SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-24429
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
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(Exact Name of Registrant as Specified In Its Charter)
Delaware 13-3728359
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(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.
500 Glenpointe Centre West, Teaneck, New Jersey 07666
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(Address of Principal Executive Offices) (Zip Code)
(201) 801-0233
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(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01 per share
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Class B Common Stock, par value $0.01 per share
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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:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant: $286,194,384 at March 1, 2002 based on
the last sales price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 1, 2002:
Class Number of Shares
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Class A Common Stock, par value $0.01 per share 8,068,197
Class B Common Stock, par value $0.01 per share 11,290,900
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the Registrant's definitive Proxy Statement for
its 2002 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business........................................... 4
2. Properties......................................... 17
3. Legal Proceedings.................................. 18
4. Submission of Matters to a Vote of Security
Holders............................................ 18
PART II 5. Market for the Company's Common Equity and
Related Stockholder Matters........................ 19
6. Selected Consolidated Financial Data............... 21
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 22
8. Financial Statements and Supplementary Data........ 35
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 35
PART III 10. Directors and Executive Officers of the Company.... 36
11. Executive Compensation............................. 36
12. Security Ownership of Certain Beneficial Owners
and Management..................................... 36
13. Certain Relationships and Related Transactions..... 36
PART IV 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K............................ 37
SIGNATURES........................................................ 38
EXHIBIT INDEX..................................................... 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................ F-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
Cognizant Technology Solutions Corporation ("CTS" or the "Company")
delivers high-quality, cost-effective, full life cycle solutions to complex
software development and maintenance problems that companies face as they
transition to e-business. These information technology ("IT") services are
delivered through the use of a seamless on-site and offshore consulting project
team. The Company's solutions include application development and integration,
application management, and re-engineering services.
The Company began its software development and maintenance services
business in early 1994, as an in-house technology development center for The Dun
& Bradstreet Corporation and its operating units. In 1996, the Company, along
with Erisco Managed Care Technologies, Inc. ("Erisco"), IMS International, Inc.,
Nielsen Media Research, Inc., Pilot Software, Inc. and Strategic Technologies,
Inc. and certain other entities, plus a majority interest in Gartner Group, Inc.
were spun-off from The Dun & Bradstreet Corporation to form a new company,
Cognizant Corporation. In 1997, the Company purchased the 24.0% minority
interest in its Indian subsidiary from a third party for $3.4 million, making
the Indian subsidiary wholly owned by the Company.
In June 1998, the Company completed its initial public offering. On June
30, 1998, a majority interest in the Company, Erisco, IMS International and
certain other entities were spun-off from Cognizant Corporation to form IMS
Health. At December 31, 2001, IMS Health owned approximately 58.3% of the
outstanding stock of the Company and held approximately 93.3% of the combined
voting power of the Company's common stock.
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
effected by a 100% dividend payable on March 16, 2000 to stockholders of record
on March 2, 2000. The stock split has been reflected in the accompanying
consolidated financial statements, and all applicable references as to the
number of common shares and per share information have been restated.
Appropriate adjustments have been made in the exercise price and number of
shares subject to stock options. Stockholder equity accounts have been restated
to reflect the reclassification of an amount equal to the par value of the
increase in issued common shares from the additional paid-in-capital account to
the common stock accounts.
On May 23, 2000, the stockholders of the Company approved an increase in
the number of authorized Class B common Stock from 15,000,000 shares to
25,000,000 shares.
The Company provides professional IT services to its customers through an
integrated business model that combines a technical and account management team
located on-site at the customer location and eleven development centers located
in India. The Company's core competencies include web-centric applications, data
warehousing, component-based development, and legacy and client-server systems.
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The Company markets and sells its technology consulting services directly
through its professional staff, senior management and sales personnel. The
Company operates out of its Teaneck, New Jersey headquarters and its regional
and international offices. The number of customers for whom the Company has
provided services has grown from 57 customers in 1999 to 90 customers in 2000
and 100 customers in 2001. The Company's customers include:
ACNielsen Corporation First Data Corporation
ADP, Incorporated IMS Health Incorporated ("IMS Health")
Brinker International, Incorporated Metropolitan Life Insurance Company
CCC Information Services Incorporated Nielsen Media Research, Incorporated
Computer Sciences Corporation PNC Bank
The Dun & Bradstreet Corporation Royal & SunAlliance USA
INDUSTRY BACKGROUND
Many companies today face increasing customer demands to improve service
levels, lower costs and shorten time to market. In this competitive environment,
improving IT systems and leveraging the internet are critical to achieving these
objectives. At the same time, the pace of technology evolution has accelerated.
In order to remain competitive, companies are increasingly required to adopt
emerging technologies, such as:
o e-business and e-commerce applications;
o data warehousing;
o supply chain management; and
o middleware / enterprise application integration.
These emerging technologies offer the promise of faster, more responsive,
lower cost business operations. However, their development, integration and
on-going management present major challenges and require a large number of
highly skilled individuals trained in many diverse technologies. In addition,
companies also require additional technical resources to maintain, enhance and
re-engineer their core legacy systems for e-business and to address application
management projects such as Eurocurrency compliance, decimalization in the
securities industry, and the health insurance portability and accountability act
("HIPAA") regulations in the healthcare industry. Increasingly, companies turn
to solutions providers such as CTS to provide these services.
Many companies have made the strategic decision to focus on their core
competencies and reduce their cost structures rather than invest in the
additional large IT staffs that are necessary to evaluate, implement and manage
IT initiatives in a rapidly changing environment. Consequently, these companies
have turned to IT service providers both to develop and implement new IT
solutions and to maintain core systems.
As the global demand for IT services has increased, the number of qualified
technical professionals has not kept pace with such demand. As a result, some IT
service providers have
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attempted to access the large talent pool in certain developing countries,
particularly India. India is widely acknowledged as a leader in offshore
software development and has the second largest pool of IT talent behind the
U.S. Historically, IT service providers have used the offshore labor pool
primarily to supplement the internal staffing needs of customers. However,
evolving customer demands have led to the utilization of offshore resources for
higher value-added services. Such services include application development,
integration and maintenance. The use of offshore personnel can offer a number of
benefits, including faster delivery of new IT solutions, more flexible
scheduling and lower costs. However, utilizing an offshore workforce to provide
value-added services presents a number of challenges to IT service providers.
The offshore implementation of value-added software services requires
highly developed project management skills. Such skills are necessary to design,
develop and deploy high-quality technology solutions in a timely and
cost-effective manner. In addition, IT service providers must have the
methodologies, processes and communications capabilities to successfully
integrate offshore workforces with on-site personnel. Service providers must
also have strong research and development capabilities and technology competency
centers. Finally, service providers utilizing offshore workforces must
continually recruit and manage their workforces to deliver solutions using
emerging technologies. As a result of the increasing demand for global IT
services, a significant opportunity exists for IT service providers that can
successfully address the challenges in utilizing an offshore talent pool.
THE CTS SOLUTION
CTS is a leader in delivering high-quality, cost-effective, full life-cycle
solutions to complex IT problems to clients transitioning to e-business through
the use of a seamless on-site and offshore project team. These solutions are
comprised of application development and integration, application management and
re-engineering services.
The Company provides professional services to its customers through an
integrated business model. The Company's business model combines a technical and
account management team located on-site at the customer location and eleven
development centers located in India. To support this business model, the
Company has recruited and trained a current staff of approximately 2,650
programmers in India. The Company has also put in place well developed
facilities, technology and communications infrastructure. By basing the
Company's technical operations in India, the Company has access to a large pool
of skilled, English-speaking IT and Internet technology professionals. Such IT
and Internet technology professionals service customers on a cost basis
significantly lower than in developed countries. The main elements of the CTS
solution, which the Company believes differentiates it from other IT service
providers, include the following:
ESTABLISHED AND SCALABLE PROPRIETARY PROCESSES. To facilitate the Company's
cost-effective, on-time delivery of high-quality projects integrating an on-site
and offshore team, the Company has developed proprietary methodologies. Such
methodologies are encapsulated in the Company's QVIEW software engineering
process, which is available to all on-site and offshore programmers. The Company
utilizes this ISO 9000 certified process to define and implement projects from
the design, development and deployment stages through to ongoing application
maintenance. For most projects, QVIEW is used to make an extensive front-end
assessment. This
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assessment allows the Company to define the scope and risks of the project and
subdivide the project into smaller phases with frequent deliverables and
feedback from customers. The Company also utilizes its QVIEW process to detect,
mitigate and correct possible quality defects and to establish appropriate
contingencies for each project. In order to ensure implementation of the quality
process, the Company assigns a quality facilitator to each project. This
facilitator reports to a centralized quality assurance and software engineering
group. This group performs, on a sample basis, continuous quality audits,
deliverables verifications, metrics collection and analysis, which are used to
continually improve processes and methodologies. The Company's processes and
methodologies have proven to be scalable as the Company has significantly
increased its number of offshore development centers, customers and projects. In
addition, the Company is assessed by KPMG at Level 5 (on a 1 to 5 scale) of the
Capability Maturity Model of the Software Engineering Institute at Carnegie
Mellon University. The assessment for the Software Capability Maturity Model is
widely regarded as the best means to measure the quality and maturity of an
organization's software development and maintenance processes.
HIGHLY SKILLED WORKFORCE. The Company has placed significant emphasis on
recruiting and training its workforce of highly skilled professionals. Such
professionals must be versed in the Company's processes and methodologies,
particularly the QVIEW software engineering process. The Company has over 240
project managers and senior technical personnel on its worldwide staff, many of
whom have significant work experience in the United States and Europe. The
Company's project managers and senior technical personnel provide in-depth
project management expertise to customers. The Company maintains programs and
personnel, including an extensive campus recruiting program in India, to hire
and train the best available technical professionals in both legacy systems and
emerging technologies. The Company provides five months of combined classroom
and on-the-job training to new hires. The Company provides additional training
each year to continually enhance the business practices, tools, technology and
consulting skills of its professional staff.
RESEARCH & DEVELOPMENT AND COMPETENCY CENTERS. The Company has project
experience and expertise across multiple architectures and technologies, and
makes a substantial on-going investment in competency centers and research and
development to keep abreast of the latest technology developments.
Most of the Company's programmers are trained in multiple technologies and
architectures. As a result, the Company is able to react to customers' needs and
quickly redeploy programmers to new technologies. To facilitate this ability,
the Company has made a substantial investment in competency centers to leverage
its knowledge base across the company. In addition, through its investment in
research and development activities and the continuing education of technical
personnel, the Company assures that its knowledge base and collective skill set
keeps pace with emerging technologies. The ability to work in new technologies
allows the Company to foster long-term relationships by addressing the needs of
both its existing and new customers.
WELL DEVELOPED INFRASTRUCTURE. The Company's extensive facilities,
technology and communications infrastructure facilitates the seamless
integration of its on-site and offshore workforces. This is accomplished by
permitting team members in different locations to access
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common project information and to work directly on customer projects. This
infrastructure allows for:
o rapid completion of projects;
o highest level of quality;
o off-peak utilization of customers' technological resources; and
o real-time access to project information by the on-site account manager or
the customer.
By using the excess capacity of a customer's existing computing facilities
during off-peak hours, the Company's offshore development centers can undertake
additional projects without substantial customer investment in new hardware and
software. In addition, for large projects with short time frames, the Company's
offshore facilities allow for parallel processing of various development phases
to accelerate delivery time.
STRATEGY
The Company's objective is to be a leading provider of full life-cycle
e-business and application development projects, take full responsibility for
on-going management of a client's software systems, and help our clients move
legacy transformation projects through to completion. The Company provides
services to its North American and European customers, supported by its offshore
Indian development centers. The Company pursues the following strategies to
achieve this objective:
DEVELOP LONG-TERM CUSTOMER RELATIONSHIPS AND STRATEGIC ALLIANCES. The
Company seeks to develop long-term strategic relationships with its customers
and business partners. The Company tries to leverage these relationships into
additional project opportunities. For example, the knowledge of customers'
systems gained during the performance of application management services
provides the Company with a competitive advantage in securing additional
software development and maintenance projects from these customers. In addition,
the Company believes that through its working relationships with independent
software vendors it can obtain projects from such vendors' customers due to the
detailed knowledge gained in the development process. Finally, the Company has
partnered with select IT service firms which offer complementary services in
order to best meet customer requirements.
EXTEND SERVICE OFFERINGS AND SOLUTIONS. The Company has several teams
dedicated to developing new service offerings in emerging technologies. These
teams collaborate with the Company's customers to develop such offerings. For
example, the Company is currently developing new solutions for portfolio
analysis, program management, technology architecture and strategy, e-testing,
legacy restoration, and digital security and forensics. To facilitate the
development of new solutions, the Company invests in internal research and
development and promotes knowledge building and sharing across the organization.
In addition, the Company continues to enhance its capabilities and service
offerings in the areas of Customer Relationship Management ("CRM") and
Enterprise Resource Planning ("ERP"). The Company believes that
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the continued expansion of its service offerings will reduce its reliance on any
one technology initiative and foster long-term relationships with its customers.
Because of the Company's low offshore cost structure, it is able to
substantially leverage the cost of its investment in these activities.
ENHANCE PROCESSES, METHODOLOGIES AND PRODUCTIVITY TOOLSETS. The Company is
committed to improving and enhancing its proprietary QView software engineering
process and other methodologies and toolsets. With the rapid evolution of
technology, the Company believes that continued investment in research and
development is critical to its success. The Company is constantly designing and
developing additional productivity software tools to automate testing processes
and improve project estimation and risk assessment techniques. The Company
continually refines its processes by utilizing groupware technology to share
project experience and best practice methodologies across the organization.
EXPAND DOMESTIC AND INTERNATIONAL GEOGRAPHIC PRESENCE. As the Company
expands its customer base, it plans to open additional sales and marketing
offices in the United States and internationally. This will enable the Company
to sell to and support existing and prospective customers. The Company has
established sales and marketing offices in Atlanta, Chicago, Cincinnati, Dallas,
Minneapolis, Los Angeles, San Francisco and Teaneck, NJ. In addition, the
Company has been pursuing market opportunities in Europe through its U.K.
office, which was established in the beginning of 1998. The Company operates in
Canada through its Toronto office, which was established in 1997.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS. The Company believes that
opportunities exist in the fragmented IT services market to expand its business
through selective strategic acquisitions and/or joint ventures. The Company
believes that acquisition and/or joint venture candidates may enable it to
expand its geographic presence, enter new technology areas or expand capacity,
with a particular focus on European expansion.
SERVICES
The Company provides a broad range of software services, including:
o application development and integration;
o application management; and
o re-engineering.
The Company's range of services enables it to meet customer needs for
systems development/integration, application management and re-engineering
services. The Company uses its QVIEW software engineering process, its on-site
and offshore delivery model and well developed facilities, technology and
communications infrastructure to deliver these services. For each of these
services, the Company utilizes its QVIEW proprietary processes and methodologies
to define the execution and delivery of the projects.
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Service Summary Description of Service Offerings
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Application Development and Integration..... Define requirements, write specifications and design, develop
test and integrate software across multiple platforms including
internet technologies.
Application Management...................... Support some or all of a customer's applications ensuring that
systems remain operational and responsive to changing user
requirements, and to provide on-going enhancement as required
by the customer.
Re-engineering.............................. Modify and test applications to enable systems to function in
new operating environments.
APPLICATION DEVELOPMENT AND INTEGRATION SERVICES. The Company follows
either of two alternative approaches to application development and integration:
o full life cycle application development, in which the Company assumes
start-to-finish responsibility for analysis, design, implementation,
testing and integration of systems generally performed under fixed bid
contracts; or
o cooperative development, in which the Company's employees work with a
customer's in-house IT personnel to jointly analyze, design, implement,
test and integrate new systems.
In both cases, the Company's on-site team members work closely with the
end-users of the application to develop specifications and define requirements.
Detailed design, implementation and testing are generally performed offshore at
the Company's eleven software development centers located in India. In addition,
the Company maintains an on-site presence at the customer's location in order to
address evolving customer needs and resulting changes to the project.
A key part of the Company's application development and integration
offering is a suite of services to help organizations build and integrate
e-business applications with the rest of the enterprise. In this suite of
offerings, the Company leverages its skills in e-business applications
development and enterprise application integration to build sophisticated
e-business applications and to integrate these new applications and websites
with mainstream and legacy systems. The Company builds and deploys robust,
scalable and extensible Internet architectures for transaction intensive,
mission critical applications. The Company has competency centers specializing
in Microsoft, IBM and Sun Technologies. The Company builds secure applications
using Secure Socket Layers ("SSL") standards and several advanced technologies
including those from RSA Security Inc.
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APPLICATION MANAGEMENT SERVICES. The Company provides services to help
ensure that a customer's core operational systems are free of defects and
responsive to end-users' changing needs. In doing so, the Company is often able
to introduce product and process enhancements and improve service levels to
customers requesting modifications and on-going support.
Through the Company's on-site and offshore delivery model, the Company is
able to provide a range of support services to its customers. On-site team
members often provide help desk services at the customer's facility. These team
members typically carry pagers in the event of an emergency service request and
are often available to quickly resolve customer problems from remote locations.
More complex maintenance services, including modifications, enhancements and
documentation, which typically have longer turn around times, are completed
offshore. Such services are completed utilizing satellite and fiber-optic
telecommunications and the resources of the Company's software development
centers.
As part of its application management services, the Company assists
customers in renovating their core systems to meet the requirements imposed by
new regulations, new standards, or other external events. Such services include,
or have previously included, Year 2000 compliance, Eurocurrency compliance,
decimalization within the securities industry and HIPAA, a set of regulations
for the healthcare industry.
RE-ENGINEERING SERVICES. Through the Company's re-engineering service
offerings, the Company works with customers to migrate systems based on legacy
computing environments to newer, open systems-based platforms and client/server
architectures, often in response to the more stringent demands of e-business.
The Company's re-engineering tools automate many of the processes required to
implement advanced client/server technologies. Such automation substantially
reduces the time and cost to perform these services. These tools enable the
Company to perform source code analysis and to re-design target databases and
convert certain programming languages. If necessary, the Company's software
engineers also help customers re-design and convert user interfaces.
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CUSTOMERS
The Company provides services through time and material ("T&M") and fixed
bid contracts. The volume of work performed for specific customers is likely to
vary from year to year, and a significant customer in one year may not use the
Company's services in a subsequent year. In 1999, IMS Health and First Data
Corporation each accounted for more than 10.0% of revenue. In 2000 and 2001, IMS
Health accounted for more than 10.0% of revenue. Presented below is additional
information about the Company's customers.
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2001 2000 1999
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Number of customers 100 90 57
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Percent of revenues from top five customers 34.7% 39.5% 57.3%
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Percent of revenues from top ten customers 53.0% 59.1% 75.3%
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Percent of revenues from IMS Health and current subsidiaries 10.6% 10.4% 16.7%
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Application development services as a percent of revenues 42.9% 46.1% 32.3%
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Application maintenance services as a percent of revenues 51.8% 47.0% 44.0%
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Fixed bid contracts as a percent of revenues 23.9% 15.1% 15.0%
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Year 2000 compliance services as a percentage of revenues 0.0% 0.4% 15.6%
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SALES AND MARKETING
The Company markets and sells its services directly through its
professional staff, senior management and direct sales persons operating out of
its Teaneck, New Jersey headquarters and business development offices in
Atlanta, Chicago, Dallas, Minneapolis, Los Angeles San Francisco, Toronto, and
London. The Company manages its business and results of operations on a
geographic basis. At December 31, 2001, the Company had 41 direct sales persons
and 64 account managers. The sales and marketing group works with the Company's
technical team as the sales process moves closer to the customer's selection of
an IT service provider. The duration of the sales process varies depending on
the type of service, ranging from approximately two months to over one year. The
account manager or sales executive works with the technical team to:
o define the scope, deliverables, assumptions and execution strategies for
a proposed project;
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o develop project estimates;
o prepare pricing and margin analyses; and
o finalize sales proposals.
Management reviews and approves proposals, which are then presented to the
prospective customer. Sales and account management personnel remain actively
involved in the project through the execution phase.
The Company focuses its marketing efforts on businesses with intensive
information processing needs. The Company maintains a prospect/customer
database, which is continuously updated and utilized throughout the sales cycle
from prospect qualification to close. As a result of this marketing system, the
Company prequalifies sales opportunities, and direct sales representatives are
able to minimize the time spent on prospect qualification. In addition,
substantial emphasis is placed on customer retention and expansion of services
provided to existing customers.
COMPETITION
The IT services market includes a large number of participants, is subject
to rapid change and is intensely competitive. This market includes participants
from a variety of market segments, including:
o systems integration firms;
o contract programming companies;
o application software companies;
o Internet solutions providers;
o the professional services groups of computer equipment companies;
o facilities management and outsourcing companies; and
o "Big Five" accounting firms.
The market also includes numerous smaller local competitors in the various
geographic markets in which the Company operates. The Company competes with,
among others:
Accenture Ltd. Infosys, Inc.
Alydaar Corp. Keane, Inc.
Cap Gemini America, Inc. KPMG Consulting, Inc.
Covansys Inc. Sapient Corporation
Computer Horizons Corp. Satyam Computer Services Limited
Computer Task Group, Inc. Syntel, Inc.
CGI Group, Inc. Tanning Technology Corporation
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Electronic Data Systems Corp Tata Consultancy Services
IBM Global Services WIPRO Ltd.
I-Gate Capital Corporation
In certain markets in which the Company competes, there are no significant
barriers to entry. Current and potential competitors may introduce new and more
competitive services, make strategic acquisitions or establish cooperative
relationships among themselves or with third parties. As a result, these
competitors increase the ability of their services to address the needs of
customers. Many of the Company's competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
us. The principal competitive factors affecting the markets for the Company's
services include:
o performance and reliability;
o quality of technical support, training and services;
o responsiveness to customer needs;
o reputation, experience and financial stability; and
o competitive pricing of services.
The Company competes by offering:
o a well developed recruiting, training and retention model;
o a successful service delivery model;
o an excellent referral base;
o continual investment in process improvement and knowledge capture;
o investment in research and development; and
o continued focus on responsiveness to customer needs, quality of services,
competitive prices, project management capabilities and technical
expertise.
In order to be successful in the future, the Company must continue to
respond promptly and effectively to technological change and competitors'
innovations. There can be no assurance that the Company will be able to compete
successfully against current and future competitors. The Company's failure to
successfully compete could have a material adverse effect upon its business,
results of operations and financial condition.
INTELLECTUAL PROPERTY
The Company's consulting business includes the co-development, with the
customer, of software applications and other technology deliverables. These
include written specifications and documentation in connection with specific
customer engagements. The Company's future
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success depends in part on its ability to protect its intellectual property
rights. The Company presently holds no patents or registered copyrights. The
Company relies upon a combination of copyright and trade secret laws,
non-disclosure and other contractual arrangements and various security measures
to protect its intellectual property rights. India is a member of the Berne
Convention, and has agreed to recognize protections on copyrights conferred
under the laws of foreign countries, including the laws of the United States.
The Company believes that laws, rules, regulations and treaties in effect in the
United States and India are adequate to protect it from misappropriation or
unauthorized use of the Company's copyrights. However, there can be no assurance
that such laws will not change and, in particular, that the laws of India will
not change in ways that may prevent or restrict the transfer of software
components, libraries and toolsets from India to the United States. There can be
no assurance that the steps taken by the Company to protect its intellectual
property rights will be adequate to deter misappropriation of any of the
Company's intellectual property, or that the Company will be able to detect
unauthorized use and take appropriate steps to enforce the Company's rights.
Pursuant to the License Agreement between CTS and IMS Health, all rights to
the "Cognizant" name and certain related trade and service marks were
transferred to the Company in July, 1998.
EMPLOYEES
At December 31, 2001, the Company employed 855 persons on a full-time basis
in its North American headquarters and satellite offices and on-site North
American customer locations. The Company also employed 110 persons on a
full-time basis in its European satellite offices and on-site European customer
locations and 2,960 persons on a full-time basis in its offshore software
development centers in India. None of the Company's employees is subject to a
collective bargaining arrangement. The Company considers its relations with
employees to be good.
The Company's future success depends to a significant extent on its ability
to attract, train and retain highly skilled software development professionals.
In particular, the Company needs to attract, train and retain project managers,
software engineers and other senior technical personnel. The Company believes
that in both the United States and India there is a shortage of, and significant
competition for, software development professionals with the advanced
technological skills necessary to perform the services offered by the Company.
The Company has an active recruitment program in India. The Company has
developed a recruiting system and database that facilitates the rapid
identification of skilled candidates. During the course of the year, the Company
conducts extensive recruiting efforts at premier colleges and technical schools
in India. The Company evaluates candidates based on academic performance, the
results of a written aptitude test measuring problem-solving skills and a
technical interview. In addition, the Company has an active lateral recruiting
program.
Senior project managers are hired from leading consulting firms in the
United States and India. The Company's senior management and substantially all
of the project managers have experience working in the United States and Europe.
This enhances the Company's ability to attract and retain other professionals
with experience in the United States.
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The Company also has adopted a career and education management program to
define the employees' objectives and career plans. Through an intensive
orientation and training program, the Company introduces new employees to the
QVIEW software engineering process and its services.
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ITEM 2. PROPERTIES
The Company's executive and business development office is located in
Teaneck, New Jersey. The Company believes that its current facilities are
adequate to support its existing operations. The Company also believes that it
will be able to obtain suitable additional facilities on commercially reasonable
terms on an "as needed" basis.
The Company occupies the following properties:
Approximate Area
Location (in sq. feet) Use Nature of Occupancy
- ---------------------------------------------------------------------------------------------------------------------
Bangalore, India 23,800 Software Development Multiple leases expiring 6/30/06
Facility with renewal options
Chennai, India 58,800 Software Development Lease expiring 10/24/03 with
Facility renewal options
Chennai, India 15,500 Software Development Multiple leases expiring 1/31/06 -
Facility 4/30/06 with renewal options
Chennai, India 38,200 Software Development Multiple leases expiring 8/31/04
Facility -12/31/06 with renewal options
Chennai, India 35,100 Software Development Multiple leases expiring 4/30/06
Facility with renewal options
Chennai, India 33,700 Software Development Lease expiring 12/15/06 with
Facility renewal options
Pune, India 127,500 Software Development Owned
Facility
Calcutta, India 13,900 Software Development Lease expiring 10/7/07 with a
Facility renewal option
Calcutta, India 10,900 Software Development Lease expiring 6/14/06 with a
Facility renewal option
Calcutta, India 9,300 Software Development Lease expiring 11/30/03 with a
Facility renewal option
Calcutta, India 4,000 Software Development Multiple leases expiring 4/30/02-
Facility 1/15/03 with renewal options
Teaneck, New Jersey 34,400 Executive and Business Multiple leases expiring 5/31/02 -
Development Office 12/31/10
Atlanta, Georgia 1,000 Business Development Lease expiring 9/14/03
Office
Chicago, Illinois 5,100 Business Development Lease expiring 7/31/05
Office
Dallas, Texas 800 Business Development Lease expiring 3/31/03
Office
Los Angeles, California 1,000 Business Development Lease expiring 5/31/02
Office
Minneapolis, Minnesota 800 Business Development Lease expiring 6/30/03
Office
17
Approximate Area
Location (in sq. feet) Use Nature of Occupancy
- ---------------------------------------------------------------------------------------------------------------------
San Ramon, California 5,700 Business Development Multiple leases expiring 10/15/06
Office
Toronto, Canada 200 Business Development Lease expiring 4/1/02
Office
Frankfurt, Germany 200 Business Development Lease expires 3/31/02
Office
London, England 2,080 Business Development Multiple leases expiring 9/28/04
Office and month-to-month
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to June 1998, there was no established market for the Company's Class
A Common Stock. Since June 19, 1998, the Class A Common Stock has traded on the
Nasdaq National Market ("NNM") under the symbol "CTSH".
All of the issued and outstanding shares of Class B Common Stock are held
by IMS Health. Each outstanding share of Class B Common Stock is convertible at
the holder's option into one share of Class A Common Stock at any time prior to
a Tax-Free Spin-Off (as defined below). If a Tax-Free Spin-Off occurs, the
stockholders of IMS Health will receive Class B Common Stock, which will
continue to have ten votes per share (as compared to one vote per share for
Class A Common Stock). Such shares of Class B Common Stock shall convert upon
transfer to Class A Common Stock. Additionally, each share of Class B Common
Stock automatically converts into one share of Class A Common Stock if at any
time the number of outstanding shares of Class B Common Stock represents less
than 35.0% of the economic ownership represented by the aggregate number of
shares of Common Stock then outstanding.
Except as provided below, any shares of Class B Common Stock transferred to
a person other than IMS Health shall automatically convert to shares of Class A
Common Stock upon such disposition. Shares of Class B Common Stock transferred
to stockholders of IMS Health in a transaction intended to be on a tax-free
basis (a "Tax-Free Spin-Off") under the Code shall not convert to shares of
Class A Common Stock upon the occurrence of such Tax-Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall convert
upon transfer to Class A Common Stock; provided, however, that shares of Class B
Common Stock shall automatically convert into shares of Class A Common Stock on
the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free
Spin-Off, IMS Health delivers to the Company written advice of counsel
reasonably satisfactory to the Company to the effect that (i) such conversion
could adversely affect the ability of IMS Health to obtain a favorable ruling
from the Internal Revenue Service that the distribution would be a Tax-Free
Spin-Off or (ii) the Internal Revenue Service has adopted a general non-ruling
policy on tax-free spin-offs and that such conversion could adversely affect the
status of the transaction as a Tax-Free Spin-Off. If such written advice is
received, approval of such conversion shall be submitted to a vote of the
holders of the Common Stock as soon as practicable after the fifth anniversary
of the Tax-Free Spin-Off, unless IMS Health delivers to the Company written
advice of counsel reasonably satisfactory to the Company prior to such
anniversary that such vote could adversely affect the status of the distribution
as a Tax-Free Spin-Off, including the ability to obtain a favorable ruling from
the Internal Revenue Service. If such written advice is delivered, such vote
shall not be held. Approval of such conversion will require the affirmative vote
of the holders of a majority of the shares of both Class A Common Stock and
Class B Common Stock present and voting, voting together as a single class, with
each share entitled to one vote for such purpose. No assurance can be given that
such conversion would be consummated. The foregoing requirements are intended to
ensure that tax-free treatment of a Tax-Free Spin-Off is preserved should the
Internal Revenue Service challenge such automatic conversion as violating the
80.0% vote requirement currently required by the Code for a Tax-Free Spin-Off.
19
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
effected by a 100% dividend payable on March 16, 2000 to stockholders of record
on March 2, 2000. The stock split has been reflected in the accompanying
financial statements, and all applicable references as to the number of common
shares and per share information have been restated.
The following table sets forth the high and low sales price for the Class A
Common Stock for each of the quarters since the quarter ended March 31, 2000 as
reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quarter Ended High Low
--------------------------------- ------------ ------------
March 31, 2000................... $72.13 $36.50
June 30, 2000.................... $65.00 $24.25
September 30, 2000............... $49.00 $30.94
December 31, 2000................ $45.00 $28.88
March 31, 2001................... $53.75 $27.81
June 30, 2001.................... $47.60 $27.85
September 30, 2001............... $46.05 $18.25
December 31, 2001................ $45.31 $17.70
As of March 1, 2002, the approximate number of holders of record of the
Class A Common Stock was 36 and the approximate number of beneficial holders of
the Class A Common Stock was 5,300.
As of March 1, 2002, all of the outstanding Class B Common Stock of the
Company was owned by IMS Health.
The Company has never declared or paid cash dividends on its Class A or
Class B Common Stock. The Company currently intends to retain any future
earnings to finance the growth of the business and, therefore, does not
currently anticipate paying any cash dividends in the foreseeable future.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company as of the dates and for the periods indicated. The selected
consolidated financial data set forth below for the Company as of December 31,
2000 and 2001 and for each of the three years in the period ended December 31,
2001 have been derived from the audited financial statements included elsewhere
herein. The selected consolidated financial data set forth below for the Company
as of December 31, 1997, 1998 and 1999 and for each of the years ended December
31, 1997 and 1998 are derived from the audited financial statements not included
elsewhere herein. The selected consolidated financial information for 1999, 2000
and 2001 should be read in conjunction with the Consolidated Financial
Statements and the Notes and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are included elsewhere in
this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 13,898 $ 45,031 $ 74,084 $ 122,758 $ 158,969
Revenues - related party................... 10,846 13,575 14,820 14,273 18,809
--------- --------- --------- --------- ------
Total revenues.......................... 24,744 58,606 88,904 137,031 177,778
Cost of revenues........................... 14,359 31,919 46,161 70,437 90,848
--------- --------- --------- --------- ---------
Gross profit............................... 10,385 26,687 42,743 66,594 86,930
Selling, general and administrative
expenses................................ 6,898 15,547 23,061 35,959 44,942
Depreciation and amortization expense...... 1,358 2,222 3,037 4,507 6,368
--------- --------- --------- --------- ---------
Income from operations..................... 2,129 8,918 16,645 26,128 35,620
Other income (expense):
Interest income......................... 25 638 1,263 2,649 2,501
Impairment loss on Investment -- -- -- -- (1,955)
Other income (expense) - net............ -- 83 37 (530) (767)
--------- --------- --------- ---------- ----------
Total other income (expense)............ 25 721 1,300 2,119 (221)
--------- --------- --------- ---------- ----------
Income before provision for income taxes... 2,154 9,639 17,945 28,247 35,399
Provision for income taxes................. (581) (3,606) (6,711) (10,564) (13,239)
Minority interest.......................... (545) -- -- -- --
Net income................................. $ 1,028 $ 6,033 $ 11,234 $ 17,683 $ 22,160
========= ======== ========= ========= =========
Net income per share, basic................ $ 0.08 $ 0.38 $ 0.61 $ 0.95 $ 1.17
========= ========= ========= ========= =========
Net income per share, diluted.............. $ 0.08 $ 0.37 $ 0.58 $ 0.87 $ 1.09
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding...................... 13,094 15,886 18,342 18,565 19,017
========= ========= ========= ========= =========
Weighted average number of common
shares and stock options outstanding.... 13,010 16,538 19,416 20,256 20,371
========= ========= ========= ========= =========
CONSOLIDATED STATEMENT OF FINANCIAL
POSITION DATA:
Cash and cash equivalents.................. $ 2,715 $ 28,418 $ 42,641 $ 61,976 $ 84,977
Working capital............................ 5,694 29,416 43,507 61,501 95,637
Total assets............................... 18,298 51,679 69,026 109,540 144,983
Due to related party....................... 6,646 9 -- 8 --
Stockholders' equity....................... 3,419 32,616 45,461 66,116 98,792
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company delivers high-quality, cost-effective, full life cycle
solutions to complex software development and maintenance problems that
companies face as they transition to e-business. These IT services are delivered
through the use of a seamless on-site and offshore consulting project team. The
Company's service offerings include:
o application development and integration;
o application management; and
o re-engineering.
During 1996, the Company made a strategic decision to attract customers
that were not affiliated with Cognizant Corporation or any of the former
affiliates of The Dun & Bradstreet Corporation. As a result of the
implementation of this strategy, the Company has successfully transitioned from
a company primarily serving affiliated customers to a company whose customer
base now consists primarily of unaffiliated third parties. For example, revenues
derived from customers not currently or previously affiliated with The Dun &
Bradstreet Corporation, Cognizant Corporation, IMS Health, and any of their
respective subsidiaries grew from $50.5 million, or 56.8% of revenues, in 1999
to $92.3 million, or 67.4% of revenues, in 2000 and to $129 million, or 72.3% of
revenues in 2001. Approximately 43.2%, 32.6% and 27.7% of the Company's revenues
in 1999, 2000 and 2001, respectively, were generated from current and former
affiliates including approximately 16.7%, 10.4% and 10.6%, respectively, from
IMS Health and its current subsidiaries.
The Company has derived and believes that it will continue to derive a
significant portion of its revenues from a limited number of large third-party
customers. During 1999, 2000 and 2001, the Company's five largest customers
(other than IMS Health and its current subsidiaries) accounted for 44.9%, 34.5%
and 28.5% of revenues, respectively. In 1999, IMS Health and First Data
Corporation accounted for more than 10.0% of revenue. In 2000 and 2001, IMS
Health accounted for more than 10.0% of revenues. The volume of work performed
for IMS Health and its subsidiaries and other customers is likely to vary from
year to year. Major customers, whether affiliated or unaffiliated, in one year
may not provide the same level of revenues in any subsequent year.
The tragic events of September 11, 2001 have significantly impacted our
travel industry customers, which represent approximately 5% of revenues. In
addition, we expect short-term logistical delays in launching new initiatives
for existing and new customers. There is no evidence that these events have
changed our customers' strategy of doing business in India.
Prior to fiscal 2000, Year 2000 compliance services were an important
element of the Company's service offerings. Approximately 15.6% and 0.4% of the
Company's revenues were derived from Year 2000 compliance services in 1999 and
2000, respectively. The Company
22
believes that it has successfully utilized its Year 2000 compliance expertise to
establish new client relationships and to deepen its relationships with existing
customers. The knowledge of customers' systems gained while performing Year 2000
compliance services gave the Company a competitive advantage in securing
additional application development and application management projects for such
customers.
Application development and integration services represented approximately
32.3%, 46.1% and 42.9% of revenues in 1999, 2000 and 2001, respectively.
Application management services accounted for 44.0%, 47.0% and 51.8% of revenues
in 1999, 2000 and 2001, respectively.
The Company's services are performed on either a time-and-materials or
fixed-price basis. Revenues related to time-and-materials contracts are
recognized as the service is performed. Revenues related to fixed-price
contracts are recognized using the percentage-of-completion method of
accounting. Under such method, the sales value of performance, including
earnings thereon, is recognized on the basis of the percentage that each
contract's cost to date bears to the total estimated contract cost. Estimates
are subject to adjustment as a project progresses, to reflect changes in
expected completion costs. The cumulative impact of any revision in estimates of
the percentage of work completed is reflected in the financial reporting period
in which the change in the estimate becomes known. Additionally, any anticipated
losses are recognized immediately. Since the Company bears the risk of cost
over-runs and inflation associated with fixed-price projects, the Company's
operating results may be adversely affected by changes in estimates of contract
completion costs.
The majority of the Company's revenues are earned within North America.
Revenues outside of North America totaled $17.7 million, $22.1 million, and
$25.4 million in 1999, 2000, and 2001, respectively, based upon where the
customers are located. Revenues from customers located outside of North America
have been generated primarily in the United Kingdom and Germany. As a percentage
of revenues, revenues outside of North America represented 19.9%, 16.1% and
14.3% in 1999, 2000 and 2001, respectively. The primary denomination for
invoices issued by the Company is U.S. dollars, with the exception of invoices
issued in Canada, Germany and the United Kingdom. Invoices issued in Canada,
Germany and the United Kingdom are issued in local currency. Gains and losses as
a result of fluctuations in foreign currency exchange rates have not had a
significant impact on historical results of operations.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 to the Consolidated Financial Statements includes a
summary of the significant accounting policies and methods used in the
preparation of the Company's Consolidated Financial Statements. The following is
a brief discussion of the more significant accounting policies and methods used
by the Company.
23
In addition, Financial Reporting Release No. 61 was recently released by
the SEC to require all companies to include a discussion to address, among other
things, liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments.
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of financial statements in
accordance with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the recoverability of tangible and
intangible assets, disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period.
On an on-going basis, the Company evaluates its estimates. The most
significant estimates relate to the allowance for doubtful accounts, reserve for
warranties, reserves for employee benefits, income taxes, depreciation of fixed
assets and long-lived assets, contingencies and litigation and the recognition
of revenue and profits based on the percentage of completion method of
accounting for fixed bid contracts. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could vary from the
estimates and assumptions used in the preparation of the accompanying financial
statements.
All of the Company's software development centers, including a substantial
majority of its employees are located in India. As a result, the Company may be
subject to certain risks associated with international operations, including
risks associated with foreign currency exchange rate fluctuations and risks
associated with the application and imposition of protective legislation and
regulations relating to import and export or otherwise resulting from foreign
policy or the variability of foreign economic conditions. To date, the Company
has not engaged in any hedging transactions to mitigate its risks relating to
exchange rate fluctuations. Additional risks associated with international
operations include difficulties in enforcing intellectual property rights, the
burdens of complying with a wide variety of foreign laws, potentially adverse
tax consequences, tariffs, quotas and other barriers.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
REVENUE RECOGNITION. The Company's services are entered into on either a
T&M or fixed-price basis. Revenues related to T&M contracts are recognized as
the service is performed. Revenues related to fixed-price contracts are
recognized as the service is performed using the percentage-of-completion method
of accounting, under which the sales value of performance, including estimated
earnings thereon, is recognized on the basis of the percentage that each
contract's cost to date bears to the total estimated cost. Fixed price contracts
are cancelable subject to a specified notice period. All services provided by
the Company through the date of cancellation are due and payable under the
contract terms. The Company issues invoices related
24
to fixed price contracts based upon achievement of milestones during a project
or other contractual terms. Differences between the timing of billings, based
upon contract milestones or other contractual terms, and the recognition of
revenue, based upon the percentage-of-completion method of accounting, are
recognized as either unbilled or deferred revenue. Estimates are subject to
adjustment as a project progresses to reflect changes in expected completion
costs. The cumulative impact of any revision in estimates is reflected in the
financial reporting period in which the change in estimate becomes known and any
anticipated losses on contracts are recognized immediately. A reserve for
warranty provisions under such contracts, which generally exist for ninety days
past contract completion, is estimated and accrued during the contract period.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of the Company's
Canadian and European subsidiaries are translated into U.S. dollars from local
currencies at current exchange rates and revenues and expenses are translated
from local currencies at average monthly exchange rates. The resulting
translation adjustments are recorded in a separate component of stockholders'
equity. For the Company's Indian subsidiary ("CTS India"), the functional
currency is the U.S. dollar, since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between CTS
India and its U.S. affiliates. Non-monetary assets and liabilities are
translated at historical exchange rates, while monetary assets and liabilities
are translated at current exchange rates. The resulting gain (loss) is included
in other income.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
INCOME TAXES. The Company records a valuation allowance to reduce its
deferred tax assets to the amount that is more likely than not to be realized.
While the Company has considered future taxable income and on-going prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event the Company were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company determine that
it would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. Additionally, the Company provides
deferred taxes on the earnings of its Indian subsidiary based on the assumption
that those earnings will be repatriated. Should the Company subsequently be
unable to repatriate such earnings based on regulatory or other factors, or
decide not to repatriate these or future earnings, an adjustment to the deferred
tax liability account would be credited to income in the period of such
determination.
25
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 2000 2001
-------------- ------------------ ---------
Total revenues......................................... 100.0% 100.0% 100.0%
Cost of revenues....................................... 51.9 51.4 51.1
----- ----- -----
Gross profit....................................... 48.1 48.6 48.9
Selling, general and administrative expenses........... 25.9 26.2 25.3
Depreciation and amortization expense.................. 3.4 3.3 3.6
----- ----- -----
Income from operations............................. 18.8 19.1 20.0
Other income (expense):
Interest income.................................... 1.4 1.9 1.4
Impairment loss on Investment -- -- (1.1)
Other income (expense)............................. -- (0.4) (0.4)
----- ----- -----
Total other income..................................... 1.4 1.5 (0.1)
----- ----- -----
Income before provision for income taxes............... 20.2 20.6 19.9
Provision for income taxes............................. (7.6) (7.7) (7.4)
----- ----- -----
Net income............................................ 12.6% 12.9% 12.5%
===== ===== =====
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue increased by 29.7%, or $40.7 million, from $137.0 million
during 2000 to $177.8 million in 2001. This increase resulted primarily from a
$27.7 million (42.9%) increase in application management and a $13.5 million
(18.8%) increase in application development and integration, partially offset by
an approximately $0.5 million (100.0%) decrease in Year 2000 compliance
services. The Company provides services through T&M and fixed bid contracts.
Over the course of the last three years fixed bid contracts have increased as a
percent of revenues from 15.0% in 1999 to 15.1% in 2000 to 23.9% in 2001.
Sales to related parties on a year-over-year basis were relatively stable
at 10.6% in 2001 compared to 10.4% in 2000. For statement of operations
purposes, revenues from related parties only include revenues recognized during
the period in which the related party was affiliated with the Company. During
2001 and 2000, no third party accounted for greater than 10% of revenues.
GROSS PROFIT. The Company's cost of revenues consists primarily of the cost
of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. The Company's
cost of revenues increased by 29.0%, or $20.4 million, from $70.4 million during
2000 to $90.8 million in 2001. The increase was due primarily to the increased
cost resulting from the increase in the number of the Company's technical
professionals from approximately 2,800 employees at December 31, 2000 to
approximately 3,470 employees at December 31, 2001. The increased number of
technical professionals is a direct result of greater demand for the Company's
services. The Company's
26
gross profit increased by 30.5%, or approximately $20.3 million, from
approximately $66.6 million during 2000 to $86.9 during 2001. Gross profit
margin increased from 48.6% of revenues during 2000 to 48.9% of revenues in
2001. The increase in such gross profit margin was primarily attributable to a
continued shift toward higher margin fixed bid contracts and a lower incentive
compensation accrual in 2001 as compared to 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs. Selling, general and administrative expenses, including
depreciation and amortization, increased by 26.8%, or $10.8 million, from $40.5
million during 2000 to $51.3 million during 2001, and decreased as a percentage
of revenue from approximately 29.5% to 28.9%, respectively. The increase in such
expenses in absolute dollars was due primarily to expenses incurred to expand
the Company's sales and marketing activities and increased infrastructure
expenses to support the Company's growth. The decrease in such expenses as a
percentage of revenue was primarily due to the increased revenues that have
resulted from the Company's expanded sales and marketing activities in the
current and prior years.
INCOME FROM OPERATIONS. Income from operations increased 36.3%, or
approximately $9.5 million, from approximately $26.1 million during 2000 to
$35.6 million during 2001, representing approximately 19.1% and 20.0% of
revenues, respectively. The increase in operating margin was primarily due to a
continued shift toward higher margin fixed bid contracts and a lower incentive
compensation accrual in 2001 as compared to 2000.
OTHER INCOME/EXPENSE. Other income/expense consists primarily of interest
income offset, by foreign currency exchange losses and, in 2001, an impairment
loss on an investment. Interest income decreased by approximately 5.6%, from
$2.6 million during 2000 to $2.5 million during 2001. The decrease in such
interest income was attributable primarily to lower interest rates, offset, in
part, by higher operating cash balances. The Company recognized a net foreign
currency exchange loss of approximately $767,000 during 2001, as a result of the
effect of changing exchange rates on the Company's transactions. The Company
recognized an impairment loss on its investment in Questra Corporation
("Questra") of approximately $2.0 million during the fourth quarter of 2001 in
recognition of an other than temporary decline in value. The impairment loss was
based upon an implied valuation of Questra as a result of a recent new round of
venture capital funding in which the Company's equity interest in Questra was
substantially diluted and investors, other than the Company, received
preferential liquidation rights. The impairment loss, net of tax benefit, was
$1.2 million or $0.06 per diluted share. (See Note 5 to the Consolidated
Financial Statements).
PROVISION FOR INCOME TAXES. Historically, through the date of the IPO, the
Company had been included in the consolidated federal income tax returns of The
Dun & Bradstreet Corporation and Cognizant Corporation. The Company's provision
for income taxes in the consolidated statements of income reflects the federal
and state income taxes calculated on the Company's stand-alone basis. The
provision for income taxes increased from $10.6 million in 2000 to $13.2 million
in 2001, with an effective tax rate of 37.4% in both years. The provision for
income taxes reflects the Company's intent to repatriate earnings from its
Indian subsidiary.
27
NET INCOME. Net income increased from approximately $17.7 million in 2000
to $22.2 million in 2001, representing approximately 12.9% and 12.5% as a
percentage of revenues, respectively. The lower percentage in 2001 reflects the
one-time write-off of the Company's investment in Questra, discussed previously.
RESULTS BY BUSINESS SEGMENT
The Company, operating globally, provides software services for medium and
large businesses. North American operations consist primarily of software
services in the United States and Canada. European operations consist of
software services principally in the United Kingdom. Asian operations consist of
software services principally in India. The Company is managed on a geographic
basis. Accordingly, regional sales managers, sales managers, account managers,
project teams and facilities are segmented geographically and decisions by the
Company's chief operating decision maker regarding the allocation of assets and
assessment of performance are based on such geographic segmentation. Revenues
and resulting operating income are attributed to regions based upon customer
location.
North American Segment
REVENUE. Revenue increased by 32.6%, or approximately $37.5 million, from
approximately $114.9 million during 2000 to approximately $152.4 million in
2001. The increase in revenue was attributable primarily to increased market
awareness and acceptance of the on-site/offshore software delivery model, as
well as sales and marketing activities directed at the U.S. market for the
Company's services.
INCOME FROM OPERATIONS. Income from operations increased 39.3%, or
approximately $8.6 million, from approximately $21.9 million during 2000 to
approximately $30.5 million during 2001. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
European Segment
REVENUE. Revenue increased by 10.2%, or approximately $2.1 million, from
approximately $21.0 million during 2000 to approximately $23.1 million in 2001.
The increase in revenue was attributable to the Company's sales and marketing
activities in the United Kingdom, partially offset by weak demand for the
Company's services elsewhere in Europe.
INCOME FROM OPERATIONS. Income from operations increased 16.0%, or
approximately $0.6 million, from approximately $4.0 million during 2000 to $4.6
million during 2001. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments.
Asian Segment
REVENUE. Revenue increased by 98.6%, or $1.1 million, from $1.1 million
during 2000 to $2.2 million in 2001. The increase in revenue was attributable
primarily to the Company's success in India providing software services to
domestic Indian companies as well as to Indian divisions of the Company's
multi-national clients.
28
INCOME FROM OPERATIONS. Income from operations increased 109.3%, or
approximately $0.2 million, from approximately $0.2 million during 2000 to $0.5
million during 2001. The increase in operating income was attributable primarily
to increased revenues.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUE. Revenue increased by 54.1%, or $48.1 million, from $88.9 million
during 1999 to $137.0 million in 2000. This increase resulted primarily from a
$61.5 million (82.0%) increase in application development and integration,
application management, re-engineering and other services partially offset by an
approximately $13.4 million (96.5%) decrease in Year 2000 compliance services.
The percentage of revenues derived from unrelated parties increased from 83.3%
during 1999 to 89.6% during 2000. This increase resulted from the Company's
continued effort to pursue unaffiliated third-party customers and expanded
service offerings to existing unaffiliated customers. For statement of
operations purposes, revenues from related parties only include revenues
recognized during the period in which the related party was affiliated with the
Company. During 2000, sales to related party customers accounted for 10.4% of
revenues and no third party accounted for greater than 10% of revenues. During
1999, sales to related party customers accounted for 16.7% of revenues and one
third-party customer accounted for 17.4% of revenues.
GROSS PROFIT. The Company's cost of revenues increased by 52.6%, or $24.3
million, from $46.2 million during 1999 to $70.4 million during 2000. The
increase was due primarily to the increased cost resulting from the increase in
the number of the Company's technical professionals from approximately 2,000
employees at December 31, 1999 to approximately 2,800 employees at December 31,
2000. The increased number of technical professionals is a direct result of
greater demand for the Company's services. The Company's gross profit increased
by 55.8%, or approximately $23.9 million, from approximately $42.7 million
during 1999 to approximately $66.6 million during 2000. Gross profit margin
increased from 48.1% of revenues during 1999 to 48.6% of revenues during 2000.
The increase in such gross profit margin was primarily attributable to the
increased third-party revenue and the shift toward newer, higher margin
customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased by
55.1%, or $14.4 million, from $26.1 million during 1999 to $40.5 million during
2000, and increased as a percentage of revenue from approximately 29.4% to
29.5%, respectively. The increase in such expenses in absolute dollars and as a
percentage of revenue was primarily due to expenses incurred to expand the
Company's sales and marketing activities and increased infrastructure expenses
to support the Company's revenue growth.
INCOME FROM OPERATIONS. Income from operations increased 57.0%, or
approximately $9.5 million, from approximately $16.6 million during 1999 to
approximately $26.1 million during 2000, representing approximately 18.7% and
19.1% of revenues, respectively. The increase in operating margin was primarily
attributable to the increased third-party revenue and the shift toward newer,
higher margin customers.
29
OTHER INCOME. Interest income increased by approximately 109.7%, from $1.3
million during 1999 to approximately $2.6 million during 2000. The increase in
such interest income was attributable primarily to generally higher operating
cash balances. The Company recognized a net foreign currency exchange loss of
approximately $538,000 during 2000, as a result of the effect of changing
exchange rates on the Company's transactions.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes in the
consolidated statements of income reflects the federal and state income taxes
calculated on the Company's stand alone basis. The provision for income taxes
increased from $6.7 million in 1999 to $10.6 million in 2000, with an effective
tax rate of 37.4% in both 1999 and 2000.
NET INCOME. Net income increased from approximately $11.2 million in 1999
to approximately $17.7 million in 2000, representing approximately 12.6% and
12.9% as a percentage of revenues, respectively.
RESULTS BY BUSINESS SEGMENT
North American Segment
REVENUE. Revenue increased by 61.5%, or approximately $43.8 million, from
approximately $71.2 million during 1999 to approximately $114.9 million in 2000.
The increase in revenue was attributable primarily to increased market awareness
and acceptance of the on-site/offshore software delivery model, as well as sales
and marketing activities directed at the U.S. market for the Company's services.
INCOME FROM OPERATIONS. Income from operations increased 64.4%, or
approximately $8.6 million, from approximately $13.3 million during 1999 to
approximately $21.9 million during 2000. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
European Segment
REVENUE. Revenue increased by 20.8%, or approximately $3.6 million, from
approximately $17.4 million during 1999 to approximately $21.0 million in 2000.
The increase in revenue was attributable the Company's sales and marketing
activities in the United Kingdom.
INCOME FROM OPERATIONS. Income from operations increased 23.1%, or
approximately $0.7 million, from approximately $3.2 million during 1999 to
approximately $4.0 million during 2000. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
Asian Segment
REVENUE. Revenue increased by 199.2%, or $0.8 million, from approximately
$0.4 million during 1999 to approximately $1.2 million in 2000. The increase in
revenue was attributable primarily to the Company's success in India providing
software services to domestic Indian companies.
30
INCOME FROM OPERATIONS. Income from operations increased 100.0%, or
approximately $0.1 million, from approximately $0.1 million during 1999 to
approximately $0.2 million during 2000. The increase in operating income was
attributable primarily to increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
Historically, through the date of the IPO, the Company's primary sources of
funding had been cash flow from operations and intercompany cash transfers with
its majority owner and controlling parent company Cognizant Corporation and IMS
Health. In June 1998, the Company consummated its initial public offering of
5,834,000 shares of its Class A Common Stock at a price to the public of $5.00
per share, of which 5,000,000 shares were issued and sold by the Company and
834,000 shares were sold, at that time, by Cognizant Corporation. The net
proceeds to the Company from the offering were approximately $22.4 million after
$845,000 of direct expenses. The funds received by the Company from the initial
public offering were invested in short-term, investment grade, interest bearing
securities, after the Company used a portion of the net proceeds to repay
approximately $6.6 million of then-existing non-trade related party balances to
Cognizant Corporation. The Company has used and plans to use the remainder of
the net proceeds from the offering as well as other cash for (i) expansion of
existing operations, including its offshore software development centers; (ii)
continued development of new service lines and possible acquisitions of related
businesses including cost and equity investments; and (iii) general corporate
purposes including working capital.
Net cash provided by operating activities was approximately $32.1 million,
$30.2 million and $19.4 million for the years ended December 31, 2001, 2000 and
1999, respectively. The increase in 2001 as compared to the prior year resulted
primarily from increased tax benefits related to stock plans, increased
depreciation and amortization, a smaller increase in accounts receivable and
increased net income, offset, in part, by decreased levels of year-end accrued
liabilities and accounts payable, due primarily to the timing of payments. The
increase for 2000 compared to 1999 results primarily from increased levels of
accrued liabilities and accounts payable, increased net income and an increase
in deferred taxes, partially offset, in part, by increases in accounts
receivable and other current assets. Trade accounts receivable increased from
$10.0 million at December 31, 1999 to $20.5 million at December 31, 2000 and to
$22.5 million at December 31, 2001. Unbilled accounts receivable increased from
$1.1 million at December 31, 1999 to $1.9 million at December 31, 2000 and to
$5.4 million at December 31, 2001. The increase in trade accounts receivable
during 2001 was due primarily to increased revenue. The increase in unbilled
accounts receivable in 2001 compared to prior years was primarily related to the
increase in the percentage of revenues derived from fixed bid contracts and the
related timing of contractual billings. The Company monitors turnover, aging and
the collection of accounts receivable through the use of management reports
which are prepared on a customer basis and evaluated by the Company's finance
staff. At December 31, 2001, the Company's day's sales outstanding, including
unbilled receivables, was approximately 59 days, as compared to 50 days and 43
days at December 31, 2000 and 1999.
The Company's investing activities used net cash of $14.9 million, $12.6
million and $5.9 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The increase in 2001 compared to 2000 primarily reflects the
Company's increased purchases of land, buildings and equipment to expand the
Company's offshore development infrastructure. The increase in
31
2000 of net cash used in investing activities compared to 1999 primarily
reflects an increase in purchases of property and equipment.
In June 2000, the Company announced a strategic relationship with Trident
Capital, a leading venture capital firm, to jointly invest in emerging
e-business service and technology companies. In accordance with this strategy,
the Company invested approximately $2 million in Questra Corporation, an
e-business software and consulting firm headquartered in Rochester, New York, in
return for an initial 5.8% equity interest. Trident Capital also independently
made a direct investment in Questra Corporation. Based upon an implied valuation
of Questra as a result of a recent new round of venture capital funding in which
the Company's equity interest in Questra was substantially diluted and
investors, other than the Company, received preferential liquidation rights, the
Company recorded an impairment loss for the full $2.0 million original
investment in recognition of an other than temporary impairment. The Company's
investment is being accounted for under the cost basis of accounting. (See Note
5 to the Consolidated Financial Statements.)
The Company's financing activities provided net cash of $6.0 million, $1.8
million and $0.7 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The increase in each year was primarily related to a higher level
of cash proceeds from the exercise of stock options and employee purchases of
stock.
The Company believes that its available funds and the cash flows expected
to be generated from operations, will be adequate to satisfy its current and
planned operations and needs for at least the next 12 months. The Company's
ability to expand and grow its business in accordance with current plans, to
make acquisitions and form joint ventures and to meet its long-term capital
requirements beyond this 12-month period will depend on many factors, including
the rate, if any, at which its cash flow increases, its ability and willingness
to accomplish acquisitions and joint ventures with capital stock and the
availability to the Company of public and private debt and equity financing. The
Company cannot be certain that additional financing, if required, will be
available on terms favorable to it, if at all.
At December 31, 2001 and 2000, the Company had cash and cash equivalents of
approximately $85 million and $62 million, respectively. As of December 31, 2001
and 2000 the Company had no significant third party debt. The Company had
working capital of approximately $95.6 and $61.5 million at December 31, 2001
and 2000, respectively. Accordingly, the Company does not anticipate any
near-term liquidity issues.
As of December 31, 2001, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $10.7 million, of which $7.6 million has been spent to date. The
multi-phase program will encompass the construction of three fully owned
development centers containing approximately 600,000 square feet of space in
Pune, Chennai and Calcutta. Total costs related to this program are expected to
be approximately $35.6 million, which the Company expects to fund internally.
The Company leases office space and equipment under operating leases, which
expire at various dates through the year 2010. Certain leases contain renewal
provisions and generally require the Company to pay utilities, insurance, taxes,
and other operating expenses.
32
Approximate future minimum rental payments under operating leases that have
initial or remaining lease terms in excess of one year as of December 31, 2001
are as follows:
2002.....................................................$4.8 million
2003......................................................4.3 million
2004......................................................2.8 million
2005......................................................1.4 million
2006......................................................0.8 million
Thereafter................................................2.0 million
Total minimum lease payments............................$16.1 million
The Company does not engage in hedging activities nor has it entered into
transactions, arrangements or other relationships with unconsolidated entities
or other persons that are likely to affect liquidity or the availability of or
requirements for capital resources.
RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
As indicated in Notes 1 and 10 to the consolidated financial statements,
the Company has entered into various agreements with IMS Health, who owned a
majority and controlling interest in the outstanding Common Stock of the Company
(58.3%) and held approximately 93.3% of the combined voting power of the
Company's Common Stock at December 31, 2001.
IMS Health currently provides the Company with certain administrative
services, including payroll and payables processing and permits the Company to
participate in IMS Health's business insurance plans. In prior periods, IMS
Health provided certain other services such as tax planning and compliance,
which have now been transitioned to the Company. Costs for all periods prior to
the Company's IPO were allocated to the Company based on utilization of certain
specific services. All subsequent services were performed and charged to the
Company under the CTS/IMS Health intercompany services agreement that was
negotiated between the parties on an arms length basis.
The Company and IMS Health have entered into Master Services Agreements
pursuant to which the Company provides IT services to IMS Health. The IT
services are provided to IMS Health on terms that are comparable to unrelated
third parties. The same is true for IT services provided to former affiliates of
D&B and Cognizant Corporation, former parents of the Company, and former and
present affiliates of IMS Health. In 2001, the Company recognized related party
revenues totaling $18.8 million for services performed for IMS Health. In 2000,
the Company recognized related party revenues totaling $14.3 million including
revenues from IMS Health and Strategic Technologies (through August 30, 2000).
In 1999, the Company recognized related party revenues totaling $14.8 million
including revenues from IMS Health and Strategic Technologies.
In December 2001, the Company paid IMS Health a one-time fee of
approximately $825,000 under an alliance agreement in which the Company was
named "vendor of choice" for IT services to the pharmaceutical industry. This
agreement was negotiated between the parties on an arms-length basis.
33
In addition, the Company has a certain relationship with Erisco, which is
now a wholly owned subsidiary of The Trizetto Group, Inc. ("Trizetto"). As of
December 31, 2001, IMS Health owned approximately 26.8% of the outstanding
common stock of Trizetto. During 2001 the Company recorded revenues from Erisco
of approximately $401,000 and payments to Erisco for commissions and marketing
fees of approximately $1.0 million.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate component of
stockholders' equity. For the Company's Indian subsidiary, the functional
currency is the U.S. dollar since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars; and there is a high
volume of intercompany transactions denominated in U.S. dollars between the
Indian subsidiary and the Company's U.S. affiliates. Non-monetary assets and
liabilities are translated at historical exchange rates, while monetary assets
and liabilities are translated at current exchange rates. A portion of the
Company's costs in India are denominated in local currency and subject to
exchange fluctuations, which has not had any material effect on the Company's
results of operations.
EFFECTS OF INFLATION
The Company's most significant costs are the salaries and related benefits
for its programming staff and other professionals. Competition in India and the
United States for professionals with advanced technical skills necessary to
perform the services offered by the Company have caused wages to increase at a
rate greater than the general rate of inflation. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. There can be no assurance that the Company will be
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
RECENT ACCOUNTING PRONOUNCEMENTS
During 2000 and 2001, various new accounting pronouncements were issued
which may impact the Company's financial statements. (See Note 2 to the
Consolidated Financial Statements.)
FORWARD LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission,
34
or press releases or oral statements made by or with the approval of an
authorized executive officer of the Company. These forward-looking statements,
such as statements regarding anticipated future revenues, contract percentage
completions, capital expenditures, and other statements regarding matters that
are not historical facts, involve predictions. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect the Company's future operating results include,
but are not limited to: (i) the significant fluctuations of the Company's
quarterly operating results caused by a variety of factors, many of which are
not within the Company's control, including (a) the number, timing, scope and
contractual terms of software development and maintenance projects, (b) delays
in the performance of projects, (c) the accuracy of estimates of costs,
resources and time to complete projects, (d) seasonal patterns of the Company's
services required by customers, (e) levels of market acceptance for the
Company's services, and (f) the hiring of additional staff; (ii) changes in the
Company's billing and employee utilization rates; (iii) the Company's ability to
manage its growth effectively, which will require the Company (a) to increase
the number of its personnel, particularly skilled technical, marketing and
management personnel, and (b) to continue to develop and improve its
operational, financial, communications and other internal systems, in the United
States, Europe and India; (iv) the Company's limited operating history with
unaffiliated customers; (v) the Company's reliance on key customers and large
projects; (vi) the highly competitive nature of the markets for the Company's
services; (vii) the Company's ability to successfully address the continuing
changes in information technology, evolving industry standards and changing
customer objectives and preferences; (viii) the Company's reliance on the
continued services of its key executive officers and leading technical
personnel; (ix) the Company's ability to attract and retain a sufficient number
of highly skilled employees in the future; (x) the Company's ability to protect
its intellectual property rights; and (xi) general economic conditions. The
Company's actual results may differ materially from the results disclosed in
such forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed and financial statement schedule herewith is found at "Item 14. Exhibits,
Financial Statement Schedule, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
2002 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 2002 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 2002
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2002 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements.
Reference is made to the Index to Consolidated Financial Statements on
Page F-1.
(a) (2) Consolidated Financial Statement Schedule.
Reference is made to the Index to Financial Statement Schedule on Page
F-1.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 40.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
2001.
Schedules other than as listed above are omitted as not required or
inapplicable or because the required information is provided in the consolidated
financial statements, including the notes thereto.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 11th day of March,
2002.
COGNIZANT TECHNOLOGY
SOLUTIONS CORPORATION
By: /s/Wijeyaraj Mahadeva
-----------------------------------
Wijeyaraj Mahadeva, Chairman of the
Board and Chief Executive Officer
38
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Wijeyaraj Mahadeva Chairman of the Board and Chief March 11, 2002
- ------------------------------ Executive Officer (Principal
Wijeyaraj Mahadeva Executive Officer)
/s/Gordon Coburn Chief Financial Officer, Treasurer March 11, 2002
- ------------------------------ and Secretary (Principal Financial
Gordon Coburn and Accounting Officer)
/s/ Thomas M. Wendel Director March 11, 2002
- ------------------------------
Thomas M. Wendel
/s/ Robert W. Howe Director March 11, 2002
- ------------------------------
Robert W. Howe
Director March 11, 2002
- ------------------------------
John E. Klein
/s/Venetia Kontogouris Director March 11, 2002
- ------------------------------
Venetia Kontogouris
/s/ David M. Thomas Director March 11, 2002
- ------------------------------
David M. Thomas
/s/ Robert W. Weissman Director March 11, 2002
- ------------------------------
Robert W. Weissman
Director March 11, 2002
- ------------------------------
James C. Malone
39
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------------- ----------------------------
3.1 Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
to the Company's Registration Statement on Form S-1 (File Number 333-49783) which became
effective on June 18, 1998.)
3.2 Certificate of Amendment to the Company's Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.)
3.3 By-laws. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File Number 333-49783) which became effective on June 18, 1998.)
10.1* Form of Indemnification Agreement for Directors and Officers. (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1 (File Number 333-49783) which
became effective on June 18, 1998.)
10.2* Amended and Restated Cognizant Technology Solutions Key Employees' Stock Option Plan.
(Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File Number 333-49783) which became effective on June 18, 1998.)
10.3* Amended and Restated Cognizant Technology Solutions Non-Employee Directors' Stock Option
Plan. (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (File Number 333-49783) which became effective on June 18, 1998.)
10.4* Option Agreement between the Company and Wijeyaraj Mahadeva. (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1 (File Number 333-49783) which
became effective on June 18, 1998.)
10.5 Form of Master Services Agreement between the Company and each of I.M.S. International, Inc.,
IMS America, Ltd. and Nielsen Media Research, Inc. (Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1 (File Number 333-49783) which became
effective on June 18, 1998.)
10.6 License Agreement between the Company and Cognizant Corporation. (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement on Form S-1 (File Number 333-49783) which
became effective on June 18, 1998.)
10.7 Intercompany Agreement between the Company and Cognizant Corporation. (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.8 Intercompany Services Agreement between the Company and Cognizant Corporation. (Incorporated
by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.9* Form of Severance and Non-Competition Agreement between the Company and each of its Executive
Officers. (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (File Number 333-49783) which became effective on June 18, 1998.)
40
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------------- ----------------------------
10.10 Sublease dated August 28, 1998 by and between Trans Tec Services, Inc., as Sublessor, and the
Company, as Sublessee (Incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the Year ended December 31, 1998.)
10.11* 1999 Incentive Compensation Plan, as amended. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.)
10.12* Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.13** Sublease dated as of April 6, 2001 by and between American Express Travel Related Services
Company, Inc., as Sublessor, and the Company, as Sublessee.
21 List of subsidiaries of the Company. (Incorporated by reference to Exhibit 21 to the
Company's Registration Statement on Form S-1 (File Number 333-49783) which became effective on
June 18, 1998.)
23** Consent of PricewaterhouseCoopers LLP.
- -----------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed herewith. All other exhibits previously filed.
41
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Consolidated Financial Statements:
Report of Independent Accountants................................... F-2
Consolidated Statements of Financial Position as of
December 31, 2001 and 2000........................................ F-3
Consolidated Statements of Operations for the
years ended December 31, 2001, 2000 and 1999...................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999...................... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and 1999...................... F-6
Notes to Consolidated Financial Statements.......................... F-7
Unaudited Quarterly Financial Data..................................... F-24
Financial Statement Schedule:
Schedule of Valuation and Qualifying Accounts................. F-25
F - 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cognizant Technology Solutions Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and stockholders'
equity listed in the accompanying index present fairly, in all material
respects, the financial position of Cognizant Technology Solutions Corporation
and its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 4, 2002
F - 2
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except par values)
AT DECEMBER 31,
---------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 84,977 $ 61,976
Trade accounts receivable, net of allowances of $882 and $516, respectively... 21,063 19,187
Trade accounts receivable - related party...................................... 1,481 1,361
Unbilled accounts receivable................................................... 5,005 1,941
Unbilled accounts receivable - related party 417 --
Other current assets........................................................... 4,392 3,758
---------- ----------
Total current assets......................................................... 117,335 88,223
---------- ----------
Property and equipment, net of accumulated depreciation of $16,805
and $10,997, respectively.................................................... 24,339 15,937
Goodwill, net.................................................................. 878 1,195
Investment..................................................................... -- 1,955
Other assets................................................................... 2,431 2,230
---------- ----------
Total assets................................................................. $ 144,983 $ 109,540
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 3,652 $ 2,849
Accounts payable-related party................................................. -- 8
Accrued expenses and other liabilities......................................... 18,046 23,865
---------- ----------
Total current liabilities.................................................... 21,698 26,722
Deferred income taxes.......................................................... 24,493 16,702
---------- ----------
Total liabilities............................................................ 46,191 43,424
---------- ----------
Commitments and contingencies (See Notes 11 and 12 to the Consolidated
Financial Statements)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares authorized, none issued......... -- --
Class A common stock, $.01 par value, 100,000 shares authorized, 8,065
and 7,362 shares issued and outstanding at December 31, 2001 and 2000,
respectively.... 80 73
Class B common stock, $.01 par value, 25,000 shares authorized, 11,290 shares
issued and outstanding at December 31, 2000 and 1999, respectively........... 113 113
Additional paid-in capital..................................................... 39,711 29,094
Retained earnings.............................................................. 59,046 36,886
Cumulative translation adjustment.............................................. (158) (50)
---------- ----------
Total stockholders' equity................................................... 98,792 66,116
---------- ----------
Total liabilities and stockholders' equity................................... $ 144,983 $ 109,540
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Revenues......................................................... $158,969 $122,758 $ 74,084
Revenues-related party........................................... 18,809 14,273 14,820
------------- ------------ ------------
Total revenues................................................. 177,778 137,031 88,904
Cost of revenues................................................. 90,848 70,437 46,161
------------- ------------ ------------
Gross profit..................................................... 86,930 66,594 42,743
Selling, general and administrative expenses..................... 44,942 35,959 23,061
Depreciation and amortization expense............................ 6,368 4,507 3,037
------------- ------------ ------------
Income from operations........................................... 35,620 26,128 16,645
Other(expense) income:
Interest income.................................................. 2,501 2,649 1,263
Impairment loss on investment (1,955) -- --
Other (expense) income, net..................................... (767) (530) 37
------------- ------------ ------------
Total other (expense) income................................... (221) 2,119 1,300
------------- ------------ ------------
Income before provision for income taxes......................... 35,399 28,247 17,945
Provision for income taxes....................................... (13,239) (10,564) (6,711)
------------- ------------ ------------
Net income....................................................... $ 22,160 $ 17,683 $ 11,234
============= ============ ============
Net income per share, Basic...................................... $ 1.17 $ 0.95 $ 0.61
============= ============ ============
Net income per share, Diluted.................................... $ 1.09 $ 0.87 $ 0.58
============= ============ ============
Weighted average number of common shares outstanding - Basic..... 19,017 18,565 18,342
Dilutive effect of shares issuable as of period-end under stock
option plans................................................... 1,354 1,691 1,074
------------- ------------ ------------
Weighted average number of common shares - Diluted............... 20,371 20,256 19,416
------------- ------------ ------------
Comprehensive Income:
Net income.................................................... $ 22,160 $ 17,683 $ 11,234
Foreign currency translation adjustment....................... (108) (41) 2
------------ ------------ -------------
Total comprehensive income....................................... $ 22,052 $ 17,642 $ 11,236
============= ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
F - 4
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE
------------- ------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------ ------ ------- -------- ---------- -----
Balance, December 31, 1998...... 7,010 $70 11,290 $113 $24,475 $7,969 $(11) $32,616
========= ======= ========== ======== ========== ========== ========== =========
Translation adjustment ......... -- -- -- -- -- -- 2 2
Exercise of Stock Options....... 192 2 -- -- 549 -- -- 551
Tax Benefit related to Option
Exercises..................... -- -- -- -- 886 -- -- 886
Compensatory Grant.............. -- -- -- -- 340 -- -- 340
Less Prior year charge....... -- -- -- -- (122) -- -- (122)
Less Unearned portion........ -- -- -- -- (46) -- -- (46)
Net income ..................... -- -- -- -- -- 11,234 -- 11,234
--------- ------ ---------- -------- ---------- ---------- ---------- ---------
Balance, December 31, 1999...... 7,202 72 11,290 113 26,082 19,203 (9) 45,461
========= ======= ========== ======== ========== ========== ========== =========
Translation Adjustment.......... -- -- -- -- -- -- (41) (41)
Exercise of Stock Options....... 129 1 -- -- 782 -- -- 783
Tax Benefit related to Option
Exercises..................... -- -- -- -- 1,258 -- -- 1,258
Employee Stock Purchase Plan.... 32 -- -- -- 937 -- -- 937
Compensatory Grant.............. -- -- -- -- 340 -- -- 340
Less Prior year charges....... -- -- -- -- (294) -- -- (294)
Less Unearned portion......... -- -- -- -- (11) -- -- (11)
Net Income...................... -- -- -- -- -- 17,683 -- 17,683
--------- ------- ---------- -------- ---------- ---------- ----------- ---------
Balance, December 31, 2000...... 7,363 $ 73 11,290 $ 113 $ 29,094 $ 36,886 $ (50) $66,116
========= ======= ========== ======== ========== ========== =========== =========
Translation Adjustment.......... -- -- -- -- -- -- (108) (108)
Exercise of Stock Options....... 665 7 -- -- 5,131 -- -- 5,138
Tax Benefit related to Stock
Plans......................... -- -- -- -- 4,633 -- -- 4,633
Employee Stock Purchase Plan.... 37 -- -- -- 842 -- -- 842
Compensatory Grant.............. -- -- -- -- 340 -- -- 340
Less Prior year charges....... -- -- -- -- (329) -- -- (329)
Net Income...................... -- -- -- -- -- 22,160 -- 22,160
--------- ------- ---------- ------- ---------- ---------- ----------- ---------
Balance, December 31, 2001...... 8,065 $ 80 11,290 $ 113 $ 39,711 $ 59,046 $ (158) $98,792
========= ======= ========== ======= ========== ========== =========== =========
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income.................................................... $ 22,160 $ 17,683 $ 11,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 6,367 4,507 3,037
Provision/(reduction) for doubtful accounts................ 1,837 572 (31)
Deferred income taxes...................................... 7,791 6,341 4,258
Impairment loss on investment 1,955 -- --
Tax benefit related to option exercises.................... 4,633 1,258 886
Changes in assets and liabilities:
Trade accounts receivable..................................... (3,833) (10,825) 1,068
Other current assets.......................................... (4,115) (1,924) (1,143)
Other assets.................................................. 300 (902) (116)
Accounts payable.............................................. 803 1,414 (309)
Accrued and other liabilities................................. (5,819) 12,096 562
---------- ---------- ----------
Net cash provided by operating activities..................... 32,079 30,220 19,446
---------- ---------- ----------
Cash flows used in investing activities:
Purchase of property and equipment............................ (14,953) (10,652) (5,924)
Investment.................................................... -- (1,955) --
---------- ---------- ----------
Net cash used in investing activities......................... (14,953) (12,607) (5,924)
Cash flows from financing activities:
Proceeds from stock plans / compensatory grant .............. 5,991 1,755 723
(Payments to) proceeds from related party................... (8) 8 (24)
---------- ---------- ----------
Net cash provided by financing activities..................... 5,983 1,763 699
Effect of currency translation................................ (108) (41) 2
Increase in cash and cash equivalents......................... 23,001 19,335 14,223
Cash and cash equivalents, at beginning of year............... 61,976 42,641 28,418
---------- ---------- ----------
Cash and cash equivalents, at end of year..................... $ 84,977 $ 61,976 $ 42,641
========== ========== ==========
Supplemental information:
Cash paid for income taxes during the year.................... $ 3,797 $ 1,186 $ 2,546
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. BASIS OF PRESENTATION
Cognizant Technology Solutions Corporation (the "Company" or "CTS") is
principally engaged in providing high-quality, cost-effective, full life cycle
solutions to complex software development and maintenance requirements that
companies face as they transition to e-business. The Company has operations and
subsidiaries in India, the United Kingdom, Germany, Canada and the United
States. These IT services are delivered through the use of a seamless on-site
and offshore consulting project team. These solutions include application
development and integration, application management, and re-engineering
services.
The Company began its software development and maintenance services
business in early 1994 as an in-house technology development center for The Dun
& Bradstreet Corporation ("D&B") and its operating units. These operating units
principally included A.C.Nielsen, Dun & Bradstreet Information Services, Dun &
Bradstreet Software, Erisco, Inc. ("Erisco"), IMS International, Inc. ("IMS
International"), NCH Promotional Services, Inc., Nielsen Media Research, Inc.
("Nielsen Media Research"), The Reuben H. Donnelley Corporation, Pilot Software,
Inc. ("Pilot Software") and Strategic Technologies, Inc. ("Strategic
Technologies"), and a majority interest in Gartner Group, Inc. ("Gartner
Group"). In November 1996, the Company, Erisco, IMS International, Nielsen Media
Research, Pilot Software, Strategic Technologies and certain other entities,
plus a majority interest in Gartner Group, were spun-off from D&B to form
Cognizant, the then majority owner and controlling parent of the Company. At
that time, ACNielsen was separately spun-off from D&B and Dun & Bradstreet
Software was sold to GEAC Software. In 1997, Cognizant sold Pilot Software to a
third party.
In 1997, the Company purchased the 24.0% minority interest in its Indian
subsidiary from a third party for $3,468 making the Indian subsidiary wholly
owned by the Company.
On January 15, 1998, Cognizant announced that it would, subject to certain
conditions, reorganize itself (the "Reorganization"), by spinning the Nielsen
Media Research business from the rest of its businesses, creating two publicly
traded companies, IMS Health Corporation ("IMS Health") and Nielsen Media
Research. The reorganization became effective on July 1, 1998. The shares of the
Company previously held by Cognizant are now held by IMS Health and all services
previously provided to the Company by Cognizant are now being provided by IMS
Health.
In June 1998, the Company completed its IPO. (See Note 3 to the
Consolidated Financial Statements.) As of December 31, 2001, IMS Health owned a
majority and controlling interest in the outstanding Common Stock of the Company
(58.3%) and held approximately 93.3% of the combined voting power of the
Company's Common Stock.
IMS Health currently provides the Company with certain administrative
services, including payroll and payables processing and permits the Company to
participate in IMS Health's business insurance plans. In prior periods, IMS
Health provided certain other services such as tax planning and compliance,
which have now been transitioned to the Company. Certain employees also
participate in IMS Health's employee benefit plans. Costs for these services for
all periods prior to the IPO were allocated to the Company based on utilization
of
F - 7
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
certain specific services. All subsequent services were performed and charged to
the Company under the CTS / IMS Health intercompany services agreement. (See
also Note 10 to the Consolidated Financial Statements.)
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
of Class A and Class B Common Stock effected by a 100% dividend payable on March
16, 2000 to stockholders of record on March 2, 2000. The stock split has been
reflected in the accompanying financial statements, and all applicable
references to the number of outstanding common shares and per share information
has been restated. Appropriate adjustments have been made in the exercise price
and number of shares subject to stock options. Stockholders' equity account have
been restated to reflect the reclassification of an amount equal to the par
value of the increase in issued common shares from the capital in excess of par
value account to the common stock accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and its consolidated subsidiaries as if it were a separate entity for
all periods presented. All intercompany transactions are eliminated.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents primarily include time and
demand deposits in the Company's operating bank accounts. The Company considers
all highly liquid instruments with an initial maturity of three months or less
to be cash equivalents.
INVESTMENTS. Investments in business entities in which the Company does not have
control or the ability to exercise significant influence over the operating and
financial policies are accounted for under the cost method. Investments are
evaluated, at each balance sheet date, for impairment.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated on the straight-line basis
over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of the term of the lease or
the estimated useful life of the improvement. Maintenance and repairs are
expensed as incurred, while renewals and betterments are capitalized.
PURCHASED SOFTWARE. Purchased software that is intended for internal use is
capitalized, including the salaries and benefits of employees that are directly
involved in the installation of such software. The capitalized costs are
amortized on a straight-line method over the lesser of three years or its useful
life.
GOODWILL. Goodwill represents the excess of the purchase price of the former
minority interest in the Company's Indian subsidiary over the fair values of
amounts assigned to the incremental net assets acquired. Amortization expense
has been recorded using the straight-line method over a period of seven years.
Amortization expense was $317 for each of the years ended December 31, 2001,
2000 and 1999. Accumulated amortization was $1,345, $1,028 and $711 at December
31,
F - 8
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
2001, 2000 and 1999, respectively. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets"
("FAS 142"), the Company will no longer amortize its remaining goodwill balance
for years beginning after December 31, 2001.
IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews for impairment of long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In general, the Company will recognize an
impairment loss when the sum of undiscounted expected future cash flows is less
than the carrying amount of such assets. The measurement for such an impairment
loss is then based on the fair value of the asset.
REVENUE RECOGNITION. The Company's services are entered into on either a
time-and-materials or fixed-price basis. Revenues related to time-and-material
contracts are recognized as the service is performed. Revenues related to
fixed-price contracts are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the sales value of
performance, including estimated earnings thereon, is recognized on the basis of
the percentage that each contract's cost to date bears to the total estimated
cost. Fixed price contracts are cancellable subject to a specified notice
period. All services provided by the Company through the date of cancellation
are due and payable under the contract terms. The Company issues invoices
related to fixed price contracts based upon achievement of milestones during a
project or other contractual terms. Differences between the timing of billings,
based upon contract milestones or other contractual terms, and the recognition
of revenue, based upon the percentage-of-completion method of accounting, are
recognized as either unbilled or deferred revenue. Estimates are subject to
adjustment as a project progresses to reflect changes in expected completion
costs. The cumulative impact of any revision in estimates is reflected in the
financial reporting period in which the change in estimate becomes known and any
anticipated losses on contracts are recognized immediately. A reserve for
warranty provisions under such contracts, which generally exist for ninety days
past contract completion, is estimated and accrued during the contract period.
UNBILLED ACCOUNTS RECEIVABLE. Unbilled accounts receivable represent revenues on
contracts to be billed, in subsequent periods, as per the terms of the
contracts.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of the Company's
Canadian and European subsidiaries are translated into U.S. dollars from local
currencies at current exchange rates and revenues and expenses are translated
from local currencies at average monthly exchange rates. The resulting
translation adjustments are recorded in a separate component of stockholders'
equity. For the Company's Indian subsidiary ("CTS India"), the functional
currency is the U.S. dollar, since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between CTS
India and its U.S. affiliates. Non-monetary assets and liabilities are
translated at historical exchange rates, while monetary assets and liabilities
are translated at current exchange rates. The resulting gain (loss) is included
in other income.
F - 9
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
RISKS AND UNCERTAINTIES. The preparation of financial statements in accordance
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period. The most significant estimates relate to the allowance for
doubtful accounts, reserve for warranties, reserves for employee benefits,
depreciation of fixed assets and long-lived assets, contingencies and litigation
and the recognition of revenue and profits based on the percentage of completion
method of accounting for fixed bid contracts. Actual results could vary from the
estimates and assumptions used in the preparation of the accompanying financial
statements.
All of the Company's software development centers, including a substantial
majority of its employees are located in India. As a result, the Company may be
subject to certain risks associated with international operations, including
risks associated with foreign currency exchange rate fluctuations and risks
associated with the application and imposition of protective legislation and
regulations relating to import and export or otherwise resulting from foreign
policy or the variability of foreign economic conditions. To date, the Company
has not engaged in any significant hedging transactions to mitigate its risks
relating to exchange rate fluctuations. Additional risks associated with
international operations include difficulties in enforcing intellectual property
rights, the burdens of complying with a wide variety of foreign laws,
potentially adverse tax consequences, tariffs, quotas and other barriers.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of cash
and cash equivalents and trade accounts receivable. The Company maintains its
cash investments with high credit quality financial institutions in
investment-grade, short term debt securities and limits the amount of credit
exposure to any one commercial issuer.
INCOME TAXES. Prior to the consummation of the Company's IPO, the Company had
been included in the federal and certain state income tax returns of Cognizant
and D&B. The provision for income taxes in the Company's consolidated financial
statements has been calculated on a separate company basis. Income tax benefits
realized by the Company and utilized by Cognizant or D&B are included in
stockholders' equity. The Company is no longer included in the consolidated
return of its majority owner and controlling parent company, and is required to
file separate income tax returns.
On a stand-alone basis, the Company provides for income taxes utilizing the
asset and liability method of accounting for income taxes. Under this method,
deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each balance sheet date, based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. If it is determined that it is more
likely than not that future tax benefits associated with a deferred tax asset
will not be realized, a valuation allowance is provided. The effect on deferred
tax assets and liabilities of a change in the tax rates is recognized in income
in the period that includes the enactment date.
F - 10
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
CTS India is an export oriented company that is entitled to claim a tax
holiday for a period of nine years from April 1995 through March 2004 in respect
to its export profits. Under the Indian Income Tax Act of 1961, substantially
all of the earnings of the Company's Indian subsidiary are currently exempt from
Indian Income Tax as profits are attributable to export operations. However,
since management currently intends to repatriate all accumulated earnings from
India to the United States, the Company has provided deferred U.S. income taxes
on all such Indian undistributed earnings. Deferred U.S. income taxes on
unremitted earnings from other foreign entities have not been provided for as it
is the Company's intent to reinvest such earnings. Such income taxes are
immaterial.
NET INCOME PER SHARE. Basic earnings per share ("EPS") excludes dilution and is
computed by dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
includes all dilutive potential common stock in the weighted average shares
outstanding. (See Note 8 to the Consolidated Financial Statements)
STOCK-BASED COMPENSATION. With respect to stock options granted to employees,
SFAS No. 123 "Accounting for Stock-Based Compensation" permits companies to
continue using the accounting method promulgated by the Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," to
measure compensation or to adopt the fair value based method prescribed by SFAS
No. 123. Management has decided to continue to use the provisions of APB 25 and
not to adopt SFAS No. 123's accounting provisions, but has included the required
pro forma disclosures.
RECLASSIFICATIONS. Certain prior-year amounts have been reclassified to conform
with the 2001 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 2001, Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("FAS 141") and Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("FAS 142") were issued. FAS 141 requires the purchase method of accounting to
be used for all business combinations initiated after June 30, 2001. FAS 141
also specifies criteria that intangible assets acquired must meet to be
recognized and reported separately from goodwill. The Company does not
anticipate that adoption of FAS 141 will have any material effect on the
Company's financial position or results of operations. FAS 142 requires that
goodwill and intangible assets with indefinite lives no longer be amortized but
instead be measured for impairment at least annually, or when events indicate
that there may be an impairment. FAS 142 is effective for fiscal years beginning
after December 15, 2001. The adoption of FAS 142 in the first quarter of 2002
will not have a material effect on the Company's financial position or results
of operations.
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("FAS 143") was issued. FAS 143
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and the associated retirement
costs that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an increase in the carrying amount
of the related long-
F - 11
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
lived asset. The asset retirement cost is subsequently allocated to expense
using a systematic and rational method over the assets useful life. FAS 143 is
effective for fiscal years beginning after June 15, 2002. The adoption of this
statement is not expected to have a material impact on the Company's financial
position or results of operations.
In August 2001, Statement of Financial Standards No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets" ("FAS 144") was issued. FAS 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently occurring Events and Transactions." FAS
144 also amends ARB ("Accounting Research Bulletins") No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. FAS 144 retains the
fundamental provisions of FAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while resolving significant implementation issues associated with FAS
121. Among other things, FAS 144 provides guidance on how long-lived assets used
as part of a group should be evaluated for impairment, establishes criteria for
when long-lived assets are held for sale, and prescribes the accounting for
long-lived assets that will be disposed of other than by sale. FAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not anticipate, that adoption of FAS 144 will have a material impact on the
Company's financial position and results of operations.
3. INITIAL PUBLIC OFFERING
On June 24, 1998, the Company consummated its Initial Public Offering
("IPO") of 5,834,000 shares of its Common Stock at a price of $5.00 per share
(on a post-split basis), 5,000,000 of which were issued and sold by the Company
and 834,000 of which were sold by Cognizant Corporation ("Cognizant"), the
Company's then majority owner and controlling parent company. The net proceeds
to the Company from the IPO were approximately $22,407 after $843 of direct
expenses. In July 1998, IMS Health (the accounting successor to Cognizant) sold
875,000 shares of Class B Common Stock, which were converted to Class A Common
Stock pursuant to an over allotment option granted to the underwriters of the
IPO. Of the total net proceeds received by the Company upon the consummation of
its IPO, approximately $6,637 was used to repay the related party balance then
owed to Cognizant. The related party balance resulted from certain advances to
the Company from Cognizant used to purchase the minority interest of the
Company's Indian subsidiary and to fund payroll and accounts payable. Concurrent
with the IPO, the Company reclassified the amounts in mandatorily redeemable
common stock to stockholders' equity as the redemption feature was voided. (See
Note 8 to the Consolidated Financial Statements.)
F - 12
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
4. SUPPLEMENTAL FINANCIAL DATA
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIFE -----------
(YEARS) 2001 2000
----------- ---- ----
Buildings....................... 40 $ 3,930 $ 1,544
Computer equipment and
purchased software 3 27,160 18,106
Furniture and equipment......... 5 - 9 1,958 1,753
Land............................ 1,678 1,580
Leasehold improvements.......... Various 6,418 3,951
------------ ----------
Sub-total..................... 41,144 26,934
Accumulated depreciation and
amortization.................. (16,805) (10,997)
------------ ----------
Property and Equipment - Net........ $ 24,339 $ 15,937
============ ==========
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
------------
2001 2000
---- ----
Accrued compensation and benefits... $ 7,676 $ 10,056
Deferred revenue.................... 2,696 2,199
Accrued vacation 2,465 1,873
Accrued travel and entertainment.... 1,705 2,398
Accrued income taxes................ 0 1,446
Other............................... 3,504 5,368
------------ ----------
$ 18,046 $ 23,865
============ ==========
F - 13
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
5. INVESTMENT
In June 2000, the Company announced a strategic relationship with Trident
Capital, a leading venture capital firm, to jointly invest in emerging
e-business service and technology companies. In accordance with this strategy,
the Company invested $1,955 in Questra Corporation, an e-business software and
consulting firm headquartered in Rochester, New York, in return for a 5.8%
equity interest. Trident Capital also independently made a direct investment in
Questra Corporation. The Company's investment is being accounted for under the
cost basis of accounting.
The Company reviews for impairment certain assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Questra Corporation recently issued Preferred B shares in
exchange for $19 million of new venture capital financing. Since the Company did
not participate, it's ownership interest in Preferred A shares was reduced from
5.8% to 2.1%. Based on the implied fair value of Questra, as measured by the
latest round of financing, and considering the preferential liquidation rights
that the Preferred B shareholders received, the Company has concluded that it
will not recover its investment in Questra and has recorded an impairment loss
of $1,955 to recognize the other than temporary decline in value of its
investment.
6. EMPLOYEE BENEFITS
Beginning in 1997, certain U.S. employees of the Company were eligible to
participate in Cognizant's and now IMS Health's 401(k) plan. The Company matches
up to 50.0% of the eligible employee's contribution. The amount charged to
expense for the Company's matching contribution was $0, $31 and $49 for the
years ended December 31, 2001, 2000 and 1999, respectively. In 2000, the Company
established a 401(k) plan, which certain U.S. employees of the Company became
eligible to participate in. The Company matches up to 50.0% of the eligible
employee's contribution. The amount charged to expense for the matching
contribution was $351 and $195 for the years ended December 31, 2001 and 2000,
respectively.
Certain of the Company's employees participate in IMS Health's defined
benefit pension plan and a defined contribution plan in the United Kingdom
sponsored by the Company. The costs to the Company recognized as postretirement
benefit costs and related liabilities were not material to the Company's results
of operations or financial position for the years presented. (See Note 10 to the
Consolidated Financial Statements.)
CTS India maintains an employee benefit plan that covers substantially all
India-based employees. The employees' provident fund, pension and family pension
plans are statutory defined contribution retirement benefit plans. Under the
plans, employees contribute up to twelve percent of their base compensation,
which is matched by an equal contribution by CTS India. Contribution expense
recognized was $790, $501 and $338 for the years ended December 31, 2001, 2000
and 1999, respectively.
F - 14
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
CTS India also maintains a statutory gratuity plan that is a statutory
postemployment benefit plan providing defined lump sum benefits. CTS India makes
annual contributions to an employees' gratuity fund established with a
government-owned insurance corporation to fund a portion of the estimated
obligation. The Company estimates its obligation based upon employees' salary
and years of service. Expense recognized by the Company was $902, $511,and $358
for the years ended December 31, 2001, 2000 and 1999, respectively.
7. INCOME TAXES
Income (loss) before provision for income taxes consisted of the following
for years ended December 31:
2001 2000 1999
---- ---- ----
U.S.................................. $ 7,236 $ 7,469 $ 7,553
Non-U.S.............................. 28,163 20,778 10,392
-------- -------- --------
Total................................ $35,399 $28,247 $17,945
======== ======== =======
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
2001 2000 1999
---- ---- ----
U.S. Federal and state:
Current.............................. $ 2,986 $ 3,276 $ 3,079
Deferred............................. 8,620 6,409 3,354
-------- -------- --------
Total U.S. Federal and state......... 11,606 9,685 6,433
-------- -------- --------
Non-U.S.:
Current.............................. 1,466 961 315
Deferred............................. 167 (82) (37)
-------- -------- --------
Total non-U.S........................ 1,633 879 278
-------- -------- --------
Total................................ $13,239 $10,564 $ 6,711
======== ======== ========
The following table sets forth the significant differences between the U.S.
federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes:
2001 2000 1999
---- ---- ----
Tax expense at U.S. Federal statutory rate...$ 12,390 $ 9,604 $ 6,101
State and local income taxes, net of
Federal benefit........................... 361 375 398
Non-deductible Goodwill amortization......... 111 108 109
Other........................................ 377 477 103
--------- -------- -------
Total income taxes...........................$ 13,239 $10,564 $ 6,711
========= ======== =======
F - 15
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
The Company's deferred tax assets (liabilities) are comprised of the following
at December 31:
2001 2000
---- ----
Deferred tax assets:
Net operating losses $ -- $ 120
Timing differences.............................. 1,042 367
Net deferred tax assets........................... 1,042 487
Deferred tax liabilities:
Undistributed Indian income..................... 25,535 17,189
Total deferred tax liabilities.................... 25,535 17,189
Net deferred tax liability........................ $24,493 $16,702
CTS India is an export oriented company that is entitled to claim a tax
holiday for a period of nine years from April 1995 through March 2004 in respect
to its export profits. Under the Indian Income Tax Act of 1961, substantially
all of the earnings of the Company's Indian subsidiary are currently exempt from
Indian Income Tax as profits are attributable to export operations. However,
since management currently intends to repatriate all accumulated earnings from
India to the United States, the Company has provided deferred U.S. income taxes
on all such undistributed earnings. Deferred U.S. income taxes on unremitted
earnings from other foreign entities have not been provided for as it is the
Company's intent to reinvest such earnings. Such income taxes are not material.
The Company has determined that the income taxes recorded by the Company would
not be materially different in the absence of the current tax exemption and,
therefore, the tax exemption had no material effect on earnings per share.
8. CAPITAL STOCK
A. COMMON STOCK. On June 12, 1998, the Company amended and restated its
certificate of incorporation to authorize 100,000,000 shares of Class A common
stock, par value $.01 per share, 15,000,000 shares of Class B common stock, par
value $.01 per share, and 15,000,000 shares of preferred stock, par value $.10
per share, and effected a 0.65 for one reverse stock split. Holders of Class A
common stock have one vote per share and holders of Class B common stock have
ten votes per share. Holders of Class B common stock are entitled to convert
their shares into Class A common stock at any time on a share for share basis.
Shares of Class B Common Stock transferred to stockholders of IMS Health in a
transaction intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the
Code shall not convert to shares of Class A Common Stock upon the occurrence of
such Tax-Free Spin-Off. No preferred stock has been issued.
Subsequent to the IPO, the underwriters exercised their right to purchase
an additional 875,100 shares of Class A Common Stock. As a result, IMS Health,
the majority owner and controlling parent of the Company, converted 875,100
shares of Class B Common stock into Class A Common Stock and subsequently sold
such shares.
F - 16
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
of Class A and Class B Common Stock effected by a 100% dividend payable on March
16, 2000 to stockholders of record on March 2, 2000. The stock split has been
reflected in the financial statements, and all applicable references to the
number of outstanding common shares and per share information has been restated.
Appropriate adjustments have been made in the exercise price and number of
shares subject to stock options. Stockholders' equity account have been restated
to reflect the reclassification of an amount equal to the par value of the
increase in issued common shares from the capital in excess of par value account
to the common stock accounts.
On May 23, 2000, the stockholders of the Company approved an increase in
the number of authorized Class B common Stock from 15,000,000 shares to
25,000,000 shares.
B. REDEEMABLE COMMON STOCK. On July 25, 1997, certain management employees of
the Company and its affiliates subscribed and subsequently purchased Common
Stock under the "Key Employees Restricted Stock Purchase Plan." These shares
were purchased by the employees at the then estimated fair market value of $1.93
per share. Holders of the stock may put, at any time, to the Company their
shares at the lower of the purchase price or the share price based on a
valuation of the Company at the time of the put. Upon consummation of the IPO,
this put right terminated. The Company initially recorded the value of the
purchased stock outside the equity section. In 1998, upon the completion of the
initial public offering, all redemption conditions were removed, and the shares
were reclassified to common stock.
9. EMPLOYEE STOCK OPTIONS PLANS
In July 1997, CTS adopted a Key Employees Stock Option Plan, which provides
for the grant of up to 1,397,500 stock options to eligible employees. Options
granted under this plan may not be granted at an exercise price less than fair
market value of the underlying shares on the date of grant. As a result of the
IPO, all options have a life of ten years, vest proportionally over four years
and have an exercise price equal to the fair market value of the common stock on
the grant date.
In December 1997, CTS adopted a Non-Employee Directors' Stock Option Plan,
which provides for the grant of up to 143,000 stock options to eligible
directors. Options granted under this plan may not be granted at an exercise
price less than fair market value of the underlying shares on the date of grant.
As a result of the IPO, all options have a life of ten years, vest
proportionally over two years and have an exercise price equal to the fair
market value of the common stock on the grant date.
In March 1998, CTS granted non-qualified stock options to purchase an
aggregate of 97,500 shares to CTS's Chairman and Chief Executive Officer at an
exercise price of $13.84 per share, an amount less than the then fair market
value of the shares on the date of the grant. The Company has recorded the
related compensation expense over the vesting period of these options.
In May 1999, CTS adopted the 1999 Incentive Compensation Plan, which
provides for the grant of up to 2,000,000 stock options to eligible employees,
nonemployee Directors and
F - 17
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
independent contractors. Options granted under this plan may not be granted at
an exercise price less than fair market value of the underlying shares on the
date of grant. All options have a life of ten years, vest proportionally over
four years, unless specified otherwise, and have an exercise price equal to the
fair market value of the common stock on the grant date. On May 23, 2000, the
stockholders of the Company approved an increase in the number of shares
available for issuance under this plan from 2,000,000 to 3,000,000 shares. On
May 30, 2001, the stockholders of the Company approved an increase in the number
of shares available for issuance under this plan from 3,000,000 to 6,000,000.
A summary of the Company's stock option activity, and related information
is as follows as of December 31, 2001, 2000 and 1999:
--------------------------------------------------------------------------------------
2001 2001 2000 2000 1999 1999
--------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning of year........ 3,681,312 $ 18.90 2,551,808 $ 8.37 1,370,052 $ 2.93
Granted, Employee Option Plan......... -- -- -- -- 122,400 $ 13.73
Granted, Directors Option Plan........ -- -- -- -- 40,000 11.16
Granted, 1999 Incentive Comp. Plan.... 1,541,600 $ 31.71 1,408,000 $ 37.59 1,277,000 12.58
Exercised............................. (666,019) $ 7.71 (129,868) $ 6.01 (191,494) 2.88
Cancelled............................. (238,352) $ 37.57 (147,878) $ 26.43 (66,150) 4.51
Expired............................... (13,000) $ 53.70 (750) $ 12.22 -- --
Outstanding - end of year............... 4,305,541 $ 24.08 3,681,312 $ 18.90 2,551,808 $ 8.37
Exercisable - end of year............... 1,192,510 $ 13.99 956,608 $ 5.83 441,902 $ 3.40
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at December 31, 2001:
- ------------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
RANGE OF WEIGHTED AVERAGE REMAINING WEIGHTED
EXERCISE NUMBER CONTRACTUAL LIFE IN YEARS AVERAGE WEIGHTED AVERAGE
PRICES OUTSTANDING EXERCISE PRICE OPTIONS EXERCISE PRICE
- -------------------- ------------------ -------------------------- -------------- ------- --------------------
$1.93 - $1.93 386,404 5.5 Years $ 1.93 386,404 $ 1.93
$3.46 - $5.00 206,532 6.3 Years $ 4.24 162,276 $ 4.04
$5.44 - $8.06 16,500 6.7 Years $ 6.23 5,000 $ 5.96
$10.75 - $15.36 1,064,055 7.4 Years $ 12.39 351,155 $ 12.36
$20.78 - $30.94 1,069,800 9.3 Years $ 28.12 2,000 $ 29.94
$31.50 - $45.50 1,404,250 8.9 Years $ 35.43 229,175 $ 33.35
$47.91 - $68.75 158,000 8.3 Years $ 56.53 56,500 $ 56.89
----------
Total 4,305,541 8.2 Years $ 24.08 1,192,510 $ 13.99
- ------------------------------------------------------------------------------------------------------------------------------------
F - 18
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Compensation cost recognized by the Company under APB 25 was $11, $35 and $172
for 2001, 2000 and 1999, respectively.
Had compensation cost for the Company's stock-based compensation plans, as
well as the IMS Health options held by certain executive officers (See Note 10
to the Consolidated Financial Statements), been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS No. 123, the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
DECEMBER 31,
------------
2001 2000 1999
---- ---- ----
Net income
As reported..................... $22,160 $17,683 $11,234
Pro forma....................... $15,033 $12,815 $10,047
As reported
Net income per share, basic..... $1.17 $0.95 $0.61
Net income per share, diluted... $1.09 $0.87 $0.58
Pro forma
Net income per share, basic..... $0.79 $0.69 $0.55
Net income per share, diluted... $0.74 $0.63 $0.52
The pro forma disclosures shown above are not representative of the effects
on net income and earnings per share in future years.
For purposes of pro forma disclosures only, the fair value for all Company
options was estimated at the date of grant using the Black-Scholes option model
with the following weighted average assumptions in 2001; risk-free interest rate
of 4.3%, expected dividend yield of 0.0%, expected volatility of 78% and
weighted average expected life of 3.0 years. 2000 assumptions; risk-free
interest rate of 6.1%, expected dividend yield of 0.0%, expected volatility of
75% and expected life of 3.9 years. 1999 assumptions; risk-free interest rate of
5.6 %, expected dividend yield of 0.0%, expected volatility of 75.0% and
expected life of 3.9 years. The weighted-average fair value of the Company's
options granted during 2001, 2000 and 1999 was $16.68, $21.71 and $7.45,
respectively. The assumptions used in 1999 for IMS Health stock options were:
risk-free interest rate of 4.8%, expected dividend yield of 0.3%, expected
volatility of 35.0% and expected life of 3.0 years. The assumptions used in 1998
for IMS Health stock options were: risk-free interest rate of 5.5%, expected
dividend yield of 0.3%, expected volatility of 25.0% and expected life of 3.0
years. The weighted average fair value of IMS Health stock options granted to
certain executive officers in 1998 was $7.14 and in 1999 was $9.99.
F - 19
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
10. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
REVENUES. The Company and IMS Health have entered into Master Services
Agreements pursuant to which the Company provides IT services to IMS Health. In
2001, the Company recognized related party revenues totaling $18,809 including
revenues from IMS Health. In 2000, the Company recognized related party revenues
totaling $14,273 including revenues from IMS Health and Strategic Technologies
(through August 30, 2000). In 1999, the Company recognized related party
revenues totaling $14,820 including revenues from IMS Health and Strategic
Technologies.
AFFILIATED AGREEMENTS. In 1997, the Company entered into various agreements with
Cognizant which were assigned to IMS Health as part of the 1998 Reorganization.
The agreements include an Intercompany Services Agreement for services provided
by IMS Health such as payroll and payables processing, tax, real estate and risk
management services, a License Agreement to use the "Cognizant" trade name and
an Intercompany Agreement. On July 1, 1998, IMS Health transferred all of its
rights to the "Cognizant" name and related trade and service marks to the
Company.
SERVICES. IMS Health currently provides the Company with certain administrative
services, including payroll and payables processing and permits the Company to
participate in IMS Health's business insurance plans. In prior periods, IMS
Health provided certain other services such as tax planning and compliance,
which have now been transitioned to the Company. All services were performed
under the CTS / IMS Health intercompany services agreement. Total costs charged
to the Company by IMS Health in connection with these services were $440, $254
and $350 for the years ended December 31, 2001, 2000 and 1999, respectively.
In December 2001, the Company paid IMS Health a one-time fee of
approximately $825 under an alliance agreement in which the Company was named
"vendor of choice" for IT services to the pharmaceutical industry.
Intercompany receivables/payables to IMS Health at December 31, 2001, 2000
and 1999 are as follows:
2001 2000 1999
---- ---- ----
Proceeds from (payments to), net..... - $8 $(24)
In addition, the Company has a certain relationship with the former Erisco
Managed Care Technologies ("Erisco"), which is now a wholly owned subsidiary of
The Trizetto Group, Inc. ("Trizetto"). As of December 31, 2001, IMS Health owned
approximately 26.8% of the outstanding common stock of Trizetto. During 2001 the
Company recorded revenues from
F - 20
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Erisco of approximately $401 and payments to Erisco for commissions and
marketing fees of approximately $1,012.
PENSION PLANS. Certain U.S. employees of the Company participate in IMS Health's
defined benefit pension plans. The plans are cash balance pension plans under
which six percent of creditable compensation plus interest is credited to the
employee's retirement account on a monthly basis. The cash balance earns monthly
investment credits based on the 30-year Treasury bond yield. At the time of
retirement, the vested employee's account balance is actuarially converted into
an annuity. The Company's cost for these plans is included in the allocation of
expense from IMS Health for employee benefits plans.
STOCK OPTIONS. In November 1996, in consideration for services to the Company,
Cognizant Corporation granted an executive officer and director of the Company
options to purchase an aggregate of 114,900 shares (on a pre-split basis) of the
common stock of Cognizant Corporation at an exercise price of $33.38 per share.
Such executive officer and director agreed to forfeit options to purchase 58,334
shares (on a pre-split basis) of Cognizant Corporation common stock upon the
consummation of the Company's initial public offering. In July 1998, IMS Health
granted an executive officer options to purchase an aggregate of 8,158 shares
(on a pre-split basis) of the common stock of IMS Health at an exercise price of
$30.17 per share. All remaining such options have since been converted into
options to purchase the common stock of IMS Health as a result of the
Reorganization that occurred on July 1, 1998, the two-for-one split of IMS
Health stock that occurred on January 15, 1999, the distribution of Gartner
Group shares that occurred on July 26, 1999 and the distribution of Synavant
Inc. (formerly known as Strategic Technologies) shares that occurred on August
30, 2000. At December 31, 2001 after adjusting for the Reorganization, the split
of IMSH stock and the distribution of Gartner Group and Synavant Inc. shares,
such officer had 143,687 options in IMS Health outstanding at a weighted average
exercise price of $14.47 per share. At December 31, 2001, 127,470 options were
exercisable.
In November 1996, Cognizant Corporation granted an executive officer
options to purchase an aggregate of 60,000 shares (on a pre-split basis) of the
common stock of Cognizant Corporation at an exercise price of $33.38 per share.
In addition, in November 1996, such executive officer was granted options to
purchase an aggregate of 20,000 shares (on a pre-split basis) of the common
stock of Cognizant Corporation at an exercise price of $33.38 per share, which
was equal to the fair market value at the grant date, by paying ten percent of
the option exercise price as an advance payment toward such exercise. The
unvested portion of such advance payment is refundable under certain conditions.
The remaining 90 percent is payable at exercise. In July 1998, IMS Health
granted an executive officer options to purchase an aggregate of 9,106 shares
(on a pre-split basis) of the common stock of IMS Health at an exercise price of
$30.17 per share. All remaining such options have since been converted into
options to purchase the common stock of IMS Health as a result of the
Reorganization, the two-for-one split of IMS Health stock, the distribution of
Gartner Group and Synavant Inc. shares discussed above. At December 31, 2001,
after adjusting for the Reorganization, the split of IMSH stock and the
distribution of Gartner Group and Synavant Inc. shares, such officer had
F - 21
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
68,222 options in IMS Health outstanding at a weighted average exercise price of
$17.07 per share. At December 31, 2001, 39,326 options were exercisable.
11. COMMITMENTS
As of December 31,2001, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $10.7 million, of which $7.6 million has been spent to date.
The Company leases office space and equipment under operating leases, which
expire at various dates through the year 2010. Certain leases contain renewal
provisions and generally require the Company to pay utilities, insurance, taxes,
and other operating expenses. Future minimum rental payments under operating
leases that have initial or remaining lease terms in excess of one year as of
December 31, 2001 are as follows:
2002................................................... $4,761
2003................................................... 4,296
2004................................................... 2,819
2005................................................... 1,400
2006................................................... 785
Thereafter............................................. 2,033
Total minimum lease payments........................... $16,094
Rental expense totaled $3,175, $3,472, and $1,823 for years ended December
31, 2001, 2000 and 1999, respectively.
12. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, many of the Company's engagements involve
projects that are critical to the operations of its customers' business and
provide benefits that are difficult to quantify. Any failure in a customer's
computer system could result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure. Although
the Company attempts to contractually limit its liability for damages arising
from negligent acts, errors, mistakes, or omissions in rendering its software
development and maintenance services, there can be no assurance that the
limitations of liability set forth in its contracts will be enforceable in all
instances or will otherwise protect the Company from liability for damages.
Although the Company has general liability insurance coverage, including
coverage for errors or omissions, there can be no assurance that such coverage
will continue to be available on reasonable terms or will be available in
sufficient amounts to cover one or more large claims, or that the insurer will
not disclaim coverage as to any future claim. The successful assertion of one or
more large claims against the Company that
F - 22
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
exceed available insurance coverage or changes in the Company's insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, would have a material adverse effect on the Company's
business, results of operations and financial condition.
13. SEGMENT INFORMATION
The Company, operating globally, provides software services for medium and
large businesses. North American operations consist primarily of software
services in the United States and Canada. European operations consist of
software services principally in the United Kingdom. Asian operations consist of
software services principally in India. The Company is managed on a geographic
basis. Accordingly, regional sales managers, sales managers, account managers,
project teams and facilities are segmented geographically and decisions by the
Company's chief operating decision maker regarding the allocation of assets and
assessment of performance are based on such geographic segmentation.
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Information about the Company's operations
and total assets in North America, Europe and Asia for the years ended December
31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
---- ---- ----
REVENUES (1)(1a)
North America (2)............... $ 152,422 $ 114,932 $ 71,171
Europe(3)....................... 23,092 20,959 17,352
Asia............................ 2,264 1,140 381
---------- ---------- ----------
Consolidated.................... $ 177,778 $ 137,031 $ 88,904
========== ========== ==========
OPERATING INCOME (1)
North America(2)................ $ 30,536 $ 21,918 $ 13,328
Europe(3)....................... 4,632 3,994 3,245
Asia............................ 452 216 72
---------- ---------- ------------
Consolidated.................... $ 35,620 $ 26,128 $ 16,645
========== ========== ============
IDENTIFIABLE ASSETS
North America(2)................ $ 88,328 $ 71,464 $ 43,671
Europe(4)....................... 5,322 7,293 3,408
Asia............................ 51,333 30,783 21,947
---------- ---------- ------------
Consolidated.................... $ 144,983 $ 109,540 $ 69,026
========== ========== ============
(1) Revenues and resulting operating income are attributed to regions based
upon customer location.
(1a) Application development and integration services represented
approximately 32.3%, 46.1% and 42.9% of revenues in 1999, 2000 and
2001, repsectively. Application management services accounted for
44.0%, 47.0% and 51.8% of revenues in 1999, 2000 and 2001,
respectively. Year 2000 compliance services represented approximately
15.6% of revenues in 1999.
(2) Substantially all relates to operations in the United States.
(3) Includes revenue from operations in the United Kingdom of $18,129,
$13,718, and $9,933 for the year ended December 31, 2001, 2000 and
1999, respectively.
(4) Includes identifiable assets in the United Kingdom of $5,184, $7,012,
and $3,325 at December 31, 2001, 2000 and 1999, respectively.
F - 23
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
During 1999, 2000 and 2001, the Company's top five customers accounted for,
in the aggregate, 57.3%, 39.5% and 34.7% of revenues, respectively. The
Company's ten largest customers accounted for, in the aggregate, approximately
75.3%, 59.1% and 53.0% of the Company's revenues in 1999, 2000 and 2001,
respectively. In 2001, sales to related party customers accounted for 10.6% of
revenues. No third party customer accounted for sales in excess of 10% of
revenues in 2000. In 2000, sales to related party customers accounted for 10.4%
of revenues. No third party customer accounted for sales in excess of 10% of
revenues in 2000. In 1999, sales to related party customers accounted for 16.7%
of revenues and one third party customer accounted for 17.4% of revenues. For
statement of operations purposes, revenues from related parties only include
revenues recognized during the period in which the related party was affiliated
with the Company.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
---------------------------------------------------------------
2001 March 31 June 30 September 30 December 31 Full Year
- ----------------------------------------------------------------------------------------------------------------------------
Operating Revenue $43,404 $45,411 $45,502 $43,461 $177,778
Gross Profit $21,035 $22,030 $22,393 $21,472 $86,930
Income from Operations $8,389 $8,874 $9,323 $9,034 $35,620
Net Income $5,565 $5,847 $6,108 $4,640 $22,160
Earnings Per Share of Common Stock
Basic $0.30 $0.31 $0.32 $0.24 $1.17
Diluted $0.28 $0.29 $0.30 $0.23 $1.09(1)
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
-----------------------------------------------------------------
2000 March 31 June 30 September 30 December 31 Full Year
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Operating Revenue $27,070 $31,801 $37,107 $41,053 $137,031
Gross Profit $13,131 $15,425 $17,997 $20,041 $66,594
Income from Operations $5,123 $6,041 $7,079 $7,885 $26,128
Net Income $3,461 $4,017 $4,785 $5,420 $17,683
Earnings Per Share of Common Stock
Basic $0.19 $0.22 $0.26 $0.29 $0.95(1)
Diluted $0.17 $0.20 $0.24 $0.27 $0.87(1)
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(1) The sum of the quarterly earnings per share does not equal full year
earnings per share due to rounding.
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Cognizant Technology Solutions Corporation
Valuation and Qualifying Accounts
(Dollars in Thousands)
Accounts Receivable Allowance:
Balance at Charged to Charged to
Beginning of Costs and Other Balance at
Year Period Expenses Accounts Deductions End of Period
---- ------- -------- -------- ---------- -------------
2001 $ 516 $ 1,895 -- $ 1,529 $ 882
2000 $ 225 $ 572 -- $ 281 $ 516
1999 $ 274 $ (31) -- $ 18 $ 225
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