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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 0-24429
Cognizant Technology Solutions Corporation
----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
- --------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(201) 801-0233
--------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
------ ------
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of July 30, 2002:
Class Number of Shares
----- ----------------
Class A Common Stock, par value $.01 per share 8,542,810
Class B Common Stock, par value $.01 per share 11,290,900
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)......... 1
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited) for the Three Months Ended June 30, 2002
and 2001 and Six Months ended June 30, 2002 and 2001............ 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of June 30, 2002 and December 31, 2001 .......... 3
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 2002 and 2001..................... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)..................................................... 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition......................................... 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 20
Item 6. Exhibits and Reports on Form 8-K................................ 20
SIGNATURES.............................................................. 21
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-1-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- ------------ ----------- ---------
Revenues............................................... $ 49,146 $ 40,414 $ 90,796 $ 80,400
Revenues - related party............................... 5,212 4,997 10,046 8,415
--------- ---------- --------- ---------
Total revenues................................ 54,358 45,411 100,842 88,815
Cost of revenues....................................... 29,348 23,381 53,537 45,750
--------- ---------- --------- ---------
Gross profit........................................... 25,010 22,030 47,305 43,065
Selling, general and administrative expenses........... 12,561 11,657 23,783 22,865
Depreciation and amortization expense.................. 1,747 1,499 3,674 2,937
--------- ---------- --------- ---------
Income from operations................................. 10,702 8,874 19,848 17,263
Other income:
Interest income..................................... 405 617 834 1,363
Other income/(expense) - net........................ 46 (150) (113) (395)
--------- ---------- --------- ---------
Total other income............................ 451 467 721 968
--------- ---------- --------- ---------
Income before provision for income taxes............... 11,153 9,341 20,569 18,231
Provision for income taxes............................. (2,506) (3,494) (4,813) (6,819)
--------- ---------- --------- ---------
Net income............................................. $ 8,647 $ 5,847 $ 15,756 $ 11,412
========= ========== ========= =========
Basic earnings per share............................... $ 0.44 $ 0.31 $ 0.80 $ 0.61
========= ========== ========= =========
Diluted earnings per share............................. $ 0.41 $ 0.29 $ 0.75 $ 0.56
========= ========== ========= =========
Weighted average number of common shares
outstanding - Basic................................. 19,579 18,913 19,579 18,801
========= ========== ========= =========
Dilutive Effect of Shares Issuable as of
Period-End Under Stock Option Plans................. 1,476 1,551 1,339 1,528
========= ========== ========= =========
Weighted average number of common shares
outstanding - Diluted............................... 21,055 20,464 20,918 20,329
========= ========== ========= =========
Comprehensive Income:
Net Income............................................. $ 8,647 $ 5,847 $ 15,756 $ 11,412
Foreign Currency Translation Adjustments............... 142 7 96 (109)
--------- ---------- --------- ---------
Comprehensive Income................................... $ 8,789 $ 5,854 $ 15,852 $ 11,303
========= ========== ========= =========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-2-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
JUNE 30, DECEMBER 31,
2002 2001
-------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 103,843 $ 84,977
Trade accounts receivable, net of allowance of $ 760 and
$882, respectively......................................................... 28,671 21,063
Trade accounts receivable-related party.................................... 2,411 1,481
Unbilled accounts receivable............................................... 6,193 5,005
Unbilled accounts receivable-related party................................. 840 417
Other current assets....................................................... 7,986 4,392
----------- -----------
Total current assets................................................... 149,944 117,335
----------- -----------
Property and equipment, net of accumulated depreciation of $20,604
and $16,805 respectively................................................... 25,165 24,339
Goodwill, net................................................................... 878 878
Other assets.................................................................... 4,805 2,431
----------- -----------
Total assets........................................................... $ 180,792 $ 144,983
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 4,607 $ 3,652
Accrued and other current liabilities...................................... 27,501 18,046
----------- -----------
Total current liabilities.............................................. 32,108 21,698
Deferred income taxes........................................................... 25,591 24,493
----------- -----------
Total liabilities...................................................... 57,699 46,191
----------- -----------
Commitments and Contingencies (See Note 7)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares authorized, none issued.......... -- --
Class A common stock, $.01 par value, 100,000 shares authorized,
8,418 shares and 8,065 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively.......................... 84 80
Class B common stock, $.01 par value, 25,000 shares authorized,
11,290 shares issued and outstanding at June 30, 2002 and
December 31, 2001, respectively............................................ 113 113
Additional paid-in-capital...................................................... 48,156 39,711
Retained earnings............................................................... 74,802 59,046
Cumulative translation adjustment............................................... (62) (158)
----------- -----------
Total stockholders' equity............................................. 123,093 98,792
----------- -----------
Total liabilities and stockholders' equity............................. $ 180,792 $ 144,983
=========== ===========
The accompanying notes are an integral part of the unaudited consolidated financial statements.
-3-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30,
--------
2002 2001
---- ----
Cash flows from operating activities:
Net income........................................................................ $ 15,756 $ 11,412
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 3,674 2,937
Provision for doubtful accounts.......................................... 368 1,081
Deferred income taxes.................................................... 1,098 3,437
Tax benefit related to stock option exercises............................ 2,470 2,421
Changes in assets and liabilities:
Trade accounts receivable................................................ (8,416) (3,756)
Other current assets..................................................... (5,695) (3,140)
Other assets............................................................. 711 104
Accounts payable......................................................... 955 (859)
Accrued and other liabilities............................................ 9,455 (5,694)
---------- --------
Net cash provided by operating activities......................................... 20,376 7,943
---------- --------
Cash flows from investing activities:
Purchases of property and equipment............................................... (4,841) (5,286)
Investment........................................................................ (2,744) --
---------- --------
Net cash used in investing activities............................................. (7,585) (5,286)
---------- --------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital................................... 5,979 3,113
Payments to related party......................................................... -- 22
---------- --------
Net cash provided by financing activities......................................... 5,979 3,135
---------- --------
Effect of currency translation.................................................... 96 (109)
---------- --------
Increase in cash and cash equivalents............................................. 18,866 5,683
Cash and cash equivalents, beginning of year...................................... 84,977 61,976
---------- --------
Cash and cash equivalents, end of period.......................................... $ 103,843 $ 67,659
========== ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
(the "Company") in accordance with generally accepted accounting principles in
the United States and Article 10 of Regulation S-X under the Securities and
Exchange Act of 1934, as amended, and should be read in conjunction with the
Company's consolidated financial statements (and notes thereto) included in the
Company's 2001 Annual Report on Form 10-K and the Company's condensed
consolidated financial statements (and notes thereto) included in the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 2002 In the opinion
of the Company's management, all adjustments considered necessary for a fair
presentation of the accompanying condensed consolidated financial statements
have been included, and all adjustments are of a normal and recurring nature.
Operating results for the interim period are not necessarily indicative of
results that may be expected to occur for the entire year. Certain prior-year
amounts have been reclassified to conform to the 2002 presentation.
NOTE 2 - INVESTMENT:
On June 30, 2002, Cognizant Technology Solutions Ireland Limited ("CTS
Ireland"), a newly formed wholly owned subsidiary of the Company, purchased
certain assets and assumed certain liabilities from UnitedHealthcare Ireland
Limited ("UHC Ireland"), a subsidiary of UnitedHealth Group, for $2,900. UHC
Ireland previously provided, and will continue to provide through CTS Ireland,
application development and maintenance services, using the existing staff of 70
software professionals. The acquisition of the operations of UHC Ireland, will
enable the Company to provide a wide range of services to the Company's clients
in Europe and worldwide and represents the implementation of the Company's
previously announced international expansion strategy.
The Company has commenced a preliminary assessment of the allocation of the
purchase price to the tangible and amortizable intangible assets and liabilities
acquired. Based upon that preliminary assessment, the Company expects that the
amortization of such intangible assets will not have a material effect on the
Company's results of operations. In the interim, the purchase price, net of
amounts assigned to fixed assets of approximately $260 has been included in
long-term "Other Assets" in the accompanying Balance Sheet. Such net assets have
been included as identifiable assets in the European segment in Note 8 of the
Notes to the Condensed Consolidated Financial Statements.
Since the acquisition closed on June 30, 2002, the results of operations of
CTS Ireland will be included in the consolidated financial statements of the
Company effective July 1, 2002. The operating results of the acquired entity are
not expected to be material to the Company.
-5-
NOTE 3 - COMPREHENSIVE INCOME:
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments. Accumulated balances of Cumulative Translation
Adjustments, as of June 30, 2002 and June 30, 2001 are as follows:
Cumulative
Translation
Adjustment
----------
Balance, December 31, 2001................................ $ (158)
Period Change............................................. 96
---------
Balance, June 30, 2002.................................... $ (62)
=========
Balance, December 31, 2000................................ $ (50)
Period Change............................................. (109)
---------
Balance, June 30, 2001.................................... $ (159)
=========
NOTE 4 - RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES:
As of June 30, 2002, IMS Health Incorporated ("IMS Health") owned 57.3% of
the outstanding Common Stock of the Company (representing all of the Company's
Class B Common Stock) and held 93.1% 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 certain of IMS Health's business insurance plans. In prior
periods, IMS Health provided certain other services such as tax planning and
compliance, which have since been transitioned to the Company. Costs for these
services for all periods prior to the IPO were allocated to the Company based on
utilization of certain specific services. All subsequent services were performed
and charged to the Company under an intercompany services agreement with IMS
Health. Total costs in connection with these services were approximately $139
and $110 for the three-month periods ended June 30, 2002 and June 30, 2001,
respectively. Total costs in connection with these services were approximately
$278 and $220 for the six-month periods ended June 30, 2002 and June 30, 2001,
respectively.
The Company has a business relationship with The Trizetto Group Inc.
("Trizetto") that includes helping healthcare customers integrate Trizetto's
products with their existing information systems and, within Trizetto,
supporting further development of these software applications. As of June 30,
2002, IMS Health owned approximately 26.6% of the outstanding common stock of
Trizetto. During the three months and six months ended June 30, 2002, the
Company recorded revenues from Trizetto of approximately $103 and recorded
payments to Trizetto for commissions of approximately $145 and $333 for the
three and six month periods ended June 30, 2002, respectively.
Other related party disclosures are included in Note 8 to the Condensed
Consolidated Financial Statements.
-6-
NOTE 5 - INCOME TAXES:
CTS India is an export-oriented company which, under the Indian Income Tax
Act of 1961, is entitled to claim a tax holiday for a period of ten years with
respect to its export profits. Substantially all of the earnings of the
Company's Indian subsidiary are attributable to export profits and are therefore
currently entitled to a 90% exemption from Indian income tax. These tax holidays
will begin to expire in 2004 and under current law will be completely phased out
by 2009. In prior periods, it was management's intent to repatriate all
accumulated earnings from India to the United States; accordingly, the Company
has provided deferred income taxes in the amount of approximately $25,535 on all
such undistributed earnings through December 31, 2001.
During the first quarter of 2002, the Company made a strategic decision to
pursue an international strategy that includes expanded infrastructure
investments in India and geographic expansion in Europe and Asia. As a component
of this strategy, the Company intends to use 2002 and future Indian earnings to
expand operations outside of the United States instead of repatriating these
earnings to the United States. Accordingly, effective January 1, 2002, pursuant
to Accounting Principles Bulletin 23, the Company will no longer accrue taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are considered to be permanently reinvested outside of the United
States. As of June 30, 2002, the amount of unrepatriated earnings upon which no
provision for taxation has been recorded is approximately $16,226. If such
earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, the Company will accrue the applicable amount of taxes
associated with such earnings. This change in intent resulted in an estimated
effective tax rate for the three months ended March 31, 2002 of 24.5%.
During the second quarter there was a change in the manner in which
repatriated earnings are taxed in India. This resulted in a further reduction of
the effective tax rate for the three and six month periods ended June 30, 2002
to 22.5% and 23.4%, respectively. These rates compare to an effective tax rate
for the three and six months ended June 30, 2001 of 37.4%.
During the six month period ended June 30, 2002, stock option exercises
resulted in a tax benefit to the Company of approximately $2,470. This benefit
is included in the caption "Other Current Assets" on the accompanying balance
sheet and accounts for the significant increase in the balance of "Other Current
Assets" at June 30, 2002 compared to December 31, 2001.
NOTE 6 - ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
Statements of Financial Accounting Standards Adopted:
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. 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 141 and FAS 142 did not have a material effect on the
Company's financial position or results of operations. The following table sets
forth the Company's results had FAS 142 been applied to the prior-period
financial statements presented herein.
-7-
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2001 JUNE 30, 2001
------------- ------------
Reported Net Income $5,847 $11,412
Reversal of Goodwill Amortization - net of tax 80 159
------ -------
Adjusted Net Income excluding Goodwill Amortization $5,927 $11,571
Adjusted Basic EPS excluding Goodwill Amortization $0.31 $0.62
Adjusted Diluted EPS excluding Goodwill Amortization $0.29 $0.57
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 adoption of
FAS 144 did not have a material impact on the Company's financial position and
results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145") was issued. FAS 145 updates,
clarifies and simplifies existing accounting pronouncements and is generally
effective for transactions occurring after May 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations.
-8-
Statements of Financial Accounting Standards Not Yet Adopted:
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-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 June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Exit or Disposal Activities" ("FAS No. 146") was issued. FAS No.
146 addresses the accounting for costs to terminate a contract that is not a
capital lease, costs to consolidate facilities and relocate employees, and
involuntary termination benefits under one-time benefit arrangements that are
not an ongoing benefit program or an individual deferred compensation contract.
A liability for contract termination costs should be recognized and measured at
fair value either when the contract is terminated or when the entity ceases to
use the right conveyed by the contract. A liability for one-time termination
benefits should be recognized and measured at fair value at the communication
date if the employee would not be retained beyond a minimum retention period
(i.e., either a legal notification period or 60 days, if no legal requirement
exists). For employees which will be retained beyond the minimum retention
period, a liability should be accrued ratably over the future service period.
The provisions of the statement will be effective for disposal activities
initiated after December 31, 2002. The Company is currently evaluating the
financial impact of adoption of SFAS No. 146.
NOTE 7 - CONTINGENCIES AND COMMITMENTS:
As of June 30, 2002, the Company has entered into fixed capital commitments
related to its India development center expansion program of approximately
$12,100, of which $9,000 has been spent to date.
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 quarterly or annual operating results,
cash flows, or consolidated financial position. 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 application 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 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,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
-9-
NOTE 8 - SEGMENT INFORMATION:
The Company is a leading provider of application development, integration
and maintenance services that link e-business with core information systems for
companies worldwide. These services are delivered through the use of a seamless
on-site and offshore consulting project team. North American operations consist
primarily of application development and maintenance consulting services in the
United States and Canada. European operations consist primarily of application
development and maintenance services principally in the United Kingdom and
Germany. European identifiable assets include the net assets and goodwill
resulting from the acquisition of certain assets and liabilities from UHC
Ireland (See Note 2 to the Notes to the Condensed Consolidated Financial
Statements). Asian operations consist primarily of application development and
maintenance consulting 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, and exclude the effect of intercompany revenue for
services provided by CTS India to other CTS entities.
Information about the Company's operations and total assets in North
America, Europe and Asia for the period ended June 30, 2002 and June 30, 2001
are presented in accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES (1)
North America (2) $47,223 $39,324 $87,533 $76,557
Europe 6,801 5,707 12,365 11,538
Asia 334 380 944 720
------- ------- -------- -------
Consolidated $54,358 $45,411 $100,842 $88,815
======= ======= ======== =======
OPERATING INCOME (1)
North America (2) $ 9,298 $ 7,684 $ 17,229 $14,880
Europe 1,338 1,115 2,433 2,242
Asia 66 75 186 141
------- ------- -------- -------
Consolidated $10,702 $ 8,874 $ 19,848 $17,263
======= ======= ======== =======
AS OF JUNE 30,
--------------
IDENTIFIABLE ASSETS 2002 2001
---- ----
North America (2) $103,023 $80,918
Europe 10,859 5,841
Asia 66,910 36,524
-------- --------
Consolidated $180,792 $123,283
======== ========
(1)Revenues and resulting operating income are attributed to regions based upon
customer location.
(2)Primarily relates to operations in the United States.
In the second quarter of 2002, sales to one related party customer
accounted for 9.6% of revenues. In the second quarter of 2001, sales to one
related party customer accounted for 11.0% of revenues. During the six months
ended June 30, 2002, sales to one related party customer accounted for 10.0% of
revenues. During the six months ended June 30, 2001, sales to one related party
customer accounted for 9.5% of revenues.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
The Company is a leading provider of application development, integration
and maintenance services that link e-business with core information systems for
companies worldwide. These services are delivered through the use of a seamless
on-site and offshore consulting project team. The Company began its application
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 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, Incorporated ("IMS Health"). At June 30, 2002, IMS Health owned 57.3% of
the outstanding stock of the Company and held 93.1% of the combined voting power
of the Company's common stock.
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 which the sales value of performance, including earnings
thereon, is recognized on the basis of the percentage that each contract's
incurred cost to date bears to the total estimated cost. Estimates are subject
to adjustment as a project progresses to reflect changes in expected completion
costs or dates. 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, and 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
and dates.
CHANGES TO CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
The Company's critical accounting policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 2001. The following sets
forth a change to such critical accounting policies:
INCOME TAXES. CTS India is an export-oriented company, which, under the
Indian Income Tax Act of 1961 is entitled to claim a tax holiday for a period of
ten years with respect to its export profits. Substantially all of the earnings
of the Company's Indian subsidiary are attributable to export profits and are
therefore currently entitled to a 90% exemption from Indian income tax. These
tax holidays will begin to expire in 2004 and under current law will be
completely phased out by 2009. In prior periods, it was management's intent to
repatriate all accumulated earnings from India to the United States;
accordingly, the Company has provided deferred income taxes in the amount of
approximately $25.5 million dollars on all such undistributed earnings through
December 31, 2001. During the first quarter of 2002, the Company made a
strategic decision to pursue an international strategy that includes expanded
infrastructure investments in India and geographic expansion in Europe and Asia.
As a component of this strategy, the Company intends to use 2002 and future
Indian earnings to expand operations outside of the United States instead of
repatriating these earnings to the United States. Accordingly, effective January
1, 2002, pursuant to Accounting Principles Bulletin 23, the Company will no
longer accrue taxes on the repatriation of earnings recognized in 2002 and
subsequent periods as these earnings are considered to be permanently reinvested
outside of the United States. If such earnings are repatriated in the future, or
are no longer deemed to be indefinitely reinvested, the Company will accrue the
applicable amount of taxes associated with such earnings. This change in intent
resulted in an estimated effective tax rate for the three months ended March 31,
2002 of 24.5%.
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During the second quarter there was a change in the manner in which
repatriated earnings are taxed in India. This resulted in a further reduction of
the effective tax rate for the three and six month periods ended June 30, 2002
to 22.5% and 23.4%, respectively. These rates compare to an effective tax rate
for the three and six month periods ended June 30, 2001 of 37.4%.
* * * * * * * * *
The statements contained in this Quarterly Report on Form 10-Q 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, 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 application 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, (f) potential adverse impacts of new tax legislation, and (g) 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, (b) to find
suitable acquisition candidates to support continued geographic expansion, and
(c) to continue to develop and improve its operational, financial,
communications and other internal systems, in the United States, India and
Europe; (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; (xi) terrorist activity, the threat of such activity, and
responses to and results of such activity and threats, including, but not
limited to, effects, domestically and/or internationally, on the Company, its
personnel and facilities, its customers and suppliers, financial markets and
general economic conditions; and (xii) general economic conditions. The
Company's actual results may differ materially from the results disclosed in
such forward-looking statements.
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RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenues.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Total revenues.................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 54.0 51.5 53.1 51.5
----- ----- ----- -----
Gross profit.................................. 46.0 48.5 46.9 48.5
Selling, general and administrative
expense....................................... 23.1 25.7 23.6 25.7
Depreciation and amortization expense............. 3.2 3.3 3.6 3.3
----- ----- ----- -----
Income from operations........................ 19.7 19.5 19.7 19.4
Other income (expense):
Interest income............................... 0.7 1.4 0.8 1.5
Other income (expense)........................ 0.1 (0.3) (0.1) (0.4)
----- ----- ----- -----
Total other income (expense)...................... 0.8 1.1 0.7 1.1
----- ----- ----- -----
Income before provision for income taxes.......... 20.5 20.6 20.4 20.5
Provision for income taxes........................ (4.6) (7.7) (4.8) (7.7)
----- ----- ----- -----
Net income ....................................... 15.9% 12.9% 15.6% 12.8%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUE. Revenue increased by 19.7%, or approximately $8.9 million, from
approximately $45.4 million during the three months ended June 30, 2001 to
approximately $54.4 million during the three months ended June 30, 2002. This
increase resulted primarily from an increase in both application management and
application development services. For statement of operations purposes, revenues
from related parties only include revenues recognized during the period in which
the related party was directly affiliated with the Company. In the second
quarter of 2002, sales to IMS Health accounted for 9.6% of revenues and no third
party customer accounted for sales in excess of 10% of revenues. In the second
quarter of 2001, sales to IMS Health accounted for 11.0% of revenues and no
third party customer accounted for sales in excess of 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. The Company's cost of revenues
increased by 25.5%, or approximately $6.0 million, from approximately $23.4
million during the three months ended June 30, 2001 to approximately $29.4
million during the three months ended June 30, 2002. The increase was due
primarily to costs resulting from an increase in the number of the Company's
technical professionals from 3,200 employees at June 30, 2001 to approximately
3,800 employees at June 30, 2002. The increased number of the Company's
technical professionals is a direct result of greater demand for the Company's
services. The Company's gross profit increased by 13.5%, or approximately $3.0
million, from approximately $22.0 million during the three months ended June 30,
2001 to approximately $25.0 million during the three months ended June 30, 2002.
Gross profit margin decreased from 48.5% of revenues during the three months
ended June 30, 2001 to 46.0% of revenues during the three months ended June 30,
2002. The decrease in gross profit margin was due primarily to a higher
incentive compensation accrual associated with an increased revenue forecast for
the full year.
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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 as well as depreciation and amortization expense. Selling,
general and administrative expenses, including depreciation and amortization,
increased by 8.8%, or approximately $1.2 million, from approximately $13.2
million during the three months ended June 30, 2001 to approximately $14.3
million during the three months ended June 30, 2002, and decreased as a
percentage of revenue from 29.0% to 26.3%, respectively. The dollar increase in
such expenses was due primarily to expenses incurred to expand the Company's
sales and marketing activities and increased infrastructure expenses to support
the Company's revenue growth. The decrease in such expenses as a percentage of
revenue resulted from the Company's increased volume of revenue, which outpaced
the increase in selling, general and administrative expenses.
INCOME FROM OPERATIONS. Income from operations increased 20.6%, or
approximately $1.8 million, from approximately $8.9 million during the three
months ended June 30, 2001 to approximately $10.7 million during the three
months ended June 30, 2002, representing 19.5% and 19.7 % of revenues,
respectively. The increase in operating margin was due primarily to the
Company's ability to leverage previous investments in infrastructure and sales
and marketing activities.
OTHER INCOME. Other income consists primarily of interest income offset, in
part, by foreign currency exchange losses/gains. Interest income decreased by
approximately $212,000 from approximately $617,000 during the three months ended
June 30, 2001 to approximately $405,000 during the three months ended June 30,
2002. The decrease in such interest income was attributable primarily to
declining interest rates, offset, in part, by higher operating cash balances.
The Company recognized a net foreign currency exchange loss of approximately
$150,000 during the three month periods ended June 30, 2001 as compared to a net
foreign currency gain of $46,000 during the three month period ended June 30,
2002, as a result of the effect of changing exchange rates on the Company's
transactions.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
approximately $3.5 million in the three months ended June 30, 2001 to
approximately $2.5 million in the three months ended June 30, 2002. Although the
Company enjoys a tax holiday on most of its income earned in India, it had been
the Company's practice to accrue income taxes on these earnings for financial
reporting purposes based on the expectation of repatriating the earnings to the
United States in the future. Based on the Company's expanded infrastructure and
global reinvestment strategy, the Company no longer intends to repatriate its
2002 and future earnings from its subsidiary in India. Accordingly, effective
January 1, 2002, the Company will no longer accrue taxes related to repatriation
of these earnings. This change in intent resulted in an estimated effective tax
rate for the three months ended March 31, 2002 of 24.5% (See Note 5 to the Notes
to Condensed Consolidated Financial Statements).
During the second quarter there was a change in the manner in which
repatriated earnings are taxed in India. This resulted in a further reduction of
the effective tax rate for the three months ended June 30, 2002 to 22.5%. These
rates compare to an effective tax rate for the three months ended June 30, 2001
of 37.4%.
NET INCOME. Net income increased from approximately $5.8 million for the
three months ended June 30, 2001 to approximately $8.6 million for the three
months ended June 30, 2002, representing 12.9% and 15.9% of revenues,
respectively.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUE. Revenue increased by 13.5%, or approximately $12.0 million, from
approximately $88.8 million during the six months ended June 30, 2001 to
approximately $100.8 million during the six months ended June 30, 2002. This
increase resulted primarily from an increase in both application management and
application development services. For statement of operations purposes, revenues
from related parties only include revenues recognized during the period in which
the related party was directly affiliated with the Company. During the six
months ended June 30, 2002, sales to one related party customer accounted for
10.0% of revenues. During the
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six months ended June 30, 2001, sales to one related party customer accounted
for 9.5% of revenues. During the six months ended June 30, 2001 and 2002, no
third party customer accounted for sales in excess of 10% of revenues.
GROSS PROFIT. The Company's cost of revenues increased by 17.0%, or
approximately $7.8 million, from approximately $45.8 million during the six
months ended June 30, 2001 to approximately $53.5 million during the six months
ended June 30, 2002. The increase was due primarily to increased costs resulting
from the increase in the number of the Company's technical professionals from
approximately 3,200 employees at June 30, 2001 to approximately 3,800 employees
at June 30, 2002. The Company's gross profit increased by 9.8%, or approximately
$4.2 million, from approximately $43.1 million during the six months ended June
30, 2001 to approximately $47.3 million during the six months ended June 30,
2002. Gross profit margin was 48.5% and 46.9% of revenues during the six months
ended June 30, 2001 and 2002, respectively. The decrease in gross profit margin
was due primarily to a higher incentive compensation accrual associated with an
increased revenue forecast for the full year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased by
6.4%, or approximately $1.7 million, from approximately $25.8 million during the
six months ended June 30, 2001 to approximately $27.5 million during the six
months ended June 30, 2002, and decreased as a percentage of revenue from 29.1%
to 27.2%, 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
revenue growth. The decrease in such expenses as a percentage of revenue
resulted from the Company's increased volume of revenue, which outpaced the
increase in selling, general and administrative expenses.
INCOME FROM OPERATIONS. Income from operations increased 15.0%, or
approximately $2.6 million, from approximately $17.3 million during the six
months ended June 30, 2001 to approximately $19.9 million during the six months
ended June 30, 2002, representing 19.4% and 19.7% of revenues, respectively. The
increase in operating margin was due primarily to the Company's ability to
leverage previous investments in infrastructure and sales and marketing
activities.
OTHER INCOME. Interest income decreased by approximately $529,000 from
approximately $1.4 million during the six months ended June 30, 2001 to
approximately $800,000 million during the six months ended June 30, 2002. The
decrease in such interest income was attributable primarily to declining
interest rates, offset, in part, by higher operating cash balances. The Company
recognized a net foreign currency exchange loss of $113,000 during the six
months ended June 30, 2002 compared to a loss of $395,000 in the prior period,
as a result of changes in exchange rates on the Company's transactions.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
approximately $6.8 million for the six months ended June 30, 2001 to
approximately $4.8 million for the six months ended June 30, 2002, with an
effective tax rate of 23.4% for the six months ended June 30, 2002 as compared
to 37.4% for the six months ended June 30, 2001. (See Note 5 to the Notes to
Condensed Consolidated Financial Statements).
NET INCOME. Net income increased from approximately $11.4 million for the
six months ended June 30, 2001 to approximately $15.8 million for the six months
ended June 30, 2002, representing 12.8% and 15.6% of revenues for the six months
ended June 30, 2001 and 2002, respectively.
RESULTS BY BUSINESS SEGMENT
The Company, operating globally, provides application development and
application maintenance services in the United States and Canada. European
operations consist of application development and application maintenance
services principally in the United Kingdom. Asian operations consist of
application development and application maintenance services principally in
India. The Company is managed on a geographic basis. Accordingly, regional sales
managers, sales managers, account managers, project teams and
-15-
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, and
exclude the effect of intercompany revenue for services provided by CTS India to
other CTS entities.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
North American Segment
REVENUE. Revenue increased by 20.1%, or approximately $7.9 million, from
approximately $39.3 million for the three months ended June 30, 2001 to
approximately $47.2 million during the three months ended June 30, 2002. The
increase in revenue was attributable primarily to increased market awareness and
acceptance of the on-site/offshore application development and application
maintenance services 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 21.8%, or
approximately $1.7 million, from approximately $7.6 million for the three months
ended June 30, 2001 to approximately $9.3 million for the three months ended
June 30, 2002. 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 19.2%, or approximately $1.1 million, from
approximately $5.7 million for the three months ended June 30, 2001 to
approximately $6.8 million for the three months ended June 30, 2002. The
increase in revenue was primarily attributable to increased demand for the
Company's services in the United Kingdom.
INCOME FROM OPERATIONS. Income from operations increased 20.0%, or
approximately $0.2 million, from $1.1 million for the three months ended June
30, 2001 to $1.3 million for the three months ended June 30, 2002. The increase
in income from operations from the prior period was due to expense reductions
during the first quarter of 2002 coupled with increased revenues.
Asian Segment
REVENUE. Revenue of approximately $0.3 million remained relatively constant
during the first quarter of 2002 as compared to the first quarter of 2001.
INCOME FROM OPERATIONS. Income from operations of approximately $0.1
million in each period remained relatively constant during the first quarter of
2002 as compared to the first quarter of 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
North American Segment
REVENUE. Revenue increased by 14.3%, or approximately $11.0 million, from
approximately $76.6 million for the first half of 2001 to approximately $87.5
million during the first half of 2002. The increase in revenue was attributable
primarily to increased market awareness and acceptance of the on-site/offshore
application development and application maintenance services 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 15.8%, or
approximately $2.3 million, from approximately $14.8 million during the first
half of 2001 to approximately $17.2 million during the first half of
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2002. 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 7.2%, or approximately $0.8 million, from
approximately $11.5million during the first half of 2001 to approximately $12.4
million during the first half of 2002. The increase in revenue was primarily
attributable to increased demand for the Company's services in the United
Kingdom.
INCOME FROM OPERATIONS. Income from operations increased marginally from
$2.2 million for the first half of 2001 to $2.4 million for the first half of
2002. The increase in income from operations from the prior period was due to
expense reductions during the first half of 2002 coupled with increased
revenues.
Asian Segment
REVENUE. Revenue increased by 31.1%, or approximately $0.2 million, from
approximately $0.7 million during the first half of 2001 to approximately $0.9
million during the first half of 2002. The increase in revenue was attributable
primarily to the Company's success in providing services to the Japanese market.
INCOME FROM OPERATIONS. Income from operations of approximately $0.2
million in each period remained relatively constant during the first half of
2002 as compared to the first half of 2001.
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 Company's
then owner and controlling parent company. The net proceeds to the Company from
the offering were approximately $22.4 million after $843,000 of direct expenses.
The funds received by the Company from the IPO 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 non-trade related
party balances to Cognizant Corporation. The Company has used and will continue
to use the remainder of the net proceeds from the offering for (i) expansion of
existing operations, including the Company's offshore application development
and application maintenance centers; (ii) continued development of new service
lines and strategic acquisitions of related businesses; (iii) planned
infrastructure investments in India and geographic expansion in Europe and Asia,
and (iv) general corporate purposes, including working capital. At June 30,
2002, the Company had cash and cash equivalents of approximately $103.8 million.
Net cash provided by operating activities was approximately $20.4 million
during the six months ended June 30, 2002 as compared to net cash provided by
operating activities of approximately $7.9 million during the six months ended
June 30, 2001. The increase results primarily from increased net income and an
increase in the incentive compensation accrual related to increased full year
forecasted revenues. Trade accounts receivable, net of allowance, increased from
$22.5 million at December 31, 2001 to $31.1 million at June 30, 2002. The
increase in trade accounts receivable during 2002 was due primarily to increased
revenue and an increase in the Company's Days Sales Outstanding ("DSO"). 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 June 30, 2002, the Company's DSO,
including unbilled receivables, were approximately 64 days compared to
approximately 55 days at June 30, 2001.
The Company's investing activities used net cash of approximately $7.6
million for the six months ended June 30, 2002 as compared to net cash used of
approximately $5.3 million for the same period in 2001. The
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increase in 2002 compared to 2001 primarily reflects the purchase of certain
assets from UnitedHealthcare Ireland ("UHC Ireland") during the second quarter
partially offset by the timing of purchases of property plant and equipment (See
Note 2 to Notes to the Condensed Consolidated Financial Statements).
The Company's financing activities provided net cash of approximately $6.0
million for the six months ended June 30, 2002 as compared to net cash provided
by financing activities of approximately $3.1 million for the same period in
2001. The increase in net cash provided by financing activities was related
primarily to a higher level of cash proceeds from the exercise of stock options
and the purchase of employee stock purchase plan shares in 2002, as compared to
the prior year. The exercise of stock options and the purchase of employee stock
purchase plan shares resulted in an increase of approximately 353,000 shares in
the Company's outstanding Class A Common Stock during the six months ended June
30, 2002.
As of June 30, 2002, the Company had no third-party debt.
The Company had working capital of $117.8 million at June 30, 2002 and
$95.6 million at December 31, 2001.
As of June 30, 2002, the Company has entered into fixed capital commitments
related to its India development center expansion program of approximately $12.1
million, of which $9.0 million has been spent to date. The multi-phase program
will encompass the construction of three fully owned development centers
containing approximately 620,000 sq. ft. of space in Pune, Chennai and
Calcutta. Total costs related to this program are expected to be approximately
$39.4 million.
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 through at least the next 12 months, including its planned
infrastructure investments in India and geographic expansion in Europe and Asia.
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 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. 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 adverse 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. 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
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
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recognized and reported separately from goodwill. 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 141 and FAS 142 did not have a material
effect on the Company's financial position or results of operations (See Note 5
to the Notes to Condensed Consolidated Financial Statements).
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 adoption of
FAS 144 did not have a material impact on the Company's financial position and
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-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 April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145") was issued. FAS 145 updates,
clarifies and simplifies existing accounting pronouncements and is generally
effective for transactions occurring after May 15, 2002. The adoption did not
have a material impact on the Company's financial position or results of
operations.
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Exit or Disposal Activities" ("FAS No. 146") was issued. FAS No.
146 addresses the accounting for costs to terminate a contract that is not a
capital lease, costs to consolidate facilities and relocate employees, and
involuntary termination benefits under one-time benefit arrangements that are
not an ongoing benefit program or an individual deferred compensation contract.
A liability for contract termination costs should be recognized and measured at
fair value either when the contract is terminated or when the entity ceases to
use the right conveyed by the contract. A liability for one-time termination
benefits should be recognized and measured at fair value at the communication
date if the employee would not be retained beyond a minimum retention period
(i.e., either a legal notification period or 60 days, if no legal requirement
exists). For employees which will be retained beyond the minimum retention
period, a liability should be accrued ratably over the future service period.
The provisions of the statement will be effective for disposal activities
initiated after December 31, 2002. The Company is currently evaluating the
financial impact of adoption of SFAS No. 146.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on May 29, 2002.
There were present at the meeting in person or by proxy stockholders
holding an aggregate of 6,761,988 shares of Class A Common Stock and an
aggregate of 11,290,900 shares of Class B Common Stock. Each share of Class A
Common Stock is entitled to one vote and each share of Class B Common Stock is
entitled to ten votes on any matter presented to the stockholders. The results
of the vote taken at such meeting with respect to each nominee for director were
as follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Wijeyaraj Mahadeva 119,184,710 486,278
Nancy E. Cooper 119,567,989 102,999
Robert W. Howe 119,567,989 102,999
John E. Klein 119,298,410 372,578
Venetia Kontogouris 119,018,710 652,278
David M. Thomas 119,567,980 103,008
Robert E. Weissman 119,184,910 486,078
Thomas M. Wendel 119,567,989 102,999
In addition, a vote was taken on the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the independent accountants of the Company for the
fiscal year ending December 31, 2002. Of the shares present at the meeting in
person or by proxy, 119,452,040 shares were voted in favor of such proposal,
208,429 shares were voted against such proposal and 10,519 shares of Common
Stock abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 Statement Pursuant to 18 U.S.C. ss. 1350.
(b) Reports on Form 8-K.
On April 16, 2002, the Company filed a Form 8-K disclosing the change in
intent with respect to the repatriation of its 2002 and future earnings in India
commencing in the first quarter of 2002. (See Note 5 to the Notes to the
Condensed Consolidated Financial Statements.)
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SIGNATURES
Pursuant to the requirements 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.
Cognizant Technology Solutions Corporation
DATE: August 8, 2002 By: /s/ Wijeyaraj Mahadeva
-----------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: August 8, 2002 By: /s/ Gordon Coburn
--------------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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