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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
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OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24429
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 801-0233
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value per share
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(Title of Class)
Class B Common Stock, par value $0.01 per share
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(Title of Class)
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Preferred Share Purchase Rights
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of the registrant's voting shares of common stock
held by non-affiliates of the registrant on June 30, 2003, based on $24.39 per
share, the last reported sale price on the NASDAQ National Market on that date,
was $1,515,361,188.
The number of shares of Class A common stock, $0.01 par value, of the registrant
outstanding as of March 5, 2004 was 64,580,041 shares. There were no shares of
Class B common stock, $0.01 par value, of the registrant outstanding as of March
5, 2004.
The following documents are incorporated by reference into the Annual Report on
Form 10-K: Portions of the registrant's definitive Proxy Statement for its 2004
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
TABLE OF CONTENTS
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Item Page
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PART I 1. Business............................................. 4
2. Properties........................................... 30
3. Legal Proceedings.................................... 33
4. Submission of Matters to a Vote of Security Holders.. 33
PART II 5. Market for Our Common Equity and
Related Stockholder Matters......................... 34
6. Selected Consolidated Financial Data................. 36
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 38
7A. Quantitative and Qualitative Disclosures
Amount Market Risk................................. 50
8. Financial Statements and Supplementary Data.......... 51
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 51
9A. Controls and Procedures.............................. 51
PART III 10. Our Directors and Executive Officers................. 52
11. Executive Compensation............................... 52
12. Security Ownership of Certain Beneficial Owners52
and Management and Related Stockholder Matters...... 52
13. Certain Relationships and Related Transactions....... 52
14. Principal Accountant Fees and Services............... 52
PART IV 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................. 53
SIGNATURES............................................................. 54
EXHIBIT INDEX.......................................................... 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-1
3
PART I
ITEM 1. BUSINESS
Overview
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Cognizant Technology Solutions Corporation is a leading provider of custom
information technology ("IT") services related to IT design, development,
integration and maintenance services primarily for Fortune 1000 companies
located in the United States and Europe. Our core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. We provide the IT services we offer using an
integrated on-site/offshore business model. This seamless on-site/offshore
business model combines technical and account management teams located on-site
at the customer location and offshore at dedicated development centers located
in India and Ireland.
Industry Background
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Many companies today face intense competitive pressure and rapidly
changing market dynamics. In addition, the evolution of technology and the
commercialization of the Internet have contributed to the rapid change in the
business environment. In response to these challenges, many companies are
focused on improving productivity, increasing service levels, lowering costs and
accelerating delivery times. In order to achieve these goals, companies are
implementing a broad range of technologies, such as,
o e-business and e-commerce applications;
o data warehousing;
o customer and supply chain management; and
o middleware/enterprise application integration.
These technologies facilitate faster, more responsive, lower-cost business
operations. However, their development, integration and on-going maintenance
present major challenges and require a large number of highly skilled
professionals trained in many diverse technologies. In addition, companies also
require additional technical resources to maintain, enhance and re-engineer
their core legacy IT systems and to address application maintenance projects.
Increasingly, companies are relying on custom IT solutions providers, such as
us, to provide these services.
In order to respond effectively to a changing and challenging business
environment, IT departments of many companies have focused increasingly on
improving returns on IT investments, lowering costs and accelerating the
delivery of new systems and solutions. To accomplish these objectives, many IT
departments have shifted all or a portion of their IT development, integration
and maintenance requirements to outside service providers operating with
on-site/offshore business models.
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Global demand for high quality, lower cost IT services from outside
providers has created a significant opportunity for IT service providers that
can successfully leverage the benefits of, and address the challenges in using,
an offshore talent pool. The effective use of offshore personnel can offer a
variety of benefits, including lower costs, faster delivery of new IT solutions
and more flexible scheduling. Certain developing countries, particularly India,
have a large talent pool of highly qualified technical professionals that can
provide high quality IT services at a lower cost. India is a leader in IT
services, and is regarded as having one of the largest pools of IT talent in the
world. Historically, IT service providers have used offshore labor pools
primarily to supplement the internal staffing needs of customers. However,
evolving customer demands have led to the increasing acceptance and use of
offshore resources for higher value-added services. These services include
application design, development, integration and maintenance. India's services
and software exports have grown from $7.60 billion for the fiscal year ended
March 31, 2002 to $9.55 billion for the fiscal year ended March 31, 2003, as
estimated by the National Association of Software and Services Companies
(NASSCOM) in India. This represents a 26% growth over the prior period. NASSCOM
has projected India's services and software exports to grow at a rate of
approximately 28% for fiscal year 2003-04.
Using an offshore workforce to provide value-added services presents a
number of challenges to IT service providers. The offshore implementation of
value-added IT services requires that IT service providers continually and
effectively attract, train and retain highly skilled software development
professionals with the advanced technical skills necessary to keep pace with
continuing changes in information technology, evolving industry standards and
changing customer preferences. These skills are necessary to design, develop and
deploy high-quality technology solutions in a cost-effective and timely manner.
In addition, IT service providers must have the methodologies, processes and
communications capabilities to enable offshore workforces to be successfully
integrated with on-site personnel. Service providers must also have strong
research and development capabilities, technology competency centers and
relationship management skills in order to compete effectively.
Our Solution
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We believe that we have developed an effective integrated on-site/offshore
business model, and that this business model will be a critical element of our
continued growth. To support this business model, at December 31, 2003, we
employed over 8,500 programmers globally. We have also established facilities,
technology and communications infrastructure in order to support our business
model. By basing certain technical operations in India, we have access to a
large pool of skilled, English-speaking IT professionals. These IT professionals
provide high quality services to our customers at costs significantly lower than
services sourced exclusively in developed countries. Our strengths, which we
believe differentiate us from other IT service providers, include the following:
ESTABLISHED AND SCALABLE PROPRIETARY PROCESSES. We have developed
proprietary methodologies for integrating on-site and offshore teams to
facilitate cost-effective, on-time delivery of high-quality projects. These
methodologies comprise our proprietary Q*VIEW software engineering process,
which is available to all on-site and offshore programmers. We use this ISO
9001:2000 certified process to define and implement projects from the design,
development and deployment stages through to on-going application maintenance.
For most
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projects, Q*VIEW is used as part of an initial assessment that allows us to
define the scope and risks of the project and subdivide the project into smaller
phases with frequent deliverables and feedback from customers. We also use our
Q*VIEW process to detect, mitigate and correct possible quality defects and to
establish appropriate contingencies for each project. In order to ensure
implementation of the quality process, we assign a quality facilitator to each
project who reports to a centralized quality assurance and software engineering
group. This group performs, on a sample basis, quality audits, deliverables
verifications, metrics collection and analysis, which are used to improve
processes and methodologies. These processes and methodologies have proven to be
scalable, as we have significantly increased the number of offshore development
centers, customers and projects. In addition, all of our principal development
centers have been assessed by KPMG at Level 5 (the highest possible rating) of
both the Capability Maturity Model and the Capability Maturity Model Integration
of the Software Engineering Institute at Carnegie Mellon University, which are
widely recognized means of measuring the quality and maturity of an
organization's software development and maintenance processes. In addition, all
of our principal development centers have been certified by the STQC Directorate
Ministry of Communications and Information Technology, Government of India (the
accreditation authority for companies in India) under the internationally
recognized BS 7799 Part 2:2002 Information Security Standards, a comprehensive
set of controls comprising best practices in information security and business
continuity planning. Our quality management system has also been certified by
KPMG to International Standard ISO 9001:2000 of the International Organization
for Standardization, an internationally recognized standard for quality
management systems directed to the achievement of business results, including
satisfaction of customers and others.
HIGHLY SKILLED WORKFORCE. Our managers and senior technical personnel
provide in-depth project management expertise to customers. To maintain this
level of expertise, we have placed significant emphasis on recruiting and
training our workforce of highly skilled professionals. We have over 600 project
managers and senior technical personnel around the world, many of whom have
significant work experience in the United States and Europe. We also maintain
programs and personnel to hire and train the best available technical
professionals in both legacy systems and emerging technologies. We provide five
months of combined classroom and on-the-job training to newly hired programmers,
as well as additional annual training programs designed to enhance the business
practices, tools, technology and consulting skills of our professional staff. We
were recently assessed by KPMG at Level 5 (the highest possible rating) of the
People Capability Maturity Model (P-CMM) version 2.0 of the Software Engineering
Institute at Carnegie Mellon University, a widely recognized means of
implementing best current practices in fields such as human resources, knowledge
management, and organizational development which improves our processes for
managing and developing our workforce and addressing critical people issues.
RESEARCH AND DEVELOPMENT AND COMPETENCY CENTERS. We have project
experience and expertise across multiple architectures and technologies, and
have made significant investments in our competency centers and in research and
development to keep abreast of the latest technology developments. Most of our
programmers are trained in multiple technologies and architectures. As a result,
we are able to react to customers' needs quickly and efficiently redeploy
programmers to different technologies. In order to develop and maintain this
flexibility, we have made a substantial investment in our competency centers
where the experience gained
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from particular projects and research and development efforts is leveraged
across our entire organization. In addition, through our investment in research
and development activities and the continuing education of our technical
personnel, we enlarge our knowledge base and develop the necessary skills to
keep pace with emerging technologies. We believe that our ability to work in new
technologies allows us to foster long-term relationships by having the capacity
to continually address the needs of both existing and new customers.
WELL-DEVELOPED INFRASTRUCTURE. Our extensive facilities, technology and
communications infrastructure facilitate the seamless integration of our on-site
and offshore workforces. This is accomplished by permitting team members in
different locations to access common project information and to work directly on
customer projects. This infrastructure allows for:
o rapid completion of projects;
o highest level of quality;
o off-peak use of customers' technological resources; and
o real-time access to project information by the on-site account
manager or the customer.
International time differences enable our offshore teams located in India
to access a customer's computing facilities located in the United States and
Europe during off-peak hours. This ability to perform services during off-peak
hours enables us to complete projects more rapidly and does not require our
customers to invest in duplicative hardware and software. In addition, for large
projects with short time frames, our offshore facilities allow for parallel
processing of various development phases to accelerate delivery time. In
addition, we can deliver services more rapidly than some competitors without an
offshore labor pool because our lower labor costs enable us to cost-effectively
assign more professionals to a project.
Business Strategies
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Our objectives are to maximize stockholder value and enhance our position
as a leading provider of custom IT design, development, integration and
maintenance services. We implement the following core strategies to achieve
these objectives:
FURTHER DEVELOP LONG-TERM CUSTOMER RELATIONSHIPS. We have strong long-term
strategic relationships with our customers and business partners. We seek to
establish long-term relationships that present recurring revenue opportunities,
frequently trying to establish relationships with our customers' chief
information officers, or other IT decision makers, by offering a wide array of
cost-effective high quality services. Over 80% of our revenues in the year ended
December 31, 2003, were derived from customers who had been using our services
for one year or more. We also seek to leverage our experience with a customer's
IT systems into new business opportunities. Knowledge of a customer's IT systems
gained during the performance of application maintenance services, for example,
may provide us with a competitive advantage in securing additional development
and maintenance projects from that customer.
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EXPAND SERVICE OFFERINGS AND SOLUTIONS. We have several teams dedicated to
developing new, high value services. These teams collaborate with customers to
develop these services. For example, we are currently developing new solutions
for IT systems portfolio analysis, program management, technology architecture
and strategy, systems testing, legacy restoration and digital security and
forensics. In addition, we invest in internal research and development and
promote knowledge building and sharing across the organization in order to
promote the development of new services and solutions that we can offer to our
customers. Furthermore, we continue to enhance our capabilities and service
offerings in the areas of Customer Relationship Management, or CRM, and
Enterprise Resource Planning, or ERP. We believe that the continued expansion of
our service offerings will reduce our reliance on any one technology initiative
and will help foster long-term relationships with customers by allowing us to
serve the needs of our customers better.
ENHANCE PROCESSES, METHODOLOGIES AND PRODUCTIVITY TOOLSETS. We are
committed to improving and enhancing our proprietary Q*VIEW software engineering
process and other methodologies and toolsets. In light of the rapid evolution of
technology, we believe that continued investment in research and development is
critical to our continued success. We are constantly designing and developing
additional productivity software tools to automate testing processes and improve
project estimation and risk assessment techniques. In addition, we use groupware
technology to share project experience and best practice methodologies across
the organization with the objective of improving productivity.
EXPAND DOMESTIC AND INTERNATIONAL GEOGRAPHIC PRESENCE. As we expand our
customer base, we plan to open additional sales and marketing offices in the
United States and internationally. It is expected that this expansion will
facilitate sales and service to existing and new customers. We have established
sales and marketing offices in Atlanta, Chicago, Dallas, Minneapolis, Phoenix,
Los Angeles, San Francisco and Teaneck. In addition, we have been pursuing
market opportunities in Europe through our offices in London, England, Limerick,
Ireland, Frankfurt, Germany, Zurich, Switzerland and Amsterdam, The Netherlands.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS, JOINT VENTURES AND STRATEGIC
ALLIANCES. We believe that opportunities exist in the fragmented IT services
market to expand our business through selective strategic acquisitions, joint
ventures and strategic alliances. We believe that acquisition and joint venture
candidates may enable us to expand our geographic presence and our capabilities
more rapidly, especially in the European market, as well as accelerate our entry
into areas of new technology. In addition, through our working relationships
with independent software vendors we obtain projects using the detailed
knowledge we gain in connection with a joint development process. Finally, we
will strategically partner with select IT service firms that offer complementary
services in order to best meet the requirements of our customers.
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Services
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We provide a broad range of IT services, including:
Service Summary Description of Service Offerings
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Application Design, Development, Define customer requirements, write
Integration and Re-engineering specifications and design, develop,
test and integrate software across
multiple platforms including Internet
technologies. Modify and test
applications to enable systems to
function in new operating environments.
Application Maintenance Support some or all of a customer's
applications ensuring that systems
remain operational and responsive to
changing user requirements, and to
provide on-going enhancement as
required by the customer.
We use our Q*VIEW software engineering process, our on-site and offshore
business model and well-developed technology and communications infrastructure
to deliver these services.
APPLICATION DEVELOPMENT, INTEGRATION AND RE-ENGINEERING SERVICES. We
follow either of two alternative approaches to application development and
integration:
o full life-cycle application development, in which we assume
start-to-finish responsibility for analysis, design, implementation,
testing and integration of systems; or
o cooperative development, in which our employees work with a
customer's in-house IT personnel to jointly analyze, design,
implement, test and integrate new systems.
In both cases, our on-site team members work closely with the end-users of
the application to define requirements and develop specifications. Detailed
design, implementation and testing are generally performed offshore at our
twelve IT development centers located in India, as well our development centers
in Limerick, Ireland and Phoenix, Arizona. In addition, we maintain an on-site
presence at each customer location in order to address evolving customer needs
and resulting changes to the project.
A key part of our application development and integration offering is a
suite of services to help organizations build and integrate business
applications with the rest of their operations. In this suite of services, we
leverage our skills in business application development and enterprise
application integration to build sophisticated business applications and to
integrate these new applications and Web sites with client server and legacy
systems. We build and deploy robust, scalable and extensible architectures for
use in a wide range of industries. We maintain competency centers specializing
in Microsoft, IBM and Sun technologies, among others, in order
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to be able to provide application development and integration services to a
broad spectrum of customers.
Our re-engineering service offerings assist customers migrating from
systems based on legacy computing environments to newer, open systems-based
platforms and client/server architectures, often in response to the more
stringent demands of business. Our re-engineering tools automate many of the
processes required to implement advanced client/server technologies. We believe
that this automation substantially reduces the time and cost to perform
re-engineering services, savings that benefit both us and our customers. These
tools also enable us to perform source code analysis and to re-design target
databases and convert certain programming languages. If necessary, our
programmers also help customers re-design and convert user interfaces.
APPLICATION MAINTENANCE SERVICES. We provide services to help ensure that
a customer's core operational systems are free of defects and responsive to the
customer's changing needs. As part of this process, we are often able to
introduce product and process enhancements and improve service levels to
customers requesting modifications and on-going support.
Our on-site/offshore business model enables us to provide a range of rapid
response and cost-effective support services to our customers. Our on-site team
members often provide help-desk services at the customer's facility. These team
members typically carry pagers in the event of an emergency service request and
are available to quickly resolve customer problems from remote locations. In the
case of more complex maintenance services, including modifications, enhancements
and documentation, which typically have longer turnaround times, we take full
advantage of our offshore resources to develop solutions more cost-effectively
than would be possible relying on higher cost local professionals. The services
provided by our offshore team members are delivered to customers using satellite
and fiber-optic telecommunications.
As part of our application maintenance services, we assist customers in
renovating their core systems to meet the requirements imposed by new
regulations, new standards or other external events. These services include, or
have previously included, Year 2000 compliance, Eurocurrency compliance,
decimalization within the securities industry and compliance with the Health
Insurance Portability and Accountability Act for the healthcare industry.
Application maintenance service contracts are usually long term in nature
and, at times, can include an element of application development.
We seek to anticipate the operational environment of customer's IT systems
as we design and develop such systems. We also offer diagnostic services to
customers to assist them in identifying shortcomings in their IT systems and
optimizing the performance of their systems.
Sales and Marketing
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We market and sell our services directly through our professional staff,
senior management and direct sales personnel operating out of our Teaneck
headquarters and our business development offices in Atlanta, Chicago, Dallas,
Minneapolis, Phoenix, Los Angeles, San Francisco, Limerick, London, Amsterdam,
Frankfurt and Zurich. In 2003, we managed our business and results of operations
on a geographic basis. At December 31, 2003, we had
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approximately 29 direct sales persons and 111 account managers. The sales and
marketing group works with our technical team as the sales process moves closer
to the customer's selection of an IT service provider. The duration of the sales
process varies depending on the type of service, ranging from approximately two
months to over one year. The account manager or sales executive works with the
technical team to:
o define the scope, deliverables, assumptions and execution strategies
for a proposed project;
o develop project estimates;
o prepare pricing and margin analyses; and
o finalize sales proposals.
Management reviews and approves proposals, which are then presented to the
prospective customer. Our sales and account management personnel remain actively
involved in the project through the execution phase. We focus our marketing
efforts on businesses with intensive information processing needs. We maintain a
prospect/customer database that is continuously updated and used throughout the
sales cycle from prospect qualification to close. As a result of this marketing
system, we pre-qualify sales opportunities, and direct sales representatives are
able to minimize the time spent on prospect qualification. In addition,
substantial emphasis is placed on customer retention and expansion of services
provided to existing customers. In this regard, our account managers play an
important marketing role by leveraging their ongoing relationship with the
customer to identify opportunities to expand and diversify the type of services
provided to that customer.
Customers
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The number of customers served by us has increased significantly in recent
years. At the end of the years ended December 31, 2001, 2002 and 2003, we were
providing services to 100 customers, 115 customers and 153 customers,
respectively.
For the year ended December 31, 2003, we derived our revenues from the
following industries: 46% from financial related services, 22% from healthcare
services, 15% from retail, manufacturing and logistics and 10% from information
services. The remaining portions of our revenues were derived from strategic
alliances and other sources. We dedicate a number of our employees to each of
the major industries we service to better serve our customers.
We provide services either on a time-and-material basis or on the basis of
an agreed fixed bid. The volume of work performed for specific customers is
likely to vary from year to year, and a significant customer in one year may not
use our services in a subsequent year. Approximately 10.1% of our revenues in
the fiscal year ended December 31, 2003 were generated from JP Morgan Chase.
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Our customers include:
ACNielsen Corporation First Data Corporation
ADP, Incorporated IMS Health Incorporated ("IMS Health")
Brinker International, Incorporated JP Morgan Chase
CCC Information Services Incorporated Metropolitan Life Insurance Company
Computer Sciences Corporation Royal & SunAlliance USA
The Dun & Bradstreet Corporation United Healthcare
Presented in the table below is additional information about our
customers.
Year Ended December 31,
2001 2002 2003
---- ---- ----
Percent of revenues from top five customers,
including IMS Health............................ 35% 38% 36%
Percent of revenues from top ten customers,
including IMS Health............................ 53% 54% 54%
Percent of revenues from IMS Health............... 11% 9% 6%
Application development services as a percent
of revenues..................................... 48% 43% 41%
Application maintenance services as a percent
of revenues..................................... 52% 57% 59%
Revenues under fixed-bid contracts as a percent
of revenues..................................... 24% 25% 26%
Competition
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The intensely competitive IT services market includes a large number of
participants and is subject to rapid change. This market includes participants
from a variety of market segments, including:
o systems integration firms;
o contract programming companies;
o application software companies;
o Internet solutions providers;
o the professional services groups of computer equipment companies;
and
o facilities management and outsourcing companies.
Our most direct competitors include, among others, Infosys, Inc., Tata
Consultancy Services and WIPRO Ltd., which utilize an integrated
on-site/offshore business model comparable to that used by us. We also compete
with large IT service providers with greater resources, such as Accenture Ltd.,
Electronic Data Systems Corporation and IBM Global Services, who have announced
their intentions to develop more offshore capabilities to lower their cost
structure. In addition, we compete with numerous smaller local companies in the
various geographic markets in which we operate.
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Many of our competitors have significantly greater financial, technical
and marketing resources and greater name recognition than we do. The principal
competitive factors affecting the markets for our services include:
o performance and reliability;
o quality of technical support, training and services;
o responsiveness to customer needs;
o reputation, experience and financial stability; and
o competitive pricing of services.
We rely on the following to compete effectively:
o a well developed recruiting, training and retention model;
o a successful service delivery model;
o a broad referral base;
o continual investment in process improvement and knowledge capture;
o investment in research and development;
o continued focus on responsiveness to customer needs, quality of
services, competitive prices; and
o project management capabilities and technical expertise.
Intellectual Property
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Our intellectual property rights are important to our business. We
presently hold no patents or registered copyrights. Instead, we rely on a
combination of intellectual property laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property. We
require our employees, independent contractors, vendors and customers to enter
into written confidentiality agreements upon the commencement of their
relationships with us. These agreements generally provide that any confidential
or proprietary information developed by us or on our behalf be kept
confidential. In addition, when we disclose any confidential or proprietary
information to third parties, we routinely require those third parties to agree
in writing to keep that information confidential.
A portion of our business involves the development for customers of highly
complex information technology software applications and other technology
deliverables. This intellectual property includes written specifications and
documentation in connection with specific customer engagements. Our customers
usually own the intellectual property in the software we develop for them.
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Pursuant to a license agreement with IMS Health, all rights to the
"Cognizant" name and certain related trade and service marks were transferred to
us in July 1998. As of December 31, 2003, we held three trademark registrations
in the United States and had four pending trademark applications in India. In
addition, as of December 31, 2003, we held 230 other trademark registrations in
56 other countries.
Employees
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At December 31, 2003, we employed approximately 2,150 persons on a
full-time basis in various locations throughout North America. We also employed
approximately 320 persons on a full-time basis in various locations throughout
Europe, principally in the United Kingdom and Ireland, and approximately 6,770
persons on a full-time basis in our offshore IT development centers in India.
None of our employees are subject to a collective bargaining arrangement. We
consider our relations with our employees to be good.
Our future success depends to a significant extent on our ability to
attract, train and retain highly skilled IT development professionals. In
particular, we need to attract, train and retain project managers, programmers
and other senior technical personnel. We believe there is a shortage of, and
significant competition for, IT development professionals in the United States
and in India with the advanced technological skills necessary to perform the
services we offer. We have an active recruitment program in India, and have
developed a recruiting system and database that facilitates the rapid
identification of skilled candidates. During the course of the year, we conduct
extensive recruiting efforts at premier colleges and technical schools in India.
We evaluate candidates based on academic performance, the results of a written
aptitude test measuring problem-solving skills and a technical interview. In
addition, we have an active lateral recruiting program. A substantial majority
of the personnel on most on-site teams and virtually all the personnel staffed
on offshore teams is comprised of Indian nationals.
Our senior project managers are hired from leading consulting firms in the
United States and India. Our senior management and most of our project managers
have experience working in the United States and Europe. This enhances our
ability to attract and retain other professionals with experience in the United
States. We have also adopted a career and education management program to define
our employees' objectives and career plans. We have implemented an intensive
orientation and training program to introduce new employees to the Q*VIEW
software engineering process, our other technologies and our services.
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Our Executive Officers
- ----------------------
The following table identifies our current executive officers:
Capacities in In Current
Name Age Which Served Position Since
- ---- --- ------------- --------------
Lakshmi Narayanan(1).... 51 President and Chief 2003
Executive Officer
Francisco D'Souza(2).... 35 Chief Operating Officer 2003
Gordon Coburn(3)........ 40 Executive Vice President, 2003
Chief Financial Officer,
Treasurer and Secretary
Ramakrishnan Executive Vice President 2004
Chandrasekaran(4)....... 47 & Managing Director
(1) Lakshmi Narayanan was elected Chief Executive Officer in December 2003.
Mr. Narayanan continues to serve as our President, a position he has held
since his election in March 1998. Mr. Narayanan joined our Indian
subsidiary as Chief Technology Officer in 1994 and was elected President
of such subsidiary on January 1, 1996. Prior to joining us, from 1975 to
1994, Mr. Narayanan was the regional head of Tata Consultancy Services, a
large consulting and software services company located in India. Mr.
Narayanan holds a Bachelor of Science degree, a Master of Science degree
and a Master of Business Administration degree from the Indian Institute
of Science.
(2) Francisco D'Souza was elected Chief Operating Officer in December 2003.
Prior to that, from November 1999 to December 2003, he served as our
Senior Vice President, North American Operations and Business Development.
From March 1998 to November 1999, he served as our Vice President, North
American Operations and Business Development and as our Director-North
American Operations and Business Development from June 1997 to March 1998.
From January 1996 to June 1997, Mr. D'Souza was engaged as our consultant.
From February 1995 to December 1995, Mr. D'Souza was employed as Product
Manager at Pilot Software. Between 1992 and 1995, Mr. D'Souza held various
marketing, business development and technology management positions as a
Management Associate at The Dun & Bradstreet Corporation. While working at
The Dun & Bradstreet Corporation, Mr. D'Souza was part of the team that
established the software development and maintenance business conducted by
us. Mr. D'Souza holds a Bachelor of Business Administration degree from
the University of East Asia and a Master of Business Administration degree
from Carnegie-Mellon University.
(3) Gordon Coburn was elected Executive Vice President in December 2003. Mr.
Coburn continues to serve as our Chief Financial Officer, Treasurer and
Secretary, positions he has held since his election in March 1998. From
November 1999 to December 2003, he
15
served as our Senior Vice President. He previously was our Vice President
from 1996 to November 1999. Mr. Coburn served as Senior Director - Group
Finance & Operations for Cognizant Corporation from November 1996 to
December 1997. From 1990 to October 1996, Mr. Coburn held key financial
positions with The Dun & Bradstreet Corporation. Mr. Coburn holds a
Bachelor of Arts degree from Wesleyan University and a Master of Business
Administration degree from the Amos Tuck School at Dartmouth College.
(4) Ramakrishnan Chandrasekaran was elected Executive Vice President and
Managing Director in January 2004. Prior to that, from November 1999 to
January 2004, he served as our Senior Vice President responsible for the
ISV relationships, key alliances, capacity growth, process initiatives,
business development and offshore delivery. Mr. Chandrasekaran joined us
as Assistant Vice President in December 1994, before getting promoted to
Vice President in January 1997. Mr. Chandrasekaran has more than 20 years
of experience working in the IT services industry. Prior to joining us,
Mr. Chandrasekaran worked with Tata Consultancy Services. Mr.
Chandrasekaran holds a Mechanical Engineering degree and Master of
Business Administration degree from the Indian Institute of Management.
None of our executive officers is related to any other executive officer
or to any of our Directors. Our executive officers are elected annually by the
Board of Directors and serve until their successors are duly elected and
qualified.
Corporate History
- -----------------
We began our 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, we, along with certain other
entities, were spun-off from The Dun & Bradstreet Corporation to form a new
company, Cognizant Corporation. On June 24, 1998, we completed an initial public
offering of our Class A common stock. On June 30, 1998, a majority interest in
us, and certain other entities were spun-off from Cognizant Corporation to form
IMS Health. Subsequently, Cognizant Corporation was renamed Nielsen Media
Research, Incorporated. At December 31, 2002, IMS Health owned 55.3% of our
outstanding stock (representing all of our Class B common stock) and held 92.5%
of the combined voting power of our common stock.
On January 30, 2003, we filed a tender offer in which IMS Health
stockholders could exchange IMS Health shares held by them for our Class B
common stock held by IMS Health.
On February 13, 2003, IMS Health distributed all of our Class B common
stock that IMS Health owned (a total of 33,872,700 shares) in an exchange offer
to its stockholders. IMS Health distributed 0.927 shares of our 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 our total shares outstanding upon
the completion of the exchange offer.
As of February 21, 2003, pursuant to our Restated Certificate of
Incorporation, all of the shares of Class B common stock automatically converted
into shares of Class A common stock. According to our Restated Certificate of
Incorporation, if at any time the outstanding shares of
16
our Class B common stock ceased to represent at least 35% of the economic
ownership represented by the aggregate number of shares of our common stock then
outstanding, each share of our Class B common stock shall automatically convert
into one share of Class A common stock. This automatic conversion occurred on
February 21, 2003 based on share numbers received by us from our transfer agent
(American Stock Transfer and Trust Company) as of the close of business February
20, 2003, which indicated that the Class B common stock represented less than
35% ownership represented by the aggregate number of shares of our common stock
then outstanding. Accordingly, as of February 21, 2003, there are no shares of
Class B common stock outstanding.
On February 11, 2000, the Board of Directors declared a 2-for-1 stock
split effected by a 100% dividend payable on March 16, 2000 to stockholders of
record on March 2, 2000.
On May 23, 2000, our stockholders approved an increase in the number of
authorized Class B common stock from 15,000,000 shares to 25,000,000 shares.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend payable on April 1, 2003 to stockholders of
record on March 19, 2003. The stock splits have been reflected in the
accompanying consolidated financial statements, and all applicable references as
to the number of common shares and per share information were restated.
Appropriate adjustments have been made in the exercise and number of shares
subject to stock options. Stockholder equity accounts were restated to reflect
the reclassification of an amount equal to the par value of the increase in
issued common shares from the additional paid-in-capital account to the common
stock accounts.
Acquisitions
- ------------
On April 2, 2003, we completed the acquisition of Aces International,
Inc., a company specializing in Customer Relationship Management solutions,
serving clients in the healthcare, financial services and telecommunications
verticals. This acquisition is designed to help us lay a strong foundation for
growth in the Customer Relationship Management solutions.
On November 24, 2003, we completed the acquisition of Infopulse Nederland
B.V. ("Infopulse"), a Netherlands-based IT services firm specializing in the
banking and financial services industry. The acquisition is designed to allow us
to better serve customers in the Benelux region by adding local client partners,
industry expertise, and local language capability.
Available Information
- ---------------------
We make available the following public filings with the Securities and
Exchange Commission (the "SEC") free of charge through our Web site at
www.cognizant.com as soon as reasonably practicable after we electronically file
such material with, or furnishes such material to, the SEC:
o our Annual Reports on Form 10-K and any amendments thereto;
o our Quarterly Reports on Form 10-Q and any amendments thereto; and
17
o our Current Reports on Form 8-K and any amendments thereto.
In addition, we will make available our code of business conduct and
ethics free of charge through our Web site. We intend to disclose any amendments
to, or waivers from, our code of business conduct and ethics that are required
to be publicly disclosed pursuant to rules of the SEC and the Nasdaq National
Market by filing such amendment or waiver with the Securities and Exchange
Commission and posting it on our Web site.
No information on our Internet Web site is incorporated by reference into
this Form 10-K or any other public filing made by us with the SEC.
Additional Factors That May Affect Future Results
- -------------------------------------------------
IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR PROSPECTS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
A SUBSTANTIAL PORTION OF OUR ASSETS AND OPERATIONS ARE LOCATED IN INDIA AND WE
ARE SUBJECT TO REGULATORY, ECONOMIC AND POLITICAL UNCERTAINTIES IN INDIA.
We intend to continue to develop and expand our offshore facilities in
India where, as of December 31, 2003, a majority of our technical professionals
were located. While wage costs are lower in India than in the United States and
other developed countries for comparably skilled professionals, wages in India
are increasing at a faster rate than in the United States, which could result in
our incurring increased costs for technical professionals and reduced operating
margins. In addition, there is intense competition in India for skilled
technical professionals and we expect that competition to increase.
India has also experienced civil unrest and terrorism and has been
involved in conflicts with neighboring countries. In recent years, there have
been military confrontations between India and Pakistan that have occurred in
the region of Kashmir and along the Indian-Pakistan border. The potential for
hostilities between the two countries has been high in light of tensions related
to recent terrorist incidents in India and the unsettled nature of the regional
geopolitical environment, including events in and related to Afghanistan. If
India were to become engaged in armed hostilities, particularly if these
hostilities were protracted or involved the threat of or use of weapons of mass
destruction, our operations would be materially adversely affected. In addition,
U.S. companies may decline to contract with us for services in light of
international terrorist incidents or armed hostilities even where India is not
involved because of more generalized concerns about relying on a service
provider utilizing international resources.
In the past, the Indian economy has experienced many of the problems
confronting the economies of developing countries, including high inflation,
erratic gross domestic product growth and shortages of foreign exchange. The
Indian government has exercised and continues to exercise significant influence
over many aspects of the Indian economy, and Indian government actions
concerning the economy could have a material adverse effect on private sector
entities, including us. In the past, the Indian government has provided
significant tax incentives and relaxed certain regulatory restrictions in order
to encourage foreign investment in
18
specified sectors of the economy, including the software development services
industry. Programs that have benefited us include, among others, tax holidays,
liberalized import and export duties and preferential rules on foreign
investment and repatriation. Notwithstanding these benefits, India's central and
state governments remain significantly involved in the Indian economy as
regulators. The elimination of any of the benefits realized by us from our
Indian operations could have a material adverse effect on our business, results
of operations and financial condition.
GENERAL ELECTIONS ARE DECLARED TO TAKE PLACE IN INDIA IN APRIL 2004. THE OUTCOME
OF THE ELECTIONS WILL DETERMINE THE NEW GOVERNMENT, WHICH MAY BE A COALITION OF
DIFFERENT PARTIES THAN EXISTING. THE APPROACH OF THE NEW GOVERNMENT ON THE
ECONOMIC REFORMS, IF DIFFERENT, MAY HAVE AN IMPACT ON OUR FINANCIAL RESULTS. WE
CANNOT ASSURE THE POSITIVE TREND IN CURRENT REFORMS MAY CONTINUE AND SUCH
CHANGES MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIALS.
Since 1991, successive governments in India have pursued policies of
economic reform, including significantly relaxing restrictions on the private
sector. The current Indian government, formed in October 1999, is a coalition of
several parties, including some small regional parties. The withdrawal of one or
more of these parties from the current coalition could result in political
instability. Political instability or further changes in the government in India
could delay the reform of the Indian economy and adversely affect economic
conditions in India generally, which could impact our financial results and
prospects. The current Indian government has generally pursued policies and
taken initiatives that support the continued economic reform policies that have
been pursued by previous governments. These economic reform policies have also
been advocated by the opposition parties. We cannot be assured, however, that
these policies and initiatives will continue in the future. The rate of economic
reform could change, and specific laws and policies affecting technology
companies, foreign investment, currency exchange and other matters affecting our
business could change as well. A significant change in India's economic reform
and deregulation policies could adversely affect business and economic
conditions in India generally and our business in particular.
No assurance can be given that we will not be adversely affected by
changes in inflation, interest rates, taxation, social stability or other
political, economic or diplomatic developments in or affecting India in the
future.
HOSTILITIES BETWEEN THE UNITED STATES AND IRAQ COULD ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND IMPAIR OUR ABILITY
TO SERVICE OUR CUSTOMERS.
Tensions between the United States and Iraq have escalated due to the
United States invasion of and ongoing conflict with Iraq. Hostilities involving
the United States, or military or travel disruptions and restrictions affecting
our employees, could materially adversely affect our operations and our ability
to service our customers. As of December 31, 2003, a majority of our technical
professionals were located in India, and the vast majority of our technical
professionals in the United States and Europe are Indian nationals who are able
to work in the United States and Europe only because they hold current visas.
Travel restrictions could cause
19
us to incur additional unexpected labor costs and expenses or could restrain our
ability to retain the skilled professionals we need for our operations in the
United States and Europe.
OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO MANY UNCERTAINTIES.
Revenues from customers outside North America represented 12%, 13% and 15%
of our revenues for the years ended December 31, 2003, 2002 and 2001,
respectively. We anticipate that revenues from customers outside North America
will continue to account for a material portion of our revenues in the
foreseeable future and may increase as we expand our international presence,
particularly in Europe. In addition, a substantial majority of our employees and
almost all of our IT development centers are located in India. As a result, we
may be subject to risks associated with international operations, including
risks associated with foreign currency exchange rate fluctuations and risks
associated with the application and imposition of protective legislation and
regulations relating to import or export or otherwise resulting from foreign
policy or the variability of foreign economic conditions. To date, we have not
engaged in any hedging transactions to mitigate our risks relating to exchange
rate fluctuations. Additional risks associated with international operations
include difficulties in enforcing intellectual property rights, the burdens of
complying with a wide variety of foreign laws, potentially adverse tax
consequences, tariffs, quotas and other barriers and potential difficulties in
collecting accounts receivable. There can be no assurance that these and other
factors will not have a material adverse effect on our business, results of
operations and financial condition.
WE FACE INTENSE COMPETITION FROM OTHER IT SERVICE PROVIDERS.
The intensely competitive IT professional services market includes a large
number of participants and is subject to rapid change. This market includes
participants from a variety of market segments, including:
o systems integration firms;
o contract programming companies;
o application software companies;
o Internet solutions providers;
o the professional services groups of computer equipment companies;
and
o facilities management and outsourcing companies.
The market also includes numerous smaller local competitors in the various
geographic markets in which we operate. Our direct competitors who use the
on-site/offshore business model include, among others, Infosys, Inc., Tata
Consultancy Services and WIPRO Ltd. In addition, many of our competitors have
significantly greater financial, technical and marketing resources and greater
name recognition than we do. Some of these larger competitors, such as Accenture
Ltd., Electronic Data Systems Corporation and IBM Global Services, have
announced their intentions to develop their offshore operations in order to
lower their cost structure. We
20
cannot assure you that we will be able to sustain our current levels of
profitability or growth as competitive pressures, including competition for
skilled IT development professionals and pricing pressure from competitors
employing an on-site/offshore business model, increase.
OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP NEW SERVICES AND ENHANCE OUR
EXISTING SERVICES IN ORDER TO KEEP PACE WITH THE RAPIDLY EVOLVING TECHNOLOGICAL
ENVIRONMENT.
The IT services market is characterized by rapid technological change,
evolving industry standards, changing customer preferences and new product and
service introductions. Our future success will depend on our ability to develop
solutions that keep pace with changes in the IT services market. There can be no
assurance that we will be successful in developing new services addressing
evolving technologies on a timely or cost-effective basis or, if these services
are developed, that we will be successful in the marketplace. In addition, there
can be no assurance that products, services or technologies developed by others
will not render our services non-competitive or obsolete. Our failure to address
these developments could have a material adverse effect on our business, results
of operations and financial condition.
Our ability to remain competitive will also depend on our ability to
design and implement, in a timely and cost-effective manner, solutions for
customers moving from the mainframe environment to client/server or other
advanced architectures. Our failure to design and implement solutions in a
timely and cost-effective manner could have a material adverse effect on our
business, results of operations and financial condition.
COMPETITION FOR HIGHLY SKILLED TECHNICAL PERSONNEL IS INTENSE AND THE SUCCESS OF
OUR BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED
PROFESSIONALS.
Our future success will depend to a significant extent on our ability to
attract, train and retain highly skilled IT development professionals. In
particular, we need to attract, train and retain project managers, IT engineers
and other senior technical personnel. We believe there is a shortage of, and
significant competition for, IT development professionals in the United States
and India with the advanced technological skills necessary to perform the
services we offer. We have subcontracted, to a limited extent in the past, and
may do so in the future, with other service providers in order to meet our
obligations to our customers. Our ability to maintain and renew existing
engagements and obtain new business will depend, in large part, on our ability
to attract, train and retain technical personnel with the skills that keep pace
with continuing changes in information technology, evolving industry standards
and changing customer preferences. Further, we must train and manage our growing
work force, requiring an increase in the level of responsibility for both
existing and new management personnel. There can be no assurance that the
management skills and systems currently in place will be adequate or that we
will be able to train and assimilate new employees successfully. Our failure to
attract, train and retain current or future employees could have a material
adverse effect on our business, results of operations and financial condition.
OUR GROWTH MAY BE HINDERED BY IMMIGRATION RESTRICTIONS.
Our future success will depend on our ability to attract and retain
employees with technical and project management skills from developing
countries, especially India. The vast
21
majority of our IT professionals in the United States and in Europe are Indian
nationals. The ability of Indian nationals to work in the United States depends
on their ability and our ability to obtain the necessary visas and work permits.
The H-1 B visa classification enables U.S. employers to hire qualified
foreign workers in positions which require an education at least equal to a U.S.
Baccalaureate Degree in specialty occupations such as IT systems engineering and
systems analysis. The H-1 B visa usually permits an individual to work and live
in the United States for a period of up to six years. There is a limit on the
number of new H-1 B petitions that U.S. Citizenship and Immigration Services
("CIS," one of the successor agencies to the Immigration and Naturalization
Service) may approve in any federal fiscal year, and in years in which this
limit is reached, we may be unable to obtain H-1 B visas necessary to bring
foreign employees to the United States. In the current federal fiscal year, the
limit is 65,000. This cap has been reached as of February 17, 2004. New H-1 B
petitions may not be filed until April 1, 2004, and these petitions must be for
positions beginning no earlier than October 1, 2004. However, as a part of our
advanced planning process, we have sufficient employees visa-ready to meet our
anticipated business growth in the current year. In addition, there are strict
labor regulations associated with the H-1 B visa classification. Higher users of
the H-1 B visa program are often subject to investigations by the Wage and Hour
Division of the U.S. Department of Labor. A finding by the U.S. Department of
Labor of willful or substantial failure by us to comply with existing
regulations on the H-1 B classification may result in a bar on future use of the
H-1 B program.
We also regularly transfer employees of our subsidiary in India to the
United States to work on projects and at client sites, using the L-1 visa
classification. The L-1 visa allows companies abroad to transfer certain
managers, executives and employees with specialized company knowledge to related
U.S. companies such as a parent, subsidiary, affiliate, joint venture or branch
office. We have an approved "Blanket L Program," under which the corporate
relationships of our transferring and receiving entities have been pre-approved
by the CIS, thus enabling individual L-1 applications to be presented directly
to a U.S. consular post abroad rather than undergoing the pre-approval process
in the United States. While there have been no major changes in the law or
regulations governing the L-1 categories, both the U.S. consular posts that
review initial L-1 applications and the CIS office, which adjudicates extensions
of L-1 status, have become more restrictive with respect to this category in the
recent past. As a result, the rate of refusals of initial L-1 applications and
of extension denials has increased. In addition, even where L-1 visas are
ultimately granted and issued, security measures undertaken by U.S. consular
posts around the world have caused major delays in visa issuances. Our inability
to bring qualified technical personnel into the United States to staff on-site
customer locations would have a material adverse effect on our business, results
of operations and financial condition.
In the past year, the press has covered allegations of abuse of the L-1
visa category by certain companies. The companies are alleged to have used the
L-1 category to bring workers into the U.S. who then displace U.S. workers.
Because of this press attention, Congress has held hearings on the L-1 visa
category and legislators have introduced bills to change or restrict the
standards for the L-1 category. While none of the proposed legislation has moved
out of the introductory stage, it is possible that new restrictions on the L
visa category will become law. If
22
such restrictive proposals become law, this could impair our ability to staff
our projects in the U.S. with resources from our entities abroad.
We also process immigrant visas for lawful permanent residence for
employees to fill positions for which there are no able, willing and qualified
U.S. workers available to fill the positions. Compliance with existing U.S.
immigration and labor laws, or changes in those laws making it more difficult to
hire foreign nationals or limiting our ability to successfully obtain permanent
residence for our foreign employees in the United States, could require us to
incur additional unexpected labor costs and expenses or could restrain our
ability to retain the skilled professionals we need for our operations in the
United States. Any of these restrictions or limitations on our hiring practices
could have a material adverse effect on our business, results of operations and
financial condition.
In addition to immigration restrictions in the United States, there have
recently been changes to work permit legislation in the United Kingdom, where we
have experienced significant growth. Under the new regulations, in order for us
to transfer our employees to the United Kingdom, either from the United States
or from India, we must demonstrate that the employee had been employed by us for
at least six months prior to the transfer. These restrictions restrain our
ability to add the skilled professionals we need for our operations in Europe,
and could have an adverse affect on our international strategy to expand our
presence in Europe. As a result, the changes to work permit legislation in the
United Kingdom could have a material adverse effect on our business, results of
operations and financial condition.
Immigration and work permit laws and regulations in the United States, the
United Kingdom and other countries is subject to legislative and administrative
changes as well as changes in the application of standards and enforcement.
Immigration and work permit laws and regulation can be significantly affected by
political forces and levels of economic activity. Our international expansion
strategy and our business, results of operations and financial condition may be
materially adversely affected if changes in immigration and work permit laws and
regulations or the administration or enforcement of such laws or regulations
impairs our ability to staff projects with IT professionals who are not citizens
of the country where the work is to be performed.
POTENTIAL ANTI-OUTSOURCING LEGISLATION COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND IMPAIR OUR ABILITY TO SERVICE
OUR CUSTOMERS.
In the past few months, the issue of outsourcing of services abroad by
American companies has become a topic of political discussion in the United
States. Measures aimed at limiting or restricting outsourcing by U.S. companies
are under discussion in Congress and in as many as one-half of the state
legislatures. While no substantive anti-outsourcing legislation has been
introduced to date, given the intensifying debate over this issue, the
introduction of such legislation is possible. If introduced, such measures are
likely to fall within two categories: (1) a broadening of restrictions on
outsourcing by federal government agencies and on government contracts with
firms that outsource services directly or indirectly, and/or (2) measures that
impact private industry, such as tax disincentives or intellectual property
transfer restrictions. In the event that any such measures become law, our
business, financial condition and results of operations could be adversely
affected and our ability to service our customer could be impaired.
23
OUR ABILITY TO OPERATE AND COMPETE EFFECTIVELY COULD BE IMPAIRED IF WE LOSE KEY
PERSONNEL.
Our future performance depends to a significant degree upon the continued
service of the key members of our management team, as well as marketing, sales
and technical personnel, and our ability to attract and retain new management
and other personnel. We do not maintain key man life insurance on any of our
executive officers or significant employees. Competition for personnel is
intense, and there can be no assurance that we will be able to retain our key
employees or that we will be successful in attracting and retaining new
personnel in the future. The loss of any one or more of our key personnel or the
failure to attract and retain key personnel could have a material adverse effect
on our business, results of operations and financial condition.
RESTRICTIONS IN NON-COMPETITION AGREEMENTS WITH OUR EXECUTIVE OFFICERS MAY NOT
BE ENFORCEABLE.
We have entered into non-competition agreements with a majority of our
executive officers. There can be no assurance, however, that the restrictions in
these agreements prohibiting the executive officers from engaging in competitive
activities are enforceable. Further, substantially all of our professional
non-executive staff are not covered by agreements that would prohibit them from
working for our competitors. If any of our key professional personnel leaves our
employment and joins one of our competitors, our business could be adversely
affected.
OUR EARNINGS MAY BE ADVERSELY AFFECTED IF WE CHANGE OUR INTENT NOT TO REPATRIATE
EARNINGS IN INDIA.
During the first quarter of 2002, we 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, we intend to use 2002 and future Indian earnings to expand our
operations outside the United States instead of repatriating those earnings to
the United States. Accordingly, effective January 1, 2002, pursuant to
Accounting Principles Board Opinion No. 23, "Accounting for Income Taxes-Special
Areas", we no longer have to accrue taxes on all foreign earnings recognized in
2002 and subsequent periods as these earnings are now considered to be
indefinitely reinvested outside the United States. While we have no plans to do
so, events may occur in the future that could effectively force us to change our
intent on repatriating Indian earnings. If we change our intent and repatriate
such earnings, we will have to accrue the applicable amount of taxes associated
with such earnings and pay taxes at a substantially higher rate than the
effective rate in 2003. These increased taxes could have a material adverse
effect on our business, results of operations and financial condition.
OUR EARNINGS MAY BE ADVERSELY AFFECTED IF WE CHANGE OUR ACCOUNTING POLICY WITH
RESPECT TO EMPLOYEE STOCK OPTIONS.
Stock options are an important component of compensation packages for most
of our mid- and senior-level employees. We currently do not deduct the expense
of employee stock option grants from our income. Many companies, however, are
considering a change to their
24
accounting policies to record the value of stock options issued to employees as
an expense and changes in the accounting treatment of stock options are
currently under consideration by the Financial Accounting Standards Board and
other accounting standards-setting bodies. If we are required to or decide to
change our accounting policy with respect to the treatment of employee stock
option grants, our earnings could be materially adversely affected.
A SIGNIFICANT PORTION OF OUR PROJECTS ARE ON A FIXED-PRICE BASIS, SUBJECTING US
TO THE RISKS ASSOCIATED WITH COST OVER-RUNS AND OPERATING COST INFLATION.
We contract to provide services either on a time-and-materials basis or on
a fixed-price basis, with fixed-price contracts accounting for approximately 25%
and 26% of our revenues for the years ended December 31, 2002 and 2003,
respectively. We expect that an increasing number of our future projects will be
contracted on a fixed-price basis. We bear the risk of cost over-runs and
operating cost inflation in connection with projects covered by fixed-price
contracts. Our failure to estimate accurately the resources and time required
for a fixed-price project, or our failure to complete our contractual
obligations within the time frame committed, could have a material adverse
effect on our business, results of operations and financial condition.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MANAGE OUR RAPID GROWTH.
Since we began providing software development and maintenance services in
early 1994, our professional and support staff has increased from approximately
25 to over approximately 9,240 at December 31, 2003. Our anticipated growth will
continue to place significant demands on our management and other resources. In
particular, we will have to continue to increase the number of our personnel,
particularly skilled technical, marketing and management personnel, and continue
to develop and improve our operational, financial, communications and other
internal systems. Our inability to manage our anticipated growth effectively
could have a material adverse effect on our business, results of operations and
financial condition.
As part of our growth strategy, we are expanding our operations in Europe
and Asia. We may not be able to compete effectively in these markets and the
cost of entering these markets may be substantially greater than we expect. If
we fail to compete effectively in the new markets we enter, or if the cost of
entering those markets is substantially greater than we expect, our business,
results of operations and financial condition could be adversely affected. In
addition, if we cannot compete effectively, we may be required to reconsider our
strategy to invest in our international expansion plans and change our intent on
the repatriation of our earnings.
WE RELY ON A FEW CUSTOMERS FOR A LARGE PORTION OF OUR REVENUES.
Approximately 35%, 38% and 36% of our revenues in years ended December 31,
2001 and 2002 and 2003, respectively, were generated from our top five
customers. Approximately 10.1% of our revenues in the fiscal year ended December
31, 2003 were generated from JP Morgan Chase. The volume of work performed for
specific customers is likely to vary from year to year, and a major customer in
one year may not use our services in a subsequent year. The loss of one of our
large customers could have a material adverse effect on our business, results of
operations and financial condition.
25
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
Consistent with industry practice, we generally do not enter into
long-term contracts with our customers. As a result, we are substantially
exposed to volatility in the market for our services, and may not be able to
maintain our level of profitability. If we are unable to market our services on
terms we find acceptable, our financial condition and results of operations
could suffer materially.
OUR OPERATING RESULTS EXPERIENCE SIGNIFICANT QUARTERLY FLUCTUATIONS.
We historically have experienced significant quarterly fluctuations in our
revenues and results of operations and expect these fluctuations to continue.
Among the factors causing these variations have been:
o the number, timing, scope and contractual terms of IT development
and maintenance projects in which we are engaged;
o delays incurred in the performance of those projects;
o the accuracy of estimates of resources and time required to complete
ongoing projects; and
o general economic conditions.
In addition, our future revenues, operating results and margins may
fluctuate as a result of:
o changes in pricing in response to customer demand and competitive
pressures;
o the mix of on-site and offshore staffing;
o the ratio of fixed-price contracts versus time-and-materials
contracts;
o employee wage levels and utilization rates;
o the timing of collection of accounts receivable; and
o the breakdown of revenues by distribution channel.
A high percentage of our operating expenses, particularly personnel and
rent, are relatively fixed in advance of any particular quarter. As a result,
unanticipated variations in the number and timing of our projects or in employee
wage levels and utilization rates may cause significant variations in our
operating results in any particular quarter, and could result in losses. Any
significant shortfall of revenues in relation to our expectations, any material
reduction in utilization rates for our professional staff or variance in the
on-site, offshore staffing mix, an unanticipated termination of a major project,
a customer's decision not to pursue a new project or proceed to succeeding
stages of a current project or the completion during a quarter of several
26
major customer projects could require us to pay underutilized employees and
could therefore have a material adverse effect on our business, results of
operations and financial condition.
As a result of these factors, it is possible that in some future periods,
our revenues and operating results may be significantly below the expectations
of public market analysts and investors. In such an event, the price of our
common stock would likely be materially and adversely affected.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT LEVEL OF PROFITABILITY.
Our gross margin of 46.4% and 45.8% for the years ended December 31, 2002
and 2003, respectively, may decline if we experience declines in demand and
pricing for our services. In addition, wages in India are increasing at a faster
rate than in the United States, which could result in us incurring increased
costs for technical professionals. Although we have been able to partially
offset pricing pressures and wage increases through our low-cost operating
structure, there can be no assurance that we will be able to continue to do so
in the future.
LIABILITY CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Many of our engagements involve projects that are critical to the
operations of our 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 us, regardless of our responsibility for the
failure. Although we attempt to limit by contract our liability for damages
arising from negligent acts, errors, mistakes or omissions in rendering our IT
development and maintenance services, there can be no assurance that any
contractual limitations on liability will be enforceable in all instances or
will otherwise protect us from liability for damages. Although we have general
liability insurance coverage, including coverage for errors or omissions, there
can be no assurance that 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 us that exceed
available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on our business, results of
operations and financial condition.
WE MAY HAVE POTENTIAL LIABILITY ARISING FROM THE IMS HEALTH EXCHANGE OFFER IN
THE EVENT THAT WE BREACH ANY OF OUR REPRESENTATIONS IN CONNECTION WITH THE
DISTRIBUTION AGREEMENT ENTERED INTO WITH IMS HEALTH.
We entered into a Distribution Agreement, dated January 7, 2003, with IMS
Health (the "Distribution Agreement"), that provides, among other things, that
IMS Health and we 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 U.S. federal income tax consequences of the exchange offer. In
addition, pursuant to the Distribution Agreement, we agreed to indemnify IMS
Health for any tax liability to which they may be subject as a result of the
exchange offer but only to the extent that such tax liability resulted solely
from a breach of the representations that we made and were
27
relied upon by McDermott, Will & Emery in connection with rendering its opinion
regarding the U.S. federal income tax consequences of the exchange offer. If we
breach any of our representations in connection with the Distribution Agreement,
the related indemnification liability could have a material adverse effect on
our results of operations, financial position and cash flows.
WE MAY BE SUBJECT TO LEGACY DUN & BRADSTREET LIABILITIES THAT COULD HAVE AN
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In 1996, The Dun & Bradstreet Corporation, now known as R.H. Donnelly
Corporation, split itself into three separate companies: The Dun & Bradstreet
Corporation, Cognizant Corporation and ACNielsen Corporation. In connection with
the split-up transaction, The Dun & Bradstreet Corporation, Cognizant
Corporation (renamed Nielsen Media Research), of which Cognizant Technology
Solutions Corporation was once a part, and AC Nielsen Corporation (now a
subsidiary of the Dutch company VNU N.A.) entered into a distribution agreement.
In the 1996 distribution agreement, each party assumed the liabilities relating
to the businesses allocated to it and agreed to indemnify the other parties and
their subsidiaries against those liabilities and certain other matters. The 1996
distribution agreement also prohibited each party thereto from distributing to
our stockholders any business allocated to it unless the distributed business
delivered undertakings agreeing to be jointly and severally liable to the other
parties under the 1996 distribution agreement for the liabilities of the
distributing parent company under the 1996 distribution agreement. IMS Health
made such undertaking when it was spun off by Nielsen Media Research in 1998
and, accordingly, IMS Health and Nielsen Media Research are jointly and
severally liable to R.H. Donnelly and ACNielsen for Cognizant Corporation
obligations under the terms of the 1996 distribution agreement. IMS Health has
requested similar undertakings from Cognizant Technology Solutions Corporation
as a condition to the distribution of our shares in the exchange offer. IMS
Health is obligated to procure similar undertakings from Cognizant Technology
Solutions Corporation to Nielsen Media Research and Synavant Inc. with respect
to liabilities allocated to IMS Health in connection with Nielsen Media
Research's spin-off of IMS Health and IMS Health's spin-off of Synavant Inc. In
connection with the exchange offer, Cognizant Technology Solutions Corporation
has given these undertakings and, as a result, Cognizant Technology Solutions
Corporation may be subject to claims in the future in relation to legacy
liabilities.
One possible legacy liability arises from a pending antitrust action filed
by Information Resources Inc. in 1996, which names as joint defendants all
parties to the 1996 distribution agreement. Information Resources' complaint
alleges damages in excess of $350 million, which amount it has asked to be
trebled, plus punitive damages. ACNielsen Corporation agreed in connection with
the 1996 distribution agreement to assume any and all liabilities resulting from
the Information Resources claim to the extent that ACNielsen remains financially
viable. In connection with VNU's acquisition of ACNielsen in 2001, VNU was
required to assume this liability and to be included with ACNielsen for purposes
of determining the amount that can be paid by ACNielsen in respect of any claim.
IMS Health and Nielsen Media Research, Inc., successors to Cognizant
Corporation, have agreed to share liabilities in excess of the amount ACNielsen
is required to pay under the 1996 distribution agreement in respect of this
claim on a 50-50 basis with The Dun & Bradstreet Corporation (subsequently
separated into The Dun & Bradstreet Corporation and Moody's Corporation). IMS
Health and Nielsen Media Research,
28
Inc. further agreed to share their portion of the liabilities in relation to the
Information Resources action on a 75-25 basis, subject to Nielsen Media
Research, Inc.'s liability in respect of the Information Resources action and
certain other contingent liabilities being capped at $125 million. Pursuant to
our undertaking, Cognizant Technology Solutions Corporation could be held liable
for those amounts that VNU, IMS Health, Nielsen Media Research, Inc., and The
Dun & Bradstreet Corporation and their successors are unable or unwilling to
pay.
Other claims have arisen in the past and may arise in the future under the
1996 distribution agreement or the distribution agreements relating to Nielsen
Media Research's spin-off of IMS Health and IMS Health's spin-off of Synavant
Inc., in which case Cognizant Technology Solutions Corporation may be jointly
and severally liable for any losses suffered by the parties entitled to
indemnification.
IMS Health has agreed to indemnify Cognizant Technology Solutions
Corporation for any and all liabilities that arise out of our undertakings to be
jointly and severally liable for these liabilities, but if for any reason IMS
Health does not perform on our indemnification obligation, these liabilities
could have a material adverse effect on our financial condition and results of
operations.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
Our future success will depend in part on our ability to protect our
intellectual property rights. We presently hold no patents or registered
copyrights, and rely upon a combination of copyright and trade secret laws,
non-disclosure and other contractual arrangements and various security measures
to protect our intellectual property rights. India is a member of the Berne
Convention, and has agreed to recognize protections on copyrights conferred
under the laws of foreign countries, including the laws of the United States. We
believe that laws, rules, regulations and treaties in effect in the United
States and India are adequate to protect us from misappropriation or
unauthorized use of our copyrights. However, there can be no assurance that
these laws will not change and, in particular, that the laws of India will not
change in ways that may prevent or restrict the transfer of software components,
libraries and toolsets from India to the United States. There can be no
assurance that the steps we have taken to protect our intellectual property
rights will be adequate to deter misappropriation of any of our intellectual
property, or that we will be able to detect unauthorized use and take
appropriate steps to enforce our rights. Unauthorized use of our intellectual
property may result in development of technology, products or services which
compete with our products and unauthorized parties may infringe upon or
misappropriate our products, services or proprietary information.
Although we believe that our intellectual property rights do not infringe
on the intellectual property rights of any of our competitors or others, there
can be no assurance that infringement claims will not be asserted against us in
the future, that assertion of infringement claims will not result in litigation
or that we would prevail in that litigation or be able to obtain a license for
the use of any infringed intellectual property from a third party on
commercially reasonable terms, if at all. We expect that the risk of
infringement claims against us will increase if our competitors are able to
obtain patents for software products and processes. Any infringement claims,
regardless of their outcome, could result in substantial cost to us and divert
management's attention from our operations. Any infringement claim or litigation
against us
29
could, therefore, have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO INTEGRATE ACQUIRED COMPANIES OR TECHNOLOGIES SUCCESSFULLY.
We believe that opportunities exist in the fragmented IT services market
to expand our business through selective strategic acquisitions and joint
ventures. We believe that acquisition and joint venture candidates may enable us
to expand our geographic presence, especially in the European market, enter new
technology areas or expand our capacity. There can be no assurance that we will
identify suitable acquisition candidates available for sale at reasonable
prices, consummate any acquisition or joint venture or successfully integrate
any acquired business or joint venture into our operations. Further,
acquisitions and joint ventures involve a number of special risks, including
diversion of management's attention, failure to retain key personnel,
unanticipated events or circumstances and legal liabilities, some or all of
which could have a material adverse effect on our business, results of
operations and financial condition. We may finance any future acquisitions with
debt financing, the issuance of equity securities or a combination of the
foregoing. There can be no assurance that we will be able to arrange adequate
financing on acceptable terms. In addition, acquisitions financed with the
issuance of our equity securities could be dilutive.
PROVISIONS IN OUR CHARTER, BY-LAWS AND STOCKHOLDERS' RIGHTS PLAN AND PROVISIONS
UNDER DELAWARE LAW MAY DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS.
Provisions in our charter and by-laws, each as amended, our stockholders'
rights plan and Delaware General Corporate Law ("DGCL") may have the effect of
deterring unsolicited takeover proposals or delaying or preventing changes in
our control or management, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices. In
addition, these documents and provisions may limit the ability of stockholders
to approve transactions that they may deem to be in their best interests. Our
board of directors has the authority, without further action by the
stockholders, to fix the rights and preferences, and issue shares, of preferred
stock. Our charter provides for a classified board of directors, which will
prevent a change of control of our board of directors at a single meeting of
stockholders. The elimination of our stockholders' ability to act by written
consent and to call a special meeting will delay stockholder actions until
annual meetings or until a special meeting is called by our chairman or chief
executive officer or our board of directors. The supermajority-voting
requirement for specified amendments to our charter and by-laws allows a
minority of our stockholders to block those amendments. The DGCL also contains
provisions preventing stockholders from engaging in business combinations with
us, subject to certain exceptions. These provisions could also discourage bids
for our common stock at a premium as well as create a depressive effect on the
market price of the shares of our common stock.
ITEM 2. PROPERTIES
As of December 31, 2003, we have substantially completed the initial phase
of our India development center expansion program, which was announced in July
2001. This program encompassed the construction of three fully-owned development
centers containing approximately 650,000 square feet of space in Chennai,
Calcutta and Pune. Each of these
30
development centers contain up-to-date technology infrastructure and
communications capabilities.
On December 22, 2003, we announced building plans for three additional
fully-owned development centers containing over 600,000 square feet of space in
Pune, Chennai and Bangalore. These additional facilities will be able to
accommodate approximately 6,500 employees in total.
In addition, we operate eleven leased development facilities in the
following cities: Bangalore, Chennai, Calcutta and Hyderabad in India, Phoenix,
Arizona and Limerick, Ireland.
We operate out of our Teaneck, New Jersey headquarters and our regional
and international offices. We believe that our current facilities are adequate
to support our existing operations. We also believe that we will be able to
obtain suitable additional facilities on commercially reasonable terms on an "as
needed" basis.
We occupy the following properties:
Approximate
Area
Location (in sq. feet) Use Nature of Occupancy
- ------------------ ------------- ------------- ------------------------
Bangalore, India 25,849 Software Multiple leases
Development expiring 04/30/05 -
Facility 06/30/06 with renewal
options
Bangalore, India 35,475 Software Lease expires 10/31/11
Development with renewal option
Facility
Chennai, India 84,888 Software Multiple leases
Development expiring 11/30/04 with
Facility renewal options
Chennai, India 15,536 Software Multiple leases
Development expiring 1/31/06 -
Facility 4/30/06 with renewal
options
Chennai, India 34,700 Software Multiple leases
Development expiring 8/31/04
Facility -03/14/06 with renewal
options
Chennai, India 35,126 Software Multiple leases
Development expiring 4/30/06 with
Facility renewal options
Chennai, India 33,688 Software Lease expires 12/15/06
Development with renewal options
Facility
Chennai, India 400,000 Software Owned
Development
Facility
31
Approximate
Area
Location (in sq. feet) Use Nature of Occupancy
- ------------------ ------------- ------------- ------------------------
Pune, India 135,723 Software Owned
Development
Facility
Calcutta, India 114,120 Software Owned
Development
Facility
Calcutta, India 13,928 Software Lease expires 10/06/06
Development with a renewal option
Facility
Hyderabad, India 31,019 Software Multiple leases
Development expiring 10/19/08 -
Facility 12/31/08
Teaneck, New Jersey 24,745 Executive and Multiple leases
Business expiring 09/30/05 -
Development 12/30/10
Office
Atlanta, Georgia 957 Business Lease expires 9/30/06
Development
Office
Chicago, Illinois 5,113 Business Lease expires 7/31/05
Development
Office
Dallas, Texas 2,613 Business Lease expires 11/30/06
Development
Office
Los Angeles, 1,018 Business Lease expires 7/31/04
California Development
Office
Minneapolis, 766 Business Lease expires 9/30/06
Minnesota Development
Office
San Ramon, 5,670 Business Lease expires 10/15/06
California Development
Office
Phoenix, Arizona 15,953 Software Lease expires 06/30/06
Development
Facility
Toronto, Canada 200 Business Lease on Month to Month
Development basis
Office
Frankfurt, Germany 284 Business Lease expires 03/31/07
Development
Office
Limerick, Ireland 10,495 Software Multiple lease expiring
Development 03/27/23 - 05/31/32,
Facility cancelable with 12
month notice
32
Approximate
Area
Location (in sq. feet) Use Nature of Occupancy
- ------------------ ------------- ------------- ------------------------
London, England 2,080 Business Lease expires 9/28/04
Development
Office
Zurich, Switzerland 102 Business Lease expires 09/30/04
Development
Office
Geneva, Switzerland 100 Business Lease expires 09/30/04
Development
Office
Singapore 200 Business Lease expires 09/30/04
Development
Office
Amsterdam, The 7,131 Business Multiple leases
Netherlands Development expiring 7/31/05 -
Office 12/31/05
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of our management, the outcome of
such claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on our quarterly or annual operating results, cash flows
or consolidated financial position.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
33
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to June 1998, there was no established market for our Class B common
stock. Since June 19, 1998, the Class A common stock has traded on the Nasdaq
National Market ("NNM") under the symbol "CTSH". Our Class B common stock is not
listed on a stock exchange and does not trade.
Prior to February 13, 2003, all of the issued and outstanding shares of
our Class B common stock were held by IMS Health. On February 13, 2003, IMS
Health distributed all of our 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 its
stockholders. IMS Health distributed 0.927 shares of our Class B common stock to
its stockholders for every one share of IMS Health's common stock tendered. As
of February 21, 2003, pursuant to our Restated Certificate of Incorporation, all
of the shares of Class B common stock automatically converted into shares of
Class A common stock. According to our Restated Certificate of Incorporation, if
at any time the outstanding shares of our Class B common stock ceases to
represent at least 35% of the economic ownership represented by the aggregate
number of shares of our common stock then outstanding, each share of our Class B
common stock shall automatically convert into one share of our Class A common
stock. This automatic conversion occurred on February 21, 2003 based on share
numbers we received from our transfer agent (American Stock Transfer and Trust
Company) as of the close of business February 20, 2003, which indicated that the
Class B common stock represented less than 35% ownership represented by the
aggregate number of shares of our common stock then outstanding. Accordingly, as
of February 21, 2003, there are no shares of Class B common stock outstanding.
The following table describes the per share range of high and low sale
prices for shares of our Class A common stock, as listed for quotation on the
NNM, and the quarterly cash dividends per share for the periods indicated. This
table has been restated to reflect our 3-for-1 stock split which became
effective on April 1, 2003.
Cash
Dividend Per
Quarter Ended High Low Share
- -------------------------- ------ ------ ------------
March 31, 2002............ $14.03 $11.00 $0.00
June 30, 2002............. $18.07 $12.57 $0.00
September 30, 2002........ $21.23 $16.16 $0.00
December 31, 2002......... $25.22 $16.00 $0.00
March 31, 2003............ $24.08 $18.77 $0.00
June 30, 2003............. $25.20 $17.49 $0.00
September 30, 2003........ $40.80 $25.07 $0.00
December 31, 2003......... $48.40 $37.18 $0.00
As of March 5, 2004, the approximate number of holders of record of our
Class A common stock was 352 and the approximate number of beneficial holders of
our Class A common stock was 13,501.
34
We have never declared or paid cash dividends on our Class A or Class B
common stock. We currently intend to retain any future earnings to finance the
growth of the business and, therefore, do not currently anticipate paying any
cash dividends in the foreseeable future.
Equity Compensation Plan Information
------------------------------------
The following table provides information as of December 31, 2003 with
respect to the shares of our common stock that may be issued under our existing
equity compensation plans.
----------------------------------------------------------------------
Number of Number of
Securities Weighted Securities
to be Issued Average Available for
Upon Exercise Future Issuance
Exercise of Price of Under Equity
Outstanding Outstanding Compensation
Plan Category Options Options Plans
----------------------------------------------------------------------
Equity compensation
plans that have been
approved by security
holders................ 12,471,665 $14.79 1,165,768
----------------------------------------------------------------------
In addition, as of December 31, 2003, there are 2,028,249 shares available
for issuance under our Employee Stock Purchase Plan, which is an equity
compensation plan approved by security holders. There are no equity compensation
plans that have not been approved by security holders.
35
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated historical
financial data as of the dates and for the periods indicated. Our selected
consolidated financial data set forth below as of December 31, 2002 and 2003 and
for each of the three years in the period ended December 31, 2003 has been
derived from the audited financial statements included elsewhere herein. Our
selected consolidated financial data set forth below as of December 31, 1999,
2000 and 2001 and for each of the years ended December 31, 1999 and 2000 are
derived from the audited financial statements not included elsewhere herein. Our
selected consolidated financial information for 2001, 2002 and 2003 should be
read in conjunction with the Consolidated Financial Statements and the Notes and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" which are included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues .......................... $ 74,084 $ 122,758 $ 158,969 $ 208,657 $ 365,656
Revenues - related party .......... 14,820 14,273 18,809 20,429 2,575
--------- --------- --------- --------- ---------
Total revenues ................ 88,904 137,031 177,778 229,086 368,231
Cost of revenues .................. 46,161 70,437 90,848 122,701 199,724
--------- --------- --------- --------- ---------
Gross profit ...................... 42,743 66,594 86,930 106,385 168,507
Selling, general and
administrative expenses ......... 23,061 35,959 44,942 53,345 84,259
Depreciation and
amortization expense ............ 3,037 4,507 6,368 7,842 11,936
--------- --------- --------- --------- ---------
Income from operations ............ 16,645 26,128 35,620 45,198 72,312
Other income (expense):
Interest income ................. 1,263 2,649 2,501 1,808 2,128
Split-off costs ................. -- -- -- (1,680) (2,010)
Impairment loss on investment ... -- -- (1,955) -- --
Other income (expense) - net .... 37 (530) (767) (235) (199)
--------- --------- --------- --------- ---------
Total other income (expense)... 1,300 2,119 (221) (107) (81)
--------- --------- --------- --------- ---------
Income before provision for
income taxes .................... 17,945 28,247 35,399 45,091 72,231
Provision for income taxes ........ (6,711) (10,564) (13,239) (10,529) (14,866)
--------- --------- --------- --------- ---------
Net income ........................ $ 11,234 $ 17,683 $ 22,160 $ 34,562 $ 57,365
========= ========= ========= ========= =========
Basic earnings per share .......... $ 0.20 $ 0.32 $ 0.39 $ 0.58 $ 0.92
========= ========= ========= ========= =========
Diluted earnings per share ........ $ 0.19 $ 0.29 $ 0.36 $ 0.54 $ 0.84
========= ========= ========= ========= =========
Weighted average number of
common shares outstanding ....... 55,026 55,695 57,051 59,241 62,505
========= ========= ========= ========= =========
Weighted average number of
common shares and stock
options outstanding ............. 58,246 60,767 61,113 63,693 67,907
========= ========= ========= ========= =========
36
Year Ended December 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Financial
Position Data:
Cash and cash equivalents.......... $ 42,641 $ 61,976 $ 84,977 $ 126,211 $ 194,221
Working capital.................... 43,507 61,501 95,637 134,347 215,861
Total assets....................... 69,026 109,540 144,983 231,473 360,589
Due to related party............... -- 8 -- -- --
Stockholders' equity............... 45,461 66,116 98,792 165,481 274,070
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
We are a leading provider of custom IT services related to IT design,
development, integration and maintenance services primarily for Fortune 1000
companies located in the United States and Europe. Our core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. We provide IT services using an integrated
on-site/offshore business model. This seamless on-site/offshore business model
combines technical and account management teams located on-site at the customer
location and offshore at dedicated development centers located in India and
Ireland.
In 2003, our revenue increased to $368.2 million compared to $229.1
million in 2002. Net income increased to $57.4 million or $0.84 per diluted
share in 2003 compared to $34.6 million or $0.54 per diluted share in 2002. Our
revenue growth was driven by continued strong demand for our application
management and application development and integration services. We believe this
trend will continue in 2004. We finished 2003 with 153 active clients compared
to 115 in 2002. We anticipate that a significant portion of our revenue growth
in 2004 will come from increased penetration of existing clients. During 2003,
88% of our revenue came from clients in North America. In 2004, we will look to
expand our presence in Northern Europe as we are starting to see an increased
level of interest for offshore services in that region. In 2003, our operating
margin decreased approximately 10 basis points to 19.6% from 19.7% in 2002. This
was consistent with our targeted operating margin range of 19 to 20% of total
revenues.
At December 31, 2003, we had cash and cash equivalents of $194.2 million,
an increase of $68 million over the prior year. On December 22, 2003, we
announced building plans for three additional fully-owned development centers
containing over 600,000 square feet of space in Pune, Chennai and Bangalore.
Total costs related to this program are expected to be approximately $42.5
million, which we expect to fund from current operations. Accordingly, we
believe our financial condition will remain strong. In addition, we will
continue to consider acquisitions of companies that can improve our capabilities
in certain market niches or geographic areas.
Critical Accounting Estimates and Risks
- ---------------------------------------
Management's discussion and analysis of our financial condition and
results of operations are based on our consolidated financial statements that
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the amounts
reported for assets and liabilities, including the recoverability of tangible
and intangible assets, disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. On an on-going basis, we evaluate our
estimates. The most significant estimates relate to the recognition of revenue
and profits based on the percentage of completion method of accounting for
certain fixed-bid contracts, the allowance for doubtful accounts, income taxes,
valuation of goodwill and other long-lived assets, contingencies and litigation.
We
38
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. The actual amounts
will differ from the estimates used in the preparation of the accompanying
consolidated financial statements. Our significant accounting policies are
described in Note 2 to the consolidated financial statements.
We believe the following critical accounting policies require higher level
of management judgments and estimates than others in preparing the consolidated
financial statements:
REVENUE RECOGNITION. Revenues related to our fixed-price contracts are
recognized as the service is performed using the percentage-of-completion method
of accounting, under which the total contract 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. Estimates of total contract revenues
and costs are continuously monitored during the term of the contract, and
recorded revenues and costs are subject to revision as the contract progresses.
Such revisions may result in increases or decreases to revenues and income and
are reflected in the consolidated financial statements in the periods in which
they are first identified.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. The allowance for doubtful accounts is determined by
evaluating the relative credit-worthiness of each customer based upon market
capitalization and other information, including the aging of the receivables. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
INCOME TAXES. Determining the consolidated provision for income tax
expense, deferred tax assets and liabilities and related valuation allowance, if
any, involves judgment. As a global company, we are required to calculate and
provide for income taxes in each of the jurisdictions where we operate. This
involves estimating current tax exposures in each jurisdiction as well as making
judgments regarding the recoverability of deferred tax assets. Tax exposures can
involve complex issues and may require an extended period to resolve. In the
period of resolution, adjustments may need to be recorded that result in
increases or decreases to income. Changes in the geographic mix or estimated
level of annual pre-tax income can also affect the overall effective income tax
rate.
On an on-going basis, we evaluate whether a valuation allowance is needed
to reduce our deferred tax assets to the amount that is more likely than not to
be realized. While we have considered future taxable income and on-going prudent
and feasible tax planning strategies in assessing the need for the valuation
allowance, in the event we determine that we will be able to realize deferred
tax assets in the future in excess of the net recorded amount, an adjustment to
the deferred tax asset would increase income in the period such determination
was made. Likewise, should we determine that we will not be able to realize all
or part of the net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income or equity (if the deferred tax
asset is related to tax benefits from stock option benefits that have not been
realized) in the period such determination was made.
39
Our Indian subsidiary, Cognizant 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 Cognizant India's export
profits. Substantially all of the earnings of Cognizant India are attributable
to export profits and are therefore currently entitled to a 100% exemption from
Indian income tax. These tax holidays will begin to expire in 2004 and, under
current law, will be completely phased out by March of 2009. Prior to 2002, it
was management's intent to repatriate all accumulated earnings from India to the
United States; accordingly, we provided for deferred income taxes in the amount
of approximately $28.6 million on all such undistributed earnings through
December 31, 2001. During the first quarter of 2002, we 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, we intend 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 Board Opinion No. 23, we no longer
accrue incremental U.S. taxes on all foreign earnings recognized in 2002 and
subsequent periods as these earnings are considered to be indefinitely
reinvested outside of the United States. As of December 31, 2003, the amount of
unrepatriated Indian earnings upon which no incremental U.S. taxes have been
recorded is approximately $79.5 million. While we have no plans to do so, if
such earnings are repatriated in the future or are no longer deemed to be
indefinitely reinvested, we will accrue the applicable amount of taxes
associated with such earnings and pay taxes at a substantially higher rate than
the effective rate in 2003. 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 or
whether the amount of previously accrued deferred taxes on earnings recognized
prior to 2002 will require adjustment.
Effective April 1, 2003, the government of India passed various tax law
changes which affected the way in which our earnings are taxed in India. The tax
exemption for export earnings was restored to 100% from 90%. The surtax was
reduced, decreasing the Indian effective rate from 36.75% to 35.875% for income
that is subject to tax, the corporate level tax on the payment of dividends was
restored and the withholding tax on dividends was repealed.
GOODWILL. We evaluate goodwill for impairment at least annually, or as
circumstances warrant. When determining the fair value of our reporting units,
we utilize various assumptions, including projections of future cash flows. Any
adverse changes in key assumptions about our businesses and their prospects or
an adverse change in market conditions may cause a change in the estimation of
fair value and could result in an impairment charge. As of December 31, 2003,
our goodwill balance was approximately $4.5 million.
LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which was adopted in 2002, we review for impairment
long-lived assets and certain identifiable intangibles whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In general, we will recognize an impairment loss when the sum of
undiscounted expected future cash flows is less than the carrying amount of such
asset. The measurement for such an impairment loss is then based on the fair
value of the asset. If such assets were determined to be impaired, it could have
a material adverse effect on our business, results of operations and financial
condition.
40
RISKS. Most of our IT development centers, including a substantial
majority of our employees are located in India. As a result, we may be subject
to certain risks associated with international operations, including risks
associated with foreign currency exchange rate fluctuations and risks associated
with the application and imposition of protective legislation and regulations
relating to import and export or otherwise resulting from foreign policy or the
variability of foreign economic or political conditions. To date, we have not
engaged in any hedging transactions to mitigate our risks relating to exchange
rate fluctuations. Additional risks associated with international operations
include difficulties in enforcing intellectual property rights, the burdens of
complying with a wide variety of foreign laws, potential geo-political and other
risks associated with terrorist activities and local and cross border conflicts,
potentially adverse tax consequences, tariffs, quotas and other barriers. See
Item 1 "Business - Additional Factors That May Affect Future Results" for
discussion of additional risks that may affect our business, operations or
financial results.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, certain
financial data expressed for the three years ended December 31, 2003:
Increase (Decrease)
% of % of % of -----------------------
(Dollars in thousands) 2001 Revenues 2002 Revenues 2003 Revenues 2002 2003
--------- -------- --------- -------- --------- -------- --------- ---------
Revenues ................ $ 177,778 100.0% $ 229,086 100.0% $ 368,231 100.0% $ 51,308 $ 139,145
Cost ofrevenues ......... 90,848 51.1 122,701 53.6 199,724 54.2 31,853 77,023
--------- ------ --------- ------ --------- ------ --------- ---------
Gross profit ............ 86,930 48.9 106,385 46.4 168,507 45.8 19,455 62,122
Selling, general and
administrative ........ 44,942 25.3 53,345 23.3 84,259 22.9 8,403 30,914
Depreciation and
amortization .......... 6,368 3.6 7,842 3.4 11,936 3.3 1,474 4,094
--------- ------ --------- ------ --------- ------ --------- ---------
Income from operations .. 35,620 20.0 45,198 19.7 72,312 19.6 9,578 27,114
====== ====== ======
Other income (expense),
net ................... (221) (107) (81) 114 26
Provision for
income taxes .......... (13,239) (10,529) (14,866) (2,710) 4,337
Net income .............. $ 22,160 12.5 $ 34,562 15.1 $ 57,365 15.6 12,402 22,803
========= ====== ========= ====== ========= ======
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
REVENUE. Revenue increased by 60.7%, or approximately $139.1 million, from
approximately $229.1 million during 2002 to approximately $368.2 million in
2003. This increase resulted primarily from an increase in both application
management and development services, and revenue generated from acquisitions. We
provide services through time-and-materials and fixed-bid contracts. Over the
course of the last three years, revenues recognized under fixed-bid contracts
have increased as a percent of total revenues from 23.9% in 2001 to 24.6% in
2002 and 25.9% in 2003. This increase is attributable primarily to increased
demand
41
due to our customers preferring to specifically quantify project costs prior to
entering into contracts.
During 2003, one customer, JP Morgan Chase, accounted for 10.1% of our
revenues and, in 2002, no single customer accounted for greater than 10% of
revenues.
GROSS PROFIT. Our 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. Cost of
revenues increased by 62.8%, or approximately $77.0 million, from approximately
$122.7 million during 2002 to approximately $199.7 million in 2003. The increase
was due primarily to higher compensation costs resulting from the increase in
the number of our technical professionals from approximately 5,600 employees at
December 31, 2002 to approximately 8,500 employees at December 31, 2003. The
increased number of technical professionals is a direct result of greater demand
for our services and employees acquired through acquisitions. Our gross profit
increased by 58.4%, or approximately $62.1 million, from approximately $106.4
million during 2002 to approximately $168.5 million during 2003. Gross profit
margin decreased from 46.4% of revenues during 2002 to 45.8% of revenues in
2003. The decrease in such gross profit margin was primarily attributable to the
appreciation of the Indian Rupee versus the U.S. dollar.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs. Selling, general and administrative expenses, including
depreciation and amortization, increased by 57.2%, or approximately $35.0
million, from approximately $61.2 million during 2002 to approximately $96.2
million during 2003, and decreased as a percentage of revenue from approximately
26.7% to 26.1%, respectively. The increase in such expenses in absolute dollars
was due primarily to expenses incurred to expand our sales and marketing
activities and increased infrastructure expenses to support our growth. The
decrease in such expenses as a percentage of revenue was due primarily to the
leverage achieved from increased revenues that have resulted from our expanded
sales and marketing activities in the current and prior years.
INCOME FROM OPERATIONS. Income from operations increased 60.0%, or
approximately $27.1 million, from approximately $45.2 million during 2002 to
approximately $72.3 million during 2003, representing approximately 19.7% and
19.6% of revenues, respectively. The decrease in operating margin was due
primarily to the lower gross margin partially offset by our ability to leverage
prior sales and marketing investments.
OTHER INCOME/EXPENSE. Other income/expense consists primarily of interest
income and split-off costs related to the exchange offer in which IMS Health
offered to its stockholders to exchange its holdings of our Class B common stock
for shares of IMS Health. Interest income increased by approximately 17.7%, from
approximately $1.8 million during 2002 to approximately $2.1 million during
2003. The increase in such interest income was attributable to higher invested
cash balances partially offset by lower global interest rates. We recognized
split-off costs of approximately $2.0 million and $1.7 million in 2003 and 2002,
respectively.
42
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
approximately $10.5 million in 2002 to approximately $14.9 million in 2003, with
an effective tax rate of 23.4% in 2002 and 20.6% in 2003. The lower effective
tax rate is a result of a reduction in the surtax in India and the restoration
of the 100% exemption on export earnings both of which were effective April 1,
2003. (See Note 7 to the consolidated financial statements.)
NET INCOME. Net income increased from approximately $34.6 million in 2002
to approximately $57.4 million in 2003, representing approximately 15.1% and
15.6% as a percentage of revenues, respectively. The higher percentage in 2003
is primarily attributed to the decrease in the effective tax rate discussed
above.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
REVENUE. Revenue increased by 28.9%, or approximately $51.3 million, from
approximately $177.8 million during 2001 to approximately $229.1 million in
2002. This increase resulted primarily from an increase in application
management and application development and integration services. We provide
services through time-and-materials and fixed-bid contracts. Over the course of
the last three years revenues recognized under fixed-bid contracts have
increased as a percent of total revenues from 15.1% in 2000 to 23.9% in 2001 to
24.6% in 2002.
Sales to related parties on a year-over-year basis were 8.9% in 2002
compared to 10.6% in 2001. For statement of operations purposes, revenues from
related parties only include revenues recognized during the period in which the
related party was our affiliate. During 2002 and 2001, no third party accounted
for greater than 10% of revenues.
GROSS PROFIT. Our 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. Our cost of
revenues increased by 35.1%, or approximately $31.9 million, from approximately
$90.8 million during 2001 to approximately $122.7 million in 2002. The increase
was due primarily to the increased cost resulting from the increase in the
number of our technical professionals from approximately 3,470 employees at
December 31, 2001 to approximately 5,600 employees at December 31, 2002. The
increased number of technical professionals is a direct result of greater demand
for our services and employees acquired through acquisitions. Our gross profit
increased by 22.4%, or approximately $19.5 million, from approximately $86.9
million during 2001 to approximately $106.4 million during 2002. Gross profit
margin decreased from 48.9% of revenues during 2001 to 46.4% of revenues in
2002. The decrease in such gross profit margin was primarily attributable to
higher incentive compensation costs in 2002 as compared to 2001, due to our
significantly increased performance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs. Selling, general and administrative expenses, including
depreciation and amortization, increased by 19.2%, or approximately $9.9
million, from approximately $51.3 million during 2001 to approximately $61.2
million during 2002, and decreased as a percentage of revenue from approximately
28.9% to 26.7%, respectively. The increase in such expenses in absolute dollars
was due primarily to expenses
43
incurred to expand our sales and marketing activities and increased
infrastructure expenses to support our growth. The decrease in such expenses as
a percentage of revenue was due primarily to the increased revenues that have
resulted from our expanded sales and marketing activities in the current and
prior years.
INCOME FROM OPERATIONS. Income from operations increased 26.9%, or
approximately $9.6 million, from approximately $35.6 million during 2001 to
approximately $45.2 million during 2002, representing approximately 20.0% and
19.7% of revenues, respectively. The decrease in operating margin was due
primarily to higher incentive compensation costs in 2002 as compared to 2001.
OTHER INCOME/EXPENSE. Other income/expense consists primarily of interest
income offset, by foreign currency exchange losses and, in 2001, an impairment
loss on an investment, and in 2002, split-off costs related to the exchange
offer in which IMS Health has offered to its stockholders to exchange its
holdings of our Class B common stock for shares of IMS Health. (See Note 1 to
the consolidated financial statements.) Interest income decreased by
approximately 27.7%, from approximately $2.5 million during 2001 to
approximately $1.8 million during 2002. The decrease in such interest income was
attributable primarily to lower interest rates, offset, in part, by higher
operating cash balances. We recognized a net foreign currency exchange loss of
approximately $767,000 during 2001 compared to an exchange loss of approximately
$235,000 during 2002, as a result of the effect of changing exchange rates on
our transactions. We recognized an impairment loss on our investment in Questra
Corporation ("Questra") of approximately $2.0 million during the fourth quarter
of 2001 in recognition of an other than temporary decline in value. The
impairment loss was based upon an implied valuation of Questra as a result of a
recent new round of venture capital funding in which our equity interest in
Questra was substantially diluted and investors, other than us, received
preferential liquidation rights. The impairment loss, net of tax benefit, was
approximately $1.2 million, or $0.02 per diluted share. We recognized split-off
costs of approximately $1.7 million in the fourth quarter of 2002 related to the
exchange offer.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
approximately $13.2 million in 2001 to approximately $10.5 million in 2002, with
an effective tax rate of 37.4% in 2001 and 23.4% in 2002. The lower effective
tax rate reflects our change in our intention regarding the repatriation of 2002
and future earnings from our subsidiary in India, as well as a change in the
manner in which repatriated earnings are taxed in India. (See Note 7 to the
consolidated financial statements.)
NET INCOME. Net income increased from approximately $22.2 million in 2001
to approximately $34.6 million in 2002, representing approximately 12.5% and
15.1% as a percentage of revenues, respectively. The higher percentage in 2002
primarily reflects the decrease in the effective tax rate discussed above.
Results by Business Segment
- ---------------------------
We, operating globally, provide IT services for medium and large
businesses. North American operations consist primarily of IT services in the
United States and Canada. European operations consist of IT services principally
in the United Kingdom, The Netherlands and
44
Ireland. Asian operations consist of IT services principally in India,
Singapore, Japan and Australia. We are managed on a geographic basis.
Accordingly, regional sales managers, sales managers, account managers, project
teams and facilities are segmented geographically and decisions by our chief
operating decision maker regarding the allocation of assets and assessment of
performance are based on such geographic segmentation. In this regard, revenues
are allocated to each geographic area based on the location of the customer.
The following table sets forth, for the periods indicated, operating
results by geographic segment:
2002 2003
(Dollars in thousands) --------------------- -------------------
Increase Increase
2001 2002 2003 (Decrease) % (Decrease) %
-------- -------- -------- ---------- ----- ---------- -----
Revenues
North America ................... $151,933 $199,605 $325,337 $ 47,672 31.4% $125,732 63.0%
Europe .......................... 24,221 27,886 40,160 3,665 15.1 12,274 44.0
Asia ............................ 1,624 1,595 2,734 (29) (1.8) 1,139 71.4
-------- -------- --------
Total revenue .................. $177,778 $229,086 $368,231
======== ======== ========
Operating Income
North America ................... $ 30,435 $ 39,380 $ 63,888 $ 8,945 29.4% $ 24,508 62.2%
Europe .......................... 4,860 5,503 7,887 643 13.2 2,384 43.3
Asia ............................ 325 315 537 (10) (3.1) 222 70.5
-------- -------- --------
Total revenue .................. $ 35,620 $ 45,198 $ 72,312
======== ======== ========
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
North American Segment
----------------------
REVENUE. Revenue increased by 63.0%, or approximately $125.7 million, from
approximately $199.6 million during 2002 to approximately $325.3 million in
2003. The increase in revenue was attributable primarily to greater acceptance
of the on-site/offshore IT 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 our services.
INCOME FROM OPERATIONS. Income from operations increased 62.2%, or
approximately $24.5 million, from approximately $39.4 million during 2002 to
approximately $63.9 million during 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 44.0%, or approximately $12.3 million, from
approximately $27.9 million during 2002 to approximately $40.2 million in 2003.
The increase in revenue was attributable to the increased acceptance of our
services, particularly in the United Kingdom.
45
INCOME FROM OPERATIONS. Income from operations increased 43.3%, or
approximately $2.4 million, from approximately $5.5 million during 2002 to
approximately $7.9 million during 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 71.4%, or approximately $1.1 million, from
approximately $1.6 million during 2002 to approximately $2.7 million in 2003.
The increase in revenue was primarily attributable to increased acceptance of
our on-site/offshore delivery model by clients based in Japan, Singapore and
Australia.
INCOME FROM OPERATIONS. Income from operations increased 70.5%, or
approximately $0.2 million, from approximately $0.3 million during 2002 to
approximately $0.5 million during 2003. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
North American Segment
----------------------
REVENUE. Revenue increased by 31.4%, or approximately $47.7 million, from
approximately $151.9 million during 2001 to approximately $199.6 million in
2002. The increase in revenue was attributable primarily to increased market
awareness and acceptance of the on-site/offshore IT services delivery model, as
well as sales and marketing activities directed at the U.S. market for our
services.
INCOME FROM OPERATIONS. Income from operations increased 29.4%, or
approximately $8.9 million, from approximately $30.4 million during 2001 to
approximately $39.4 million during 2002. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
European Segment
----------------
REVENUE. Revenue increased by 15.1%, or approximately $3.7 million, from
approximately $24.2 million during 2001 to approximately $27.9 million in 2002.
The increase in revenue was attributable to our sales and marketing activities
in the United Kingdom, partially offset by weak demand for our services
elsewhere in Europe.
INCOME FROM OPERATIONS. Income from operations increased 13.2%, or
approximately $0.6 million, from approximately $4.9 million during 2001 to
approximately $5.5 million during 2002. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
Asian Segment
-------------
REVENUE. Revenue was essentially constant from 2001 to 2002 at
approximately $1.6 million in each year.
46
INCOME FROM OPERATIONS. Income from operations was essentially constant
from 2001 to 2002 at approximately $0.3 million in each year.
Liquidity and Capital Resources
- -------------------------------
At December 31, 2003, we had cash and cash equivalents of approximately
$194.2 million. We have used, and plan to use, such cash for (i) expansion of
existing operations, including our 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. As of December 31, 2003 and 2002, we had no
significant third party debt. We had working capital of approximately $215.9 and
$134.3 million at December 31, 2003 and 2002, respectively. Accordingly, we do
not anticipate any near-term liquidity issues.
Net cash provided by operating activities was approximately $79.9 million,
$56.7 million and $32.1 million for the years ended December 31, 2003, 2002 and
2001, respectively. The increase in 2003 as compared to the prior year is
primarily attributed to the increase in our net income. Trade accounts
receivable increased from approximately $22.5 million at December 31, 2001 to
approximately $36.7 million at December 31, 2002 and to approximately $52.3
million at December 31, 2003. Unbilled accounts receivable decreased from
approximately $5.4 million at December 31, 2001 to approximately $4.3 million at
December 31, 2002 and increased to approximately $9.5 million at December 31,
2003. The increase in trade accounts receivable during 2003 was due primarily to
increased revenue. The increase in unbilled accounts receivable in 2003 compared
to the prior year was due primarily to revenue growth and increased percentage
of revenue coming from fixed-price contracts. We monitor turnover, aging and the
collection of accounts receivable through the use of management reports that are
prepared on a customer basis and evaluated by our finance staff. At December 31,
2003, our days' sales outstanding, including unbilled receivables, was
approximately 53 days as compared to 56 days and 59 days at December 31, 2002
and 2001, respectively.
Our investing activities used net cash of approximately $37.8 million,
$35.5 million and $15.0 million for the years ended December 31, 2003, 2002 and
2001, respectively. The increase in 2003 compared to 2002 primarily reflects our
increased investment in property and equipment to expand our offshore
development infrastructure offset in part by lower spending for acquisitions in
2003. The increase in 2002 compared to 2001 primarily reflects our increased
purchases of property and equipment to expand our offshore development
infrastructure and the acquisitions of intangible assets related to
UnitedHealthcare Ireland Limited and Silverline Technologies, Inc. (See Note 4
to the consolidated financial statements.)
Our financing activities provided net cash of approximately $21.8 million,
$20.0 million, and $6.0 million for the years ended December 31, 2003, 2002 and
2001, respectively. The increase in each year was primarily related to a higher
level of cash proceeds from the exercise of stock options and employee purchases
of stock, partially offset by payment of split-off costs in 2003.
We believe that our available funds and the cash flows expected to be
generated from operations will be adequate to satisfy our current and planned
operations and needs for at least
47
the next 12 months. Our ability to expand and grow our business in accordance
with current plans, to make acquisitions and form joint ventures and to meet our
long-term capital requirements beyond this 12-month period will depend on many
factors, including the rate, if any, at which our cash flow increases, our
ability and willingness to accomplish acquisitions and joint ventures with
capital stock, our continued intent not to repatriate earnings from India, our
ability not to breach the Distribution Agreement between IMS Health and us,
especially as it relates to our tax indemnities, and the availability of public
and private debt and equity financing. We cannot be certain that additional
financing, if required, will be available on terms favorable to us, if at all.
We do not engage in hedging activities nor have we entered into
off-balance sheet transactions, arrangements or other relationships with
unconsolidated entities or other persons that are likely to affect liquidity or
the availability of or requirements for capital resources.
Commitments and Contingencies
- -----------------------------
As of December 31, 2003, we have substantially completed the initial phase
of our Indian development center expansion program, which was announced in July
2001. The program encompassed the construction of three fully-owned development
centers containing approximately 650,000 square feet of space in Chennai, Pune
and Calcutta.
On December 22, 2003, we announced building plans for three additional
fully-owned development centers containing over 600,000 square feet of space in
Chennai, Pune and Bangalore. As of December 31, 2003, we had entered into fixed
capital commitments related to this program of approximately $0.3 million, of
which approximately $0.3 million had been spent. Total costs related to this
program are expected to be approximately $42.5 million, which we expect to fund
internally.
We lease office space and equipment under operating leases, which expire
at various dates through the year 2032. Certain leases contain renewal
provisions and generally require that we pay utilities, insurance, taxes, and
other operating expenses. Future minimum rental payments under operating leases
that have initial or remaining lease terms in excess of one year as of December
31, 2003 are as follows (in thousands):
2004........................... $ 5,573
2005........................... 4,484
2006........................... 2,229
2007........................... 1,296
2008........................... 1,126
Thereafter..................... 996
--------
Total minimum lease payments... $ 15,704
========
We are 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 our quarterly or annual operating
48
results, cash flows, or consolidated financial position. Additionally, many of
our engagements involve projects that are critical to the operations of our
customers' business and provide benefits that are difficult to quantify. Any
failure in a customer's computer system could result in a claim for substantial
damages against us, regardless of our responsibility for such failure. Although
we attempt to contractually limit our liability for damages arising from
negligent acts, errors, mistakes, or omissions in rendering our application
design, development and maintenance services, there can be no assurance that the
limitations of liability set forth in our contracts will be enforceable in all
instances or will otherwise protect us from liability for damages. Although we
have 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 us that exceed available insurance coverage or changes in our insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on our business,
results of operations and financial condition.
The Distribution Agreement with IMS Health provides, among other things,
that IMS Health and we will comply with, and not take any action during the
relevant time period that is inconsistent with, the representations made to and
relied upon by McDermott, Will & Emery in connection with rendering its opinion
regarding the U.S. federal income tax consequences of the exchange offer. In
addition, pursuant to the Distribution Agreement, we indemnified IMS Health for
any tax liability to which they may be subject as a result of the exchange offer
but only to the extent that such tax liability resulted solely from a breach in
the representations we made to and were relied upon by McDermott, Will & Emery
in connection with rendering its opinion regarding the U.S. federal income tax
consequences of the exchange offer. If we breach any of our representations in
connection with the Distribution Agreement, the related indemnification
liability could be material to our quarterly and annual operating results,
financial position and cash flows.
Foreign Currency Translation
- ----------------------------
A portion of our costs in India are denominated in local currency and
subject to exchange fluctuations, which has not had any material effect on our
results of operations.
Related Party Transactions
- --------------------------
As described in Note 1 to the consolidated financial statements, on
February 13, 2003 (the "Split-Off Date"), IMS Health distributed all of the
Cognizant Class B common stock that IMS Health owned in an exchange offer to IMS
Health stockholders (the "Split-Off"). As a result of the Split-Off, IMS Health
is no longer a related party as of the Split-Off Date. Accordingly, our revenues
from IMS Health subsequent to the Split-Off Date are classified as third party
revenues. We recognized related party revenues from IMS Health totaling
approximately $2.6 million, $20.4 million and $18.8 million in 2003, 2002 and
2001, respectively. Total revenues from IMS Health during 2003, including
related party revenues prior to the Split-Off Date, were approximately $22.7
million. In 2004, we do not expect significant change from prior periods in
revenues earned for services provided to IMS Health.
49
Effects of Inflation
- --------------------
Our most significant costs are the salaries and related benefits for our
programming staff and other professionals. Competition in India, the United
States and Europe for professionals with advanced technical skills necessary to
perform our services offered have caused wages to increase at a rate greater
than the general rate of inflation. As with other IT service providers, we must
adequately anticipate wage increases, particularly on our fixed-price contracts.
There can be no assurance that we will be able to recover cost increases through
increases in the prices that we charge for our services in the United States and
elsewhere.
Recent Accounting Pronouncements
- --------------------------------
During 2003 and 2002, various accounting pronouncements were issued which
may impact our financial statements. (See Note 2 to the consolidated financial
statements.)
Forward Looking Statements
- --------------------------
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, we or our 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 us with
the Securities and Exchange Commission, or press releases or oral statements
made by or with the approval of one of our authorized executive officers. 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.
Our actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. There are
a number of important factors that could cause our results to differ materially
from those indicated by such forward-looking statements. These factors include
those set forth in the section entitled "Additional Factors That May Affect
Future Results."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that we do not have operations subject to material risks of
foreign currency fluctuations, nor do we use derivative financial instruments in
our operations or investment portfolio. Nonetheless, we periodically evaluate
the need for hedging strategies to mitigate the effect of foreign currency
fluctuations. We believe that we do not have exposure to material market risks
associated with changes in interest rates, as we have no variable interest rate
debt outstanding. We do not believe that we have any other material exposure to
market risks associated with interest rates.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 15. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of December 31, 2003. In designing and evaluating our disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation, our chief executive officer and chief financial
officer concluded that, as of December 31, 2003, our disclosure controls and
procedures were (1) designed to ensure that material information relating to us,
including our consolidated subsidiaries, is made known to our 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 us in our reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
No change in our 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 December 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
51
PART III
ITEM 10. OUR DIRECTORS AND EXECUTIVE OFFICERS
The information relating to our directors and nominees for election as
directors under the heading "Election of Directors" in our definitive proxy
statement for the 2004 Annual Meeting of Stockholders is incorporated herein by
reference to such proxy statement. The information relating to our executive
officers in response to this item is contained in part under the caption "Our
Executive Officers" in Part I of this Annual Report on Form 10-K and the
remainder is incorporated herein by reference to our definitive proxy statement
for the 2004 Annual Meeting of Stockholders.
We have adopted a written code of business conduct and ethics that applies
to our principal executive officer, principal financial officer, principal
accounting officer and controller, or persons performing similar functions. We
will make available our code of business conduct and ethics free of charge
through our Web site which is located at www.cognizant.com. We intend to
disclose any amendments to, or waivers from, our code of business conduct and
ethics that are required to be publicly disclosed pursuant to rules of the
Securities and Exchange Commission and the Nasdaq National Market by filing such
amendment or waiver with the Securities and Exchange Commission and by posting
it on our Web site.
ITEM 11. EXECUTIVE COMPENSATION
The discussion under the heading "Executive Compensation" in our
definitive proxy statement for the 2004 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in our definitive proxy statement for the 2004 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the heading "Certain Relationships and Related
Transactions" in our definitive proxy statement for the 2004 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The discussion under the heading "Independent Auditors Fees and Other
Matters" in our definitive proxy statement for the 2004 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, AND
REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements.
Reference is made to the Index to Consolidated Financial Statements on
Page F-1.
(a) (2) Consolidated Financial Statement Schedule.
Reference is made to the Index to Financial Statement Schedule on Page
F-1.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 56.
(b) Reports on Form 8-K.
On October 21, 2003, we furnished a Current Report on Form 8-K under Item
9 (pursuant to Item 12) containing a press release announcing our financial
results for the fiscal quarter ended September 30, 2003.
On December 2, 2003, we filed a Current Report on Form 8-K under Item 5
containing a press release announcing our acquisition of Infopulse.
On December 22, 2003, we filed a Current Report on Form 8-K under Item 5
containing a press release announcing that, among other things, our founder,
Chairman and CEO, Kumar Mahadeva retired.
Schedules other than as listed above are omitted as not required or
inapplicable or because the required information is provided in the consolidated
financial statements, including the notes thereto.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 12th day of March,
2004.
COGNIZANT TECHNOLOGY
SOLUTIONS CORPORATION
By: /s/ Lakshmi Narayanan
-----------------------------------
Lakshmi Narayanan, President, Chief
Executive Officer and Director
(Principal Executive Officer)
54
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------ ------------------------- ------------------
/s/ Lakshmi Narayanan President, Chief March 12, 2004
- ------------------------ Executive Officer and
Lakshmi Narayanan Director (Principal
Executive Officer)
/s/ Gordon Coburn Executive Vice President, March 12, 2004
- ------------------------ Chief Financial Officer,
Gordon Coburn Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ John E. Klein Chairman of the Board and March 12, 2004
- ------------------------ Director
John E. Klein
/s/ Thomas M. Wendel Director March 12, 2004
- ------------------------
Thomas M. Wendel
/s/ Robert W. Howe Director March 12, 2004
- ------------------------
Robert W. Howe
Director
- ------------------------
Venetia Kontogouris
Director
- ------------------------
Robert W. Weissman
55
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- -----------------------------------------------------------------
3.1 Restated Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K dated February 13, 2003.)
3.3 Amended and Restated By-laws of the Company. (Incorporated by
reference to Exhibit 3.2 to the Company's Current Report on
Form 8-K dated February 13, 2003.)
4.1 Rights Agreement, dated March 5, 2003, between the Company and
American Stock Transfer & Trust Company, as Rights Agent, which
includes the Certificate of Designations for the Series A Junior
Participating Preferred Stock as Exhibit A, the Form of Right
Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Shares as Exhibit C (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated
March 5, 2003.)
4.2 Specimen Certificate for shares of Class A common stock.
(Incorporated by reference to Exhibit 4.2 to the Company's
Amendment Number 4 to the Company's Form S-4 dated January 30,
2003.)
4.3 Specimen Certificate for shares of Class B common stock.
(Incorporated by reference to Exhibit 4.1 to the Company's
Amendment Number 2 to the Company's Form S-4 dated January 9,
2003.)
10.1* Form of Indemnification Agreement for Directors and Officers.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1. (File Number 333-49783) which
became effective on June 18, 1998.)
10.2* Amended and Restated Cognizant Technology Solutions Key
Employees' Stock Option Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File Number 333-49783) which became effective on June 18, 1998.)
10.3* Amended and Restated Cognizant Technology Solutions Non-Employee
Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1
(File Number 333-49783) which became effective on June 18, 1998.)
10.4* Form of Severance and Non-Competition Agreement between the
Company and each of its Executive Officers. (Incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1 (File Number 333-49783) which became effective on
June 18, 1998.)
56
Exhibit No. Description of Exhibit
- ----------- -----------------------------------------------------------------
10.5* 1999 Incentive Compensation Plan, as amended. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001.)
10.6* Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.)
10.7 Distribution Agreement between IMS Health Incorporated and the
Company dated January 7, 2003. (Incorporated by reference to
Exhibit 10.13 to the Company's Amendment Number 4 to the Company
Form S-4 dated January 30, 2003.)
10.8*+ Form of Stock Option Agreement between the Company and Wijeyaraj
Mahadeva pursuant to which stock options were granted on March
29, 2001.
10.9*+ Form of Stock Option Agreement between the Company and Wijeyaraj
Mahadeva pursuant to which stock options were granted on
February 5, 2003.
10.10*+ Form of Stock Option Agreement between the Company and Lakshmi
Narayanan pursuant to which stock options were granted on March
29, 2001.
10.11*+ Form of Stock Option Agreement between the Company and Lakshmi
Narayanan pursuant to which stock options were granted on
February 5, 2003.
10.12*+ Form of Stock Option Agreement between the Company and each of
Francisco D'Souza and Gordon Coburn pursuant to which stock
options were granted on March 29, 2001.
10.13*+ Form of Stock Option Agreement between the Company and each of
Francisco D'Souza and Gordon Coburn pursuant to which stock
options were granted on February 5, 2003.
10.14*+ Agreement and General Release of All Claims between the Company
and Kumar Mahadeva dated December 19, 2003.
21+ List of subsidiaries of the Company.
23+ Consent of PricewaterhouseCoopers LLP.
31.1+ Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the
Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
57
Exhibit No. Description of Exhibit
- ----------- -----------------------------------------------------------------
31.2+ Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of the
Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
32.1+ Certification Pursuant to 18 U.S.C. Section 1350 (Chief Executive
Officer).
32.2+ Certification Pursuant to 18 U.S.C. Section 1350 (Chief Financial
Officer).
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15(c) of Form 10-K.
+ Filed herewith. All other exhibits previously filed.
58
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Consolidated Financial Statements:
Report of Independent Auditors................................. F-2
Consolidated Statements of Financial Position as of
December 31, 2003 and 2002..................................... F-3
Consolidated Statements of Operations for the
years ended December 31, 2003, 2002 and 2001................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002 and 2001................... F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001................... F-6
Notes to Consolidated Financial Statements..................... F-7
Financial Statement Schedule:
Schedule of Valuation and Qualifying Accounts.................. F-31
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Cognizant Technology Solutions Corporation:
In our opinion, the accompanying consolidated financial statements listed
in the index appearing under Item 15 (a) (1) present fairly, in all material
respects, the financial position of Cognizant Technology Solutions Corporation
and its subsidiaries (the "Company") at December 31, 2003 and 2002 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item 15 (a)
(2) presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 6, 2004
F-2
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except par values)
At December 31,
----------------------
2003 2002
--------- ---------
Assets
Current assets:
Cash and cash equivalents .......................... $ 194,221 $ 126,211
Trade accounts receivable, net of allowances of
$989 and $861, respectively ...................... 52,253 35,092
Trade accounts receivable - related party .......... -- 1,605
Unbilled accounts receivable ....................... 9,543 4,159
Unbilled accounts receivable - related party ....... -- 149
Current tax asset .................................. 14,066 3,711
Other current assets ............................... 8,414 4,907
--------- ---------
Total current assets ............................ 278,497 175,834
Property and equipment, net of accumulated depreciation
of $34,168 and $24,559 respectively ................ 58,438 39,090
Goodwill .............................................. 4,477 878
Other intangible assets, net .......................... 16,436 12,870
Other assets .......................................... 2,741 2,801
--------- ---------
Total assets .................................... $ 360,589 $ 231,473
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................... $ 9,423 $ 6,948
Accrued expenses and other liabilities ............. 53,213 34,539
--------- ---------
Total current liabilities ........................ 62,636 41,487
Deferred income taxes ................................. 23,883 24,505
--------- ---------
Total liabilities ................................ 86,519 65,992
--------- ---------
Commitments and contingencies (See Notes 10 and 11)
Stockholders' equity: (See Note 1)
Preferred stock, $.10 par value, 15,000 shares
authorized, none issued ............................... -- --
Class A common stock, $.01 par value, 100,000 shares
authorized, 64,337 and 61,260 shares issued and
outstanding at December 31, 2003 and 2002,
respectively (1) .................................... 643 612
Class B common stock, $.01 par value, 25,000 shares
authorized, none outstanding (1) .................... -- --
Additional paid-in capital (1) ........................ 118,454 71,446
Retained earnings ..................................... 150,973 93,608
Accumulated other comprehensive income (loss) ......... 4,000 (185)
--------- ---------
Total stockholders' equity ...................... 274,070 165,481
--------- ---------
Total liabilities and stockholders' equity ...... $ 360,589 $ 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 and 3-for-1 stock
split effected by a 200% stock dividend paid on April 1, 2003.
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Revenues .................................... $ 365,656 $ 208,657 $ 158,969
Revenues-related party ...................... 2,575 20,429 18,809
--------- --------- ---------
Total revenues ........................ 368,231 229,086 177,778
Cost of revenues ............................ 199,724 122,701 90,848
--------- --------- ---------
Gross profit ................................ 168,507 106,385 86,930
Selling, general and administrative
expenses .................................. 84,259 53,345 44,942
Depreciation and amortization expense ....... 11,936 7,842 6,368
--------- --------- ---------
Income from operations ...................... 72,312 45,198 35,620
--------- --------- ---------
Other income (expense), net:
Interest income ........................... 2,128 1,808 2,501
Impairment loss on investment ............. -- -- (1,955)
Split-off costs (See Note 1) .............. (2,010) (1,680) --
Other (expense) income, net ............... (199) (235) (767)
--------- --------- ---------
Total other (expense) income .......... (81) (107) (221)
--------- --------- ---------
Income before provision for income taxes .... 72,231 45,091 35,399
Provision for income taxes .................. (14,866) (10,529) (13,239)
--------- --------- ---------
Net income .................................. $ 57,365 $ 34,562 $ 22,160
========= ========= =========
Basic earnings per share (1) ................ $ 0.92 $ 0.58 $ 0.39
========= ========= =========
Diluted earnings per share (1) .............. $ 0.84 $ 0.54 $ 0.36
========= ========= =========
Weighted average number of common shares
outstanding - Basic (1) ................... 62,505 59,241 57,051
Dilutive effect of shares issuable as of
period-end under stock option plans (1) ... 5,402 4,452 4,062
--------- --------- ---------
Weighted average number of common shares
outstanding - Diluted (1) ................. 67,907 63,693 61,113
========= ========= =========
Comprehensive Income:
Net income .................................. $ 57,365 $ 34,562 $ 22,160
Foreign currency translation adjustment ..... 4,185 (27) (108)
Total comprehensive income .................. $ 61,550 $ 34,535 $ 22,052
========= ========= =========
(1) Restated to reflect 3-for-1 stock split effected by a 200% stock dividend
paid on April 1, 2003.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Class A Common Class B Common Other
stock(1) stock(1) Additional Comprehensive
---------------------- --------------- Paid-in Retained Income
Shares Amount Shares Amount Capital(1) Earnings (Loss) Total
--------- --------- ------ ------- ---------- --------- ------------- ---------
Balance, December 31, 2000 ... 55,959 $ 558 -- $ -- $ 28,722 $ 36,886 $ (50) $ 66,116
Translation Adjustment ....... -- -- -- -- -- -- (108) (108)
Exercise of Stock Options .... 1,995 21 -- -- 5,117 -- -- 5,138
Tax Benefit related to
Stock Plans ................ -- -- -- -- 4,633 -- -- 4,633
Employee Stock Purchase
Plan ....................... 111 -- -- -- 842 -- -- 842
Compensatory Grant ........... -- -- -- -- 340 -- -- 340
Less Prior year charges .... -- -- -- -- (329) -- -- (329)
Net Income ................... -- -- -- -- -- 22,160 -- 22,160
--------- --------- -- ------- --------- --------- --------- ---------
Balance, December 31, 2001 ... 58,065 579 -- -- 39,325 59,046 (158) 98,792
Translation Adjustment ....... -- -- -- -- -- -- (27) (27)
Exercise of Stock Options .... 3,111 30 -- -- 18,882 -- -- 18,912
Tax Benefit related to
Stock Plans ................ -- -- -- -- 12,111 -- -- 12,111
Employee Stock Purchase
Plan ....................... 84 3 -- -- 1,128 -- -- 1,131
Net Income ................... -- -- -- -- -- 34,562 34,562
--------- --------- -- ------- --------- --------- --------- ---------
Balance, December 31, 2002 ... 61,260 612 -- -- 71,446 93,608 (185) 165,481
Translation Adjustment ....... -- -- -- -- -- -- 4,185 4,185
Exercise of Stock Options .... 2,979 30 -- -- 21,858 -- -- 21,888
Tax Benefit related to
Stock Plans ................ -- -- -- -- 22,299 -- -- 22,299
Employee Stock Purchase
Plan ....................... 98 1 -- -- 2,363 -- -- 2,364
Compensatory Grants .......... -- -- -- -- 488 -- -- 488
Net Income ................... -- -- -- -- -- 57,365 -- 57,365
--------- --------- -- ------- --------- --------- --------- ---------
Balance, December 31, 2003 ... 64,337 $ 643 -- $ -- $ 118,454 $ 150,973 $ 4,000 $ 274,070
========= ========= == ======= ========= ========= ========= =========
(1) Restated to reflect the conversion of shares of Class B common stock to shares of Class A common stock on February 21, 2003
and 3-for-1 stock split effected by a 200% stock dividend paid on April 1, 2003.
The accompanying notes are an integral part of the consolidated financial statements.
F-5
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net income ................................ $ 57,365 $ 34,562 $ 22,160
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...... 11,936 7,842 6,367
Provision for doubtful accounts .... 100 510 1,837
Split-off costs (See Note 1) ....... 2,010 1,680 --
Deferred income taxes .............. (622) 12 7,791
Impairment loss on investment ...... -- -- 1,955
Tax benefit related to stock option 22,299 12,111 4,633
exercises
Changes in assets and liabilities:
Trade accounts receivable .......... (13,442) (14,663) (3,833)
Other current assets ............... (18,538) (3,111) (4,115)
Other assets ....................... 1,334 (370) 300
Accounts payable ................... 1,785 3,296 803
Accrued and other liabilities ...... 15,635 14,813 (5,819)
--------- --------- ---------
Net cash provided by operating
activities ....................... 79,862 56,682 32,079
--------- --------- ---------
Cash flows used in investing activities:
Purchases of property and equipment ...... (29,991) (22,268) (14,953)
Acquisitions, net of cash acquired ....... (7,823) (13,196) --
--------- --------- ---------
Net cash used in investing activities .... (37,814) (35,464) (14,953)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issued shares ............... 24,740 20,043 5,991
Split-off costs (See Note 1) .............. (2,963) -- --
Payments to related party ................. -- -- (8)
--------- --------- ---------
Net cash provided by financing activities . 21,777 20,043 5,983
--------- --------- ---------
Effect of currency translation ............ 4,185 (27) (108)
--------- --------- ---------
Increase in cash and cash equivalents ..... 68,010 41,234 23,001
Cash and cash equivalents, at beginning of 126,211 84,977 61,976
year
--------- --------- ---------
Cash and cash equivalents, at end of year . $ 194,221 $ 126,211 $ 84,977
========= ========= =========
Supplemental information:
Cash paid for income taxes during the . $ 3,331 $ 2,896 $ 3,797
year ................................ ========= ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F-6
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
1. BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS. Cognizant Technology Solutions Corporation ("Cognizant
or the "Company") is a leading provider of custom information technology ("IT")
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 services it offers using an integrated
on-site/offshore business model. This seamless onsite/offshore business model
combines technical and account management teams located on-site at the customer
location and offshore at dedicated development centers located in India and
Ireland.
ORGANIZATION. Cognizant began its IT development and maintenance services
business in early 1994, as an in-house technology development center for The Dun
& Bradstreet Corporation and its operating units. In 1996, Cognizant, along with
certain other entities, was spun-off from the Dun & Bradstreet Corporation to
form a new company, Cognizant Corporation. On June 24, 1998, Cognizant completed
its initial public offering of its Class A common stock. On June 30, 1998, a
majority interest in Cognizant, and certain other entities were spun-off from
Cognizant Corporation to form IMS Health Incorporated ("IMS Health").
Subsequently, Cognizant Corporation was renamed Nielsen Media Research,
Incorporated. At December 31, 2002, IMS Health owned 55.3% of the outstanding
stock of Cognizant (representing all of Cognizant's Class B common stock) and
held 92.5% of the combined voting power of Cognizant's common stock.
SPLIT-OFF FROM IMS HEALTH. 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 stockholders (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. 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. (See Note 9).
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.
F-7
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
In 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 Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees and Related Interpretations" ("APB No. 25") of approximately $488
related to the retention, acceleration and extended life of Cognizant common
stock options held by two former Directors of Cognizant who resigned on the
Split-Off Date as a condition of the Split-Off. Such former Directors were, and
are, officers of IMS Health.
Of the total of approximately $3,700 of Split-Off Costs incurred and
recorded, including approximately $1,700 recorded in 2002, all costs have been
paid as of December 31, 2003. Cognizant did not receive any proceeds from the
IMS Health exchange offer.
CAPITAL STOCK. 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. All
applicable references as to the number of issued and outstanding shares of Class
A and Class B common stock in the accompanying consolidated financial statements
have been restated to reflect the conversion. Stockholders' equity accounts have
been restated to reflect a $339 reclassification of an amount equal to the par
value of the shares of Class B common stock to the Class A common stock account.
In connection with the Split-Off, IMS Health, as the Company's majority
stockholder at that time, 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
consolidated financial statements, and all applicable references as to the
number of outstanding shares of common stock and per share
F-8
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
information have been restated. Appropriate adjustments have been made in the
exercise price and number of shares subject to stock options. Stockholders'
equity accounts have been restated to reflect the reclassification of an amount
equal to the par value of the increase in issued common shares from the
additional paid-in-capital to Class A common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and its consolidated subsidiaries for all periods presented. All
intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents primarily include time and
demand deposits in the Company's operating bank accounts. The Company considers
all highly liquid instruments with a maturity of three months or less at the
time of purchase to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. The allowance for doubtful accounts is determined by
evaluating the relative credit-worthiness of each customer based upon market
capitalization and other information, including the aging of the receivables.
INVESTMENTS. Investments in business entities in which the Company does not have
control or the ability to exercise significant influence over the operating and
financial policies are accounted for under the cost method. Investments are
evaluated for impairment at least annually, or as circumstances warrant.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated on the straight-line basis
over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of the term of the lease or
the estimated useful life of the improvement. Maintenance and repairs are
expensed as incurred, while renewals and betterments are capitalized.
PURCHASED SOFTWARE. Purchased software that is intended for internal use is
capitalized, including the salaries and benefits of employees that are directly
involved in the installation of such software. The capitalized costs are
amortized on a straight-line method over the lesser of three years or its useful
life.
GOODWILL AND OTHER INTANGIBLES. Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), which requires that goodwill no longer be
amortized, but instead tested for impairment at least annually or as
circumstances warrant. If an impairment is indicated, a write-down to fair value
(normally measured by discounting estimated future cash flows) is recorded.
During the year ended December 31, 2001, amortization expense of $317 had been
recorded
F-9
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
using the straight-line method over a period of seven years. Adjusted net income
and adjusted diluted EPS for the year ended December 31, 2001, would have been
$22,477 and $0.37, respectively, had the Company applied the non-amortization
methodology of SFAS No. 142. Other intangibles represent primarily customer
relationships and assembled workforce, which are being amortized on a
straight-line basis over their estimated useful lives.
LONG-LIVED ASSETS. In accordance SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which was adopted in 2002, the Company reviews
for impairment long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In general, the Company will recognize an impairment
loss when the sum of undiscounted expected future cash flows is less than the
carrying amount of such assets. The measurement for such an impairment loss is
then based on the fair value of the asset.
REVENUE RECOGNITION. The Company's services are entered into on either a
time-and-materials or fixed-price basis. Revenues related to time-and-material
contracts are recognized as the service is performed. Revenues related to
fixed-price contracts that provide for highly complex information technology
application development services are recognized as the service is performed
using the percentage-of-completion method of accounting, under which the total
value of revenue is recognized on the basis of the percentage that each
contract's cost to date bears to the total estimated cost. Revenues related to
fixed-priced contracts that provide solely for application maintenance services
are recognized on a straight-line basis or as services are rendered or
transactions processed in accordance with contractual terms. Expenses are
recorded as incurred over the contract period.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force
("EITF") Consensus 00-21, "Revenue Arrangements with Multiple Deliverables"
("EITF 00-21"). For contracts with multiple deliverables, the Company evaluates
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-price contracts that provide
both application maintenance and application development service and certain
application maintenance contracts, arrangement consideration is allocated among
the units of accounting, where separable, based on their relative fair values
and revenue is recognized for each unit of accounting based on the Company's
revenue recognition policy described above. The adoption of EITF 00-21 did not
have a material impact on the Company's financial position, results of
operations or cash flows.
Fixed-price contracts are cancelable subject to a specified notice period.
All services provided by the Company through the date of cancellation are due
and payable under the contract terms. The Company issues invoices related to
fixed-price contracts based upon achievement of milestones during a project or
other contractual terms. Differences between the timing of billings, based upon
contract milestones or other contractual terms, and the recognition of revenue,
based upon the percentage-of-completion method of accounting, are recognized as
either unbilled or deferred revenue. Estimates of certain fixed-price contracts
are subject to adjustment as a project progresses to reflect changes in expected
completion costs. The
F-10
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
cumulative impact of any revision in estimates is reflected in the financial
reporting period in which the change in estimate becomes known and any
anticipated losses on contracts are recognized immediately. A reserve for
warranty provisions under such contracts, which generally exist for ninety days
past contract completion, is estimated and accrued during the contract period.
Revenues related to services performed without a signed agreement or work
order are not recognized until there is evidence of an arrangement, such as when
agreements or work orders are signed or payment is received; however the cost
related to the performance of such work is recognized in the period the services
are rendered.
For all services, revenue is recognized when, and if, evidence of an
arrangement is obtained and the other criteria to support revenue recognition
are met, including the price is fixed and determinable, services have been
rendered and collectibility is assured.
ACCOUNTING FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS. In the first quarter of
2003, the Company adopted the interim disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation" (SFAS No. 148) which amends SFAS No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 148
provides alternative methods to transition for a voluntary change to fair
value-based method of accounting for stock-based employee compensation and
requires disclosures in annual and interim financial statements of the effects
of stock-based compensation as reflected below. The Company continues to account
for its stock-based employee compensation plans (as more fully described in Note
8) under the recognition and measurement principles APB No. 25. Except for
approximately $488 calculated in accordance with APB No. 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 and one grant in
1998 (See Note 8), no employee stock-based compensation cost is reflected in net
income, as all options granted under the plans had an exercise price equal to
the market value of the underlying common stock on the date of grant and for the
stock purchase plan the discount does not exceed 15%.
F-11
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans, consistent with the method prescribed by SFAS No. 123, as amended
by SFAS No. 148, the Company's net income and net income per share would have
been reduced to the pro forma amounts indicated below:
December 31,
---------------------------
2003 2002 2001
------- ------- -------
Net income, as reported............... $57,365 $34,562 $22,160
Add: Stock-based compensation,
expense, net of related tax
benefit, included in net
income............................ 488 -- --
Deduct: Total stock-based
compensation expense determined
under the fair value method for
all awards, net of related tax
benefits.......................... 15,495 11,562 7,127
------- ------- -------
Pro forma net income.................. $42,358 $23,000 $15,033
======= ======= =======
Earnings per share:
Basic earnings per share, as
reported............................ $ 0.92 $ 0.58 $ 0.39
Pro forma- basic earnings per share.. $ 0.68 $ 0.39 $ 0.26
Diluted earnings per share, as
reported............................ $ 0.84 $ 0.54 $ 0.36
Pro forma- diluted earnings per
share............................... $ 0.62 $ 0.36 $ 0.25
The pro forma disclosures shown above are not representative of the
effects on net income and earnings per share in future years.
F-12
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
For purposes of pro forma disclosures only, the fair value for all Company
options was estimated at the date of grant using the Black-Scholes option model
with the following weighted average assumptions:
Years ended December 31, 2003 2002 2001
----------- ----- -----
Dividend yield...................... 0% 0% 0%
Volatility factor................... 45% 65% 78%
Expected life (in years):
Options........................... 4.0 2.9 3.0
Stock purchase plans.............. .25 .25 .25
Weighted average risk-free interest rate:
Options.......................... 2.70% 2.71% 4.3%
Employee stock purchase plans.... 0.96% 1.60% 3.6%
Weighted average fair value:
Options........................... $8.79 $6.68 $5.56
Employee stock purchase plans..... $5.17 $3.23 $2.23
See Note 8 for additional information relating to the Company's stock
plans.
UNBILLED ACCOUNTS RECEIVABLE. Unbilled accounts receivable represent
revenues on contracts to be billed, in subsequent periods, as per the terms
of the related contracts.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of the Company's
subsidiaries other than the Company's Indian subsidiary ("Cognizant India"), are
translated into U.S. dollars from local currencies at current exchange rates and
revenues and expenses are translated from local currencies at average monthly
exchange rates. The resulting translation adjustments are recorded in a separate
component of stockholders' equity. For Cognizant India, the functional currency
is the U.S. dollar, since its sales are made primarily in the United States, the
sales price is predominantly in U.S. dollars and there is a high volume of
intercompany transactions denominated in U.S. dollars between Cognizant India
and its U.S. affiliates. Non-monetary assets and liabilities are translated at
historical exchange rates, while monetary assets and liabilities are translated
at current exchange rates. The resulting gain (loss) is included in other income
(expense). Currency transaction gains and losses, which are included in the
results of operations, are immaterial for all periods presented. Gains and
losses from balance sheet translation are included in accumulated other
comprehensive income (loss) on the statement of financial position.
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the recoverability of tangible and
intangible assets, disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. The most significant estimates relate to
the allowance for doubtful accounts,
F-13
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
depreciation of fixed assets and long-lived assets, contingencies and litigation
and the recognition of revenue and profits based on the percentage of completion
method of accounting for applicable fixed-bid contracts, income tax expense and
related deferred assets and liabilities, and purchase price allocation related
to intangible and tangible assets acquired. Results could vary from the
estimates and assumptions used in the preparation of the accompanying
consolidated financial statements.
RISKS AND UNCERTAINTIES. Principally, all of the Company's IT development
centers, including a substantial majority of its employees are located in India.
As a result, the Company may be subject to certain risks associated with
international operations, including risks associated with foreign currency
exchange rate fluctuations and risks associated with the application and
imposition of protective legislation and regulations relating to import and
export or otherwise resulting from foreign policy or the variability of foreign
economic or political conditions. To date, the Company has not engaged in any
significant hedging transactions to mitigate its risks relating to exchange rate
fluctuations. Additional risks associated with international operations include
difficulties in enforcing intellectual property rights, the burdens of complying
with a wide variety of foreign laws, potential geo-political and other risks
associated with terrorist activities and local or cross border conflicts,
potentially adverse tax consequences, tariffs, quotas and other barriers.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of cash
and cash equivalents and trade accounts receivable. The Company maintains its
cash investments with high credit quality financial institutions in
investment-grade, short-term debt securities and limits the amount of credit
exposure to any one commercial issuer.
INCOME TAXES. The Company provides for income taxes utilizing the asset and
liability method of accounting for income taxes. Under this method, deferred
income taxes are recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each balance sheet date, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. If it is determined that it is more likely
than not that future tax benefits associated with a deferred tax asset will not
be realized, a valuation allowance is provided. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date.
Cognizant India is an export-oriented company, which under the Indian
Income Tax Act of 1961, is entitled to claim a tax holiday for a period of ten
years with respect to its export profits. Substantially all of the earnings of
the Company's Indian subsidiary are attributable to export profits and are
therefore currently entitled to a 100% exemption from Indian income tax. These
tax holidays will begin to expire in 2004 and under current law will be
completely phased out in 2009. Prior to 2002, it was management's intent to
repatriate all accumulated earnings from India to the United States;
accordingly, the Company has provided deferred income taxes in the amount of
approximately $28,594 on all such undistributed earnings through December 31,
2001.
F-14
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
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 APB No. 23, "Accounting for Income Taxes-Special Areas", the Company has not
accrued incremental U.S. taxes on all foreign earnings recognized in 2002 and
subsequent periods as these earnings are considered to be indefinitely
reinvested outside of the United States. As of December 31, 2003, the amount of
unrepatriated Indian earnings upon which no incremental U.S. taxes has been
recorded is approximately $79,525. If such earnings are repatriated in the
future, or are no longer deemed to be indefinitely reinvested, the Company would
accrue the applicable amount of taxes associated with such earnings. The
estimated effective income tax rate for the year ended December 31, 2003 was
20.6%. This rate compares to an effective tax rate for the years ended December
31, 2002 and 2001 of 23.4% and 37.4%, respectively.
Deferred U.S. income taxes on unremitted earnings from other foreign
entities have not been provided for as it is the Company's intent to reinvest
such earnings. Such income taxes are immaterial.
EARNINGS PER SHARE ("EPS"). Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS includes all
potential dilutive common stock in the weighted average shares outstanding.
RECLASSIFICATIONS. Certain prior-year amounts have been reclassified to conform
to the 2003 presentation.
Other Recently Adopted Accounting Standards.
- --------------------------------------------
In June 2001, the Financial Accounting Standards Board ("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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." 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
F-15
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
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, results of
operations or cash flows
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 a material impact on the
Company's financial position, results of operations or cash flows.
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 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 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
F-16
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
modified after June 30, 2003. The adoption of SFAS No. 149 did not 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 third quarter
of fiscal 2003. The adoption of this statement did not have a material impact on
the Company's financial position, results of operations, or cash flows.
3. SUPPLEMENTAL FINANCIAL DATA
Property and Equipment
- ----------------------
Property and equipment consist of the following:
December 31
--------------------
Estimated Useful Life (Years) 2003 2002
----------------------------- --------- --------
Buildings.................. 30 $ 18,475 $ 17,574
Computer equipment and
purchased software....... 3 49,992 33,829
Furniture and equipment.... 5 - 9 3,208 1,999
Land....................... 1,743 1,705
Leasehold improvements..... Over shorter of lease term or 19,188 8,542
life of asset
Sub-total............... 92,606 63,649
Accumulated depreciation
and amortization......... (34,168) (24,559)
--------- --------
Property and Equipment -
Net...................... $ 58,438 $ 39,090
Depreciation and amortization expense related to property and equipment
was $10,451, $7,516 and $6,368 for the years ended December 31, 2003, 2002 and
2001, respectively.
F-17
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
Accrued Expenses and Other Liabilities
- --------------------------------------
Accrued expenses and other current liabilities consist of the following:
December 31
--------------------
2003 2002
-------- --------
Accrued compensation and benefits... $ 30,092 $ 17,907
Accrued taxes....................... 1,497 --
Deferred revenue.................... 4,821 5,075
Accrued professional fees........... 3,623 3,757
Accrued vacation ................... 5,015 3,274
Accrued travel and entertainment.... 3,674 2,131
Other............................... 4,491 2,395
-------- --------
Total............................... $ 53,213 $ 34,539
======== ========
4. INVESTMENTS
On November 24, 2003, the Company acquired the stock of Infopulse
Nederland B.V. ("Infopulse"), a Netherlands-based information technology
services company specializing in the banking and financial services industry for
approximately $6,400 (including approximately $400 of estimated direct deal
costs) of which approximately $5,400 has been paid to date. Additional purchase
price, not to exceed 3.5 million Euros (approximately $4,200), payable in 2006
is contingent on Infopulse achieving certain revenue and operating income
targets for the 24-month period ending December 31, 2005. This acquisition will
allow the Company to improve its service capabilities in the Benelux region by
adding local client partners, industry expertise and local language capability.
On April 1, 2003, the Company acquired the U.S-based company of Aces
International, Inc. ("Aces"), that specializes 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).
The Company has accounted for the acquisitions of Infopulse and Aces as
business combinations under the provisions of SFAS No. 141, "Business
Combinations." In accordance with the provisions of SFAS No. 142, the Company
has made preliminary allocations of the respective purchase prices to the
tangible and intangible assets and liabilities acquired, pending the completion
of independent appraisals when additional information concerning asset and
liability valuations is finalized. Accordingly, the allocations are subject to
revision when the Company receives final information, including appraisals and
other analysis. Revisions to the fair values, will be recorded by the Company as
further adjustments to the purchase price allocations. The Infopulse and Aces
assets acquired and liabilities assumed have been included in the European
segment and North American segment, respectively (see Note 12). The
F-18
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
operating results of Aces and Infopulse have been included in the consolidated
financial statements of the Company, effective April 1, 2003 and November 24,
2003, respectively.
The Company recorded approximately $3,600 of goodwill and $5,100 of
intangible assets, principally customer relationships, in connection with the
2003 acquisitions. (See Note 5.) Amortization of $98 related to the acquisition
of amortizable intangible assets of Infopulse and Aces has been included in the
accompanying consolidated statements of operations for year ended December 31,
2003.
On June 30, 2002, Cognizant Technology Solutions Ireland Limited
("Cognizant Ireland"), a newly formed wholly-owned subsidiary of the Company,
purchased certain assets and assumed certain liabilities from UnitedHealthcare
Ireland Limited ("UHCI"), a subsidiary of UnitedHealth Group, for $3,043
(including approximately $143 of direct deal costs). In accordance with SFAS No.
142, this transaction was determined to be an acquisition of assets, not a
business combination. UHCI previously provided, and will continue to provide
through Cognizant Ireland, application development and maintenance services,
using the existing staff of approximately 70 software professionals.
On October 29, 2002, the Company completed the transfer of Silverline
Technologies, Inc.'s ("Silverline") practice, which serviced a major financial
services company to the Company for $10,424 (including approximately $620 of
direct deal costs). In accordance with SFAS No. 142, this transaction was
determined to be an acquisition of assets, not a business combination.
Under the terms of the transfer, the Company provides application design,
development and maintenance services to such major financial services company
through an acquired workforce of approximately 300 IT and support professionals
located primarily in the United States and India.
In accordance with SFAS No. 142, the Company has allocated, based upon
independent appraisals, the respective purchase prices to the UHCI and
Silverline tangible and intangible assets and liabilities acquired. The UHCI and
Silverline assets acquired have been included in the European and North American
segments, respectively, (See Note 12). The operating results of Cognizant
Ireland and Silverline have been included in the consolidated financial
statements of the Company effective July 1 and October 29, 2002, respectively.
The Company recorded intangible assets of approximately $13,200 in
connection with the 2002 acquisitions. (See Note 5.)
The operating results of Infopulse, Aces, UHCI and Silverline, for the
periods included indicated above, were not material to the consolidated
operating results of the Company for the years ended December 31, 2003 and 2002.
In June 2000, the Company announced a strategic relationship with Trident
Capital, a leading venture capital firm, to jointly invest in emerging
e-business service and technology companies. In accordance with this strategy,
the Company invested $1,955 in Questra
F-19
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
Corporation ("Questra"), an e-business software and consulting firm
headquartered in Rochester, New York, in return for a 5.8% equity interest.
Trident Capital also independently made a direct investment in Questra. This
investment was being accounted for under the cost basis of accounting.
In the fourth quarter of 2001, Questra issued Preferred B shares in
exchange for $19 million of venture capital financing. Since the Company did not
participate, its ownership interest in Preferred A shares was reduced from 5.8%
to 2.1%. Based on the implied fair value of Questra, as measured by the latest
round of financing, and considering the preferential liquidation rights that the
Preferred B shareholders received, the Company concluded that it will not
recover its investment in Questra and recorded an impairment loss of $1,955, in
the fourth quarter of 2001, to recognize the other than temporary decline in
value of its investment.
5. GOODWILL AND INTANGIBLE ASSETS, NET
Changes in goodwill for the year ended December 31, 2003 are as follows:
Balance as of January 1, 2003:.... $ 878
Aces acquisition.................. 3,599
---------
Balance as of December 31, 2003... $ 4,477
=========
No impairment losses were recognized during 2003. There were no changes to
goodwill during the year ended December 31, 2002. Goodwill primarily relates to
the Company's North American business segment.
Components of intangibles assets are as follows:
Weighted
2003 2002 Average Life
------- ------- ------------
Intangibles:
Customer Relationships...... $17,061 $12,092 10 years
Backlog..................... 120 -- 1.8 years
Assembled Workforce......... 1,106 1,104 5-8 years
------- -------
18,287 13,196
Less: accumulated amortization (1,851) (326)
------- -------
Intangible assets, net...... $16,436 $12,870
======= =======
F-20
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
All of the intangible assets have finite lives and as such are subject to
amortization. Amortization of intangibles totaled $1,485 for 2003, $326 for
2002, and $0 for 2001. Estimated amortization expenses of the Company's existing
intangible assets for the next five years are as follows:
Year Amount
------------- -------
2004......... $1,899
2005......... 1,838
2006......... 1,833
2007......... 1,813
2008......... 1,794
6. EMPLOYEE BENEFITS
The Company has a 401(k) savings plan which allows eligible U.S. employees
of the Company to contribute a percentage of their compensation into the plan
and the Company matches up to 50.0% of the eligible employee's contribution. The
amount charged to expense for the matching contribution was $642, $479 and $351
for the years ended December 31, 2003 and 2002 and 2001, respectively.
Certain of the Company's employees participate in IMS Health's defined
benefit pension plan and a defined contribution plan in the United Kingdom and
Ireland sponsored by the Company. The costs to the Company recognized as
postretirement benefit costs and related liabilities were not material to the
Company's results of operations or financial position for the years presented.
Cognizant India maintains an employee benefit plans that covers
substantially all India-based employees. The employees' provident fund, pension
and family pension plans are statutory defined contribution retirement benefit
plans. Under the plans, employees contribute up to 12% of their base
compensation, which is matched by an equal contribution by Cognizant India.
Contribution expense recognized was $1,310, $928 and $790 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Cognizant India also maintains a statutory gratuity plan that is a
statutory post-employment benefit plan providing defined lump sum benefits.
Cognizant India makes annual contributions to an employees' gratuity fund
established with a government-owned insurance corporation to fund a portion of
the estimated obligation. The Company estimates its obligation based upon
employees' salary and years of service. Contribution expense recognized by the
Company was $1,112, $752 and $902 for the years ended December 31, 2003, 2002
and 2001, respectively.
The Company does not offer any defined benefit plans to its employees.
F-21
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
7. INCOME TAXES
Income before provision for income taxes consisted of the following for
years ended December 31:
2003 2002 2001
------- ------- -------
U.S.................................... $17,516 $11,892 $ 7,236
Non-U.S................................ 54,715 33,199 28,163
------- ------- -------
Total.................................. $72,231 $45,091 $35,399
======= ======= =======
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
2003 2002 2001
------- ------- -------
U.S. Federal and state:
Current.............................. $ 8,690 $ 6,292 $2,986
Deferred............................. 4,355 1,565 8,620
------- ------- -------
Total U.S. Federal and state......... 13,045 7,857 11,606
------- ------- -------
Non-U.S.:
Current.............................. 1,942 2,432 1,466
Deferred............................. (121) 240 167
Total non-U.S........................ 1,821 2,672 1,633
------- ------- -------
Total.............................. $14,866 $10,529 $13,239
======= ======= =======
The following table sets forth the significant differences between the
U.S. federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes:
2003 2002 2001
-------- ------- -------
Tax expense at U.S. Federal statutory rate.. $25,281 $15,782 $12,390
State and local income taxes, net of
Federal benefit........................... 1,354 867 361
Non-deductible goodwill amortization........ -- -- 111
Rate differential on foreign earnings....... (16,124) (7,544) --
Other....................................... 4,355 1,424 377
-------- ------- -------
Total income taxes.......................... $14,866 $10,529 $13,239
======== ======= =======
F-22
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
2003 2002
-------- --------
Deferred tax assets:
Timing differences................ $ 4,711 $ 430
-------- --------
Net deferred tax assets............. 4,711 430
-------- --------
Deferred tax liabilities:
Undistributed Indian income....... (28,594) (24,935)
-------- --------
Total deferred tax liabilities...... (28,594) (24,935)
-------- --------
Net deferred tax liability.......... $(23,883) $(24,505)
======== ========
Cognizant has generated net operating losses for U.S. tax purposes of
approximately $26.4 million. These losses have an expiration date for Federal
purposes through December 31, 2023. For state purposes, the date of expiration
varies but will generally be less than or equal to the Federal expiration
period.
Cognizant's Indian subsidiary, Cognizant 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 Cognizant India are attributable to export
profits and are therefore currently entitled to a 100% exemption from Indian
income tax. These tax holidays will begin to expire in 2004 and under current
law will be completely phased out by March of 2009. In 2003 and 2002, the effect
of the income tax holiday was to reduce the overall income tax provision and
increase net income by approximately $12,423 and $7,683, respectively, and
increase diluted EPS by $0.18 and $0.12, respectively. In 2001, there was no
impact on the Company's overall income tax provision, net income or diluted EPS
because, prior to 2002, the Company was providing deferred income taxes on such
untaxed Indian earnings due to its intent to repatriate all accumulated earnings
from India to the United States. Cognizant has provided deferred income taxes in
the amount of approximately $28,594 on all such undistributed earnings. During
the first quarter of 2002, Cognizant made a strategic decision to pursue an
international strategy that includes expanded infrastructure investments in
India and geographic expansion in Europe and Asia. As a component of this
strategy, Cognizant intends to use 2002 and future Indian earnings to expand
operations outside of the United States instead of repatriating these earnings
to the United States. Accordingly, effective January 1, 2002, pursuant to APB
No. 23, Cognizant no longer accrues incremental U.S. taxes on all foreign
earnings recognized in 2002 and subsequent periods as these earnings are
considered to be indefinitely reinvested outside of the United States. As of
December 31, 2003, the amount of unrepatriated Indian earnings upon which no
incremental U.S. taxes has been recorded is approximately $79,525. If such
earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, Cognizant will accrue the applicable amount of taxes
associated with such earnings. Due to the various methods by which such earnings
could be repatriated in the
F-23
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
future, it is not currently practicable to determine the amount of applicable
taxes that would result from such repatriation.
Effective April 1, 2003, the government of India passed various tax law
changes which affected the way in which our earnings are taxed in India. The tax
exemption for export earnings was restored to 100% from 90%. The surtax was
reduced, decreasing the effective rate from 36.75% to 35.875% for income that is
subject to tax, the corporate level tax on the payment of dividends was restored
and the withholding tax on dividends was repealed.
The lower effective income tax rate of 20.6% for the year ended December
31, 2003 as compared to 23.4% for the year ended December 31, 2002, is
principally attributed to the reduction in the surtax and the restoration of the
100% exemption on export earnings in India, both effective April 1, 2003.
Deferred U.S. income taxes on unremitted earnings from other foreign
entities have not been provided for as it is the Company's intent to reinvest
such earnings. Such income taxes are immaterial.
8. EMPLOYEE STOCK-BASED COMPENSATION PLANS
The Key Employees Stock Option Plan provides for the grant of up to
4,192,500 stock options (each option exercisable into one (1) share of the
Company's Class A common stock) to eligible employees. Options granted under
this plan may not be granted at an exercise price less than fair market value of
the underlying shares on the date of grant. These options have a life of ten
years, vest proportionally over four years and have an exercise price equal to
the fair market value of the common stock on the grant date.
The Non-Employee Directors' Stock Option Plan provides for the grant of up
to 429,000 stock options (each option exercisable into one (1) share of the
Company's Class A common stock) to eligible directors. Options granted under
this plan may not be granted at an exercise price less than fair market value of
the underlying shares on the date of grant. These options have a life of ten
years, vest proportionally over two years and have an exercise price equal to
the fair market value of the common stock on the grant date.
In March 1998, the Company granted non-qualified stock options to purchase
an aggregate of 292,500 shares of Class A common stock to Cognizant's Chairman
and Chief Executive Officer at an exercise price of $4.61 per share, an amount
less than the then fair market value of the underlying shares on the date of the
grant. The Company has recorded the related compensation expense over the
vesting period of these options.
The 1999 Incentive Compensation Plan provides for the grant of up to
18,000,000 stock options (each option exercisable into one (1) share of the
Company's Class A common stock) to eligible employees, nonemployee Directors and
independent contractors. Options granted under this plan may not be granted at
an exercise price less than fair market value of the underlying shares on the
date of grant. All options have a life of ten years, vest proportionally over
four
F-24
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
years, unless specified otherwise, and have an exercise price equal to the fair
market value of the common stock on the date of grant.
The Employee Stock Purchase Plan (the "Purchase Plan") provides for the
issuance of up to 2,400,000 shares of Class A common stock to eligible
employees. The Purchase Plan provides for eligible employees to designate in
advance of specified purchase periods a percentage of compensation to be
withheld from their pay and applied toward the purchase of such number of whole
shares of Class A common stock as can be purchased at a price of 90% of the
lesser of (a) the fair market value of a share of Class A common stock on the
first date of the purchase period; or (b) the fair market value of a share of
Class A common stock on the last date of the purchase period. No employee can
purchase more than $25 worth of stock annually, and no stock can be purchased by
any person which would result in the purchaser owning more than five percent or
more of the total combined voting power or value of all classes of stock of the
Company. In accordance with APB No. 25, no compensation expense was recorded in
connection with the purchase of shares by employees.
During the year ended December 31, 2003, approximately 98,000 shares of
Class A common stock were purchased by employees under the Purchase Plan. At
December 31, 2003, there were approximately 2,028,000 shares available for
future issuance under the Purchase Plan.
A summary of the Company's stock option activity, and related information
is as follows as of December 31, 2003, 2002 and 2001:
2003 2003 2002 2002 2001 2001
---------- ------- ---------- ------- ---------- -------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------- ---------- ------- ---------- -------
Outstanding at beginning of
year..................... 11,428,653 $ 9.67 12,916,623 $ 8.03 11,043,936 $ 6.30
Granted, 1999 Incentive
Comp. Plan............... 4,470,300 $ 22.98 2,077,500 $ 15.07 4,624,800 $ 10.57
Exercised.................. (2,978,988) $ 7.35 (3,112,770) $ 6.08 (1,998,057) $ 2.57
Cancelled.................. (447,550) $ 15.40 (444,000) $ 12.14 (715,056) $ 12.52
Expired.................... (750) $ 13.56 (8,700) $ 14.44 (39,000) $ 17.90
Outstanding - end of year.. 12,471,665 $ 14.79 11,428,653 $ 9.67 12,916,623 $ 8.03
Exercisable - end of year.. 4,001,790 $ 8.74 3,643,734 $ 6.84 3,577,530 $ 4.66
At December 31, 2003, 1,165,768 options (each option exercisable into one
(1) share of the Company's Class A common stock) were available for future
issuance under the Company's option plans.
F-25
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at December 31, 2003:
Options Outstanding Options Exercisable
----------------------------------------- -----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Exercise
Prices Outstanding Life in Years Price Options Price
-------- ----------- ------------- -------- --------- --------
$0.64 - $0.64 290,050 3.6 Years $ 0.64 290,050 $ 0.64
$1.51 - $1.67 74,340 4.2 Years $ 1.59 74,340 $ 1.59
$2.69 - $3.92 86,450 5.4 Years $ 3.81 86,450 $ 3.81
$4.07 - $5.10 1,074,640 5.4 Years $ 4.15 1,074,640 $ 4.15
$6.93 - $10.31 2,457,246 7.3 Years $ 9.38 807,096 $ 9.40
$10.50 - $15.17 2,821,637 7.2 Years $ 11.91 1,238,387 $ 11.76
$15.97 - $23.26 4,906,402 8.9 Years $ 19.40 430,827 $ 17.95
$25.07 - $36.50 512,100 9.7 Years $ 32.82 0 $ --
$40.00 - $43.16 248,800 9.9 Years $ 42.84 0 $ --
---------- ---------
Total 12,471,665 7.8 Years $ 14.79 4,001,790 $ 8.74
Compensation cost recognized by the Company under APB No. 25 was $488, $0
and $11 for 2003, 2002 and 2001, respectively.
9. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
REVENUES. The Company and IMS Health have entered into Master Services
Agreements pursuant to which the Company provides certain IT services to IMS
Health. 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. The
Company recognized related party revenues from IMS Health totaling $2,575,
$20,429, and $18,809 in 2003, 2002 and 2001, respectively. Total revenues from
IMS Health during 2003, including related party revenues prior to the Split-Off
Date, were approximately $22,675.
SERVICES. IMS Health provides 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. Total costs charged in connection with these
services during the period January 1 through the Split-Off Date, in 2002 and
2001 were $28, $656 and $440, respectively.
F-26
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
In December 2001, the Company paid IMS Health a one-time fee of
approximately $825 under an alliance agreement in which the Company was named
"vendor of choice" for IT services to the pharmaceutical industry.
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, $2,577 in 2002 and $401 in
2001. The Company recorded expenses related to Trizetto commissions of
approximately $9 from January 1, 2003 through the Split-Off Date, $697 in 2002
and $1,012 in 2001.
PENSION PLANS. Certain U.S. employees of the Company participated in IMS
Health's defined benefit pension plans. The plans are cash balance pension plans
under which six percent of creditable compensation plus interest is credited to
the employee's retirement account on a monthly basis. The cash balance earns
monthly investment credits based on the 30-year Treasury bond yield. At the time
of retirement, the vested employee's account balance is actuarially converted
into an annuity. The Company's cost for these plans is included in the
allocation of expense from IMS Health for employee benefits plans.
10. COMMITMENTS
The Company leases office space and equipment under operating leases,
which expire at various dates through the year 2032. Certain leases contain
renewal provisions and generally require the Company to pay utilities,
insurance, taxes, and other operating expenses. Future minimum rental payments
under operating leases that have initial or remaining lease terms in excess of
one year as of December 31, 2003 are as follows:
2004........................... $ 5,573
2005........................... 4,484
2006........................... 2,229
2007........................... 1,296
2008........................... 1,126
Thereafter..................... 996
--------
Total minimum lease payments... $ 15,704
========
Rental expense totaled $7,782, $5,201 and $3,175 for years ended December
31, 2003, 2002 and 2001, respectively.
On December 22, 2003, the Company announced building plans for three
additional fully-owned development centers containing over 600,000 square feet
of space in Chennai,
F-27
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
Bangalore and Pune. Total costs related to this program are estimated to be
approximately $42.5 million. As of December 31, 2003, the Company has not
entered into any significant fixed commitments related to this capital expansion
program.
11. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, many of the Company's engagements involve
projects that are critical to the operations of its customers' business and
provide benefits that are difficult to quantify. Any failure in a customer's
computer system could result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure. Although
the Company attempts to contractually limit its liability for damages arising
from negligent acts, errors, mistakes, or omissions in rendering its software
development and maintenance services, there can be no assurance that the
limitations of liability set forth in its contracts will be enforceable in all
instances or will otherwise protect the Company from liability for damages.
Although the Company has general liability insurance coverage, including
coverage for errors or omissions, there can be no assurance that such coverage
will continue to be available on reasonable terms or will be available in
sufficient amounts to cover one or more large claims, or that the insurer will
not disclaim coverage as to any future claim. The successful assertion of one or
more large claims against the Company that exceed available insurance coverage
or changes in the Company's insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, would have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company entered into a Distribution Agreement, dated January 7, 2003,
with IMS Health (the "Distribution Agreement"), that provides, among other
things, that IMS Health and the Company will comply with, and not take any
action during the relevant time period that is inconsistent with, the
representations made to and relied upon by McDermott, Will & Emery in connection
with rendering its opinion regarding the U.S. federal income tax consequences of
the exchange offer. In addition, pursuant to the Distribution Agreement, the
Company indemnified IMS Health for any tax liability to which they may be
subject as a result of the exchange offer but only to the extent that such tax
liability resulted solely from a breach in the representations of the Company
made to and were relied upon by McDermott, Will & Emery in connection with
rendering its opinion regarding the U.S. federal income tax consequences of the
exchange offer. If the Company breaches any of its representations in connection
with the Distribution Agreement, the related indemnification liability could be
material to the Company's results of operations, financial position and cash
flows.
12. SEGMENT INFORMATION
The Company, operating globally, provides IT services for medium and large
businesses. North American operations consist primarily of IT services in the
United States and Canada.
F-28
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
European operations consist of IT services principally in the United Kingdom,
The Netherlands and Ireland. Asian operations consist of IT services principally
in India, Singapore, Japan and Australia. The Company is managed on a geographic
basis. Accordingly, regional sales managers, sales managers, account managers,
project teams and facilities are segmented geographically and decisions by the
Company's chief operating decision maker regarding the allocation of assets and
assessment of performance are based on such geographic segmentation.
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Information about the Company's operations
and total assets in North America, Europe and Asia for the years ended December
31, 2003, 2002 and 2001 are as follows:
2003 2002 2001
-------- -------- --------
REVENUES(1)(1a)
North America(2)........ $325,337 $199,605 $151,933
Europe(3)............... 40,160 27,886 24,221
Asia.................... 2,734 1,595 1,624
-------- -------- --------
Consolidated............ $368,231 $229,086 $177,778
======== ======== ========
OPERATING INCOME(1)
North America(2)........ $ 63,888 $39,380 $ 30,435
Europe(3)............... 7,887 5,503 4,860
Asia.................... 537 315 325
-------- -------- --------
Consolidated............ $ 72,312 $ 45,198 $ 35,620
======== ======== ========
IDENTIFIABLE ASSETS
North America(2)........ $203,168 $133,418 $ 88,328
Europe(4)............... 26,045 12,972 5,322
Asia.................... 131,376 85,083 51,333
-------- -------- --------
Consolidated............ $360,589 $231,473 $144,983
======== ======== ========
(1) Revenues and resulting operating income are attributed to regions based
upon customer location.
(1a) Application development and integration services represented approximately
41.2%, 42.7% and 48.2% of revenues in 2003, 2002 and 2001, respectively.
Application maintenance services accounted for 58.8%, 57.3% and 51.8% of
revenues in 2003, 2002, and 2001, respectively.
(2) Substantially all relates to operations in the United States.
(3) Includes revenue from operations in the United Kingdom of $37,323, $25,785
and $19,895 in 2003, 2002 and 2001, respectively.
(4) Includes identifiable assets in the United Kingdom of $12,972, $9,610 and
$5,269 in 2003, 2002 and 2001, respectively.
F-29
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share date)
One customer, JP Morgan Chase, accounted for 10.1% of revenues in 2003. No
third party customer accounted for revenues in excess of 10% of revenues in 2002
and 2001.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results for the two years ended December 31, 2003 are
as follows:
Three Months Ended
------------------
2003 March 31 June 30 September 30 December 31 Full Year
---- -------- ------- ------------ ----------- ---------
Operating Revenue.......... $74,516 $87,446 $98,111 $108,158 $368,231
Gross Profit............... $33,557 $40,247 $45,143 $49,560 $168,507
Income from Operations..... $14,524 $17,128 $19,274 $21,386 $ 72,312
Net Income................. $10,178(1) $13,502 $15,960 $17,725 $ 57,365(1)
Basic EPS.................. $ 0.17 $ 0.22 $ 0.25 $ 0.28 $ 0.92
Diluted EPS................ $ 0.15 $ 0.20 $ 0.23 $ 0.25 $ 0.84(2)
- -------------------------------------------------------------------------------------------
Three Months Ended
------------------
2002 March 31 June 30 September 30 December 31 Full Year
---- -------- ------- ------------ ----------- ---------
Operating Revenue.......... $46,484 $54,358 $61,233 $67,011 $229,086
Gross Profit............... $22,295 $25,010 $28,263 $30,817 $106,385
Income from Operations..... $9,146 $10,702 $12,108 $13,242 $ 45,198
Net Income................. $7,109 $8,647 $9,667 $9,139 (1) $ 34,562 (1)
Basic EPS.................. $ 0.12 $ 0.15 $ 0.16 $ 0.15 $ 0.58
Diluted EPS................ $ 0.12 $ 0.14 $ 0.15 $ 0.14 $ 0.54(2)
- --------------------------------------------------------------------------------------------
(1) Includes split-off costs of approximately $2,000 and $1,700, net of tax, in
the first quarter of 2003 and the fourth quarter of 2002, respectively.
(2) The sum of the quarterly diluted EPS does not equal full year EPS due to
rounding.
F-30
Cognizant Technology Solutions Corporation
Valuation and Qualifying Accounts
For the Year Ended December 31, 2003
(Dollars in Thousands)
Description Balance at Charged to Charged to Deductions/ Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Other Period
Accounts
receivable
allowance
for
doubtful
accounts.. $ 861 $ 100 -- $ (28) $ 989
Warranty
accrual... $ 477 $ 1,285 -- $ 999 $ 763
- ------------------------------------------------------------------------------
F-31
Cognizant Technology Solutions Corporation
Valuation and Qualifying Accounts
For the Year Ended December 31, 2002
(Dollars in Thousands)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions/ End of
Description of Period Expenses Accounts Other Period
----------- --------- ---------- ---------- ----------- -----------
Accounts
receivable
allowance
for
doubtful
accounts.. $ 882 $ 510 -- $ 531 $ 861
Warranty
accrual... $ 341 $ 761 $ 625 $ 477
F-32
Cognizant Technology Solutions Corporation
Valuation and Qualifying Accounts
For the Year Ended December 31, 2001
(Dollars in Thousands)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions/ End of
Description of Period Expenses Accounts Other Period
----------- --------- ---------- ---------- ----------- -----------
Accounts
receivable
allowance
for
doubtful
accounts.. $ 516 $ 1,837 -- $ 1,471 $ 882
Warranty
accrual... $ 287 $ 501 -- $ 447 $ 341
F-33