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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 0-28074
   
 
Sapient Corporation
(Exact name of registrant as specified in its charter)
  
 
 
Delaware
 
04-3130648
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
131 Dartmouth St, Boston, MA
 
02116
(Address of principal executive offices)
 
(Zip Code)
617-621-0200
(Registrant’s telephone number, including area code)
(Not applicable)
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
x
Accelerated filer
 
o
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
Outstanding at November 3, 2014
Common Stock, $0.01 par value per share
 
140,740,938
 


Table of Contents

SAPIENT CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2014
 
 
Page
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.  
Item 2.
Item 6.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements included in this Quarterly Report on Form 10-Q, including those related to the proposed acquisition by Publicis Groupe S.A., the timing for closing the proposed acquisition, the conditions to closing the proposed acquisition, benefits of the proposed acquisition, our cash and liquidity resources, our expected cash outlays, our capital expenditures relating to restructuring and the effects of restructuring certain subsidiaries, future dividend payments, our peoplecount, investing activities, and repurchases of our common stock, the nature of our unbilled revenues, our tax estimates and deferred tax assets and amounts, including previously recorded employment-related tax liabilities, the timing of settlement of employment-related tax liabilities, the outcome of tax audits and proceedings, our accrual of contingent liabilities, the impact of acquisitions and acquisition costs and our fair value estimates, our compensation expense, the ability of our insurance to cover our indemnification arrangements and our fair value estimates of such arrangements, the effects of changes in interest rates and currency exchange rate fluctuations, the impact of new accounting pronouncements and changes to accounting policies, the temporary nature of certain impairments, our assumptions underlying certain impairment reviews, anticipated revenue from our services, including traditional IT consulting services, anticipated client contractual demands, our ability to meet working capital and capital expenditure requirements, the outcome of litigation, benefits of our relationships and strategic alliances, determinations around goodwill, the alignment of our sales professionals, our employee relationships, our competition and our principal competitive factors, our ability to estimate required resources for client arrangements, our technology platforms, borrowings under our credit facility, the nature of our unbilled revenues, our reinvestment of unremitted earnings and our plans regarding whether or not to repatriate overseas funds, our expectations regarding fixed price contracts and lease extensions, opportunities to earn performance bonuses in customer contracts, the anticipated impact of cross-border mobility and the movement of employees globally, and the cost impact and timing of our internal controls remediation, as well as any statement other than statements of historical facts are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “will,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in Part II, Item 1A, Risk Factors, and elsewhere in this Quarterly Report on Form 10-Q. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments, including our acquisition by Publicis Groupe S.A. In addition, any forward-looking statements represent our expectation only as of the day this Quarterly Report on Form 10-Q was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change, except as required by law.


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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated and Condensed Financial Statements
SAPIENT CORPORATION
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
308,887

 
$
337,630

Marketable securities
6,255

 
5,870

Restricted cash, current portion
41

 
69

Accounts receivable, net of allowance for doubtful accounts of $0 at September 30, 2014 and December 31, 2013
206,714


184,174

Unbilled revenues
110,960


85,436

Prepaid expenses and other current assets
82,438


54,516

Total current assets
715,295

 
667,695

Restricted cash, net of current portion
1,547


2,019

Property and equipment, net
97,073

 
85,898

Purchased intangible assets, net
26,301


27,508

Goodwill
149,303


149,142

Other assets
16,990


18,386

Total assets
$
1,006,509

 
$
950,648

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
30,226


$
30,410

Accrued expenses
78,177


65,348

Accrued compensation
134,755


99,004

Income taxes payable
14,990


18,439

Deferred revenues
23,133


29,866

Total current liabilities
281,281

 
243,067

Other long-term liabilities
83,734


117,568

Total liabilities
365,015

 
360,635

Commitments and contingencies (Note 7)

 

Noncontrolling interest subject to put provisions (Note 9)
727

 
784

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized and none issued or outstanding at September 30, 2014 and December 31, 2013

 

Common stock, par value $0.01 per share, 200,000,000 shares authorized, 146,431,623 and 144,484,051 shares issued, and 141,243,240 and 140,368,351 shares outstanding at September 30, 2014 and December 31, 2013, respectively
1,464

 
1,445

Additional paid-in capital
601,116

 
586,673

Treasury stock, at cost, 5,188,383 and 4,125,700 shares at September 30, 2014 and at December 31, 2013, respectively
(59,901
)
 
(43,756
)
Accumulated other comprehensive loss
(42,508
)
 
(36,551
)
Retained earnings
140,596

 
81,418

Total Sapient Corporation stockholders’ equity
640,767

 
589,229

Total liabilities and stockholders’ equity
$
1,006,509

 
$
950,648


The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.

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SAPIENT CORPORATION
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) 

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
As Restated
 

 
As Restated
Revenues:
 
 
 
 

 

Service revenues
$
350,704


$
323,793


$
1,054,432


$
930,765

Reimbursable expenses
13,928

 
11,087

 
42,139

 
33,705

Total gross revenues
364,632

 
334,880

 
1,096,571

 
964,470

Operating expenses:
 
 
 
 

 

Project personnel expenses
236,862

 
219,654

 
727,817


639,289

Reimbursable expenses
13,928

 
11,087

 
42,139

 
33,705

Total project personnel expenses and reimbursable expenses
250,790

 
230,741

 
769,956

 
672,994

Selling and marketing expenses
13,556

 
11,926

 
44,313


36,629

General and administrative expenses
60,654

 
52,313

 
178,159


160,188

Restructuring and other related charges (benefits)
1,125

 
(28
)
 
2,989

 
1,955

Amortization of purchased intangible assets
3,389

 
3,007

 
10,430


9,927

Acquisition costs and other related charges (benefits)
1,301

 
(1,268
)
 
1,729


(1,652
)
Impairment of intangible asset

 
596

 

 
2,090

Total operating expenses
330,815

 
297,287

 
1,007,576

 
882,131

Income from operations
33,817


37,593


88,995


82,339

Interest income
2,212

 
1,493

 
6,221

 
4,570

Interest expense
(924
)
 
(636
)
 
(2,412
)
 
(1,997
)
Other income, net
28

 
484

 
499

 
840

Income before income taxes
35,133

 
38,934

 
93,303

 
85,752

Provision for income taxes
12,796

 
12,677

 
34,132

 
30,874

Net income
22,337

 
26,257

 
59,171

 
54,878

Less: Net income (loss) attributable to noncontrolling interest
70

 
(88
)
 
(7
)
 
(175
)
Net income attributable to stockholders of Sapient Corporation
$
22,267


$
26,345

 
$
59,178

 
$
55,053

Basic net income per share attributable to stockholders of Sapient Corporation
$
0.16

 
$
0.19

 
$
0.42

 
$
0.40

Diluted net income per share attributable to stockholders of Sapient Corporation
$
0.16

 
$
0.19

 
$
0.41

 
$
0.39

Weighted average common shares
141,624

 
139,959

 
141,299

 
139,202

Weighted average dilutive common share equivalents
1,473

 
2,302

 
2,259

 
3,731

Weighted average common shares and dilutive common share equivalents
143,097

 
142,261

 
143,558

 
142,933


The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.


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SAPIENT CORPORATION
CONSOLIDATED AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
As Restated
 
 
 
As Restated
Net income
$
22,337

 
$
26,257

 
$
59,171

 
$
54,878

Other comprehensive (loss) income:
 
 
 
 
 
 

Foreign currency translation adjustments
(13,036
)
 
2,614

 
(6,002
)
 
(14,449
)
Net unrealized gain on available-for-sale investments, net of taxes
5

 
(55
)
 
46

 
1

Reclassification adjustment for realized loss on available-for-sale investments, net of taxes

 

 

 
28

Net gain on available-for-sale investments
5

 
(55
)
 
46

 
29

Other comprehensive (loss) income
(13,031
)
 
2,559

 
(5,956
)
 
(14,420
)
Total comprehensive income
9,306

 
28,816

 
53,215

 
40,458

Comprehensive loss attributable to noncontrolling interest
(21
)
 
(92
)
 
(57
)
 
(282
)
Comprehensive income attributable to stockholders of Sapient Corporation
$
9,327

 
$
28,908

 
$
53,272

 
$
40,740


The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.


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SAPIENT CORPORATION
CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Nine Months Ended September 30,
 
2014
 
2013
 

 
As Restated
Cash flows from operating activities:

 

Net income
$
59,171

 
$
54,878

Adjustments to reconcile net income to net cash provided by operating activities:

 

Deferred income taxes
(6,594
)
 
(2,250
)
Unrealized (gain) loss on financial instruments
(238
)
 
88

(Gain) loss recognized on disposition of fixed assets
(29
)
 
1,043

Realized gain on investments
(301
)
 

Depreciation expense
23,118

 
20,251

Amortization of purchased intangible assets
10,430

 
9,927

Loss recognized on sale of available-for-sale marketable securities

 
28

Impairment of intangible asset

 
2,090

Stock-based compensation expense
24,438

 
23,142

Excess tax benefits from exercise and release of stock-based awards
(4,030
)
 
(2,024
)
Non-cash restructuring charges

 
146

Changes in operating assets and liabilities, excluding impact of acquisitions:

 

Accounts receivable
(20,379
)
 
(6,659
)
Unbilled revenues
(27,063
)
 
(32,984
)
Prepaid expenses and other current assets
(28,125
)
 
5,773

Other assets
11,200

 
(144
)
Accounts payable
(793
)
 
907

Accrued compensation
19,949

 
(2,539
)
Deferred revenues
(6,718
)
 
(4,979
)
Accrued expenses
17,307

 
(4,903
)
Income taxes payable
(100
)
 
12,386

Other long-term liabilities
(32,962
)
 
1,275

Net cash provided by operating activities
38,281

 
75,452

Cash flows from investing activities:

 

Purchases of property and equipment and cost of internally developed software
(34,385
)
 
(27,201
)
Proceeds from sale of property and equipment
102

 

Cash paid for acquisitions of businesses, net of cash acquired
(13,016
)
 
(4,993
)
Cash paid for asset acquisitions
(1,500
)
 

Sales of marketable securities classified as available-for-sale

 
1,372

Purchases of marketable securities classified as available-for-sale

 
(1,916
)
Cash paid for acquisition of cost method investment
(5,526
)
 
(200
)
Cash received on settlement of financial instruments, net
154

 
(1,624
)
Change in restricted cash balances
373

 
3,941

Net cash used in investing activities
(53,798
)
 
(30,621
)
Cash flows from financing activities:

 

Excess tax benefits from exercise and release of stock-based awards
4,030

 
2,024

Proceeds from issuance of common stock under stock plans
2,375

 
2,703

Payment of acquisition date fair value contingent consideration
(5,136
)
 

Repurchases of common stock
(15,481
)
 

Net cash (used in) provided by financing activities
(14,212
)
 
4,727

Effect of exchange rate changes on cash and cash equivalents
986

 
(10,840
)
Net (decrease) increase in cash and cash equivalents
(28,743
)
 
38,718

Cash and cash equivalents at beginning of period
337,630

 
234,038

Cash and cash equivalents at end of period
$
308,887

 
$
272,756

Supplemental cash flow information:

 

Non-cash investing transactions:

 

Purchases of property and equipment for which cash had not been paid as of period end
$
2,665

 
$
2,254

Settlement of acquisition-related contingent consideration through releases from escrow
$

 
$
5,520

The accompanying notes are an integral part of these Unaudited Consolidated and Condensed Financial Statements.

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SAPIENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited consolidated and condensed financial statements have been prepared by Sapient Corporation (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K. These financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
The consolidated financial statements include the accounts of the Company and its wholly-owned and controlled subsidiaries. All intercompany transactions have been eliminated in consolidation.
The results of operations of acquired companies have been included in the Company’s consolidated financial statements as of the respective acquisition dates, as described further in Note 3, Business Acquisitions.
Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Sapient,” “the Company,” “we,” “us” or “our” refer to Sapient Corporation and its consolidated subsidiaries.
Restatement of Prior Period Financial Statements
As disclosed previously in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, the Company restated its audited consolidated financial statements as of and for the years ended December 31, 2012 and 2011 and its unaudited quarterly financial information for each of the quarters in the year ended December 31, 2012 and for the first three quarters in the year ended December 31, 2013. The Company has reflected herein its restated unaudited quarterly consolidated and condensed financial information as of and for the three and nine months ended September 30, 2013.
For further information regarding the Company's restatement, see Note 17, Restatement.
(2) Subsequent Events
On November 1, 2014, Sapient entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Publicis Groupe S.A., a French société anonyme (“Publicis Groupe ”), and 1926 Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Publicis Groupe (“Merger Sub”). Under the Merger Agreement, Publicis Groupe will cause Merger Sub to commence a cash tender offer (the “Offer”) within 10 business days following the date of the Merger Agreement, for all of Sapient’s outstanding shares of common stock, par value $0.01 per share (the “Shares”), at a purchase price of $25.00 per Share, net to the seller in cash, without interest, subject to any required withholding of taxes.  The Offer will remain open for a minimum of 20 business days from the date of commencement. The transaction was unanimously approved by the Board of Directors of Sapient and the Management and Supervisory Boards of Publicis Groupe. The obligation of Merger Sub to purchase the Shares in the Offer is subject to certain closing conditions, including the Shares having been validly tendered and not withdrawn representing at least a majority of the total number of Shares then-outstanding, expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the antitrust, competition and trade regulation laws of Germany, the conclusion or termination of review by the Committee on Foreign Investment in the United States and certain other regulatory approvals. The transaction is expected to close in the first quarter of 2015, although there can be no assurance the transaction will close within the expected timeframe or at all. If the Merger Agreement is terminated under certain circumstances, Sapient may be obligated to pay Publicis Groupe a termination fee of $125.0 million.
For further information regarding the transaction and the Merger Agreement, please refer to the Current Report on Form 8-K filed on November 3, 2014, with which the Merger Agreement is filed as Exhibit 2.1.
(3) Business Acquisitions
2014 Acquisition
OnPoint Consulting, Inc. ("OnPoint")
On February 5, 2014, the Company acquired 100% of the outstanding equity of OnPoint Consulting, Inc. (“OnPoint”), a technology consulting firm based in Arlington, Virginia, which provides enterprise systems and infrastructure services to federal

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government customers. The Company acquired OnPoint to expand its portfolio of government clients and contracts for application development cyber-security services and IT infrastructure services.
The acquisition date fair value, net of cash acquired, was $12.8 million for the purchase of 100% of OnPoint’s common stock. This total consisted of $12.5 million in cash paid upon closing (net of cash acquired). Of the cash amount paid, $0.8 million was placed into escrow, of which $0.3 million serves as security for any claims made by the Company under the terms of the escrow agreement between the Company and the former owners of OnPoint. The remaining amounts deposited into escrow were related to net working capital adjustments and were released from escrow during the three months ended June 30, 2014. Also, during the three months ended June 30, 2014, an additional $0.3 million was distributed to the former owners related to net working capital adjustments.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The fair values of goodwill, intangible assets and net assets acquired were approximately $1.7 million, $7.8 million, and $3.3 million, respectively.
The Company believes the amount of goodwill is attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset). All of the goodwill was allocated to the Company’s Sapient Government Services reportable segment. The following table presents the estimated fair values and useful lives of intangible assets acquired:
 
Amount
 
Weighted Average Useful
Life
 
(in thousands)
 
(in years)
Backlog
$
5,290

 
7
Customer relationships
2,260

 
7
Tradename
230

 
2
Identifiable intangible assets
$
7,780

 
 
The useful lives of these intangible assets were based upon the patterns in which the economic benefits related to such assets are expected to be realized, and the intangible assets will be amortized on a basis reflecting those economic patterns. OnPoint's acquired goodwill and intangible assets will be deductible for tax purposes.
Service revenues for OnPoint during the three and nine months ended September 30, 2014 were $8.0 million and $18.3 million, respectively. Net income and net loss for OnPoint during the three and nine months ended September 30, 2014 were $0.9 million and $2.1 million, respectively. Proforma results of operations have not been included as the acquisition of OnPoint was not material to the Company's operations for any periods presented.
Prior Year Acquisitions
"la comunidad" CORPORATION and La Comunidad S.A.
On December 30, 2013, the Company acquired 100% of the outstanding equity of "la comunidad" CORPORATION and La Comunidad S.A. (together, "La Comunidad"), an independent multicultural creative agency based in Miami, Florida and Buenos Aires, Argentina. The Company acquired La Comunidad to leverage the growing importance of multicultural marketing in expanding Sapient's combination of brand and creative service offerings to its clients.
The acquisition date fair value, net of cash acquired, was $21.0 million for the purchase of 100% of La Comunidad’s common stock. This total consisted of $9.7 million in cash (net of cash acquired), stock-based awards with an estimated fair value of $2.0 million and contingent consideration with estimated fair value of $9.3 million. Of the stock-based awards, $1.5 million was not issued at the time of acquisition (determined fair value of $1.0 million), of which $1.0 million serves as security for any claims made by the Company, and $0.5 million was related to final working capital adjustments. During the three months ended September 30, 2014, $0.3 million was distributed to the former owners related to net working capital adjustments.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The preliminary fair values of goodwill, intangible assets and net assets were approximately $13.9 million, $6.1 million, and $1.1 million, respectively. These amounts are subject to subsequent adjustment as the Company obtains additional information during the measurement period and finalizes its fair value estimates primarily with respect to certain components of working capital.

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The Company believes the amount of goodwill is attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset) and the expected synergistic benefits of being able to leverage La Comunidad’s expertise with the Company’s existing services to provide integrated marketing services to the customer bases of both the Company and La Comunidad. All of the goodwill was allocated to the Company’s SapientNitro reportable segment.
The former owners of La Comunidad are also eligible to receive additional consideration of up to $24.0 million, which is contingent on the fulfillment of certain financial and other performance conditions during the years ending December 31, 2014 through December 31, 2017. If such conditions are achieved, the consideration is payable under certain circumstances in cash or a combination of cash and common stock, at the Company's discretion up to a defined threshold. Using a discounted cash flow method, the Company recorded an estimated liability of $9.3 million as of the acquisition date and $10.4 million as of September 30, 2014. The Company will continue to assess the probability that the conditions will be fulfilled, and any subsequent changes in the estimated fair value of the liability will be reflected in earnings until the liability is fully settled. During the three and nine months ended September 30, 2014, the Company recorded an expense of $0.2 million and $0.6 million, respectively, relating to the change in fair value of the contingent liability. This amount is included in "Acquisition costs and other related charges" in the Company's unaudited consolidated and condensed statements of operations.
iThink Comunicação e Publicidade Ltda.
On January 16, 2013, the Company acquired 81% of the outstanding securities of iThink Comunicação e Publicidade Ltda. (“iThink”), an independent digital agency based in São Paulo, Brazil. The Company acquired iThink to expand Sapient’s combination of brand, digital and commerce service offerings to global clients in Latin America.
The acquisition date fair value, net of cash acquired, was $6.8 million for the purchase of 81% of iThink’s outstanding securities, including the fair value amount of $1.2 million of noncontrolling interest. This total consisted of $4.9 million of cash paid (net of cash acquired and working capital adjustments), deferred contingent consideration with an estimated fair value of $0.7 million, and noncontrolling interest with an estimated fair value of $1.2 million. Of the cash amount paid, $2.0 million was placed into escrow, of which $1.5 million serves as security for any claims made by the Company under the terms of an escrow agreement between the Company and the former owners of iThink. The remaining amounts were related to other adjustments, including net working capital adjustments, and were released from escrow during the three months ended June 30, 2013.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the tangible assets, identifiable intangible assets and net assets was recorded as goodwill. The fair values of goodwill, intangible assets and net assets were $6.3 million, $1.4 million, and $(0.4) million, respectively.
The Company believes the amount of goodwill is attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable intangible asset) and the expected synergistic benefits of being able to leverage iThink’s expertise with the Company’s existing services to provide integrated marketing services to the customer bases of both the Company and iThink in Latin America. All of the goodwill was allocated to the Company’s SapientNitro reportable segment.
The former owners of iThink are eligible to receive additional cash consideration of up to $11.7 million, which is contingent on the fulfillment of certain financial conditions during the three years ending December 31, 2015. Using a discounted cash flow method, the Company recorded an estimated contingent consideration liability of $0.7 million as of the acquisition date, and zero as of September 30, 2014. The Company will continue to assess the probability that the conditions will be fulfilled and any subsequent changes in the estimated fair value of the liability will be reflected in earnings until the liability is fully settled. During the nine months ended September 30, 2014, the Company recorded a benefit of less than $0.1 million, relating to the remeasurement of the fair value of the contingent liability. This amount is included in "Acquisition costs and other related charges" in the Company's unaudited consolidated and condensed statements of operations. The contingent consideration liability is denominated in a foreign currency and, therefore, its value as reported in U.S. dollars on the Company’s consolidated balance sheet may change from period to period due to currency exchange rate fluctuations. During the three months ended June 30, 2014, the Company executed an Employment Agreement with one of iThink's minority owners, pursuant to which the individual waived all rights to the contingent consideration.
The Company has the right (but not the obligation) to purchase the remaining noncontrolling interest in iThink at certain times and under certain circumstances (the “Call Option”) as defined by the terms of the purchase agreement. With respect to any of the remaining equity interests in iThink for which the Company does not exercise its purchase option, the owners of the noncontrolling interest in iThink have the right (but not the obligation) to sell their equity interests to the Company (the “Put Option”). The Call Option and Put Option may only be exercised for a period of 30 days following specific circumstances. The Call Option and Put Option are embedded features of the noncontrolling interest and are not freestanding financial instruments. Due to the presence of the Put Option, the noncontrolling interest in iThink is classified as temporary equity, between liabilities and permanent equity, in the Company’s consolidated balance sheets. The noncontrolling interest was initially recorded at fair value and is subsequently adjusted at each reporting period for comprehensive income (loss) of the subsidiary attributed to the noncontrolling interest, dividends paid to the noncontrolling interest, and changes in the controlling entity’s ownership interest.

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During the three months ended December 31, 2013, the Company made additional capital contributions which increased the Company's ownership from 81% to 84% of the outstanding securities of iThink.
(m)Phasize, LLC
On December 27, 2012, the Company acquired 100% of the membership interests of (m)Phasize, LLC (“(m)Phasize”), a marketing analytics company located in Westport, Connecticut. The Company acquired (m)Phasize to strengthen its analytics services and marketing mix modeling capabilities.
The acquisition date fair value, net of cash acquired, was $18.5 million for the purchase of 100% of (m)Phasize’s membership interests. This total consisted of $12.1 million in cash, inclusive of net working capital adjustments, stock-based awards with an estimated fair value of $0.3 million, and deferred contingent consideration with an estimated fair value of $6.1 million. Of the cash amount, $2.5 million was placed into escrow; $1.2 million served as security for any claims made by the Company under the terms of an escrow agreement between the Company and the former owners of (m)Phasize and was released to the former owners of (m)Phasize during the three months ended June 30, 2014; $1.0 million was contingent upon meeting certain revenue targets and was released to the former owners of (m)Phasize during the three months ended March 31, 2013; and $0.3 million related to final working capital adjustments and was released to the former owners of (m)Phasize in July 2013.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The fair values of goodwill, intangible assets and net assets were $11.8 million, $5.9 million, and $0.8 million, respectively.
The former members of (m)Phasize are also eligible to receive additional consideration of up to $12.8 million, which is contingent on the fulfillment of certain financial conditions during the year ended December 31, 2013 and the year ending December 31, 2014. If such conditions are achieved, the consideration is payable under certain circumstances in cash or a combination of cash and common stock, at the Company's discretion up to a defined threshold. Using a discounted cash flow method, the Company recorded an estimated liability of $6.1 million as of the acquisition date. As of December 31, 2013, one of the financial conditions was achieved and as a result, $5.5 million was paid to the former shareholders of (m)Phasize during the three months ended June 30, 2014. As of September 30, 2014, using a discounted cash flow method, the Company recorded an estimated liability of $4.3 million for the consideration related to the fulfillment of certain financial conditions during the year ended December 31, 2014. The Company will continue to assess the probability that the conditions will be fulfilled, and any subsequent changes in the estimated fair value of the liability will be reflected in earnings until the liability is fully settled. During the three and nine months ended September 30, 2014, the Company recorded an expense of $0.4 million and $2.4 million, respectively, relating to the remeasurement of the fair value of the contingent liability. This amount is included in “Acquisition costs and other related charges” in the Company’s unaudited consolidated and condensed statements of operations.
Second Story Inc.
On November 1, 2012, the Company acquired Second Story Inc. (“Second Story”), an interactive studio operating in the United States. The Company acquired Second Story to strengthen the Company’s ability to craft physical and digital experiences from web and mobile to in-store and in-venue.
The acquisition date fair value, net of cash acquired, was $9.9 million for the purchase of 100% of Second Story’s outstanding shares. This total consisted of $6.0 million in cash, restricted stock with an estimated fair value of $2.1 million, and deferred stock consideration with an estimated fair value of $1.8 million. Of the cash amount, $0.9 million was placed into escrow; of which $0.5 million served as security for any claims made by the Company under the terms of an escrow agreement between the Company and the former owners of Second Story, and $0.4 million was related to final working capital adjustments. These escrow amounts were released to the former owners of Second Story during the three-months ended March 31, 2013. As of September 30, 2014, the fair value of the deferred stock consideration was $1.7 million.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The fair values of goodwill, intangible assets and net assets were $6.5 million, $2.4 million, and $1.0 million, respectively.
D&D Holdings Limited
On September 6, 2011, the Company acquired D&D Holdings Ltd. (“DAD”), a London-based advertising agency operating in the United Kingdom and continental Europe. The Company acquired DAD in order to strengthen its capabilities in marketing campaign production and direct response measurement.

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The acquisition date fair value, net of cash acquired, was $45.2 million for the purchase of 100% of DAD’s outstanding shares. The $45.2 million consisted of $29.5 million in cash and deferred contingent consideration with an estimated fair value of $15.7 million. Of the cash amount, $9.8 million was placed into escrow to serve as security for any claims made by the Company under the terms of an escrow agreement between the Company and the former owners of DAD. The escrow amount may be utilized for the potential settlement of a portion of the deferred contingent consideration.
Assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The fair values of identifiable intangible assets were based on valuations using the income approach and estimates provided by management. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The fair values of goodwill, intangible assets and net assets were $24.0 million, $25.2 million, and $(4.0) million, respectively.
The former shareholders of DAD were also eligible to receive additional consideration of up to $21.9 million, which was contingent on the fulfillment of certain financial conditions within the period from July 1, 2011 to June 30, 2014. The consideration was payable under certain circumstances in cash, common stock or a combination of both, at the Company's discretion up to a defined threshold. Using a discounted cash flow method, the Company recorded an estimated liability of $15.7 million as of the acquisition date. During the three months ended March 31, 2012, one of the financial conditions was achieved and as a result, $4.7 million of the escrow was released to the former shareholders of DAD during the three months ended June 30, 2012. At December 31, 2012, another of the financial conditions was achieved and as a result, $4.8 million of the escrow was released to the former shareholders of DAD during the three months ending March 31, 2013. At June 30, 2014, the remaining financial conditions were partially achieved and as a result, $2.6 million was paid in cash to the former shareholders of DAD during the three months ended September 30, 2014 and $1.1 million remains as a liability as of September 30, 2014. The remaining $1.1 million liability was issued in shares subsequent to September 30, 2014. During the three and nine months ended September 30, 2014, the Company recorded a benefit of less than $0.1 million and $3.2 million, respectively, relating to remeasurement of the fair value of the contingent liability, which are included in “Acquisition costs and other related charges” in the Company’s consolidated and condensed statements of operations. This liability is denominated in a foreign currency and therefore, its value as reported in U.S. dollars on the Company’s unaudited consolidated and condensed balance sheets may change from period to period due to currency exchange rate fluctuations.
(4) Marketable Securities and Fair Value Disclosures
Marketable Securities
As of September 30, 2014 and December 31, 2013, all of the Company’s marketable securities were classified as available-for-sale and their estimated fair values were $6.3 million and $5.9 million, respectively.
The following table presents details of the Company’s marketable securities as of September 30, 2014 and December 31, 2013 (in thousands):
 
Available-for-Sale Securities as of September 30, 2014
 
Available-for-Sale Securities as of December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
$
6,268

 
$
17

 
$
(30
)
 
$
6,255

 
$
5,934

 
$

 
$
(64
)
 
$
5,870

Total
$
6,268

 
$
17

 
$
(30
)
 
$
6,255

 
$
5,934

 
$

 
$
(64
)
 
$
5,870

There were no other-than-temporary impairment losses recorded during the three and nine months ended September 30, 2014 or 2013. Any other-than-temporary impairment losses on marketable securities would be recorded in “Other income, net” in the Company’s unaudited consolidated and condensed statements of operations.
Fair Value Disclosures
ASC 820, Fair Value Measures and Disclosures, establishes a value hierarchy based on three levels of inputs, of which the first two are considered observable and the third is considered unobservable:
Level 1 assets consist of money market fund deposits and mutual funds that are traded in active markets with sufficient volume and frequency of transactions. The fair values of these assets were determined from quoted prices in active markets for identical assets.
Level 2 assets consist of bank time deposits, foreign exchange option contracts, and Level 2 liabilities consist of foreign exchange option contracts. The fair values of these assets and liabilities were determined from inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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Level 3 assets and liabilities include indemnification assets and contingent consideration liabilities, recorded as the result of acquisitions. The fair value of an acquired indemnification asset is affected most significantly by changes in the fair value of the subject of the indemnification and changes in the expected probabilities of collecting the asset amounts. The fair value of an acquisition-related contingent consideration liability is affected most significantly by changes in the estimated probabilities of the contingencies being achieved.
The Company records certain assets and liabilities at fair value. The following tables present the Company’s fair value hierarchy for its assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
 
 
 
Fair Value Measurements at September 30, 2014 Using
 
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 
 
 
 
 
 
 
 
Bank time deposits
Cash and cash equivalents
 
$

 
$
93,236

 
$

 
$
93,236

Money market fund deposits
Cash and cash equivalents
 
2,801

 

 

 
2,801

Mutual funds
Marketable securities, current portion
 
6,255

 

 

 
6,255

Foreign exchange option contracts, net
Prepaid expenses and other current assets
 

 
294

 

 
294

Indemnification assets associated with acquisitions, current
Prepaid expenses and other current assets
 

 

 
383

 
383

Indemnification assets associated with acquisitions, noncurrent
Other assets
 

 

 
206

 
206

Total
 
 
$
9,056

 
$
93,530

 
$
589

 
$
103,175

 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial liabilities:
 
 
 
 
 
 
 
 
 
Foreign exchange option contracts
Accrued expenses
 
$

 
$
46

 
$

 
$
46

Contingent consideration liability associated with acquisitions, current
Accrued expenses
 

 

 
7,872

 
7,872

Contingent consideration liability associated with acquisitions, noncurrent
Other long-term liabilities
 

 

 
7,808

 
7,808

Total
 
 
$

 
$
46

 
$
15,680

 
$
15,726

 
 
 
Fair Value Measurements at December 31, 2013 Using
 
Balance Sheet Classification
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets:
 
 
 
 
 
 
 
 
 
Bank time deposits
Cash and cash equivalents
 
$

 
$
79,662

 
$

 
$
79,662

Money market fund deposits
Cash and cash equivalents
 
14,154

 

 

 
14,154

Mutual funds
Marketable securities, current portion
 
5,870

 

 

 
5,870

Foreign exchange option contracts, net
Prepaid expenses and other current assets
 

 
129

 

 
129

Indemnification assets associated with acquisitions, current
Prepaid expenses and other current assets
 

 

 
304

 
304

Indemnification assets associated with acquisitions, noncurrent
Other assets
 

 

 
597

 
597

Total
 
 
$
20,024

 
$
79,791

 
$
901

 
$
100,716

 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial liabilities:
 
 
 
 
 
 
 
 
 
Foreign exchange option contracts
Accrued expenses
 
$

 
$
175

 
$

 
$
175

Contingent consideration liability associated with acquisitions, current
Accrued expenses
 

 

 
11,237

 
11,237

Contingent consideration liability associated with acquisitions, noncurrent
Other long-term liabilities
 

 

 
12,426

 
12,426

Total
 
 
$

 
$
175

 
$
23,663

 
$
23,838

The Company did not have any transfers of assets or liabilities between Level 1 and Level 2 or Level 3 of the fair value measurement hierarchy during the three or nine months ended September 30, 2014.

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The following table presents a summary of changes in fair value of the Company’s Level 3 financial assets and liabilities measured on a recurring basis for the nine months ended September 30, 2014 (in thousands):
 
Level 3 Inputs
 
Assets
 
Liabilities
Balance at December 31, 2013
$
901

 
$
23,663

Payment of contingent consideration liability

 
(8,062
)
Change in fair value of contingent consideration liability, included in acquisition costs and other related benefits

 
(403
)
Change in fair value of acquired indemnification assets and contingent consideration liability, included in currency translation adjustments
(30
)
 
(24
)
Increase in fair value of contingent consideration liability, included in general and administrative expenses

 
506

Change in indemnification assets recorded in acquisitions
(282
)
 

Balance at September 30, 2014
$
589

 
$
15,680

The Company’s non-financial assets and liabilities, which include goodwill and long-lived assets held and used, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, the Company would evaluate the non-financial assets and liabilities for impairment. If an impairment was to occur, the asset or liability would be recorded at its estimated fair value. During the three months ended September 30 and March 31, 2013, the Company recorded an impairment of its Nitro customer list intangible asset in the amount of $0.6 million and $1.5 million, respectively. No impairment was recorded in the three and nine months ended September 30, 2014. See Note 12, Goodwill and Purchased Intangible Assets, for additional information.
(5) Stock-Based Compensation
Project personnel expenses, selling and marketing expenses and general and administrative expenses presented in the accompanying unaudited consolidated and condensed statements of operations include the following stock-based compensation expense amounts (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
As Restated
 
 
 
As Restated
Project personnel expenses
$
5,136

 
$
5,044

 
$
14,993

 
$
14,521

Selling and marketing expenses
295

 
175

 
803

 
714

General and administrative expenses
2,913

 
2,933

 
8,642

 
7,907

Total stock-based compensation expense
$
8,344

 
$
8,152

 
$
24,438

 
$
23,142

Stock-based compensation costs capitalized relating to individuals working on internally developed software were immaterial during all periods presented. The Company values restricted stock units (“RSUs”) based on performance conditions and RSUs contingent on employment based on the fair market value on the date of grant, which is equal to the quoted closing market price of the Company’s common stock on the date of grant.
For only those awards that are expected to vest, the Company recognizes stock-based compensation expense, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award when the only condition to vesting is continued employment. If vesting is subject to a market or performance condition, vesting is based on the derived service period. The Company estimates its forfeiture rate based on its historical experience.
During the second quarter of 2011, the Company granted an aggregate of 294,000 RSUs with service and performance conditions to six members of its leadership team. Any units which become eligible for vesting as a result of fulfillment of the performance conditions will vest only if the recipient remains continuously employed with the Company through the award vesting period. On April 1, 2014, the recipients fulfilled the service conditions and received 81,323, 69,848 and 87,268 units for the performance conditions partially achieved during the years ended December 31, 2013, 2012, and 2011, respectively.

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On April 1, 2014, the Company granted an aggregate of 280,591 RSUs with service and performance conditions to five members of its leadership team. Any units which become eligible for vesting as a result of fulfillment of the performance conditions will vest only if the recipient remains continuously employed with the Company through the award vest date of April 1, 2017.
The following table presents activity relating to stock options under all of the Company’s stock option plans during the nine months ended September 30, 2014 (in thousands, except prices):
 
Shares
 
Weighted Average
Exercise Price
Outstanding as of December 31, 2013
463

 
$
6.55

Options exercised
(380
)
 
$
6.35

Options forfeited/canceled
(10
)
 
$
6.14

Outstanding as of September 30, 2014
73

 
$
7.64

Outstanding, vested and exercisable as of September 30, 2014
73

 
$
7.64

Aggregate intrinsic value of outstanding, vested and exercisable
$
463

 
 
The aggregate intrinsic value of stock options exercised in the nine months ended September 30, 2014 and 2013 was $3.9 million and $5.5 million, respectively, determined at the exercise date. As of September 30, 2014, all stock options outstanding were vested and exercisable. As of September 30, 2014, there was no remaining unrecognized compensation expense related to non-vested stock options.
The following table presents activity relating to RSUs during the nine months ended September 30, 2014 (in thousands, except prices):
 
Number of Shares Underlying Restricted Units
 
Weighted Average
Grant Date Fair
Value
Unvested as of December 31, 2013
6,828

 
$
6.97

Restricted units granted
2,331

 
$
17.18

Restricted units vested
(2,408
)
 
$
16.93

Restricted units forfeited/canceled
(391
)
 
$
12.96

Unvested as of September 30, 2014
6,360

 
$
6.58

Expected to vest as of September 30, 2014
5,873

 
$
6.58

The weighted-average grant date fair value of RSUs granted during the nine months ended September 30, 2014 and 2013 was $17.18 and $12.08 per RSU, respectively. The aggregate intrinsic value of RSUs vested during the nine months ended September 30, 2014 and 2013 was $41.0 million and $28.1 million, respectively. As of September 30, 2014, the aggregate intrinsic value of non-vested RSUs, net of estimated forfeitures, was $89.1 million. As of September 30, 2014, unrecognized compensation expense related to non-vested RSUs was $65.0 million, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.4 years.


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(6) Net Income Per Share
The following table presents the computation of basic and diluted net income per share for the periods presented (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
As Restated
 
 
 
As Restated
Net income attributable to stockholders of Sapient Corporation
$
22,267

 
$
26,345

 
$
59,178

 
$
55,053

Basic net income per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
141,624

 
139,959

 
141,299

 
139,202

Basic net income per share attributable to stockholders of Sapient Corporation
$
0.16

 
$
0.19

 
$
0.42

 
$
0.40

Diluted net income per share:
 
 
 
 
 
 
 
Weighted average common shares outstanding
141,624

 
139,959

 
141,299


139,202

Weighted average dilutive common share equivalents
1,473

 
2,302

 
2,259


3,731

Weighted average common shares and dilutive common share equivalents
143,097

 
142,261

 
143,558

 
142,933

Diluted net income per share attributable to stockholders of Sapient Corporation
$
0.16

 
$
0.19

 
$
0.41

 
$
0.39

Anti-dilutive options and share-based awards not included in the calculation
26

 
3

 
21

 
10

Weighted average dilutive common share equivalents include the dilutive impact of deferred stock consideration and restricted stock associated with the acquisitions of La Comunidad, (m)Phasize, Second Story, and DAD. The dilutive impact is included in the weighted average dilutive common share equivalents when contingencies are achieved.
(7) Commitments and Contingencies
The Company is subject to certain legal proceedings and claims incidental to the operations of its business. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully adjudicated. The Company currently does not anticipate that these matters, if resolved against the Company, will have a material adverse impact on its financial results or financial condition.
The Company accrues loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. As of September 30, 2014, the Company has recorded an accrual of $0.7 million for loss contingencies, which represents the better estimate within the probable range of $0.7 million and $2.4 million, related to all probable losses where a reasonable estimate could be made.
The Company does not accrue for contingent losses that, in the judgment of the Company, are considered to be reasonably possible, but not probable. As of September 30, 2014, the Company does not have any reasonably possible losses for which an estimate can be made. Although the Company intends to defend its legal matters vigorously, the ultimate outcome of these matters is uncertain. However, the Company does not expect the potential losses, if any, to have a material adverse impact on its operating results, cash flows, or financial condition.
(8) Income Taxes
For the three and nine months ended September 30, 2014, the Company recorded income tax provisions of $12.8 million and $34.1 million, respectively, compared to $12.7 million and $30.9 million, respectively, for the three and nine months ended September 30, 2013. Income tax is related to federal, state, and foreign tax obligations. The increase in tax expense for the three months ended September 30, 2014 was primarily due to the jurisdictional mix of profit before tax. The increase in tax expense for the nine months ended September 30, 2014 was primarily related to the increase in profit before taxes and the jurisdictional mix.
For the nine months ended September 30, 2014, the Company’s effective tax rate varied from the statutory tax rate primarily due to state income taxes, the tax rate differential attributable to income earned by the Company’s foreign subsidiaries and the related mix of jurisdictional profits, and changes in uncertain tax positions.
The Company enjoys the benefits of income tax holidays in certain jurisdictions in which it operates. In 2009, the Company established a new India unit in a Special Economic Zone (“SEZ”) which was entitled to a five year, 100% tax holiday, which ended on

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March 31, 2014. Immediately following the expiration of the 100% tax holiday, the SEZ unit is entitled to a five year, 50% tax holiday, which ends on March 31, 2019.
Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of September 30, 2014, a valuation allowance is maintained against the Company's U.S. deferred tax assets associated with certain capital loss and state tax net operating loss carryforwards. The Company continues to believe that the remainder of its U.S. deferred tax assets and the deferred tax assets of its foreign subsidiaries are more likely than not to be realized, and therefore, no valuation allowance has been recorded against these assets.
The Company had gross unrecognized tax benefits, including interest and penalties, of $33.2 million as of September 30, 2014 and $30.8 million as of December 31, 2013. The amounts of unrecognized tax benefits that, if recognized, would result in a reduction of the Company’s effective tax rate were $32.1 million and $29.7 million as of September 30, 2014 and December 31, 2013, respectively. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of September 30, 2014 and December 31, 2013, accrued interest and penalties were $5.2 million and $4.2 million, respectively.
The Company conducts business globally, and as a result, the Company and its subsidiaries file income tax returns in the U.S. federal and state jurisdictions as well as various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, Germany, India, Switzerland, the United Kingdom and the United States. The Company is currently under tax audits and proceedings in Canada, India, the United Kingdom, and the United States for various periods between 2006 and 2013. The statute of limitations in the Company’s other tax jurisdictions remain open for various periods between 2006 and the present. However, carryforward attributes from prior closed years may still be adjusted upon examination by tax authorities if they are used in open periods.
Although the Company believes its tax estimates are appropriate, the final determination of tax audits and proceedings could result in favorable or unfavorable changes in its estimates. The Company anticipates the settlement of tax audits and proceedings, as well as the expiration of relevant statutes of limitations in the next twelve months could result in a decrease in its gross unrecognized tax benefits, including interest and penalties, of between $13.0 million and $17.0 million.
(9) Noncontrolling Interest Subject to Put Provisions
The Company has potential obligations to purchase the noncontrolling interests held by third parties in connection with its acquisition of iThink. See Note 3, Business Acquisitions. These obligations are in the form of put provisions that are exercisable at the third-party owners' discretion, within the specified period, as outlined in the iThink purchase and sale agreement. If these put provisions are exercised by the third parties within the specified period, the Company will be required to purchase all of the third-party owners' noncontrolling interests at a determined put price as outlined in the iThink purchase and sale agreement, which is based on a specified factor multiplied by the average quarterly EBITDA achieved in the 12 quarters subsequent to the acquisition date. The put provisions are not exercisable until after the fiscal year ending December 31, 2015.
The acquisition date fair value of the noncontrolling interest was derived by extrapolating the fair value of the noncontrolling interest ownership based on the consideration transferred for the controlling interest in connection with the acquisition of the majority interest of iThink, net of a discount factor, to take into account the noncontrolling interest’s lack of marketability.
During the three months ended December 31, 2013, the Company made additional capital contributions, which increased the Company's ownership from 81% to 84% of the outstanding securities of iThink.
As of September 30, 2014, the Company's potential obligations under these put options were approximately $0.7 million, of which none were exercisable.

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The following table presents a roll forward of the noncontrolling interest subject to put provisions during the nine months ended September 30, 2014 and 2013 (in thousands):
 
Nine months ended September 30,
 
2014
 
2013
 
 
 
As Restated
Beginning Balance
$
784

 
$

Acquisitions during the period

 
1,205

Net loss
(7
)
 
(175
)
Other comprehensive loss
(50
)
 
(107
)
Ending Balance
$
727

 
$
923

(10) Segment Information
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM") in deciding how to allocate resources to an individual segment and in assessing performance. The Company's CODM is its Chief Executive Officer.
The Company identifies such segments based upon target client markets because each operating segment helps clients identify and act upon opportunities to improve their business performance, but strategically serves a different market. The Company considered qualitative factors, including the economic characteristics of each operating segment to determine if any qualified for aggregation. More specifically, the Company evaluated the economic characteristics, the nature of products and services, the methods used to provide services, the types of customers, and the nature of the corresponding regulatory environment of its operating segments. As a result, the Company identified the following reportable segments: SapientNitro, Sapient Global Markets, and Sapient Government Services.
The CODM evaluates performance based upon each segment's operating income, which is defined as income before allocations of certain marketing and general and administrative expenses. These charges are excluded from evaluation of performance because these activities and costs generally impact areas that support all of the segments and, therefore, are managed separately. Management does not allocate amortization of purchased intangible assets, acquisition costs and other related charges (benefits), stock-based compensation expense, impairment of intangible asset, restructuring and other related charges (benefits), or interest and other income to the segments for the review of results by the CODM. Asset information by segment is not reported to or reviewed by the CODM, and therefore, the Company has not disclosed asset information for the segments.
The following tables present the service revenues and income from operations attributable to the Company’s reportable segments for the periods presented (in thousands):
 
Three Months Ended  
 September 30,

Nine Months Ended 
 September 30,
 
2014

2013

2014

2013
 


As Restated



As Restated
Service Revenues:







SapientNitro
$
233,415


$
219,784


$
702,717


$
628,325

Sapient Global Markets
95,552


88,666


287,847


259,264

Sapient Government Services
21,737


15,343


63,868


43,176

Total service revenues
$
350,704

 
$
323,793

 
$
1,054,432


$
930,765

Income Before Income Taxes:
 
 
 
 
 
 
 
SapientNitro
$
80,937


$
73,668


$
231,480


$
199,265

Sapient Global Markets
27,088


27,900


82,871


79,463

Sapient Government Services
5,497


4,840


13,341


12,656

Total reportable segments operating income (1)
113,522

 
106,408

 
327,692

 
291,384

Less: reconciling items (2)
(78,389
)

(67,474
)

(234,389
)

(205,632
)
Total income before income taxes
$
35,133

 
$
38,934

 
$
93,303


$
85,752

 
(1)
Segment operating income does not represent the total operating results for each business unit, as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments. Segment operating income reflects

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restructuring charges allocated to the SapientNitro and Sapient Global Markets reportable segments consisting of immaterial amounts for the three months ended September 30, 2013, and $1.3 million and $0.5 million, respectively, for the nine months ended September 30, 2013.
(2)
Adjustments that are made to reconcile total reportable segments operating income to consolidated income before income taxes include the following (in thousands):
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2014

2013

2014

2013
 



As Restated




As Restated
Centrally managed functions
$
65,546


$
58,356


$
196,296


$
175,367

Stock-based compensation expense
8,344


8,152


24,438


23,142

Restructuring and other related charges (benefits)
1,125


(28
)

2,989


171

Amortization of purchased intangible assets
3,389


3,007


10,430


9,927

Acquisition costs and other related charges (benefits)
1,301


(1,268
)

1,729


(1,652
)
Impairment of intangible asset


596




2,090

Other (3)




2,815



Interest and other income, net
(1,316
)

(1,341
)

(4,308
)

(3,413
)
Total reconciling items
$
78,389

 
$
67,474

 
$
234,389


$
205,632

(3) In the nine months ended September 30, 2014, the Company incurred a $2.8 million one-time project personnel expense charge to reimburse employees for costs incurred as part of a restructuring of a global travel program. As this is unrelated to current operations, and neither comparable to prior periods nor predictive of future results, the Company has excluded it from the reportable segments operating income in evaluating management performance.
(11) Geographic Data
The following tables present data for the geographic regions in which the Company operates (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
As Restated
 
 
 
As Restated
Service revenues (1):
 
 
 
 
 
 
 
United States
$
224,673

 
$
211,271

 
$
658,176

 
$
589,916

United Kingdom
66,276

 
33,870

 
184,730

 
86,316

Rest of International
59,755

 
78,652

 
211,526

 
254,533

Total service revenues
$
350,704

 
$
323,793

 
$
1,054,432


$
930,765

 
September 30,
2014
 
December 31,
2013
Long-lived tangible assets (2):
 
 
 
United States
$
41,641

 
$
34,198

India
37,435

 
35,094

United Kingdom
10,342

 
8,670

Rest of International
7,655

 
7,936

Total long-lived tangible assets (3)
$
97,073


$
85,898

(1)
Allocation of service revenues to individual countries is based on the location of the Sapient legal entity that contracts with the client.
(2)
Allocation of long-lived tangible assets to individual countries is based on the location of the Sapient legal entity that has title to the assets.
(3)
Reflects the net book value of the Company’s property and equipment.


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(12) Goodwill and Purchased Intangible Assets
The following table presents the changes in goodwill allocated to the Company’s reportable segments during the nine months ended September 30, 2014 (in thousands):
 
SapientNitro
 
Sapient Global
Markets
 
Sapient Government Services
 
Total
Goodwill as of December 31, 2013
$
118,642

 
$
30,500

 
$

 
$
149,142

Acquisitions during the period

 

 
1,708

 
1,708

Adjustments
(26
)
 

 

 
(26
)
Foreign currency exchange rate effect
(1,305
)
 
(216
)
 

 
(1,521
)
Goodwill as of September 30, 2014
$
117,311

 
$
30,284

 
$
1,708

 
$
149,303

The following table summarizes purchased intangible assets as of September 30, 2014 and December 31, 2013 (in thousands): 
 
September 30, 2014
 
December 31, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book
Value
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book
Value
Customer lists and customer relationships
$
47,179

 
$
(29,449
)
 
$
17,730

 
$
45,569

 
$
(24,520
)
 
$
21,049

Non-compete agreements
12,087

 
(11,555
)
 
532

 
12,168

 
(10,513
)
 
1,655

Intellectual property
5,730

 
(2,608
)
 
3,122

 
5,765

 
(1,879
)
 
3,886

Tradename
6,752

 
(5,404
)
 
1,348

 
4,797

 
(3,879
)
 
918

Backlog
5,290

 
(1,721
)
 
3,569

 

 

 

Total purchased intangible assets
$
77,038

 
$
(50,737
)
 
$
26,301

 
$
68,299

 
$
(40,791
)
 
$
27,508

Amortization expense related to purchased intangible assets was $3.4 million and $3.0 million for the three months ended September 30, 2014 and 2013, respectively, and $10.4 million and $9.9 million for the nine months ended September 30, 2014 and 2013, respectively. Estimated future amortization expense as of September 30, 2014 is $3.2 million for the remainder of 2014, $9.0 million for 2015, $5.9 million for 2016, $4.4 million for 2017, $2.7 million for 2018, and $1.1 million thereafter.
During the three months ended March 31, 2013, the Company performed an impairment review of the customer list intangible asset obtained in its acquisition of Nitro in 2009. The impairment review was triggered by certain legacy Nitro customers having notified the Company of their intentions to cease or reduce purchases of the Company’s services. In the first step of the March 31, 2013 impairment review, the carrying value of the asset exceeded the undiscounted net cash flows expected to be generated by the asset, indicating that the carrying value was not recoverable. In the second step, the impairment amounts of $0.6 million and $1.5 million were recorded in the three months ended September 30 and March 31, 2013, respectively, which were estimated using a discounted cash flows approach. During the three months ended September 30, 2014, there were no triggering events that required the Company to perform an impairment review. The net book value of the Nitro customer list intangible asset was $0.1 million as of September 30, 2014.
In estimating the undiscounted future net cash flows expected to be generated by this intangible asset, management considered the following factors: actual customer attrition rates since the acquisition date; expected future attrition rates; estimated undiscounted net cash flows generated by the intangible asset since the acquisition date; estimated undiscounted net cash flows expected to be generated by the intangible asset over its remaining expected useful life; and the expected remaining useful life of the intangible asset. In the course of these impairment reviews, the Company considered multiple future scenarios and the expected likelihood of those scenarios occurring, based on the information which was known to management at the times the reviews were performed. These impairment reviews involved the use of significant judgment by management, and different judgments could yield different results.
(13) Restructuring and Other Related Charges (Benefits)
Short-term and long-term restructuring and other related liabilities are recorded in "Accrued expenses" and "Other long-term liabilities," respectively, in the consolidated and condensed balance sheets.

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2014 Restructuring Event
During the three and nine months ended September 30, 2014, the Company recorded a restructuring charge of $1.1 million and $3.0 million, respectively, related to cash severance and other termination benefits for approximately 93 employees across multiple functions. Substantially all of the workforce charges were related to the Company's SapientNitro reportable segment.
2013 Restructuring Event
During the year ended December 31, 2013, the Company recorded a restructuring charge of $2.0 million related to cash severance and other termination benefits for approximately 82 employees across multiple functions. Of the total charges, $1.3 million and $0.5 million were recorded to the Company's SapientNitro and Global Markets reportable segments, respectively.
The following table presents activity during the nine months ended September 30, 2014 related to all restructuring events (in thousands):
 
Other Prior Restructuring Events
 
2014 Restructuring Event
 
 
 
Facilities
 
Workforce
 
Facilities
 
Workforce
 
Totals
Balance at December 31, 2013
$
185

 
$
312

 
$

 
$

 
$
497

2014 (benefits) provisions, net
(21
)
 

 
154

 
2,856

 
2,989

Cash utilized
(67
)
 
(308
)
 
(47
)
 
(2,132
)
 
(2,554
)
Foreign currency exchange rate effect

 
(4
)
 
(13
)
 
(29
)
 
(46
)
Balance at September 30, 2014
$
97

 
$

 
$
94

 
$
695

 
$
886

The total remaining accrued restructuring balance of $0.9 million as of September 30, 2014 is expected to be paid in full by March 31, 2016.
(14) Foreign Currency Exposures and Derivative Instruments
Foreign Currency Transaction Exposure
Foreign currency transaction exposure is derived primarily from intercompany transactions of a short-term nature and transactions with clients or vendors in currencies other than the functional currency of the legal entity in which the transaction is recorded. Assets and liabilities arising from such transactions are translated into the legal entity’s functional currency at each reporting period using period-end exchange rates, and any resulting gain or loss as a result of currency fluctuations is recorded in “General and administrative expenses” in the Company’s unaudited consolidated and condensed statements of operations. Foreign currency transaction net losses and net gains of $(2.4) million and $1.1 million were recorded in the three months ended September 30, 2014 and 2013, respectively. Foreign currency transaction net losses of $3.3 million and $0.7 million were recorded for the nine months ended September 30, 2014 and 2013, respectively.
Foreign Currency Translation Exposure
Foreign currency translation exposure is derived from the translation of the financial statements of the Company’s subsidiaries for which the functional currency is not the U.S. dollar into U.S. dollars for consolidated reporting purposes. Assets and liabilities of these subsidiaries are translated into U.S. dollars at period-end exchange rates, and statement of operations amounts are translated into U.S. dollars using individual transactional exchange rates or average monthly exchange rates. The functional currency for the majority of the Company’s foreign subsidiaries is considered to be the local currency and, accordingly, translation adjustments for those subsidiaries are recorded in the unaudited consolidated and condensed balance sheets as a separate component of stockholders’ equity, in the caption “Accumulated other comprehensive loss”.
The Company manages its foreign currency exposures through a risk management program which is designed to mitigate its exposure to operating expenses incurred by foreign subsidiaries whose functional currency is the Indian rupee and operating margins in foreign subsidiaries whose functional currencies are the British pound sterling and the euro. This program includes the use of derivative financial instruments, consisting of foreign currency option contracts, which are not designated as accounting hedges. The Company uses these instruments to mitigate its exposure to movements of the Indian rupee, British pound sterling, and euro, relative to the U.S. dollar. The Company records all derivative instruments on its consolidated balance sheets at fair value. Changes in a derivative’s fair value through the settlement date are recognized in current period earnings unless specific hedge criteria are met.

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Currently, the Company enters into 30-day average rate instruments covering rolling periods of up to four months, with the following notional amounts outstanding as of September 30, 2014: 
1.5 billion Indian rupees (approximately $24.5 million);
5 million British pounds sterling (approximately $8.1 million); and
1.3 million euros (approximately $1.6 million).
Because these instruments are average rate option collars that are settled on a net basis with the counterparty banks, the Company has not recorded the gross underlying notional amounts in its unaudited consolidated and condensed balance sheets as of September 30, 2014 or December 31, 2013. Open option positions as of September 30, 2014 will settle in the three month period ending December 31, 2014. None of the Company’s derivative financial instruments qualified for hedge accounting.
The following table presents the fair values of the derivative assets and liabilities recorded on the Company’s unaudited consolidated and condensed balance sheets as of September 30, 2014 and December 31, 2013 (in thousands): 
 
 
 
September 30,
 
December 31,
Derivative Instrument
Balance Sheet Classification
 
2014
 
2013
Foreign exchange option contracts (asset)
Prepaid and other current assets
 
$
294

 
$
129

Foreign exchange option contracts (liability)
Accrued expenses
 
$
46

 
$
175

Realized and unrealized gains and losses on the Company’s foreign exchange option contracts are included in “General and administrative expenses” in the unaudited consolidated and condensed statements of operations. The following table presents the effect of net realized and unrealized gains and losses relating to the Company’s foreign exchange option contracts on its results of operations for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended  
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Realized/Unrealized gain (loss) on financial instruments
 
 
As Restated
 
 
 
As Restated
Net realized gain (loss) on foreign exchange option contracts not designated as accounting hedges
$
72

 
$
(1,701
)
 
$
256

 
$
(1,625
)
Net unrealized gain (loss) on foreign exchange option contracts not designated as accounting hedges
259

 
683

 
238

 
(88
)
Total
$
331

 
$
(1,018
)
 
$
494

 
$
(1,713
)
(15) Stockholders’ Equity
The Company uses the cost method to account for its treasury stock transactions. Shares of treasury stock are issued in connection with the Company’s stock option plans, restricted stock plans, employee stock purchase plan, and acquisitions using the average cost basis method. On May 9, 2012, the Board of Directors of the Company authorized a stock repurchase program of up to $100 million of the Company’s common stock within two years from the authorization date. Under the program, management of the Company was authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. Depending on market conditions and other factors, the repurchases may be commenced or suspended at any time or from time to time, without prior notice. In 2014, under this program, the Company repurchased 70,010 shares of its common stock, at an average price of $15.93 per share, for an aggregate purchase price of $1.1 million. Through May 9, 2014, the Company repurchased 4,338,306 shares of its common stock, at an average price of $10.67 per share for an aggregate purchase price of $46.3 million. As of May 9, 2014, the authorization for the program expired.
On May 12, 2014, the Board of Directors of the Company authorized a stock repurchase program of up to $150 million of the Company’s common stock (the "2014 Repurchase Program"). Under this new program, management of the Company is authorized to repurchase shares through Rule 10b5-1 plans, open market purchases, privately negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act. Depending on market conditions and other factors, the repurchases may be commenced or suspended at any time or from time to time, without prior notice. During the three months ended September 30, 2014, under this program, the Company repurchased 752,873 shares of its common stock at an average price of $14.75 per share for an aggregate purchase price of $11.1 million, including transaction costs. During the nine months ended September 30, 2014, under this program, the Company repurchased

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992,673 shares of its common stock at an average price of $15.14 per share for an aggregate purchase price of $15.0 million, including transaction costs. As of September 30, 2014, $135.0 million remained available for repurchases under this program. The 2014 Repurchase Program will expire upon the earlier of the date on which the program is terminated by the Board of Directors or when all authorized repurchases are completed. The Company made additional purchases under the 2014 Repurchase Program between October 1, 2014 and October 31, 2014. However, the Company does not intend to make further repurchases under the 2014 Repurchase Program.
(16) Line of Credit
On July 11, 2012, Sapient International GmbH, a Switzerland subsidiary of the Company (the “Borrower”), entered into an uncommitted, multi-currency revolving credit facility (the “Facility”) with a bank. The Facility permits the Borrower to request advances for general working capital purposes, in U.S. dollars, British pounds sterling and euros, not to exceed an equivalent of $20 million U.S. dollars in the aggregate. On April 29, 2014, the Company amended the Facility primarily to add Sapient Limited, a subsidiary of Sapient U.K., as an additional borrower. All other terms of the amended facility remained consistent with the original Facility. For each advance, the Borrower requests a term of one, two, three or six months, or such other period to which the Borrower and the bank may agree. Each advance is due for repayment on the last day of the agreed-upon term, or upon demand by the bank or termination of the Facility. Each advance bears interest at an annualized rate equal to the London Interbank Offered Rate (“LIBOR”) benchmark rate in effect on the advance date and applicable to the relevant term plus 2.25%. Interest is payable every three months, or at the end of the relevant advance term if such term is less than three months. The Facility does not have a contractual term, but the bank may terminate the Facility at any time. The Facility does not include any financial covenants. Any obligations incurred by the Borrower under the Facility are guaranteed at all times by Sapient Corporation. As of November 6, 2014, the Borrower had not drawn any advances under the Facility.
(17) Restatement
As disclosed previously in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the Company restated its consolidated financial statements for the years ended December 31, 2012 and 2011 and its unaudited quarterly financial information for each of the quarters in the year ended December 31, 2012 and for the first three quarters in the year ended December 31, 2013, primarily to correct the manner in which the Company recorded certain tax liabilities resulting from the movement of employees globally.
As disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the Company identified certain prior period errors which affected the interim and annual periods in the years ended December 31, 2006 through 2012. The prior period errors primarily relate to the Company’s unrecorded corporate income and employment tax liabilities resulting from cross-border mobility of employees into various countries in prior periods. More specifically, the Company concluded that during those prior periods several of its subsidiaries had created previously unrecognized permanent establishments in foreign tax jurisdictions as a result of employees working in those foreign countries, which triggered corporate income tax liabilities for those subsidiaries and individual-tax liabilities for some of those employees. The net expense recorded in the interim and annual periods in the years ended December 31, 2006 through December 31, 2012 amounted to $14.2 million.
Also, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the Company identified certain prior period errors which affected the interim and annual periods in the years ended December 31, 2010 through 2012 and the first three quarters in the year ended December 31, 2013. The prior period errors primarily relate to the Company's unrecorded employment-related tax liabilities associated with the movement of employees globally. More specifically, the Company did not properly report the appropriate amount of income, and did not withhold and remit the appropriate amount of employment-related tax resulting from taxable benefits provided to certain employees on foreign long-term assignments for those periods. The net expense recorded in the interim and annual periods in the years ended December 31, 2010 through December 31, 2012 amounted to $13.1 million. The net expense recorded in the interim periods ended March 31, June 30, and September 30, 2013 amounted to $2.3 million.
Although the Company believes the recorded employment-related tax liabilities associated with the movement of employees globally are appropriate, the final determination of tax audits and settlement discussions with local tax authorities could result in potential favorable or unfavorable changes to these estimates. The Company anticipates to settle substantially all of the employment-related tax liabilities in the next twelve months.
In addition, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the Company also corrected certain other immaterial prior period errors in the Company’s consolidated financial statements into the periods in which they originated.
In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated, the Company considered the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1,

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Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The Company concluded that these errors were in the aggregate material to the prior reporting periods, and therefore, restatement of previously filed financial statements was necessary.
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 includes the impact of the restatement on the comparative unaudited quarterly financial information for the quarter ended September 30, 2013
The account balances labeled "As Reported" in the following tables for the quarter ended September 30, 2013 represent the previously reported unaudited balances in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013.
The effects of these prior period errors on the unaudited consolidated financial statements are as follows:
 
September 30, 2013
 
As Reported
 
Adjustments
 
As Restated
Consolidated Unaudited Balance Sheet:
(In thousands, except share and per share amounts)
ASSETS
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
272,756

 
$

 
$
272,756

Marketable securities, current portion
7,310

 

 
7,310

Restricted cash, current portion
101

 

 
101

Accounts receivable, net of allowance for doubtful accounts of $0 at September 30, 2013
175,618

 

 
175,618

Unbilled revenues
104,865

 

 
104,865

Deferred tax assets, current portion
16,281

 

 
16,281

Prepaid expenses and other current assets
44,742

 
(7,480
)
 
37,262

Total current assets
621,673

 
(7,480
)
 
614,193

Restricted cash, net of current portion
2,042

 

 
2,042

Property and equipment, net
83,166

 
81

 
83,247

Purchased intangible assets, net
24,068

 

 
24,068

Goodwill
134,359

 

 
134,359

Other assets
8,914

 
13,382

 
22,296

Total assets
$
874,222

 
$
5,983

 
$
880,205

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
25,166

 
$

 
$
25,166

Accrued expenses
49,275

 
806

 
50,081

Accrued compensation
105,422

 
(16,688
)
 
88,734

Income taxes payable
17,427

 
(6,427
)
 
11,000

Deferred revenues
23,326

 

 
23,326

Total current liabilities
220,616

 
(22,309
)
 
198,307

Deferred tax liabilities, net of current portion
20,798

 

 
20,798

Other long-term liabilities
66,534

 
40,060

 
106,594

Total liabilities
307,948

 
17,751

 
325,699

Commitments and contingencies

 

 

Noncontrolling interest subject to put provisions
923

 

 
923

Stockholders’ equity:
 
 
 
 
 
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized and none issued or outstanding at September 30, 2013

 

 

Common stock, par value $0.01 per share, 200,000,000 shares authorized, 144,326,146 shares issued, and 140,120,721 shares outstanding at September 30, 2013
1,443

 

 
1,443

Additional paid-in capital
578,160

 

 
578,160

Treasury stock, at cost, 4,205,425 shares at September 30, 2013
(44,435
)
 

 
(44,435
)
Accumulated other comprehensive loss
(40,328
)
 

 
(40,328
)
Retained earnings
70,511

 
(11,768
)
 
58,743

Total Sapient Corporation stockholders' equity
565,351

 
(11,768
)
 
553,583

Total liabilities and stockholders’ equity
$
874,222

 
$
5,983

 
$
880,205


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Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2013
 
September 30, 2013
 
As Reported
 
Adjustments
 
As Restated
 
As Reported
 
Adjustments
 
As Restated
Consolidated Unaudited Statement of Operations:
(In thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Service revenues
$
323,793

 
$

 
$
323,793

 
$
930,765

 
$

 
$
930,765

Reimbursable expenses
11,087

 

 
11,087

 
33,705

 

 
33,705

Total gross revenues
334,880

 

 
334,880

 
964,470

 

 
964,470

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Project personnel expenses
218,977

 
677

 
219,654

 
637,258

 
2,031

 
639,289

Reimbursable expenses
11,087

 

 
11,087

 
33,705

 

 
33,705

Total project personnel expenses and reimbursable expenses
230,064

 
677

 
230,741

 
670,963

 
2,031

 
672,994

Selling and marketing expenses
11,968

 
(42
)
 
11,926

 
36,754

 
(125
)
 
36,629

General and administrative expenses
52,136

 
177

 
52,313

 
159,657

 
531

 
160,188

Restructuring and other related (benefits) charges
(28
)
 

 
(28
)
 
1,955

 

 
1,955

Amortization of purchased intangible assets
3,007

 

 
3,007

 
9,927

 

 
9,927

Acquisition costs and other related benefits
(1,268
)
 

 
(1,268
)
 
(1,652
)
 

 
(1,652
)
Impairment of intangible asset
596

 

 
596

 
2,090

 

 
2,090

Total operating expenses
296,475

 
812

 
297,287

 
879,694

 
2,437

 
882,131

Income from operations
38,405

 
(812
)
 
37,593

 
84,776

 
(2,437
)
 
82,339

Interest income
1,492

 
1

 
1,493

 
4,569

 
1

 
4,570

Interest expense
(636
)
 

 
(636
)
 
(1,997
)
 

 
(1,997
)
Other income, net
484

 

 
484

 
840

 

 
840

Income before income taxes
39,745

 
(811
)
 
38,934

 
88,188

 
(2,436
)
 
85,752

Provision for income taxes
12,986

 
(309
)
 
12,677

 
31,612

 
(738
)
 
30,874

Net income
26,759

 
(502
)
 
26,257

 
56,576

 
(1,698
)
 
54,878

Less: Net loss attributable to noncontrolling interest
(88
)
 

 
(88
)
 
(175
)
 

 
(175
)
Net income attributable to stockholders of Sapient Corporation
$
26,847

 
$
(502
)