SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 Identification No.)
Incorporation or Organization)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 801-0233
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value per share
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(Title of Class)
Class B Common Stock, par value $0.01 per share
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(Title of Class)
Preferred Share Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act. Yes [X] No [ ]
The aggregate market value of the registrant's voting shares of common stock
held by non-affiliates of the registrant on June 28, 2002, based on $53.75 per
share, the last reported sale price on the NASDAQ National Market on that date,
was $447,186,563 million.
The number of shares of Class A common stock, $0.01 par value, of the registrant
outstanding as of March 3, 2003 was 20,470,238 shares. There were no shares of
Class B common stock, $0.01 par value, of the registrant outstanding as of March
3, 2003.
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 2003
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........................................ 19
4. Submission of Matters to a Vote of Security Holders...... 19
PART II 5. Market for the Company's Common Equity and
Related Stockholder Matters.............................. 21
6. Selected Consolidated Financial Data..................... 27
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 28
7A. Quantitative and Qualitative Disclosures
Amount Market Risk ...................................... 47
8. Financial Statements and Supplementary Data.............. 47
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 47
PART III 10. Directors and Executive Officers of the Company.......... 48
11. Executive Compensation................................... 48
12. Security Ownership of Certain Beneficial Owners
and Management........................................... 48
13. Certain Relationships and Related Transactions........... 48
14. Controls and Procedures.................................. 48
PART IV 15. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K.................................. 49
SIGNATURES.............................................................. 51
EXHIBIT INDEX........................................................... 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
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PART I
Item 1. Business
Overview
Cognizant Technology Solutions Corporation ("Cognizant", "CTS" or the
"Company") is a leading provider of custom IT design, development, integration
and maintenance services primarily for Fortune 1000 companies located in the
United States and Europe. Cognizant's core competencies include web-centric
applications, data warehousing, component-based development and legacy and
client-server systems. Cognizant provides the IT services it offers using an
integrated on-site/offshore business model. This seamless on-site/offshore
business model combines technical and account management teams located on-site
at the customer location and offshore at dedicated development centers located
in India and Ireland.
Cognizant began its IT 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, Cognizant, along with
certain other entities, was spun-off from the Dun & Bradstreet Corporation to
form a new company, Cognizant Corporation. On June 24, 1998, Cognizant completed
an initial public offering of an Class A common stock (the "IPO"). On June 30,
1998, a majority interest in Cognizant, and certain other entities were spun-off
from Cognizant Corporation to form IMS Health Incorporated ("IMS Health").
Subsequently, Cognizant Corporation was renamed Nielsen Media Research,
Incorporated. At December 31, 2002, IMS Health owned 55.3% of the outstanding
stock of Cognizant (representing all of Cognizant's Class B common stock) and
held 92.5% of the combined voting power of Cognizant's common stock. Holders of
Cognizant's Class A common stock have one vote per share and holders of
Cognizant's Class B common stock had ten votes per share.
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 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.
On January 30, 2003, the Company filed a tender offer in which IMS Health
stockholders could exchange IMS Health shares held by them for Cognizant Class B
common stock held by IMS Health.
On February 13, 2003, IMS Health distributed all of the Cognizant Class B
common stock that IMS Health owned (a total of 11,290,900 shares) in an exchange
offer to its stockholders. IMS Health distributed 0.309 shares of Cognizant
Class B common stock to its
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stockholders for every one share of IMS Health's common stock tendered. There
was no impact on the number of Cognizant's total shares outstanding upon the
completion of the exchange offer.
As of February 21, 2003, pursuant to Cognizant's Restated Certificate of
Incorporation, all of the shares of Class B common stock automatically converted
into shares of Class A common stock. According to Cognizant's Restated
Certificate of Incorporation, if at any time the outstanding shares of Cognizant
Class B common stock ceased to represent at least 35% of the economic ownership
represented by the aggregate number of shares of Cognizant common stock then
outstanding, each share of Cognizant Class B common stock shall automatically
convert into one share of Class A common stock. This automatic conversion
occurred on February 21, 2003 based on share numbers received by Cognizant from
its transfer agent (American Stock Transfer and Trust Company) as of the close
of business February 20, 2003, which indicated that the Class B common stock
represented less than 35% ownership represented by the aggregate number of
shares of Cognizant common stock then outstanding. Accordingly, as of February
21, 2003, there are no shares of Class B common stock outstanding.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend payable on April 1, 2003 to stockholders of
record on March 19, 2003. Pro forma unaudited earnings per share reflective of
the stock split have been presented in Cognizant's Consolidated Statement of
Operations. The historical share and per share amounts in the consolidated
financial statements have not been restated to reflect the 3-for-1 stock split.
Such amounts will be restated on the effective date of the stock dividend.
The Company provides the IT services it offers using an integrated
on-site/offshore business model. This seamless on-site/offshore business model
combines technical and account management teams located on-site at the customer
location and offshore at dedicated development centers located in India and
Ireland. 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 90 customers in 2000 to 100 customers in
2001; and to 115 customers in 2002. 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
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ACQUISITIONS
On June 30, 2002, the Company acquired the assets of UnitedHealthcare
Ireland Limited ("UHCI"), a subsidiary of UnitedHealth Group. UHCI previously
provided, and will continue to provide through Cognizant Technology Solutions
Ireland Limited ("CTS Ireland"), application development and maintenance
services, using the existing staff of approximately 70 software professionals.
This acquisition is designed to enable the Company to provide a wide range of
services to the Company's clients in Europe and worldwide and represents the
initial implementation of the Company's previously announced international
expansion strategy.
Additionally, on October 29, 2002, the Company completed the transfer of
Silverline Technologies, Inc.'s practice, which serviced a major financial
services company to the Company. Under the terms of the transfer, the Company
will provide application design, development and maintenance services to such
major financial services company through an acquired workforce of approximately
three hundred IT and support professionals located primarily in the United
States and India.
INDUSTRY BACKGROUND
Many companies today face intense competitive pressure and rapidly changing
market dynamics. In addition, the evolution of technology and the
commercialization of the Internet have contributed to the rapid change in the
business environment. In response to these challenges, many companies are
focused on improving productivity, increasing service levels, lowering costs and
accelerating delivery times. In order to achieve these goals, companies are
implementing a broad range of technologies, such as,
o e-business and e-commerce applications;
o data warehousing;
o customer and supply chain management; and
o middleware/enterprise application integration.
These technologies facilitate faster, more responsive, lower-cost business
operations. However, their development, integration and on-going maintenance
present major challenges and require a large number of highly skilled
professionals trained in many diverse technologies. In addition, companies also
require additional technical resources to maintain, enhance and re-engineer
their core legacy IT systems and to address application maintenance projects.
Increasingly, companies are relying on custom IT solutions providers, such as
Cognizant, to provide these services.
In order to respond effectively to a changing and challenging business
environment, IT departments of many companies have focused increasingly on
improving returns on IT investments, lowering costs and accelerating the
delivery of new systems and solutions. To accomplish these objectives, many IT
departments have shifted all or a portion of their IT
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development, integration and maintenance requirements to outside service
providers. This outsourcing enables companies to eliminate or reduce the large
in-house IT staffs otherwise required to evaluate, implement and manage IT
initiatives, thereby reducing the present and future investments required to
maintain and continually train a technical staff. In order to achieve greater
cost savings and to increase delivery times, companies are increasingly turning
to IT services providers operating with on-site/offshore business models.
Global demand for high quality, lower cost IT services from outside
providers has created a significant opportunity for IT service providers which
can successfully leverage the benefits of, and address the challenges in using,
an offshore talent pool. The effective use of offshore personnel can offer a
variety of benefits, including lower costs, faster delivery of new IT solutions
and more flexible scheduling. Certain developing countries, particularly India,
have a large talent pool of highly qualified technical professionals that can
provide high quality IT services at a lower cost. India is a leader in IT
services and is regarded as having one of the largest pools of IT talent in the
world. Historically, IT service providers have used offshore labor pools
primarily to supplement the internal staffing needs of customers. However,
evolving customer demands have led to the increasing acceptance and use of
offshore resources for higher value-added services. These services include
application design, development, integration and maintenance. India's services
and software exports have grown from $5.2 billion for the fiscal year ended
March 31, 2001 to $6.0 billion for the fiscal year ended March 31, 2002, as
estimated by the National Association of Software and Services Companies
(NASSCOM) in India (converted from rupees to U.S. dollars at the respective
year-end noon-buying rates announced by the New York Federal Reserve Bank). This
represents a 15% growth over the prior period. NASSCOM has projected India's
services and software exports to grow at a rate of approximately 22% for fiscal
year 2002-03.
Using an offshore workforce to provide value-added services presents a
number of challenges to IT service providers. The offshore implementation of
value-added IT services requires that IT service providers continually and
effectively attract, train and retain highly skilled software development
professionals with the advanced technical skills necessary to keep pace with
continuing changes in information technology, evolving industry standards and
changing customer preferences. These skills are necessary to design, develop and
deploy high-quality technology solutions in a cost-effective and timely manner.
In addition, IT service providers must have the methodologies, processes and
communications capabilities to enable offshore workforces to be successfully
integrated with on-site personnel. Service providers must also have strong
research and development capabilities, technology competency centers and
relationship management skills in order to compete effectively.
THE COGNIZANT SOLUTION
Cognizant believes that it has developed an effective integrated
on-site/offshore business model, and that this business model will be a critical
element of Cognizant's continued growth. To support this business model, at
December 31, 2002, Cognizant employed over 3,900 programmers in India and over
5,400 globally. Cognizant has also established facilities, technology and
communications infrastructure in order to support its business model. By basing
certain technical operations in India, Cognizant has access to a large pool of
skilled, English-speaking IT professionals. These IT professionals provide high
quality services to Cognizant's
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customers at costs significantly lower than services sourced exclusively in
developed countries. Cognizant's strengths, which Cognizant believes
differentiate it from other IT service providers, include the following:
ESTABLISHED AND SCALABLE PROPRIETARY PROCESSES. Cognizant has developed
proprietary methodologies for integrating on-site and offshore teams to
facilitate cost-effective, on-time delivery of high-quality projects. These
methodologies comprise Cognizant's proprietary Q*VIEW software engineering
process, which is available to all on-site and offshore programmers. Cognizant
uses this ISO 9000 certified process to define and implement projects from the
design, development and deployment stages through to on-going application
maintenance. For most projects, Q*VIEW is used as part of an initial assessment
that allows Cognizant to define the scope and risks of the project and subdivide
the project into smaller phases with frequent deliverables and feedback from
customers. Cognizant also uses its Q*VIEW 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,
Cognizant assigns a quality facilitator to each project who reports to a
centralized quality assurance and software engineering group. This group
performs, on a sample basis, quality audits, deliverables verifications, metrics
collection and analysis, which are used to improve processes and methodologies.
These processes and methodologies have proven to be scalable, as Cognizant has
significantly increased the number of offshore development centers, customers
and projects. In addition, all of Cognizant's principal development centers have
been assessed by KPMG at Level 5 (the highest possible rating) of the Capability
Maturity Model of the Software Engineering Institute at Carnegie Mellon
University, which is a widely recognized means of measuring the quality and
maturity of an organization's software development and maintenance processes.
HIGHLY SKILLED WORKFORCE. Cognizant's managers and senior technical
personnel provide in-depth project management expertise to customers. To
maintain this level of expertise, Cognizant has placed significant emphasis on
recruiting and training its workforce of highly skilled professionals. Cognizant
has over 350 project managers and senior technical personnel around the world,
many of whom have significant work experience in the United States and Europe.
Cognizant also maintains programs and personnel to hire and train the best
available technical professionals in both legacy systems and emerging
technologies. Cognizant provides five months of combined classroom and
on-the-job training to newly hired programmers, as well as additional annual
training programs designed to enhance the business practices, tools, technology
and consulting skills of Cognizant's professional staff. Cognizant was recently
assessed at Level 5 (the highest possible rating) of the People Capability
Maturity Model (P-CMM) version 2.0.
RESEARCH AND DEVELOPMENT AND COMPETENCY CENTERS. Cognizant has project
experience and expertise across multiple architectures and technologies, and
makes significant investments in its competency centers and in research and
development to keep abreast of the latest technology developments. Most of
Cognizant's programmers are trained in multiple technologies and architectures.
As a result, Cognizant is able to react to customers' needs quickly and
efficiently redeploy programmers to different technologies. In order to develop
and maintain this flexibility, Cognizant has made a substantial investment in
its competency centers where the
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experience gained from particular projects and research and development efforts
is leveraged across the entire company. In addition, through its investment in
research and development activities and the continuing education of its
technical personnel, Cognizant enlarges its knowledge base and develops the
necessary skills to keep pace with emerging technologies. Cognizant believes
that its ability to work in new technologies allows it to foster long-term
relationships by having the capacity to continually address the needs of both
existing and new customers.
WELL-DEVELOPED INFRASTRUCTURE. Cognizant's extensive facilities, technology
and communications infrastructure facilitate the seamless integration of its
on-site and offshore workforces. This is accomplished by permitting team members
in different locations to access 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 use of customers' technological resources; and
o real-time access to project information by the on-site account
manager or the customer.
International time differences enable Cognizant's offshore teams located in
India to access a customer's computing facilities located in the United States
and Europe during off-peak hours. This ability to perform services during
off-peak hours enables Cognizant to complete projects more rapidly and does not
require Cognizant's customers to invest in duplicative hardware and software. In
addition, for large projects with short time frames, Cognizant's offshore
facilities allow for parallel processing of various development phases to
accelerate delivery time. In addition, Cognizant can deliver services more
rapidly than some competitors without an offshore labor pool because Cognizant's
lower labor costs enable it to cost-effectively assign more professionals to a
project.
BUSINESS STRATEGIES
Cognizant's objectives are to maximize stockholder value and enhance
Cognizant's position as a leading provider of custom IT design, development,
integration and maintenance services. Cognizant implements the following core
strategies to achieve these objectives:
FURTHER DEVELOP LONG-TERM CUSTOMER RELATIONSHIPS. Cognizant has strong
long-term strategic relationships with its customers and business partners.
Cognizant seeks to establish long-term relationships that present recurring
revenue opportunities, frequently trying to establish relationships with its
customers' chief information officers, or other IT decision makers, by offering
a wide array of cost-effective high quality services. Over 80% of Cognizant's
revenues in the year ended December 31, 2002 were derived from customers who had
been using Cognizant's services for one year or more. Cognizant also seeks to
leverage its experience with a customer's IT systems into new business
opportunities. Knowledge of a customer's IT systems
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gained during the performance of application maintenance services, for example,
may provide Cognizant with a competitive advantage in securing additional
development and maintenance projects from that customer.
EXPAND SERVICE OFFERINGS AND SOLUTIONS. Cognizant has several teams
dedicated to developing new, high value services. These teams collaborate with
customers to develop these services. For example, Cognizant is currently
developing new solutions for IT systems portfolio analysis, program management,
technology architecture and strategy, systems testing, legacy restoration and
digital security and forensics. In addition, Cognizant invests in internal
research and development and promotes knowledge building and sharing across the
organization in order to promote the development of new services and solutions
that it can offer to customers. Furthermore, Cognizant continues to enhance its
capabilities and service offerings in the areas of Customer Relationship
Management, or CRM, and Enterprise Resource Planning, or ERP. Cognizant believes
that the continued expansion of its service offerings will reduce its reliance
on any one technology initiative and will help foster long-term relationships
with customers by allowing Cognizant to serve the needs of its customers better.
ENHANCE PROCESSES, METHODOLOGIES AND PRODUCTIVITY TOOLSETS. Cognizant is
committed to improving and enhancing its proprietary Q*VIEW software engineering
process and other methodologies and toolsets. In light of the rapid evolution of
technology, Cognizant believes that continued investment in research and
development is critical to its continued success. Cognizant is constantly
designing and developing additional productivity software tools to automate
testing processes and improve project estimation and risk assessment techniques.
In addition, Cognizant uses groupware technology to share project experience and
best practice methodologies across the organization with the objective of
improving productivity.
EXPAND DOMESTIC AND INTERNATIONAL GEOGRAPHIC PRESENCE. As Cognizant expands
its customer base, it plans to open additional sales and marketing offices in
the United States and internationally. It is expected that this expansion will
facilitate sales and service to existing and new customers. Cognizant has
established sales and marketing offices in Atlanta, Chicago, Dallas,
Minneapolis, Los Angeles, San Francisco and in Teaneck, New Jersey. In addition,
Cognizant has been pursuing market opportunities in Europe through its London
office, which was established in the beginning of 1998, and its recently
acquired development center in Limerick, Ireland.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS, JOINT VENTURES AND STRATEGIC
ALLIANCES. Cognizant believes that opportunities exist in the fragmented IT
services market to expand its business through selective strategic acquisitions,
joint ventures and strategic alliances. Cognizant believes that acquisition and
joint venture candidates may enable it to expand its geographic presence and its
capabilities more rapidly, especially in the European market, as well as
accelerate its entry into areas of new technology. In addition, through its
working relationships with independent software vendors Cognizant obtains
projects using the detailed knowledge it gains in connection with a joint
development process. Finally, Cognizant will strategically partner with select
IT service firms that offer complementary services in order to best meet the
requirements of its customers.
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SERVICES
Cognizant provides a broad range of IT services, including:
Service Summary Description of Service Offerings
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Application Design, Development, Define customer requirements, write
Integration and Re-engineering specifications and design, develop, test and
integrate software across multiple platforms
including Internet technologies. Modify and
test applications to enable systems to
function in new operating environments.
Application Maintenance 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.
Cognizant uses its Q*VIEW software engineering process, its on-site and
offshore business model and well-developed technology and communications
infrastructure to deliver these services.
APPLICATION DEVELOPMENT, INTEGRATION AND RE-ENGINEERING SERVICES. Cognizant
follows either of two alternative approaches to application development and
integration:
o full life-cycle application development, in which Cognizant
assumes start-to-finish responsibility for analysis, design,
implementation, testing and integration of systems; or
o cooperative development, in which Cognizant employees work with a
customer's in- house IT personnel to jointly analyze, design,
implement, test and integrate new systems.
In both cases, Cognizant's on-site team members work closely with the
end-users of the application to define requirements and develop specifications.
Detailed design, implementation and testing are generally performed offshore at
Cognizant's ten IT development centers located in India, as well its development
center in Limerick, Ireland. In addition, Cognizant maintains an on-site
presence at each customer location in order to address evolving customer needs
and resulting changes to the project.
A key part of Cognizant's application development and integration offering
is a suite of services to help organizations build and integrate business
applications with the rest of their operations. In this suite of services,
Cognizant leverages its skills in business application development and
enterprise application integration to build sophisticated business applications
and to integrate these new applications and websites with client server and
legacy systems. Cognizant builds and deploys robust, scalable and extensible
architectures for use in a wide range of industries. Cognizant maintains
competency centers specializing in Microsoft, IBM and
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Sun, among others, in order to be able to provide application development and
integration services to a broad spectrum of customers.
Cognizant's re-engineering service offerings assist customers migrating
from 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 business. Cognizant's re-engineering tools automate many of
the processes required to implement advanced client/server technologies.
Cognizant believes that this automation substantially reduces the time and cost
to perform re-engineering services, savings that benefit both Cognizant and its
customers. These tools also enable Cognizant to perform source code analysis and
to re-design target databases and convert certain programming languages. If
necessary, Cognizant's programmers also help customers re-design and convert
user interfaces.
APPLICATION MAINTENANCE SERVICES. Cognizant provides services to help
ensure that a customer's core operational systems are free of defects and
responsive to the customer's changing needs. As part of this process, Cognizant
is often able to introduce product and process enhancements and improve service
levels to customers requesting modifications and on-going support.
Cognizant's on-site/offshore business model enables Cognizant to provide a
range of rapid response and cost-effective support services to its customers.
Cognizant's 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 available to quickly resolve customer
problems from remote locations. In the case of more complex maintenance
services, including modifications, enhancements and documentation, which
typically have longer turnaround times, Cognizant takes full advantage of its
offshore resources to develop solutions more cost-effectively than would be
possible relying on higher cost local professionals. The services provided by
Cognizant's offshore team members are delivered to customers using satellite and
fiber-optic telecommunications.
As part of Cognizant's application maintenance services, it assists
customers in renovating their core systems to meet the requirements imposed by
new regulations, new standards or other external events. These services include,
or have previously included, Year 2000 compliance, Eurocurrency compliance,
decimalization within the securities industry and compliance with the Health
Insurance Portability and Accountability Act for the healthcare industry.
Application maintenance service contracts are usually long term in nature
and, at times, can include an element of application development (See Note 2 to
the Consolidated Financial Statements).
Cognizant seeks to anticipate the operational environment of customer's IT
systems as it designs and develops such systems. Cognizant also offers
diagnostic services to customers to assist them in identifying shortcomings in
their IT systems and optimizing the performance of their systems.
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SALES AND MARKETING
Cognizant markets and sells its services directly through its professional
staff, senior management and direct sales personnel operating out of its
Teaneck, New Jersey headquarters and its business development offices in
Atlanta, Chicago, Dallas, Minneapolis, Los Angeles, San Francisco and London.
Cognizant manages its business and results of operations on a geographic basis.
At December 31, 2002, Cognizant had approximately 21 direct sales persons and 68
account managers. The sales and marketing group works with Cognizant'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;
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. Cognizant sales and account management personnel remain
actively involved in the project through the execution phase. Cognizant focuses
its marketing efforts on businesses with intensive information processing needs.
Cognizant maintains a prospect/customer database that is continuously updated
and used throughout the sales cycle from prospect qualification to close. As a
result of this marketing system, Cognizant pre-qualifies 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. In this regard,
Cognizant's account managers play an important marketing role by leveraging
their ongoing relationship with the customer to identify opportunities to expand
and diversify the type of services provided to that customer.
CUSTOMERS
The number of customers served by Cognizant has increased significantly in
recent years. Cognizant provided services to 90 customers in 2000; 100 customers
in 2001; and 115 customers in 2002.
For the year ended December 31, 2002, Cognizant derived its revenues from
the following industries: 34% from financial related services, 24% from
healthcare services, 17% from retail, manufacturing and logistics and 14% from
information services. The remaining portions of Cognizant's revenues were
derived from strategic alliances and other sources.
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Cognizant dedicates a number of its employees to each of the major industries it
services to better serve its customers.
Cognizant provides services either on a time-and-material basis or on the
basis of an agreed fixed bid. 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 Cognizant's services in a subsequent year.
Presented in the table below is additional information about
Cognizant's customers.
Year ended December 31,
2000 2001 2002
---- ---- ----
Percent of revenues from top five customers, including IMS 40% 35% 38%
Percent of revenues from top ten customers, including IMS 59% 53% 54%
Percent of revenues from IMS Health and current subsidiaries 10% 11% 9%
Application development services as a percent of revenues 46% 43% 43%
Application maintenance services as a percent of revenues 47% 52% 57%
Revenues under fixed-bid contracts as a percent of revenues 15% 24% 25%
For the year ended December 31, 2002, Cognizant derived 9% of its revenues
from IMS Health, 13% of its revenues from other companies formerly affiliated
with The Dun & Bradstreet Corporation, and 78% of its revenues from companies
never affiliated with The Dun & Bradstreet Corporation.
COMPETITION
The intensely competitive IT services market includes a large number of
participants and is subject to rapid change. 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;
and
o facilities management and outsourcing companies.
Cognizant's most direct competitors include, among others, WIPRO Ltd. and
Infosys Technologies Limited, which utilize an integrated on-site/offshore
business model comparable to that used by Cognizant. Cognizant also competes
with large IT service providers with greater resources, such as Accenture Ltd.,
Electronic Data Systems Corporation and IBM Global Services, who have announced
their intentions to develop more offshore capabilities to lower
14
their cost structure. In addition, Cognizant competes with numerous smaller
local companies in the various geographic markets in which Cognizant operates.
Many of Cognizant's competitors have significantly greater financial,
technical and marketing resources and greater name recognition than does
Cognizant. The principal competitive factors affecting the markets for
Cognizant'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.
Cognizant relies on the following to compete effectively:
o a well developed recruiting, training and retention model;
o a successful service delivery model;
o a broad referral base;
o continual investment in process improvement and knowledge
capture;
o investment in research and development;
o continued focus on responsiveness to customer needs, quality of
services, competitive; and
o prices, project management capabilities and technical expertise.
INTELLECTUAL PROPERTY
Cognizant's intellectual property rights are important to its business.
Cognizant presently holds no patents or registered copyrights. Instead,
Cognizant relies on a combination of intellectual property laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
intellectual property. Cognizant requires its employees, independent
contractors, vendors and customers to enter into written confidentiality
agreements upon the commencement of their relationships with Cognizant. These
agreements generally provide that any confidential or proprietary information
developed by Cognizant or on its behalf be kept confidential. In addition, when
Cognizant discloses any confidential or proprietary information to third
parties, it routinely requires those third parties to agree in writing to keep
that information confidential.
15
A portion of Cognizant's business involves the development for customers of
highly complex information technology software applications and other technology
deliverables. This intellectual property includes written specifications and
documentation in connection with specific customer engagements. Cognizant's
customers usually own the intellectual property in the software Cognizant
develops for them.
Pursuant to a license agreement with IMS Health, all rights to the
"Cognizant" name and certain related trade and service marks were transferred to
Cognizant in July 1998. As of December 31, 2002, Cognizant held three registered
trademarks in the United States and four pending trademark applications in
India.
EMPLOYEES
At December 31, 2002, Cognizant employed approximately 1,425 persons on a
full-time basis in its North American headquarters and satellite offices and
on-site North American customer locations. Cognizant also employed approximately
240 persons on a full-time basis in its European satellite offices and on-site
European customer locations, principally in the United Kingdom and Ireland, and
approximately 4,500 persons on a full-time basis in its offshore IT development
centers in India. None of Cognizant's employees are subject to a collective
bargaining arrangement. Cognizant considers its relations with its employees to
be good.
Cognizant's future success depends to a significant extent on its ability
to attract, train and retain highly skilled IT development professionals. In
particular, Cognizant needs to attract, train and retain project managers,
programmers and other senior technical personnel. Cognizant believes there is a
shortage of, and significant competition for, IT development professionals in
the United States and in India with the advanced technological skills necessary
to perform the services Cognizant offers. Cognizant has an active recruitment
program in India, and has developed a recruiting system and database that
facilitates the rapid identification of skilled candidates. During the course of
the year, Cognizant conducts extensive recruiting efforts at premier colleges
and technical schools in India. Cognizant evaluates candidates based on academic
performance, the results of a written aptitude test measuring problem-solving
skills and a technical interview. In addition, Cognizant has an active lateral
recruiting program. A substantial majority of the personnel on most on-site
teams and virtually all the personnel staffed on offshore teams is comprised of
Indian nationals.
Cognizant's senior project managers are hired from leading consulting firms
in the United States and India. Cognizant's senior management and most of its
project managers have experience working in the United States and Europe. This
enhances Cognizant's ability to attract and retain other professionals with
experience in the United States. Cognizant has also adopted a career and
education management program to define its employees' objectives and career
plans. Cognizant has implemented an intensive orientation and training program
to introduce new employees to the Q*VIEW software engineering process and
Cognizant's services.
16
AVAILABLE INFORMATION
Cognizant makes available the following public filings with the Securities
and Exchange Commission (the "SEC") free of charge through its website at
www.cognizant.com as soon as reasonably practicable after they are filed with
the SEC:
o its Annual Reports on Form 10-K and any amendments thereto;
o its Quarterly Reports on Form 10-Q and any amendments thereto;
and
o its Current Reports on Form 8-K and any amendments thereto.
No information on Cognizant's Internet website is incorporated by reference into
this Form 10-K or any other public filing made by Cognizant with the SEC.
ITEM 2. PROPERTIES
Cognizant has recently completed construction of two fully-owned
state-of-the-art development centers containing approximately 250,000 square
feet of space in the Indian cities of Calcutta and Pune, and expects
construction of a third state-of-the-art development center in Chennai, India
containing approximately 370,000 square feet to be completed in 2003. Each of
these development centers will contain up-to-date technology infrastructure and
communications capabilities. These three facilities will be able to accommodate
approximately 6,000 employees in total. Cognizant believes that these new
facilities will provide Cognizant with an advantage in recruiting new employees
and in retaining customers.
Cognizant operates out of its Teaneck, New Jersey headquarters and its
regional and international offices. Cognizant believes that its current
facilities are adequate to support its existing operations. Cognizant 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 25,849 Software Development Multiple leases expiring 04/30/05
Facility - 06/30/06 with renewal options
Bangalore, India 35,475 Software Development Lease expires 10/31/11 with
Facility renewal options
Chennai, India 96,002 Software Development Multiple leases expiring 06/30/03
Facility - 11/30/04 with renewal options
Chennai, India 15,536 Software Development Multiple leases expiring 1/31/06 -
Facility 4/30/06 with renewal options
17
Approximate Area
Location (in sq. feet) Use Nature of Occupancy
- -------------------------------------------------------------------------------------------------------
Chennai, India 43,350 Software Development Multiple leases expiring 8/31/04
Facility -03/14/06 with renewal options
Chennai, India 35,126 Software Development Multiple leases expiring 4/30/06
Facility with renewal options
Chennai, India 33,688 Software Development Lease expires 12/15/06 with
Facility renewal options
Chennai, India 397,440 Software Development Owned
Facility
Pune, India 172,800 Software Development Owned
Facility
Calcutta, India 129,600 Software Development Owned
Facility
Calcutta, India 13,928 Software Development Lease expires 04/30/03 with a
Facility renewal option
Calcutta, India 9,296 Software Development Lease expiring 01/31/03 with a
Facility renewal option
Calcutta, India 4,000 Software Development Multiple leases expiring 01/15/04
Facility -04/30/05 with renewal options
Hyderabad, India 40,640 Software Development Multiple leases expiring 01/31/03
Facility - 12/31/08
Teaneck, New Jersey 24,745 Executive and Business Multiple leases expiring 09/30/05
Development Office - 12/30/10
Atlanta, Georgia 957 Business Development Lease expires 9/14/03
Office
Chicago, Illinois 5,113 Business Development Lease expires 7/31/05
Office
Dallas, Texas 836 Business Development Lease expires 3/31/03
Office
Los Angeles, California 1,018 Business Development Lease expires 5/31/03
Office
Minneapolis, Minnesota 766 Business Development Lease expires 6/30/03
Office
San Ramon, California 5,670 Business Development Multiple leases expiring 10/15/06
Office
18
Approximate Area
Location (in sq. feet) Use Nature of Occupancy
- -------------------------------------------------------------------------------------------------------
Phoenix, Arizona 15,953 Software Development Lease on Month to Month basis
Facility
Toronto, Canada 200 Business Development Lease on Month to Month basis
Office
Frankfurt, Germany 66 Business Development Lease expires 03/31/07
Office
Limerick, Ireland 10,495 Software Development Multiple leases expiring 03/27/23 -
Facility 05/31/32
London, England 2,080 Business Development Multiple leases expiring 9/28/04
Office and month-to-month
Zurich, Switzerland 102 Business Development Lease expires 11/30/03
Office
Singapore 200 Business Development Lease expires 09/30/03
Office
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 its quarterly or annual operating results, cash flows
or consolidated financial position.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Subsequent to the end of the fiscal year, on January 7, 2003, the Board of
Directors, and IMS Health, the holder on such date of approximately 55% of the
Company's outstanding common stock and approximately 93% of the combined voting
power of the Company's outstanding common stock, by written consent in lieu of a
special stockholders meeting, approved the amendment and restatement of
Cognizant's Amended and Restated Certificate of Incorporation. As of January 7,
2003, 9,129,438 shares of Cognizant's Class A common stock and 11,290,900 shares
of Cognizant's Class B common stock were issued and outstanding. Each share of
Cognizant's Class A common stock entitles its holder to one vote on each matter
submitted to the stockholders and each share of Cognizant's Class B common stock
entitled its holder to ten votes on each matter submitted to the stockholders.
Because IMS Health, which held in excess of a majority of the voting power of
Cognizant's outstanding common stock as of the date of such stockholder action,
approved the foregoing amendment and restatement of the certificate of
incorporation by written consent, no other stockholder consents were solicited
in connection with the stockholder action. In compliance with Delaware law,
notice of such stockholder action was sent to all non-consenting stockholders on
January 17, 2003. The material terms of the amendments to the Amended and
Restated Certificate of Incorporation are summarized in Item 5 below. For
complete information, you should read the full text of the
19
Restated Certificate of Incorporation, which has been filed with the SEC as an
exhibit to the Company's Current Report of Form 8-K dated February 13, 2003. The
Restated Certificate of Incorporation is incorporated by reference into this
Annual Report on Form 10-K. The approved amendments were effected on February 7,
2003 upon the filing of the Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware.
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
B common stock. Since June 19, 1998, the Class A common stock has traded on the
Nasdaq National Market ("NNM") under the symbol "CTSH". Cognizant Class B common
stock is not listed on a stock exchange and does not trade.
Prior to February 13, 2003, all of the issued and outstanding shares of
Class B common stock were held by IMS Health. On February 13, 2003, IMS Health
distributed all of the Cognizant Class B common stock that IMS Health owned (a
total of 11,290,900 shares) in an exchange offer to its stockholders. IMS Health
distributed 0.309 shares of Cognizant Class B common stock to its stockholders
for every one share of IMS Health's common stock tendered. As of February 21,
2003, pursuant to Cognizant's Restated Certificate of Incorporation, all of the
shares of Class B common stock automatically converted into shares of Class A
common stock. According to Cognizant's Restated Certificate of Incorporation, if
at any time the outstanding shares of Cognizant Class B common stock ceased to
represent at least 35% of the economic ownership represented by the aggregate
number of shares of Cognizant common stock then outstanding, each share of
Cognizant Class B common stock shall automatically convert into one share of
Class A common stock. This automatic conversion occurred on February 21, 2003
based on share numbers received by Cognizant from its transfer agent (American
Stock Transfer and Trust Company) as of the close of business February 20, 2003,
which indicated that the Class B common stock represented less than 35%
ownership represented by the aggregate number of shares of Cognizant common
stock then outstanding. Accordingly, as of February 21, 2003, there are no
shares of Class B common stock outstanding.
The following table describes the per share range of high and low sale
prices for shares of Cognizant Class A common stock, as listed for quotation on
the NNM, and the quarterly cash dividends per share for the periods indicated.
Cash Dividend
Quarter Ended High Low Per Share
----------------------------------- ------ ------ -----------------
March 31, 2001..................... $50.25 $28.38 $0.00
June 30, 2001...................... $46.25 $31.48 $0.00
September 30, 2001................. $45.55 $20.94 $0.00
December 31, 2001.................. $45.10 $20.00 $0.00
March 31, 2002..................... $42.10 $33.01 $0.00
June 30, 2002...................... $54.22 $37.71 $0.00
September 30, 2002................. $63.68 $48.47 $0.00
December 31, 2002.................. $75.66 $48.00 $0.00
As of March 3, 2003, the approximate number of holders of record of the
Class A common stock was 28 and the approximate number of beneficial holders of
the Class A common stock was 29,950.
21
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.
AMENDMENTS TO COGNIZANT'S CERTIFICATE OF INCORPORATION
In connection with the exchange offer, IMS Health executed a written
consent in lieu of a special stockholders meeting to approve amendments to
Cognizant's certificate of incorporation that included the provisions described
below and became effective following consummation of the exchange offer. The
material terms of these amendments are summarized below. For complete
information, you should read the full text of the Restated Certificate of
Incorporation, which has been filed with the SEC as an exhibit to the Company's
Current Report of Form 8-K dated February 13, 2003. The Restated Certificate of
Incorporation is incorporated by reference into this Annual Report on Form 10-K.
EFFECTS OF THE AMENDMENTS
The exchange offer may make it easier for a single person or group of
related persons to gain control over Cognizant. Because IMS Health held
approximately 55% of Cognizant's outstanding common stock, constituting
approximately 93% of the combined voting power of Cognizant's common stock, it
was impossible for a person other than IMS Health to gain control of Cognizant
without IMS Health's consent. Following the exchange offer, however, the new
holders of Cognizant's common stock have the ability to elect Cognizant's entire
Board of Directors. Accordingly, a person or group of related persons could gain
control of Cognizant by acquiring a majority of the outstanding common stock, or
the votes represented by those shares. In addition, the control position that
IMS Health had in matters voted on by Cognizant stockholders were eliminated as
a result of the exchange offer. Eliminating IMS Health as holder of
approximately 55% of Cognizant's outstanding common stock, constituting
approximately 93% of the combined voting power of Cognizant's common stock, as a
result of the exchange offer could increase Cognizant's vulnerability to an
unsolicited takeover proposal. The charter amendments, together with the by-law
amendments and Cognizant's stockholders' rights plan will make it more difficult
for a potential acquirer of Cognizant to take advantage of Cognizant's new
capital structure in acquiring Cognizant by means of a transaction that is not
negotiated with Cognizant's Board of Directors.
CLASSIFIED BOARD
Cognizant's certificate of incorporation was amended to provide for a
classified Board of Directors, also known as a staggered board. The Board of
Directors, other than those directors who may be elected by the holders of
Cognizant's preferred stock, will be divided into three classes of directors
effective as of the first annual meeting of stockholders following the
completion of the exchange offer.
22
Cognizant's directors will be elected to three separate classes at
Cognizant's next annual meeting, as follows:
o two "Class I Directors" will be elected at Cognizant's next annual
meeting to serve for a term expiring at the first annual meeting of
stockholders to be held following that meeting;
o two "Class II Directors" will be elected at Cognizant's next annual
meeting to serve for a term expiring at the second annual meeting of
stockholders to be held following that meeting; and
o two "Class III Directors" will be elected at Cognizant's next annual
meeting to serve for a term expiring at the third annual meeting of
stockholders to be held following that meeting.
At each annual meeting following Cognizant's next annual meeting, only
directors of the class whose term is expiring that year will be required to
stand for election, and upon election each director will serve a three-year
term. Any newly created directorship that results from an increase in the number
of directors and any vacancy occurring in the Board of Directors can be filled
only by a majority of the directors then in office. No change may have the
effect of removing any director from office. Upon any change in the authorized
number of directors, the total number of directors will be allocated as evenly
as possible among the three classes, provided that the term of office may not be
shortened for any incumbent director. Any director elected to fill a vacancy not
resulting from an increase in the number of directors will have the same
remaining term as that of his or her predecessor. Any director elected to fill a
newly created directorship resulting from an increase in the size of any class
will have the same remaining term as the other directors of that class.
Cognizant's certificate of incorporation provides that directors can be
removed only by the affirmative vote of at least 80% in voting power of all
outstanding shares of Cognizant common stock entitled to vote generally in the
election of directors. In addition, following Cognizant's next annual meeting
and the implementation of the classified Board of Directors, directors may be
removed only for cause.
BOARD SIZE
Cognizant's certificate of incorporation was amended to provide that the
number of Cognizant's directors will be not less than three and that the exact
number of directors will be fixed from time to time by a majority of Cognizant's
Board of Directors. The Board of Directors set the number of directors at six,
which was effective immediately following consummation of the exchange offer.
STOCKHOLDERS MAY NOT ACT BY WRITTEN CONSENT
Unless otherwise provided in a company's certificate of incorporation,
Delaware law permits any action required or permitted to be taken by
stockholders of a company at a meeting to be taken without notice, without a
meeting and without a stockholder vote if a written consent setting forth the
action to be taken is signed by the holders of shares of outstanding stock
having the requisite number of votes that would be necessary to authorize the
action at a meeting of stockholders at which all shares entitled to vote were
present and voted. Cognizant's Restated
23
Certificate of Incorporation and Amended and Restated By-laws require that
stockholder action be taken only at an annual or special meeting of
stockholders, and prohibits stockholder action by written consent.
STOCKHOLDERS MAY NOT CALL A SPECIAL MEETING
Upon the consummation of the exchange offer, Cognizant's certificate of
incorporation was amended, and conforming changes were made to Cognizant's
by-laws, to prohibit stockholders from calling a special meeting, to provide
that a special meeting of the stockholders may be called only by the chief
executive officer of Cognizant or Cognizant's Board of Directors, and to require
that business transacted at any special meeting be limited to the purpose stated
in the notice of the meeting.
SUPERMAJORITY APPROVAL REQUIREMENTS
Prior to the exchange offer, in addition to approval by Cognizant's Board
of Directors, the approval of the holders of a majority in voting power of
Cognizant's outstanding shares of stock entitled to vote was required to amend
any provision of Cognizant's certificate of incorporation. Delaware law permits
a company to include provisions in its certificate of incorporation that require
a greater vote than the vote otherwise required by law for any corporate action.
Upon completion of the exchange offer, Cognizant's certificate of incorporation
was amended to require the affirmative vote of the holders of at least 80% in
voting power of the outstanding shares of Cognizant entitled to vote generally
in the election of directors, voting together as a single class, to amend,
alter, change, add to or repeal specified provisions of Cognizant's certificate
of incorporation and any provision of the by-laws. The provisions in Cognizant's
certificate of incorporation affected by this amendment are:
o the provisions concerning the classified board, the size of the board
and the filling of board vacancies and newly created directorships;
o the provision concerning the inability of Cognizant's stockholders to
call special meetings;
o the provision concerning the inability of Cognizant's stockholders to
act by written consent; and
o the provisions concerning the ability of Cognizant's stockholders to
amend, alter, change, add to or repeal the foregoing provisions of the
certificate of incorporation or the by-laws.
This supermajority voting requirement may discourage or deter a person from
attempting to obtain control of Cognizant by making it more difficult to amend
Cognizant's by-laws, whether to eliminate provisions that have an anti-takeover
effect or those that protect the interests of minority stockholders. This
supermajority voting amendment permits a minority of Cognizant's stockholders to
block an attempt by its stockholders to amend or repeal its by-laws.
24
AMENDMENTS TO COGNIZANT'S BY-LAWS
In connection with the exchange offer, Cognizant's Board of Directors also
approved amendments to Cognizant's by-laws, which became effective following
completion of the exchange offer. The material terms of these amendments are
summarized below. For complete information, you should read the full text of the
Amended and Restated By-laws, which has been filed with the SEC as an exhibit to
the Company's Current Report of Form 8-K dated February 13, 2003. The Amended
and Restated By-laws are incorporated by reference into this Annual Report on
Form 10-K.
Cognizant's Amended and Restated By-laws require that, at any annual or
special meeting of stockholders, the only nominations of persons for election to
the Board of Directors and proposals of business to be considered will be the
nominations made or proposals of business brought before the meeting:
o pursuant to Cognizant's notice of meeting;
o by or at the direction of the Board of Directors; and
o by a stockholder of Cognizant who was a stockholder of record of
Cognizant at the time of the delivery of the notice provided for in
the Amended and Restated By-laws, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in the
by-laws.
These amendments may preclude nominations or the conduct of business by
stockholders at a particular stockholders meeting if the proper procedures are
not followed, and may discourage or deter a third party from attempting to
obtain control of Cognizant, even if this attempt might be viewed as beneficial
to Cognizant by its stockholders.
STOCKHOLDERS' RIGHTS PLAN
In connection with the completion of the exchange offer, on March 5, 2003
Cognizant's Board of Directors adopted a stockholders' rights plan. The
stockholders' rights plan did not require stockholder approval.
The stockholders' rights plan provides that holders of Cognizant's
outstanding Class A or Class B common stock will receive, in the form of a
dividend, a right to purchase 1/1000 of a share of a newly created series of
preferred stock, which will be the economic equivalent of one share of
Cognizant's common stock. The rights will become exercisable on the earlier of
(1) the tenth day following the public announcement that a person or group has
acquired beneficial ownership of 15% or more of Cognizant's total voting power
represented by the Class A common stock and Class B common stock and (2) the
tenth business day (or such later date as may be determined by Cognizant's Board
of Directors) following the commencement or announcement of an intention to make
a tender offer or exchange offer pursuant to which a person would acquire more
than 15% of Cognizant's voting power. The rights are redeemable at a price of
$.01 per right, by the vote of Cognizant's Board of Directors, at any time prior
to the
25
time a person acquires more than 15% of the voting power. If any person were to
do so, each holder of a right (other than rights held by the acquiring person,
which would become void) will receive, upon exercise of the right at the
then-current exercise price, shares of Cognizant's common stock having a market
value on that date of twice the exercise price of the right, commonly referred
to as a "flip-in right." If the flip-in right were exercised, the acquiring
person's voting and economic interest in Cognizant would be dramatically diluted
by the issuance by Cognizant of large numbers of its shares of common stock to
its current stockholders other than the acquiring person at a reduced price. If,
after any person acquired shares of Cognizant's outstanding common stock
representing more than 15% of the voting power, Cognizant were acquired in a
business consolidation or 50% or more of its assets or earning power were sold,
each holder of a right (other than rights held by the acquiring person, which
would become void) will receive, upon exercise of the right at the then-current
exercise price, shares of the acquirer having a market value on that date of
twice the exercise price of the right, commonly referred to as a "flip-over
right." This would cause significant dilution to the acquirer's existing
stockholders.
Any person owning in excess of 15% of Cognizant's voting power on the date
of the adoption of the plan or as a result of the exchange offer will not
trigger these rights so long as that person does not acquire additional shares.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002 with
respect to the shares of the Company's common stock that may be issued under the
Company's existing equity compensation plans.
Number of
Securities to be Weighted Number of
Issued Upon Average Securities Available
Exercise of Exercise Price for Future Issuance
Outstanding of Outstanding Under Equity
Plan Category Options Options Compensation Plans
- --------------------------------------------------------------------------------
Equity compensation
plans that have been
approved by security
holders 3,809,551 $29.01 1,727,431
- --------------------------------------------------------------------------------
In addition, there are 708,605 shares available for issuance under the
Company's Employee Stock Purchase Plan, which is an equity compensation plan
approved by security holders. There are no equity compensation plans that have
not been approved by security holders.
26
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,
2001 and 2002 and for each of the three years in the period ended December 31,
2002 has 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, 1998, 1999 and 2000 and for each of the years ended December
31, 1998 and 1999 are derived from the audited financial statements not included
elsewhere herein. The selected consolidated financial information for 2000, 2001
and 2002 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,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 45,031 $ 74,084 $ 122,758 $ 158,969 $ 208,657
Revenues - related party................... 13,575 14,820 14,273 18,809 20,429
--------- --------- --------- ------ ------
Total revenues.......................... 58,606 88,904 137,031 177,778 229,086
Cost of revenues........................... 31,919 46,161 70,437 90,848 122,701
--------- --------- --------- --------- --------
Gross profit............................... 26,687 42,743 66,594 86,930 106,385
Selling, general and administrative
expenses................................ 15,547 23,061 35,959 44,942 53,345
Depreciation and amortization expense...... 2,222 3,037 4,507 6,368 7,842
--------- --------- --------- --------- --------
Income from operations..................... 8,918 16,645 26,128 35,620 45,198
Other income (expense):
Interest income.......................... 638 1,263 2,649 2,501 1,808
Split-off costs.......................... -- -- -- -- (1,680)
Impairment loss on investment............ -- -- -- (1,955) --
Other income (expense) - net............ 83 37 (530) (767) (235)
--------- --------- --------- ---------- --------
Total other income (expense)............ 721 1,300 2,119 (221) (107)
--------- --------- --------- ---------- --------
Income before provision for income taxes... 9,639 17,945 28,247 35,399 45,091
Provision for income taxes................. (3,606) (6,711) (10,564) (13,239) (10,529)
Net income................................. $ 6,033 $ 11,234 $ 17,683 $ 22,160 $ 34,562
======== ========= ========= ========= ========
Net income per share, basic................ $ 0.38 $ 0.61 $ 0.95 $ 1.17 $ 1.75
========= ========= ========= ======== ========
Net income per share, diluted.............. $ 0.37 $ 0.58 $ 0.87 $ 1.09 $ 1.63
========= ========= ========= ======== ========
Weighted average number of common
shares outstanding...................... 15,886 18,342 18,565 19,017 19,747
============ ========= ========= ========= =========
Weighted average number of common
shares and stock options outstanding.... 16,538 19,416 20,256 20,371 21,231
========= ========= ========= ========= =========
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DATA:
Cash and cash equivalents.................. $ 28,418 $ 42,641 $ 61,976 $ 84,977 $ 126,211
Working capital............................ 29,416 43,507 61,501 95,637 134,347
Total assets............................... 51,679 69,026 109,540 144,983 231,473
Due to related party....................... 9 -- 8 -- --
Stockholders' equity....................... 32,616 45,461 66,116 98,792 165,481
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cognizant is a leading provider of custom IT design, development,
integration and maintenance services primarily for Fortune 1000 companies
located in the United States and Europe. Cognizant's core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. Cognizant provides the IT services it offers
using an integrated on-site/offshore business model. This seamless
onsite/offshore business model combines technical and account management teams
located on-site at the customer location and offshore at dedicated development
centers located in India and Ireland. Cognizant began its IT 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, Cognizant, along with certain other entities, was spun-off from the Dun
& Bradstreet Corporation to form a new company, Cognizant Corporation. On June
24, 1998, Cognizant completed its initial public offering. On June 30, 1998, a
majority interest in Cognizant, and certain other entities were spun-off from
Cognizant Corporation to form IMS Health Incorporated ("IMS Health").
Subsequently, Cognizant Corporation was renamed Nielsen Media Research,
Incorporated. At December 31, 2002, IMS Health owned 55.3% of the outstanding
stock of Cognizant (representing all of Cognizant's Class B common stock) and
held 92.5% of the combined voting power of Cognizant's common stock. Holders of
Cognizant's Class A common stock have one vote per share and holders of
Cognizant's Class B common stock have ten votes per share.
On June 30, 2002, the Company acquired the assets of UHCI, a subsidiary of
UnitedHealth Group. UHCI previously provided, and will continue to provide
through CTS Ireland, application development and maintenance services, using the
existing staff of approximately 70 software professionals. This acquisition is
designed to enable the Company to provide a wide range of services to the
Company's clients in Europe and worldwide and represents the initial
implementation of the Company's previously announced international expansion
strategy.
Additionally, on October 29, 2002, the Company completed the transfer of
Silverline Technologies, Inc.'s practice, which serviced a major financial
services company to the Company. Under the terms of the transfer, the Company
will provide application design, development and maintenance services to such
major financial services company through an acquired workforce of approximately
three hundred IT and support professionals located primarily in the United
States and India.
On February 13, 2003, IMS Health distributed all of the Cognizant Class B
common stock that IMS Health owned (a total of 11,290,900 shares) in an exchange
offer to its stockholders. IMS Health distributed 0.309 shares of Cognizant
Class B common stock to its stockholders for every one share of IMS Health's
common stock tendered. There was no impact on the number of Cognizant's total
shares of common stock outstanding as a result of the completion of the exchange
offer. As a direct result of the IMS Health exchange offer Cognizant has
incurred charges in the fourth quarter of 2002 of $1.7 million and expects total
charges
28
aggregating approximately $3.5 million. Such charges primarily relate to direct
and incremental legal, accounting, printing and other costs. In addition, total
estimated charges include approximately $0.5 million of costs related to the
retention and acceleration of Cognizant stock options by two former Directors of
Cognizant who resigned on February 13, 2003 as a result of the split-off. As of
February 21, 2003, pursuant to the Company's Restated Certificate of
Incorporation, all of the shares of Class B common stock converted into shares
of Class A common stock. Accordingly, as of such date, there are no shares of
Class B common stock outstanding.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
Financial Reporting Release No. 60 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 include 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.
In addition, Financial Reporting Release No. 61 requires 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 certain 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. The actual amounts will differ from the
estimates used in the preparation of the accompanying financial statements.
Most of the Company's IT 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
29
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
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 that provide for application development services or that
provide for a combination of application development and application management
services are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the sales value of
performance is recognized on the basis of the percentage that each contract's
cost to date bears to the total estimated cost. Revenues related to fixed-priced
contracts that provided solely for application management services are
recognized on a straight-line basis or as services are rendered or transactions
processed in accordance with contract terms. Expenses are recorded as incurred
over the contract period.
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
in EITF 00-21 "Revenue Arrangements with Multiple Deliverables". The consensus,
which is effective for contracts entered into in fiscal periods beginning after
June 15, 2003, requires that a Company evaluate all deliverables in an
arrangement to determine whether they represent separate units of accounting.
That evaluation must be performed at the inception of the arrangement and as
each item in the arrangement is delivered. Arrangement consideration should be
then allocated among the separate units of accounting based on their relative
fair values. EITF 00-21 indicates that the best evidence of fair value is the
price of a deliverable when it is regularly sold on a stand-alone basis. Fair
value evidence often consists of entity-specific or vendor-specific objective
evidence of fair value.
The Company enters into contracts that could be considered arrangements
with multiple deliverables. These contracts are primarily long-term fixed-bid
contracts that provide both application maintenance and application development
services. As indicated above and in Note 2 to the Consolidated Financial
Statements, the Company accounts for such contracts using percentage of
completion accounting. The Company is currently evaluating the prospective
impact of EITF 00-21 on the Company's results of operations related to contracts
entered into after June 15, 2003.
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 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
30
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.
Revenues related to services performed without a signed agreement or work
order are not recognized until there is evidence of an arrangement, such as when
agreements or work orders are signed or payment is received; however the cost
related to the performance of such work is recognized in the period the services
are rendered. Such revenue is recognized when, and if, evidence of an
arrangement is obtained.
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. The allowance for doubtful accounts is
determined by evaluating the relative credit-worthiness of each customer based
upon market capitalization and other information, including the aging of the
receivables. 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 or
equity (if the deferred tax asset is related to tax benefits from stock option
benefits that have not been realized) in the period such determination was made.
Cognizant's Indian subsidiary, CTS India, is an export-oriented company,
which, under the Indian Income Tax Act of 1961 is entitled to claim tax holidays
for a period of ten years with respect to its export profits. Substantially all
of the earnings of CTS India are attributable to export profits and are
therefore currently entitled to a 90% exemption from Indian income tax.
31
These tax holidays will begin to expire in 2004 and under current law will be
completely phased out by March of 2009. Prior to 2002, it was management's
intent to repatriate all accumulated earnings from India to the United States;
accordingly, Cognizant has provided deferred income taxes in the amount of
approximately $24.9 million on all such undistributed earnings through December
31, 2001. During the first quarter of 2002, Cognizant 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, Cognizant 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, Cognizant will no longer accrue taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are considered to be indefinitely reinvested outside of the United
States. As of December 31, 2002, the amount of unrepatriated earnings upon which
no provision for taxation has been recorded is approximately $30.1 million. If
such earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, Cognizant will accrue the applicable amount of taxes
associated with such earnings. Due to the various methods by which such earnings
could be repatriated in the future, it is not currently practicable to determine
the amount of applicable taxes that would result from such repatriation.
This change in intent, as well as a change in the manner in which
repatriated earnings are taxed in India, resulted in an estimated effective tax
rate for the year ended December 31, 2002 of 23.4%. This rate compares to an
effective tax rate for the year ended December 31, 2001 of 37.4%.
Effective April 1, 2002, the government of India passed various tax law
changes which affected the way in which the Company's earnings are taxed in
India. The tax exemption for export earnings was reduced from 100% to 90%, a
surtax was imposed increasing the effective rate from 35.7% to 36.75% for income
that is subject to tax, and the corporate level tax on the payment of dividends
was replaced with a withholding tax on dividends.
Cognizant's cash requirements could change over time, which could
effectively force it to change its intent on repatriating Indian earnings. If
Cognizant's earnings are intended to be repatriated in the future, or are no
longer reinvested outside the United States, Cognizant will have to accrue the
applicable amount of taxes associated with such earnings and pay taxes at a
substantially higher rate than the effective rate in 2002. These increased taxes
could have a material adverse effect on Cognizant's business, results of
operations and financial condition, as well as cash flows to fund such taxes. In
addition, Cognizant may need to accelerate the payment of significant deferred
taxes, which would have a significant impact on its cash position.
GOODWILL AND OTHER INTANGIBLES. Prior to 2002, goodwill, which related to
the acquisition of the former minority interest in the Company's Indian
subsidiary, was amortized using the straight-line basis over a period of seven
years. Effective January 1, 2002, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets"
("FAS 142"), the Company is no longer amortizing its remaining goodwill balance;
however, at each balance date, the Company does evaluate goodwill and other
intangible assets for impairment at least annually, or as circumstances warrant.
If such assets were determined to
32
be impaired, it could have a material adverse effect on Cognizant's business,
results of operations and financial condition.
LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which was adopted in 2002, the Company reviews for
impairment 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
2000 2001 2002
-------- ------- --------
Total revenues............................... 100.0% 100.0% 100.0%
Cost of revenues............................. 51.4 51.1 53.6
---- ---- ----
Gross profit............................. 48.6 48.9 46.4
Selling, general and administrative expenses. 26.2 25.3 23.3
Depreciation and amortization expense........ 3.3 3.6 3.4
--- --- ---
Income from operations................... 19.1 20.0 19.7
Other income (expense):
Interest income.......................... 1.9 1.4 0.8
Split-off costs.......................... -- -- (0.7)
Impairment loss on Investment............ -- (1.1) --
Other income / (expense)................. (0.4) (0.4) (0.1)
---- ---- ----
Total other income / (expense) .............. 1.5 (0.1) --
--- ---- ----
Income before provision for income taxes..... 20.6 19.9 19.7
Provision for income taxes................... (7.7) (7.4) (4.6)
---- ---- ----
Net income.................................. 12.9% 12.5% 15.1%
======= ======= =======
33
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUE. Revenue increased by 28.9%, or approximately $51.3 million, from
approximately $177.8 million during 2001 to approximately $229.1 million in
2002. This increase resulted primarily from an increase in application
management and application development and integration services. The Company
provides services through time and materials ("T&M") and fixed-bid contracts.
Over the course of the last three years revenues recognized under fixed-bid
contracts have increased as a percent of total revenues from 15.1% in 2000 to
23.9% in 2001 and 24.6% in 2002. This increase is attributable primarily to
increased demand for such services due to the customer's ability to specifically
quantify project costs prior to entering into contracts.
Sales to related parties on a year-over-year basis were 10.6% in 2001
compared to 8.9% in 2002. 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 2002, 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 35.1%, or approximately $31.9 million, from
approximately $90.8 million during 2001 to approximately $122.7 million in 2002.
The increase was due primarily to the increased cost resulting from the increase
in the number of the Company's technical professionals from approximately 3,470
employees at December 31, 2001 to over 6,100 employees at December 31, 2002. The
increased number of technical professionals is a direct result of greater demand
for the Company's services and on employees acquired through acquisitions. (See
Note 2 to the Consolidated Financial Statements.) The Company's gross profit
increased by 22.4%, or approximately $19.5 million, from approximately $86.9
million during 2001 to approximately $106.4 million during 2002. Gross profit
margin decreased from 48.9% of revenues during 2001 to 46.4% of revenues in
2002. The decrease in such gross profit margin was primarily attributable to
higher incentive compensation costs in 2002 as compared to 2001, due to the
significantly increased performance of the Company.
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 19.2%, or approximately $9.9
million, from approximately $51.3 million during 2001 to approximately $61.2
million during 2002, and decreased as a percentage of revenue from approximately
28.9% to 26.7%, 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
due primarily to the increased revenues that have resulted from the Company's
expanded sales and marketing activities in the current and prior years.
34
INCOME FROM OPERATIONS. Income from operations increased 26.9%, or
approximately $9.6 million, from approximately $35.6 million during 2001 to
approximately $45.2 million during 2002, representing approximately 20.0% and
19.7% of revenues, respectively. The decrease in operating margin was due
primarily to higher incentive compensation costs in 2002 as compared to 2001.
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, and in 2002, split-off costs related to the exchange
offer in which IMS Health has offered to its stockholders to exchange its
holdings of the Company's Class B common stock for shares of IMS Health.
Interest income decreased by approximately 27.7%, from approximately $2.5
million during 2001 to approximately $1.8 million during 2002. 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 compared to an
exchange loss of approximately $235,000 during 2002, 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
approximately $1.2 million, or $0.06 per diluted share. (See Note 4 to the
Consolidated Financial Statements). The Company recognized split-off costs of
approximately $1.7 million, or $0.08 per diluted share, in the fourth quarter of
2002 related to the exchange offer and expects total charges aggregating
approximately $3.5 million in relation to one-time costs associated with the
exchange offer. Such charges primarily relate to direct and incremental legal,
accounting, printing and other costs. In addition, total estimated charges
include approximately $0.5 million of costs related to the retention and
acceleration of Cognizant stock options by two former Directors of Cognizant who
resigned on February 13, 2003 as a result of the split-off.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
approximately $13.2 million in 2001 to approximately $10.5 million in 2002, with
an effective tax rate of 37.4% in 2001 and 23.4% in 2002. The lower effective
tax rate reflects Cognizant's change in its intention regarding the repatriation
of 2002 and future earnings from its subsidiary in India, as well as a change in
the manner in which repatriated earnings are taxed in India. (See Note 6 to the
Consolidated Financial Statements.)
NET INCOME. Net income increased from approximately $22.2 million in 2001
to approximately $34.6 million in 2002, representing approximately 12.5% and
15.1% as a percentage of revenues, respectively. The higher percentage in 2002
primarily reflects the decrease in the effective tax rate discussed above.
35
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. In this
regard, revenues are allocated to each geographic area based on the location of
the customer.
North American Segment
REVENUE. Revenue increased by 31.4%, or approximately $47.7 million, from
approximately $151.9 million during 2001 to approximately $199.6 million in
2002. 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 29.4%, or
approximately $8.9 million, from approximately $30.4 million during 2001 to
approximately $39.4 million during 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 15.1%, or approximately $3.7 million, from
approximately $24.2 million during 2001 to approximately $27.9 million in 2002.
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 13.2%, or
approximately $0.6 million, from approximately $4.9 million during 2001 to
approximately $5.5 million during 2002. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
Asian Segment
REVENUE. Revenue was essentially constant from 2001 to 2002 at
approximately $1.6 million in each year.
INCOME FROM OPERATIONS. Income from operations was essentially constant
from 2001 to 2002 at approximately $0.3 million in each year.
36
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUE. Revenue increased by 29.7%, or approximately $40.7 million, from
approximately $137.0 million during 2000 to approximately $177.8 million in
2001. This increase resulted primarily from approximately a $27.7 million
(42.9%) increase in application management and approximately 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 approximately $20.4 million, from
approximately $70.4 million during 2000 to approximately $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 gross profit increased
by 30.5%, or approximately $20.3 million, from approximately $66.6 million
during 2000 to approximately $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 approximately $10.8
million, from approximately $40.5 million during 2000 to approximately $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
approximately $35.6 million during 2001, representing approximately 19.1% and
20.0% of revenues, respectively. The
37
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
approximately $2.6 million during 2000 to approximately $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 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
approximately $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 approximately $10.6 million in 2000 to
approximately $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.
NET INCOME. Net income increased from approximately $17.7 million in 2000
to approximately $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
North American Segment
REVENUE. Revenue increased by 32.2%, or approximately $37.0 million, from
approximately $114.9 million during 2000 to approximately $151.9 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 38.9%, or
approximately $8.5 million, from approximately $21.9 million during 2000 to
approximately $30.4 million during 2001. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
38
European Segment
REVENUE. Revenue increased by 15.6%, or approximately $3.3 million, from
approximately $21.0 million during 2000 to approximately $24.2 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 21.7%, or
approximately $0.9 million, from approximately $4.0 million during 2000 to
approximately $4.9 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 42.5%, or approximately $0.5 million, from
approximately $1.1 million during 2000 to approximately $1.6 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.
INCOME FROM OPERATIONS. Income from operations increased 50.5%, or
approximately $0.1 million, from approximately $0.2 million during 2000 to
approximately $0.3 million during 2001. The increase in operating income was
attributable primarily to increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and cash equivalents of
approximately $126 million. The Company has used and plans to use such 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, and formation of joint ventures;
and (iii) general corporate purposes, including working capital.
Net cash provided by operating activities was approximately $56.7 million,
$32.1 million and $30.2 million for the years ended December 31, 2002, 2001 and
2000, respectively. The increase in 2002 as compared to the prior year resulted
primarily from increased net income, increased accrued employee incentive
payments, which resulted in higher levels of year-end accrued liabilities,
increased tax benefits related to stock plans, offset, in part, by a greater
increase in accounts receivable then the prior year. The increase in 2001 as
compared to 2000 results primarily from increased levels of accrued liabilities
and accounts payable, increased net income and an increase in deferred taxes,
partially offset, by increases in accounts receivable and other current assets.
Trade accounts receivable increased from approximately $20.5 million at
December 31, 2000 to approximately $22.5 million at December 31, 2001 and to
approximately $36.7 million at December 31, 2002. Unbilled accounts receivable
increased from approximately $1.9 million at December 31, 2000 and to
approximately $5.4 million at December 31, 2001 and decreased to approximately
$4.3 million at December 31, 2002. The increase in trade accounts receivable
during 2002 was due primarily to increased revenue. The decrease in unbilled
accounts
39
receivable in 2002 compared to the prior year was primarily related to timing of
fixed- bid 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, 2002, the Company's day's sales outstanding, including unbilled
receivables, was approximately 56 days as compared to 59 days and 50 days at
December 31, 2001 and 2000, respectively.
The Company's investing activities used net cash of approximately $35.5
million, $14.9 million and $12.6 million for the years ended December 31, 2002,
2001 and 2000, respectively. The increase in 2002 compared to 2001 primarily
reflects the Company's increased purchases of property and equipment to expand
the Company's offshore development infrastructure and the acquisitions of
intangible assets related to UHCI and Silverline Technologies, Inc. (See Note 4
to the Consolidated Financial Statements.) The increase in 2001 of net cash used
in investing activities as compared to 2000 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, 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. 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 4 to the Consolidated
Financial Statements.)
The Company's financing activities provided net cash of approximately $20
million, $6 million, and $1.8 million for the years ended December 31, 2002,
2001 and 2000, 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, its continued
intent not to repatriate earnings from India, its ability not to breach the
Distribution Agreement, dated January 7, 2003, between the Company and IMS
Health (the "Distribution Agreement"), especially as it relates to tax
indemnities 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.
40
At December 31, 2002 and 2001, the Company had cash and cash equivalents of
approximately $126 million and $85 million, respectively. As of December 31,
2002 and 2001 the Company had no significant third party debt. The Company had
working capital of approximately $134.3 and $95.6 million at December 31, 2002
and 2001, respectively. Accordingly, the Company does not anticipate any
near-term liquidity issues.
The Company does not engage in hedging activities nor has it entered into
off-balance sheet 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.
COMMITMENTS AND CONTINGENCIES
As of December 31, 2002, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $28.8 million, of which approximately $19.2 million has been
spent. The multi-phase program will encompass the construction of three fully
owned development centers containing approximately 620,000 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 2011. 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, 2002 are as follows:
2003................................................................$5,799
2004.................................................................3,829
2005.................................................................2,229
2006.................................................................1,755
2007.................................................................1,252
Thereafter...........................................................2,090
Total minimum lease payments.......................................$16,954
Cognizant 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 Cognizant's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of
Cognizant'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 Cognizant, regardless of Cognizant's responsibility for such
failure. Although Cognizant attempts to contractually limit its liability for
damages arising from negligent acts, errors, mistakes, or omissions in rendering
its application design, 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 Cognizant from liability
for damages. Although Cognizant 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
41
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 Cognizant that exceed available insurance coverage or changes in
Cognizant's insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could have a material adverse
effect on Cognizant's business, results of operations and financial condition.
In addition, as a result of the IMS Health split-off, the Company has entered
into certain agreements and indemnifications (See Note 13 to the Consolidated
Financial Statements).
RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
As indicated in Notes 1 and 9 and 13 to Notes 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 (55.3%) and held approximately 92.5% of the combined voting power of the
Company's common stock at December 31, 2002. On February 13, 2003, IMS Health
completed its plan to distribute all of the Cognizant Class B common stock that
IMS Health owned in the exchange offer, which is the subject of Amendment No. 4
to Form S-4 Registration Statement filed by the Company on January 30, 2003. As
of the completion of such distribution, IMS Health is no longer a related party
of Cognizant.
INTERCOMPANY SERVICES AGREEMENT
Prior to the consummation of the exchange offer, pursuant to the terms of
an Intercompany Services Agreement, dated as of May 15, 1998, IMS Health
provided the Company with certain administrative services, including payroll and
payables processing and permitted 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. IMS Health and Cognizant entered into an amended and restated
Intercompany Services Agreement, effective following the consummation of the
exchange offer, which provides for the continued provision of payroll, payables
processing and certain other administrative services for a term of up to one
year.
MASTER SERVICES AGREEMENT
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
The Dun and Bradstreet Corporation and Cognizant Corporation, former parents of
the Company, and former and present affiliates of IMS Health. In 2002, the
Company recognized related party revenues totaling $20.4 million for services
performed for 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
42
totaling $14.3 million including revenues from IMS Health and Strategic
Technologies (through August 30, 2000).
DISTRIBUTION AGREEMENT
The Company and IMS Health entered into the Distribution Agreement, the
terms of which have been approved by a special committee of the Board of
Directors of the Company, which was comprised of the Company's independent
directors. The Distribution Agreement sets forth certain rights and obligations
of IMS Health and the Company in respect of the exchange offer in addition to
those provided in the Intercompany Agreement. For a more complete description of
the terms of the Distribution Agreement, we urge you to read the entire
Distribution Agreement, which has been filed with the SEC as an exhibit to
Amendment No. 4 to Form S-4 Registration Statement filed with the SEC on January
30, 2003.
AGREEMENTS RELATING TO THE DISTRIBUTION
Director Resignations. IMS Health caused David M. Thomas and Nancy E.
----------------------
Cooper to resign as of the consummation of the exchange offer from their
positions as directors of the Company and from any boards of directors of the
Company's subsidiaries on which they served.
Indemnification. IMS Health and the Company have agreed to indemnification
---------------
provisions in respect of the respective disclosure in the exchange offer
documents, the conduct of the exchange offer and any failure to perform the
Distribution Agreement.
Joint and Several Undertakings. IMS Health requested, as a condition to the
------------------------------
distribution of the Company's shares in the exchange offer, that the Company
agree to undertake to be jointly and severally liable to certain of IMS Health's
prior affiliates for liabilities arising out of or in connection with IMS
Health's business and the businesses of the Company and other successors to the
businesses of Cognizant Corporation in accordance with the terms of the
Distribution Agreement dated as of October 28, 1996, among Cognizant
Corporation, which has been renamed Nielsen Media Research, Inc., The Dun &
Bradstreet Corporation, which has been renamed the R.H. Donnelly Corporation and
ACNielsen Corporation and related agreements. In addition, IMS Health is
obligated to procure similar undertakings from the Company to Nielsen Media
Research and Synavant Inc. with respect to liabilities allocated to IMS Health
in connection with the Distribution Agreement, dated as of June 30, 1998,
between Nielsen Media Research, Inc. and IMS Health and related agreements and
the Distribution Agreement, dated as of August 31, 2000, between IMS Health and
Synavant Inc. The Company has agreed to deliver these undertakings. However,
subject to the general allocation of liabilities arising from the respective
businesses of IMS Health and the Company, IMS Health has agreed to indemnify and
reimburse the Company for liabilities incurred with respect to these
undertakings.
Commercial Arrangements. In addition to the Intercompany Services
-----------------------
Agreement, IMS Health and the Company agreed to the continuation of certain
commercial relationships between the companies for a period of at least three
years.
43
Insurance. The Distribution Agreement includes provisions governing the
---------
administration of certain insurance programs and procedures for making claims
and it also allocates the right to proceeds and the allocation of deductibles
under these programs.
Tax. The Distribution Agreement provides that IMS Health and the Company
---
will comply with, and not take any action during the relevant time period that
is inconsistent with, the representations made to and relied upon by McDermott,
Will & Emery in connection with rendering its opinion regarding the U.S. federal
income tax consequences of the exchange offer.
In addition, under Section 355(e) of the Internal Revenue Code of 1986, as
amended (the "Code"), the exchange offer will be taxable to IMS Health if the
exchange offer is part of a plan or series of related transactions pursuant to
which one or more persons acquire directly or indirectly stock representing a
50% or greater interest, based on either vote or value, in IMS Health or the
Company. If IMS Health becomes subject to tax under Section 355(e) of the Code,
its tax liability will be based upon the difference between the fair market
value of the Cognizant Class B common stock at the time of the exchange offer
and IMS Health's adjusted basis in the Cognizant Class B common stock at that
time. This tax liability could be a material amount.
If a breach by the Company of the representations made by it to McDermott,
Will & Emery in connection with its tax opinion or the covenants in the
distribution agreement is the "but for" cause of the exchange offer either
failing to qualify as a tax-free distribution under Section 355(a) of the Code
or becoming taxable to IMS Health under Section 355(e) of the Code, then the
Company has agreed to indemnify IMS Health and each member of the consolidated
group of which IMS Health is a member from and against any liability, including
any taxes, interest or penalties or additions to tax, that is imposed upon IMS
Health or any member of its consolidated group as a result of the exchange offer
becoming taxable under Section 355 of the Code. The Company will be entitled to
rely upon certain representations made by IMS Health to McDermott, Will & Emery
in connection with its tax opinion. In the event any of these representations
are not true, correct or complete, the Company will not be obligated to
indemnify IMS Health or the members of its consolidated group against any
liability arising under Section 355 of the Code if the Company's breach of a
representation would not have resulted in this type of liability had all of IMS
Health's representations made in connection with McDermott, Will & Emery's tax
opinion been true, complete and correct.
As a result of the representations made to McDermott, Will & Emery in
connection with its tax opinion and the covenants in the Distribution Agreement,
the acquisition of control of the Company during the two-year period following
the exchange offer may be more difficult or less likely to occur because of the
potential indemnification liability associated with a breach of these
representations or covenants. In addition, the Company's ability to undertake
acquisitions and other transactions may be substantially restricted during the
two-year period following the exchange offer.
OTHER RELATIONSHIPS AND TRANSACTIONS
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
44
IT services to the pharmaceutical industry. This agreement was negotiated
between the parties on an arms-length basis.
In addition, the Company has a strategic business relationship with The
TriZetto Group Inc. that includes helping its healthcare customers integrate
TriZetto's products with their existing information systems and, within
TriZetto, supporting further development of these software applications. As of
December 31, 2002, IMS Health owned approximately 26.4% of the outstanding
common stock of Trizetto. During 2002 the Company recorded revenues from
TriZetto of approximately $2.6 million and expenses related to TriZetto
commissions and marketing fees of approximately $0.7 million. During 2001 the
Company recorded revenues from TriZetto of approximately $401,000 and payments
related to TriZetto 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, the
United States and Europe 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 2002 and 2001, various accounting pronouncements were issued which
may impact the Company's financial statements. (See Note 2 to the Consolidated
Financial Statements.)
45
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, 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 the significant fluctuations of Cognizant's quarterly operating results
caused by a variety of factors, many of which are not within Cognizant's
control, including, but not limited to,: (i) the significant fluctuations of
Cognizant's quarterly operating results caused by a variety of factors, many of
which are not within Cognizant's control, including (a) the number, timing,
scope and contractual terms of application design, 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 Cognizant's services required by customers, (e) levels of market
acceptance for Cognizant's services, (f) potential adverse impacts of new tax
legislation, and (g) the hiring of additional staff; (ii) changes in Cognizant's
billing and employee utilization rates; (iii) Cognizant's ability to manage its
growth effectively, which will require Cognizant (a) to increase the number of
its personnel, particularly skilled technical, marketing and management
personnel, (b) to find suitable acquisition candidates to support 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) Cognizant's limited operating history with unaffiliated
customers; (v) Cognizant's reliance on key customers and large projects; (vi)
the highly competitive nature of the markets for Cognizant's services; (vii)
Cognizant's ability to successfully address the continuing changes in
information technology, evolving industry standards and changing customer
objectives and preferences; (viii) Cognizant's reliance on the continued
services of its key executive officers and leading technical personnel; (ix)
Cognizant's ability to attract and retain a sufficient number of highly skilled
employees in the future; (x) Cognizant's ability to protect its intellectual
property rights; (xi) the concentration of Cognizant's operations in India and
the related geo-political risks of local and cross-border conflicts; (xii)
terrorist activity, the threat of terrorist activity, and responses to and
results of terrorist activity and threats, including, but not limited to,
effects, domestically and/or internationally, on Cognizant, its personnel and
facilities, its customers and suppliers, financial markets and general economic
conditions; (xiii) the effects, domestically and/or internationally, on
Cognizant, its personnel and facilities, its customers and suppliers, financial
markets and general economic conditions arising from hostilities involving the
United States in Iraq or elsewhere; (xiv) a
46
breach of the Distribution agreement entered into between the Company and IMS
Health; (xv) a change in the Company's intent to repatriate undistributed
earnings and (xvi) general economic conditions. Such forward-looking statements
include risks and uncertainties; consequently, actual transactions and results
may differ materially from those expressed or implied thereby.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that it does not have operations subject to material
risks of foreign currency fluctuations, nor does it use derivative financial
instruments in its operations or investment portfolio. Nonetheless, the Company
periodically evaluates the need for hedging strategies to mitigate the effect of
foreign currency fluctuations. The Company believes that it is does not have
exposure to material market risks associated with changes in interest rates, as
they have no variable interest rate debt outstanding. The Company does not
believe that it has any other material exposure to market risks associated with
interest rates.
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 15. 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.
47
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
2003 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 2003 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 2003
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 2003 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Annual Report on Form 10-K, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and are operating in an effective manner.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
48
PART IV
ITEM 15. 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 57.
(b) Reports on Form 8-K.
On October 31, 2002, the Company filed a Form 8-K disclosing the transfer
of Silverline Technologies, Inc.'s American Express practice to the Company.
Subsequent to the end of the fiscal year, on January 6, 2003, the Company
filed a Form 8-K disclosing that it issued a press release announcing a
presentation to be made at a conference, reiteration of prior guidance for the
fourth quarter of 2002 and guidance for 2003.
Subsequent to the end of the fiscal year, on February 13, 2003, the Company
filed a Form 8-K disclosing that its Restated Certificate of Incorporation was
approved by Board of Directors and by written consent of the holder of
approximately 55% of the Company's outstanding common stock and approximately
93% of the combined voting power of the Company's outstanding common stock.
Subsequent to the end of the fiscal year, on February 13, 2003, the Company
filed a Form 8-K disclosing that it issued a press release announcing its
financial results for the fourth quarter.
Subsequent to the end of the fiscal year, on February 21, 2003, the Company
filed a Form 8-K disclosing that, pursuant to its Restated Certificate of
Incorporation, all its shares of Class B common stock automatically converted to
Class A common stock.
Subsequent to the end of the fiscal year, on March 5, 2003, the Company
filed a Form 8-K disclosing that its Board of Directors approved a three-for-one
stock split in the form of a 200% stock dividend.
Subsequent to the end of the fiscal year, on March 6, 2003, the Company
filed a Form 8-K disclosing that its Board of Directors approved a stockholder
rights plan.
49
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.
50
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 fourteenth day of
March, 2003.
COGNIZANT TECHNOLOGY
SOLUTIONS CORPORATION
By:/s/ Wijeyaraj Mahadeva
------------------------------------
Wijeyaraj Mahadeva, Chairman of the
Board and Chief Executive Officer
51
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 14, 2003
- ------------------------------
Wijeyaraj Mahadeva Executive Officer (Principal
Executive Officer)
/s/ Gordon Coburn Chief Financial Officer, Treasurer March 14, 2003
- ------------------------------ and Secretary
Gordon Coburn (Principal Financial and Accounting
Officer)
/s/ Thomas M. Wendel Director March 14, 2003
- ------------------------------
Thomas M. Wendel
/s/ Robert W. Howe Director March 14, 2003
- ------------------------------
Robert W. Howe
/s/ John E. Klein Director March 14, 2003
- ------------------------------
John E. Klein
/s/ Venetia Kontogouris Director March 14, 2003
- ------------------------------
Venetia Kontogouris
/s/ Director March 14, 2003
- ------------------------------
Robert W. Weissman
52
CERTIFICATION
-------------
I, Wijeyaraj Mahadeva, certify that:
1. I have reviewed this annual report on Form 10-K of Cognizant
Technology Solutions Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
53
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 14, 2003 /s/ Wijeyaraj Mahadeva
------------------------
Wijeyaraj Mahadeva
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
54
CERTIFICATION
-------------
I, Gordon Coburn, certify that:
1. I have reviewed this annual report on Form 10-K of Cognizant
Technology Solutions Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
55
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: March 14, 2003 /s/ Gordon Coburn
--------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
56
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------------- ----------------------------
3.1 Restated Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K dated February 13, 2003.)
3.3 Amended and Restated By-laws of the Company. (Incorporated
by reference to Exhibit 3.2 to the Company's Current Report
on Form 8-K dated February 13, 2003.)
4.1 Rights Agreement, dated March 5, 2003, between the Company
and American Stock Transfer & Trust Company, as Rights
Agent, which includes the Certificate of Designations for
the Series A Junior Participating Preferred Stock as Exhibit
A, the Form of Right Certificate as Exhibit B and the
Summary of Rights to Purchase Preferred Shares as Exhibit C
(Incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 5, 2003.)
4.2 Specimen Certificate for shares of Class A common stock.
(Incorporated by reference to Exhibit 4.2 to the Company's
Amendment Number 4 to the Company's Form S-4 dated January
30, 2003.)
4.3 Specimen Certificate for shares of Class B common stock.
(Incorporated by reference to Exhibit 4.1 to the Company's
Amendment Number 2 to the Company's Form S-4 dated January
9, 2003.)
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 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.)
57
10.7 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.)
10.8* 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.)
10.9 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.)
10.10* 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.)
10.11* 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.)
10.12 Sublease dated as of April 6, 2001 by and between American
Express Travel Related Services Company, Inc., as Sublessor,
and the Company, as Sublessee. (Incorporated by reference to
Exhibit 10.13 of the Company's Annual Report of Form 10-K
for the fiscal year ended December 31, 2001.)
10.13 Distribution Agreement between IMS Health Incorporated and
the Company dated January 7, 2003. (Incorporated by
reference to Exhibit 10.13 to the Company's Amendment Number
4 to the Company Form S-4 dated January 30, 2003.)
21** List of subsidiaries of the Company.
23** Consent of PricewaterhouseCoopers LLP.
99.1** Statement Pursuant to 18 U.S.C.ss. 1350.
- -----------------
* 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.
58
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, 2002 and 2001................................. F-3
Consolidated Statements of Operations for the
years ended December 31, 2002, 2001 and 2000............... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000............... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001 and 2000............... F-6
Notes to Consolidated Financial Statements...................... F-7
Unaudited Quarterly Financial Data....................................... F-32
Financial Statement Schedule:
Schedule of Valuation and Qualifying Accounts................... F-33
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cognizant Technology Solutions Corporation:
In our opinion, the accompanying consolidated statements of financial
position, and the related consolidated statements of operations, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Cognizant Technology Solutions Corporation and its subsidiaries at
December 31, 2002 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule 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 10, 2003, except for Note 13, as to which the date is February 21, 2003
F-2
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except par values)
AT DECEMBER 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 126,211 $ 84,977
Trade accounts receivable, net of allowances of $861 and $882, respectively... 35,092 21,063
Trade accounts receivable - related party...................................... 1,605 1,481
Unbilled accounts receivable................................................... 4,159 5,005
Unbilled accounts receivable - related party................................... 149 417
Current tax asset.............................................................. 3,711 1,451
Other current assets........................................................... 4,907 2,941
---------- ----------
Total current assets......................................................... 175,834 117,335
---------- ----------
Property and equipment, net of accumulated depreciation of $24,559
and $16,805, respectively.................................................... 39,090 24,339
Goodwill, net.................................................................. 878 878
Other intangible assets, net................................................... 12,870 --
Other assets................................................................... 2,801 2,431
---------- ----------
Total assets................................................................. $ 231,473 $ 144,983
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 6,948 $ 3,652
Accrued expenses and other liabilities......................................... 34,539 18,046
---------- ----------
Total current liabilities.................................................... 41,487 21,698
Deferred income taxes.......................................................... 24,505 24,493
---------- ----------
Total liabilities............................................................ 65,992 46,191
---------- ----------
Commitments and contingencies (See Notes 10 and 11)
Stockholders' equity: (See Notes 7, 13 and 14)
Preferred stock, $.10 par value, 15,000 shares authorized, none issued......... -- --
Class A common stock, $.01 par value, 100,000 shares authorized, 9,130
and 8,065 shares issued and outstanding at December 31, 2002 and 2001,
respectively................................................................. 91 80
Class B common stock, $.01 par value, 25,000 shares authorized, 11,290 shares
issued and outstanding at December 31, 2002 and 2001, respectively........... 113 113
Additional paid-in capital..................................................... 71,854 39,711
Retained earnings.............................................................. 93,608 59,046
Cumulative translation adjustment.............................................. (185) (158)
---------- ----------
Total stockholders' equity................................................... 165,481 98,792
---------- ----------
Total liabilities and stockholders' equity................................... $ 231,473 $ 144,983
========== ==========
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,
----------------------
2002 2001 2000
---- ---- ----
Revenues......................................................... $208,657 $158,969 $122,758
Revenues-related party........................................... 20,429 18,809 14,273
------------- ------------ ------------
Total revenues................................................. 229,086 177,778 137,031
Cost of revenues................................................. 122,701 90,848 70,437
------------- ------------ ------------
Gross profit..................................................... 106,385 86,930 66,594
Selling, general and administrative expenses..................... 53,345 44,942 35,959
Depreciation and amortization expense............................ 7,842 6,368 4,507
------------- ------------ ------------
Income from operations........................................... 45,198 35,620 26,128
Other income / (expense), net:
Interest income.................................................. 1,808 2,501 2,649
Impairment loss on investment.................................... -- (1,955) --
Split-off costs.................................................. (1,680) -- --
Other income / (expense), net.................................... (235) (767) (530)
------------- ------------ ------------
Total other (expense) income................................... (107) (221) 2,119
------------- ------------ ------------
Income before provision for income taxes......................... 45,091 35,399 28,247
Provision for income taxes....................................... (10,529) (13,239) (10,564)
------------- ------------ ------------
Net income....................................................... $ 34,562 $ 22,160 $ 17,683
============= ============ ============
Net income per share, Basic...................................... $ 1.75 $ 1.17 $ 0.95
============= ============ ============
Net income per share, Diluted.................................... $ 1.63 $ 1.09 $ 0.87
============= ============ ============
Unaudited Pro Forma Net Income per share post split, Basic (1) $ 0.58 $ 0.39 $ 0.32
============= ============ ============
Unaudited Pro Forma Net Income per share post split, Diluted (1) $ 0.54 $ 0.36 $ 0.29
============= ============ ============
Weighted average number of common shares outstanding - Basic..... 19,747 19,017 18,565
Dilutive effect of shares issuable as of period-end under stock
option plans................................................... 1,484 1,354 1,691
------------- ------------ ------------
Weighted average number of common shares outstanding - Diluted... 21,231 20,371 20,256
------------- ------------ ------------
Comprehensive Income:
Net income.................................................... $ 34,562 $ 22,160 $ 17,683
Foreign currency translation adjustment....................... (27) (108) (41)
------------ ------------ -------------
Total comprehensive income....................................... $ 34,535 $ 22,052 $ 17,642
============= ============ ============
1) See Note 14.
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(1) COMMON STOCK(1) ADDITIONAL CUMULATIVE
----------------- ----------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------ ------ ------- -------- ---------- ------
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
Translation Adjustment.......... -- -- -- -- -- -- (27) (27)
Exercise of Stock Options....... 1,037 10 -- -- 18,902 -- -- 18,912
Tax Benefit related to Stock
Plans......................... -- -- -- -- 12,111 -- -- 12,111
Employee Stock Purchase Plan 28 1 -- -- 1,130 -- -- 1,131
Net Income...................... -- -- -- -- -- 34,562 -- 34,562
------ --------- ------ --------- --------- ----------- ---------- ----------
Balance, December 31, 2002...... 9,130 $ 91 11,290 $ 113 $ 71,854 $ 93,608 $ (185) $ 165,481
===== ====== ====== ======= ========= ========== ========= ========
(1) See Notes 1, 7, 13, and 14.
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,
----------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income.................................................... $ 34,562 $ 22,160 $ 17,683
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.............................. 7,842 6,367 4,507
Provision for doubtful accounts............................ 510 1,837 572
Deferred income taxes...................................... 12 7,791 6,341
Impairment loss on investment............................. -- 1,955 --
Tax benefit related to stock option exercises.............. 12,111 4,633 1,258
Changes in assets and liabilities:
Trade accounts receivable..................................... (14,663) (3,833) (10,825)
Other current assets.......................................... (3,111) (4,115) (1,924)
Other assets.................................................. (370) 300 (902)
Accounts payable.............................................. 3,296 803 1,414
Accrued and other liabilities................................. 16,493 (5,819) 12,096
------ ------ ------
Net cash provided by operating activities..................... 56,682 32,079 30,220
------ ------ ------
Cash flows used in investing activities:
Purchase of property and equipment............................ (22,268) (14,953) (10,652)
Intangible assets acquired.................................... (13,196) -- --
Investment.................................................... -- -- (1,955)
------ ------ ------
Net cash used in investing activities......................... (35,464) (14,953) (12,607)
Cash flows from financing activities:
Proceeds from stock plans / compensatory grant ............... 20,043 5,991 1,755
(Payments to) proceeds from related party..................... - (8) 8
------ ------ ------
Net cash provided by financing activities..................... 20,043 5,983 1,763
Effect of currency translation................................ (27) (108) (41)
Increase in cash and cash equivalents......................... 41,234 23,001 19,335
Cash and cash equivalents, at beginning of year............... 84,977 61,976 42,641
------ ------ ------
Cash and cash equivalents, at end of year..................... $ 126,211 $ 84,977 $ 61,976
========= ======== =========
Supplemental information:
Cash paid for income taxes during the year.................... $ 2,896 $ 3,797 $ 1,186
======= ======= =========
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", "Cognizant", or
"CTS") is a leading provider of custom IT design, development, integration and
maintenance services primarily for Fortune 1000 companies located in the United
States and Europe. Cognizant's core competencies include web-centric
applications, data warehousing, component-based development and legacy and
client-server systems. Cognizant provides the IT services it offers using an
integrated on-site/offshore business model. This seamless onsite/offshore
business model combines technical and account management teams located on-site
at the customer location and offshore at dedicated development centers located
in India and Ireland.
Cognizant began its IT 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, Cognizant, along with
certain other entities, was spun-off from the Dun & Bradstreet Corporation to
form a new company, Cognizant Corporation. On June 24, 1998, Cognizant completed
its initial public offering of its Class A common stock (the "IPO"). On June 30,
1998, a majority interest in Cognizant, and certain other entities were spun-off
from Cognizant Corporation to form IMS Health Incorporated (""IMS Health").
Subsequently, Cognizant Corporation was renamed Nielsen Media Research,
Incorporated.
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.
At December 31, 2002, IMS Health owned 55.3% of the outstanding stock of
Cognizant (representing all of Cognizant's Class B common stock) and held 92.5%
of the combined voting power of Cognizant's common stock. Holders of Cognizant's
Class A common stock have one vote per share and holders of Cognizant's Class B
common stock have ten votes per share.
On January 30, 2003, the Company filed a tender offer in which IMS Health
stockholders could exchange IMS Health shares held by them for Cognizant Class B
common stock held by IMS Health. There will be no impact on the number of
Cognizant's total shares outstanding upon the completion of the exchange offer.
(See Note 13 to the Consolidated Financial Statements)
F-7
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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.
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. The allowance for doubtful accounts is determined by
evaluating the relative credit-worthiness of each customer based upon market
capitalization and other information, including the aging of the receivables.
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 for impairment at least annually, or as circumstances warrant.
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 AND OTHER INTANGIBLES. 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 net assets acquired. Amortization
expense had 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 and 2000. Accumulated amortization was $1,345 and $1,028 at December 31,
2001 and 2000, respectively. Effective January 1, 2002, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"), the Company is no longer amortizing its
remaining goodwill balance; however, the Company does evaluate goodwill for
impairment, in accordance with FAS 142, at least annually, or as circumstances
warrant.
F-8
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Other intangibles represent primarily customer relationships and assembled
workforce, which are being amortized on a straight-line basis over 10 years and
5-8 years, respectively. The Company evaluates such intangibles for impairment
in accordance with FAS 142, at each balance sheet date
LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which was adopted in 2002, the Company reviews for
impairment 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 that provide for highly complex information technology
application development services or that provide for a combination of
application development and application maintenance services are recognized as
the service is performed using the percentage-of-completion method of
accounting, under which the sales value of performance is recognized on the
basis of the percentage that each contract's cost to date bears to the total
estimated cost. Revenues related to fixed-priced contracts that provide solely
for application maintenance services are recognized on a straight-line basis or
as services are rendered or transactions processed in accordance with
contractual terms. Expenses are recorded as incurred over the contract period.
Fixed-priced 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 of certain fixed
contracts 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.
Revenues related to services performed without a signed agreement or work
order are not recognized until there is evidence of an arrangement, such as when
agreements or work orders are signed or payment is received; however the cost
related to the performance of such work is recognized in the period the services
are rendered. Such revenue is recognized when, and if, evidence of an
arrangement is obtained.
F-9
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
ACCOUNTING FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS. At December 31, 2002,
the Company has four stock-based employee compensation plans, which are
described more fully in Note 8. The company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees, and related Interpretations." No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
December 31,
2002 2001 2000
---- ---- ----
Net income, as reported $34,562 $22,160 $17,683
Deduct: Total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax benefits 11,562 7,127 4,868
Pro forma net income $23,000 $15,033 $12,815
Earnings per share:
Net income, as reported- basic.................. $1.75 $1.17 $0.95
Pro forma- basic................................ $1.16 $0.79 $0.69
Net income, as reported- diluted................ $1.63 $1.09 $0.87
Pro forma- diluted.............................. $1.08 $0.74 $0.63
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-10
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
USE OF ESTIMATES. 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 applicable fixed-bid contracts, income tax expense and
related deferred assets and liabilities, and purchase price allocation related
to intangible and tangible assets acquired. Results could vary from the
estimates and assumptions used in the preparation of the accompanying financial
statements.
RISKS AND UNCERTAINTIES
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, potential
geo-political and other risks associated with terrorist activities and local or
cross border conflicts, 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.
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-11
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 $24,935 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 has not accrued taxes on the
repatriation of earnings recognized in 2002 as these earnings are considered to
be indefinitely reinvested outside of the United States. As of December 31,
2002, the amount of unrepatriated earnings upon which no provision for taxation
has been recorded is approximately $30,059. If such earnings are repatriated in
the future, or are no longer deemed to be indefinitely reinvested, the Company
would accrue the applicable amount of taxes associated with such earnings. This
change in intent, as well as a change in the second quarter in the manner in
which repatriated earnings are taxed in India, resulted in an estimated
effective tax rate for the year ended December 31, 2002 of 23.4%. This rate
compares to an effective tax rate for the years ended December 31, 2001 and 2000
of 37.4%.
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 potential dilutive common stock in the weighted average shares
outstanding.
RECLASSIFICATIONS. Certain prior-year amounts have been reclassified to conform
with the 2002 presentation.
RECENTLY ISSUED 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,
F-12
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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. At December 31, 2002, the Company evaluated
both goodwill and intangible assets and concluded that they had not been
impaired. 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.
2002 2001 2000
---- ---- ----
Reported Net Income $34,562 $22,160 $17,683
Reversal of Goodwill Amortization - net of tax 0 317 317
------- ------- --------
Adjusted Net Income excluding Goodwill
Amoritization $34,563 $22,477 $18,000
Adjusted Basic EPS excluding Goodwill
Amoritization $ 1.75 $ 1.18 $ 0.97
Adjusted Diluted EPS excluding Goodwill
Amoritization $ 1.63 $ 1.10 $ 0.89
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,
F-13
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
2002. The adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
In December 2002, Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FAS 123" (FAS 148) was issued. FAS 148 amends FAS 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, FAS 148 amends the disclosure requirements
of FAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has adopted
these amended disclosure requirements (See Note 2 to the Consolidated Financial
Statements) under the heading "Accounting for Stock Based Compensation Plans"
and will implement the required interim disclosures beginning in the first
quarter of 2003.
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 146") was issued. FAS 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 that 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 adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.
F-14
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
in EITF 00-21 "Revenue Arrangements with Multiple Deliverables". The consensus,
which is effective for contracts entered into in fiscal periods beginning after
June 15, 2003, requires that a Company should evaluate all deliverables in an
arrangement to determine whether they represent separate units of accounting.
That evaluation must be performed at the inception of the arrangement and as
each item in the arrangement is delivered. Arrangement consideration should be
then allocated among the separate units of accounting based on their relative
fair values. EITF 00-21 indicates that the best evidence of fair value is the
price of a deliverable when it is regularly sold on a standalone basis. Fair
value evidence often consists of entity-specific or vendor-specific objective
evidence (VSOE) of fair value.
The Company enters into contracts that could be considered arrangements
with multiple deliverables. These contracts are primarily long-term fixed-bid
contracts that provide both application maintenance and application development
services. As indicated in Note 2 to the Consolidated Financial Statements, the
Company accounts for such contracts using percentage of completion accounting,
which is the prevailing industry practice. The Company is currently evaluating
the possible prospective impact of EITF 00-21 on the Company's results of
operations related to contracts entered into after June 15, 2003.
3. SUPPLEMENTAL FINANCIAL DATA
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
USEFUL LIFE DECEMBER 31
(Years) 2002 2001
------------ ------------ ---------
Buildings................................ 30 $ 17,574 $ 3,930
Computer equipment and purchased software
3 33,829 27,160
Furniture and equipment.................. 5 - 9 1,999 1,958
Land..................................... 1,705 1,678
Leasehold improvements................... Over shorter of 8,542 6,418
lease term or
life of asset
----------------- ----------------
Sub-total.............................. 63,649 41,144
Accumulated depreciation and amortization
(24,559) (16,805)
----------------- ----------------
----------------- ----------------
Property and Equipment - Net............. $ 39,090 $ 24,339
================= ================
Depreciation expense was $7,516, 6,368 and 4,507 for the years ended
December 31, 2002, 2001 and 2000, respectively.
F-15
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
2002 2001
---- ----
Accrued compensation and benefits........... $ 17,907 $ 7,676
Deferred revenue............................ 5,075 2,696
Accrued professional fees................... 3,757 1,411
Accrued vacation ........................... 3,274 2,465
Accrued travel and entertainment............ 2,131 1,705
Other....................................... 2,395 2,093
-------------- ---------------
Total $ 34,539 $ 18,046
============== ===============
4. INVESTMENTS
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 ("UHCI"), a subsidiary of UnitedHealth Group, for $3,043 (including
approximately $143 of direct deal costs). In accordance with FAS 142, this
transaction was determined to be an acquisition of assets, not a business
combination.
UHCI previously provided, and will continue to provide through CTS Ireland,
application development and maintenance services, using the existing staff of
approximately 70 software professionals. The acquisition of the assets of UHCI,
is designed to enable the Company to provide a wide range of services to the
Company's clients in Europe and worldwide and represents the initial
implementation of the Company's previously announced international expansion
strategy.
In accordance with FAS 142, the Company has allocated, based upon an
independent appraisal, the purchase price to the UHCI tangible and intangible
assets and liabilities acquired. The details of the allocation and the
respective useful lives over which these assets are being amortized are provided
in the table below. Amortization of $148, related to the acquisition of these
assets, has been included in the Consolidated Statements of Operations for the
six-month period ended December 31, 2002. Such net assets, excluding amounts
assigned to fixed assets, have been included as intangible assets in the
Consolidated Balance Sheets and as identifiable assets in the European segment
in Note 12. The operating results of CTS Ireland have been included in the
consolidated financial statements of the Company effective July 1, 2002.
On October 29, 2002, the Company completed the transfer of Silverline
Technologies, Inc.'s ("Silverline") practice, which serviced a major financial
services company to the Company for $10,424 (including approximately $620 of
direct deal costs). In accordance with FAS 142, this transaction was determined
to be an acquisition of assets, not a business combination.
F-16
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Under the terms of the transfer, the Company will provide application
design, development and maintenance services to such major financial services
company through an acquired workforce of approximately 300 IT and support
professionals located primarily in the United States and India. Amortization of
$178, related to the acquisition of these assets, has been included in the
Consolidated Statements of Operations for the two-month period ended December
31, 2002. Such net assets have been included as intangible assets in the
Consolidated Balance Sheets and as identifiable assets in the North American
segment in Note 12.
Since the transfer was effected on October 29, 2002, the operating results
of this transfer have been included in the consolidated financial statements of
the Company commencing from that date.
The operating results of UHCI and Silverline, for the periods included
indicated above, were not material to the consolidated operating results of the
Company for the year ended December 31, 2002.
The purchase price for UHCI and Silverline's financial services company
practice was allocated to the following tangible and intangibles assets and is
being amortized over the useful lives indicated below:
UHCI Useful Life Silverline Useful Life
---- ----------- ---------- -----------
Customer Relationship $2,577 10 years $9,515 10 years
Assembled Workforce 195 5 years 909 8 years
Fixed Assets 271 3-5 years - -
----- --------
Purchase Price $3,043 $10,424
(Incl. Deal costs) ----- --------
The estimated aggregate amortization expense for intangible assets for each
of the succeeding five fiscal years is; 2003 through 2006: $1,362, 2007: $1,342.
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 ("Questra"), 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. The Company's investment is being accounted for under the
cost basis of accounting.
F-17
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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. In the fourth quarter of 2001, Questra issued Preferred B shares
in exchange for $19 million of new venture capital financing. Since the Company
did not participate, its 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.
5. EMPLOYEE BENEFITS
Beginning in 1997, certain U.S. employees of the Company were eligible to
participate in Cognizant Corporation'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, $0, and $31
for the years ended December 31, 2002, 2001 and 2000, 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 $479, $351 and $195 for the years ended December 31, 2002, 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 and
Ireland 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 9 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 $928, $790, and $501 for the years ended December 31, 2002, 2001
and 2000, respectively.
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 $752, $902, and $511
for the years ended December 31, 2002, 2001 and 2000, respectively.
F-18
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
6. INCOME TAXES
Income before provision for income taxes consisted of the following for
years ended December 31:
2002 2001 2000
---- ---- ----
U.S. $11,892 $ 7,236 $ 7,469
Non-U.S. 33,199 28,163 20,778
------ ------ ------
Total $45,091 $35,399 $28,247
------- ------- -------
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
2002 2001 2000
---- ---- ----
U.S. Federal and state:
Current $ 6,292 $ 2,986 $ 3,276
Deferred 1,565 8,620 6,409
----- ----- -----
Total U.S. Federal and state 7,857 11,606 9,685
Non-U.S.:
Current 2,432 1,466 961
Deferred 240 167 (82)
----- ----- -----
Total non-U.S. 2,672 1,633 879
----- ----- -----
Total $10,529 $ 13,239 $10,564
------- -------- -------
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:
2002 2001 2000
---- ---- ----
Tax expense at U.S. Federal statutory rate $15,782 $12,390 $ 9,604
State and local income taxes, net of Federal benefit 867 361 375
Non-deductible Goodwill amortization 0 111 108
Rate differential on foreign earnings (7,544) -- --
Other 1,424 377 477
----- ------- -------
Total income taxes $10,529 $13,239 $10,564
------- ------- -------
F-19
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:
2002 2001
------ ------
Deferred tax assets:
Timing differences $ 430 $ 1,042
-------- --------
430 1,042
-------- --------
Net deferred tax assets
Deferred tax liabilities:
Undistributed Indian income (24,935) (25,535)
-------- --------
Total deferred tax liabilities (24,935) (25,535)
-------- --------
Net deferred tax liability $(24,505) $ (24,493)
Cognizant has generated net operating losses for U.S. tax purposes of
approximately $8.6 million. These losses have an expiration date for Federal
purposes through 12/31/22. For state purposes, the date of expiration varies but
will generally be less than the Federal expiration period.
Cognizant's Indian subsidiary, CTS India, is an export-oriented company,
which, under the Indian Income Tax Act of 1961 is entitled to claim tax holidays
for a period of ten years with respect to its export profits. Substantially all
of the earnings of CTS India 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 March of 2009. Prior to 2002, it was management's
intent to repatriate all accumulated earnings from India to the United States;
accordingly, Cognizant has provided deferred income taxes in the amount of
approximately $24,935 on all such undistributed earnings through December 31,
2001. During the first quarter of 2002, Cognizant 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, Cognizant 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, Cognizant will no longer accrue taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are considered to be indefinitely reinvested outside of the United
States. As of December 31, 2002, the amount of unrepatriated earnings upon which
no provision for taxation has been recorded is approximately $30,059. If such
earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, Cognizant will accrue the applicable amount of taxes
associated with such earnings. Due to the various methods by which such earnings
could be repatriated in the future, it is not currently practicable to determine
the amount of applicable taxes that would result from such repatriation.
F-20
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
This change in intent, as well as a change in the manner in which
repatriated earnings are taxed in India, resulted in an estimated effective tax
rate for the year ended December 31, 2002 of 23.4%. This rate compares to an
effective tax rate for the year ended December 31, 2001 of 37.4%.
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.
7. CAPITAL STOCK
On June 24, 1998, the Company consummated its Initial Public Offering
("IPO") of 5,834,000 shares of its Class A 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, 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 Corporation)
sold 875,100 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 Corporation. The related party balance resulted from
certain advances to the Company from Cognizant Corporation 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.
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 Internal Revenue
Code of 1986, as amended shall not convert to shares of Class A Common Stock
upon the occurrence of such Tax-Free Spin-Off. (See Note 13 to the Consolidated
Financial Statements). No preferred stock has been issued.
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 has been
F-21
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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.
At December 31, 2002, IMS Health owned 55.3% of the outstanding stock of
Cognizant (representing all of Cognizant's Class B common stock) and held 92.5%
of the combined voting power of Cognizant's common stock. Holders of Cognizant's
Class A common stock have one vote per share and holders of Cognizant's Class B
common stock have ten votes per share. (See Note 13 to the Consolidated
Financial Statements).
On January 30, 2003, the Company filed a tender offer in which IMS Health
shareholders could exchange IMS Health shares held by them for Cognizant Class B
common stock held by IMS Health. There will be no impact on the number of
Cognizant's total shares outstanding upon the completion of the exchange offer.
As a direct result of the IMS Health exchange offer, Cognizant has incurred
charges in the fourth quarter of 2002 of $1.7 million related to direct and
incremental legal, accounting, printing and other costs.
8. EMPLOYEE STOCK-BASED COMPENSATION 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 (each option exercisable into one
(1) share of the Company's Class A common stock) 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 (each option
exercisable into one (1) share of the Class A common stock) to eligible
directors. Options granted under this Company's 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 of Class A common stock 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 underlying 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 (each option exercisable
into one (1) share of the
F-22
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Company's Class A common stock) to eligible employees, nonemployee Directors and
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.
In May 1999, CTS adopted the Employee Stock Purchase Plan (the "Purchase
Plan"), which provides for the issuance of up to 800,000 shares of CTS Class A
common stock to eligible employees. The Purchase Plan provides for eligible
employees to designate in advance of specified purchase periods a percentage of
compensation to be withheld from their pay and applied toward the purchase of
such number of whole shares of Class A common stock as can be purchased at a
price of 85% of the lesser of (a) the fair market value of a share of Class A
common stock on the first date of the purchase period; or (b) the fair market
value of a share of Class A common stock on the last date of the purchase
period. No employee can purchase more than $25,000 worth of stock annually, and
no stock can be purchased by any person which would result in the purchaser
owning more than five percent or more of the total combined voting power or
value of all classes of stock of the Company. In accordance with APB 25, no
compensation expense was recorded in connection with the purchase of shares by
employees.
During the year ended December 31, 2002, approximately 28,000 shares of
Class A common stock were purchased by employees under the Purchase Plan. At
December 31, 2002, there were approximate 708,605 shares available for future
issuance under the Purchase Plan.
A summary of the Company's stock option activity, and related information
is as follows as of December 31, 2002, 2001 and 2000:
------------------------------------------------------------------------------
2002 2002 2001 2001 2000 2000
-----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of year 4,305,541 $24.08 3,681,312 $18.90 2,551,808 $ 8.37
Granted, Employee Option Plan -- -- -- -- -- --
Granted, Directors Option Plan -- -- -- -- -- --
Granted, 1999 Incentive Comp. Plan 692,500 $45.20 1,541,600 $31.71 1,408,000 $ 37.59
Exercised (1,037,590) $18.23 (666,019) $ 7.71 (129,868) $ 6.01
Cancelled (148,000) $36.42 (238,352) $37.57 (147,878) $ 26.43
Expired (2,900) $43.33 (13,000) $53.70 (750) $ 12.22
-----------------------------------------------------------------------------
Outstanding - end of year 3,809,551 $29.01 4,305,541 $24.08 3,681,312 $ 18.90
-----------------------------------------------------------------------------
Exercisable - end of year 1,214,578 $20.51 1,192,510 $13.99 956,608 $ 5.83
F-23
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
At December 31, 2002, 1,727,431 options(each option exercisable into
one (1) share of the Company's Class A common stock) were available for future
issuance under the Company's option plans.
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at December 31, 2002:
- ---------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------
Weighted Weighted
Weighted Average Average Average
Range of Number Remaining Contractual Exercise Exercise
Exercise Prices Outstanding Life in Years Price Options Price
---------------- ----------- -------------- ---------- ---------- ---------
$1.93 - $1.93 123,900 4.6 Years $ 1.93 123,900 $ 1.93
$3.46 - $5.00 92,530 5.3 Years $ 4.18 92,530 $ 4.18
$5.44 - $8.06 7,000 5.7 Years $ 6.56 7,000 $ 6.56
$11.00 - $15.31 854,257 6.4 Years $ 12.34 502,309 $ 12.30
$20.78 - $30.94 925,920 8.3 Years $ 28.13 135,445 $ 28.24
$31.50 - $45.50 1,283,644 8.2 Years $ 36.12 279,494 $ 35.63
$47.91 - $68.75 522,300 9.2 Years $ 51.52 73,900 $ 57.80
-------- ------
Total 3,809,551 7.8 Years $ 29.01 1,214,578 $ 20.51
- ----------------------------------------------------------------------------------------------------
Compensation cost recognized by the Company under APB 25 was $0, $11, and $35
for 2002, 2001 and 2000, 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 9 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,
2002 2001 2000
---- ---- ----
Net income, as reported......................... $34,562 $22,160 $17,683
Deduct: Total stock-based compensation
expense determined under the fair value
method for all awards, net of related tax
benefits..................................... 11,562 7,127 4,868
Pro forma net income............................ $23,000 $15,033 $12,815
Earnings per share:
Net income, as reported- basic................ $1.75 $1.17 $0.95
Pro forma - basic............................. $1.16 $0.79 $0.69
Net income, as reported- diluted.............. $1.63 $1.09 $0.87
Pro forma - diluted.......................... $1.08 $0.74 $0.63
F-24
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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 2002: risk-free interest rate
of 2.71%, expected dividend yield of 0.0%, expected volatility of 65% and
weighted average expected life of 2.9 years. 2001 assumptions; 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. The weighted-average fair value of the
Company's options granted during 2002, 2001 and 2000 was $20.04, $16.68, and
$21.71, respectively.
9. 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 certain IT services to IMS
Health. The Company recognized related party revenues from IMS Health totaling
$20,429 and $18,809 in 2002 and 2001, respectively. In 2000, the Company
recognized related party revenues totaling $14,273, including revenues from IMS
Health and Strategic Technologies, a then affiliated subsidiary, (through August
30, 2000).
AFFILIATED AGREEMENTS. In 1997, the Company entered into various agreements with
Cognizant Corporation, which were assigned to IMS Health as part of the 1998
Reorganization. The agreements included 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. In 2002 and 2001, IMS Health provided the Company with certain
administrative services, including payroll and payables processing and permitted
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 $656, $440 and $254 for the years ended December 31, 2002, 2001 and 2000,
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.
F-25
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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, 2002, IMS Health owned approximately 26.4% of
the outstanding common stock of Trizetto. During 2002 and 2001, the Company
recorded revenues from Erisco of approximately $2,577 and $401, respectively and
payments to Erisco for commissions and marketing fees of approximately $697 and
$1,012, respectively.
PENSION PLANS. Certain U.S. employees of the Company participated 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, 2002 after adjusting for the Reorganization, the split
of IMS Health's stock and the distribution of Gartner Group and Synavant Inc.
shares, such officer had 172,297 options in IMS Health outstanding at a weighted
average exercise price of $15.96 per share. At December 31, 2002, 172,297
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
F-26
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
discussed above. At December 31, 2002, after adjusting for the Reorganization,
the split of IMS Health's stock and the distribution of Gartner Group and
Synavant Inc. shares, such officer had 127,379 options in IMS Health outstanding
at a weighted average exercise price of $15.96 per share. At December 31, 2002,
127,379 options were exercisable.
10. COMMITMENTS
As of December 31, 2002, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $28.8 million, of which $19.2 million has been spent as of
December 31, 2002.
The Company leases office space and equipment under operating leases, which
expire at various dates through the year 2011. 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, 2002 are as follows:
2003.........................................................$5,799
2004..........................................................3,829
2005..........................................................2,229
2006..........................................................1,755
2007..........................................................1,252
Thereafter....................................................2,090
Total minimum lease payments................................$16,954
Rental expense totaled $5,201, $3,175 and $3,472 for years ended December
31, 2002, 2001 and 2000, respectively.
11. 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
F-27
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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, would have a material adverse effect on
the Company's business, results of operations and financial condition.
12. 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 and Ireland. 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, 2002, 2001 and 2000 are as follows:
2002 2001 2000
---- ---- ----
REVENUES (1)(1a)
North America (2) $ 199,605 $ 151,933 $ 114,932
Europe(3) 27,886 24,221 20,959
Asia 1,595 1,624 1,140
------------------------------------------------
Consolidated $ 229,086 $ 177,778 $ 137,031
------------------------------------------------
OPERATING INCOME (1)
North America(2) $ 39,380 $ 30,435 $ 21,918
Europe(3) 5,503 4,860 3,994
Asia 315 325 216
------------------------------------------------
Consolidated $ 45,198 $ 35,620 $ 26,128
------------------------------------------------
IDENTIFIABLE ASSETS
North America(2) $ 133,417 $ 88,328 $ 71,464
Europe(4) 12,972 5,322 7,293
Asia 85,083 51,333 30,783
------------------------------------------------
Consolidated $ 231,473 $ 144,983 $ 109,540
------------------------------------------------
(1) Revenues and resulting operating income are attributed to regions
based upon customer location.
(1a) Application development and integration services represented
approximately 46.1%, 42.9% and 42.7% of revenues in 2000, 2001 and
2002, respectively. Application maintenance services accounted for
47.0%, 51.8% and 57.3% of revenues in 2000, 2001, and 2002,
respectively.
(2) Substantially all relates to operations in the United States.
(3) Includes revenue from operations in the United Kingdom of $13,718,
$19,895 and $25,785 in 2000, 2001 and 2002, respectively.
(4) Includes identifiable assets in the United Kingdom of $3,325, $5,269
and $9,610 in 2001, 2001 and 2002, respectively.
F-28
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
No third party customer accounted for sales in excess of 10% of revenues in
2002, 2001 and 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.
NOTE 13. SUBSEQUENT EVENT - IMS HEALTH EXCHANGE OFFER
On February 13, 2003, IMS Health completed its plan to distribute all of
the Cognizant Class B common stock that IMS Health owned in an exchange offer.
There is no impact on the number of Cognizant's total shares outstanding as a
result of the completion of the exchange offer. As of February 21, 2003,
pursuant to the Company's Restated Certificate of Incorporation, all 11,290,900
shares of Class B common stock converted into shares of Class A common stock.
Accordingly, as of such date, there are no shares of Class B common stock
outstanding and the share and equity balances that relate to Class B common
stock will be reclassed to the share and equity balances of Class A common
stock.
In connection with the exchange offer, IMS Health, as the Company's
majority shareholder, approved amendments to Cognizant's certificate of
incorporation that became effective following consummation of the exchange
offer. The material terms of these amendments:
o provide for a classified board of directors;
o set the number of Cognizant's directors; and
o provide for supermajority approval requirements for actions to amend,
alter, change, add to or repeal specified provisions of Cognizant's
certificate of incorporation and any provision of the by-laws.
In connection with the exchange offer, Cognizant's Board of Directors also
approved amendments to Cognizant's by-laws, which became effective following
completion of the exchange offer. The material terms of these amendments made to
Cognizant's by-laws affect nominations of persons for election to the Board of
Directors and proposals of business at annual or special meeting of
stockholders. Cognizant's Board of Directors also adopted a stockholders rights
plan providing certain rights to stockholders under certain circumstances.
F-29
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Additionally, the Company amended existing agreements with IMS Health which
included:
o an amended and restated Intercompany Services Agreement, which
provides for the continued provision of payroll, payables processing
and certain other administrative services for a term of up to one
year; and
o a Master Services Agreements pursuant to which the Company continues
to provides IT services to IMS Health on terms that are comparable to
unrelated third parties;
The Company also entered into a Distribution Agreement, dated January 7,
2003, with IMS Health the ("Distribution Agreement"), the terms of which were
approved by a special committee of the Board of Directors of the Company, which
was comprised of the Company's independent directors. The Distribution Agreement
sets forth certain rights and obligations of IMS Health and the Company in
respect of the exchange offer in addition to those provided in the Intercompany
Services Agreement. The material terms of the Distribution Agreement include:
o the resignation of David M. Thomas and Nancy E. Cooper from any boards
of directors of the Company's subsidiaries on which they served;
o indemnification provisions in respect of the respective disclosure in
the exchange offer documents, the conduct of the exchange offer and
any failure to perform the Distribution Agreement;
o the agreement of the Company to undertake to be jointly and severally
liable to certain of IMS Health's prior affiliates for liabilities
arising out of or in connection with IMS Health's business and the
businesses of the Company and other successors to the businesses of
Cognizant Corporation in accordance with the terms of the Distribution
Agreement dated as of October 28, 1996, among Cognizant Corporation,
which has been renamed Nielsen Media Research, Inc., The Dun &
Bradstreet Corporation, which has been renamed the R.H. Donnelly
Corporation and ACNielsen Corporation and related agreements. However,
subject to the general allocation of liabilities arising from the
respective businesses of IMS Health and the Company, IMS Health has
agreed to indemnify and reimburse the Company for liabilities incurred
with respect to these undertakings;
o the continuation of certain commercial relationships between the
companies for a period of at least three years; and
o provisions governing the administration of certain insurance programs
and procedures for making claims;
The Distribution Agreement also provides that IMS Health and the Company
will comply with, and not take any action during the relevant time period that
is inconsistent with, the representations made to and relied upon by McDermott,
Will & Emery in connection with rendering its opinion regarding the U.S. federal
income tax consequences of the exchange offer.
F-30
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
In addition, pursuant to the Distribution Agreement, the Company indemnifies IMS
Health for any tax liability to which they may be subject as a result of the
exchange offer but only to the extent that such tax liability resulted solely
from a breach in the representations the Company made to and were relied upon by
McDermott, Will & Emery in connection with rendering its opinion regarding the
U.S. federal income tax consequences of the exchange offer. This indemnification
liability could be material to the Company's quarterly and annual operating
results, financial position and cash flows.
NOTE 14. SUBSEQUENT EVENT - STOCK SPLIT (UNAUDITED)
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% dividend payable on April 1, 2003 to stockholders of record
on March 19, 2003. Pro forma unaudited earnings per share reflective of the
stock split have been presented in the Company's Consolidated Statement of
Operations. The historical share and per share amounts have not been restated to
reflect the 3-for-1 stock split. Such amounts will be restated upon the
effective date of the stock dividend.
F-31
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
----------------------------------------------------------------
2002 March 31 June 30 September 30 December 31 Full Year
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenue $46,484 $54,358 $61,233 $67,011 $229,086
Gross Profit $22,295 $25,010 $28,263 $30,817 $106,385
Income from Operations $9,146 $10,702 $12,108 $13,242 $ 45,198
Net Income $7,109 $8,647 $9,667 $9,139(1) $ 34,562(1)
Earnings Per Share of Common Stock
Basic $0.37 $0.44 $0.49 $0.45 $ 1.75
Diluted $0.35 $0.41 $0.45 $0.42 $ 1.63
- --------------------------------------------------------------------------------------------------------------------------
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(2)
- ----------------------------------------------------------------------------------------------------------------------------
This table has not been restated to reflect the Company's 3-for-1 stock
split which will be effective April 1, 2003. (See Note 14 to the Consolidated
Financial Statements)
(1) Includes split-off costs of $1,700, net of tax.
(2) The sum of the quarterly earnings per share does not equal full year
earnings per share due to rounding.
F-32
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
- ---- -------------- ------------ ------------ ---------- -------------
2002 $ 882 $ 533 -- $ 554 $ 861
2001 $ 516 $ 1,895 -- $ 1,529 $ 882
2000 $ 225 $ 572 -- $ 281 $ 516
F-33