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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 2003
--------------
[ ] 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
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
- --------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 Glenpointe Centre West
Teaneck, New Jersey 07666
(201) 801-0233
(Address, including zip code, and
telephone
number (including area code) of
registrant's
principal executive office)
-----------------------------------
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes: X No:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 29, 2003:
Class Number of Shares
----- ----------------
Class A Common Stock, par value $.01 per share 61,553,576
Class B Common Stock, par value $.01 per share 0
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited).... 1
Condensed Consolidated Statements of Income and
Comprehensive Income (Unaudited) for the Three Months
Ended March 31, 2003 and 2002.............................. 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of March 31, 2003 and December 31, 2002 .... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2003 and 2002......... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 22
Item 4. Controls and Procedures.................................... 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................. 23
Item 4. Submission of Matters to a Vote of Security Holders........ 23
Item 6. Exhibits and Reports on Form 8-K........................... 23
SIGNATURES......................................................... 25
CERTIFICATIONS..................................................... 26
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-1-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2003 2002
---- ----
Revenues..................................................................... $ 71,941 $ 41,650
Revenues - related party..................................................... 2,575 4,834
--------- ----------
Total revenues............................................................ 74,516 46,484
Cost of revenues............................................................. 40,959 24,189
--------- ----------
Gross profit................................................................. 33,557 22,295
Selling, general and administrative
expenses.................................................................. 16,411 11,222
Depreciation and amortization expense........................................ 2,622 1,927
--------- ----------
Income from operations....................................................... 14,524 9,146
Other income (expense):
Split-off costs (See Note 2) ............................................. (2,010) --
Interest income........................................................... 421 429
Other expense - net ...................................................... (197) (159)
--------- ----------
Total other (expense) income........................................ (1,786) 270
--------- ----------
Income before provision for income taxes..................................... 12,738 9,416
Provision for income taxes................................................... (2,560) (2,307)
--------- ----------
Net income................................................................... 10,178 7,109
--------- ----------
Basic earnings per share (1).............................................. $ 0.17 $ 0.12
========= ==========
Diluted earnings per share (1).............................................. $ 0.15 $ 0.12
========= ==========
Weighted average number of common shares outstanding - Basic (1)............. 61,319 58,095
========= ==========
Dilutive effect of shares issuable as of period-end
under stock option plans (1)............................................ 4,674 3,606
========= ==========
Weighted average number of common shares outstanding - Diluted (1)........... 65,993 61,701
========= ==========
Comprehensive income:
Net income................................................................ $ 10,178 $ 7,109
Foreign currency translation adjustments................................ (10) (46)
--------- ----------
Comprehensive income....................................................... $ 10,168 $ 7,063
========= ==========
(1) Reflects a 3-for-1 stock split effected by a 200% stock dividend paid on
April 1, 2003 (See Note 3).
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-2-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in thousands, except par values)
MARCH 31, DECEMBER 31,
2003 2002
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 126,647 $ 126,211
Trade accounts receivable, net of allowance of $ 847 and
$861, respectively....................................................... 40,610 35,092
Trade accounts receivable-related party.................................... -- 1,605
Unbilled accounts receivable............................................... 6,223 4,159
Unbilled accounts receivable-related party................................. -- 149
Current tax asset.......................................................... 2,639 3,711
Other current assets....................................................... 6,423 4,907
----------- -----------
Total current assets................................................... 182,542 175,834
----------- -----------
Property and equipment, net of accumulated depreciation of $25,550
and $24,559 respectively................................................... 42,766 39,090
Goodwill, net................................................................... 878 878
Other intangible assets, net.................................................... 12,530 12,870
Other assets.................................................................... 2,976 2,801
----------- -----------
Total assets........................................................... $ 241,692 $ 231,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 5,643 $ 6,948
Accrued and other current liabilities...................................... 31,882 34,539
----------- -----------
Total current liabilities.............................................. 37,525 41,487
Deferred income taxes........................................................... 24,537 24,505
----------- -----------
Total liabilities...................................................... 62,062 65,992
----------- -----------
Commitments and Contingencies (See Note 9)
Stockholders' equity: (See Notes 1, 2 and 3)
Preferred stock, $.10 par value, 15,000 shares authorized, none issued.......... -- --
Class A common stock, $.01 par value, 100,000 shares authorized,
61,528 shares and 61,260 shares issued and outstanding at
March 31, 2003 and December 31, 2002, respectively (1)..................... 615 612
Class B common stock, $.01 par value, 25,000 shares authorized,
none outstanding (1)....................................................... -- --
Additional paid-in-capital (1) ................................................. 75,424 71,446
Retained earnings............................................................... 103,786 93,608
Cumulative translation adjustment............................................... (195) (185)
----------- -----------
Total stockholders' equity............................................. 179,630 165,481
----------- -----------
Total liabilities and stockholders' equity............................. $ 241,692 $ 231,473
=========== ===========
(1) Restated to reflect the conversion of shares of Class B common
stock to shares of Class A common stock on February 21, 2003 (See
Note 2) and 3-for-1 stock split effected by a 200% stock dividend
paid on April 1, 2003 (See Note 3).
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-3-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31,
---------
2003 2002
---- ----
Cash flows from operating activities:
Net income........................................................................ $ 10,178 $ 7,109
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 2,622 1,927
Split-off costs (See Note 2) ............................................ 2,010 --
Provision for doubtful accounts.......................................... (4) 328
Deferred income taxes.................................................... 32 511
Tax benefit related to option exercises.................................. 1,156 423
Changes in assets and liabilities:
Trade accounts receivable................................................ (3,909) (1,558)
Other current assets..................................................... (2,359) (2,298)
Other assets............................................................. (77) 417
Accounts payable......................................................... (1,305) (92)
Accrued and other liabilities............................................ (1,617) 758
------------- -----------
Net cash provided by operating activities......................................... 6,727 7,525
------------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................................... (6,054) (1,944)
------------- -----------
Net cash used in investing activities............................................. (6,054) (1,944)
------------- -----------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital................................... 2,823 674
Split-off costs................................................................... (3,050) --
------------- -----------
Net cash provided by financing activities......................................... (227) 674
Effect of currency translation.................................................... (10) (46)
------------- -----------
Increase in cash and cash equivalents ............................................ 436 6,209
Cash and cash equivalents, beginning of year...................................... 126,211 84,977
------------- -----------
Cash and cash equivalents, end of period.......................................... $ 126,647 $ 91,186
============= ===========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
-4-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollar amounts in thousands)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
("Cognizant" or the "Company") in accordance with generally accepted accounting
principles in the United States and Article 10 of Regulation S-X under the
Securities and Exchange Act of 1934, as amended, and should be read in
conjunction with the Company's consolidated financial statements (and notes
thereto) included in the Company's 2002 Annual Report on Form 10-K and as
amended on the Company's Current Report on Form 8-K filed on April 25, 2003.
Such Form 8-K restates the Company's consolidated financial statements (and
notes thereto) to give effect to the Company's stock split, which was effective
April 1, 2003 (see Note 3). In the opinion of the Company's management, all
adjustments considered necessary for a fair presentation of the accompanying
condensed consolidated financial statements have been included, and all
adjustments are of a normal and recurring nature. Operating results for the
interim period are not necessarily indicative of results that may be expected to
occur for the entire year. Certain prior period amounts have been restated to
conform to the presentation of the Company's financial statements for fiscal
year 2003. (See Notes 2 and 3).
NOTE 2 - SPLIT-OFF FROM IMS HEALTH
As of December 31, 2002, IMS Health Incorporated ("IMS Health") owned
approximately 55.3% of the outstanding common stock of the Company (representing
all of the Company's Class B common stock) and held approximately 92.5% of the
combined voting power of the Company's common stock. On February 13, 2003, (the
"Split-Off Date") IMS Health distributed all of the Cognizant Class B common
stock that IMS Health owned (a total of 33,872,700 shares, on a post-split
basis) in an exchange offer to IMS Health stockholders (the "Split-Off"). There
was no impact on the number of outstanding shares of Cognizant common stock as a
result of the completion of the Split-Off.
As a result of the Split-Off, IMS Health and its affiliates are no longer
related parties of Cognizant as of the Split-Off Date. Accordingly, only
services rendered to or received from IMS Health and its affiliates are
classified as related party transactions for the period January 1, 2003 to
February 12, 2003, as well as for the three months ended March 31, 2002.
As of February 21, 2003, pursuant to the Company's Restated Certificate of
Incorporation, all 33,872,700 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. The conversion of Class B common
stock to Class A common stock has been reflected in the accompanying financial
statements, including all applicable references as to the number of outstanding
Class A and Class B common shares. Stockholders' equity accounts have been
restated to reflect a $113 reclassification of an amount equal to the par value
of the Class B shares to the Class A common stock account.
In connection with the Split-Off, during the quarter ended March 31, 2003,
Cognizant incurred direct and incremental costs of approximately $2.0 million,
resulting from external costs incurred on the Company's behalf related to the
Split-Off. Such costs included direct legal, accounting, printing and other
costs. In addition, costs incurred in the first quarter of 2003 include a
-5-
non-cash charge of approximately $0.5 million calculated in accordance with APB
25 related to the retention, acceleration and extended life of Cognizant common
stock options by two former Directors of Cognizant who resigned on the Split-Off
Date as a condition of the Split-Off. Such former Directors were, and are,
Officers of IMS Health.
Of the total of approximately $3.7 million of split-off costs incurred and
recorded, including approximately $1.7 million recorded in fiscal 2002,
substantially all have either been invoiced or paid as of March 31, 2003.
Cognizant did not receive any proceeds from the IMS Health exchange offer.
NOTE 3 - CAPITAL STOCK
As of February 21, 2003, pursuant to the Company's Restated Certificate of
Incorporation, all 33,872,700 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. The conversion of Class B common
stock to Class A common stock has been reflected in the accompanying financial
statements, including all applicable references as to the number of outstanding
Class A and Class B common shares. Stockholders' equity accounts have been
restated to reflect a $113 reclassification of an amount equal to the par value
of the Class B shares to the Class A common stock account.
In connection with the Split-Off, IMS Health, as the Company's majority
stockholder, approved amendments to Cognizant's certificate of incorporation
that became effective following consummation of the Split-Off. 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 Split-Off, Cognizant's Board of Directors also
approved amendments to Cognizant's by-laws, which became effective following
completion of the Split-Off. 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 meetings of
stockholders. Cognizant's Board of Directors also adopted a stockholders rights
plan providing certain rights to stockholders under certain circumstances.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend paid on April 1, 2003 to stockholders of
record on March 19, 2003. The stock split has been reflected in the accompanying
condensed financial statements, and all applicable references as to the number
of outstanding common shares and per share information have been reclassified.
Stockholders' equity accounts have been restated to reflect a $408
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 Class A common
stock account.
-6-
NOTE 4 - RELATED PARTY TRANSACTIONS
Since the Split-off Date, IMS Health continues to provide the Company with
certain administrative services, including payroll and payables processing,
under the provisions of an amended and restated Intercompany Services Agreement
entered into in connection with the Split-Off. In prior periods, IMS Health
permitted the Company to participate in certain of IMS Health's business
insurance plans and provided certain other services such as tax planning and
compliance, which have since been transitioned to the Company. All services were
performed and charged to the Company under the Intercompany Services Agreement
with IMS Health that was in effect prior to the Split-Off. Total costs in
connection with these services were approximately $28 and $139 from January 1,
2003 through February 12, 2003, and for the three-month period ended March 31,
2002, respectively.
The Company has a strategic relationship with The Trizetto Group Inc.
("Trizetto") 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 the
Split-Off Date, IMS Health owned approximately 26.4% of the outstanding common
stock of Trizetto. The Company recorded revenues from Trizetto of approximately
$831 from January 1, 2003 through the Split-Off Date, and $1,199 for the three
months ended March 31, 2002, and recorded expenses related to Trizetto
commissions of approximately $9 from January 1, 2003 through the Split-Off Date,
and $123 for the three months ended March 31, 2002.
NOTE 5 - COMPREHENSIVE INCOME
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments. Accumulated balances of Cumulative Translation
Adjustments, as of March 31, 2003 and March 31, 2002 are as follows:
Cumulative
Translation
Adjustment
----------
Balance, December 31, 2002........................................ $ (185)
Period Change..................................................... (10)
----------
Balance, March 31, 2003........................................... $ (195)
==========
Balance, December 31, 2001........................................ $ (158)
Period Change..................................................... ( 46)
----------
Balance, March 31, 2002........................................... $ (204)
==========
NOTE 6 - ACCOUNTING FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS
In the first quarter of 2003, the Company adopted the interim disclosures
required by Statement of Financial Accounting Standards No. 148 ("Accounting for
Stock-Based Compensation - Transition and Disclosure"). Such disclosures are
provided below.
At March 31, 2003, the Company had four stock-based employee compensation
plans. The Company accounts for these plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees and Related Interpretations." Except as noted below, 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 for the three months ended March
31, 2003 and 2002, if the Company had applied the fair value recognition
-7-
provisions of Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee compensation.
FOR THREE FOR THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
------------------ ------------------
Net income as reported................................ $ 10,178 $ 7,109
Add: Stock-based compensation, net of tax benefit,
included in net income............................... 488 --
Deduct: Total stock-based compensation expense
determined under the fair value method for all
awards, net of tax related benefits.................. (3,860) (2,583)
------------------ ------------------
Pro forma net income.................................. $ 6,806 $ 4,526
Earnings per share:
- -------------------
As reported - basic................................... $0.17 $0.12
Pro forma - basic..................................... $0.11 $0.08
As reported - diluted................................. $0.15 $0.12
Pro forma - diluted................................... $0.10 $0.07
NOTE 7 - INCOME TAXES
The Company'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 substantially exempt 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, the Company has provided deferred income taxes as of March 31, 2003
of approximately $24,917 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 no longer accrues taxes on the
repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are considered to be permanently reinvested outside of the United
States. As of March 31, 2003, the amount of unrepatriated earnings upon which no
provision for taxation has been recorded is approximately $39,467. If such
earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, the Company will accrue the applicable amount of taxes
associated with such earnings. 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.
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
-8-
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.
Effective April 1, 2003, the tax exemption in India for export earnings
will go back to 100% from 90% under the law as currently in effect. Under the
budget proposed by the Indian government, which would be effective April 1, 2003
but is not yet passed into law, the surtax will be reduced to 2.5% from 5% for
income that is subject to the tax. The corporate level tax on distributed Indian
earnings is proposed to be reinstated and the withholding tax on stockholders
repealed. If the budget passes, as proposed, management expects that the
Company's worldwide full year effective tax rate for 2003 will increase from the
rate in effect during the first quarter. Any tax law changes as a result of the
proposed Indian budget will be incorporated in the period they are enacted.
The provision for income taxes increased from approximately $2.3 million
during the three months ended March 31, 2002 to approximately $2.6 million
during the three months ended March 31, 2003. The effective tax rate of 24.5%
for the three months ended March 31, 2002 decreased to 20.1% for the three
months ended March 31, 2003 primarily due to the impact on the Company's
estimated income taxes of the expiration on March 31, 2003 of the government of
India's previous tax law change, which decreased the tax exemption for export
earnings from 100% to 90%. In addition, the decrease in the effective tax rate
reflects the government of India's tax law change effective on April 1, 2002,
which imposed a withholding tax in place of a corporate tax upon the payment of
dividends.
NOTE 8 - ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
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 were effective for disposal activities initiated after December 31,
2002. The adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
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
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. The Company currently accounts for such contracts using percentage of
completion accounting, in accordance with an interpretation of
-9-
paragraph 13 of SOP 81-1. The Company is currently evaluating the possible
prospective impact, commencing at the end of the quarter ending June 30, 2003,
of adopting EITF 00-21 on the Company's results of operations related to
contracts entered into after June 15, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133. The
changes are intended to improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. Additionally, those
changes are expected to result in more consistent reporting of contracts as
either derivatives or hybrid instruments. SFAS No. 149 is effective for the
Company beginning in the third quarter of fiscal 2003 for contracts entered into
or modified by it and for hedging relationships designated during such period.
The Company is currently evaluating the impact of SFAS No. 149 to determine the
effect, if any, it may have on the Company's consolidated results of operations,
financial position or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. SFAS No. 143 was effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143
effective January 1, 2003 did not have a material impact on the Company's
financial position, results of operations or cash flows for the three months
ended March 31, 2003.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
As of March 31, 2003, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $30,254, of which $24,270 has been spent to date.
The Company 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 Split-Off in addition to those provided in the amended and
restated 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
Split-Off documents, the conduct of the Split-Off and any failure to perform the
Distribution Agreement; and
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.
-10-
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 Split-Off. 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 Split-Off, 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 Split-Off. This indemnification liability could be
material to the Company's quarterly and annual operating results, financial
position and cash flows.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' businesses and provide benefits that are difficult to quantify.
Any failure in a customer's computer system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to contractually
limit its liability for damages arising from negligent acts, errors, mistakes,
or omissions in rendering its software development and maintenance services,
there can be no assurance that the limitations of liability set forth in its
contracts will be enforceable in all instances or will otherwise protect the
Company from liability for damages. Although the Company has general liability
insurance coverage, including coverage for errors or omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in sufficient amounts to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the Company that exceed
available insurance coverage or changes in the Company's insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on the Company's
business, results of operations and financial condition.
NOTE 10 - SEGMENT INFORMATION
The Company, operating globally, provides information technology consulting
services for medium and large businesses. North American operations consist
primarily of information technology consulting services in the United States and
Canada. European operations consist of information technology consulting
services principally in the United Kingdom and Ireland. Asian operations consist
of information technology consulting services principally in India. The Company
is managed on a geographic basis. Accordingly, regional sales managers, sales
managers, account managers, project teams and facilities are segmented
geographically and decisions by the Company's chief operating decision maker
regarding the allocation of assets and assessment of performance are based on
such geographic segmentation.
-11-
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 period ended March
31, 2003 and March 31, 2002 are as follows:
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2003 2002
---- ----
REVENUES (1)
North America (2)............................................. $ 65,702 $ 40,310
Europe........................................................ 8,246 5,564
Asia.......................................................... 568 610
----------- -----------
Consolidated.................................................. $ 74,516 $ 46,484
=========== ===========
OPERATING INCOME (1)
North America (2)............................................. $ 12,806 $ 7,931
Europe........................................................ 1,607 1,095
Asia.......................................................... 111 120
----------- -----------
Consolidated.................................................. $ 14,524 $ 9,146
=========== ===========
AS OF MARCH 31,
---------------
IDENTIFIABLE ASSETS 2003 2002
---- ----
North America (2)............................................. $ 143,196 $ 91,109
Europe........................................................ 10,132 5,542
Asia.......................................................... 88,364 57,670
----------- -----------
Consolidated.................................................. $ 241,692 $ 154,321
=========== ===========
(1) Revenues and resulting operating income in this schedule are attributed to
regions based upon customer location.
(2) Primarily relates to operations in the United States.
Related party sales were 10.4% for the three months ended March 31, 2002.
NOTE 11 - SUBSEQUENT EVENT - ACQUISITION
On April 1, 2003, the Company acquired Aces International Inc. ("Aces"), a
company specializing in Customer Relationship Management solutions with a strong
record base of serving clients in healthcare, financial services and
telecommunications verticals, for approximately $4,400 (including approximately
$200 of estimated direct deal costs). Aces, a U.S.-based company having small
offshore operations in India, will operate as a 100% subsidiary.
The Company intends to account for the acquisition as a business
combination under the provisions of SFAS 141, "Business Combinations" and has
commenced a preliminary assessment of the allocation of the purchase price to
the tangible and amortizable intangible assets and liabilities acquired. Based
upon that preliminary assessment, the Company expects that the amortization of
such intangible assets will not have a material effect on the Company's results
of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
Cognizant Technology Solutions Corporation ("Cognizant", "CTS" or the
"Company") is a leading provider of information technology ("IT") consulting
services related to 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 consulting 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 IT 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 (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"). 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.
On February 13, 2003, IMS Health distributed all of the Cognizant Class B
common stock that IMS Health owned (a total of 33,872,700 shares, on a
post-split basis) in connection with the Split-Off. IMS Health distributed 0.927
shares of Cognizant Class B common stock to its stockholders for every on 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.
Accordingly, as of February 13, 2003, IMS Health is no longer a related party.
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. Accordingly, as of February 21, 2003, there
are no shares of Class B common stock outstanding.
The conversion of Class B common stock to Class A common has been reflected
in the accompanying financial statements, including the restatement of all
applicable references as to the number of outstanding Class A and Class B common
shares on the accompanying Statements of Financial Position. Stockholders'
equity accounts have been restated to reflect a $113 reclassification of an
amount equal to the par value of the Class B shares to the Class A common stock
account.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend paid on April 1, 2003 to stockholders of
record on March 19, 2003. The stock split has been reflected in the accompanying
condensed financial statements, and all applicable references as to the number
of outstanding common shares and per share information have been restated.
Stockholders' equity accounts have been restated to reflect a $408
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 Class A common
stock account.
-13-
CHANGES TO CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
INCOME TAXES.
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.
Effective April 1, 2003, the tax exemption in India for export earnings
will go back to 100% from 90% under the law as currently in effect. Under the
budget proposed by the Indian government, which would be effective April 1, 2003
but is not yet passed into law, the surtax will be reduced to 2.5% from 5% for
income that is subject to the tax. The corporate level tax on distributed Indian
earnings is proposed to be reinstated and the withholding tax on stockholders
repealed. If the budget passes, as proposed, management expects that the
Company's worldwide full year effective tax rate for 2003 will increase from the
rate in effect during the first quarter. Any tax law changes as a result of the
proposed Indian budget will be incorporated in the period they are enacted.
FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, contract percentage completions, capital
expenditures, and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not
limited: (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 to (a) increase the number of its personnel, particularly
skilled technical, marketing and management personnel, (b) find suitable
acquisition candidates to support geographic expansion, and (c) 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
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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 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.
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
Total revenues...................................................... 100.0% 100.0%
Cost of revenues.................................................... 55.0 52.0
-------- ---------
Gross profit.................................................... 45.0 48.0
Selling, general and administrative
expense......................................................... 22.0 24.1
Depreciation and amortization expense............................... 3.5 4.1
-------- ---------
Income from operations.......................................... 19.5 19.7
Other income (expense):
Split-off costs................................................. (2.7) --
Interest income................................................. 0.6 0.9
Other (expense) income.......................................... (0.3) (0.3)
--------- ---------
Total other income.................................................. (2.4) 0.6
--------- ---------
Income before provision for income taxes............................ 17.1 20.3
Provision for income taxes.......................................... (3.4) (5.0)
--------- ---------
Net income.......................................................... 13.7% 15.3%
========= =========
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUE. Revenue increased by 60.3%, or approximately $28.0 million, from
approximately $46.5 million during the three months ended March 31, 2002 to
approximately $74.5 million during the three months ended March 31, 2003. This
increase resulted primarily from an increase in application management services.
On February 13, 2003, IMS Health ceased to be a related party and, accordingly,
the statement of operations only includes related party revenues of
approximately $2.6 million recognized from services provided to IMS Health from
January 1, 2003 through February 12, 2003. In the first quarter of 2003, no
third party customer accounted for sales in excess of 10% of revenues. In the
first quarter of 2002, sales to IMS Health accounted for 10.4% 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 69.3%, or
-15-
approximately $16.8 million, from approximately $24.2 million during the three
months ended March 31, 2002 to approximately $41.0 million during the three
months ended March 31, 2003. The increase was due primarily to costs resulting
from an increase in the number of the Company's technical professionals from
approximately 3,400 employees at March 31, 2002 to approximately 5,900 employees
at March 31, 2003. The increased number of the Company's technical professionals
is a direct result of greater demand for the Company's services. The Company's
gross profit increased by 50.5%, or approximately $11.3 million, from
approximately $22.3 million during the three months ended March 31, 2002 to
approximately $33.6 million during the three months ended March 31, 2003.
Gross profit margin decreased from 48.0% of revenues during the three
months ended March 31, 2002 to 45.0% of revenues during the three months ended
March 31, 2003. The decrease in gross profit margin was due primarily to a
significant increase, compared to the prior year period, in on-site employees,
who are paid a greater salary than their offshore counterparts, coupled with a
lower utilization of offshore technical professionals and the appreciation of
the Indian Rupee versus the U.S. dollar in the first quarter of 2003, as
compared to the first quarter of 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs as well as depreciation and amortization expense. Selling,
general and administrative expenses, including depreciation and amortization,
increased by 44.7%, or approximately $5.9 million, from approximately $13.1
million during the three months ended March 31, 2002 to approximately $19.0
million during the three months ended March 31, 2003, and decreased as a
percentage of revenue from 28.3% to 25.5%. The increase in such expenses in
absolute dollars was due primarily to expenses incurred to expand the Company's
sales and marketing activities and increased infrastructure expenses to support
the Company's revenue growth. The decrease in such expenses as a percentage of
revenue resulted from the Company's increased volume of revenue, which outpaced
the increase in selling general and administrative expenses.
INCOME FROM OPERATIONS. Income from operations increased 58.8%, or
approximately $5.4 million, from approximately $9.1 million during the three
months ended March 31, 2002 to approximately $14.5 million during the three
months ended March 31, 2003, representing operating margins of 19.7% and 19.5 %
of revenues, respectively. The decrease in operating margin was due primarily to
the decrease in the gross profit margin discussed above, offset primarily by the
Company's ability to leverage prior selling, general and administrative
investments.
OTHER INCOME/EXPENSE. Other income/expense consists primarily of Split-Off
costs, interest income and foreign currency exchange losses. Split-Off costs
relate to direct and incremental expenses (e.g., legal and accounting fees,
printing and registration costs) incurred directly by the Company on its behalf
in connection with the Split-Off. (See Note 2 to the Condensed Consolidated
Financial Statements). Interest income remained flat at $0.4 million each during
the three months ended March 31, 2003 and March 31, 2002. The Company recognized
a net foreign currency exchange loss of approximately $0.2 million during each
of the three month periods ended March 31, 2003 and March 31, 2002, as a result
of the effect of changing exchange rates on the Company's transactions.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
approximately $2.3 million during the three months ended March 31, 2002 to
approximately $2.6 million during the three months ended March 31, 2003. The
effective tax rate of 24.5% for the three months ended March 31, 2002 decreased
to 20.1% for the three months ended March 31, 2003 primarily due to the
expiration on March 31, 2003 of the government of India's previous tax law
change, which decreased the tax exemption for export earnings from 100% to 90%.
In addition, the decrease in the effective tax rate reflects the government of
India's tax law change subsequent to March 31, 2002, which imposed a withholding
tax to stockholders in place of a direct tax to a corporation upon payment of
dividends to stockholders.
-16-
NET INCOME. Net income increased from approximately $7.1 million for the
three months ended March 31, 2002 to approximately $10.2 million for the three
months ended March 31, 2003, representing 15.3% and 13.7% of revenues,
respectively. The significant decrease in net income as a percentage of revenues
compared to the prior period was primarily due to the one-time non-recurring
split-off costs referred to above.
RESULTS BY BUSINESS SEGMENT
The Company, operating globally, provides IT consulting services for
primarily for Fortune 1000 companies located in the United States and Europe.
North American operations consist primarily of providing IT consulting services
in the United States and Canada. European operations consist of providing IT
consulting services principally in the United Kingdom. Asian operations consist
of providing IT consulting services principally in India. The Company is managed
on a geographic basis. Accordingly, regional sales managers, sales managers,
account managers, project teams and facilities are segmented geographically and
decisions by the Company's chief operating decision maker regarding the
allocation of assets and assessment of performance are based on such geographic
segmentation. Revenues and resulting operating income are attributed to regions
based upon customer location, and exclude the effect of intercompany revenue for
services provided by CTS India to other Cognizant entities.
North American Segment
REVENUE. Revenue increased by 63.0%, or approximately $25.4 million, from
approximately $40.3 million during the first quarter of 2002 to approximately
$65.7 million during the first quarter of 2003. The increase in revenue was
attributable primarily to greater acceptance of the on-site/offshore consulting
services delivery model as a means of reducing a customer's internal IT costs,
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 61.5%, or
approximately $4.9 million, from approximately $7.9 million during the first
quarter of 2002 to approximately $12.8 million during the first quarter of 2003.
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 48.2%, or approximately $2.7 million, from
approximately $5.6 million during the first quarter of 2002 to approximately
$8.2 million during the first quarter of 2003. The increase in revenue was
attributable to the increased acceptance of the Company's services, particularly
in the United Kingdom.
INCOME FROM OPERATIONS. Income from operations increased 46.8%, or
approximately $0.5 million, from $1.1 million during the first quarter of 2002
as compared to $1.6 million during the first quarter of 2003. The increase in
operating income was attributable primarily to increased revenues and achieving
leverage on prior sales and marketing investments.
-17-
Asian Segment
REVENUE. Revenue of approximately $0.6 million in each period remained
relatively constant during the first quarter of 2003 as compared to the first
quarter of 2002.
INCOME FROM OPERATIONS. Income from operations of approximately $0.1
million in each period remained relatively constant during the first quarter of
2003 as compared to the first quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash and cash equivalents of
approximately $126.6 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; (iii)
possible acquisitions of related businesses; (iv) formation of joint ventures;
and (v) general corporate purposes, including working capital.
Net cash provided by operating activities was approximately $6.7 million
during the three months ended March 31, 2003 as compared to net cash provided by
operating activities of approximately $7.5 million during the three months ended
March 31, 2002. This decrease resulted primarily from increased trade accounts
receivable and higher incentive bonus pay-outs in the first quarter of 2003 as
compared to 2002. Trade accounts receivable, net of allowance, increased from
$35.1 million at December 31, 2002 to $40.6 million at March 31, 2003. The
increase in trade accounts receivable during 2003 was due primarily to increased
revenue. 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 March 31, 2003,
the Company's day's sales outstanding, including unbilled receivables, was
approximately 57 days compared to approximately 58 days at March 31, 2002.
The Company's investing activities used net cash of approximately $6.1
million for the three months ended March 31, 2003 as compared to net cash used
of approximately $1.9 million for the same period in 2002. The increase in 2003
as compared to 2002 primarily reflects the Company's investment in property and
equipment for newly constructed owned facilities in India.
The Company's financing activities used net cash of approximately $0.2
million for the three months ended March 31, 2003 as compared to net cash
provided by financing activities of approximately $0.7 million for the same
period in 2002. The decrease in net cash provided by financing activities was
primarily related to the payment of one-time non-recurring split-off costs in
the first quarter of 2003, offset in part by a higher level of cash proceeds
from the exercise of stock options and the purchase of employee stock purchase
plan shares in 2003, as compared to the prior year.
As of March 31, 2003, the Company had no third-party debt.
The Company had working capital of $145.0 million at March 31, 2003 and
$134.3 million at December 31, 2002. Accordingly, the Company does not
anticipate any near-term liquidity issues.
As of March 31, 2003, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $30.3 million, of which $24.3 million has been spent to date. The
multi-phase program encompasses the construction of two fully owned IT
facilities containing approximately 622,000 square feet of space in Pune,
Calcutta and Chennai. The facilities in Calcutta and Pune were completed in
2002. The facility in Chennai is expected to be
-18-
completed in 2003. Total costs related to this program are expected to be
approximately $35.6 million, which the Company expects to fund internally.
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.
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 March 31, 2003, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $30.3 million, of which $24.3 million has been spent to date. The
multi-phase program encompasses the construction of two fully-owned IT
facilities containing approximately 622,000 square feet of space in Pune,
Calcutta and Chennai. The facilities in Calcutta and Pune were completed in
2002. The facility in Chennai is expected to be completed in late 2003. Total
expenditures related to this program are expected to be approximately $35.6
million, which the Company expects to fund internally.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' businesses and provide benefits that are difficult to quantify.
Any failure in a customer's computer system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to contractually
limit its liability for damages arising from negligent acts, errors, mistakes,
or omissions in rendering its application 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
the Company from liability for damages. Although the Company has general
liability insurance coverage, including coverage for errors or omissions, there
can be no assurance that such coverage will continue to be available on
reasonable terms or will be available in sufficient amounts to cover one or more
large claims, or that the insurer will not disclaim coverage as to any future
claim. The successful assertion of one or more large claims against the Company
that exceed available insurance coverage or changes in the Company's insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company also entered into 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 Split-Off in addition to those provided in
-19-
the amended and restated 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
Split-Off documents, the conduct of the Split-Off and any failure to
perform the Distribution Agreement; and
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.
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 Split-Off. 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 Split-Off 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 Split-Off. This indemnification liability could be material to the Company's
quarterly and annual operating results, financial position and cash flows.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate component of
stockholders' equity. For the Company's Indian subsidiary, the functional
currency is the U.S. dollar since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between the
Indian subsidiary and its U.S. affiliates. Non-monetary assets and liabilities
are translated at historical exchange rates, while monetary assets and
liabilities are translated at current exchange rates. A portion of the Company's
costs in India are denominated in local currency and subject to exchange
fluctuations, which has not had any material adverse effect on the Company's
results of operations.
EFFECTS OF INFLATION
The Company's most significant costs are the salaries and related benefits
for its programming staff and other professionals. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. There can be no assurance that the Company will be
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
-20-
RECENT ACCOUNTING PRONOUNCEMENTS
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 will not have a material impact on the
Company's financial position or results of operations.
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
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. The Company currently accounts for such contracts using percentage of
completion accounting, in accordance with an interpretation of paragraph 13 of
SOP 81-1. 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.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS")No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133. The changes are
intended to improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. Additionally, those
changes are expected to result in more consistent reporting of contracts as
either derivatives or hybrid instruments. SFAS No. 149 is effective for the
Company beginning in the third quarter of fiscal 2003 for contracts entered into
or modified by it and for hedging relationships designated during such period.
The Company is currently evaluating the impact of SFAS No. 149 to determine the
effect, if any, it may have on the Company's consolidated results of operations,
financial position or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the
-21-
retirement of a tangible long-lived asset. SFAS No. 143 was effective for fiscal
years beginning after June 15, 2002. The adoption of SFAS No. 143, effective
January 1, 2003, did not have a material impact on the Company's, financial
position, results of operations or cash flows for the three months ended March
31, 2003.
ITEM 3. 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 4. 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 Quarterly Report on Form 10-Q, 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
Securities and Exchange Commission'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.
-22-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 13, 2003, IMS Health distributed all of the Cognizant Class B
common stock owned (a total of 33,872,700 shares, on a post-split basis) in
connection with the Split-Off. IMS Health distributed 0.927 shares of Cognizant
Class B common stock to its stockholders for every one share of IMS Health's
common stock tendered.
According to Cognizant's Restated Certificate of Incorporation, if at any
time the outstanding shares of Cognizant Class B common stock cease 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 Cognizant Class A
common stock.
As of February 21, 2003, pursuant to Cognizant'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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 7, 2003, the Company's Restated Certificate of Incorporation was
approved by the Board of Directors and by the written consent, in lieu of a
special meeting, of IMS Health, the then 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. Notice of the proposed
corporate action was provided to all stockholders of the Company in a Definitive
Information Statement on Schedule 14C dated January 17, 2003. The Company's
Restated Certificate of Incorporation became effective on February 13, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
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.)
3.2 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.)
-23-
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 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.)
99.1 Statement Pursuant to 18 U.S.C. ss.1350.
(b) Reports on Form 8-K.
On January 6, 2003, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission 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.
On February 13, 2003, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission disclosing that
its Restated Certificate of Incorporation was approved by the
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.
On February 13, 2003, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission disclosing that
it issued a press release announcing its financial results for
the fourth quarter and year ended December 31, 2002.
On February 21, 2003, the Company filed a Current Report on Form
8-K with the Securities and Exchange Commission disclosing that,
pursuant to its Restated Certificate of Incorporation, all its
shares of Class B common stock automatically converted into
shares of Class A common stock.
On March 5, 2003, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission disclosing that its
Board of Directors approved a three-for-one stock split in the
form of a 200% stock dividend.
On March 6, 2003, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission disclosing that its
Board of Directors approved a stockholder rights plan.
Subsequent to the end of the quarter, on April 21, 2003, the
Company furnished a Current Report on Form 8-K to the Securities
and Exchange Commission under Item 9, containing a copy of its
earnings release for the period ended March 31, 2003 (including
financial statements) pursuant to Item 12 (Results of Operations
and Financial Condition).
Subsequent to the end of the quarter, on April 25, 2003, the
Company filed a Current Report on Form 8-K with the Securities
and Exchange Commission relating to the restatement of certain
financial and statistical data included in the Company's Annual
Report on Form 10-K as a result of the Company's three-for-one
stock split.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cognizant Technology Solutions Corporation
DATE: May 14, 2003 By: /s/ Wijeyaraj Mahadeva
--------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: May 14, 2003 By: /s/ Gordon Coburn
--------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-25-
CERTIFICATION
-------------
I, Wijeyaraj Mahadeva, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cognizant
Technology Solutions Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 officer 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 function):
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
6. The registrant's other certifying officer and I have indicated in this
quarterly 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.
/s/ Wijeyaraj Mahadeva
----------------------
Dated: May 14, 2003 Wijeyaraj Mahadeva
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
-26-
CERTIFICATION
I, Gordon Coburn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cognizant
Technology Solutions Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 officer 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 function):
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
6. The registrant's other certifying officer and I have indicated in this
quarterly 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.
/s/ Gordon Coburn
-----------------
Dated: May 14, 2003 Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
-27-
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-Q of Cognizant Technology Solutions
Corporation (the "Company") for the period ended March 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Wijeyaraj Mahadeva, Chairman of the Board and Chief Executive
Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350,
that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Wijeyaraj Mahadeva*
-----------------------
Dated: May 14, 2003 Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
* A signed original of this written statement required by Section 906 has
been provided to Cognizant Technology Solutions Corporation and will be retained
by Cognizant Technology Solutions Corporation and furnished to the Securities
and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-Q of Cognizant Technology Solutions
Corporation (the "Company") for the period ended March 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Gordon Coburn, Chief Financial Officer and Treasurer of the
Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Gordon Coburn*
------------------
Dated: May 14, 2003 Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
* A signed original of this written statement required by Section 906 has
been provided to Cognizant Technology Solutions Corporation and will be retained
by Cognizant Technology Solutions Corporation and furnished to the Securities
and Exchange Commission or its staff upon request.