<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
----- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ___________
Commission File Number 0-28074
SAPIENT CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-3130648
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Memorial Drive, Cambridge, MA 02142
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(Address of Principal Executive Offices) (Zip Code)
(617) 621-0200
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Registrant's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par value per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Company was approximately $422,700,000 on February 27, 1998 based on the last
reported sale price of the Company's Common Stock on the Nasdaq National Market
on February 27, 1998. There were 24,361,540 shares of Common Stock outstanding
as of February 27, 1998.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 8, 1998 are incorporated by reference in Items 10, 11, 12 and
13 of Part III of this Report.
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SAPIENT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
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PART I Page No.
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<S> <C> <C>
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 13
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 28
Signatures 29
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this Annual Report on Form 10-K, including
information with respect to the Company's future business plans, constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "plans," "expects" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements. These factors include those set forth in Part I
"Business -- Risk Factors."
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PART I
Except as otherwise noted, all information contained herein gives
effect to the two-for-one stock split effected by the Company as a 100% stock
dividend paid on March 9, 1998 to stockholders of record on February 20, 1998.
ITEM 1. BUSINESS
GENERAL
Sapient Corporation ("Sapient" or the "Company") is a leading provider
of business and information technology solutions implemented on a fixed-price,
fixed-timeframe basis. Using client/server and Web-based technologies, Sapient
offers a variety of services designed to help clients rapidly achieve their
business objective, including implementation and integration of packaged
software solutions, custom software development, implementation of enterprise
resource planning ("ERP") systems, production support, and business and
operational consulting. Sapient delivers services using its proprietary QUADD
(Quality Design and Delivery) process. QUADD is a workshop-based methodology
that emphasizes active client participation to help visualize, prioritize and
create time-critical business and technology solutions.
In December 1997, Sapient acquired EXOR Technologies, Inc. ("EXOR"), a
Dallas-based consulting and systems integration firm recognized as a leader in
implementing ERP solutions using Oracle applications. EXOR operates as a
division of the Company and is responsible for driving Sapient's growth in the
implementation of full-scale ERP applications.
The Company's executive offices are located at One Memorial Drive,
Cambridge, MA 02142, and its telephone number is (617) 621-0200. Its stock is
traded on the Nasdaq National Market under the symbol "SAPE." The Company's
Internet address is http://www.sapient.com.
SERVICES
The Company's services include implementation and integration of
packaged software solutions, custom software development, implementation of ERP
systems, production support and business and operational consulting.
Specific client projects may involve writing custom software
applications, integrating existing third-party applications or Sapient-developed
solutions, or a combination of both. Recent examples of solutions designed by
the Company featuring custom developed software include a scaleable, end-to-end
retail services system developed to help a national energy and communications
company enter the deregulated energy services market and an online, real-time,
browser-based small business banking system which allows small business
customers of a major financial institution to bank in a secure Web-based
environment. As an example of a solution integrating third-party applications,
the Company recently worked with a large financial institution to integrate
packages from three software vendors with Sapient-developed components in the
implementation of an intranet-based enterprise-wide human resources call center.
Sapient began offering ERP implementation services in December 1997
following its acquisition of EXOR. EXOR is a leader in the implementation of
Oracle ERP systems that provide large corporations with infrastructure software
to link functions such as purchasing, human resources, manufacturing and
administration. EXOR operates as a division of the Company and is intended to
drive the Company's growth in the implementation of full-scale ERP applications.
Prior to its acquisition by Sapient, EXOR provided services to its customers on
a time and materials basis. Sapient intends to begin providing ERP system
implementation services on a fixed-price, fixed-timeframe basis.
The focus of Sapient's business and operational consulting services is
to maximize the overall business value for its clients by quickly identifying,
developing and implementing high impact strategic actions based on the
integration of business and technology solutions. These services are provided
in conjunction with design or implementation projects being performed by Sapient
for a client.
THE QUADD PROCESS
Sapient delivers its services using its proprietary QUADD process. The
Company employs QUADD as an innovative approach to designing, developing and
implementing packaged and custom business solutions. QUADD is a highly
disciplined, integrated, workshop-oriented methodology that involves active
client participation and is designed to rapidly deliver business applications
that improve processes and performance. The Company believes that QUADD offers
the following advantages:
Focus on Improved Business Processes and Information Systems. The
Company's approach facilitates the concurrent definition of business
processes and information systems, which helps ensure that its clients'
business objectives are appropriately addressed by the information systems
that Sapient develops or implements.
Fixed-Price and Fixed-Timeframe. The Company performs its services
primarily on a fixed-price, fixed timeframe basis, which the Company
believes aligns its objectives with those of its clients.
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Project Prioritization. Through the use of visual tools, the QUADD
process enables the Company and its clients to prioritize needed changes in
the clients' business and technology systems. Accurate prioritization helps
clients maximize the return on their fixed-price investment in the
Company's services.
Short Implementation Timeframes. The Company believes that a rapid
time to market for the solutions it develops is important to meet its
clients' business objectives. Through the QUADD process, the Company
divides, structures and manages the project to reduce the time needed to
reach a solution for its clients.
The QUADD process consists of four stages: RIP workshop, Design,
Implementation and Production. The RIP (Rapid Implementation Plan) workshop is
designed to rapidly identify the client's needs and develop a strategy and
action plan to meet those needs. The Design workshop focuses on outlining the
proposed process changes and required information technology solutions. The
Implementation stage primarily involves the development and testing of the new
solution or enhancements to a third-party packaged software application or
existing Sapient-developed solution. The Production stage primarily involves the
maintenance, enhancement and support of the solution after it is operational.
While the QUADD process is designed as an integrated approach, each
stage represents a separate contractual commitment and concludes with the
delivery of a discrete value-added deliverable. Clients are able to elect at
each stage whether to proceed to the next stage of the process. Total fees for
most client engagements which involve the completion of all stages of the QUADD
process range from approximately $1,000,000 to $7,500,000.
RIP WORKSHOP. The RIP (Rapid Implementation Plan) workshop is designed
to rapidly identify the client's needs and develop a strategy and action plan to
meet those needs. A team of Sapient personnel leads the RIP workshop at one of
the Company's Design Centers located throughout its offices. A cross-functional
team of executives, managers and end-users from the client's various business
and technical units works with the Sapient team to create a common vision, goal
and action plan.
The RIP workshop uses visual tools and approaches, including process
matrices, prototyping and electronic storyboards, to help clients articulate
their needs more clearly than with traditional interview methods. The RIP
workshop employs rapid iteration and prioritization to focus on those aspects of
a solution that will provide the greatest business benefit and generally
concludes with consensus on the following key items: a clear statement of the
client's business need; a statement of vision that addresses the business need;
a plan to achieve the vision; a visual representation of the solution; and a
cost/benefit analysis of, and if appropriate, a business justification for
proceeding with, the outlined plan. The client team generally presents an
executive summary of the workshop to other senior members of the client's
organization. The Company believes these presentations increase the likelihood
that the client will proceed to the Design stage.
DESIGN. In the Design stage, a team consisting of Company and client
participants outlines more thoroughly the proposed processes and required
information technology solutions. This workshop focuses on functional
definition, identifies process redesign opportunities and attempts to synthesize
broad-based support for the proposed changes. During this stage, the Company
again uses rapid prototyping and electronic storyboards, as well as object
modeling techniques, to help the project team iteratively define system
functionality, process flows, systems architectures and object models. The
Company also uses software and techniques it has developed to help clients
visualize batch processes or other difficult to define business processing
elements. In addition, during this workshop the project team may create a
detailed prototype and defines the required system interfaces.
The client's workshop participants typically present the proposed
solution to other members of the client's organization both during and at the
end of the Design stage. The Company believes that these client presentations
are critical to validating the workshop's results and gaining broad-based
support for the proposed changes and also increase the likelihood that the
client will commit to complete development of the proposed solution. At the
conclusion of Design, the client and the Sapient teams generally have defined a
proposed solution to the client's business needs and a detailed plan to
implement this solution. This solution may include custom development or
enhancements to an existing third-party application or Sapient-developed
solution. At this point, the Company generally delivers to the client a
fixed-price, fixed-timeframe proposal for implementing the solution. In addition
to pricing and timing, this proposal identifies the critical tasks for the
client to complete, such as preparing interfaces to and modifications of legacy
systems, preparing, formatting and collecting existing data and testing and
verifying the software application.
IMPLEMENTATION. Implementation primarily involves the development and
testing of a new software application, or enhancements to an existing
third-party application or Sapient-developed solution, to meet the client's
needs identified during the Design stage.
A Sapient project manager and system architect manage the Sapient team,
which usually consists of five to thirty people. The project manager tracks the
progress of the implementation on a daily basis and senior management reviews
each project's progress on a weekly basis by analyzing its expected time to
completion as compared to previous estimates. The Sapient development team
typically works in a dedicated workspace within one of the Company's Development
Centers located throughout Sapient's offices.
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Throughout the Implementation stage, Sapient and the client work
together to ensure that the solution continues to meet the client's business
needs. Proposed changes in the scope of the project resulting from a change in
the client's needs are analyzed using the QUADD process, and any adjustments to
the contract's fixed-price, fixed-timeframe parameters are negotiated in advance
of implementing the change.
During the later parts of the Implementation stage, technical, process,
data and organizational changes are integrated into the client's organization.
At this time, the Company may also participate in rolling out the application
and training end-users as it transitions the solution to the production
environment. Implementation generally ends with the delivered solution in use in
the client's business.
PRODUCTION. During the Production stage, the Company maintains,
enhances and supports the solution after it has been delivered to the client and
used in the Client's operations. After a system has been delivered, the Company
generally provides at least six months of production support and maintenance for
an additional price. Following the initial support period, Sapient offers these
services under a separate fixed-price, multi-year support agreement.
CLIENTS; MARKETS; COMPETITION
During 1997, Sapient focused its business development efforts on
clients in the following key industries: Financial Services, Energy Services,
Manufacturing, Communications, and Government. Many large organizations in
these industries have moved to client/server or Web-enabled computing over the
past several years and require the type of services provided by the Company.
Within these industries, the Company has targeted clients with large-scale
information access and processing needs.
The Company has derived, and believes that it will continue to derive,
a significant portion of its revenues from a limited number of large clients. In
1997, the Company's five largest clients accounted for approximately 31% of its
revenues with three clients each accounting for more than 5% of such revenues.
No single client accounted for more than 10% of revenues during 1997.
The markets for the Company's services are highly competitive. The
Company believes that it currently competes principally with consulting and
software integration firms, application software vendors and internal
information systems groups. Many of these companies have significantly greater
financial, technical and marketing resources than the Company and generate
greater revenues and have greater name recognition than Sapient. In addition,
there are relatively low barriers to entry into the Company's markets and the
Company has faced, and expects to continue to face, additional competition from
new entrants into its markets.
The Company believes that the principal competitive factors in its
markets include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes it competes favorably with respect to these
factors and that its QUADD methodology, focus on providing high-quality
solutions to client business needs and fixed-price, fixed-timeframe contracting
practices distinguish it from its competitors. In addition, the Company believes
that its ability to compete depends in part on a number of competitive factors
outside its control, including the ability of its competitors to hire, retain
and motivate project managers and other senior technical staff, the development
by others of software that is competitive with the Company's products and
services and the extent of its competitors' responsiveness to client needs.
SELLING AND MARKETING
During 1997, the Company's dedicated business development team, which
consisted of 32 employees at December 31, 1997, concentrated its efforts on key
industries targeted by the Company. The Company believes that focusing on
selected key industries will broaden its knowledge and expertise in these
industries and generate additional client engagements.
A significant amount of the Company's business comes from referrals
from existing clients and strong relationship-building within the Company's
defined key industries. A variety of marketing activities support the business
development team in deploying this approach, including attendance at targeted
conferences and trade shows, mailings to CIOs and CEOs, private briefings with
individual companies, one-day workshops which demonstrate the Company's unique
capabilities, and partnerships with other industry players. In addition, the
Company employs an outside public relations firm to ensure that the Sapient
story is as widely disseminated as possible.
The Company's services typically require a substantial financial
commitment by clients. Sales cycles typically range from two to six months from
the time the Company initially meets with a prospective client until the client
decides whether to authorize commencement of an engagement. The Company often
encounters longer sales cycles with clients in certain industries such as
Government.
The Company generally enters into written commitment letters with its
clients at or around the time it commences 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 contracts
contain varying terms and conditions and the Company does not generally believe
it is appropriate to characterize them as consisting of backlog. In addition,
because these written commitments and contracts often provide that the
arrangement can be terminated with limited advance notice or penalty, the
Company does not believe the projects in
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process at any one time are a reliable indicator or measure of expected future
revenues. In the event a client terminates a project, the client usually remains
obligated to pay the Company for services performed through the termination
date.
EMPLOYEES
Management believes that certain key values, namely, client-focused
delivery, leadership, long-term relationships, openness, and professional
growth, are critical to attaining success and has developed a strong corporate
culture around these values. To encourage the achievement of these values,
Sapient rewards teamwork and promotes individuals who demonstrate these values.
Also, the Company has an intensive orientation program for new employees, a
variable compensation system centered around these values, and an internal team
dedicated to defining, tracking and promoting these core values. The Company
believes that its growth and success are attributable in large part to the high
caliber of its employees and the Company's commitment to maintain the values on
which its success has been based. The Company believes that it has been
successful in its efforts to attract and retain the number and quality of
professionals needed to support present operations and anticipated growth, in
part because of its emphasis on training and its QUADD methodology, which allows
employees to progress with one client through multiple phases of a project. The
Company intends to continue to recruit, hire and promote employees who share the
Company's values.
There is significant competition for employees with the skills required
to perform the services the Company offers. Qualified project managers and
senior technical staff are in great demand and are likely to remain a limited
resource for the foreseeable future.
As of December 31, 1997, the Company had 817 full-time employees,
comprised of 674 project personnel, 111 employees in finance and administration
and 32 employees in business development. None of the Company's employees is
subject to a collective bargaining agreement. The Company believes that its
relations with its employees are good.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of trade secret, nondisclosure
and other contractual arrangements, and copyright and trademark laws, to protect
its proprietary rights. The Company enters into confidentiality agreements with
its employees, generally requires that its consultants and clients enter into
such agreements, and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
A portion of the Company's business involves the development of
software applications for specific client engagements. Ownership of such
software is the subject of negotiation and is frequently assigned to the client,
with the Company frequently retaining a license for certain uses. Certain
clients have prohibited the Company 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 continue to demand similar or other
restrictions in the future. Issues relating to the ownership of and rights to
use software applications can be complicated and there can be no assurance that
disputes will not arise that affect the Company's ability to resell or reuse
such applications.
In connection with Implementation stage projects which use previously
developed Sapient solutions, the Company may, in certain cases, obtain a license
fee from the client for use of the Sapient solution and a development fee from
such client for any required additional customization. A portion of the license
fee will generally be paid as a royalty to the client for which the original
Sapient solution was developed pursuant to such original client's agreement
with the Company.
RISK FACTORS
The following important factors, among others, could cause actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report on Form 10-K or presented elsewhere by management
from time to time.
MANAGEMENT OF GROWTH
The Company's growth has placed significant demands on its management
and other resources. The Company's revenues increased approximately 84% in 1997
from $49 million in 1996 to $90 million in 1997. The Company's staff increased
from 530 full-time employees at December 31, 1996 to 817 at December 31, 1997.
In December 1997, the Company completed the acquisition of EXOR, a consulting
and systems integration firm based in Dallas, Texas. The Company's ability to
manage its growth effectively will require it to continue to develop and improve
its operational, financial and other internal systems, as well as its business
development capabilities, to train, motivate and manage its employees and to
successfully integrate acquired operations. In addition, the Company's future
success will depend in large part on its ability to continue to set fixed-price
fees accurately, maintain high rates of employee utilization and maintain
project quality. The Company's management has limited experience managing a
business of the Company's size or managing a public company. If the Company is
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unable to manage its growth and projects effectively, such inability could have
a material adverse effect on the quality of the Company's services and products,
its ability to retain key personnel and its business, financial condition and
results of operations.
NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF
The Company's business is labor intensive. The Company's success will
depend in large part upon its ability to attract, retain, train and motivate
highly-skilled employees, particularly project managers and other senior
technical personnel. There is significant competition for employees with the
skills required to perform the services the Company offers. Qualified project
managers and senior technical staff are in great demand and are likely to remain
a limited resource for the foreseeable future. There can be no assurance that
the Company will be successful in attracting a sufficient number of
highly-skilled employees in the future, or that it will be successful in
retaining, training and motivating the employees it is able to attract, and any
inability to do so could impair the Company's ability to adequately manage and
complete its existing projects and to bid for or obtain new projects. If the
Company's employees are unable to achieve expected performance levels, the
Company's business, financial condition and results of operations could be
adversely affected.
CUSTOMER CONCENTRATION; DEPENDENCE ON LARGE PROJECTS
The Company has derived, and believes that it will continue to derive,
a significant portion of its revenues from a limited number of large clients. In
1997, the Company's five largest clients accounted for approximately 31% of its
revenues, with three clients each accounting for more than 5% of such revenues.
The volume of work performed for specific clients is likely to vary from year to
year, and a major client in one year may not use the Company's services in a
subsequent year. The loss of any large client could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, revenues from a large client may constitute a significant portion
of the Company's total revenues in a particular quarter.
Most of the Company's fixed-price contracts are terminable by the
client following limited notice and without significant penalty. The
cancellation or a significant reduction in the scope of a large project could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, while the QUADD process is designed as
an integrated approach, each stage of the QUADD process represents a separate
contractual commitment at the end of which the client may elect not to proceed
to the next stage. A decision by any large client not to proceed with a project
to the stage anticipated by the Company could also have a material adverse
effect on the Company's business, financial condition and results of operations.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and earnings may fluctuate from quarter to
quarter based on such factors as the number, size and scope of projects in which
the Company is engaged, the contractual terms and degree of completion of such
projects, any delays incurred in connection with projects, employee utilization
rates (particularly utilization rates of employees who specialize in certain
third-party applications or architectures and of recently hired employees), the
adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects, and general economic conditions. A high
percentage of the Company's operating expenses, particularly personnel and rent,
are relatively fixed in advance of any particular quarter. As a result,
unanticipated variations in the number, or progress toward completion, of the
Company's projects or in employee utilization rates may cause significant
variations in operating results in any particular quarter and could result in
losses for such quarter. An unanticipated termination of a major project, a
client's decision not to proceed to the stage of a project anticipated by the
Company or the completion during a quarter of several major client projects,
could require the Company to maintain underutilized employees and could
therefore have a material adverse effect on the Company's business, financial
condition and results of operations.
FIXED-PRICE CONTRACTS
An important element of the Company's strategy is to enter into
fixed-price, fixed-timeframe contracts, rather than contracts in which payment
to the Company is determined on a time and materials basis. Consistent with this
strategy, the Company intends to provide its ERP system implementation services,
which historically have been provided by EXOR on a time and materials basis, on
a fixed-price, fixed-timeframe basis. The Company's failure to accurately
estimate the resources required for a project (including an ERP system
implementation, with respect to which the Company has limited experience) or its
failure to complete its contractual obligations in a manner consistent with the
project plan upon which its fixed-price, fixed-timeframe contract was based
would adversely affect the Company's overall profitability and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has been required to commit unanticipated
additional resources to complete certain projects, which has resulted in losses
on certain contracts. The Company recognizes that it will experience similar
situations in the future. In addition, for certain projects the Company may fix
the price before the design specifications are finalized, which could result in
a fixed price that turns out to be too low and therefore adversely affect the
Company's profitability.
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EMERGING MARKETS; DEPENDENCE ON PRINCIPAL SERVICE OFFERINGS
The Company has derived a significant portion of its revenues from
projects based primarily on client/server and Web-based architectures. These
markets are continuing to develop and are subject to rapid change. The Company's
near-term success is dependent in part on the continued acceptance of
information processing systems using client/server and Web-based architectures.
Any factors negatively affecting the acceptance of such technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's success will also depend in part on its ability to
develop information technology solutions which keep pace with continuing changes
in technology, evolving industry standards and changing client preferences.
There can be no assurance that the Company will be successful in addressing
these developments on a timely basis or that if addressed the Company will be
successful in the marketplace. The Company's failure to address these
developments could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The markets for the Company's services are highly competitive. The
Company believes that it currently competes principally with consulting and
software integration firms, application software vendors and internal
information systems groups. Many of these companies have significantly greater
financial, technical and marketing resources than the Company and generate
greater revenues and have greater name recognition than the Company. In
addition, there are relatively low barriers to entry into the Company's markets
and the Company has faced, and expects to continue to face, additional
competition from new entrants into its markets.
The Company believes that the principal competitive factors in its
markets include quality of service and deliverables, speed of development and
implementation, price, project management capability and technical and business
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability of
its competitors to hire, retain and motivate project managers and other senior
technical staff, the development by others of software that is competitive with
the Company's products and services and the extent of its competitors'
responsiveness to client needs. There can be no assurance that the Company will
be able to compete successfully with its competitors.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in large part upon the continued
services of a number of key employees, including its founders and co-Chairmen of
the Board of Directors and co-Chief Executive Officers, Jerry A. Greenberg and
J. Stuart Moore. The Company's employment contracts with Messrs. Greenberg and
Moore and with the Company's 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 the Company's other key
personnel could have a material adverse effect on the Company. In addition, if
one or more of the Company's key employees resigns from the Company 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 the Company's business, financial condition
and results of operations. In the event of the loss of any such personnel, there
can be no assurance that the Company would be able to prevent the unauthorized
disclosure or use of its technical knowledge, practices or procedures by such
personnel.
INTELLECTUAL PROPERTY RIGHTS
The Company's success is dependent, in part, upon its proprietary QUADD
methodology and other intellectual property rights. The Company relies upon a
combination of trade secret, nondisclosure and other contractual arrangements,
and copyright and trademark laws to protect its proprietary rights. The Company
enters into confidentiality agreements with its employees, generally requires
that its consultants and clients enter into such agreements, and limits access
to and distribution of its proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of its proprietary information or that the Company will be able
to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights.
A portion of the Company's business involves the development of
software applications for specific client engagements. Ownership of such
software is the subject of negotiation and is frequently assigned to the client,
with the Company frequently retaining a license for certain uses. Issues
relating to the ownership of and rights to use software applications can be
complicated and there can be no assurance that disputes will not arise that
affect the Company's ability to resell or reuse such applications.
Although the Company believes that its services and products do not
infringe on the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the Company in the
future, or that if asserted any such claim will be successfully defended. A
successful claim against the Company could materially and adversely affect the
Company's business, financial condition and results of operations.
- 6 -
<PAGE> 9
CONCENTRATION OF CONTROL
Messrs. Greenberg and Moore, the Company's co-Chairmen of the Board of
Directors and co-Chief Executive Officers, beneficially own approximately 51% of
the Company's outstanding Common Stock. As a result, these stockholders have the
ability to elect the Company's directors and to determine the outcome of
corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company.
EFFECTS OF YEAR 2000 ISSUE
Although the Company does not believe the Year 2000 issue will have a
significant impact on the Company's internal operations or on solutions
developed by the Company for clients where the Company has provided an express
warranty regarding the Year 2000 issue, there can be no assurance that the
Company will not experience interruptions of operations because of Year 2000
problems or become involved in disputes with clients regarding Year 2000
problems involving solutions developed or implemented by the Company or the
interaction of such solutions with other applications. Year 2000 problems could
require the Company to incur unanticipated expenses, and such expenses could
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, the purchasing patterns of clients or
potential clients may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase services
offered by the Company.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS
The Company's revenues and results of operations will be influenced by
general economic conditions prevailing in the United States. In the event of a
general economic downturn or a recession in the United States, the Company's
clients and potential clients may substantially reduce their information
technology and related budgets. Such an economic downturn may materially and
adversely affect the Company's business, financial condition and results of
operations.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, finance,
selling and marketing operations are located in approximately 88,000 square feet
of leased office space in Cambridge, Massachusetts. The Company leases office
space of approximately 75,000 square feet in metropolitan New York, and 64,000
square feet in San Francisco, California. In addition, the Company maintains
smaller offices in Atlanta, Chicago, Dallas, Los Angeles and Portland, Maine.
ITEM 3. LEGAL PROCEEDINGS
Except as set forth below, the Company is not a party to any material
pending legal proceedings. The Company is in arbitration with John Adler, a
former employee of the Company (the "Plaintiff"), who alleges, among other
things, wrongful termination of his employment. In addition to seeking
unspecified damages, the Plaintiff is demanding that the Company issue to him
70,000 shares of the Company's Common Stock pursuant to certain stock options
that had previously been granted to him. In addition, one month after filing his
original complaint, the Plaintiff informed the Company that he believed he is
owed additional shares of Common Stock pursuant to a purported oral option
agreement for fully vested shares. Management denies that it breached any
obligations or duties to the Plaintiff and believes that the Company has
meritorious defenses (including that a substantial number of the 70,000 shares
subject to the stock options that were granted to the Plaintiff had not vested
in accordance with their terms at the time the Plaintiff's employment was
terminated by the Company). Mr. Adler commenced suit against the Company and
certain of its executive officers, both individually and in their capacities as
officers of the Company, in Middlesex Superior Court, Commonwealth of
Massachusetts in April 1996. In August 1996, the court allowed the Company's
motion to compel arbitration of the Plaintiff's claims. In connection with the
arbitration, the Plaintiff agreed to dismiss certain of his claims. The parties
are currently engaged in discovery, and the arbitration has been scheduled to
begin in September 1998. The Company intends to vigorously defend against the
Plaintiff's claims. Although the Company does not expect this case to have a
material adverse effect on the Company's business, operating income or financial
condition, an adverse judgment or settlement could have a material adverse
effect on the operating results reported by the Company for the period in which
any such adverse judgment or settlement occurs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
- 7 -
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a1) Market Price of Common Stock
Sapient's 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 sale prices for Sapient's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Second Quarter (from April 3, 1996)....................... $29.13 $14.63
Third Quarter............................................. $23.00 $14.88
Fourth Quarter............................................ $24.50 $18.50
1997
First Quarter............................................. $24.88 $15.56
Second Quarter............................................ $24.75 $15.00
Third Quarter............................................. $30.50 $24.25
Fourth Quarter............................................ $31.38 $23.88
</TABLE>
On March 12, 1998, the last reported sale price of Sapient's Common Stock
was $44.125 per share. As of March 12, 1998, there were approximately 250
holders of record of the Common Stock.
(a2) Recent Sales of Unregistered Securities
In connection with the Company's acquisition of EXOR, the Company
issued a total of 611,738 shares of its Common Stock on December 15, 1997
to four former stockholders of EXOR as consideration for all of the
outstanding capital stock of EXOR. This transaction was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933, as amended, because it did not involve a public offering of
securities.
(b) Use of Proceeds. There has been no change to the information
previously provided by the Company on Form SR for the period ended July 3,
1996, as amended to date, relating to securities sold by the Company
pursuant to Registration Statements on Form S-1 (Registration Nos. 333-1586
and 333-3204), both of which were declared effective on April 3, 1996.
- 8 -
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K. The Balance
Sheet Data at December 31, 1994, 1995, 1996 and 1997 and the Statement of Income
Data for the years ended December 31, 1994, 1995, 1996 and 1997 have been
derived from the Consolidated Financial Statements for such years, which have
been audited by KPMG Peat Marwick LLP, independent auditors. The Balance Sheet
Data as of December 31, 1993 and the Statement of Income Data for the year ended
December 31, 1993 are derived from the Consolidated Financial Statements for
such year which are unaudited due to the restatement to reflect the acquisition
of EXOR in 1997 which has been accounted for as a pooling of interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Revenues............................. $90,360 $49,009 $24,481 $11,796 $ 5,916
Operating expenses:
Project personnel costs............ 43,816 22,985 11,723 4,434 1,940
Selling and marketing.............. 5,893 2,422 1,129 269 90
General and administrative......... 22,108 14,294 6,733 4,634 2,196
Acquisition costs.................. 560 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses........ 72,377 39,701 19,585 9,337 4,226
------- ------- ------- ------- -------
Income from operations............... 17,983 9,308 4,896 2,459 1,690
Interest income...................... 2,078 1,098 13 9 --
------- ------- ------- ------- -------
Income before income taxes........... 20,061 10,406 4,909 2,468 1,690
Income taxes......................... 7,703 3,936 1,995 879 691
------- ------- ------- ------- -------
Net income........................... $12,358 $ 6,470 $ 2,914 $ 1,589 $ 999
======= ======= ======= ======= =======
Basic net income per share........... $ 0.52 $ 0.30 $ 0.16 $ 0.08 $ 0.06
======= ======= ======= ======= =======
Diluted net income per share......... $ 0.47 $ 0.27 $ 0.14 $ 0.08 $ 0.05
======= ======= ======= ======= =======
Weighted average common shares....... 23,996 21,631 18,275 18,777 17,841
Weighted average common share
equivalents........................ 2,083 2,425 2,851 2,065 2,355
------- ------- ------- ------- -------
Weighted average common shares and
common share equivalents........... 26,079 24,056 21,126 20,842 20,196
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $76,385 $66,201 $ 5,785 $ 1,894 $ 1,139
Total assets......................... 98,013 79,687 12,893 6,898 2,450
Long-term debt, less current
portion............................ -- -- 189 132 145
Total stockholders' equity(2)........ 81,999 66,793 5,595 2,663 1,163
</TABLE>
- ---------------
(1) This selected consolidated financial data gives retroactive effect to the
Company's acquisition of EXOR in December 1997, which has been accounted for
as a pooling of interests. As a result of this business combination, the
financial information shown above has been restated to include the accounts
and results of operations of EXOR for all periods presented. See Note 12 of
Notes to Consolidated Financial Statements.
(2) The Company has never declared or paid any cash dividends.
- 9 -
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Sapient provides its services primarily on a fixed-price, fixed-timeframe
basis. To determine its proposed fixed price for a project, the Company uses an
internally developed estimation process which takes into account standard
billing rates and the risks associated with the particular project, such as the
number and type of key functions to be developed, the technology environment and
application type to be applied, the project's timetable and the overall
technical complexity of the project. Each fixed-price proposal must be approved
by a member of the Company's senior management team.
The Company's revenues and earnings may fluctuate from quarter to quarter
based on the number, size and scope of projects in which the Company is engaged,
the contractual terms and degree of completion of such projects, any delays
incurred in connection with a project, employee utilization rates, the adequacy
of provisions for losses, the accuracy of estimates of resources required to
complete ongoing projects, and general economic conditions and other factors. In
addition, revenues from a large client may constitute a significant portion of
the Company's total revenues in a particular quarter.
On December 15, 1997, the Company acquired all of the outstanding common
stock of EXOR in exchange for 611,738 shares of Sapient Common Stock. The
Company's financial statements have been restated for all periods presented to
reflect the acquisition of EXOR, which has been accounted for as a pooling of
interests.
On January 29, 1998, the Company declared a two-for-one stock split
effected as a 100% stock dividend paid on March 9, 1998 to all stockholders of
record on February 20, 1998. The Company's financial statements have been
restated for all periods presented to reflect the effect of the stock dividend.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in the Company's consolidated statements of income:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenue..................................................... 100% 100% 100%
Operating expenses:
Project personnel costs................................... 48 47 48
Selling and marketing..................................... 7 5 5
General and administrative................................ 24 29 27
Acquisition costs......................................... 1 -- --
--- --- ---
Total operating expenses............................... 80 81 80
Income from operations...................................... 20 19 20
Interest income............................................. 2 2 --
Income taxes................................................ 8 8 8
--- --- ---
Net income.................................................. 14% 13% 12%
=== === ===
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Revenues for 1997 increased 84% over 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
revenues in 1997. In 1997, the Company's five largest clients accounted for
approximately 31% of its revenues, no client accounted for more than 10% of such
revenues and three clients each accounted for more than 5% of such revenues. In
1996, the Company's five largest clients accounted for approximately 52% of its
revenues, two clients each accounted for more than 10% of such revenues and four
clients each accounted for more than 5% of such revenues.
PROJECT PERSONNEL COSTS
Project personnel costs consist primarily of salaries and employee benefits
for personnel dedicated to client projects, non-reimbursed direct expenses
incurred to complete projects and third-party project personnel training. These
costs represent the most significant expense the Company incurs in providing its
services. The increase in project personnel costs for the year ended December
31, 1997 was primarily due to an increase in project personnel from 427 at
December 31, 1996 to 674 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-reimbursable
travel and relocation fees due to the opening of three additional offices in the
beginning of 1997.
- 10 -
<PAGE> 13
SELLING AND MARKETING
Selling and marketing costs consist primarily of salaries, employee
benefits and travel expenses of selling and marketing personnel and promotional
costs. 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 the Company's decision to expand its selling and marketing group, which
grew from 27 employees at December 31, 1996 to 32 employees at December 31,
1997.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of expenses associated
with the Company's executive 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 1997
compared to 1996 was primarily due to an increase in the incremental costs
associated with the additional employees hired during 1997. The Company's total
headcount increased from 530 at December 31, 1996 to 817 at December 31, 1997.
As a percentage of revenues, general and administrative costs were 24% in 1997,
compared to 29% in 1996. The decrease as a percentage of revenues in 1997 was
primarily a result of non-cash compensation charges in 1996, lower cash
compensation bonuses paid to EXOR executives in 1997 and improved space
utilization.
ACQUISITION COSTS
The Company incurred a one-time charge of approximately $560,000 in the
fourth quarter of 1997 for costs associated with the EXOR acquisition.
INTEREST INCOME
Interest income for 1997 consisted of interest earned on the proceeds of
the Company's 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 expense represents combined federal and state income taxes at an
effective rate of 38.4% for 1997 and 37.8% for 1996. The Company's effective tax
rate may vary from period to period based on the Company's future expansion into
areas with varying country, state, and local income tax rates.
YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Revenues for 1996 increased 100% over revenues for 1995. The increase in
revenues reflected increases in both the size and number of client projects. The
increase in unbilled revenues on contracts from $2.3 million at December 31,
1995 to $4.7 million at December 31, 1996 was primarily due to the increase in
revenues in 1996. In 1996, the Company's five largest clients accounted for
approximately 52% of its revenues, two clients each accounted for more than 10%
of such revenues and four clients each accounted for more than 5% of such
revenues. In 1995, revenues derived from the Company's five largest clients
accounted for approximately 52% of its revenues, three clients each accounted
for more than 10% of such revenues and two clients each accounted for more than
5% of such revenues.
PROJECT PERSONNEL COSTS
Project personnel costs consist primarily of salaries and employee benefits
for personnel dedicated to client projects, fees paid to subcontractors for work
performed in connection with projects, and direct expenses incurred to complete
projects that were not reimbursed by the client. The increase in project
personnel costs for the year ended December 31, 1996 was primarily due to an
increase in project personnel from 233 at December 31, 1995 to 427 at December
31, 1996. Project personnel costs decreased slightly as a percentage of revenues
from 48% for 1995 to 47% for 1996. The decrease was mainly due to higher
utilization of EXOR project personnel, combined with an increase in their
effective billing rates during 1996.
SELLING AND MARKETING
Selling and marketing costs consist primarily of salaries, employee
benefits, travel expenses and promotional costs. Selling and marketing costs as
a percentage of revenues remained constant at 5% for 1995 and 1996. The dollar
increase in 1996 was mainly due to the Company's decision to expand its selling
and marketing group which grew from 13 employees at December 31, 1995 to 27
employees at December 31, 1996.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of expenses associated
with the Company's executive 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 1996
compared to 1995 was primarily due to an increase in the incremental costs
associated with the additional employees hired during 1996. The Company's total
headcount increased from 271 at December 31, 1995 to 530 at December 31, 1996.
As a percentage of revenues, general and administrative costs were 29% in 1996,
compared to 27% in 1995. The increase as a percentage of revenues in 1996 was
primarily a result of non-cash compensation charges in 1996.
- 11 -
-
<PAGE> 14
INTEREST INCOME
Interest income for 1996 consisted of interest earned on the proceeds of
the Company's 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 expense represented combined federal and state income taxes at
an effective rate of 37.8% for 1996 and 40.6% for 1995. The decrease in the
effective tax rate primarily reflects reduced federal taxes due to excess cash
being invested in tax-exempt municipal bonds.
QUARTERLY FINANCIAL RESULTS
The following tables set forth certain unaudited quarterly results of
operations of the Company for 1996 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 included elsewhere in this
Annual Report on Form 10-K. The quarterly operating results are not necessarily
indicative of future results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues........................................ $10,011 $11,483 $12,952 $14,563
Operating expenses:
Project personnel costs......................... 4,832 5,193 5,928 7,032
Selling and marketing........................... 481 617 506 818
General and administrative...................... 2,671 3,360 3,839 4,424
Acquisition costs............................... -- -- -- --
------- ------- ------- -------
Total operating expenses.................... 7,984 9,170 10,273 12,274
Income from operations.......................... 2,027 2,313 2,679 2,289
Interest income (expense)....................... (3) 286 322 493
------- ------- ------- -------
Income before income taxes...................... 2,024 2,599 3,001 2,782
Income taxes.................................... 810 988 1,168 970
------- ------- ------- -------
Net income...................................... $ 1,214 $ 1,611 $ 1,833 $ 1,812
======= ======= ======= =======
Basic net income per share...................... $ 0.06 $ 0.07 $ 0.08 $ 0.08
======= ======= ======= =======
Diluted net income per share.................... $ 0.06 $ 0.06 $ 0.07 $ 0.07
======= ======= ======= =======
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues........................................ $18,180 $20,799 $24,416 $26,965
Operating expenses:
Project personnel costs......................... 8,674 9,995 12,150 12,997
Selling and marketing........................... 1,121 1,138 1,544 2,090
General and administrative...................... 4,576 5,241 5,808 6,483
Acquisition costs............................... -- -- -- 560
------- ------- ------- -------
Total operating expenses.................... 14,371 16,374 19,502 22,130
Income from operations.......................... 3,809 4,425 4,914 4,835
Interest income (expense)....................... 517 571 483 507
------- ------- ------- -------
Income before income taxes...................... 4,326 4,996 5,397 5,342
Income taxes.................................... 1,620 1,900 2,077 2,106
------- ------- ------- -------
Net income...................................... $ 2,706 $ 3,096 $ 3,320 $ 3,236
======= ======= ======= =======
Basic net income per share...................... $ 0.11 $ 0.13 $ 0.14 $ 0.13
======= ======= ======= =======
Diluted net income per share.................... $ 0.10 $ 0.12 $ 0.13 $ 0.12
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-------------------------------------------
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues........................................ 100% 100% 100% 100%
Operating expenses:
Project personnel costs......................... 48 45 46 48
Selling and marketing........................... 5 5 4 6
General and administrative...................... 27 30 29 30
Acquisition costs...............................
--- --- --- ---
Total operating expenses.................... 80 80 79 84
Income from operations.......................... 20 20 21 16
Interest income (expense)....................... -- 3 2 3
--- --- --- ---
Income before income taxes...................... 20 23 23 19
Income taxes.................................... 8 9 9 7
--- --- --- ---
Net income...................................... 12% 14% 14% 12%
=== === === ===
</TABLE>
- 12 -
<PAGE> 15
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-------------------------------------------
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues........................................ 100% 100% 100% 100%
Operating expenses:
Project personnel costs......................... 48 48 50 48
Selling and marketing........................... 6 5 6 8
General and administrative...................... 25 26 24 24
Acquisition costs............................... 2
--- --- --- ---
Total operating expenses.................... 79 79 80 82
Income from operations.......................... 21 21 20 18
Interest income (expense)....................... 3 3 2 2
--- --- --- ---
Income before income taxes...................... 24 24 22 20
Income taxes.................................... 9 9 8 8
--- --- --- ---
Net income...................................... 15% 15% 14% 12%
=== === === ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily funded its operations from cash flow generated
from operations and the proceeds from its initial and follow-on public
offerings. In addition, the Company has a bank revolving line of credit
providing for borrowings of up to $5.0 million. Borrowings under this line of
credit, which expires on June 30, 1998, bear interest at the bank's prime rate.
The line of credit includes covenants relating to the maintenance of certain
financial ratios and limits the payment of dividends. At December 31, 1997, the
Company had no bank borrowings outstanding and no material capital commitments.
Cash and cash equivalents decreased to $47.3 million at December 31, 1997,
from $50.3 million at December 31, 1996. The net cash provided by operating
activities of over $9.0 million for the year ended December 31, 1997 was
partially offset with investments in property and equipment of $6.2 million.
Additionally, the Company invested a net $7.6 million in tax-exempt, short-term
municipal bonds in 1997.
The Company has reviewed its internal computer systems and their capability
of recognizing the Year 2000 and years thereafter. The Company believes that the
Year 2000 issue will not pose significant constraints on the Company's
operations. The cost to convert any remaining internal systems is not expected
to have a material impact on the Company's financial condition or results of
operations.
The Company believes that the cash provided from operations, borrowings
available under its revolving line of credit and its existing cash, cash
equivalents and marketable securities will be sufficient to meet the Company's
working capital and capital expenditure requirements for at least the next 18
months.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes a
different method of computing net income per share than previously required
under the provisions of Accounting Principles Board Opinion No. 15, "Earnings
per Share", and requires restatement of all prior periods presented. Under SFAS
128, the Company presents both basic net income per share and diluted net income
per share. Basic net income per share is based on the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
per share effect of dilutive stock options and other dilutive common stock
equivalents.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting comprehensive income and its
components in the body of the financial statements. Comprehensive income
includes net income as currently reported under Generally Accepted Accounting
Principles and also considers the effect of additional economic events that are
not required to be recorded in determining net income but are rather reported as
a separate component of stockholders' equity. These events include certain
foreign currency transactions and related hedging activities accounted for under
Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" and unrealized gains and losses on investments in marketable
securities accounted for under Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities." The
Company plans to adopt SFAS 130 in 1998. The effect of adopting SFAS 130 and
reporting comprehensive income is not considered to be material to the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes 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 Company plans to adopt this Statement in 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
- 13 -
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SAPIENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ 15
Consolidated Balance Sheets................................. 16
Consolidated Statements of Income........................... 17
Consolidated Statements of Stockholders' Equity............. 18
Consolidated Statements of Cash Flows....................... 19
Notes to Consolidated Financial Statements.................. 20
</TABLE>
- 14 -
<PAGE> 17
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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 23, 1998, except
for Note 13 which is
as of January 29, 1998
- 15 -
<PAGE> 18
SAPIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $47,314 $50,301
Short term investments................................. 17,092 9,540
Accounts receivable, less allowance for doubtful
accounts of $425 and $150 for 1997 and 1996,
respectively.......................................... 16,217 11,744
Unbilled revenues on contracts......................... 9,071 4,674
Prepaid expenses....................................... 680 317
Other current assets................................... 959 150
Deferred income taxes.................................. 35 318
------- -------
Total current assets.............................. 91,368 77,044
Property and equipment, net................................. 6,315 2,575
Other assets................................................ 330 68
------- -------
Total assets...................................... $98,013 $79,687
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank.................................. $ 208 $ 288
Accounts payable....................................... 15 96
Accrued expenses....................................... 1,924 1,569
Accrued compensation................................... 3,453 2,281
Income taxes payable................................... 1,255 1,551
Deferred income taxes.................................. 1,820 142
Deferred revenues on contracts......................... 6,308 4,916
------- -------
Total current liabilities......................... 14,983 10,843
Deferred income taxes.................................. 121 1,296
Other long term liabilities............................ 910 755
------- -------
Total liabilities................................. 16,014 12,894
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.01 per share; 5,000,000
shares authorized and none outstanding at December 31,
1996 and 1997......................................... -- --
Common stock, par value $0.01 per share, 40,000,000
shares authorized, 24,206,570 shares issued and
outstanding at December 31, 1997; 23,597,258 shares
issued and outstanding at December 31, 1996........... 242 236
Additional paid-in capital............................. 57,479 54,662
Retained earnings...................................... 24,278 11,920
Notes receivable from stockholders..................... -- (25)
------- -------
Total stockholders' equity........................ 81,999 66,793
------- -------
Total liabilities and stockholders' equity........ $98,013 $79,687
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
- 16 -
<PAGE> 19
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues.................................................... $90,360 $49,009 $24,481
Operating expenses:
Project personnel costs................................ 43,816 22,985 11,723
Selling and marketing.................................. 5,893 2,422 1,129
General and administrative............................. 22,108 14,294 6,733
Acquisition costs...................................... 560 -- --
------- ------- -------
Total operating expenses.......................... 72,377 39,701 19,585
------- ------- -------
Income from operations................................. 17,983 9,308 4,896
Interest income............................................. 2,078 1,098 13
------- ------- -------
Income before income taxes............................. 20,061 10,406 4,909
Income taxes................................................ 7,703 3,936 1,995
------- ------- -------
Net Income........................................ $12,358 $ 6,470 $ 2,914
======= ======= =======
Basic net income per share.................................. $ 0.52 $ 0.30 $ 0.16
======= ======= =======
Diluted net income per share................................ $ 0.47 $ 0.27 $ 0.14
======= ======= =======
Weighted average common shares.............................. 23,996 21,631 18,275
Weighted average common share equivalents................... 2,083 2,425 2,851
------- ------- -------
Weighted average common shares and common share
equivalents............................................... 26,079 24,056 21,126
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
- 17 -
<PAGE> 20
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
VOTING NON-VOTING NOTES
COMMON STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- ---------------- PAID-IN RETAINED FROM STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS EQUITY
------ ------ ------ ------ ---------- -------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994................. 10,581 $106 7,098 $ 71 $ -- $ 2,536 $(50) $ 2,663
Notes receivable from
stockholders.................... -- -- -- -- -- -- (25) (25)
Exercised stock options........... -- -- 566 6 37 -- -- 43
Net income........................ -- -- -- -- -- 2,914 -- 2,914
------ ---- ------- ---- ------- ------- ---- -------
Balance at
December 31, 1995................. 10,581 106 7,664 77 37 5,450 (75) 5,595
Notes repaid from stockholders.... -- -- -- -- -- -- 50 50
Exercised stock options........... 932 9 -- -- 204 -- -- 213
Proceeds from public offerings.... 4,390 44 -- -- 54,053 -- -- 54,097
Conversion of non-voting shares to
voting shares................... 7,664 77 (7,664) (77) -- -- -- --
Tax benefit of disqualifying
dispositions of stock options... -- -- -- -- 108 -- -- 108
Stock based compensation.......... 31 -- -- -- 260 -- -- 260
Net income........................ -- -- -- -- -- 6,470 -- --
------ ---- ------- ---- ------- ------- ---- -------
Balance at
December 31, 1996................. 23,598 236 -- -- 54,662 11,920 (25) 66,793
Notes repaid from stockholders.... -- -- -- -- -- -- 25 25
Exercised stock options........... 608 6 -- -- 1,783 -- -- 1,789
Tax benefit of disqualifying
dispositions of stock options... -- -- -- -- 1,034 -- -- 1,034
Net income........................ -- -- -- -- -- 12,358 -- 12,358
------ ---- ------- ---- ------- ------- ---- -------
Balance at
December 31, 1997................. 24,206 $242 -- $ -- $57,479 $24,278 $ -- $81,999
====== ==== ======= ==== ======= ======= ==== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
- 18 -
<PAGE> 21
SAPIENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 12,358 $ 6,470 $ 2,914
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 2,450 1,244 512
Deferred income taxes................................... 786 (1,030) 1,997
Allowance for doubtful accounts......................... 275 -- 50
Stock compensation expense.............................. -- 260 --
Changes in operating assets and liabilities:
Increase in accounts receivable.................... (4,748) (4,080) (4,674)
Increase in unbilled revenues on contracts......... (4,397) (2,392) (2,264)
Increase in prepaid expenses....................... (363) (172) (125)
(Increase) decrease in other current assets........ (809) (150) 94
Decrease (increase) in income tax receivable....... -- 480 (480)
(Increase) decrease in other assets................ (262) 49 (65)
(Decrease) increase in accounts payable............ (81) (397) 164
Increase in accrued expenses....................... 355 546 275
Increase in accrued compensation................... 1,172 1,419 478
Increase (decrease) in income taxes payable........ 738 1,552 (1,160)
Increase (decrease) in other long term
liabilities...................................... 155 717 (48)
Increase in deferred revenues on contracts......... 1,392 2,541 1,207
-------- -------- -------
Net cash provided by (used in) operating
activities................................... 9,021 7,057 (1,125)
-------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment...................... (6,190) (2,034) (1,116)
Sales and maturities of short term investments.......... 12,190 -- --
Purchases of short term investments..................... (19,742) (9,540) --
-------- -------- -------
Net cash used in investing activities.......... (13,742) (11,574) (1,116)
-------- -------- -------
Cash flows from financing activities:
Proceeds from (payments to) stockholders for notes
receivable............................................ 25 50 (25)
Exercise of stock options............................... 1,789 213 43
Net proceeds from initial public offering............... -- 32,403 --
Net proceeds from follow-on public offering............. -- 21,694 --
Principal payments on notes payable to related
parties............................................... -- -- (16)
Principal payments on notes payable to bank............. (80) (49) (18)
-------- -------- -------
Net cash provided by financing activities...... 1,734 54,311 (16)
-------- -------- -------
(Decrease) increase in cash and cash equivalents............ (2,987) 49,794 (2,257)
Cash and cash equivalents, beginning of year................ 50,301 507 2,764
-------- -------- -------
Cash and cash equivalents, end of year...................... $ 47,314 $ 50,301 $ 507
======== ======== =======
Schedule of non-cash financing activities:
Tax benefit of disqualifying dispositions of stock
options................................................. $ 1,034 $ 108 $ --
======== ======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
- 19 -
<PAGE> 22
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Sapient Corporation (together with its wholly owned subsidiaries, "Sapient"
or the "Company") develops client/server and Web-based software applications
designed to help organizations improve their processes and performance. Services
provided include implementation and integration of packaged software solutions,
custom software development, ERP implementations, production support and
business and operational consulting.
On December 15, 1997, the Company acquired all of the outstanding common
stock of EXOR Technologies, Inc. ("EXOR") in exchange for 611,738 shares of
Sapient Common Stock (see Note 12). The Company'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 the Company
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be 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.
(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
The Company records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases, operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(g) Financial Instruments and Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations. Write-offs of accounts receivable have not
been material for any of the periods presented. The Company operates in one
industry segment and its customers are headquartered primarily in North America.
The fair market values of cash and cash equivalents, accounts receivable
and debt instruments at both December 31, 1997 and 1996 approximate their
carrying amounts.
- 20 -
<PAGE> 23
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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,
the Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
(j) Research and Development Costs
Research and development expenditures are charged to operations as
incurred. To date, substantially all research and development activities of the
Company have been pursuant to customer contracts and, accordingly, have been
expensed as project costs. The Company 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 earnings per share in the notes to the financial
statements. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
under SFAS No. 123 for the Company's stock option plans, and footnote disclosure
is provided in Note 8.
(l) New Accounting Pronouncements
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes a
different method of computing net income per share than previously required
under the provisions of Accounting Principles Board Opinion No. 15, "Earnings
per Share," and requires restatement of all prior periods presented. Under SFAS
128, the Company presents both basic net income per share and diluted net income
per share. Basic net income per share is based on the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
per share effect of dilutive stock options and other dilutive common stock
equivalents.
In June 1997, the Financial Accounting Standards Board issued 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
affect a Company but are not required to be recorded in determining net income
but are rather reported as a separate component of stockholders' equity. These
events include certain foreign currency transactions and related hedging
activities accounted for under Statement of Financial Accounting Standards No.
52 "Foreign Currency Translation" and unrealized gains and losses on investments
in marketable securities accounted for under Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." The Company plans to adopt SFAS 130 in 1998. The effect of adopting
SFAS 130 is not expected to be material to the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes 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 Company plans to adopt this Statement in 1998.
- 21 -
<PAGE> 24
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 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements............................... $ 3,559 $ 548
Furniture and fixtures............................... 904 562
Office equipment..................................... 1,714 981
Computer equipment................................... 4,810 2,706
------- -------
10,987 4,797
Less accumulated depreciation and
amortization.................................. (4,672) (2,222)
------- -------
Property and equipment, net.......................... $ 6,315 $ 2,575
======= =======
</TABLE>
(4) Bank Loan
The Company has a $5,000,000 loan facility with a bank which expires in
June 1998. Borrowings under this agreement bear interest at the bank's prime
rate. The Company had no borrowings under this facility at December 31, 1997 or
1996. The facility contains various financial covenants, including limitations
on the payment of cash dividends and maintenance of certain financial ratios.
(5) Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal, current......................................... $5,220 $ 3,951 $ (4)
State, current........................................... 1,697 1,015 2
------ ------- ------
6,917 4,966 (2)
Federal, deferred........................................ 647 (924) 1,543
State, deferred.......................................... 139 (106) 454
------ ------- ------
786 (1,030) 1,997
------ ------- ------
Income tax expense....................................... $7,703 $ 3,936 $1,995
====== ======= ======
</TABLE>
Income tax expense for the years ended December 31, 1997, 1996 and 1995
differed from the amounts computed by applying the U.S. statutory income tax
rate to pre-tax income as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate................................... 35.0% 35.0% 34.0%
State income taxes, net of federal benefit.................. 6.0 5.7 6.3
Tax exempt interest......................................... (3.3) (2.6) --
Other, net.................................................. 0.7 (0.3) 0.3
---- ---- ----
Effective income tax rate................................... 38.4% 37.8% 40.6%
==== ==== ====
</TABLE>
At December 31, 1997 and 1996, 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:
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Deferred revenue....................................... $ 1,855 $ 1,736
Allowance for doubtful accounts........................ 60 62
Accrual for compensation............................... 390 408
Other accruals......................................... 745 634
Property and equipment................................. 548 108
Stock compensation..................................... -- 104
------- -------
Total gross deferred income tax assets............ $ 3,598 $ 3,052
</TABLE>
- 22 -
<PAGE> 25
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Deferred taxes relating to the use of cash method of
accounting for tax purposes prior to 1996............ $(1,309) (2,248)
Unbilled revenue....................................... (3,652) (1,924)
Other accruals......................................... (543) --
------- -------
Total gross deferred income tax liabilities....... $(5,504) $(4,172)
------- -------
Net deferred income tax liabilities.......... $(1,906) $(1,120)
======= =======
</TABLE>
In assessing the realizability of deferred income tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. Due to the fact that the
Company 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, 1997, 1996 and
1995 was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes from continuing operations................. $ 7,703 $ 3,936 $1,995
Stockholders' equity, for compensation expense for tax
purposes in excess of amounts recognized for financial
statement purposes.................................... (1,034) (108) --
------- ------- ------
$ 6,669 $ 3,828 $1,995
======= ======= ======
</TABLE>
Total income taxes paid in 1997, 1996 and 1995 were approximately
$6,179,000, $2,838,000 and $226,000, respectively.
(6) Commitments and Contingencies
The Company maintains its executive office in Massachusetts and operating
offices in several locations throughout the United States. The Company 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, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................................... $ 7,140
1999...................................................... 7,184
2000...................................................... 6,745
2001...................................................... 7,744
2002...................................................... 6,358
Thereafter................................................ 23,267
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $3,996,000, $3,144,000, and $1,300,000, respectively.
The Company has issued letters of credit with a bank in the aggregate
amount of $975,000 as security deposits for certain of the Company's lease
commitments.
The Company has certain contingent liabilities that arise in the ordinary
course of its business activities. The Company accrues contingent liabilities
when it is probable that future expenditures will be made and such expenditures
can be reasonably estimated.
The Company is in arbitration with a former employee who alleges breach of
certain contractual and other violations resulting from his termination as an
employee. Management denies that it breached any obligations or duties to this
former employee, and believes that the Company has meritorious defenses. The
Company plans to vigorously contest these claims. Although the Company does not
expect the claims to have a material adverse effect on the Company's business,
results of operations or financial condition, an adverse judgment or settlement
could have a material adverse effect on the operating results reported by the
Company for the period in which any such adverse judgment or settlement occurs.
- 23 -
<PAGE> 26
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) Significant Customers
No customer accounted for greater than 10 percent of total revenues in 1997
or accounts receivable at December 31, 1997. Two customers accounted for 19
percent and 15 percent, respectively, of total revenues in 1996 and 10 percent
of accounts receivable at December 31, 1996. Three customers accounted for 14
percent, 14 percent and 12 percent, respectively, of total revenues in 1995 and
34 percent of accounts receivable at December 31, 1995.
(8) Stock Plans
(a) 1992 Stock Option Plan
During 1992, the Company approved the 1992 Stock Plan (the "1992 Plan") for
its employees. The 1992 Plan provided for the Board of Directors to grant stock
options, stock purchase authorizations and stock bonus awards up to an aggregate
of 5,000,000 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 the Company's Common Stock on the date of grant. The
duration of any option was specified by the Board, but no option designated as
an ISO can be exercised beyond ten years from the date of grant. Stock options
granted under the 1992 Plan generally become exercisable over a four-year
period, are nontransferable, and expire six years after the date of grant
(subject to earlier termination in the event of the termination of the
optionee's employment or other relationship with the Company).
(b) 1996 Equity Stock Incentive Plan
The Company's 1996 Equity Stock Incentive Plan (the "1996 Plan") authorizes
the Company to grant options to purchase Common Stock, to make awards of
restricted Common Stock, and to issue certain other equity-related awards to
employees and directors of, and consultants to, the Company. The total number of
shares of Common Stock which may be issued under the 1996 Plan is 4,800,000
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 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 1996 Plan are
nontransferable, generally become exercisable over a four-year period and expire
ten years after the date of grant (subject to earlier termination in the event
of the termination of the optionee's employment or other relationship with the
Company).
(c) Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan")
authorizes the issuance of up to 300,000 shares of Common Stock to participating
employees through a series of semi-annual offerings. The maximum number of
shares available in each offering is 50,000 shares (plus any unpurchased shares
available from previous offerings). An employee becomes eligible to participate
in the Purchase Plan when he or she is regularly employed by the Company for at
least 20 hours a week and for more than five months in a calendar year on the
first day of the applicable offering. The price at which employees may purchase
Common Stock in an offering is 85 percent of the closing price of the Common
Stock on the Nasdaq National Market on the day the offering commences or on the
day the offering terminates, whichever is lower. Approximately 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, the Company sold
93,628 and 33,830 shares of Common Stock in 1997 and 1996, respectively.
(d) 1996 Directors Stock Option Plan
The Company's 1996 Directors Stock Option Plan (the "Directors Plan")
authorizes the issuance of 60,000 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 10,000 shares of Common Stock at an exercise price equal to the grant
date fair market value of the Company'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, no options had been granted under the
Directors Plan.
- 24 -
<PAGE> 27
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's two fixed stock option plans as of
December 31, 1997 and 1996 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 2,982 $ 5.14 3,018 $ 0.75 2,852 $0.28
Granted................................ 2,098 $23.59 1,066 $13.18 878 $1.94
Exercised.............................. (608) $ 0.63 (932) $ 0.25 (566) $0.08
Forfeited.............................. (89) $12.27 (170) $ 3.41 (146) $0.97
----- ----- -----
Outstanding at end of year............. 4,383 $14.49 2,982 $ 5.14 3,018 $0.76
===== ===== =====
Options exercisable at year end........ 755 722 928
===== ===== =====
Weighted average grant date fair market
value of options granted during the
year................................. $12.67 $7.16 $0.10
===== ===== =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ---------------- -------- ----------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.00 to $ 2.50................ 1,353 2.7 years $ 1.19 551 $ 0.73
$2.51 to $ 7.00................ 445 4.2 years $ 5.71 37 $ 5.33
$7.01 to $ 20.00............... 410 9.0 years $17.22 73 $17.89
$20.01 to $ 22.50.............. 632 9.0 years $21.07 93 $21.08
$22.51 to $ 25.00.............. 604 9.7 years $24.28 1 $23.25
$25.01 to $27.50............... 939 9.9 years $25.88 -- --
----- ---
$0.00 to $27.50................ 4,383 6.9 years $14.49 755 $ 5.15
</TABLE>
The Company has four stock-based compensation plans, which are described
above. The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. No compensation has been recognized relative to grants
under these plans. 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, the Company's net income
and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income
As Reported.................................... $12,358 $6,470 $2,914
Pro forma...................................... $ 5,274 $5,021 $2,899
Basic net income per share
As Reported.................................... $ 0.52 $ 0.30 $ 0.16
Pro forma...................................... $ 0.22 $ 0.23 $ 0.16
Diluted net income per share
As Reported.................................... $ 0.47 $ 0.27 $ 0.14
Pro forma...................................... $ 0.20 $ 0.21 $ 0.14
</TABLE>
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 1997, 1996 and 1995, respectively: dividend yield
of 0.0 percent for each year, expected volatility of 0.0 percent for the 1992
Plan options and 64.8, 104.9 and 0.0 percent 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.
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, 1997 and 1996: dividend yield of 0.0 and 0.0 percent, expected volatility of
64.8 and 67.5 percent, risk free interest rate of 5.7 and 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) Retirement Plans
The Company established a 401(k) retirement savings plan for employees in
June 1994. Under the provisions of the plan, the Company matches 25 percent of
an employee's contribution, up to a maximum of $1,250 per employee per year.
Total Company contributions in 1997, 1996 and 1995 were approximately $520,000,
$356,000 and $94,000, respectively.
- 25 -
<PAGE> 28
SAPIENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) PUBLIC OFFERINGS
The Company completed its initial public offering (IPO) of Common Stock on
April 10, 1996. The IPO resulted in the issuance of 3,390,000 shares of Common
Stock. Proceeds to the Company, net of underwriting discounts and costs of the
offering, were approximately $32.4 million.
The Company completed a follow-on offering of Common Stock on October 29,
1996 which resulted in the issuance of 1,000,000 shares of Common Stock.
Proceeds to the Company, net of underwriting discounts and costs of the
offering, were approximately $21.7 million.
(11) CAPITAL STOCK
(a) Increase in Authorized Common Stock; Conversion of Non-Voting Common
On February 13, 1996, the Company'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 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 the Company will consist of 40,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock.
(b) Preferred Stock
On February 13, 1996, the Board of Directors authorized an amendment to the
Company's Certificate of Incorporation giving the Board the authority to issue
up to 5,000,000 shares, $0.01 par value, of Preferred Stock with terms to be
established by the Board at the time of issuance.
(12) ACQUISITIONS
On December 15, 1997, the Company issued 611,738 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.
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, 1997 1996 1995
------------------ ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues:
Sapient....................................... $57,319 $44,580 $21,930
EXOR.......................................... 6,076 4,429 2,551
------- ------- -------
Combined...................................... $63,395 $49,009 $24,481
======= ======= =======
Net Income (Loss):
Sapient....................................... $ 8,505 $ 6,571 $ 2,830
EXOR.......................................... 617 (101) 84
------- ------- -------
Combined...................................... $ 9,122 $ 6,470 $ 2,914
======= ======= =======
</TABLE>
(13) SUBSEQUENT EVENT
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. All financial results and share
information have been restated to reflect the effect of the stock dividend.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS
The response to this Item regarding the directors of the Company and
compliance with Section 16(a) of the Securities Exchange Act of 1934 by the
Company's officers and directors will be contained in the Proxy Statement for
the 1998 Annual Meeting of Shareholders under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein.
- 26 -
<PAGE> 29
B. EXECUTIVE OFFICERS OF THE COMPANY
Below is the name, age and principal occupations for the last five
years of each current executive officer of the Company. All such persons have
been elected to serve until their successors are elected and qualified or until
their earlier resignation or removal.
Jerry A. Greenberg 32 Mr. Greenberg co-founded the Company in 1991 and
has served as Co-Chairman of the Board of
Directors and Co-Chief Executive Officer and as a
director since the Company's inception.
J. Stuart Moore 36 Mr. Moore co-founded the Company in 1991 and has
served as Co-Chairman of the Board of Directors
and Co-Chief Executive Officer and as a director
since the Company's inception.
Sheeroy D. Desai 32 Mr. Desai joined the Company in September 1991 and
has served as Executive Vice President since
September 1994. Mr. Desai is responsible for
managing the Company's metropolitan New York
and Atlanta offices.
Susan D. Johnson 32 Ms. Johnson joined the Company as Chief Financial
Officer in February 1994. From April 1991 to
February 1994, Ms. Johnson was employed by
Bitstream, Inc., a software company, where she
served in various finance positions prior to
becoming Chief Financial Officer.
Anthony S. Jules 30 Mr. Jules joined the Company in June 1992 and
became a Vice President in September 1994. From
March 1995 until December 1996, Mr. Jules was
responsible for managing the Company's San
Francisco office. In August 1997, Mr. Jules became
Vice President of the Company's People Strategy
Organization, which combines all of the Company's
recruiting, cultural, morale, communications,
benefits and leadership development teams. Prior
to joining Sapient, Mr. Jules was enrolled in a
Ph.D. program at MIT.
Preston B. Bradford 42 Mr. Bradford joined the Company in September 1994
and became a Vice President in April 1995. Mr.
Bradford is responsible for managing the Company's
Cambridge, Chicago and Dallas offices. From March
1992 to September 1994, Mr. Bradford was Director
of Sales Compensation and Corporate Marketing with
Sprint Communications, Inc., a telecommunications
company.
Desmond P. Varady 32 Mr. Varady joined the Company in October 1993 and
became a Vice President in September 1994. Mr.
Varady is responsible for managing the Company's
San Francisco and Los Angeles offices. From
February 1993 until October 1993, Mr. Varady served
as an assistant Vice President for Citicorp, a
multinational banking organization. From October
1990 until February 1993, Mr. Varady was an account
manager with CompuServe.
Christopher R. Davey 34 Mr. Davey joined the Company in February 1993 and
became a Vice President in September 1994. From
June 1992 until February 1993, Mr. Davey served as
a Regional Sales Director with Aurum Software,
Inc., a computer software development company.
From October 1990 until June 1992, Mr. Davey was a
Regional Sales Manager with Pansophic Systems, an
applications software firm.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item will be contained in the Proxy Statement for
the 1998 Annual Meeting of Shareholders under the captions "Director
Compensation" and "Compensation of Executive Officers" and is incorporated
herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item will be contained in the Proxy Statement for
the 1998 Annual Meeting of Shareholders under the caption "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item will be contained in the Proxy Statement for the
1998 Annual Meeting of Shareholders under the caption "Compensation of Executive
Officers" and is incorporated herein.
- 27 -
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
14(a)(1) FINANCIAL STATEMENTS
The Consolidated Financial Statements filed as part of this report are
listed and indexed on page 14. Schedules other than those listed in the index
have been omitted because they are not applicable or the required information
has been included elsewhere in this report.
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable regulations
of the Securities and Exchange Commission have been omitted because the
information is disclosed in the Consolidated Financial Statements or because
such schedules are not required or are not applicable.
14(a)(3) EXHIBITS
The exhibits filed as part of this Annual Report on Form 10-K are
listed in the Exhibit Index immediately preceding the exhibits. The Company has
identified with an asterisk in the Exhibit Index each management contract and
compensation plan filed as an exhibit to this Annual Report on Form 10-K in
response to Item 14(c) of Form 10-K.
14(b) REPORTS ON FORM 8-K
On December 24, 1997, the Company filed a Current Report on Form 8-K
dated December 15, 1997 announcing under Item 2 (Acquisition or Disposition of
Assets) that the Company had acquired all of the outstanding stock of EXOR
Technologies, Inc. ("EXOR") pursuant to a Stock Purchase Agreement dated as of
December 4, 1997, entered into by and among the Company and each of the
stockholders of EXOR.
The Company filed the following financial statements with the Current
Report on Form 8-K:
Independent Auditors' Report
EXOR Technologies, Inc. Balance Sheets as of December 31, 1996 and
September 30, 1997 (Unaudited)
EXOR Technologies, Inc. Statements of Operations for the year ended
December 31, 1996 and the nine-month period ended September 30, 1997
(Unaudited)
EXOR Technologies, Inc. Statements of Stockholders' Equity for the year
ended December 31, 1996 and the nine-months ended September 30, 1997
(unaudited)
EXOR Technologies, Inc. Statements of Cash Flows for the year ended
December 31, 1996 and the nine-month period ended September 30, 1997
(Unaudited)
EXOR Technologies, Inc. Notes to Financial Statements
Pro Forma Condensed Combining Balance Sheet as of September 30, 1997
Pro Forma Condensed Combining Statement of Operations for the
nine-month period ended September 30, 1997
Pro Forma Condensed Combining Statement of Operations for the year
ended December 31, 1996
Notes to Pro Forma Condensed Combining Financial Statements
- 28 -
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SAPIENT CORPORATION
By: /s/ Jerry A. Greenberg
--------------------------
Jerry A. Greenberg
Co-Chief Executive Officer
Dated: March 12, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the following capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICERS:
/s/ Jerry A. Greenberg Co-Chief Executive Officer and March 12, 1998
- ---------------------------------- Secretary
Jerry A. Greenberg
/s/ J. Stuart Moore Co-Chief Executive Officer March 12, 1998
- ----------------------------------
J. Stuart Moore
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:
/s/ Susan D. Johnson Chief Financial Officer and Treasurer March 12, 1998
- ----------------------------------
Susan D. Johnson
DIRECTORS:
/s/ Jerry A. Greenberg March 12, 1998
- ----------------------------------
Jerry A. Greenberg
/s/ J. Stuart Moore March 12, 1998
- ----------------------------------
J. Stuart Moore
/s/ R. Stephen Cheheyl March 12, 1998
- ----------------------------------
R. Stephen Cheheyl
/s/ Darius W. Gaskins, Jr. March 12, 1998
- ----------------------------------
Darius W. Gaskins, Jr.
/s/ Bruce D. Parker March 12, 1998
- ----------------------------------
Bruce D. Parker
/s/ Carl S. Sloane March 12, 1998
- ----------------------------------
Carl S. Sloane
</TABLE>
- 29 -
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1+ Amended and Restated Certificate of Incorporation
3.2+ Amended and Restated Bylaws
4.1+ Specimen Certificate for Shares of Common Stock, $.01 par value,
of the Company
10.1+ Lease between the Company and One Memorial Drive Limited
Partnership, dated March 30, 1994, as amended December 5, 1995,
for offices at One Memorial Drive, Cambridge, MA
10.2+++ Second Amendment to Lease dated April 1997 between the Company and
One Memorial Drive Limited Partnership, dated March 30, 1994, as
amended December 5, 1995, for offices at One Memorial Drive,
Cambridge, MA
10.3+ Lease between the Company and S.P.N.W. Management Associates
Limited Partnership, dated November 2, 1995, for offices at 10
Exchange Place, Jersey City, NJ
10.4+ Lease between the Company and The Prudential Insurance Company of
America, dated July 17, 1995, for offices at 580 California
Street, San Francisco, CA
10.5++++ Stock Purchase Agreement by and among Sapient Corporation and Mark
Hallman, Boyd Scroggins, Carolyn R. Waygood and Charles M. Waygood
dated as of December 4, 1997
10.6+++ Assignment and Assumption of 101 California Lease dated as of
December 9, 1996 between the Company and Tri Valley Growers, for
offices at 101 California Street, San Francisco, CA
10.7+++ Sublease dated as December 20, 1996 between the Company and Dreman
Value Advisors, Inc. for offices located at 10 Exchange Place,
Jersey City, NJ
10.8+++ Sublease dated August 6, 1997 between the Company and Fleet Bank,
N.A. for offices located at 10 Exchange Place, Jersey City, NJ
10.9+++ Sub-Sublease Agreement between the Company and Metro Provider
Service Corporation dated as of April 1, 1997, for office space at
200 West Adams, Chicago IL
10.10*+ 1992 Stock Plan
10.11*+ 1996 Equity Stock Incentive Plan
10.12*+ 1996 Director Stock Option Plan
10.13*+++ 1997 Executive Bonus Plan
10.14+ Revolving Loan Facility with Fleet Bank of Massachusetts, N.A.,
dated July 11, 1994, as amended July 1, 1995 and February 15, 1996
10.15+++ Amendment dated June 30, 1997 to the Revolving Loan Facility with
Fleet Bank of Massachusetts, N.A., dated July 11, 1994, as amended
July 1, 1995 and February 15, 1996
10.16++ Standard Form Employment Agreement between the Company and its
Employees
11 Computation of Shares used in Computing Basic and Diluted Net
Income Per Share
21 List of Subsidiaries
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
- -------------
* Exhibits filed pursuant to Item 14(c) of Form 10-K.
** Exhibits filed herewith.
+ Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-1586).
++ Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-12671).
+++ Incorporated herein by reference to the Company's Form 10-Q for the fiscal
quarter ended September 30, 1997 (File No. 000-28074).
++++ Incorporated herein by reference to the Company's Form 8-K (File No.
000-28074).
<PAGE> 1
EXHIBIT 11
SAPIENT CORPORATION
Computation of Shares Used in Computing Basic and Diluted Net Income
Per Share (In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
Net income .................... $12,358 $ 6,470 $ 2,914
-------- -------- --------
Basic net income per share:
Weighted average common shares
outstanding .................. 23,996 21,631 18,275
-------- -------- --------
Shares used in computing per
share amount ................. 23,996 21,631 18,275
======== ======== ========
Basic net income per share .... $ 0.52 0.30 0.16
======== ======== ========
Diluted net income per share:
Weighted average common shares
outstanding .................. 23,996 21,631 18,275
Dilutive stock options ........ 2,083 2,425 2,851
-------- -------- --------
Shares used in computing per
share amount ................. 26,079 24,056 21,126
======== ======== ========
Diluted net income per share .. $ 0.47 $ 0.27 $ 0.14
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
EXOR Technologies, Inc.
Sapient Securities Corporation
Sapient Limited
Sapient Software Consulting Limited
<PAGE> 1
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Sapient Corporation:
We consent to incorporation by reference in the registration statement (No.
33-43485) on Form S-3 and in the registration statements (Nos. 333-05155,
333-07561, 333-07563 and 333-07565) on Form S-8 of Sapient Corporation of our
report dated January 23, 1998, except for Note 13 which is as of January 29,
1998, relating to the consolidated balance sheets of Sapient Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997, which report appears in the
December 31, 1997 annual report on Form 10-K of Sapient Corporation.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 47,314,306 47,314,306
<SECURITIES> 17,091,604 17,091,604
<RECEIVABLES> 25,712,914 25,712,914
<ALLOWANCES> 425,000 425,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 91,367,578 91,367,578
<PP&E> 10,987,000 10,987,000
<DEPRECIATION> 4,671,546 4,671,546
<TOTAL-ASSETS> 98,013,243 98,013,243
<CURRENT-LIABILITIES> 14,983,196 14,983,196
<BONDS> 0 0
0 0
0 0
<COMMON> 242,066 242,066
<OTHER-SE> 81,757,080 81,757,080
<TOTAL-LIABILITY-AND-EQUITY> 98,013,243 98,013,243
<SALES> 26,965,183 90,359,604
<TOTAL-REVENUES> 26,965,183 90,359,604
<CGS> 12,997,157 43,816,330
<TOTAL-COSTS> 22,129,628 72,377,099
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 506,708 2,078,825
<INCOME-PRETAX> 5,342,263 20,061,330
<INCOME-TAX> 2,105,830 7,702,847
<INCOME-CONTINUING> 3,236,433 12,358,483
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,236,433 12,358,483
<EPS-PRIMARY> 0.13 0.52
<EPS-DILUTED> 0.12 0.47
</TABLE>
