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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
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(Address of Principal Executive Offices) (Zip Code)
(201) 801-0233
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(Registrant's Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $0.01 per share
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Class B Common Stock, par value $0.01 per share
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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:
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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. |X|
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant: $1,001,130,640 at March 1, 2000
based on the last sales price on that date.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 1, 2000:
Class Number of Shares
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Class A Common Stock, par value $0.01 per share 3,602,870
Class B Common Stock, par value $0.01 per share 5,645,450
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 2000 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
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Item Page
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PART I 1. Business................................................4
2. Properties.............................................15
3. Legal Proceedings......................................16
4. Submission of Matters to a Vote of Security Holders....16
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters........................17
6. Selected Consolidated Financial Data...................19
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations .........20
8. Financial Statements and Supplementary Data............29
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................29
PART III 10. Directors and Executive Officers of the Company........30
11. Executive Compensation.................................30
12. Security Ownership of Certain Beneficial Owners
and Management.........................................30
13. Certain Relationships and Related Transactions.........30
PART IV 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K................................31
SIGNATURES...............................................................32
EXHIBIT INDEX............................................................34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..............................F-1
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PART I
ITEM 1. BUSINESS
OVERVIEW
Cognizant Technology Solutions Corporation ("CTS" or the "Company")
delivers high-quality, cost-effective, full life cycle solutions to complex
software development and maintenance problems that companies face as they
transition to e-business. These services are delivered through the use of a
seamless on-site and offshore consulting project team. The Company's solutions
include application development and integration, application management,
re-engineering, and mass change services.
The Company provides world-class service to its customers through an
integrated business model that combines a technical and account management team
located on-site at the customer location and eight development centers located
in India. The Company's core competencies include web-centric applications, data
warehousing, component-based development, and legacy and client-server systems.
The Company markets and sells its technology consulting services directly
through its professional staff, senior management and sales personnel. The
Company operates out of its Teaneck, New Jersey headquarters and its regional
offices. The number of customers for whom the Company has provided services has
grown from 27 customers in 1997 to 40 customers in 1998 and 57 customers in
1999. The Company's customers include:
ACNielsen Corporation First Data Corporation
CCC Information Services Incorporated GEAC Computer Systems Incorporated
Computer Sciences Corporation Nielsen Media Research, Inc.
The Dun & Bradstreet Corporation Northwest Airlines, Inc.
IMS Health Incorporated ("IMS Health") Pacific Exchange, Inc.
INDUSTRY BACKGROUND
Many companies today face increasing customer demands to improve service
levels, lower costs and shorten time to market. In this competitive environment,
improving IT systems and leveraging the internet are critical to achieving these
objectives. At the same time, the pace of technology evolution has accelerated.
In order to remain competitive, companies are increasingly required to adopt
emerging technologies, such as:
o e-business and e-commerce applications;
o data warehousing;
o supply chain management; and
o middleware / enterprise application integration.
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These emerging technologies offer the promise of faster, more responsive,
lower cost business operations. However, their development, integration and
on-going management present major challenges and require a large number of
highly skilled individuals trained in many diverse technologies. In addition,
companies also require additional technical resources to maintain, enhance and
re-engineer their core legacy systems for e-business and to address mass change
projects such as Eurocurrency compliance, decimalization in the securities
industry, and the Health Insurance Portability and Accountability ("HIPAA")
regulations in the healthcare industry. Increasingly, companies turn to
solutions providers such as CTS to provide these services.
Many companies have made the strategic decision to focus on their core
competencies and reduce their cost structures rather than invest in the
additional large IT staffs that are necessary to evaluate, implement and manage
IT initiatives in a rapidly changing environment. Consequently, these companies
have turned to IT service providers both to develop and implement new IT
solutions and to maintain core systems.
As the global demand for IT services has increased, the number of
qualified technical professionals has not kept pace with such demand. As a
result, some IT service providers have attempted to access the large talent pool
in certain developing countries, particularly India. India is widely
acknowledged as a leader in offshore software development and has the second
largest pool of IT talent behind the U.S. Historically, IT service providers
have used the offshore labor pool primarily to supplement the internal staffing
needs of customers. However, evolving customer demands have led to the
utilization of offshore resources for higher value-added services. Such services
include application development, integration and maintenance. The use of
offshore personnel can offer a number of benefits, including faster delivery of
new IT solutions, more flexible scheduling and lower costs. However, utilizing
an offshore workforce to provide value-added services presents a number of
challenges to IT service providers.
The offshore implementation of value-added software services requires
highly developed project management skills. Such skills are necessary to design,
develop and deploy high-quality technology solutions in a timely and
cost-effective manner. In addition, IT service providers must have the
methodologies, processes and communications capabilities to successfully
integrate offshore workforces with on-site personnel. Service providers must
also have strong research and development capabilities and technology competency
centers. Finally, service providers utilizing offshore workforces must
continually recruit and manage their workforces to deliver solutions using
emerging technologies. As a result of the increasing demand for global IT
services, a significant opportunity exists for IT service providers that can
successfully address the challenges in utilizing an offshore talent pool. In a
recent study, McKinsey and Company has estimated that the market for offshore
work in India will grow from approximately $4 billion in 1998 to $87 billion in
2008.
THE CTS SOLUTION
CTS is a leader in delivering high-quality, cost-effective, full
life-cycle solutions to complex IT problems to clients transitioning to
e-business through the use of a seamless on-site and offshore project team.
These solutions are comprised of application development and integration
services, application management services, reengineering services, and mass
change services.
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The Company provides world-class service to its customers through an
integrated business model. The Company's business model combines a technical and
account management team located on-site at the customer location and eight
development centers located in India. To support this business model, the
Company has recruited and trained in excess of 2,000 programmers in India. The
Company has also put in place well developed facilities, technology and
communications infrastructure. By basing the Company's technical operations in
India, the Company has access to a large pool of skilled, English-speaking IT
professionals. Such IT professionals service customers on a cost basis
significantly lower than in developed countries. The main elements of the CTS
solution, which the Company believes differentiates it from other IT service
providers, include the following:
ESTABLISHED AND SCALEABLE PROPRIETARY PROCESSES. To facilitate the
Company's cost-effective, on-time delivery of high-quality projects integrating
an on-site and offshore team, the Company has developed proprietary
methodologies. Such methodologies are encapsulated in the Company's QView
software engineering process, which is available to all on-site and offshore
programmers. The Company utilizes this ISO 9000 certified process to define and
implement projects from the design, development and deployment stages through to
ongoing application maintenance. For every project, QView is used to make an
extensive front-end assessment. This assessment allows the Company to define the
scope and risks of the project and subdivide the project into smaller phases
with frequent deliverables and feedback from customers. The Company also
utilizes its QView 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, the Company assigns a quality
facilitator to each project. This facilitator reports to a centralized quality
assurance and software engineering group. This group performs, on a sample
basis, continuous quality audits, deliverables verifications, metrics collection
and analysis, which are used to continually improve processes and methodologies.
The Company's processes and methodologies have proven to be scaleable as the
Company has increased its number of offshore development centers, customers and
projects. In addition, the Company is assessed by KPMG at Level 4 of the
Capability Maturity Model of the Software Engineering Institute at Carnegie
Mellon University. The assessment for the Software Capability Maturity Model is
widely regarded as the best means to measure the quality and maturity of an
organization's software development and maintenance processes.
HIGHLY SKILLED WORKFORCE. The Company has placed significant emphasis on
recruiting and training its workforce of highly skilled professionals. Such
professionals must be versed in the Company's processes and methodologies,
particularly the QView software engineering process. The Company has over 150
project managers and senior technical personnel on its worldwide staff, many of
whom have significant work experience in the United States and Europe. The
Company's project managers and senior technical personnel provide in-depth
project management expertise to customers. The Company maintains programs and
personnel, including an extensive campus recruiting program in India, to hire
and train the best available technical professionals in both legacy systems and
emerging technologies. The Company provides five months of combined classroom
and on-the-job training to new hires. The Company provides additional training
each year to continually enhance the business practices, tools, technology and
consulting skills of its professional staff.
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RESEARCH & DEVELOPMENT AND COMPETENCY CENTERS. The Company has project
experience and expertise across multiple architectures and technologies, and
makes a substantial on-going investment in competency centers and research and
development to keep abreast of the latest technology developments.
Because most of the Company's programmers are trained in multiple
technologies and architectures, the Company is able to react to customers' needs
and quickly redeploy programmers to new technologies. To facilitate this
ability, the Company makes a substantial investment in competency centers to
leverage its knowledge base across the company. In addition, through its
investment in research and development activities and the continuing education
of technical personnel, the Company assures that its knowledge base and
collective skillset keeps pace with emerging technologies. The ability to work
in new technologies allows the Company to foster long-term relationships by
addressing the needs of both its existing and new customers.
WELL DEVELOPED INFRASTRUCTURE. The Company's extensive facilities,
technology and communications infrastructure facilitates the seamless
integration of its on-site and offshore workforces. This is accomplished by
permitting team members in different locations to access common project
information and to work directly on customer projects. This infrastructure
allows for:
o rapid completion of projects;
o off-peak utilization of customers' technological resources; and
o real-time access to project information by the on-site account
manager or the customer.
By using the excess capacity of a customer's existing computing facilities
during off-peak hours, the Company's offshore development centers can undertake
additional projects without substantial customer investment in new hardware and
software. In addition, for large projects with short time frames, the Company's
offshore facilities allow for parallel processing of various development phases
to accelerate delivery time.
STRATEGY
The Company's objective is to be a leading provider of full life-cycle
e-business and application development projects, take full responsibility for
on-going management of a client's software systems, and move mass change and
legacy transformation projects through to completion. The Company provides
services to its North American and European customers, supported by its offshore
Indian development centers. The Company pursues the following strategies to
achieve this objective:
DEVELOP LONG-TERM CUSTOMER RELATIONSHIPS AND STRATEGIC ALLIANCES. The
Company seeks to develop long-term strategic relationships with its customers
and business partners. The Company tries to leverage these relationships into
additional project opportunities. For example, the knowledge of customers'
systems gained during the performance of Year 2000 compliance services has
provided the Company with a competitive advantage in securing additional
software development and maintenance projects from these customers. In addition,
the Company believes
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that through its working relationships with independent software vendors it can
obtain projects from such vendors' customers due to the detailed knowledge
gained in the development process. Finally, the Company has partnered with
select IT service firms which offer complementary services in order to best meet
customer requirements.
EXTEND SERVICE OFFERINGS AND SOLUTIONS. The Company has several teams
dedicated to developing new service offerings in emerging technologies. These
teams collaborate with the Company's customers to develop such offerings. For
example, the Company is currently developing new solutions for data warehousing
and e-business in selected industries such as healthcare. To facilitate the
development of new solutions, the Company invests in internal research and
development and promotes knowledge building and sharing across the organization.
The Company believes that the continued expansion of its service offerings will
reduce its reliance on any one technology initiative and foster long-term
relationships with its customers. Because of the Company's low offshore cost
structure, it is able to substantially leverage its investment in these
activities.
ENHANCE PROCESSES, METHODOLOGIES AND PRODUCTIVITY TOOLSETS. The Company is
committed to improving and enhancing its proprietary QView software engineering
process and other methodologies and toolsets. With the rapid evolution of
technology, the Company believes that continued investment in research and
development is critical to its success. The Company is constantly designing and
developing additional productivity software tools to automate testing processes
and improve project estimation and risk assessment techniques. The Company
continually refines its processes by utilizing groupware technology to share
project experience and best practice methodologies across the organization.
EXPAND GEOGRAPHIC PRESENCE. As the Company expands its customer base, it
plans to open additional sales and marketing offices in the United States. This
will enable the Company to sell to and support existing and prospective
customers. The Company has established sales and marketing offices in Chicago
and San Francisco. In addition, the Company has been pursuing market
opportunities in Europe through its U.K. office, which was established in the
beginning of 1998 and its Germany office, which opened during 1999. The Company
operates in Canada through its Toronto office, which was established in 1997.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS. The Company believes that
opportunities exist in the fragmented IT services market to expand its business
through selective strategic acquisitions and/or joint ventures. The Company
believes that acquisition and or joint venture candidates may enable it to
expand its geographic presence, enter new technology areas or expand capacity.
SERVICES
The Company provides a broad range of software services, including:
o application development and integration;
o application management;
o re-engineering; and
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o mass change.
The Company's range of services enables it to meet customer needs for
systems development/integration, application management and mass change
implementation. The Company uses its QView software engineering process, its
on-site and offshore delivery model and well developed facilities, technology
and communications infrastructure to deliver these services. For each of these
services, the Company utilizes its QView proprietary processes and methodologies
to define the execution and delivery of the projects.
Service Summary Description of Service Offerings
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Application Development and
Integration.................. Define requirements, write specifications and
design, develop, test and integrate software
across multiple platforms including internet
technologies.
Application Management....... 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.
Re-engineering............... Modify and test applications to enable systems
to function in new operating environments.
Mass Change.................. Renovate applications to correctly function
after a mass regulatory and/or standards change.
APPLICATION DEVELOPMENT SERVICES. The Company follows either of two
alternative approaches to application development and integration:
o full life cycle application development, in which the Company assumes
total start-to-finish responsibility and accountability for analysis,
design, implementation, testing and integration of systems; or
o cooperative development, in which the Company's employees work with a
customer's in-house IT personnel to jointly analyze, design,
implement, test and integrate new systems.
In both cases, the Company's on-site team members work closely with the
end-users of the application to develop specifications and define requirements.
Detailed design, implementation and testing are generally performed offshore at
the Company's eight software development centers located in India. In addition,
the Company maintains an on-site presence at the customer's location in order to
address evolving customer needs and resulting changes to the project.
A key part of the Company's application development and integration
offering is a suite of services to help organizations build and integrate
e-business applications with the rest of the enterprise. In this suite of
offerings, the Company leverages its skills in e-business applications
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development and enterprise application integration to build sophisticated
e-business applications and to integrate these new applications and websites
with mainstream and legacy systems. The Company builds and deploys robust,
scalable and extensible Internet architectures for transaction intensive,
mission critical applications. The Company has competency centers specializing
in Microsoft, IBM and Sun Technologies. The Company builds secure applications
using several advanced technologies including RSA and SSL standards.
APPLICATION MANAGEMENT SERVICES. The Company provides services to ensure
that a customer's core operational systems are free of defects and responsive to
end-users' changing needs. In doing so, the Company is often able to introduce
product and process enhancements and improve service levels to customers
requesting modifications and on-going support.
Through the Company's on-site and offshore delivery model, the Company is
able to provide a range of support services to its customers. 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 often available to quickly resolve customer problems from remote locations.
More complex maintenance services, including modifications, enhancements and
documentation, which typically have longer turn around times, are completed
offshore. Such services are completed utilizing satellite and fiber-optic
telecommunications and the resources of the Company's software development
centers.
RE-ENGINEERING SERVICES. Through the Company's re-engineering service
offerings, the Company works with customers to migrate 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 e-business.
The Company's re-engineering tools automate many of the processes required to
implement advanced client/server technologies. Such automation substantially
reduces the time and cost to perform these services. These tools enable the
Company to perform source code analysis and to re-design target databases and
convert certain programming languages. If necessary, the Company's software
engineers also re-design and convert user interfaces.
MASS CHANGE. Through the Company's mass change service offerings, the
Company assists customers in renovating their core systems to meet the
requirements imposed by new regulations, new standards, or other external
events. The Company's mass change services include, or have previously included,
Year 2000 compliance, Eurocurrency compliance, decimalization within the
securities industry and HIPAA, a new set of regulations for the healthcare
industry.
CUSTOMERS
The Company provided services to a total of 27, 40 and 57 customers in
1997, 1998 and 1999, respectively. During 1997, 1998 and 1999, the Company's top
five customers accounted for 77.5%, 60.5% and 57.3% of revenues, respectively.
During 1997, 1998 and 1999, IMS Health and its current subsidiaries accounted
for 23.7%, 18.0% and 16.7% of revenues, respectively. 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 the Company's services in a
subsequent year. The Company's ten largest customers accounted for, in the
aggregate, approximately 92.3%, 81.0% and 75.3% of the Company's revenues in
1997, 1998 and 1999, respectively. In 1997, Cognizant Corporation and ACNielsen
accounted for more than 40.0% and 10.0% of
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revenues, respectively. In 1998, IMS Health, First Data Corporation and
ACNielsen each accounted for more than 10.0% of revenue. In 1999, IMS Health and
First Data Corporation each accounted for more than 10.0% of revenue.
Approximately 44.4%, 44.1% and 15.6% of the Company's revenues were derived from
Year 2000 compliance services in 1997, 1998 and 1999, respectively. Application
development services represented approximately 19.4%, 25.8% and 32.3% of the
Company's revenues in 1997, 1998 and 1999, respectively. Application maintenance
services accounted for 28.4%, 21.1% and 44.0% of the Company's revenues in 1997,
1998 and 1999, respectively.
SALES AND MARKETING
The Company markets and sells its services directly through its
professional staff, senior management and direct sales persons operating out of
its Teaneck, New Jersey headquarters and business development offices in
Chicago, San Francisco, Toronto, Frankfurt and London. At December 31, 1999, the
Company had 12 direct sales persons and approximately 40 account managers. The
sales and marketing group works with the Company's technical team as the sales
process moves closer to the customer's selection of an IT service provider. The
duration of the sales process varies depending on the type of service, ranging
from approximately two months to over one year. The account manager or sales
executive works with the technical team to:
o define the scope, deliverables, assumptions and execution strategies
for a proposed project;
o develop project estimates;
o prepare pricing and margin analyses; and
o finalize sales proposals.
Management reviews and approves all proposals, which are then presented to
the prospective customer. Sales and account management personnel remain actively
involved in the project through the execution phase.
The Company focuses its marketing efforts on businesses with intensive
information processing needs. The Company maintains a prospect/customer
database, which is continuously updated and utilized throughout the sales cycle
from prospect qualification to close. As a result of this marketing system, the
Company prequalifies 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.
COMPETITION
The IT services market includes a large number of participants, is subject
to rapid change and is intensely competitive. This market includes participants
from a variety of market segments, including:
o systems integration firms;
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o contract programming companies;
o application software companies;
o Internet solutions providers;
o the professional services groups of computer equipment companies;
o facilities management and outsourcing companies; and
o "Big Five" accounting firms.
The market also includes numerous smaller local competitors in the various
geographic markets in which the Company operates. The Company competes with,
among others:
Alydaar Corp. Mastech Corporation
Cambridge Technology Partners, Inc. Sapient Corporation
Cap Gemini America, Inc. Satyam Computer Services Limited
Complete Business Solutions, Inc. SHL Systemhouse (a division of MCI
Computer Horizons Corp. Communications Corporation)
Computer Task Group, Inc. Syntel, Inc.
Information Management Resources, Inc. Tanning Technology Corporation
Infosys, Inc. Tata Consultancy Services
IBM Global Services Whittman-Hart, Inc.
Keane, Inc.
In certain markets in which the Company competes, there are no significant
barriers to entry. Current and potential competitors may introduce new and more
competitive services, make strategic acquisitions or establish cooperative
relationships among themselves or with third parties. As a result, these
competitors increase the ability of their services to address the needs of
customers. Many of the Company's competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
us. The principal competitive factors affecting the markets for the Company's
services include:
o performance and reliability;
o quality of technical support, training and services;
o responsiveness to customer needs;
o reputation, experience and financial stability; and
o competitive pricing of services.
The Company competes by offering:
o a well developed recruiting, training and retention model;
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o a successful service delivery model;
o an excellent referral base;
o continual investment in process improvement and knowledge capture;
o investment in research and development; and
o continued focus on responsiveness to customer needs, quality of
services, competitive prices, project management capabilities and
technical expertise.
In order to be successful in the future, the Company must continue to
respond promptly and effectively to technological change and competitors'
innovations. There can be no assurance that the Company will be able to compete
successfully against current and future competitors. The Company's failure to
successfully compete could have a material adverse effect upon its business,
results of operations and financial condition.
INTELLECTUAL PROPERTY
The Company's consulting business includes the development of software
applications and other technology deliverables. These include written
specifications and documentation in connection with specific customer
engagements. The Company's future success depends in part on its ability to
protect its intellectual property rights. The Company presently holds no patents
or registered copyrights. The Company relies upon a combination of copyright and
trade secret laws, non-disclosure and other contractual arrangements and various
security measures to protect its 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. The Company believes that laws, rules, regulations and treaties in
effect in the United States and India are adequate to protect it from
misappropriation or unauthorized use of the Company's copyrights. However, there
can be no assurance that such 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 taken by the Company to protect its
intellectual property rights will be adequate to deter misappropriation of any
of the Company's intellectual property, or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce the Company's
rights.
EMPLOYEES
At December 31, 1999, the Company employed approximately 450 persons on a
full-time basis in the its North American headquarters and satellite offices and
on-site North American customer locations (25 of whom are United States citizens
or permanent residents). The Company also employed approximately 91 persons on a
full-time basis in its European satellite office and on-site European customer
locations and approximately 1,680 persons on a full-time basis in its offshore
software development centers in India. As of December 31, 1999, approximately
425, or 94% of the Company's employees working in the United States, were
working in nonimmigrant work-permitted visa classifications, including H-1B,
L-1A and L-1B.
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None of the Company's employees is subject to a collective bargaining
arrangement. The Company considers its relations with employees to be good.
The Company's future success depends to a significant extent on its
ability to attract, train and retain highly skilled software development
professionals. In particular, the Company needs to attract, train and retain
project managers, software engineers and other senior technical personnel. The
Company believes that in both the United States and India there is a shortage
of, and significant competition for, software development professionals with the
advanced technological skills necessary to perform the services offered by the
Company. The Company has an active recruitment program in India. The Company has
developed a recruiting system and database that facilitates the rapid
identification of skilled candidates. During the course of the year, the Company
visits approximately 52 premier colleges and technical schools in India. The
Company evaluates candidates based on academic performance, the results of a
written aptitude test measuring problem-solving skills and a technical
interview. In addition, the Company has an active lateral recruiting program.
Senior project managers are primarily hired from leading consulting firms
in the United States and India. The Company's senior management and
substantially all of the project managers have experience working in the United
States and Europe.
The Company also has adopted a career and education management program to
define the employees' objectives and career plans. Through an intensive
orientation and training program, the Company introduces new employees to the
QView software engineering process and its services.
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ITEM 2. PROPERTIES
The Company's executive and business development office is located in
Teaneck, New Jersey. The Company believes that its current facilities are
adequate to support its existing operations. The Company also believes that it
will be able to obtain suitable additional facilities on commercially reasonable
terms on an "as needed" basis.
The Company occupies the following properties, which are all leased:
Approximate
Area Use Nature of Occupancy
Location (in sq. feet)
- ----------------------------------------------------------------------------------------------------------------------------------
Chennai, India 35,100 Software Development Facility Multiple leases expiring 4/30/06 with renewal options
Chennai, India 33,700 Software Development Facility Lease expiring 12/15/06 with renewal options
Pune, India 23,000 Software Development Facility Multiple leases expiring 10/8/07-6/28/08 with renewal
options
Chennai, India 20,000 Software Development Facility Lease expires 8/31/04 with renewal option
Chennai, India 15,500 Software Development Facility Multiple leases expiring 1/31/06 - 4/30/06 with
renewal options
Calcutta, India 13,900 Software Development Facility Lease expiring 10/7/07 with a renewal option
Calcutta, India 9,300 Software Development Facility Lease expiring 11/30/03 with a renewal option
Calcutta, India 4,000 Software Development Facility Multiple Leases expiring 4/30/02-1/15/03 with renewal
options
Teaneck, New Jersey 9,700 Executive and Business Lease expiring 5/31/02
Development Office
Chicago, Illinois 2,000 Business Development Office Lease expiring 10/15/01
San Francisco, California 1,400 Business Development Office Lease expiring 1/31/02
London, England 2,100 Business Development Office Lease expiring 9/28/04
London, England 1,500 Business Development Office Monthly lease
Toronto, Canada 200 Business Development Office Lease expiring 2/29/01
Frankfurt, Germany 600 Business Development Office Monthly lease
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ITEM 3. LEGAL PROCEEDINGS
There is no material litigation to which the Company is a party or to
which any of the Company's property is subject.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to June 1998, there was no established market for the Company's
Class A Common Stock. Since June 19, 1998, the Class A Common Stock has traded
on the Nasdaq National Market ("NNM") under the symbol "CTSH".
All of the issued and outstanding shares of Class B Common Stock are held
by IMS Health. Each outstanding share of Class B Common Stock is convertible at
the holder's option into one share of Class A Common Stock at any time prior to
a Tax-Free Spin-Off (as defined below). If a Tax-Free Spin-Off occurs, the
stockholders of IMS Health will receive Class B Common Stock, which will
continue to have ten votes per share (as compared to one vote per share for
Class A Common Stock). Such shares of Class B Common Stock shall convert upon
transfer to Class A Common Stock but shall no longer be convertible into shares
of Class A Common Stock at the option of the holder. Additionally, each share of
Class B Common Stock automatically converts into one share of Class A Common
Stock if at any time the number of outstanding shares of Class B Common Stock
represents less than 35.0% of the economic ownership represented by the
aggregate number of shares of Common Stock then outstanding.
Except as provided below, any shares of Class B Common Stock transferred
to a person other than IMS Health shall automatically convert to shares of Class
A Common Stock upon such disposition. Shares of Class B Common Stock transferred
to stockholders of IMS Health in a transaction intended to be on a tax-free
basis (a "Tax-Free Spin-Off") under the Code shall not convert to shares of
Class A Common Stock upon the occurrence of such Tax-Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall
convert upon transfer to Class A Common Stock; provided, however, that shares of
Class B Common Stock shall automatically convert into shares of Class A Common
Stock on the fifth anniversary of the Tax-Free Spin-Off, unless prior to such
Tax-Free Spin-Off, IMS Health delivers to the Company written advice of counsel
reasonably satisfactory to the Company to the effect that (i) such conversion
could adversely affect the ability of IMS Health to obtain a favorable ruling
from the Internal Revenue Service that the distribution would be a Tax-Free
Spin-Off or (ii) the Internal Revenue Service has adopted a general non-ruling
policy on tax-free spin-offs and that such conversion could adversely affect the
status of the transaction as a Tax-Free Spin-Off. If such written advice is
received, approval of such conversion shall be submitted to a vote of the
holders of the Common Stock as soon as practicable after the fifth anniversary
of the Tax-Free Spin-Off, unless IMS Health delivers to the Company written
advice of counsel reasonably satisfactory to the Company prior to such
anniversary that such vote could adversely affect the status of the distribution
as a Tax-Free Spin-Off, including the ability to obtain a favorable ruling from
the Internal Revenue Service. If such written advice is delivered, such vote
shall not be held. Approval of such conversion will require the affirmative vote
of the holders of a majority of the shares of both Class A Common Stock and
Class B Common Stock present and voting, voting together as a single class, with
each share entitled to one vote for such purpose. No assurance can be given that
such conversion would be consummated. The foregoing requirements are intended to
ensure that tax-free treatment of a Tax-Free Spin-Off is preserved
17
should the Internal Revenue Service challenge such automatic conversion as
violating the 80.0% vote requirement currently required by the Code for a
Tax-Free Spin-Off.
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. Pro forma unaudited earnings per share reflective of
the stock split have been presented in the Company's Consolidated Statement of
Operations. The historical share and per share amounts in the consolidated
financial statements have not been restated to reflect the 2-for-1 stock split.
Such amounts will be restated upon the effective date of the stock dividend.
The following table sets forth the high and low sales price for the Class
A Common Stock for each of the quarters since the quarter ended June 30, 1998 as
reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
QUARTER ENDED HIGH HIGH LOW LOW
------------- ---- ---- --- ---
(Pre-Split) (Post-Split) (Pre-Split) (Post-Split)
>
June 30 , 1998.......................... $12 7/8 $6 7/16 $9 1/2 $4 3/4
(from June 19, 1998)
September 30, 1998...................... $19 5/8 $9 13/16 $11 9/16 $5 25/32
December 31, 1998....................... $33 1/2 $16 3/4 $7 $3 1/2
March 31, 1999.......................... $48 $24 $23 1/2 $11 3/4
June 30, 1999........................... $31 3/16 $15 19/32 $19 1/4 $9 5/8
September 30, 1999...................... $32 3/4 $16 3/8 $20 3/8 $10 3/16
December 31, 1999....................... $121 $60 1/2 $25 5/8 $12 13/16
As of March 1, 2000, the approximate number of holders of record of the
Class A Common Stock was 16.
As of March 1, 2000, all of the outstanding Class B Common Stock of the
Company was owned by IMS Health.
The Company has never declared or paid cash dividends on its Class A or
Class B Common Stock. The Company currently intends to retain any future
earnings to finance the growth of the business and, therefore, does not
currently anticipate paying any cash dividends in the foreseeable future.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company as of the dates and for the periods indicated. The selected
consolidated financial data set forth below for the Company as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 are derived from the audited financial statements included elsewhere
herein. The selected consolidated financial data set forth below for the Company
as of December 31, 1995, 1996 and 1997 and for each of the years ended December
31, 1995 and 1996 are derived from the audited financial statements not included
elsewhere herein. The selected consolidated financial information for 1997, 1998
and 1999 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,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except per share data)
Statements of Income Data:
Revenues ................................. $ 298 $ 2,775 $ 13,898 $ 45,031 $ 74,084
Revenues - related party ................. 6,877 9,257 10,846 13,575 14,820
-------- -------- -------- -------- --------
Total revenues ........................ 7,175 12,032 24,744 58,606 88,904
Cost of revenues ......................... 3,567 6,020 14,359 31,919 46,161
-------- -------- -------- -------- --------
Gross profit ............................. 3,608 6,012 10,385 26,687 42,743
Selling, general and administrative
expenses .............................. 2,213 3,727 6,898 15,547 23,061
Depreciation and amortization expense .... 376 819 1,358 2,222 3,037
-------- -------- -------- -------- --------
Income (loss) from operations ............ 1,019 1,466 2,129 8,918 16,645
Other income:
Interest income ....................... 7 8 25 638 1,263
Other income - net .................... 44 1 -- 83 37
-------- -------- -------- -------- --------
Total other income ................. 51 9 25 721 1,300
-------- -------- -------- -------- --------
Income before provision for income
taxes ................................. 1,070 1,475 2,154 9,639 17,945
Provision for income taxes ............... (247) (341) (581) (3,606) (6,711)
Minority interest ........................ (362) (492) (545) -- --
Net income ............................... $ 461 $ 642 $ 1,028 $ 6,033 $ 11,234
======== ======== ======== ======== ========
Basic earnings per share ................. $ 0.07 $ 0.10 $ 0.16 $ 0.76 $ 1.22
======== ======== ======== ======== ========
Diluted earnings per share ............... $ 0.07 $ 0.10 $ 0.16 $ 0.73 $ 1.16
======== ======== ======== ======== ========
Unaudited Pro forma Net income per share
post split, basic (1) ................. $ 0.04 $ 0.05 $ 0.08 $ 0.38 $ 0.61
Unaudited Pro forma Net income per share
post split, diluted (1) ............... $ 0.04 $ 0.05 $ 0.08 $ 0.37 $ 0.58
Weighted average number of common
shares outstanding .................... 6,500 6,500 6,547 7,943 9,171
======== ======== ======== ======== ========
Weighted average number of common
shares and stock options outstanding .. 6,500 6,500 6,605 8,269 9,708
======== ======== ======== ======== ========
Balance Sheet Data (at period end):
Cash and cash equivalents ................ $ 546 $ 1,810 $ 2,715 $ 28,418 $ 42,641
Working capital .......................... 1,126 2,781 5,694 29,416 43,507
Total assets ............................. 5,451 7,827 18,298 51,679 69,026
Due to related party ..................... 662 976 6,646 9 --
Stockholders' equity ..................... 1,766 2,806 3,419 32,616 45,461
(1) See Note 14. to the Consolidated Financial Statements
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company delivers high-quality, cost-effective, full life cycle
solutions to complex software development and maintenance problems that
companies face as they transition to e-business. These services are delivered
through the use of a seamless on-site and offshore consulting project team. The
Company's primary service offerings include:
o application development and integration;
o application management;
o re-engineering; and
o mass change.
The Company began its software development and maintenance services
business in early 1994, as an in-house technology development center for The Dun
& Bradstreet Corporation and its operating units. In 1996, the Company, along
with Erisco, IMS International, Nielsen Media Research, Pilot Software and Sales
Technologies and certain other entities, plus a majority interest in Gartner
Group were spun-off from The Dun & Bradstreet Corporation to form a new company,
Cognizant Corporation. In 1997, the Company purchased the 24.0% minority
interest in its Indian subsidiary from a third party for $3.4 million, making
the Indian subsidiary wholly owned by the Company.
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. Pro forma unaudited earnings per share reflective of
the stock split have been presented in the Company's Consolidated Statement of
Operations. The historical share and per share amounts have not been restated to
reflect the 2-for-1 stock split. Such amounts will be restated upon the
effective date of the stock dividend.
In June 1998, the Company completed its initial public offering. On June
30, 1998, a majority interest in the Company, Erisco, IMS International and
certain other entities were spun-off from Cognizant Corporation to form IMS
Health. At December 31, 1999, IMS Health owned approximately 61% of the
outstanding stock of the Company and held approximately 94% of the combined
voting power of the Company's common stock.
During 1996, the Company made a strategic decision to attract customers
that were not affiliated with Cognizant Corporation or any of the former
affiliates of The Dun & Bradstreet Corporation. As a result of the
implementation of this strategy, the Company has successfully transitioned from
a company primarily serving affiliated customers to a company whose customer
base now consists primarily of unaffiliated third parties. For example, revenues
derived from customers not currently or previously affiliated with The Dun &
Bradstreet Corporation, Cognizant Corporation, IMS Health, and any of their
respective subsidiaries grew
20
from $6.5 million, or 26.4% of revenues, in 1997 to $26.9 million, or 46.0% of
revenues, in 1998 and $50.5 million, or 56.8% of revenues, in 1999.
Approximately 73.6%, 54.0% and 43.2% of the Company's revenues in 1997, 1998 and
1999, respectively, were generated from current and former affiliates including
approximately 23.7%, 18.0% and 16.7%, respectively, from IMS Health and its
current subsidiaries.
The Company has derived and believes that it will continue to derive a
significant portion of its revenues from a limited number of large third-party
customers. During 1997, 1998 and 1999, the Company's five largest customers
(other than IMS Health and its current subsidiaries) accounted for 50.8%, 43.7%
and 44.9% of revenues, respectively. In 1997, Cognizant Corporation and
ACNielsen accounted for more than 40.0% and 10.0% of revenues, respectively. In
1998, IMS Health, First Data Corporation and ACNielsen each accounted for more
than 10.0% of revenue. In 1999, IMS Health and First Data Corporation accounted
for more than 10.0% of revenue. The volume of work performed for IMS Health and
its subsidiaries and other customers is likely to vary from year to year. Major
customers, whether affiliated or unaffiliated, in one year may not provide the
same level of revenues in any subsequent year.
Historically, Year 2000 compliance services were an important element of
the Company's service offerings. Approximately 44.4%, 44.1% and 15.6% of the
Company's revenues were derived from Year 2000 compliance services in 1997, 1998
and 1999, respectively. Revenues derived from providing Year 2000 compliance
services have become an increasingly less significant component of the Company's
overall revenue base. The Company believes that it has successfully utilized its
Year 2000 compliance expertise to establish relationships with new customers and
deepen its relationships with existing customers. The knowledge of customers'
systems gained while performing Year 2000 compliance services gave the Company a
competitive advantage in securing additional application development and
application management projects and projects for such customers.
Application development and integration services represented approximately
19.4%, 25.8% and 32.3% of revenues in 1997, 1998 and 1999, respectively.
Application management services accounted for 28.4%, 21.1% and 44.0% of revenues
in 1997, 1998 and 1999, respectively.
The Company's services are performed on either a time-and-materials or
fixed-price basis. The Company expects that an increasing number of future
projects will be fixed-price rather than time-and-materials (which has
historically been the basis for its contracts). Revenues related to
time-and-materials contracts are recognized as the service is performed.
Revenues related to fixed-price contracts are recognized using the
percentage-of-completion method of accounting. Under such method, the sales
value of performance, including earnings thereon, is recognized on the basis of
the percentage that each contract's cost to date bears to the total estimated
contract cost. Estimates are subject to adjustment as a project progresses, to
reflect changes in expected completion costs. The cumulative impact of any
revision in estimates of the percentage of work completed is reflected in the
financial reporting period in which the change in the estimate becomes known.
Additionally, any anticipated losses are recognized immediately. Since the
Company bears the risk of cost over-runs and inflation associated with
fixed-price projects, the Company's operating results may be adversely affected
by changes in estimates of contract completion costs.
21
The majority of the Company's revenues are earned within North America.
Revenues outside of North America totaled $3.5 million, $10.7 million and $17.7
million in 1997, 1998 and 1999, respectively. Revenues from customers located
outside of North America have been generated primarily in the United Kingdom and
Germany. As a percentage of revenues, revenues outside of North America
represented 14.3%, 18.3% and 19.9% in 1997, 1998 and 1999, respectively. The
primary denomination for invoices issued by the Company is U.S. dollars, with
the exception of invoices issued in Canada, Germany and the United Kingdom.
Invoices issued in Canada, Germany and the United Kingdom are issued in local
currency. Gains and losses as a result of fluctuations in foreign currency
exchange rates have not had a significant impact on historical results of
operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data expressed as a percentage of total revenue:
YEAR ENDED DECEMBER 31,
1997 1998 1999
----------- ---------- --------
Total revenues........................ 100.0% 100.0% 100.0%
Cost of revenues...................... 58.0 54.5 51.9
------ ------ ------
Gross profit....................... 42.0 45.5 48.1
Selling, general and administrative
expenses.............................. 27.8 26.5 25.9
Depreciation and amortization expense. 5.6 3.8 3.4
------ ------ ------
Income from operations............. 8.6 15.2 18.8
Other income:
Interest income.................... 0.1 1.1 1.4
Other income....................... -- 0.1 --
------ ------ ------
Total other income.................... 0.1 1.2 1.4
------ ------ ------
Income before provision for income
taxes................................ 8.7 16.4 20.2
Provision for income taxes............ (2.3) (6.2) (7.6)
Minority interest..................... (2.2) -- --
------ ------ ------
Net income........................... 4.2% 10.3% 12.6%
====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Revenue increased by 51.7%, or $30.3 million, from $58.6 million
during 1998 to $88.9 million during 1999. This increase resulted primarily from
a $42.3 million (129.1%) increase in application development and integration,
application management, reengineering and other services partially offset by an
approximately $12.0 million (46.4%) decrease in Year 2000 compliance services.
The percentage of revenues derived from unrelated parties increased from 76.8%
during 1998 to 83.3% during 1999. This increase resulted primarily from the
Company's continued efforts to pursue unaffiliated third-party customers and the
impact of the spin-off in June 1998 of a majority interest in the Company,
Erisco, IMS International and certain other entities to form IMS Health. For
statement of operations purposes, revenues from related parties only include
revenues recognized during the period in which the related party was affiliated
with the Company. During 1999, sales to one related party customer accounted for
16.7% of revenues
22
and one third-party customer accounted for 17.4% of revenues. During 1998, sales
to one related party customer accounted for 23.2% of revenues and two
third-party customers accounted for 12.5% and 11.3% of revenues, respectively.
GROSS PROFIT. The Company's cost of revenues consists primarily of the
cost of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. The Company's
cost of revenues increased by 44.6%, or $14.2 million, from $31.9 million during
1998 to $46.2 million during 1999. The increase was due primarily to the
increased cost resulting from the increase in the number of the Company's
technical professionals from approximately 1,400 employees at December 31, 1998
to approximately 2,000 employees at December 31, 1999. The increased number of
technical professionals is a direct result of greater demand for the Company's
services. The Company's gross profit increased by 60.2%, or approximately $16.1
million, from approximately $26.7 million during 1998 to approximately $42.7
million during 1999. Gross profit margin increased from 45.5% of revenues during
1998 to 48.1% of revenues during 1999. The increase in such gross profit margin
was primarily attributable to the increased third-party revenue and the shift
toward newer, higher margin customers.
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 46.9%, or $8.3 million, from $17.8
million during 1998 to $26.1 million during 1999, but decreased as a percentage
of revenue from 30.3% to 29.4%, respectively. The dollar increase in such
expenses was primarily due to expenses incurred to expand the Company's sales
and marketing activities and increased infrastructure expenses to support the
Company's revenue growth. The decrease in selling, general and administrative
expenses as a percentage of revenue resulted from the Company's increased
revenues.
INCOME FROM OPERATIONS. Income from operations increased 86.6%, or $7.7
million, from $8.9 million during 1998 to $16.6 million during 1999,
representing 15.2% and 18.7% of revenues, respectively. The increase in
operating margin was primarily due to the increased third-party revenue and the
shift toward newer, higher margin customers, discussed above.
OTHER INCOME. Other income consists primarily of interest income and
foreign currency exchange gains. Interest income increased by approximately
$625,000, from $638,000 during 1998 to approximately $1.3 million during 1999.
The increase in such interest income was attributable primarily to the
investment of the net proceeds generated from the Company's initial public
offering and generally higher operating cash balances. The Company recognized a
net foreign currency exchange loss of approximately $32,000 during 1999, as a
result of changes in exchange rates on its transactions.
PROVISION FOR INCOME TAXES. Historically, through the date of the IPO, the
Company had been included in the consolidated federal income tax returns of The
Dun & Bradstreet Corporation and Cognizant Corporation. The Company's provision
for income taxes in the consolidated statements of income reflects the federal
and state income taxes calculated on the
23
Company's stand alone basis. The provision for income taxes increased from $3.6
million in 1998 to $6.7 million in 1999, with an effective tax rate of 37.4% in
both 1998 and 1999.
NET INCOME. Net income increased from approximately $6.0 million in 1998
to $11.2 million in 1999, representing 10.3% and 12.6% as a percentage of
revenues, respectively.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue increased by 136.8%, or $33.9 million, from $24.7 million
in 1997 to $58.6 million in 1998. This increase included $14.9 million of
increased Year 2000 compliance services, and $19.0 million of increased sales of
application development and integration, application management, reengineering
and other services. Revenue growth resulted, in part, from the successful
implementation of the Company's Year 2000 rollover strategy, pursuant to which
Year 2000 clients have been converted to include non-Year 2000 assignments
including software development and maintenance. The percentage of revenues from
unrelated parties increased from 56.2% in 1997 to 76.8% in 1998. This increase
resulted primarily from the Company's continued efforts to pursue unaffiliated
third-party customers and the impact of the spin-off in June 1998 of a majority
interest in the Company's company, Erisco, IMS International and certain other
entities to form IMS Health, and the establishment of Nielsen Media Research as
a separate publicly traded company. For statement of operations purposes,
revenues from related parties only include revenues recognized during the period
in which the related party was affiliated with the Company. Accordingly, as of
July 1, 1998, Nielsen Media Research was no longer deemed to be a related party.
During 1998, sales to one related party customer accounted for 23.2% of revenues
and two third-party customers accounted for 12.5% and 11.3% of revenues,
respectively. During 1997, sales to one related party customer accounted for
44.3% of revenues and one third-party customer accounted for 13.9% of revenues.
GROSS PROFIT. The Company's cost of revenues increased by 122.3%, or $17.6
million, from $14.4 million in 1997 to $31.9 million in 1998. The increase was
due primarily to the increased cost resulting from the increase in the number of
the Company's technical professionals from approximately 900 employees at
December 31, 1997 to approximately 1,400 employees at December 31, 1998. The
Company's gross profit increased by 157.0%, or approximately $16.3 million, from
approximately $10.4 million in 1997 to approximately $26.7 million in 1998.
Gross profit margin increased from 42.0% of revenues in 1997 to 45.5% of
revenues in 1998. The increase in gross profit margin was primarily attributable
to the increased third party revenue which have higher margins and a higher
utilization level of technical professionals during 1998 compared to 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased by
115.2%, or $9.5 million, from $8.3 million in 1997 to $17.8 million in 1998, but
decreased as a percentage of revenue from 33.4% to 30.3%, respectively. The
increase in such expenses in absolute dollars was primarily due to expenses
incurred to expand the Company's sales and marketing activities and increased
infrastructure expenses to support the Company's revenue growth. The decrease in
selling, general and administrative expenses as a percentage of revenue resulted
from the Company's continued ability to leverage the significant investments it
made in the beginning of 1997 to
24
establish a sales and marketing organization and to create the infrastructure
necessary to operate as an independent company.
INCOME FROM OPERATIONS. Income from operations increased 318.9% or $6.8
million, from $2.1 million in 1997 to $8.9 million in 1998, representing 8.6%
and 15.2% of revenues, respectively. The increase in operating margin was
primarily due to the increased third-party revenue, which generally has higher
margins and the higher utilization level of technical professionals mentioned
above.
OTHER INCOME. Interest income increased by $613,000 from $25,000 in 1997
to $638,000 in 1998. The increase in such interest income was attributable
primarily to increased interest income resulting from the investment of the net
proceeds generated from the Company's initial public offering and generally
higher cash balances. The Company recognized a net foreign currency exchange
gain of $83,000 in 1998, as a result of the effect of changing exchange rates on
the Company's transactions.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
$581,000 in 1997 to $3.6 million in 1998 resulting in an effective tax rate of
27.0% in 1997 and 37.4% in 1998. Without the effect of minority interest, the
effective tax rate would have been approximately 35.0% in 1997.
MINORITY INTEREST. In 1997, minority interest expense was $545,000. This
expense was attributable to profitability of the Company's Indian subsidiary in
which an unaffiliated third party held a 24.0% minority interest. The Company
purchased the minority interest in October 1997 for $3.4 million. The Company
has not recognized any minority expense subsequent to such purchase. In 1997 and
1998 the Company recorded $76,000 and $317,000 of amortization expense,
respectively, in connection with the goodwill recorded on the acquisition of the
remaining portion of its Indian subsidiary.
NET INCOME. Net income increased from $1.0 million in 1997 to $6.0 million
in 1998, representing 4.2% and 10.3% as a percentage of revenues, respectively.
BACKLOG
The Company generally enters into written contracts with its customers at
the time it commences work on a project. These written contracts contain varying
terms and conditions and the Company does not generally believe it is
appropriate to characterize such written contracts as creating backlog.
Additionally, because these written contracts often provide that the arrangement
can be terminated with limited advance notice and without penalty, the Company
does not believe that projects in progress at any one time are a reliable
indicator or measure of expected future revenue.
LIQUIDITY AND CAPITAL RESOURCES
Historically, through the date of the IPO, the Company's primary sources
of funding had been cash flow from operations and intercompany cash transfers
with its majority owner and controlling parent company IMS Health. In June 1998,
the Company consummated its initial public offering of 2,917,000 shares of its
Class A Common Stock at a price to the public of
25
$10.00 per share, of which 2,500,000 shares were issued and sold by the Company
and 417,000 shares were sold, at that time, by Cognizant Corporation. The net
proceeds to the Company from the offering were approximately $22.4 million after
$845,000 of direct expenses. The funds received by the Company from the initial
public offering were invested in short-term, investment grade, interest bearing
securities, after the Company used a portion of the net proceeds to repay
approximately $6.6 million of non-trade related party balances to Cognizant
Corporation. The Company expects to use the remainder of the net proceeds from
the offering for (i) expansion of existing operations, including its offshore
software development centers; (ii) continued development of new service lines
and possible acquisitions of related businesses; and (iii) general corporate
purposes including working capital.
Net cash provided by operating activities was approximately $1.7 million,
$13.3 million and $18.6 million for the years ended December 31, 1997, 1998 and
1999, respectively. The increase for 1998 compared to 1997 results primarily
from a higher level of accrued liabilities, increased net income, and an
increase in deferred taxes, partially offset by increased other current assets.
The increase for 1999 compared to 1998 results primarily from increased net
income and a decrease in accounts receivable partially offset by a lower
increase in accrued liabilities versus the prior year. Accounts receivable
increased from $7.4 million at December 31, 1997 to $11.1 million at December
31, 1998 and decreased to $10.0 million at December 31, 1999. The decrease in
accounts receivable during 1999 was due primarily to improved collection efforts
and earlier than expected year-end payments due to Year 2000 preparations by our
customers. The Company monitors turnover, aging and the collection of accounts
receivable through the use of management reports which are prepared on a
customer basis and evaluated by the Company's finance staff.
The Company's investing activities used net cash of $6.4 million, $3.7
million and $5.9 million for the years ended December 31, 1997, 1998 and 1999,
respectively. The decrease in 1998 of net cash used in investing activities
compared to 1997 primarily reflects the payment in 1997 for the acquisition of
the minority interest of the Company's Indian subsidiary. The increase in 1999
of net cash used in investing activities compared to 1998 primarily reflects
increased purchases of equipment to expand the Company's offshore development
infrastructure.
The Company's financing activities provided net cash of $5.7 million,
$16.1 million and $1.6 million for the years ended December 31, 1997, 1998 and
1999, respectively. The increase in 1998 compared to 1997 resulted primarily
from the net proceeds generated from the initial public offering of $22.4
million, offset by the repayment of non-trade related party balances of
approximately $6.6 million. The decrease in 1999 compared to 1998 similarly
resulted from the absence of the net IPO proceeds discussed above.
As of December 31, 1999, the Company had no significant third-party debt.
The Company had working capital of $43.5 million at December 31, 1999
and $29.4 million at December 31, 1998.
The Company believes that its available funds and the cash flows expected
to be generated from operations, will be adequate to satisfy its current and
planned operations and needs for at least the next 12 months. The Company's
ability to expand and grow its business in
26
accordance with current plans, to make acquisitions and form joint ventures and
to meet its long-term capital requirements beyond this 12-month period will
depend on many factors, including the rate, if any, at which its cash flow
increases, its ability and willingness to accomplish acquisitions and joint
ventures with capital stock and the availability to the Company of public and
private debt and equity financing. The Company cannot be certain that additional
financing, if required, will be available on terms favorable to it, if at all.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate component of
stockholders' equity. For the Company's Indian subsidiary, the functional
currency is the U.S. dollar since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars; and there is a high
volume of intercompany transactions denominated in U.S. dollars between the
Indian subsidiary and the Company's U.S. affiliates. Non-monetary assets and
liabilities are translated at historical exchange rates, while monetary assets
and liabilities are translated at current exchange rates. A portion of the
Company's costs in India are denominated in local currency and subject to
exchange fluctuations, which has not had any material effect on the Company's
results of operations.
EFFECTS OF INFLATION
The Company's most significant costs are the salaries and related benefits
for its programming staff and other professionals. Competition in India and the
United States for professionals with advanced technical skills necessary to
perform the services offered by the Company have caused wages to increase at a
rate greater than the general rate of inflation. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. There can be no assurance that the Company will be
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
RISKS ASSOCIATED WITH THE YEAR 2000
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company did not experience
any significant computer or systems problems relating to the Year 2000 Problem.
Upon review of the Company's internal and external systems during 1999, the
Company determined that it did not have any material exposure to such computer
problems and that the software and systems required to operate its business and
provide its services were Year 2000 compliant. As a result, the Company did not
incur, and does not expect to incur, any material expenditures relating to Year
2000 systems issues.
27
RECENT ACCOUNTING PRONOUNCEMENTS
During 1999 , various new accounting pronouncements were issued which
may impact the Company's 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, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, contract percentage completions, capital
expenditures, and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not limited
to: (i) the significant fluctuations of the Company's quarterly operating
results caused by a variety of factors, many of which are not within the
Company's control, including (a) the number, timing, scope and contractual terms
of software development and maintenance projects, (b) delays in the performance
of projects, (c) the accuracy of estimates of costs, resources and time to
complete projects, (d) seasonal patterns of the Company's services required by
customers, (e) levels of market acceptance for the Company's services, and (f)
the hiring of additional staff; (ii) changes in the Company's billing and
employee utilization rates; (iii) the Company's ability to manage its growth
effectively, which will require the Company (a) to increase the number of its
personnel, particularly skilled technical, marketing and management personnel,
and (b) to continue to develop and improve its operational, financial,
communications and other internal systems, both in the United States and India;
(iv) the Company's limited operating history with unaffiliated customers; (v)
the Company's reliance on key customers and large projects; (vi) the highly
competitive nature of the markets for the Company's services; (vii) the
Company's ability to successfully address the continuing changes in information
technology, evolving industry standards and changing customer objectives and
preferences; (viii) the Company's reliance on the continued services of its key
executive officers and leading technical personnel; (ix) the Company's ability
to attract and retain a sufficient number of highly skilled employees in the
future; (x) the Company's ability to protect its intellectual property rights;
(xi) general economic conditions; (xii) year 2000 compliance of vendors'
products and related issues, including impact of the year 2000 problem on
customer buying patterns; and (xiii) the outcome of the impact of Year 2000 on
the Company. The Company's actual results may differ materially from the results
disclosed in such forward-looking statements.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed and financial statement schedule herewith is found at "Item 14. 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.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
2000 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 2000 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 2000
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
30
PART IV
ITEM 14. 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 34.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1999.
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.
31
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 7th day of March,
2000.
COGNIZANT TECHNOLOGY SOLUTIONS
CORPORATION
By:/s/Wijeyaraj Mahadeva
-----------------------------------
Wijeyaraj Mahadeva, Chairman of the
Board and Chief Executive Officer
32
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Wijeyaraj Mahadeva Chairman of the Board and March 7, 2000
- ------------------------
Wijeyaraj Mahadeva Chief Executive Officer
(Principal Executive
Officer)
/s/Gordon Coburn Chief Financial Officer, March 7, 2000
- ------------------------
Gordon Coburn Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/Anthony Bellomo Director March 7, 2000
- ------------------------
Anthony Bellomo
/s/Robert W. Howe Director March 7, 2000
- ------------------------
Robert W. Howe
Director March 7, 2000
- ------------------------
Victoria Fash
/s/John Klein Director March 7, 2000
- ------------------------
John Klein
/s/Venetia Kontogouris Director March 7, 2000
- ------------------------
Venetia Kontogouris
33
EXHIBIT INDEX
Exhibit
No. Description of
Exhibit
- ------------ --------------------
3.1 Amended and Restated Certificate of Incorporation. (Incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File Number 333-49783) which became
effective on June 18, 1998.)
3.2 By-laws. (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.1* Form of Indemnification Agreement for Directors and Officers.
(Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File Number 333-49783) which
became effective on June 18, 1998.)
10.2* Amended and Restated Cognizant Technology Solutions Key
Employees' Stock Option Plan. (Incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1
(File Number 333-49783) which became effective on June 18,
1998.)
10.3* Amended and Restated Cognizant Technology Solutions Non-Employee
Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1
(File Number 333-49783) which became effective on June 18,
1998.)
10.4* Option Agreement between the Company and Wijeyaraj Mahadeva.
(Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File Number 333-49783) which
became effective on June 18, 1998.)
10.5 Form of Master Services Agreement between the Company and each
of I.M.S. International, Inc., IMS America, Ltd. and Nielsen
Media Research, Inc. (Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.6 License Agreement between the Company and Cognizant Corporation.
(Incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (File Number 333-49783) which
became effective on June 18, 1998.)
10.7 Intercompany Agreement between the Company and Cognizant
Corporation. (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.8 Intercompany Services Agreement between the Company and
Cognizant Corporation. (Incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1 (File
Number 333-49783) which became effective on June 18, 1998.)
10.9* 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.)
34
10.10 Sublease dated August 28, 1998 by and between Trans Tec
Services, Inc., as Sublessor, and the Company, as Sublessee
(Incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the Year ended December 31,
1998.)
10.11* 1999 Incentive Compensation Plan. (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30,1999.)
10.12* 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.)
21 List of subsidiaries of the Company. (Incorporated by reference
to Exhibit 21 to the Company's Registration Statement on Form
S-1 (File Number 333-49783) which became effective on June 18,
1998.)
23** Consent of PricewaterhouseCoopers LLP.
27** Financial Data Schedule.
- ---------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed herewith. All other exhibits previously filed.
35
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENTS SCHEDULE
Page
----
Consolidated Financial Statements:
Report of Independent Accountants.......................................F-2
Consolidated Statements of Financial Position as of
December 31, 1998 and 1999............................................F-3
Consolidated Statements of Operations for the
years ended December 31, 1997, 1998 and 1999..........................F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999..........................F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1998 and 1999..........................F-6
Notes to Consolidated Financial Statements..............................F-7
Unaudited Quarterly Financial Data........................................F-25
Financial Statement Schedule:
Schedule of Valuation and Qualifying Accounts...........................F-26
F - 1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Cognizant Technology Solutions Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 31 present fairly, in all material
respects, the financial position of Cognizant Technology Solutions Corporation
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 31 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, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 7, 2000
(Except for Note 14 as to which the date is February 11, 2000)
F - 2
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands, except par values)
AT DECEMBER 31,
---------------
1998 1999
-------- -------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 28,418 $ 42,641
Trade accounts receivable, net of allowances of $274
and $225, respectively .................................... 9,230 8,166
Trade accounts receivable - related party ................... 1,877 1,848
Unbilled accounts receivable ................................ 1,088 1,144
Other current assets ........................................ 1,754 2,912
-------- --------
Total current assets ...................................... 42,367 56,711
-------- --------
Property and equipment, net of accumulated depreciation
of $4,121 and $6,817, respectively ........................ 6,270 9,474
Goodwill, net ............................................... 1,830 1,513
Other assets ................................................ 1,212 1,328
-------- --------
Total assets .............................................. $ 51,679 $ 69,026
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1,744 $ 1,435
Accrued and other liabilities ............................... 11,207 11,769
-------- --------
Total current liabilities ................................. 12,951 13,204
Deferred income taxes ....................................... 6,103 10,361
Due to related party ........................................ 9 --
-------- --------
Total liabilities ......................................... 19,063 23,565
-------- --------
Commitments and contingencies (See Note 11. and 12.
to the Consolidated Financial Statements)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares
authorized, none issued ................................... -- --
Class A common stock, $.01 par value, 100,000 shares
authorized, 3,505 and 3,601 shares issued and outstanding
at December 31, 1998 and 1999, respectively(1) ............ 35 36
Class B common stock, $.01 par value, 15,000 shares
authorized, 5,645 shares issued and outstanding at
December 31, 1998 and 1999, respectively(1) ............... 57 57
Additional paid-in capital .................................. 24,566 26,174
Retained earnings ........................................... 7,969 19,203
Cumulative translation adjustment ........................... (11) (9)
-------- --------
Total stockholders' equity ................................ 32,616 45,461
-------- --------
Total liabilities and stockholders' equity ................ $ 51,679 $ 69,026
======== ========
(1) See Note 14. to the Consolidated Financial Statements
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,
-----------------------
1997 1998 1999
-------- -------- --------
Revenues ..................................... $ 13,898 $ 45,031 $ 74,084
Revenues-related party ....................... 10,846 13,575 14,820
-------- -------- --------
Total revenues ............................. 24,744 58,606 88,904
Cost of revenues ............................. 14,359 31,919 46,161
-------- -------- --------
Gross profit ................................. 10,385 26,687 42,743
Selling, general and administrative expense .. 6,898 15,547 23,061
Depreciation and amortization expense ........ 1,358 2,222 3,037
-------- -------- --------
Income from operations ....................... 2,129 8,918 16,645
Other income:
Interest income .............................. 25 638 1,263
Other income, net ............................ -- 83 37
-------- -------- --------
Total other income ......................... 25 721 1,300
-------- -------- --------
Income before provision for income taxes ..... 2,154 9,639 17,945
Provision for income taxes ................... (581) (3,606) (6,711)
Minority interest ............................ (545) -- --
======== ======== ========
Net income ................................... $ 1,028 $ 6,033 $ 11,234
======== ======== ========
Net income per share, basic .................. $ 0.16 $ 0.76 $ 1.22
======== ======== ========
Net income per share, diluted ................ $ 0.16 $ 0.73 $ 1.16
======== ======== ========
Unaudited Pro forma Net income per share
post split, basic(1) ....................... $ 0.08 $ 0.38 $ 0.61
======== ======== ========
Unaudited Pro forma Net income per share
post split, diluted(1) ..................... $ 0.08 $ 0.37 $ 0.58
======== ======== ========
Weighted average number of common shares
outstanding - Basic ........................ 6,547 7,943 9,171
-------- -------- --------
Dilutive Effect of Shares Issuable as of
Period-End Under Stock Option Plans ........ 58 326 537
-------- -------- --------
Weighted average number of common shares
- Diluted .................................. 6,605 8,269 9,708
-------- -------- --------
Comprehensive Income:
Net income ................................. $ 1,028 $ 6,033 $ 11,234
Foreign currency translation adjustment .... (2) (9) 2
-------- -------- --------
========
Total comprehensive income ................... $ 1,026 $ 6,024 $ 11,236
======== ======== ========
(1) See Note 14. to the Consolidated Financial Statements
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)
ADDITIONAL CUMULATIVE
CLASS A CLASS B PAID-IN RETAINED TRANSLATION
COMMON STOCK (1) COMMON STOCK (1) CAPITAL EARNINGS ADJUSTMENT TOTAL
---------------- ---------------- ------- -------- ---------- -----
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balance, December 31, 1996... 417 $ 4 6,083 $ 61 $ 1,833 $ 908 $ -- $ 2,806
Net transfers (to) from
related party.............. -- -- -- -- (413) -- -- (413)
Translation adjustment....... -- -- -- -- -- -- (2) (2)
Net income................... -- -- -- -- -- 1,028 -- 642
----------- ---------- ---------- ------------ -----------------------------------------------------
Balance, December 31, 1997.... 417 4 6,083 61 1,420 1,936 (2) 3,419
Net transfers (to) from
Related party ............... -- -- -- -- 62 -- -- 62
Translation adjustment ...... -- -- -- -- -- -- (9) (9)
Net Proceeds from IPO/
Issued Shares................ 2,613 27 -- -- 22,818 -- -- 22,845
Exercise of Overallotment
Stock...................... 438 4 (438) (4) -- -- -- --
Exercise of Stock Options.... 37 -- -- -- 144 -- -- 144
Compensatory Grant........... -- -- -- -- 248 -- -- 248
Less Unearned portion..... -- -- -- -- (126) -- -- (126)
Net income .................. -- -- -- -- -- 6,033 -- 6,033
----------- ---------- ---------- ------------ -----------------------------------------------------
Balance, December 31, 1998... 3,505 $ 35 5,645 $ 57 $ 24,566 $ 7,969 $ (11) $ 32,616
=========== ========== ========== ============ =====================================================
Translation adjustment ...... -- -- -- -- -- -- 2 2
Exercise of Stock Options.... 96 1 -- -- 550 -- -- 551
Tax Benefit related to Option
Exercises.................. -- -- -- -- 886 -- -- 886
Compensatory Grant........... -- -- -- -- 340 -- -- 340
Less Prior year charge -- -- -- -- (122) -- -- (122)
Less Unearned portion..... -- -- -- -- (46) -- -- (46)
Net income .................. -- -- -- -- -- 11,234 -- 11,234
----------- ---------- ---------- ------------ -----------------------------------------------------
Balance, December 31, 1999... 3,601 $ 36 5,645 $ 57 $ 26,174 $ 19,203 $ (9) $ 45,461
=========== ========== ========== ============ =====================================================
(1) See Note 14. to the Consolidated Financial Statements
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,
1997 1998 1999
-------- -------- --------
Cash flows from operating activities:
Net income ................................................... $ 1,028 $ 6,033 $ 11,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................. 1,358 2,222 3,037
Provision/(reduction) for doubtful accounts ............... 239 45 (31)
Deferred income taxes ..................................... 1,170 3,510 4,258
Minority interest ......................................... 545 -- --
Changes in assets and liabilities:
Accounts receivable .......................................... (4,933) (3,959) 1,068
Other current assets ......................................... (591) (1,854) (1,143)
Other assets ................................................. (390) (410) (116)
Accounts payable ............................................. 842 201 (309)
Accrued and other liabilities ................................ 2,386 7,548 562
-------- -------- --------
Other adjustments for non-cash items ......................... 2 22 --
-------- -------- --------
Net cash provided by operating activities .................... 1,656 13,358 18,560
Cash flows used in investing activities:
Purchase of property and equipment ........................... (3,025) (3,743) (5,924)
Payment for acquisition of minority interest in subsidiary ... (3,418) -- --
-------- -------- --------
Net cash (used in) investing activities ...................... (6,443) (3,743) (5,924)
Cash flows from financing activities:
Proceeds from Initial Public Offering ........................ -- 23,250 --
Costs associated with Initial Public Offering ................ -- (843) --
Proceeds from option exercises/compensatory
grant/contributed capital ................................. 25 327 723
Tax benefit related to option exercises ...................... -- -- 886
Payments to / proceeds from related party .................... 5,669 (6,637) (24)
-------- -------- --------
Net cash provided by financing activities .................... 5,694 16,097 1,585
Effect of Currency Translation ............................... (2) (9) 2
Increase in cash and cash equivalents ........................ 905 25,703 14,223
Cash and cash equivalents, at beginning of year .............. 1,810 2,715 28,418
-------- -------- --------
Cash and cash equivalents, at end of year .................... $ 2,715 $ 28,418 $ 42,641
======== ======== ========
Supplemental information:
Cash paid for income taxes during the year................... $ 158 $ 53 $ 2,546
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. BASIS OF PRESENTATION
The Company is principally engaged in providing high-quality,
cost-effective, full life cycle solutions to complex software development and
maintenance requirements that companies face as they transition to e-business.
The Company has operations and subsidiaries in India, the United Kingdom,
Germany, Canada and the United States. These services are delivered through the
use of a seamless on-site and offshore consulting project team. These solutions
include application development and integration services, application
management, re-engineering and mass change implementation.
The Company is a Delaware corporation originally organized in 1988. The
Company began its software development and maintenance services business in
early 1994, as an in-house technology development center for The Dun &
Bradstreet Corporation and its operating units. In 1996, the Company, Erisco,
Inc. ("Erisco"), IMS International Inc. ("IMS International"), Nielsen Media
Research, Inc., Pilot Software Inc. and Sales Technologies, Inc. and certain
other entities, plus a majority interest in Gartner Group, Inc. were spun-off
from The Dun & Bradstreet Corporation to form Cognizant Corporation
("Cognizant"). In 1997, the Company purchased the 24.0% minority interest in its
Indian subsidiary from a third party for $3.4 million, making the Indian
subsidiary wholly owned by the Company. In June 1998, the Company completed its
IPO. On June 30, 1998, a majority interest in the Company, Erisco, IMS
International and certain other entities were spun-off from Cognizant to form
IMS Health Incorporated ("IMS Health"), the "accounting successor" to Cognizant,
the Company's majority owner and controlling parent company.
IMS Health currently provides the Company with certain administrative
services, including payroll and payables processing, e-mail, tax planning and
compliance, and permitted the Company to participate in IMS Health's insurance
and employee benefit plans. Costs for these services for all periods prior to
the IPO were allocated to the Company based on utilization of certain specific
services. All subsequent services were performed under the CTS IMS Health
intercompany services agreement. (See also Note 10. to the Consolidated
Financial Statements.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements reflect the
consolidated financial position, results of operations and cash flows of the
Company and its consolidated subsidiaries as if it were a separate entity for
all periods presented.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents primarily include time and
demand deposits in the Company's operating bank accounts. The Company considers
all highly liquid instruments with an initial maturity of three months or less
to be cash equivalents.
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
F - 7
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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.
GOODWILL. Goodwill represents the excess of the purchase price of the former
minority interest in the Company's Indian subsidiary over the fair values of
amounts assigned to the incremental net assets acquired. Amortization expense is
recorded using the straight-line method over a period of seven years.
Amortization expense was $317 for each of the years ended December 31, 1999 and
1998. Accumulated amortization was $711 and $393 at December 31, 1999 and 1998,
respectively. In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews for impairment of 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 are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the sales value of
performance, including estimated earnings thereon, is recognized on the basis of
the percentage that each contract's cost to date bears to the total estimated
cost. Fixed price contracts are cancellable subject to a specified notice
period. All services provided by the Company through the date of cancellation
are due and payable under the contract terms. The Company issues invoices
related to fixed price contracts based upon achievement of milestones during a
project. Estimates are subject to adjustment as a project progresses to reflect
changes in expected completion costs. The cumulative impact of any revision in
estimates is reflected in the financial reporting period in which the change in
estimate becomes known and any anticipated losses on contracts are recognized
immediately. A reserve for warranty provisions under such contracts, which
generally exist for ninety days past contract completion, is estimated and
accrued during the contract period.
UNBILLED ACCOUNTS RECEIVABLE. Unbilled accounts receivable represent revenues on
contracts to be billed, in subsequent periods, as per the terms of the
contracts.
FOREIGN CURRENCY TRANSLATION. The assets and liabilities of the Company's
Canadian and European subsidiaries are translated into U.S. dollars from local
currencies at current exchange rates and revenues and expenses are translated
from local currencies at average monthly exchange rates. The resulting
translation adjustments are recorded in a separate component of stockholders'
equity. For the Company's Indian subsidiary ("CTS India"), the functional
currency is the U.S. dollar, since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between CTS
India and its U.S. affiliates. Non-monetary assets and liabilities are
translated at
F - 8
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
historical exchange rates, while monetary assets and liabilities are translated
at current exchange rates. The resulting gain (loss) is included in other
income. Risks and Uncertainties. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the reported period. The most significant estimates relate to the
allowance for doubtful accounts, reserve for warranties, depreciation of fixed
assets and long-lived assets and the recognition of revenue and profits based on
the percentage of completion method of accounting for fixed bid contracts.
Actual results could vary from the estimates and assumptions used in the
preparation of the accompanying financial statements.
All of the Company's software development centers, including a substantial
majority of its employees and assets, are located in India. As a result, the
Company may be subject to certain risks associated with international
operations, including risks associated with foreign currency exchange rate
fluctuations and risks associated with the application and imposition of
protective legislation and regulations relating to import and export or
otherwise resulting from foreign policy or the variability of foreign economic
conditions. To date, the Company has not engaged in any significant hedging
transactions to mitigate its risks relating to exchange rate fluctuations.
Additional risks associated with international operations include difficulties
in enforcing intellectual property rights, the burdens of complying with a wide
variety of foreign laws, potentially adverse tax consequences, tariffs, quotas
and other barriers.
NET INCOME PER SHARE. In 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which replaces the
presentation of primary net income (loss) per share ("EPS") and fully diluted
EPS with a presentation of basic EPS and diluted EPS, respectively. 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. Similar to fully diluted EPS, diluted EPS includes all dilutive
potential common stock in the weighted average shares outstanding. (See Note 14.
to the Consolidated Financial Statements)
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 and cash equivalents with high credit quality financial institutions.
INCOME TAXES. Prior to the consummation of the Company's IPO, the Company had
been included in the federal and certain state income tax returns of Cognizant
and The Dun & Bradstreet Corporation. The provision for income taxes in the
Company's consolidated financial statements has been calculated on a separate
company basis. Income tax benefits realized by the Company and utilized by
Cognizant or The Dun & Bradstreet Corporation are included in stockholders'
equity. The Company is no longer included in the consolidated return of its
majority owner and controlling parent company, and is required to file separate
income tax returns.
F - 9
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
On a stand-alone basis, 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 year end 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 will be 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.
CTS India is an export oriented company that is entitled to claim a tax
holiday for a period of nine years from April 1995 through March 2004 in respect
to its export profits. Under the Indian Income Tax Act of 1961, substantially
all of the earnings of the Company's Indian subsidiary are currently exempt from
Indian Income Tax as profits are attributable to export operations. However,
since management currently intends to repatriate all accumulated earnings from
India to the United States, the Company has provided deferred U.S. income taxes
on all undistributed earnings.
STOCK-BASED COMPENSATION. With respect to stock options granted to employees,
SFAS No. 123 "Accounting for Stock-Based Compensation" permits companies to
continue using the accounting method promulgated by the Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," to
measure compensation or to adopt the fair value based method prescribed by SFAS
No. 123. Management has determined not to adopt the SFAS No. 123's accounting
recognition provisions, but has included the required pro forma disclosures.
RECLASSIFICATIONS. Certain prior-year amounts have been reclassified to conform
with the 1998 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of the FASB
Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers
the effective date of FASB No. 133, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. FASB No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variability in cash flows attributable to a particular risk, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security and a forecasted
transaction. As a result of FASB No. 137, the Company will be required to
implement SFAS No. 133 for all fiscal quarters of fiscal years
F - 10
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
beginning after June 15, 2000. The Company does not expect the adoption of this
pronouncement to have a material effect on the Company's results of operations,
financial position or cash flows.
3. INITIAL PUBLIC OFFERING
On June 24, 1998, the Company consummated its Initial Public Offering
("IPO") of 2,917,000 shares of its Common Stock at a price of $10.00 per share,
2,500,000 of which were issued and sold by the Company and 417,000 of which were
sold by Cognizant Corporation ("Cognizant"), the Company's then majority owner
and controlling parent company. The net proceeds to the Company from the IPO
were approximately $22.4 million after $845 of direct expenses. In July 1998,
IMS Health (the accounting successor to Cognizant) sold 437,550 shares of Class
B Common Stock, which were converted to Class A Common Stock pursuant to an over
allotment option granted to the underwriters of the IPO. Of the total net
proceeds received by the Company upon the consummation of its IPO, approximately
$6.6 million was used to repay the related party balance then owed to Cognizant.
The related party balance resulted from certain advances to the Company from
Cognizant used to purchase the minority interest of the Company's Indian
subsidiary and to fund payroll and accounts payable. Concurrent with the IPO,
the Company reclassified the amounts in mandatorily redeemable common stock to
stockholders' equity as the redemption feature was voided. (See Note 8. to the
Consolidated Financial Statements.)
4. SUPPLEMENTAL FINANCIAL DATA
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED
USEFUL LIFE DECEMBER 31
-----------
(YEARS) 1999 1998
------- ---- ----
Computer equipment and
purchased software.......... 3 $ 8,397 $ 5,542
Furniture and equipment....... 5 - 9 4,760 3,044
Leasehold improvements........ Various 3,134 1,805
----------- -----------
Sub-total $16,291 $10,391
Accumulated depreciation and
amortization................ (6,817) (4,121)
----------- -----------
Property and Equipment - Net.. $ 9,474 $ 6,270
=========== ===========
F - 11
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
------------
1999 1998
---- ----
Accrued bonuses and commissions............ $5,143 $6,600
Accrued vacation........................... 1,217 800
Accrued travel and entertainment........... 948 707
Deferred revenue........................... 677 604
Other...................................... 3,784 2,496
------- -------
$11,769 $11,207
======= =======
5. ACQUISITION OF MINORITY INTEREST
On July 3, 1997, the Company signed a memorandum of understanding to
purchase the 24.0% minority interest in CTS India from a third party. On October
31, 1997, the Company paid $3,468 to the minority shareholder increasing the
Company's ownership in CTS India from 76.0% to 100.0%. The Company accounted for
the acquisition of the minority interest using the purchase method. The
incremental assets acquired have been recorded at their fair value at the date
of acquisition. The excess of purchase price over the fair value of the
incremental net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over a seven year period. The following is a
summary of the purchase price allocation for the acquisition of the minority
interest:
Fair value of assets.............................................. $1,727
Deferred taxes.................................................... (482)
Goodwill.......................................................... 2,223
------
Total purchase price.............................................. $3,468
======
The results of operations of CTS India have been included in the Company's
operations since the acquisition date. Had the acquisition of the minority
interest taken place on January 1, 1997, the results of operations would not
have reflected minority interest expense in each year and would have reflected
amortization of the related goodwill of $317 for 1997.
6. EMPLOYEE BENEFITS
Beginning in 1997, certain U.S. employees of the Company were eligible to
participate in Cognizant's and now IMS Health's 401(k) plan. The Company matches
up to 50.0% of the eligible employee's contribution. The amount charged to
expense for the matching contribution was $49 and $55 for the year ended
December 31, 1999 and 1998, respectively.
F - 12
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Certain of the Company's employees participate in IMS Health's defined
benefit pension plan. The costs to the Company recognized as postretirement
benefit costs and related liabilities were not material to the Company's
results of operations or financial position for the years presented. (See
Note 10. to the Consolidated Financial Statements.)
CTS India maintains an employee benefit plan that covers substantially all
India-based employees. The employees' provident fund, pension and family pension
plans are statutory defined contribution retirement benefit plans. Under the
plans, employees contribute up to twelve percent of their base compensation,
which is matched by an equal contribution by CTS India. Contribution expense
recognized was $338, $186 and $128 for the years ended December 31, 1999, 1998
and 1997 respectively.
CTS India also maintains a statutory gratuity plan that is a statutory
postemployment benefit plan providing defined lump sum benefits. CTS India makes
annual contributions to an employees' gratuity fund established with a
government-owned insurance corporation to fund a portion of the estimated
obligation. The Company estimates its obligation based upon employee salary and
projected turnover rates. Expense recognized by the Company was $358, $135 and
$94 for the years ended December 31, 1999, 1998 and 1997, respectively.
7. Income Taxes
Income (loss) before provision for income taxes consisted of the following
for years ended December 31:
1999 1998 1997
------- ------- -------
U.S..................................... $ 7,553 $(2,862) $(1,812)
Non-U.S................................. 10,392 12,501 3,966
Total................................... $17,945 $ 9,639 $ 2,154
======= ======= =======
The provision (benefit) for income taxes consists of the following for the
years ended December 31,
1999 1998 1997
------- ------- -------
U.S. Federal and state:
Current.............................. $ 3,079 $ 75 $ (607)
Deferred............................. 3,354 3,516 1,178
------- ------- -------
Total U.S. Federal and state............ $ 6,433 $ 3,591 $ 571
------- ------- -------
Non-U.S.:
Current.............................. $ 315 $ 20 $ 18
Deferred............................. (37) (5) (8)
------- ------- -------
Total non-U.S........................ 278 15 10
------- ------- -------
Total................................ $ 6,711 $ 3,606 $ 581
======== ======= =======
F - 13
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
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:
1999 1998 1997
------- ------- --------
Tax expense at statutory rate.................... $ 6,101 $ 3,277 $ 732
State and Local Income Taxes..................... 398 (110) --
Goodwill......................................... 109 108 26
Effect of minority interest on foreign earnings.. -- -- (185)
Other............................................ 103 331 8
------- ------- -------
Total Income Taxes............................... $ 6,711 $ 3,606 $ 581
======= ======= =======
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
1999 1998
---- ----
Deferred tax assets:
Net Operating Losses................................ $ 37 $ 940
Net deferred tax assets............................... $ 37 $ 940
Deferred tax liabilities:
Undistributed Indian income......................... (10,398) (7,043)
Total deferred tax liabilities........................ (10,398) (7,043)
--------- --------
Net deferred tax liability............................ $(10,361) $(6,103)
========= ========
At December 31, 1999, the Company had $37 of tax credit carry forwards related
to Germany net operating losses, which do not expire.
CTS India is an export oriented company that is entitled to claim a tax
holiday for a period of nine years from April 1995 through March 2004 in respect
to its export profits. Under the Indian Income Tax Act of 1961, substantially
all of the earnings of the Company's Indian subsidiary are currently exempt from
Indian Income Tax as profits are attributable to export operations. However,
since management intends to repatriate all earnings from India to the United
States, the Company has provided deferred U.S. income taxes on all undistributed
earnings. The Company has determined that the income taxes recorded by the
Company would not be materially different in the absence of the current tax
exemption and, therefore, the tax exemption had no material effect on earnings
per share.
8. CAPITAL STOCK
A. COMMON STOCK. On June 12, 1998, the Company amended and restated its
certificate of incorporation to authorize 100,000,000 shares of Class A common
stock, par value $.01 per share, 15,000,000 shares of Class B common stock, par
value $.01 per share, and 15,000,000 shares of
F - 14
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
preferred stock, par value $.10 per share, and effected a 0.65 for one reverse
stock split. All applicable shares and per share amounts in the accompanying
financial statements have been retroactively adjusted to reflect this
recapitalization. Holders of Class A common stock have one vote per share and
holders of Class B common stock have ten votes per share. Holders of Class B
common stock are entitled to convert their shares into Class A common stock at
any time on a share for share basis. Shares of Class B Common Stock transferred
to stockholders of IMS Health in a transaction intended to be on a tax-free
basis (a "Tax-Free Spin-Off") under the Code shall not convert to shares of
Class A Common Stock upon the occurrence of such Tax-Free Spin-Off. No preferred
stock has been issued. (See Note 14. to the Consolidated Financial Statements)
Subsequent to the IPO, the underwriters exercised their right to purchase
an additional 437,550 shares of Class A Common Stock. As a result, IMS Health,
the majority owner and controlling parent of the Company, converted 437,550
shares of Class B Common stock into Class A Common Stock and subsequently sold
such shares.
B. REDEEMABLE COMMON STOCK. On July 25, 1997, certain management employees of
the Company and its affiliates subscribed and subsequently purchased Common
Stock under the "Key Employees Restricted Stock Purchase Plan." These shares
were purchased by the employees at the then estimated fair market value of $3.85
per share. Holders of the stock may put, at any time, to the Company their
shares at the lower of the purchase price or the share price based on a
valuation of the Company at the time of the put. Upon consummation of the IPO,
this put right terminated. The Company initially recorded the value of the
purchased stock outside the equity section. In 1998, upon the completion of the
initial public offering, all redemption conditions were removed, and the shares
have been reclassified to common stock.
9. EMPLOYEE STOCK OPTIONS PLANS
In July 1997, CTS adopted a Key Employees Stock Option Plan, which
provides for the grant of up to 698,750 stock options to eligible employees.
Options granted under this plan may not be granted at an exercise price less
than fair market value of the underlying shares on the date of grant. As a
result of the IPO all options have a life of ten years, vest proportionally over
four years and have an exercise price equal to the fair market value of the
common stock on the grant date.
In December 1997, CTS adopted a Non-Employee Directors' Stock Option Plan,
which provides for the grant of up to 71,500 stock options 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.
As a result of the IPO all options have a life of ten years, vest proportionally
over two years and have an exercise price equal to the fair market value of the
common stock on the grant date.
In March 1998, CTS granted non-qualified stock options to purchase an
aggregate of 48,750 shares to CTS's Chairman and Chief Executive Officer at an
exercise price of $6.92 per share, an amount less than the fair market value of
the shares on the date of the grant.
F - 15
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
In May 1999, CTS adopted the 1999 Incentive Compensation Plan, which
provides for the grant of up to 1,000,000 stock options to eligible employees,
nonemployee Directors and independent contractors. Options granted under this
plan may not be granted at an exercise price less than fair market value of the
underlying shares on the date of grant. All options have a life of ten years,
vest proportionally over four years, unless specified otherwise, and have an
exercise price equal to the fair market value of the common stock on the grant
date.
F - 16
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
A summary of the Company's stock option activity, and related information
is as follows:
December 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year......... 685,026 $ 5.85 539,825 $ 4.04 -- $ --
Granted, Employee Option Plan.......... 61,200 27.45 185,950 9.74 520,325 3.85
Granted, Directors Option Plan......... 20,000 22.31 36,500 10.00 19,500 9.08
Granted, 1999 Incentive Comp. Plan..... 638,500 25.16 -- -- -- --
Exercised.............................. (95,747) 5.76 (37,111) 3.85 -- --
Canceled............................... (33,075) 9.02 (40,138) 5.57 -- --
---------- ------- ------- ------- ------- -------
Outstanding - end of year................ 1,275,904 $ 16.73 685,026 $ 5.85 539,825 $ 4.04
---------- ------- ------- ------- ------- -------
Exercisable - end of year................ 220,951 $ 6.80 112,065 $ 4.69 -- --
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at December 31, 1999 and 1998,
respectively:
1999
- -------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Range of Weighted Average Weighted
Exercise Number Remaining Average Weighted Average
Prices Outstanding Contractual Life in Years Exercise Price Options Exercise Price
------ ----------- ------------------------- -------------- ------- --------------
$3.85-$3.85 374,063 7.6 years $3.85 143,313 $ 3.85
$6.92-$10.00 162,391 8.4 years $9.00 54,888 $ 8.41
$10.88-$16.13 19,500 8.7 years $12.76 2,250 $13.21
$21.50-$30.72 711,950 9.4 years $24.94 20,500 $22.35
$50.88-$61.88 8,000 9.9 years $55.38 -- --
$3.85-$61.88 1,275,904 8.7 years $16.73 220,951 $ 6.80
- -------------------------------------------------------------------------------------------------------
Compensation cost recognized by the Company under APB 25 was $172 and $122
for 1999 and 1998, respectively. No compensation cost was recognized by the
Company under APB 25 for 1997.
F - 17
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Had compensation cost for the Company's stock-based compensation plans, as
well as the IMS Health options held by certain executive officers (See Note 10.
to the Consolidated Financial Statements), been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS No. 123, the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
DECEMBER 31,
------------
1999 1998 1997
---- ---- ----
Net income
As reported............................... $11,234 $6,033 $1,028
Pro forma................................. $10,047 $5,747 $778
As reported
Net income per share, basic............... $1.22 $0.76 $0.16
Net income per share, diluted............. $1.16 $0.73 $0.16
Pro forma
Net income per share, basic............... $1.10 $0.72 $0.12
Net income per share, diluted............. $1.04 $0.69 $0.12
The pro forma disclosures shown above are not representative of the
effects on net income and earnings per share in future years.
For purposes of pro forma disclosures only, the fair value for all Company
options was estimated at the date of grant using the Black-Scholes option model
with the following weighted average assumptions in 1999; risk-free interest rate
of 5.6 %, expected dividend yield of 0.0%, expected volatility of 75.0% and
expected life of 3.9 years. 1998 assumptions; risk-free interest rate of 5.4 %,
expected dividend yield of 0.0%, expected volatility of 48.0% and expected life
of 3.6 years. 1997 assumptions: risk-free interest rate of 6.3%, expected
dividend yield of 0.0%, expected volatility of 40.0% and expected life of 8.7
years. The weighted-average fair value of the Company's options granted during
1999 was $14.89. The weighted-average fair value of the Company's options
granted during 1998 was $4.68. The weighted-average fair value of the Company's
options granted during 1997 was $2.38. The assumptions used in 1999 for IMS
Health stock options were: risk-free interest rate of 4.8%, expected dividend
yield of 0.3%, expected volatility of 35.0% and expected life of 3.0 years. The
assumptions used in 1998 for IMS Health stock options were: risk-free interest
rate of 5.5%, expected dividend yield of 0.3%, expected volatility of 25.0% and
expected life of 3.0 years. The assumptions used in 1997 for Cognizant stock
options were: risk-free interest rate of 5.9%, expected dividend yield of 0.3%,
expected volatility of 25.0% and expected life of 4.5 years. The weighted
average fair value of IMS Health stock options granted to certain executive
officers in 1998 was $7.14. The weighted average fair value of Cognizant stock
options granted to certain executive officers in 1997 was $9.76.
10. OTHER TRANSACTIONS WITH AFFILIATES
BACKGROUND. The Company began its software development and maintenance services
business in early 1994 as an in-house technology development center for The Dun
& Bradstreet Corporation and its operating units. These operating units
principally included A.C.Nielsen, Dun
F - 18
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
& Bradstreet Information Services, Dun & Bradstreet Software, Erisco, Inc.
("Erisco"), IMS International, Inc. ("IMS International"), NCH Promotional
Services, Inc. ("NCH Promotional Services"), Nielsen Media Research, Inc.
("Nielsen Media Research"), The Reuben H. Donnelley Corporation ("RHDonnelley"),
Pilot Software, Inc. ("Pilot Software") and Sales Technologies, Inc. ("Sales
Technologies"), and a majority interest in Gartner Group, Inc. ("Gartner
Group"). In November 1996, the Company, Erisco, IMS International, Nielsen Media
Research, Pilot Software, Sales Technologies and certain other entities, plus a
majority interest in Gartner Group, were spun-off from The Dun & Bradstreet
Corporation to form Cognizant, the then majority owner and controlling parent of
the Company. At that time, ACNielsen was separately spun-off from The Dun &
Bradstreet Corporation and Dun & Bradstreet Software was sold to GEAC Software.
In 1997, Cognizant sold Pilot Software to a third party.
On January 15, 1998, Cognizant announced that it would, subject to certain
conditions, reorganize itself (the "Reorganization"), by spinning the Nielsen
Media Research business from the rest of its businesses, creating two publicly
traded companies, IMS Health Corporation ("IMS Health") and Nielsen Media
Research. The reorganization became effective on July 1, 1998. The shares of the
Company previously held by Cognizant are now held by IMS Health and all services
previously provided to the Company by Cognizant are now being provided by IMS
Health.
In July 1998, IMS Health sold 437,550 shares of Class B Common Stock
pursuant to an over allotment option granted to the underwriters of the IPO. As
of December 31, 1999, IMS Health owned a majority and controlling interest in
the outstanding Common Stock of the Company and held approximately 94% of the
combined voting power of the Company's Common Stock. (See also Note 3. to the
Consolidated Financial Statements.)
IMS Health currently provides the Company with certain administrative
services including payroll and payables processing, e-mail, tax planning and
compliance, and permits the Company to participate in IMS Health's insurance and
employee benefit plans. Costs for these services for all periods prior to the
IPO were allocated to the Company based on utilization of certain specific
services. All subsequent services were performed under the CTS IMS Health
intercompany services agreement.
AFFILIATED AGREEMENTS. In 1997, the Company entered into various agreements with
Cognizant which were assigned to IMS Health as part of the 1998 spin-off. The
agreements include an Intercompany Services Agreement for services provided by
IMS Health such as payroll and payables processing, tax, finance, personnel
administration, real estate and risk management services, a License Agreement to
use the "Cognizant" trade name and an Intercompany Agreement. On July 1, 1998,
IMS Health transferred all of its rights to the "Cognizant" name and related
trade and service marks to the Company.
REVENUES. In 1997, the Company recognized related party revenues totaling
$10,846 including revenues from Erisco, IMS International, Nielsen Media
Research, Strategic Technologies, Pilot Software and Gartner Group for the full
year. In 1998, the Company recognized related party revenues totaling $13,575
including revenues from IMS Health, Nielsen Media Research (through
F - 19
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
June 30, 1998), Strategic Technologies and Gartner Group. In 1999, the Company
recognized related party revenues totaling $14,820 including revenues from IMS
Health and Strategic Technologies.
SERVICES. The Company, IMS Health and Nielsen Media Research have entered into
Master Services Agreements pursuant to which the Company provides IT services to
such subsidiaries. IMS Health, Cognizant and The Dun & Bradstreet Corporation
provided the Company with certain administrative services, including financial
planning and administration, legal, tax planning and compliance, treasury and
communications, and permitted the Company to participate in Cognizant's
insurance and employee benefit plans. Costs for these services for all periods
prior to the IPO were allocated to the Company based on utilization of certain
specific services. All subsequent services were performed under the CTS IMS
Health intercompany services agreement. Management believes that these
allocations are reasonable. Total costs charged to the Company by IMS Health in
connection with these services were $350, $1,666, and $835 for the years ended
December 31, 1999, 1998 and 1997, respectively. The decrease in such costs
during 1999 was a result of the majority of the Company's employees no longer
participating in IMS Health's employee benefits plan effective January 1, 1999.
The Company financed the acquisition of the minority interest and its
operations through intercompany balances with Cognizant, which were repaid with
proceeds from the IPO. No interest was charged on these transactions.
Such transactions in 1999, 1998 and 1997 are as follows:
1999 1998 1997
---- ---- ----
Loans and advances (repayments), net... $(24) $(6,637) $2,251
Purchase of minority interest.......... -- -- 3,418
------ ------- ------
Proceeds (to) from related party....... $(24) $(6,637) $5,669
====== ======= ======
LEASES. Beginning January 1, 1997 and ended December 31, 1998, the Company
leased office space from a subsidiary of IMS Health. The Company made annual
lease payments to the subsidiary of $107 and $99 in 1998 and 1997, respectively.
PENSION PLANS. Certain U.S. employees of the Company participate 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.
F - 20
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
STOCK OPTIONS. In November 1996, in consideration for services to the Company,
Cognizant Corporation granted an executive officer and director of the Company
options to purchase an aggregate of 114,900 (on a pre-split basis) shares of the
common stock of Cognizant Corporation at an exercise price of $33.38 per share.
Such executive officer and director agreed to forfeit options to purchase 58,334
shares (on a pre-split basis) of Cognizant Corporation common stock upon the
consummation of the Company's initial public offering. In July 1998, IMS Health
granted an executive officer options to purchase an aggregate of 8,158 shares
(on a pre-split basis) of the common stock of IMS Health at an exercise price of
$30.17 per share. All remaining such options have since been converted into
options to purchase the common stock of IMS Health as a result of the
Reorganization that occurred on July 1, 1998, the two-for-one split of IMS
Health stock that occurred on January 15, 1999 and the distribution of Gartner
Group shares that occurred on July 26, 1999. At December 31, 1999, after
adjusting for the Reorganization, the split of IMSH stock and the distribution
of Gartner Group shares, such officer had 168,113 options outstanding at a
weighted average exercise price of $16.36 per share. At December 31, 1999,
114,569 options were exercisable.
In November 1996, Cognizant Corporation granted an executive officer options to
purchase an aggregate of 60,000 shares (on a pre-split basis) of the common
stock of Cognizant Corporation at an exercise price of $33.38 per share. In
addition, in November 1996, such executive officer was granted options to
purchase an aggregate of 20,000 shares (on a pre-split basis) of the common
stock of Cognizant Corporation at an exercise price of $33.38 per share, which
was equal to the fair market value at the grant date, by paying ten percent of
the option exercise price as an advance payment toward such exercise. The
unvested portion of such advance payment is refundable under certain conditions.
The remaining 90 percent is payable at exercise. In July 1998, IMS Health
granted an executive officer options to purchase an aggregate of 9,106 shares
(on a pre-split basis) of the common stock of IMS Health at an exercise price of
$30.17 per share. All remaining such options have since been converted into
options to purchase the common stock of IMS Health as a result of the
Reorganization, the two-for-one split of IMS Health stock, and the distribution
of Gartner Group shares discussed above. At December 31, 1999, after adjusting
for the Reorganization, the split of IMSH stock and the distribution of Gartner
Group shares, such officer had 124,285 options outstanding at a weighted average
exercise price of $16.71 per share. At December 31, 1999, 32,925 options were
exercisable.
11. COMMITMENTS
The Company leases office space under operating leases which expire at
various dates through the year 2007. 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,
1999 are as follows:
F - 21
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
2000............................................................ $1,803
2001............................................................ 1,689
2002............................................................ 1,226
2003............................................................ 1,041
2004............................................................ 515
Thereafter...................................................... 85
------
Total minimum lease payments.................................... $6,359
======
Rental expense totaled $1,823, $1,260 and $509 for years ended December
31, 1999, 1998 and 1997, respectively.
12. 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.
13. SEGMENT INFORMATION
The Company delivers high-quality, cost-effective, full life cycle
solutions to complex software development and maintenance problems that
companies face as they transition to e-business. These services are delivered
through the use of a seamless on-site and offshore consulting project team.
These solutions include application development and integration services,
application management, re-engineering and mass change implementation. The
Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related
F - 22
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Information." Information about the Company's operations and total assets in
North America, Europe and Asia for the three years ended December 31, 1999, 1998
and 1997 are as follows:
1999 1998 1997
---- ---- ----
REVENUES (1)
North America....................... $71,171 $47,883 $21,217
Europe.............................. 17,352 10,481 3,177
Asia................................ 381 242 350
------- ------- -------
Consolidated........................ $88,904 $58,606 $24,744
======= ======= =======
OPERATING INCOME (1)
North America....................... $13,328 $6,724 $1,685
Europe.............................. 3,245 2,098 400
Asia................................ 72 96 44
------- ------- -------
Consolidated........................ $16,645 $8,918 $2,129
======= ======= =======
IDENTIFIABLE ASSETS
North America....................... $43,671 $36,294 $9,930
Europe.............................. 3,408 2,846 60
Asia................................ 21,947 12,539 8,308
------- ------- -------
Consolidated........................ $69,026 $51,679 $18,298
======= ======= =======
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
The Company, operating globally, provides software development and
maintenance services for medium and large businesses. North American operations
consist primarily of software development and maintenance consulting services in
the United States and Canada. European operations consist primarily of software
development and maintenance services principally in the United Kingdom and
Germany. Asian operations consist primarily of software development and
maintenance consulting services principally in India.
During 1997, 1998 and 1999, the Company's top five customers accounted for
77.5%, 60.5% and 57.3% of revenues, respectively. The Company's ten largest
customers accounted for, in the aggregate, approximately 92.3%, 81.0% and 75.3%
of the Company's revenues in 1997, 1998 and 1999, respectively. In 1999, sales
to one related party customer accounted for 16.7% of revenues and one third
party customer accounted for 17.4% of revenues. In 1998, sales to one related
party customer accounted for 23.2% of revenues and two third party customers
accounted for 12.5% and 11.3% of revenues, respectively. In 1997, sales to one
related party customer accounted for 44.3% of revenues and one third party
customer accounted for 13.9% of revenues. For statement of operations purposes,
revenues from related parties only include revenues recognized during the period
in which the related party was affiliated with the Company.
F - 23
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
14. SUBSEQUENT EVENT (UNAUDITED)
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. Pro forma unaudited earnings per share reflective of
the stock split have been presented in the Company's Consolidated Statement of
Operations. The historical share and per share amounts have not been restated to
reflect the 2-for-1 stock split. Such amounts will be restated upon the
effective date of the stock dividend.
F - 24
QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------Three Months Ended------------
1999 March 31 June 30 September 30 December 31 Full Year
- -------------------------------------------------------------------------------------------
Operating Revenue $20,426 $21,498 $22,876 $24,104 $88,904
Gross Profit $9,715 $10,349 $11,003 $11,676 $42,743
Operating Income $4,070 $3,863 $4,176 $4,536 $16,645
Net Income $2,759 $2,555 $2,860 $3,061 $11,234
Earnings Per Share of Common Stock
Basic $0.30 $0.28 $0.31 $0.33 $1.22
Diluted $0.29 $0.27 $0.30 $0.31 $1.16
- -------------------------------------------------------------------------------------------
--------------Three Months Ended------------
1998 March 31 June 30 September 30 December 31 Full Year
- -------------------------------------------------------------------------------------------
Operating Revenue $10,238 $12,668 $16,200 $19,500 $58,606
Gross Profit $4,309 $5,342 $7,276 $9,760 $26,687
Operating Income $1,124 $1,582 $2,435 $3,777 $8,918
Net Income $712 $1,066 $1,700 $2,555 $6,033
Earnings Per Share of Common Stock
Basic $0.11 $0.15 $0.19 $0.28 $0.76
Diluted $0.10 $0.15 $0.18 $0.27 $0.73
- -------------------------------------------------------------------------------------------
This table has not been restated to reflect the Company's 2-for-1 stock
split which will be effective March 16, 2000. (See Note 14 to the Consolidated
Financial Statements)
F - 25
Cognizant Technology Solutions Corporation
Valuation and Qualifying Accounts
(Dollars in Thousands)
Accounts Receivable Allowance:
Balance at Charged to
Beginning of Costs and Charged to Balance at End
Year Period Expenses Other Accounts Deductions of Period
1999 $ 274 $ (31) $ 18 $ 225
1998 $ 239 $ 45 $ 10 $ 274
1997 -- 239 -- 239
F - 26