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 June 30, 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
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(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 August 1, 2003:
Class Number of Shares
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Class A Common Stock, par value $.01 per share 62,910,884
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 three months ended June 30, 2003 and
2002 and six months ended June 30, 2003 and 2002............... 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of June 30, 2003 and December 31, 2002.......... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 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...................................... 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 27
Item 4. Controls and Procedures........................................ 27
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 28
Item 6. Exhibits and Reports on Form 8-K............................... 30
SIGNATURES.............................................................. 31
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-1-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
----------------- ------------------- ----------------- ----------
Revenues............................................... $ 87,446 $ 49,146 $ 159,387 $ 90,796
Revenues - related party............................... -- 5,212 2,575 10,046
--------- ---------- --------- ---------
Total revenues................................ 87,446 54,358 161,962 100,842
Cost of revenues....................................... 47,199 29,348 88,158 53,537
--------- ---------- --------- ---------
Gross profit........................................... 40,247 25,010 73,804 47,305
Selling, general and administrative expenses........... 20,352 12,561 36,763 23,783
Depreciation and amortization expense.................. 2,767 1,747 5,389 3,674
--------- ---------- --------- ---------
Income from operations................................. 17,128 10,702 31,652 19,848
Other income (expense):
Split-off costs (See Note 2) -- -- (2,010) --
Interest income..................................... 320 405 741 834
Other income (expense) - net........................ 98 46 ( 99) (113)
--------- ----------- --------- ---------
Total other income (expense) ................. 418 451 (1,368) 721
--------- ---------- --------- ---------
Income before provision for income taxes............... 17,546 11,153 30,284 20,569
Provision for income taxes............................. (4,044) (2,506) (6,604) (4,813)
--------- ---------- --------- ---------
Net income............................................. $ 13,502 $ 8,647 $ 23,680 $ 15,756
========= ========== ========= =========
Basic earnings per share (1)........................... $ 0.22 $ 0.15 $ 0.38 $ 0.27
========= ========== ========= =========
Diluted earnings per share (1)......................... $ 0.20 $ 0.14 $ 0.36 $ 0.25
========= ========== ========= =========
Weighted average number of common shares
outstanding - Basic (1)............................. 61,885 58,738 61,601 58,738
========= ========== ========= =========
Dilutive effect of shares issuable as of
period-end under stock option plans(1).............. 4,354 4,427 4,514 4,017
========= ========== ========= =========
Weighted average number of common shares
outstanding - Diluted(1)............................ 66,239 63,165 66,115 62,755
========= ========== ========= =========
Comprehensive income:
Net income............................................. $ 13,502 $ 8,647 $ 23,680 $ 15,756
Foreign currency translation adjustments............... 140 142 130 96
--------- ---------- --------- ---------
Comprehensive income................................... $ 13,642 $ 8,789 $ 23,810 $ 15,852
========= ========== ========= =========
(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.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
JUNE 30, DECEMBER 31,
2003 2002
---------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 137,739 $ 126,211
Trade accounts receivable, net of allowance of $963 and
$861, respectively....................................................... 42,908 35,092
Trade accounts receivable-related party.................................... -- 1,605
Unbilled accounts receivable............................................... 9,326 4,159
Unbilled accounts receivable-related party................................. -- 149
Current tax asset.......................................................... 5,916 3,711
Other current assets....................................................... 7,970 4,907
----------- -----------
Total current assets................................................... 203,859 175,834
----------- -----------
Property and equipment, net of accumulated depreciation of $28,411
and $24,559 respectively................................................... 47,765 39,090
Goodwill, net................................................................... 4,477 878
Other intangible assets, net.................................................... 12,293 12,870
Other assets.................................................................... 3,018 2,801
----------- -----------
Total assets........................................................... $ 271,412 $ 231,473
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 6,839 $ 6,948
Accrued and other current liabilities...................................... 34,752 34,539
----------- -----------
Total current liabilities.............................................. 41,591 41,487
Deferred income taxes........................................................... 26,424 24,505
----------- -----------
Total liabilities...................................................... 68,015 65,992
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Commitments and Contingencies (See Note 10)
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,
62,351 shares and 61,260 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively (1)..................... 623 612
Class B common stock, $.01 par value, 25,000 shares authorized,
none outstanding (1)....................................................... -- --
Additional paid-in-capital (1) ................................................. 85,541 71,446
Retained earnings............................................................... 117,288 93,608
Cumulative translation adjustment............................................... (55) (185)
----------- -----------
Total stockholders' equity............................................. 203,397 165,481
----------- -----------
Total liabilities and stockholders' equity............................. $ 271,412 $ 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.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30,
--------
2003 2002
---- ----
Cash flows from operating activities:
Net income........................................................................ $ 23,680 $ 15,756
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................ 5,389 3,674
Split-off costs (See Note 2) ............................................ 2,010 --
Provision for doubtful accounts.......................................... 3 368
Deferred income taxes.................................................... 1,919 1,098
Tax benefit related to option exercises.................................. 5,226 2,470
Changes in assets and liabilities:
Trade accounts receivable................................................ (5,313) (8,416)
Other current assets..................................................... (9,725) (5,695)
Other assets............................................................. 482 711
Accounts payable......................................................... (726) 955
Accrued and other liabilities............................................ 53 9,455
------------ ----------
Net cash provided by operating activities......................................... 22,998 20,376
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment............................................... (13,700) (4,841)
Acquisition, net of cash acquired................................................. (3,816) (2,744)
------------ ----------
Net cash used in investing activities............................................. (17,516) (7,585)
------------ ----------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital................................... 8,879 5,979
Split-off costs................................................................... (2,963) --
------------ ----------
Net cash provided by financing activities......................................... 5,916 5,979
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Effect of currency translation.................................................... 130 96
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Increase in cash and cash equivalents ............................................ 11,528 18,866
Cash and cash equivalents, beginning of year...................................... 126,211 84,977
------------ ----------
Cash and cash equivalents, end of period.......................................... $ 137,739 $ 103,843
============ ==========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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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, as amended
on the Company's Current Report on Form 8-K filed on April 25, 2003, and the
Company's condensed consolidated financial statements (and notes thereto)
included in the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 2003. 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 during the
period January 1, 2003 to the Split-Off Date are classified as related party
transactions. Services rendered to or received from IMS Health subsequent to the
Split-Off Date are classified as third party transactions.
In connection with the Split-Off, Cognizant was obligated to pay the costs
associated with the Split-Off (the "Split-Off Costs") in connection with the
exchange offer under the provisions of an Intercompany Agreement, dated as of
May 15, 1998. The Intercompany Agreement provided that Cognizant would pay its
own costs, without reimbursement, and the costs of IMS Health (other than
underwriting discounts, commissions and certain other specified costs) necessary
to facilitate a sale or spin-off of IMS Health's ownership interest in the
Company.
During the six months ended June 30, 2003, Cognizant incurred direct and
incremental costs of approximately $2,000, resulting from external costs
contractually incurred related to the Split-Off. Such costs included direct
legal, accounting, printing and other costs, including a non-cash charge
calculated in accordance with APB 25 of approximately $488 related to the
retention, acceleration and extended life of Cognizant common stock options by
two former Directors of Cognizant who resigned
-5-
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 $3,700 of Split-Off Costs incurred and
recorded, including approximately $1,700 recorded in fiscal 2002, all costs have
either been invoiced or paid as of June 30, 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 (on a post-split basis) 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
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
Class A common shares from the additional paid-in-capital account to the Class A
common stock account.
NOTE 4 - RELATED PARTY TRANSACTIONS
Revenues from IMS Health prior to the Split-Off Date have been classified
as related party revenues. As a result of the Split-Off, IMS Health is no longer
a related party to the Company as of the Split-Off Date. Accordingly, revenues
from IMS Health subsequent to the Split-Off Date are classified as third party
revenues. Related party revenues from IMS Health were $0 and approximately
$5,212 for the three months ended June 30, 2003 and June 30, 2002, respectively.
Total revenues from IMS Health for the six months ended June 30, 2003, including
related party revenues during the
-6-
period January 1 through February 13, 2003, were approximately $10,536 as
compared to total revenues from IMS Health of approximately $10,046 for the six
months ended June 30, 2002, during which IMS Health was classified as a related
party.
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. Related party costs
in connection with these services were approximately $0 and $139 for the three
months ended June 30, 2003 and June 30, 2002, respectively. Total costs,
including related party costs in the period January 1 through the Split-Off
Date, in connection with these services were $57 and $278 for the six-month
period ended June 30, 2003 and June 30, 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. The Company recorded
expenses related to Trizetto commissions of approximately $9 from January 1,
2003 through the Split-Off Date.
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 June 30, 2003 and June 30, 2002 are as follows:
Cumulative
Translation
Adjustment
-----------
Balance, December 31, 2002................................... $ (185)
Period Change................................................ 130
---------
Balance, June 30, 2003....................................... $ (55)
=========
Balance, December 31, 2001................................... $ (158)
Period Change................................................ 96
---------
Balance, June 30, 2002....................................... $ (62)
=========
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 June 30, 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 for approximately $488 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
included in Split-Off Costs, no stock-based employee compensation cost is
reflected in net income, as all options
-7-
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 and six months
ended June 30, 2003 and 2002, if the Company had applied the fair value
recognition provisions of the Financial Accounting Standards Board (the "FASB")
Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based
employee compensation.
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
-------------------------------------------------------------------------
Net income as reported............. $ 13,502 $ 8,647 $ 23,680 $ 15,756
Add: Stock-based
compensation, net of tax
benefit, included in net income.. 0 0 488 0
Deduct: Total stock-based
compensation expense
determined under the fair
value method for all awards,
net of tax related benefits...... (3,791) (2,770) (7,651) (5,359)
-------------------------------------------------------------------------
Pro forma net income............... $ 9,711 $ 5,877 $ 16,517 $ 10,397
Earnings per share:
- ------------------
As reported - basic................ $0.22 $0.15 $0.38 $0.27
Pro forma - basic.................. $0.16 $0.10 $0.27 $0.18
As reported - diluted.............. $0.20 $0.14 $0.36 $0.25
Pro forma - diluted................ $0.15 $0.09 $0.25 $0.17
NOTE 7 - INCOME TAXES
The Company's Indian subsidiary, Cognizant Technology Solutions India Pvt.
Limited ("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
2009. During the year ended December 31, 2002, the effect of the income tax
holiday was to reduce the overall income tax provision and increase net income
by approximately $7,683 and increase diluted earnings per share by $0.12. There
was no impact on the Company's overall income tax provision, net income or
diluted earnings per share in 2001 because, prior to 2002, the Company was
providing deferred income taxes on such untaxed Indian earnings due its intent
to repatriate all accumulated earnings from India to the United States.
Accordingly, the Company has provided deferred income taxes as of June 30, 2003
of approximately $27,359 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 June 30, 2003, the amount of unrepatriated earnings upon which no
provision for taxation has been recorded is approximately $51,231. If such
earnings are repatriated in
-8-
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 Indian 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
reverted back to 100% from 90% under the law in effect for the tax year ended
March 31, 2003. In addition, effective April 1, 2003, the surtax was reduced to
2.5% from 5.0% for income that is subject to the tax. The corporate level tax on
distributed Indian earnings has been reinstated and the withholding tax on
stockholders repealed. The effective tax rate of 23.0% for the three months
ended June 30, 2003 and 21.8% for the six months ended June 30, 2003 reflects
these statutory tax law changes, which were enacted in the second quarter of
2003. The provision for income taxes increased from approximately $2.5 million
during the three months ended June 30, 2002 to approximately $4.0 million during
the three months ended June 30, 2003. The effective tax rates for the three and
six months ended June 30, 2003 were 23.0% and 21.8%, respectively, as compared
to 22.5% and 23.4%, respectively, for the three and six months ended June 30,
2002. The increase in the effective tax rate for the three months ended June 30,
2003 was primarily due tax law changes in India, which were enacted into law
during the second quarter of 2003. The tax law changes reduced the Company's
ability to claim credit in the U.S. upon repatriation of its pre-2002 Indian
earnings. The principal difference between the effective tax rates during the
2002 and 2003 periods and the Company's U.S. federal statutory rate is the
effect of the tax holiday in India.
NOTE 8 - ACQUISITION
On April 1, 2003, the Company acquired Aces International, Inc. ("Aces"), a
company specializing in Customer Relationship Management solutions, serving
clients in healthcare, financial services and telecommunications verticals, for
approximately $4,700 (including approximately $500 of estimated direct deal
costs). Aces, a U.S.-based company having small offshore operations in India,
will operate as a 100% consolidated subsidiary.
The Company has accounted for the acquisition as a business combination
under the provisions of Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations". In accordance with the provisions of SFAS No. 142
the Company has made a preliminary allocation of purchase price, based upon an
independent appraisal, which is subject to adjustment when additional
information concerning asset and liability valuations is finalized. Based upon
that preliminary assessment, the Company has allocated the purchase price to the
tangible and amortizable intangible, goodwill assets and liabilities acquired.
Approximately $120 has been allocated to amortizable intangible assets that
relate to customer backlog, which has been determined to have a useful life of
18 months and approximately $4,580 has been allocated to goodwill, which
includes, in accordance with SFAS No. 142, the value that has been allocated to
an assembled workforce. Amortization of $16 related to the acquisition of the
backlog has been included in the accompanying Condensed Consolidated Statements
of Operations for the three and six months ended June 30, 2003. The estimated
amortization expense for such intangible asset for each of the succeeding fiscal
years is$49, $66 and $5for 2003, 2004 and 2005, respectively.
-9-
NOTE 9- STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
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 and six
months ended June 30, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" was issued. SFAS No. 146 addresses the accounting for costs
to terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. A liability for contract termination
costs should be recognized and measured at fair value either when the contract
is terminated or when the entity ceases to use the right conveyed by the
contract. A liability for one-time termination benefits should be recognized and
measured at fair value at the communication date if the employee would not be
retained beyond a minimum retention period (i.e., either a legal notification
period or 60 days, if no legal requirement exists). For employees 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 FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also requires that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted the
recognition and measurement provisions of FIN 45 beginning in the first quarter
of fiscal 2003. The adoption of FIN 45 did not have and is not expected to have
a material adverse impact on our financial position, results of operations or
cash flows.
On July 1, 2003, the Company adopted Emerging Issues Task Force ("EITF")
consensus EITF 00-21 "Revenue Arrangements with Multiple Deliverables". This
consensus requires the Company to evaluate, at the inception of each new
contract, all deliverables in an arrangement to determine whether they represent
separate units of accounting. For arrangements with multiple units of
accounting, primarily fixed-bid contracts that provide both application
maintenance and application development service and certain application
maintenance contracts, arrangement consideration will be allocated among the
separate units of accounting, where separable, based on their relative fair
values and recognized separately based on the Company's revenue recognition
policy. 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 has evaluated the impact of the adoption of EITF
00-21 on the types of contracts that it has traditionally entered into and has
concluded that the adoption of EITF 00-21 for these types of contracts entered
into subsequent to July 1, 2003 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows. (See Note
12.)
-10-
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of FIN 46 and the consolidation requirements for
variable interest entities created or acquired subsequent to January 31, 2003
became effective for financial statements issued by the Company beginning in the
first quarter of fiscal 2003. For variable interest entities created or acquired
prior to February 1, 2003, the consolidation requirements of FIN 46 become
effective for the Company in the third quarter of fiscal 2003. The Company
currently has no significant contractual relationship or other business
relationship with a variable interest entity and therefore the adoption of FIN
46 did not have a material effect on the Company's consolidated results of
operations, financial position or cash flows.
In April 2003, the FASB issued 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, "Accounting for Derivative Instruments
and Hedging Activities." 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. This
Statement is effective for contracts entered into or modified after June 30,
2003. 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. The adoption of SFAS No. 149 is
not expected to have a material effect on the Company's consolidated results of
operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
changes are intended to result in a more complete representation of an entity's
liabilities and equity and will, thereby, assist investors and creditors in
assessing the amount, timing, and likelihood of potential future cash outflows
and equity share issuances. This Statement also requires that certain
obligations that could be settled by the issuance of equity, but lack other
characteristics of equity, be reported as liabilities even though the obligation
does not meet the definition of a liability. The requirements of SFAS No. 150
became effective for the Company for financial instruments entered into or
modified after May 31, 2003, or otherwise at the beginning of the fourth quarter
of fiscal 2003. The Company did not enter into or modify any financial
instruments having characteristics of both liabilities and equity during June
2003. The Company has evaluated the impact of SFAS No. 150 to determine the
effect it may have on its consolidated results of operations, financial position
or cash flows and has concluded that the adoption of this statement is not
expected to have a material impact on the Company's financial position or
results of operations.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
As of June 30, 2003, the Company has entered into fixed capital commitments
related to its India development center expansion program of $30,315, of which
$25,770 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
-11-
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 AC Nielsen 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.
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 softwaredevelopment 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.
-12-
NOTE 11 - 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.
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 three and six months
ended June 30, 2003 and June 30, 2002 are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES (1)
North America(2)...................... $77,621 $47,223 $143,323 $ 87,533
Europe................................ 9,125 6,801 17,371 12,365
Asia.................................. 700 334 1,268 944
--- --- ----- ---
Consolidated.......................... $87,446 $54,358 $161,962 $100,842
======= ======= ======== ========
OPERATING INCOME (1)
North America(2)...................... $15,204 $ 9,298 $ 28,010 $ 17,229
Europe................................ 1,787 1,338 3,395 2,433
Asia.................................. 137 66 248 186
--- -- --- ---
Consolidated.......................... $17,128 $10,702 $ 31,652 $ 19,848
======= ======= ======== ========
REVENUES BY SERVICE
Application Development and
Integration Services.................. $35,243 $23,263 $ 63,427 $ 43,989
Application Maintenance Services..... 52,203 31,095 98,535 56,853
------- ------- -------- --------
$87,446 $54,358 $161,962 $100,842
======= ======= ======== ========
AS OF JUNE 30,
--------------
IDENTIFIABLE ASSETS 2003 2002
---- ----
North America(2)..................... $117,856 $103,023
Europe............................... 11,557 10,859
Asia................................. 141,999 66,910
-------- --------
Consolidated......................... $271,412 $180,792
======== ========
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
(2) Primarily relates to operations in the United States.
Related party revenues were 9.6% and 10.0% for the three and six months
ended June 30, 2002. Related party revenue for the three and six months ended
June 30, 2003 were not material in the period January 1, 2003 through February
13, 2003, during which IMS was a related party (See Note 4).
-13-
NOTE 12- REVENUE RECOGNITION
The Company's services are entered into on either a time-and-materials
basis or fixed-price basis. Revenues related to time-and-materials contracts are
recognized as the service is performed. Revenues related to fixed-price
contracts that provide for highly complex information technology application
development services are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the total value of
revenue during the term of an agreement is recognized on the basis of the
percentage that each contract's cost to date bears to the total estimated cost.
Revenues related to fixed-priced contracts that provide for application
maintenance services or a combination of application maintenance and application
development services that are not separable are recognized on a straight-line
basis or as services are rendered or transactions processed in accordance with
contractual terms.
Information technology consulting services provided through time and
materials contracts, as well as applications maintenance services contracts
only, are recognized as revenue in accordance with SAB 101. Accordingly, revenue
is recognized when: 1) persuasive evidence of an arrangement exists; 2) there is
a fixed and determinable price for the services rendered; 3) delivery has
occurred; and 4) collectibility is assured. Expenses are recorded as incurred
over the contract period.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, and 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 an exchange offer to IMS stockholders (the "Split-Off")
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. 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 stock 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 $113,000
reclassification of an amount equal to the par value of the Class B shares to
the Class A common stock account.
Revenues from IMS Health prior to February 13, 2003 (the date of the
Split-Off) have been classified as related party revenues. As of that date, IMS
Health is no longer a related party to the Company. Accordingly, revenues from
IMS Health subsequent to February 13, 2003 are classified as third party
revenues. Aggregate revenues from IMS Health for the six months ended June 30,
2003, including related party revenues in the period January 1 through February
13, 2003, were approximately $10.5 million compared to approximately $10.0
million for the six months ended June 30, 2002, during which IMS Health was
classified as a related party.
-15-
The Company does not anticipate a material change in total revenues
received from IMS Health in the year ended December 31, 2003, including revenues
from IMS Health when it was a related party, as compared to total revenues from
IMS Health in the year ended December 31, 2002. There can be no assurance,
however, that the expected revenues from IMS Health in 2003 or beyond will
actually approximate the level of revenue received from IMS Health during fiscal
2002.
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
Class A common shares from the additional paid-in-capital account to the Class A
common stock account.
CHANGES TO CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
INCOME TAXES.
Effective April 1, 2003, 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 increased from 90% to 100%, the
surtax was reduced decreasing the Indian effective tax rate from 36.75% to
35.875% for income that is subject to tax and the corporate level tax on the
payment of dividends was reinstated with the withholding tax on dividends
repealed.
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
-16-
changes in information technology, evolving industry standards and changing
customer objectives and preferences; (viii) Cognizant's reliance on the
continued services of its key executive officers and leading technical
personnel; (ix) Cognizant's ability to attract and retain a sufficient number of
highly skilled employees in the future; (x) Cognizant's ability to protect its
intellectual property rights; (xi) the concentration of Cognizant's operations
in India and the related geo-political risks of local and cross-border
conflicts; (xii) terrorist activity, the threat of terrorist activity, and
responses to and results of terrorist activity and threats, including, but not
limited to, effects, domestically and/or internationally, on Cognizant, its
personnel and facilities, its customers and suppliers, financial markets and
general economic conditions; (xiii) the effects, domestically and/or
internationally, on Cognizant, its personnel and facilities, its customers and
suppliers, financial markets and general economic conditions arising from
hostilities involving the United States in Iraq or elsewhere; (xiv) a 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Total revenues.................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 54.0 54.0 54.4 53.1
-------- -------- -------- --------
Gross profit.................................. 46.0 46.0 45.6 46.9
Selling, general and administrative
expense....................................... 23.3 23.1 22.7 23.6
Depreciation and amortization expense............. 3.2 3.2 3.3 3.6
-------- -------- -------- --------
Income from operations........................ 19.6 19.7 19.5 19.7
Other income (expense):
Interest income............................... 0.4 0.7 0.5 0.8
Other income (expense)........................ 0.1 0.1 (0.1) (0.1)
Split off costs (1) .......................... 0.0 0.0 (1.2) --
-------- -------- -------- --------
Total other income (expense) ..................... 0.5 0.8 (0.8) 0.7
-------- -------- -------- --------
Income before provision for income taxes.......... 20.1 20.5 18.7 20.4
Provision for income taxes........................ (4.6) (4.6) (4.1) (4.8)
-------- -------- -------- --------
Net income ....................................... 15.4% 15.9% 14.6% 15.6%
======== ======== ======== ========
(1) The Company was obligated to pay the costs associated with the Split-Off
(the "Split-Off Costs") in connection with the exchange offer under the
provisions of an Intercompany Agreement, dated as of May 15, 1998. The
Intercompany Agreement provided that Cognizant would pay its own costs, without
reimbursement, and the costs of IMS Health (other than underwriting discounts,
commissions and certain other specified costs) necessary to facilitate a sale or
spin-off of IMS Health's ownership interest in the Company. (See Note 2 of the
Notes to Condensed Financial Statements).
-17-
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUE. Revenue increased by 60.9%, or approximately $33.0 million, from
approximately $54.4 million during the three months ended June 30, 2002 to
approximately $87.4 million during the three months ended June 30, 2003. This
increase resulted primarily from an increase in both application management and
application development services, and revenue generated from the acquisition of
Aces International Inc. ("Aces") (See Note 8 of the Notes to Condensed Financial
Statements). During the three months ended June 30, 2003, one third-party
customer accounted for sales of approximately 10% of revenues. During the three
months ended June 30, 2002, sales to IMS Health accounted for approximately 10%
of revenues.
GROSS PROFIT. The Company's cost of revenues consists primarily of the cost
of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. The Company's
cost of revenues increased by 60.8%, or approximately $17.9 million, from
approximately $29.3 million during the three months ended June 30, 2002 to
approximately $47.2 million during the three months ended June 30, 2003. The
increase was due primarily to costs resulting from an increase in the number of
the Company's technical professionals from approximately 3,800 employees at June
30, 2002 to approximately 6,000 employees at June 30, 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 60.9%, or
approximately $15.2 million, from approximately $25.0 million during the three
months ended June 30, 2002 to approximately $40.2 million during the three
months ended June 30, 2003. Gross profit margin remained constant at 46.0% for
the three months ended June 30, 2002 and 2003.
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 61.6%, or approximately $8.8 million, from approximately $14.3
million during the three months ended June 30, 2002 to approximately $23.1
million during the three months ended June 30, 2003, and increased as a
percentage of revenue from 26.3% to 26.4%. 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.
INCOME FROM OPERATIONS. Income from operations increased 60.0%, or
approximately $6.4 million, from approximately $10.7 million during the three
months ended June 30, 2002 to approximately $17.1 million during the three
months ended June 30, 2003, representing operating margins of 19.7% and 19.6 %
of revenues, respectively. The decrease in operating margin was due primarily to
the increase in selling, general and administrative expenses.
OTHER INCOME/(EXPENSE). Other income/(expense) consists primarily of
interest income and foreign currency exchange gains/losses. Interest income
decreased from approximately $0.4 million during the three months ended June 30,
2002 to approximately $0.3 million during the three months ended June 30, 2003
primarily due to reductions in global interest rates.
The Company recognized net foreign currency exchange gains of approximately
$46,000 and $98,000 during the three month periods ended June 30, 2002 and June
30, 2003, respectively, 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 $2.5 million during the three months ended June 30, 2002 to
approximately $4.0 million during the three months ended June 30, 2003. The
effective tax rate of 22.5% for the three months ended June 30, 2002 increased
marginally to 23.0% for the three months ended June 30, 2003 primarily due to
the
-18-
enactment in the quarter effective April 1, 2003 of changes in the India tax
laws in which the corporate level tax on the payment of dividends was reinstated
and the withholding tax on dividends was repealed partially offset by an
increase in the Indian tax holiday from 90% to 100%.
NET INCOME. Net income increased from approximately $8.6 million for the
three months ended June 30, 2002 to approximately $13.5 million for the three
months ended June 30, 2003, representing 15.9% and 15.4% of revenues,
respectively. The decrease in net income as a percentage of revenues compared to
the prior year period was primarily due to higher selling, general and
administrative costs and a higher effective tax rate.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
REVENUE. Revenue increased by 60.6%, or approximately $61.1 million, from
approximately $100.8 million during the six months ended June 30, 2002 to
approximately $162.0 million during the six months ended June 30, 2003. This
increase resulted primarily from an increase in both application management and
development services, and revenue generated from the acquisition of Aces. During
the six months ended June 30, 2003, one third-party customer accounted for sales
of approximately 10.0% of revenues. During the six months ended June 30, 2002,
sales to IMS Health accounted for approximately 10.0% of revenues.
GROSS PROFIT. The Company's cost of revenues increased by 64.7%, or
approximately $34.6 million, from approximately $53.5 million during the six
months ended June 30, 2002 to approximately $88.2 million during the six months
ended June 30, 2003. The increase was due primarily to costs resulting from an
increase in the number of the Company's technical professionals from
approximately 3,800 employees at June 30, 2002 to approximately 6,000 employees
at June 30, 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 56.0%, or approximately $26.5 million, from
approximately $47.3 million during the six months ended June 30, 2002 to
approximately $73.8 million during the six months ended June 30, 2003.
As a result, gross profit margin decreased from 46.9% for the six months
ended June 30, 2002 to 45.6% for the six months ended June 30, 2003. The
decrease in gross profit margin was due primarily to an 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased by
53.5%, or approximately $14.7 million, from approximately $27.5 million during
the six months ended June 30, 2002 to approximately $42.2 million during the six
months ended June 30, 2003, however, selling and general administrative expenses
decreased as a percentage of revenue from 27.2% to 26.0%. 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 ability to leverage prior
sales and marketing investments.
INCOME FROM OPERATIONS. Income from operations increased 59.5%, or
approximately $11.8 million, from approximately $19.8 million during the six
months ended June 30, 2002 to approximately $31.7 million during the six months
ended June 30, 2003, representing operating margins of 19.7% and 19.5 %,
respectively. The decrease in operating margin was primarily due to the lower
gross margin partially offset by the Company's ability to leverage its prior
sales and marketing investments.
-19-
OTHER INCOME/(EXPENSE). Interest income decreased from $0.8 million during
the six months ended June 30, 2002 to $0.7 million during the six months ended
June 30, 2003 due primarily to reductions in global interest rates.
The Company recognized a net foreign currency exchange gain of
approximately $0.1 million during each of the six month periods ended June 30,
2002 and June 30, 2003, 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 $4.8 million during the six months ended June 30, 2002 to
approximately $6.6 million during the six months ended June 30, 2003. The
effective tax rate of 23.4% for the six months ended June 30, 2002 decreased to
21.8% for the six months ended June 30, 2003, primarily due to the effect of tax
law changes in India.
NET INCOME. Net income increased from approximately $15.8 million for the
six months ended June 30, 2002 to approximately $23.7 million for the six months
ended June 30, 2003, representing 15.6% and 14.6% of revenues, respectively. The
decrease in net income as a percentage of revenues compared to the prior period
was primarily due to lower gross margin and the impact of the one-time,
non-recurring Split-Off Costs incurred in the first quarter of 2003, partially
offset by the Company's ability to leverage its prior sales and marketing
investments.
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.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
North American Segment
REVENUE. Revenue increased by 64.4%, or approximately $30.4 million, from
approximately $47.2 million during the three months ended June 30, 2002 to
approximately $77.6 million during the three months ended June 30, 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 increased sales and marketing
activities directed at the U.S. market for the Company's services.
INCOME FROM OPERATIONS. Income from operations increased 63.5%, or
approximately $5.9 million, from approximately $9.3 million during the three
months ended June 30, 2002 to approximately $15.2 million during the three
months ended June 30, 2003. The increase in operating income was attributable
primarily to increased revenues and achieving leverage on prior sales and
marketing investments.
-20-
European Segment
REVENUE. Revenue increased by 34.2%, or approximately $2.3 million, from
approximately $6.8 million during the three months ended June 30, 2002 to
approximately $9.1 million during the three months ended June 30, 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 33.5%, or
approximately $0.4 million, from $1.3 million during the three months ended June
30, 2002 as compared to $1.8 million during the three months ended June 30,
2003. The increase in operating income was attributable primarily to increased
revenues and achieving leverage on prior sales and marketing investments.
Asian Segment
REVENUE. Revenue increased by 109.6% or approximately $0.4 million, from
$0.3 million during the second quarter of 2002 as compared to $0.7 million
during the second quarter of 2003. The increase in revenue was primarily
attributable to increased acceptance of Company's on-site/offshore delivery
model by clients based in Japan.
INCOME FROM OPERATIONS. Income from operations increased by 107.6% or
approximately $0.1 million, from $0.1 million during the second quarter of 2002
as compared to $0.2 million during the second quarter of 2003. The increase in
operating income was attributable primarily to increased revenues and achieving
leverage on prior sales and marketing investments
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
North American Segment
REVENUE. Revenue increased by 63.7%, or approximately $55.8 million, from
approximately $87.5 million during the six months ended June 30, 2002 to
approximately $143.3 million during the six months ended June 30, 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 increased sales and marketing
activities directed at the U.S. market for the Company's services.
INCOME FROM OPERATIONS. Income from operations increased 62.6%, or
approximately $10.8 million, from approximately $17.2 million during the six
months ended June 30, 2002 to approximately $28.0 million during the six months
ended June 30, 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 40.5%, or approximately $5.0 million,
from approximately $12.4 million during the six months ended June 30, 2002 to
approximately $17.4 million during the six months ended June 30, 2003. The
increase in revenue was attributable to the increased acceptance of the
Company's services, particularly in the United Kingdom.
-21-
INCOME FROM OPERATIONS. Income from operations increased 39.5%, or
approximately $1.0 million from $2.4 million during the six months ended June
30, 2002 as compared to $3.4 million during the six months ended June 30, 2003.
The increase in operating income was attributable primarily to increased
revenues and achieving leverage on prior sales and marketing investments.
Asian Segment
REVENUE. Revenue increased by 34.3% or approximately $0.4 million, from
$0.9 million during the six months ended June 30, 2002 as compared to $1.3
million during the six months ended June 30, 2003. The increase in revenue was
primarily attributable to increased acceptance of Company's on-site/offshore
delivery model by clients based in Singapore and Australia.
INCOME FROM OPERATIONS. Income from operations increased by 33.2% or
approximately $0.1 million, from $0.2 million during the six months ended June
30, 2002 as compared to $0.3 million during the six months ended June 30, 2003.
The increase in operating income was attributable primarily to increased
revenues and achieving leverage on prior sales and marketing investments.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had cash and cash equivalents of
approximately $137.7 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 $23.0 million
during the six months ended June 30, 2003 as compared to net cash provided by
operating activities of approximately $20.4 million during the six months ended
June 30, 2002. This increase resulted primarily from increased net income, a
lower increase in the trade accounts receivable balance compared to the prior
period and an increased tax benefit from the exercise of stock options, offset,
in part, by higher incentive compensation payments 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 $42.9 million at June 30, 2003. The
increase in trade accounts receivable during 2003 was due primarily to increased
revenue and the acquisition of Aces. Unbilled accounts receivable increased from
$4.2 million at December 31, 2002 to $9.3 million at June 30, 2003. The increase
in unbilled accounts receivable was due primarily to volume associated with
strong sequential revenue growth, a mid-month billing cycle for a significant
portion of the revenue from the Aces acquisition, and an increase in percentage
of revenue coming from fixed-price contracts. The Company monitors turnover,
aging and the collection of accounts receivable through the use of management
reports which are prepared on a customer basis and evaluated by the Company's
finance staff. At June 30, 2003, the Company's day's sales outstanding,
including unbilled receivables, was approximately 54 days compared to
approximately 64 days at June 30, 2002.
The Company's investing activities used net cash of approximately $17.5
million for the six months ended June 30, 2003 as compared to net cash used of
approximately $7.6 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 and the acquisition of
Aces.
The Company's financing activities provided net cash of approximately $5.9
million for the six months ended June 30, 2003 as compared to approximately $6.0
million for the same period in 2002. The decrease in net cash provided by
financing activities was primarily related to the payment
-22-
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 June 30, 2003, the Company had no third-party debt.
The Company had working capital of $162.3 million at June 30, 2003 and
$134.3 million at December 31, 2002. Accordingly, the Company does not
anticipate any near-term liquidity issues.
As of June 30, 2003, the Company has entered into fixed capital commitments
related to its India development center expansion program of approximately $30.3
million, of which $25.8 million has been spent to date. The multi-phase program
encompasses the construction of three 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 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 June 30, 2003, the Company has entered into fixed capital commitments
related to its India development center expansion program of approximately $30.3
million, of which $25.8 million has been spent to date. The multi-phase program
encompasses the construction of three 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
-23-
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 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, European and Asian
subsidiaries (excluding India) 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
-24-
U.S. dollars between the Indian subsidiary and its U.S. affiliates. Non-monetary
assets and liabilities are translated at historical exchange rates, while
monetary assets and liabilities are translated at current exchange rates. A
portion of the Company's costs in India are denominated in local currency and
subject to exchange fluctuations, which has not had any material adverse effect
on the Company's results of operations.
EFFECTS OF INFLATION
The Company's most significant costs are the salaries and related benefits
for its programming staff and other professionals. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. There can be no assurance that the Company will be
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 and six
months ended June 30, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" was issued. SFAS No. 146 addresses the accounting for costs
to terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. A liability for contract termination
costs should be recognized and measured at fair value either when the contract
is terminated or when the entity ceases to use the right conveyed by the
contract. A liability for one-time termination benefits should be recognized and
measured at fair value at the communication date if the employee would not be
retained beyond a minimum retention period (i.e., either a legal notification
period or 60 days, if no legal requirement exists). For employees 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 FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also requires that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted the
recognition and measurement provisions of FIN 45 beginning in the first quarter
of fiscal 2003. The adoption of FIN 45 did not have and is not expected to have
a material adverse impact on our financial position, results of operations or
cash flows.
-25-
On July 1, 2003, the Company adopted Emerging Issues Task Force ("EITF")
consensus EITF 00-21 "Revenue Arrangements with Multiple Deliverables". This
consensus requires the Company to evaluate, at the inception of each new
contract, all deliverables in an arrangement to determine whether they represent
separate units of accounting. For arrangements with multiple units of
accounting, primarily fixed-bid contracts that provide both application
maintenance and application development service and certain application
maintenance contracts, arrangement consideration will be allocated among the
separate units of accounting based on their relative fair values and recognized
separately based on the Company's revenue recognition policy. 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 has evaluated the impact of the adoption of EITF 00-21 on the types
of contracts that it has traditionally entered into and has concluded that the
adoption of EITF 00-21 for contracts entered into subsequent to July 1, 2003
will not have a material impact on the Company's financial position, results of
operations or cash flows.
The Company's services are entered into on either a time-and-materials
basis or fixed-price basis. Revenues related to time-and-materials contracts are
recognized as the service is performed. Revenues related to fixed-price
contracts that provide for highly complex information technology application
development services are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the total value of
revenue during the term of an agreement is recognized on the basis of the
percentage that each contract's cost to date bears to the total estimated cost.
Revenues related to fixed-priced contracts that provide for application
maintenance services or a combination of application maintenance and application
development services that are not separable are recognized on a straight-line
basis or as services are rendered or transactions processed in accordance with
contractual terms.
Information technology consulting services provided through time and
materials contracts, as well as applications maintenance services contracts
only, are recognized as revenue in accordance with SAB 101. Accordingly, revenue
is recognized when: 1) persuasive evidence of an arrangement exists; 2) there is
a fixed and determinable price for the services rendered; 3) delivery has
occurred; and 4) collectibility is assured. Expenses are recorded as incurred
over the contract period.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of FIN 46 and the consolidation requirements for
variable interest entities created or acquired subsequent to January 31, 2003
became effective for financial statements issued by the Company beginning in the
second quarter of fiscal 2003. For variable interest entities created or
acquired prior to February 1, 2003, the consolidation requirements of FIN 46
become effective for the Company in the fourth quarter of fiscal 2003. The
Company currently has no significant contractual relationship or other business
relationship with a variable interest entity and therefore the adoption of FIN
46 did not have a material effect on the Company's consolidated results of
operations, financial position or cash flows.
In April 2003, the FASB issued 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, "Accounting for Derivative Instruments
and Hedging Activities." 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.
-26-
This Statement is effective for contracts entered into or modified after June
30, 2003. 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. The adoption of SFAS No. 149 is
not expected to have a material effect on the Company's consolidated results of
operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
changes are intended to result in a more complete representation of an entity's
liabilities and equity and will, thereby, assist investors and creditors in
assessing the amount, timing, and likelihood of potential future cash outflows
and equity share issuances. This Statement also requires that certain
obligations that could be settled by the issuance of equity, but lack other
characteristics of equity, be reported as liabilities even though the obligation
does not meet the definition of a liability. The requirements of SFAS No. 150
became effective for the Company for financial instruments entered into or
modified after May 31, 2003, or otherwise at the beginning of the fourth quarter
of fiscal 2003. The Company did not enter into or modify any financial
instruments having characteristics of both liabilities and equity during June
2003. The Company has evaluated the impact of SFAS No. 150 to determine the
effect it may have on its consolidated results of operations, financial position
or cash flows and has concluded that the adoption of this statement is not
expected to have a material impact on the Company's financial position or
results of operations.
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
it does not have any 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.
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of June 30, 2003. Based on this evaluation, the Company's
chief executive officer and chief financial officer concluded that, as of June
30, 2003, the Company's disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Company's chief executive
officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
No change in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on May 28, 2003
(the "Annual Meeting").
There were present at the Annual Meeting in person or by proxy stockholders
holding an aggregate of 56,978,215 shares of Class A Common Stock out of a total
number of 61,552,176 shares of Class A Common Stock issued and outstanding and
entitled to vote at the meeting. The matters that were voted on at the meeting
were:
(A) The proposed election of the following six nominees as directors of the
Company to serve for their designated Class of Directors and for such terms as
follows:
1) The nominees for Class I Directors to serve until the next Annual
Meeting of Stockholders and until their respective successors have
been duly elected and qualified:
Kumar Mahadeva; and
John E. Klein
2) The nominees for Class II Directors to serve until the 2005 Annual
Meeting of Stockholders and until their respective successors have
been duly elected and qualified:
Robert W. Howe; and
Robert E. Weissman
3) The nominees for Class III Directors to serve until the 2006 Annual
Meeting of Stockholders and until their respective successors have
been duly elected and qualified:
Venetia Kontogouris; and
Thomas M. Wendel;
(B) A proposal to amend the Company's 1999 Incentive Compensation Plan, as
amended (the "Incentive Plan"), to increase the maximum number of shares of
Class A Common Stock available for issuance under the Incentive Plan from
18,000,000 to 24,000,000 shares and to reserve an additional 6,000,000 shares of
Class A Common Stock of the Company for issuance upon the exercise of stock
options granted or for the issuance of other awards granted under the Incentive
Plan; and
(C) A proposal to ratify the appointment of PricewaterhouseCoopers LLP as
independent accountants for the year ending December 31, 2003.
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The results of the votes of the Annual Meeting were as follows:
PROPOSAL
- --------
Election of each of the nominees for the
Board of Directors of the Company for
their respective class:
Number of Class A Common Stock Shares
-------------------------------------
For Withheld
--------------- -------------------
CLASS I DIRECTORS
Kumar Mahadeva 32,874,218 24,103,997
John E. Klein 45,369,348 11,608,867
CLASS II DIRECTORS
Robert W. Howe 45,369,348 11,608,867
Robert E. Weissman 33,493,454 23,484,761
CLASS III DIRECTORS
Venetia Kontogouris 46,521,865 10,456,350
Thomas M. Wendel 46,521,802 10,456,413
Number of Class A Common Stock Shares
-------------------------------------
Proposal to amend the Incentive For Against Abstain
Plan to increase the maximum number --- ------- -------
of shares of Class A Common Stock 19,956,097 24,295,757 149,283
available for issuance under the
Incentive Plan from 18,000,000 to
24,000,000 shares and to reserve an
additional 6,000,000 shares of Class
A Common Stock of the Company for
issuance upon the exercise of stock
options granted or for the issuance
of other awards granted under the
Incentive Plan:
Ratification of the appointment of For Against Abstain
PricewaterhouseCoopers LLP as --- ------- -------
independent accountants of the 55,540,727 1,420,620 16,868
Company for the year ending December
31, 2003:
Accordingly, the Company's stockholders elected all of the nominees for the
Company's Board of Directors to serve for their respective Class of Directors
and ratified PricewaterhouseCoopers LLP as independent accountants of the
Company for the year ending December 31, 2003. The Company's stockholders did
not approve the amendment to the Incentive Plan.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of principal financial officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
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).
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.
On July 22, 2003, the Company furnished a Current Report on Form 8-K
with the Securities and Exchange Commission under Item 9 containing a
copy of its earnings release for the period ended June 30, 2003
(including financial statements) pursuant to Item 12 (Results of
Operations and Financial Condition).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cognizant Technology Solutions Corporation
DATE: August 13, 2003 By: /s/ Wijeyaraj Mahadeva
------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: August 13, 2003 By: /s/ Gordon Coburn
------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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