridge, Massachusetts, New York, San Francisco, Chicago, Atlanta, Dallas, Los Angeles, London, England and Sydney, Australia. On March 29, 1999, Sapient acquired all of the outstanding Common Stock of Adjacency in exchange for 1,581,348 shares of Sapient Common Stock (see Note 13). Sapient's Consolidated Financial Statements have been restated for all periods presented to reflect the acquisition of Adjacency, which has been accounted for as a pooling of interests. On August 25, 1998, Sapient acquired Studio Archetype, Inc. ("Studio Archetype") in exchange for 996,628 shares of Common Stock and paid $250,000 in cash to the former Studio stockholders. The acquisition was accounted for as a purchase and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. On December 15, 1997, Sapient acquired all of the outstanding common stock of EXOR Technologies, Inc. ("EXOR") in exchange for 1,223,476 shares of Sapient Common Stock (see Note 13). Sapient's Consolidated Financial Statements have been restated for all periods presented to reflect the acquisition of EXOR, which has been accounted for as a pooling of interests. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Sapient and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. (b) 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 tax exempt short-term municipal bonds. (c) SHORT-TERM INVESTMENTS Short-term investments are available-for-sale securities, which are recorded at fair market value. The difference between fair market value and cost is not material. Realized gains and losses from sales of available-for-sale securities were not material for any period presented. (d) 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 and accelerated methods over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the lease term. F-9 52 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (e) REVENUE RECOGNITION Revenues pursuant to fixed-fee contracts are generally recognized as services are rendered on the percentage-of-completion method of accounting (based on the ratio of costs incurred to total estimated costs). Revenues pursuant to time and material contracts are generally recognized as services are provided. Revenues from maintenance agreements are recognized ratably over the terms of the agreements. Provisions for estimated losses on uncompleted contracts are made on a contract by contract basis and are recognized in the period in which such losses are determined. Unbilled revenues on contracts are comprised of costs, plus earnings on certain contracts in excess of contractual billings on such contracts. Billings in excess of costs plus earnings are classified as deferred revenues. (f) INCOME TAXES Sapient records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject Sapient to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. Sapient performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. Sapient maintains allowances for potential credit losses and such losses have been within management's expectations. Write-offs of accounts receivable have not been material for any of the periods presented. The fair market values of cash and cash equivalents, accounts receivable and debt instruments at both December 31, 1998 and 1997 approximate their carrying amounts. (h) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (i) IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment. To date, no such impairment has been indicated. Should there be an impairment in F-10 53 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the future, Sapient will measure the amount of the impairment based on undiscounted expected future cash flows from the impaired assets. The cash flow estimates that will be used will contain management's best estimates, using appropriate and customary assumptions and projections at the time. (j) RESEARCH AND DEVELOPMENT COSTS Research and development expenditures are charged to operations as incurred. To date, substantially all research and development activities of Sapient have been pursuant to customer contracts and, accordingly, have been expensed as project costs. Sapient has not capitalized any software development costs since such costs have neither been significant nor can the future economic benefit be reasonably determined. (k) STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123 ("SFAS 123") requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income and net income per share in the notes to the financial statements. Sapient applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized under SFAS 123 for Sapient's stock option plans, and footnote disclosure is provided in Note 9. The deferred compensation expense appearing in the financial statements relates to stock options that were granted to Adjacency employees prior to the acquisition by Sapient at below fair market value. The deferred compensation is being amortized on a straight-line basis over the vesting period of three years. Certain employees completed their vesting upon the business combination described in Note 1. (l) EARNINGS PER SHARE Under Statement of Financial Accounting Standards No. 128, Sapient presents both basic net income per share and diluted net income per share. Basic net income per share is based on the weighted average number of shares outstanding during the period. Diluted net income per share reflects the per share effect of dilutive stock options and other dilutive common stock equivalents. On January 29, 1998 the Company declared a two-for-one stock split effected as a 100 percent stock dividend distributed on March 9, 1998, to all shareholders of record on February 20, 1998. On October 21, 1999 the Company declared a two-for-one stock split effected as a 100% stock dividend paid on November 5, 1999 to stockholders of record on November 1, 1999. This stock split has been reflected in the consolidated financial statements. (m) COMPREHENSIVE INCOME During 1998, Sapient adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and its components in the body of the financial statements. Comprehensive income includes net income as currently reported under Generally Accepted Accounting Principles and also considers the effect of additional economic events that are not required to be recorded in determining net income but are rather reported as a separate F-11 54 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) component of stockholders' equity. Sapient reports foreign currency translation gains and losses as a component of comprehensive income. (n) SEGMENT REPORTING During 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 uses a management approach to report financial and descriptive information about a company's operating segments. Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for management. Under this definition, Sapient operated as a single segment for all years presented. The adoption of SFAS 131 did not have a material impact on Sapient's financial condition or results of operations. (o) GOODWILL AND OTHER PURCHASED INTANGIBLES Goodwill and other purchased intangibles represent the excess of the purchase price over the fair value of assets acquired. Goodwill and substantially all other purchased intangibles are being amortized on a straightline basis over lives ranging from five to seven years. (p) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, issued SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") which requires the capitalization of certain internal costs related to the implementation of computer software obtained for internal use. Sapient is required to adopt this standard in the first quarter of 1999. It is expected that the adoption of SOP 98-1 will not have a material impact on Sapient's financial position or its results of operations. In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133 requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. Sapient is required to adopt this standard in the first quarter of 2000. It is expected that the adoption of SFAS 133 will not have a material impact on Sapient's financial position or its results of operations. (q) UNAUDITED INTERIM FINANCIAL DATA In the opinion of management, Sapient has made all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of Sapient's financial condition as of September 30, 1999 and the results of operations and of cash flows for the nine months ended September 30, 1999 and 1998, as presented in the accompanying unaudited consolidated financial data. F-12 55 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) PROPERTY AND EQUIPMENT The cost and accumulated depreciation of property and equipment at December 31, 1997 and 1998 are as follows:
1997 1998 -------- ------- (IN THOUSANDS) Leasehold improvements................................ $ 3,604 $ 7,755 Furniture and fixtures................................ 928 2,418 Office equipment...................................... 1,744 2,706 Computer equipment.................................... 5,054 11,806 -------- ------- 11,330 24,685 Less accumulated depreciation.................... (4,754) (10,238) -------- ------- Property and equipment, net......................... $ 6,576 $14,447 ======== =======
(4) INTANGIBLE ASSETS Other assets include certain intangible assets that were acquired as part of the Studio Archetype acquisition in August 1998. The following table summarizes the cost and accumulated amortization of intangible assets at December 31, 1998:
ESTIMATED USEFUL LIFE (IN THOUSANDS) --------- Marketing assets and customer lists.............. $ 3,800 7 Years Assembled work force............................. 1,600 5-7 Years Goodwill......................................... 9,015 7 Years ------- 14,415 Less accumulated amortization.................... (686) ------- Intangible assets, net........................... $13,729 =======
(5) BANK LOAN Sapient has a $5,000,000 loan facility with a bank which expires on June 30, 2000. Borrowings under this agreement bear interest at the bank's prime rate. Sapient had no borrowings under this facility at December 31, 1997 or 1998. The facility contains various financial covenants, including limitations on the payment of cash dividends and maintenance of certain financial ratios. F-13 56 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES The provision for income taxes consists of the following:
1996 1997 1998 ------- ------ ------- (IN THOUSANDS) Federal, current..................................... $ 3,951 $5,220 $11,768 State, current....................................... 1,015 1,697 3,529 ------- ------ ------- 4,966 6,917 15,297 Foreign, deferred.................................... -- -- (382) Federal, deferred.................................... (924) 647 (4,902) State, deferred...................................... (106) 139 (1,353) ------- ------ ------- (1,030) 786 (6,637) ------- ------ ------- Income tax expense................................... $ 3,936 $7,703 $ 8,660 ======= ====== =======
Income tax expense for the years ended December 31, 1996, 1997 and 1998 differed from the amounts computed by applying the U.S. statutory income tax rate to pre-tax income as a result of the following:
1996 1997 1998 ---- ---- ---- Statutory income tax rate................................. 35.0% 35.0% 35.0% State income taxes, net of federal benefit................ 5.7 6.0 6.3 S Corporation loss (income)............................... (0.8) (0.4) 9.3 Tax exempt interest....................................... (2.6) (3.3) (4.1) Other, net................................................ (0.3) 0.7 1.5 ---- ---- ---- Effective income tax rate................................. 37.0% 38.0% 48.0% ==== ==== ====
F-14 57 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1997 and 1998, deferred income tax assets and liabilities resulted from reporting differences in the recognition of income and expense for income tax and financial reporting purposes. The sources and tax effects of these temporary differences are presented below:
1997 1998 ------- ------- (IN THOUSANDS) Deferred income tax assets: Deferred revenue..................................... $ 1,855 $ 2,831 Allowance for doubtful accounts...................... 60 223 Accrual for compensation............................. 390 -- Other accruals....................................... 745 947 Property and equipment............................... 548 745 In-process research and development.................. -- 4,399 Goodwill and other intangibles....................... -- 148 Foreign NOL.......................................... -- 382 ------- ------- Total gross deferred income tax assets....... $ 3,598 $ 9,675 ======= ======= Deferred income tax liabilities: Deferred taxes relating to the use of cash method of accounting for tax purposes prior to 1996......... $(1,309) $ (773) Unbilled revenue..................................... (3,652) (4,170) Other accruals....................................... (543) -- ------- ------- Total gross deferred income tax liabilities................................ $(5,504) $(4,943) ======= ======= Net deferred income tax assets/(liabilities)....................... $(1,906) $ 4,732 ======= =======
In assessing the realizability of deferred income tax assets, Sapient considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Due to the fact that Sapient has sufficient taxable income in the federal carryback period and anticipates sufficient future taxable income over the periods in which deferred income tax assets are deductible, the ultimate realization of deferred income tax assets for federal and state income tax purposes appears more likely than not. Total income tax expense for the years ended December 31, 1996, 1997 and 1998 was allocated as follows:
1996 1997 1998 ------- ------- ------ (IN THOUSANDS) Income taxes from continuing operations.............. $ 3,936 $ 7,703 $8,660 Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial statement purposes......................... (108) (1,034) (1,654) ------- ------- ------ $ 3,828 $ 6,669 $7,006 ======= ======= ======
Total income taxes paid in 1996, 1997 and 1998 were approximately $2,838,000, $6,179,000 and $12,383,000, respectively. F-15 58 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) COMMITMENTS AND CONTINGENCIES Sapient maintains its executive offices in Massachusetts and operating offices in several locations throughout the United States and abroad. Sapient also leases office equipment under various operating leases. Future minimum rental commitments under all noncancelable operating leases with initial or remaining terms in excess of one year were as follows at December 31, 1998:
(IN THOUSANDS) 1999.................................................. $11,392 2000.................................................. 11,700 2001.................................................. 11,651 2002.................................................. 11,549 2003.................................................. 11,696 Thereafter............................................ $26,110
Rent expense for the years ended December 31, 1996, 1997 and 1998 was approximately $3,167,000, $4,053,000, and $8,943,000, respectively. Sapient has issued letters of credit with a bank in the aggregate amount of $975,000 as security deposits for certain of its lease commitments. Sapient has certain contingent liabilities that arise in the ordinary course of its business activities. Sapient accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In August 1999, the Company settled the legal proceedings brought against it in April 1996 by John Adler, a former employee, who alleged, among other things, wrongful termination of his employment. The suit was previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In connection with the settlement, Mr. Adler received 24,000 shares of the Company's Common Stock and the parties released each other from all future claims relating to the matter. The shares Mr. Adler received in the settlement were originally issued into escrow in 1996 when this lawsuit originated. The issuance of these shares has no effect on the Company's operating results or financial condition. (8) STOCK PLANS (a) 1992 STOCK OPTION PLAN During 1992, Sapient approved the 1992 Stock Plan (the "1992 Plan") for its employees. The 1992 Plan provided for the Board of Directors to grant stock options, stock purchase authorizations and stock bonus awards up to an aggregate of 10,000,000 shares of non-voting Common Stock. Since consummation of its initial public offering of Common Stock in April 1996, no further grants or awards may be made pursuant to the 1992 Stock Plan (but previously outstanding awards remain outstanding but are exercisable for voting Common Stock). Most stock options granted under the 1992 Plan qualify as Incentive Stock Options ("ISO") under Section 422 of the Internal Revenue Code. The price at which shares may be purchased with an option was specified by the Board at the date the option was granted, but in the case of an ISO, was not less than the fair market value of Sapient's Common Stock on the date of grant. The duration of any option was specified by the Board, but no option designated as an ISO can be exercised beyond ten years from the date of grant. Stock options granted under the 1992 Plan generally become exercisable over a four-year period, are nontransferable, and expire six F-16 59 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Sapient). (b) 1996 EQUITY STOCK INCENTIVE PLAN Sapient'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, Sapient. The total number of shares of Common Stock which may be issued under the 1996 Plan is 9,600,000 shares. The 1996 Plan is administered by the Compensation Committee of the Board of Directors, which selects the persons to whom stock options and other awards are granted and determines the number of shares, the exercise or purchase prices, the vesting terms and the expiration dates of options granted. Non-qualified stock options may be granted at exercise prices which are above, equal to or below the grant date fair market value of the Common Stock. The exercise price of options qualifying as Incentive Stock Options may not be less than the grant date fair market value of the Common Stock. 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 Sapient). (c) EMPLOYEE STOCK PURCHASE PLAN Sapient's 1996 Employee Stock Purchase Plan (the "Purchase Plan") authorizes the issuance of up to 1,320,000 shares of Common Stock to participating employees through a series of semi-annual offerings. The maximum number of shares available in each offering was 100,000 shares (plus any unpurchased shares available from previous offerings) for the first six offerings, and is 120,000 shares (plus any unpurchased shares available from previous offerings) for the next six offerings. An employee becomes eligible to participate in the Purchase Plan when he or she is regularly employed by Sapient for at least 20 hours a week and for more than five months in a calendar year on the first day of the applicable offering. The price at which employees may purchase Common Stock in an offering is 85 percent of the closing price of the Common Stock on the Nasdaq National Market on the day the offering commences or on the day the offering terminates, whichever is lower. Approximately 61 percent of eligible employees participated in the two offerings under the Purchase Plan during the year ended December 31, 1998. Approximately 57 percent of eligible employees participated in the two offerings under the Purchase Plan during the year ended December 31, 1997. Approximately 70 percent of eligible employees participated in the first offering under the Purchase Plan, which terminated on December 31, 1996. Under the Purchase Plan, Sapient sold 67,660, 187,256 and 211,268 shares of Common Stock in 1996, 1997 and 1998, respectively. (d) 1996 DIRECTORS STOCK OPTION PLAN Sapient's 1996 Directors Stock Option Plan (the "Directors Plan") authorizes the issuance of 120,000 shares of Common Stock. Each non-employee director elected to the Board of Directors after the adoption of the Directors Plan will, upon his or her election, automatically be granted an option to purchase 20,000 shares of Common Stock at an exercise price equal to the grant date fair market value of Sapient's Common Stock. 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, 1997 and 1998, no options had been granted under the Directors Plan. F-17 60 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (e) 1998 STOCK INCENTIVE PLAN Sapient's 1998 Equity Stock Incentive Plan (the "1998 Plan") authorizes Sapient 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, Sapient. The total number of shares of Common Stock which may be issued under the 1998 Plan is 4,000,000 shares. The 1998 Plan is administered by the Compensation Committee of the Board of Directors, which selects the persons to whom stock options and other awards are granted and determines the number of shares, the exercise or purchase prices, the vesting terms and the expiration date. Non-qualified stock options may be granted at exercise prices which are above, equal to or below the grant date fair market value of the Common Stock. The exercise price of options qualifying as Incentive Stock Options may not be less than the grant date fair market value of the Common Stock. 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 Sapient). As of December 31, 1998, no options had been granted under the 1998 Plan. (f) ADJACENCY, INC. 1998 STOCK OPTION PLAN In connection with the acquisition of Adjacency, Inc., the Company agreed to assume the options granted under the Adjacency, Inc. 1998 Stock Option Plan (the "Adjacency Plan") that were outstanding at the time of the acquisition. The Adjacency Plan was originally adopted by Adjacency in 1998 and provided for the grant of stock options up to an aggregate of 4,000,000 shares of Class B Common Stock of Adjacency, Inc. As a result of the acquisition, the Company has assumed the obligations related to options to purchase 126,508 shares of Sapient Common Stock. No further grants may be made pursuant to the Adjacency Plan (but previously outstanding options remain outstanding but are exercisable for shares of Sapient Common Stock). A summary of the status of Sapient's five fixed stock option plans as of December 31, 1996, 1997 and 1998 and changes during the years then ended is presented below:
1996 1997 1998 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------------- ------ -------- ------ -------- ------ -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Outstanding at beginning of year........................ 6,036 $ 0.37 5,964 $ 2.57 8,766 $ 7.24 Granted....................... 2,132 $ 6.59 4,196 $11.79 4,942 $19.76 Exercised..................... (1,864) $ 0.12 (1,216) $ 0.31 (1,916) $ 3.32 Forfeited..................... (340) $ 1.70 (178) $ 6.13 (70) $11.81 ------ ------ ------ ------ ------ ------ Outstanding at end of year.... 5,964 $ 2.57 8,766 $ 7.24 11,722 $12.82 ====== ====== ====== Options exercisable at year end......................... 1,444 1,510 1,884 ====== ====== ====== Weighted average grant date fair market value of options granted during the year..... $ 3.58 $ 6.33 $14.20 ====== ====== ======
F-18 61 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ----------------------------------------- OPTIONS EXERCISABLE WEIGHTED -------------------------- AVERAGE WEIGHTED WEIGHTED DECEMBER 31, 1998 REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ----------------- -------------- ----------- -------- -------------- -------- (IN THOUSANDS) (IN THOUSANDS) $0.00 to $1.25............. 1,614 2.8 years $ .70 836 $ .56 $1.26 to $3.50............. 722 3.0 years $ 2.89 154 $ 2.86 $3.51 to $10.00............ 758 8.0 years $ 8.71 236 $ 8.81 $10.01 to $12.50........... 2,184 8.3 years $11.38 588 $11.18 $12.51 to $15.00........... 2,104 8.8 years $13.08 70 $12.95 $15.01 to $17.50........... 362 9.7 years $16.74 -- -- $17.51 to $20.00........... 1,688 9.5 years $18.93 -- -- $20.01 to $22.50........... 1,742 9.4 years $21.00 -- -- $22.51 to $25.00........... 372 9.5 years $23.31 -- -- $25.01 to $38.69........... 176 9.4 years $27.15 -- -- $0.00 to $38.69............ 11,722 7.7 years $12.82 1,884 $ 5.57
Sapient has five stock-based compensation plans, which are described above. Sapient applies APB Opinion 25 and related interpretations in accounting for its plans. No compensation has been recognized relative to grants under these plans, other than deferred compensation charges of approximately $4.5 million related to the value of stock options that were granted in 1998 under the Adjacency Plan at below fair market value and which vest in 1998. Had compensation cost for the awards under those plans been determined based on the grant date fair values for awards under those plans consistent with the method required under SFAS 123, Sapient's net income and net income per share would have been reduced to the pro forma amounts indicated below:
1996 1997 1998 -------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income As reported..................................... $6,699 $12,554 $ 9,364 Pro forma....................................... $5,250 $ 5,470 $(15,842) Basic net income per share As reported..................................... $ 0.15 $ 0.25 $ 0.18 Pro forma....................................... $ 0.12 $ 0.11 $ (0.31) Diluted net income per share As reported..................................... $ 0.13 $ 0.23 $ 0.16 Pro forma....................................... $ 0.11 $ 0.10 $ (0.28)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996, 1997 and 1998, respectively: dividend yield of 0.0 percent for each year, expected volatility of 0.0 percent for the 1992 Plan options and 104.9, 64.8 and 136.8 percent in 1996, 1997 and 1998, respectively, for the 1996 Plan options, risk free interest rates ranging from 5.0 to 5.25 percent for the 1992 Plan options and 5.0 to 5.7 percent for the 1996 Plan options, and expected lives of 4 years for the 1992 Plan and the 1996 Plan options. The assumptions used F-19 62 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) with respect to Adjacency Plan options were the same as those used with respect to the 1996 Plan. Pro-forma compensation cost related to the Purchase Plan is recognized for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for the years ended December 31, 1996, 1997 and 1998: dividend yield of 0.0 percent, expected volatility of 67.5, 64.8 and 136.8 percent, respectively, risk free interest rate ranging from 5.7 to 5.0 percent and expected life of 6 months. Pro forma net income derived as a result of applying SFAS 123 may not be representative of the effects on reported net income for future years. (9) SEGMENT REPORTING AND SIGNIFICANT CUSTOMERS Sapient engages in business activities in one operating segment which provides e-business consulting and Internet commerce solutions on a fixed-fee, fixed time-frame basis. The chief operating decision-makers are provided information about the revenues generated in key client industries. The resources needed to deliver Sapient's services are not separately reported by industry. Sapient's services are delivered to clients primarily in North America, and Sapient's long-lived assets are located primarily in North America. No customer accounted for greater than 10 percent of total revenues in 1997 or 1998. One customer accounted for 14 percent of accounts receivable at December 31, 1998. No customer accounted for greater than 10 percent of accounts receivable at December 31, 1997. Two clients accounted for 19 percent and 15 percent respectively, of total revenues in 1996 and 10 percent of accounts receivable at December 31, 1996. (10) RETIREMENT PLANS Sapient established a 401(k) retirement savings plan for employees in June 1994. Under the provisions of the plan, Sapient matches 25 percent of an employee's contribution, up to a maximum of $1,250 per employee per year. Total Sapient contributions in 1996, 1997 and 1998 were approximately $356,000, $520,000 and $1,014,000, respectively. (11) PUBLIC OFFERINGS Sapient completed its initial public offering (IPO) of Common Stock on April 10, 1996. The IPO resulted in the issuance of 6,780,000 shares of Common Stock. Proceeds to Sapient, net of underwriting discounts and costs of the offering, were approximately $32.4 million. Sapient completed a follow-on public offering of Common Stock on October 29, 1996 which resulted in the issuance of 2,000,000 shares of Common Stock. Proceeds to Sapient, net of underwriting discounts and costs of the offering, were approximately $21.7 million. Sapient completed a follow-on public offering of Common Stock on April 7, 1998 which resulted in the issuance of 1,306,250 shares of Common Stock. Proceeds to Sapient, net of underwriting discounts and costs of the offering, were approximately $29.1 million. (12) CAPITAL STOCK (a) INCREASE IN AUTHORIZED COMMON STOCK; CONVERSION OF NON-VOTING COMMON STOCK On February 13, 1996, Sapient's Board of Directors authorized an increase in the authorized number of shares of voting Common Stock to 30,000,000 and non-voting Common Stock to F-20 63 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10,000,000 and provided that, upon the closing of an IPO, all shares of non-voting Common Stock then outstanding would be converted automatically into an equal number of shares of voting Common Stock and the authorized capitalization of Sapient will consist of 40,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. At Sapient's Annual Meeting of Stockholders held on May 8, 1998, the stockholders voted to approve an amendment to Sapient's Amended and Restated Certificate of Incorporation which increased the number of authorized shares of Common Stock from 40,000,000 to 100,000,000. (b) PREFERRED STOCK On February 13, 1996, the Board of Directors authorized an amendment to Sapient'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. (13) ACQUISITIONS On March 29, 1999, the Company acquired all of the outstanding capital stock of Adjacency, Inc. This acquisition was accomplished through the issuance of 1,581,348 shares of the Company's common stock for all of the outstanding shares of Adjacency Inc. This acquisition has been accounted for using the pooling-of-interests method of accounting. Costs, which consist primarily of investment banking, accounting and legal fees related to this acquisition approximated $2.3 million, which was charged to operating expense in the first quarter of 1999. During the period from January 1, 1996 through March 29, 1999 (the date of the Company's acquisition of Adjacency), Adjacency elected to be treated as an S-Corporation for income tax purposes. Under this election, Adjacency's individual stockholders are deemed to have received a pro rata distribution of taxable income of Adjacency (whether or not an actual distribution was made), which is included in each stockholder's taxable income. Accordingly, Adjacency did not provide for income taxes during the period from January 1 through March 29, 1999. Adjacency's S-Corporation tax reporting status was terminated on the date of acquisition. Pro forma net income per share data is presented below to reflect the pro forma increase or decrease to historical income taxes related to Adjacency as if Adjacency was a C-Corporation for tax reporting purposes during those periods. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below:
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1997 1998 ------- ------- -------- (IN THOUSANDS) Revenues Sapient.......................................... $49,009 $90,360 $160,372 Adjacency........................................ 786 1,667 4,500 ------- ------- -------- Combined......................................... $49,795 $92,027 $164,872 ======= ======= ======== Net income (loss) Sapient.......................................... $ 6,470 $12,358 $ 13,699 Adjacency........................................ 229 196 (4,335) ------- ------- -------- Combined......................................... $ 6,699 $12,554 $ 9,364 ======= ======= ========
F-21 64 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma data (unaudited): Historical income before income taxes.......... $10,635 $20,257 $18,024 Provision for income taxes: Historical income taxes........................ 3,936 7,703 8,660 Pro forma (decrease)increase to historical income taxes................................. 87 74 (1,648) Pro forma net income........................... 6,612 12,480 11,012 Pro forma basic net income per share........... $ 0.14 $ 0.25 $ 0.21 Pro forma diluted net income per share......... $ 0.13 $ 0.23 $ 0.19 Weighted average number of common shares outstanding.................................. 44,970 49,700 52,354 Weighted average number of common and common equivalent shares outstanding................ 49,820 53,866 57,510
On August 25, 1998, the Company acquired Studio Archetype in exchange for 996,628 shares of Sapient Common Stock and paid $250,000 in cash to the former Studio stockholders. The acquisition was accounted for as a purchase and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. In connection with the acquisition of Studio Archetype in the third quarter of 1998, Sapient allocated $11.1 million to in-process technology and recorded a corresponding income tax benefit of $4.2 million. This allocation represents the estimated fair value of such technology based on risk-adjusted cash flows related to the development of projects that had not reached technological feasibility at the time of the acquisition and with respect to which the in-process research and development had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. Sapient allocated values to the in-process research and development projects by identifying significant research projects for which technological feasibility had not been established, including development, engineering and testing activities associated with the introduction of Studio's Archetype next-generation enterprise-wide suite of development, scheduling, bug tracking and content management applications. The integrated solution will be a comprehensive enterprise scale system, allowing developers and clients to access prototypes and trial deliverables. It will fully integrate user interface tools with client server, advanced database and legacy systems. The value assigned to purchased in-process technology was determined by estimating the costs to develop the purchased in-process technology into commercially viable products, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process research and development is based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Studio Archetype and its competitors. The estimated revenues for the projects are expected to be realized over a six year period through 2004 when other new products are expected to enter the market. Studio Archetype projected revenues are dependent upon successful introduction of the in-process projects. The nature of the efforts to develop the acquired in-process technology into commercially viable products and services principally relate to the completion of all planning, designing, prototyping, verification, and testing activities that are necessary to establish that the proposed F-22 65 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) technologies meet their design specifications including functional, technical, and economic performance requirements. The efforts to develop the purchased in-process technology also include testing of the technology for compatibility and interoperability with other applications. Expenditures on these projects to date have been approximately $2.5 million, and estimated costs to complete these projects are expected to total approximately $625,000 through 2001. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Several milestones have been or are near completion including a comprehensive needs analysis mapping data, technical and information architectures and building an integrated prototype. The rates utilized to discount the net cash flows to their present value are based on venture capital rates of return. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, discount rates of 25.0 to 30.0 percent were utilized for the business enterprise and for the in-process research and development. Sapient believes that these discount rates are commensurate with Studio's stage of development, the uncertainties in the economic estimates described above, the inherent uncertainty surrounding the successful development of the purchased in-process technology, the useful life of such technology, the profitability levels of such technology, and, the uncertainty of technological advances that are unknown at this time. The forecasts used by Sapient in valuing in-process research and development were based upon assumptions that the Company believes to be reasonable but which are inherently uncertain and unpredictable. Sapient's assumptions may be incomplete or inaccurate, and unanticipated events and circumstances are likely to occur. For these reasons, actual results may vary materially from the assumed results and could have a material adverse effect on Sapient's business, results of operations and financial condition. Sapient believes that the assumptions used in the forecasts were reasonable. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from the assumed results and could have a material adverse effect on Sapient's business, results of operations and financial condition. Sapient expects to continue its support of these efforts and believes Studio Archetype has a reasonable chance of successfully completing the research and development programs. However, there is risk associated with the completion of the projects and there is no assurance that any of the projects will meet with either technological or commercial success. If these projects are not successfully developed, the sales and profitability of Studio Archetype may be adversely affected in future periods. Additionally, the value of the other intangible assets acquired may become impaired. Studio expects to benefit from the purchased in-process technology beginning in 1999. Other intangible assets of $14.4 million is comprised of $3.8 million for marketing assets, $1.6 million for assembled work force and approximately $9.0 million of goodwill comprising the reputation of Studio Archetype, all of which have estimated useful lives of approximately 7 years. However there are no assurances that the value of these intangible assets acquired will not become impaired. Below are the pro forma results of operations for Sapient and Studio Archetype, assuming that the acquisition of Studio occurred at the beginning of the twelve-month period ended December 31, 1997. F-23 66 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 1998 ----------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues....................................... $102,386 $174,971 Net income......................................... $ 11,954 $ 7,626 Basic net income per share......................... $ 0.24 $ 0.15 Diluted net income per share....................... $ 0.22 $ 0.13
On December 15, 1997, Sapient issued 1,223,476 shares of Sapient Common Stock for all of the outstanding shares of common stock of EXOR, a provider of ERP implementation services using Oracle applications. This business combination has been accounted for as a pooling of interests and, accordingly, the Consolidated Financial Statements for the periods prior to the combination have been restated to include the accounts and results of operations of EXOR. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below (the combined numbers are before considering the acquisition of Adjacency).
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------- ------------------ (UNAUDITED) (IN THOUSANDS) Revenues Sapient............................... $44,580 $57,319 EXOR.................................. 4,429 6,076 ------- ------- Combined.............................. $49,009 $63,395 ======= ======= Net income (loss) Sapient............................... $ 6,571 $ 8,505 EXOR.................................. (101) 617 ------- ------- Combined.............................. $ 6,470 $ 9,122 ======= =======
(14) RELATED PARTY TRANSACTIONS The Company has provided technology services to certain start-up companies. As partial payment for services delivered, Sapient has received non-controlling equity interests in such start-up companies. Due to the start-up nature of these entities, Sapient has valued these investments at zero as there is no readily determinable measure of value based on the underlying operating performance and future cash flows of the start-up companies. During 1998 and the nine months ended September 30, 1999 Sapient recognized approximately $2,200,000 and $3,600,000, respectively, in net revenues from consulting services provided to these companies. In addition, certain members of management of the Company have provided funding to certain of these companies. (15) QUARTERLY FINANCIAL RESULTS The following tables set forth certain unaudited quarterly results of operations of Sapient for 1998 and 1997. In the opinion of management, this information has been prepared on the same basis as the audited Consolidated Financial Statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the quarterly information when read in conjunction with the audited Consolidated Financial Statements and Notes thereto. The quarterly operating results are not necessarily indicative of future results of operations. F-24 67 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1998 1998 1998 1998 --------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Revenues........................................ $31,595 $36,420 $43,066 $53,791 Operating expenses: Project personnel costs....................... 15,221 17,511 21,103 26,710 Selling and marketing......................... 1,842 2,666 3,061 3,700 General and administrative.................... 8,271 8,726 10,680 13,995 Stock based compensation charge............... 4,499 Amortization of intangibles................... -- -- 128 559 Charge for in-process research and development................................ -- -- 11,100 -- ------- ------- ------- ------- Total operating expenses................... 25,334 28,903 46,072 49,463 ------- ------- ------- ------- Income (loss) from operations................... 6,261 7,517 (3,006) 4,328 Interest income................................. 590 676 941 718 ------- ------- ------- ------- Income (loss) before income taxes............... 6,851 8,193 (2,065) 5,046 Income taxes (benefit).......................... 2,504 2,929 (668) 3,895 ------- ------- ------- ------- Net income (loss)............................... $ 4,347 $ 5,264 $(1,397) $ 1,151 ======= ======= ======= ======= Basic net income (loss) per share............... $ 0.09 $ 0.10 $ (0.03) $ 0.02 ======= ======= ======= ======= Diluted net income (loss) per share............. $ 0.08 $ 0.09 $ (0.03) $ 0.02 ======= ======= ======= =======
THREE MONTHS ENDED ---------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 --------- -------- --------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Revenues........................................ $18,359 $21,226 $24,914 $27,529 Operating expenses: Project personnel costs....................... 8,830 10,122 12,359 13,312 Selling and marketing......................... 1,145 1,184 1,600 2,145 General and administrative.................... 4,669 5,348 5,937 6,616 Amortization of intangibles................... -- -- -- -- Charge for in-process research and development................................ -- -- -- -- Acquisition costs............................. -- -- -- 559 ------- ------- ------- ------- Total operating expenses................... 14,644 16,654 19,896 22,632 ------- ------- ------- ------- Income from operations.......................... 3,715 4,572 5,018 4,897 Interest income................................. 515 567 479 496 ------- ------- ------- ------- Income before income taxes...................... 4,230 5,139 5,497 5,393 Income taxes.................................... 1,620 1,900 2,077 2,105 ------- ------- ------- ------- Net income...................................... $ 2,610 $ 3,239 $ 3,420 $ 3,288 ======= ======= ======= ======= Basic net income per share...................... $ 0.05 $ 0.07 $ 0.07 $ 0.07 ======= ======= ======= ======= Diluted net income per share.................... $ 0.05 $ 0.06 $ 0.06 $ 0.06 ======= ======= ======= =======
F-25 68 SAPIENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) SUBSEQUENT EVENTS (UNAUDITED) (a) STOCK SPLIT On October 21, 1999 the Company declared a two-for-one stock split effected as a 100% stock dividend paid on November 5, 1999 to stockholders of record on November 1, 1999. This stock split has been reflected in the consolidated financial statements. (b) RECLASSIFICATION Reclassifications of operating expenses for amortization of intangibles and stock based compensation charges have been made to the consolidated statements of income and comprehensive income for the years ended December 31, 1996, 1997 and 1998 in order to conform to the 1999 presentation. F-26 69 [This Page Intentionally Left Blank] 70 [This Page Intentionally Left Blank] 71 Sapient(R) is a registered service mark of Sapient. All other service marks, trademarks or trade names referenced in this prospectus are the property of their respective owners. 72 ====================================================== No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary................... 3 Risk Factors......................... 5 Special Note Regarding Forward - Looking Statements................. 11 Use of Proceeds...................... 12 Dividend Policy...................... 12 Price Range of Common Stock.......... 12 Capitalization....................... 13 Selected Consolidated Financial Data............................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 15 Business............................. 26 Management........................... 32 Selling Stockholders................. 34 Description of Capital Stock......... 36 Underwriting......................... 38 Legal Matters........................ 40 Experts.............................. 40 Where You Can Find More Information........................ 40 Index to Financial Statements........ F-1
====================================================== ====================================================== 3,500,000 Shares SAPIENT CORPORATION Common Stock ------------------------- [SAPIENT CORPORATION CORPORATE LOGO] ------------------------- GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON MORGAN STANLEY DEAN WITTER FIRST UNION SECURITIES, INC. FRIEDMAN BILLINGS RAMSEY Representatives of the Underwriters ====================================================== -----END PRIVACY-ENHANCED MESSAGE-----