SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 0-24429
Cognizant Technology Solutions Corporation
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
- --------------------------------- -------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Indentification No.)
of Incorporation or Organization)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(201) 801-0233
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of April 29, 2002:
Class Number of Shares
----- ----------------
Class A Common Stock, par value $.01 per share 8,208,331
Class B Common Stock, par value $.01 per share 11,290,900
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)..... 1
Condensed Consolidated Statements of Income and
Comprehensive Income (Unaudited) for the Three Months
Ended March 31, 2002 and 2001............................... 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of March 31, 2002 and December 31, 2001...... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2002 and 2001......... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition.............. 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 16
SIGNATURES........................................................ 17
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
-1-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2002 2001
---- ----
Revenues............................................. $41,650 $39,986
Revenues - related party............................. 4,834 3,418
------- -------
Total revenues..................................... 46,484 43,404
Cost of revenues..................................... 24,189 22,369
------- -------
Gross profit......................................... 22,295 21,035
Selling, general and administrative
expenses........................................... 11,222 11,208
Depreciation and amortization expense................ 1,927 1,438
------- -------
Income from operations............................... 9,146 8,389
Other income (expense):
Interest income.................................... 429 746
Other expense - net................................ (159) (245)
------- -------
Total other income............................. 270 501
------- -------
Income before provision for income taxes............. 9,416 8,890
Provision for income taxes........................... (2,307) (3,325)
------- -------
Net income........................................... $ 7,109 $ 5,565
======= =======
Basic earnings per share............................. $ 0.37 $ 0.30
======= =======
Diluted earnings per share........................... $ 0.35 $ 0.28
======= =======
Weighted average number of common shares outstanding -
Basic.............................................. 19,365 18,698
======= =======
Dilutive Effect of Shares Issuable as of Period-End
Under Stock Option Plans........................... 1,202 1,534
======= =======
Weighted average number of common shares outstanding -
Diluted............................................ 20,567 20,232
======= =======
Comprehensive Income:
Net Income........................................... $ 7,109 $ 5,565
Foreign Currency Translation Adjustments............. (46) (116)
------- -------
Other Comprehensive Income/(Loss).................... $ (46) $ (116)
======= =======
Comprehensive Income................................. $ 7,063 $ 5,449
======= =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statement.
-2-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
MARCH 31, DECEMBER 31,
2002 2001
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 91,186 $ 84,977
Trade accounts receivable, net of allowance of $ 717
and $882, respectively............................... 22,139 21,063
Trade accounts receivable-related party.............. 1,635 1,481
Unbilled accounts receivable......................... 5,321 5,005
Unbilled accounts receivable-related party........... 690 417
Other current assets................................. 6,101 4,392
-------- --------
Total current assets.............................. 127,072 117,335
-------- --------
Property and equipment, net of accumulated depreciation
of $18,691 and $16,805 respectively.................. 24,247 24,339
Goodwill, net........................................... 878 878
Other assets............................................ 2,124 2,431
-------- --------
Total assets...................................... $154,321 $144,983
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 3,560 $ 3,652
Accrued and other current liabilities................ 18,804 18,046
-------- --------
Total current liabilities......................... 22,364 21,698
Deferred income taxes................................... 25,004 24,493
-------- --------
Total liabilities................................. 47,368 46,191
-------- --------
Commitments and Contingencies (See Note 6)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares
authorized, none issued............................... -- --
Class A common stock, $.01 par value, 100,000 shares
authorized, 8,117 shares and 8,065 shares issued and
outstanding at March 31, 2002 and December 31, 2001,
respectively.......................................... 81 80
Class B common stock, $.01 par value, 25,000 shares
authorized, 11,290 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively.... 113 113
Additional paid-in-capital.............................. 40,808 39,711
Retained earnings....................................... 66,155 59,046
Cumulative translation adjustment....................... (204) (158)
-------- --------
Total stockholders' equity........................ 106,953 98,792
-------- --------
Total liabilities and stockholders' equity........ $154,321 $144,983
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statement.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------
2002 2001
---- ----
Cash flows from operating activities:
Net income.............................................. $ 7,109 $ 5,565
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization..................... 1,927 1,438
Provision for doubtful accounts................... 328 755
Deferred income taxes............................. 511 1,713
Tax benefit related to option exercises........... 423 523
Changes in assets and liabilities:
Trade accounts receivable......................... (1,558) 51
Other current assets.............................. (2,298) (2,366)
Other assets...................................... 417 (35)
Accounts payable.................................. (92) (627)
Accrued and other liabilities..................... 758 (5,559)
--------- --------
Net cash provided by operating activities............... 7,525 1,458
--------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (1,944) (3,108)
--------- --------
Net cash used in investing activities................... (1,944) (3,108)
--------- --------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital......... 674 756
--------- --------
Net cash provided by financing activities............... 674 756
--------- --------
Effect of currency translation.......................... (46) (116)
--------- --------
Increase in cash and cash equivalents .................. 6,209 (1,010)
Cash and cash equivalents, beginning of year............ 84,977 61,976
--------- --------
Cash and cash equivalents, end of period................ $ 91,186 $ 60,966
========= ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statement.
-4-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
(the "Company") in accordance with generally accepted accounting principles in
the United States and Article 10 of Regulation S-X under the Securities and
Exchange Act of 1934, as amended, and should be read in conjunction with the
Company's consolidated financial statements (and notes thereto) included in the
Company's 2001 Annual Report on Form 10-K. In the opinion of the Company's
management, all adjustments considered necessary for a fair presentation of the
accompanying condensed consolidated financial statements have been included, and
all adjustments are of a normal and recurring nature. Operating results for the
interim period are not necessarily indicative of results that may be expected to
occur for the entire year.
NOTE 2 - COMPREHENSIVE INCOME:
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments. Accumulated balances of Cumulative Translation
Adjustments, as of March 31, 2002 and March 31, 2001 are as follows:
Cumulative
Translation
Adjustment
----------
Balance, December 31, 2001................... $ (158)
Period Change................................ (46)
------
Balance, March 31, 2002...................... $ (204)
======
Balance, December 31, 2000................... $ (50)
Period Change................................ (116)
------
Balance, March 31, 2001...................... $ (166)
======
NOTE 3 - RELATED PARTY TRANSACTIONS:
As of March 31, 2002, IMS Health Incorporated ("IMS Health") owned
approximately 58.2% of the outstanding Common Stock of the Company (representing
all of the Company's Class B Common Stock) and held approximately 93.3% of the
combined voting power of the Company's Common Stock.
IMS Health currently provides the Company with certain administrative
services including payroll and payables processing and permits the Company to
participate in certain of IMS Health's business insurance plans. In prior
periods, IMS Health provided certain other services such as tax planning and
compliance, which have since been transitioned to the Company. 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
and charged to the Company under an intercompany services agreement with IMS
Health. Total costs in connection with these services were approximately $139
and $110 for the three-month periods ended March 31, 2002 and March 31, 2001,
respectively.
Other related party disclosures are included in Note 7 to the Condensed
Consolidated Financial Statements.
-5-
NOTE 4 - ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
Statements of Financial Accounting Standards Adopted:
In June 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("FAS 141") and Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") were
issued. FAS 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001. FAS 141 also specifies
criteria that intangible assets acquired must meet to be recognized and reported
separately from goodwill. FAS 142 requires that goodwill and intangible assets
with indefinite lives no longer be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. FAS 142 is effective for fiscal years beginning after December 15,
2001. The adoption of FAS 141 and FAS 142 did not have a material effect on the
Company's financial position or results of operations. The following table sets
forth the Company's results had FAS 142 been applied to the prior-period
financial statements presented herein.
THREE MONTHS
------------
ENDED
-----
MARCH 31, 2001
--------------
Reported Net Income $5,565
Reversal of Goodwill Amortization - net of tax 79
------
Adjusted Net Income excluding Goodwill Amortization $5,644
Adjusted Basic EPS excluding Goodwill Amortization $0.30
Adjusted Diluted EPS excluding Goodwill Amortization $0.28
In August 2001, Statement of Financial Standards No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets" ("FAS 144") was issued. FAS 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently occurring Events and Transactions." FAS
144 also amends ARB ("Accounting Research Bulletins") No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. FAS 144 retains the
fundamental provisions of FAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while resolving significant implementation issues associated with FAS
121. Among other things, FAS 144 provides guidance on how long-lived assets used
as part of a group should be evaluated for impairment, establishes criteria for
when long-lived assets are held for sale, and prescribes the accounting for
long-lived assets that will be disposed of other than by sale. FAS 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
FAS 144 did not have a material impact on the Company's financial position and
results of operations.
Statements of Financial Accounting Standards Not Yet Adopted:
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("FAS 143") was issued. FAS 143
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and the associated retirement
costs that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an increase in the carrying amount
of the related long-lived asset. The asset retirement cost is subsequently
allocated to expense using a systematic and rational method over the assets
useful life. FAS 143 is effective for fiscal years beginning after June 15,
2002. The adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.
-6-
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145") was issued. FAS 145 updates,
clarifies and simplifies existing accounting pronouncements and is generally
effective for transactions occurring after May 15, 2002. The adoption of this
statement is not expected to have a material impact on the Company's financial
position or results of operations.
NOTE 5 - INCOME TAXES
CTS India is an export oriented company which, under the Indian Income Tax
Act of 1961, is entitled to claim a tax holiday for a period of ten years with
respect to its export profits. Substantially all of the earnings of the
Company's Indian subsidiary are attributable to export profits and are therefore
currently exempt from Indian income tax. These tax holidays will begin to expire
in 2004 and under current law will be completely phased out by 2009. In prior
periods, it was management's intent to repatriate all accumulated earnings from
India to the United States; accordingly, the Company has provided deferred
income taxes in the amount of approximately $25,537 on all such undistributed
earnings through December 31, 2001. During the first quarter of 2002, the
Company made a strategic decision to pursue an international strategy that
includes expanded infrastructure investments in India and geographic expansion
in Europe and Asia. As a component of this strategy, the Company intends to use
2002 and future Indian earnings to expand operations outside of the United
States instead of repatriating these earnings to the United States. Accordingly,
effective January 1, 2002, pursuant to Accounting Principles Bulletin 23, the
Company will no longer accrue taxes on the repatriation of earnings recognized
in 2002 and subsequent periods as these earnings are considered to be
permanently reinvested outside of the United States. As of March 31, 2002, the
amount of unrepatriated earnings upon which no provision for taxation has been
recorded is approximately $7,835. If such earnings are repatriated in the
future, or are no longer deemed to be indefinitely reinvested, the Company will
accrue the applicable amount of taxes associated with such earnings. This change
in intent resulted in an estimated effective tax rate for fiscal 2002 of 24.5%,
which was used during the first quarter of 2002, compared to an effective tax
rate for fiscal 2001 of 37.4%, which was used during the first quarter of 2001.
NOTE 6 - CONTINGENCIES AND COMMITMENTS
As of March 31, 2002, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $11,400, of which $8,600 has been spent to date. The multi-phase
program will encompass the construction of three fully owned development centers
containing approximately 620,000 square feet of space in Pune, Chennai and
Calcutta. Total costs related to this program are expected to be approximately
$39,400, which the Company expects to fund internally.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' 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,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
-7-
NOTE 7 - SEGMENT INFORMATION
The Company is a leading provider of custom software development,
integration and maintenance services that link e-business with core information
systems for companies worldwide. These services are delivered through the use of
a seamless on-site and offshore consulting project team. 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. The Company is managed
on a geographic basis. Accordingly, regional sales managers, sales managers,
account managers, project teams and facilities are segmented geographically and
decisions by the Company's chief operating decision maker regarding the
allocation of assets and assessment of performance are based on such geographic
segmentation. Revenues and resulting operating income are attributed to regions
based upon customer location, and exclude the effect of intercompany revenue for
services provided by CTS India to other CTS entities.
Information about the Company's operations and total assets in North
America, Europe and Asia for the period ended March 31, 2002 and March 31, 2001
are presented in accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," as follows:
THREE MONTHS ENDED
------------------
MARCH 31,
---------
REVENUES (1) 2002 2001
---- ----
North America (2)......................... $ 40,310 $ 37,233
Europe.................................... 5,564 5,831
Asia...................................... 610 340
-------- --------
Consolidated.............................. $ 46,484 $ 43,404
======== ========
OPERATING INCOME (1)
North America (2)......................... $ 7,931 $ 7,196
Europe.................................... 1,095 1,127
Asia...................................... 120 66
-------- --------
Consolidated.............................. $ 9,146 $ 8,389
======== ========
AS OF MARCH 31,
---------------
IDENTIFIABLE ASSETS 2002 2001
---- ----
North America (2)......................... $ 91,109 $ 73,291
Europe.................................... 5,542 6,241
Asia...................................... 57,670 32,263
-------- --------
Consolidated.............................. $154,321 $111,795
======== ========
(1) Revenues and resulting operating income are attributed to regions based
upon customer location.
(2) Primarily relates to operations in the United States.
In the first quarter of 2002, sales to one related party customer accounted
for 10.4% of revenues. In the first quarter of 2001, sales to one related party
customer accounted for 7.9% of revenues and one third-party customer accounted
for 10.2% of revenues.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company is a leading provider of custom software development,
integration and maintenance services that link e-business with core information
systems for companies worldwide. These services are delivered through the use of
a seamless on-site and offshore consulting project team. The Company's primary
service offerings include application development and integration and
application management.
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 Managed Care Technologies, Inc. ("Erisco"), IMS International Inc.,
Nielsen Media Research, Inc., Pilot Software, Inc. and Strategic Technologies
and certain other entities, plus a majority interest in Gartner Group Inc. 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.
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, Incorporated ("IMS Health"). At March 31, 2002, IMS Health owned
approximately 58.2% of the outstanding stock of the Company and held
approximately 93.3% of the combined voting power of the Company's common stock.
The Company's services are performed on either a time-and-materials or
fixed-price basis. 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 which the sales value of performance, including earnings
thereon, is recognized on the basis of the percentage that each contract's
incurred cost to date bears to the total estimated cost. Estimates are subject
to adjustment as a project progresses to reflect changes in expected completion
costs or dates. 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, and 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
and dates.
CHANGES TO CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
The Company's critical accounting policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 2001. The following sets
forth a change to such critical accounting policies:
INCOME TAXES. CTS India is an export oriented company which, under the
Indian Income Tax Act of 1961 is entitled to claim a tax holiday for a period of
ten years with respect to its export profits. Substantially all of the earnings
of the Company's Indian subsidiary are attributable to export profits and are
therefore currently exempt from Indian Income Tax. These tax holidays will begin
to expire in 2004 and under current law will be completely phased out by 2009.
In prior periods, it was management's intent to repatriate all accumulated
earnings from India to the United States; accordingly, the Company has provided
deferred income taxes in the amount of $25.5 million dollars on all such
undistributed earnings through December 31, 2001. During the first quarter of
2002, the Company made a strategic decision to pursue an international strategy
that includes expanded infrastructure investments in India and geographic
expansion in Europe and Asia. As a component of this strategy, the Company
intends to use 2002 and future Indian earnings to expand operations outside of
the United States instead of repatriating these earnings to the United States.
Accordingly, effective January 1, 2002, pursuant to Accounting Principles
Bulletin 23, the Company will no longer accrue taxes on the repatriation of
earnings recognized in 2002 and subsequent periods as these earnings are
considered to be permanently
-9-
reinvested outside of the United States. If such earnings are repatriated in the
future, or are no longer deemed to be indefinitely reinvested, the Company will
accrue the applicable amount of taxes associated with such earnings. This change
in intent resulted in an estimated effective tax rate for fiscal 2002 of 24.5%,
which was used during the first quarter of 2002, compared to an effective tax
rate for fiscal 2001 of 37.4%, which was used during the first quarter of 2001.
* * * * * * * * *
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, contract percentage completions, capital
expenditures, and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not limited
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, (f)
potential adverse impacts of new tax legislation, and (g) 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, (b) to find suitable
acquisition candidates to support continued geographic expansion, and (c) to
continue to develop and improve its operational, financial, communications and
other internal systems, in the United States, India and Europe; (iv) 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;
and (xi) general economic conditions. The Company's actual results may differ
materially from the results disclosed in such forward-looking statements.
-10-
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
THREE MONTHS ENDED
MARCH 31,
---------
2002 2001
---- ----
Total revenues................................ 100.0% 100.0%
Cost of revenues.............................. 52.0 51.5
------ ------
Gross profit............................... 48.0 48.5
Selling, general and administrative
expense.................................... 24.1 25.8
Depreciation and amortization expense......... 4.1 3.3
------ ------
Income from operations..................... 19.7 19.3
Other income (expense):
Interest income............................ 0.9 1.7
Other (expense) income..................... (0.3) (0.5)
------- -------
Total other income 0.6 1.2
------ ------
Income before provision for income taxes...... 20.3 20.5
Provision for income taxes.................... (5.0) (7.7)
------- -------
Net income ................................... 15.3% 12.8%
====== ======
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUE. Revenue increased by 7.1%, or $3.1 million, from $43.4 million
during the three months ended March 31, 2001 to $46.5 million during the three
months ended March 31, 2002. This increase resulted primarily from an increase
in application management services. For statement of operations purposes,
revenues from related parties only include revenues recognized during the period
in which the related party was directly affiliated with the Company. In the
first quarter of 2002, sales to IMS Health accounted for 10.4% of revenues and
no third party customer accounted for sales in excess of 10% of revenues. In the
first quarter of 2001, sales to IMS Health accounted for 7.9% of revenues and
one third-party customer accounted for 10.2% of revenues.
GROSS PROFIT. The Company's cost of revenues consists primarily of the cost
of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions. The Company's cost of revenues
increased by 8.1%, or approximately $1.8 million, from approximately $22.4
million during the three months ended March 31, 2001 to approximately $24.2
million during the three months ended March 31, 2002. The increase was due
primarily to costs resulting from an increase in the number of the Company's
technical professionals from 2,963 employees at March 31, 2001 to approximately
3,400 employees at March 31, 2002. The increased number of the Company's
technical professionals is a direct result of greater demand for the Company's
services. The Company's gross profit increased by 6.0%, or approximately $1.3
million, from approximately $21.0 million during the three months ended March
31, 2001 to approximately $22.3 million during the three months ended March 31,
2002. Gross profit margin decreased from 48.5% of revenues during the three
months ended March 31, 2001 to 48.0% of revenues during the three months ended
March 31, 2002. The decrease in gross profit margin was due primarily to a lower
utilization of technical professionals in the first quarter of 2002, as compared
to the first quarter of 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs as well as depreciation and amortization expense. Selling,
general and
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administrative expenses, including depreciation and amortization, increased by
4.0%, or approximately $0.5 million, from approximately $12.6 million during the
three months ended March 31, 2001 to approximately $13.1 million during the
three months ended March 31, 2002, and decreased as a percentage of revenue from
29.1% to 28.3%. The dollar increase in such expenses was due primarily to
expenses incurred to expand the Company's sales and marketing activities and
increased infrastructure expenses to support the Company's revenue growth. The
decrease in such expenses as a percentage of revenue resulted from the Company's
increased volume of revenue, which outpaced the increase in selling, general and
administrative expenses.
INCOME FROM OPERATIONS. Income from operations increased 9.0%, or
approximately $0.8 million, from approximately $8.4 million during the three
months ended March 31, 2001 to approximately $9.2 million during the three
months ended March 31, 2002, representing 19.3% and 19.7 % of revenues,
respectively. The increase in operating margin was due primarily to the
Company's ability to leverage previous investments in sales and marketing
activities as well as infrastructure.
OTHER INCOME. Other income consists primarily of interest income offset, in
part, by foreign currency exchange losses. Interest income decreased by
approximately $0.3 million from approximately $0.7 million during the three
months ended March 31, 2001 to approximately $0.4 million during the three
months ended March 31, 2002. The decrease in such interest income was
attributable primarily to declining interest rates, offset, in part, by
generally higher operating cash balances. The Company recognized a net foreign
currency exchange loss of approximately $0.2 million during each of the three
month periods ended March 31, 2002 and March 31, 2001, as a result of the effect
of changing exchange rates on the Company's transactions.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
approximately $3.3 million in the three months ended March 31, 2001 to
approximately $2.3 million in the three months ended March 31, 2002, with an
effective tax rate of 37.4% for the three months ended March 31, 2001 and 24.5%
for the three months ended March 31, 2002. Although the Company enjoys a tax
holiday on most of its income earned in India, it has been the Company's
practice to accrue income taxes on these earnings for financial reporting
purposes based on the expectation of repatriating the earnings to the United
States in the future. Based on the Company's expanded infrastructure and global
reinvestment strategy, the Company no longer intends to repatriate its 2002 and
future earnings from its subsidiary in India. Accordingly, effective January 1,
2002, the Company will no longer accrue taxes related to repatriation of these
earnings. See Note 5 to the Notes to Condensed Consolidated Financial
Statements.
NET INCOME. Net income increased from approximately $5.6 million for the
three months ended March 31, 2001 to approximately $7.1 million for the three
months ended March 31, 2002, representing 12.8% and 15.3% of revenues,
respectively.
RESULTS BY BUSINESS SEGMENT
The Company, operating globally, provides software services for medium and
large businesses. North American operations consist primarily of software
services in the United States and Canada. European operations consist of
software services principally in the United Kingdom. Asian operations consist of
software services principally in India. The Company is managed on a geographic
basis. Accordingly, regional sales managers, sales managers, account managers,
project teams and facilities are segmented geographically and decisions by the
Company's chief operating decision maker regarding the allocation of assets and
assessment of performance are based on such geographic segmentation. Revenues
and resulting operating income are attributed to regions based upon customer
location, and exclude the effect of intercompany revenue for services provided
by CTS India to other CTS entities.
North American Segment
REVENUE. Revenue increased by 8.3%, or approximately $3.1 million, from
approximately $37.2 million during the first quarter of 2001 to approximately
$40.3 million during the first quarter of 2002. The
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increase in revenue was attributable primarily to increased market awareness and
acceptance of the on-site/offshore software services delivery model, as well as
sales and marketing activities directed at the U.S. market for the Company's
services.
INCOME FROM OPERATIONS. Income from operations increased 10.2%, or
approximately $0.7 million, from approximately $7.2 million during the first
quarter of 2001 to approximately $7.9 million during the first quarter of 2002.
The increase in operating income was attributable primarily to increased
revenues and achieving leverage on prior sales and marketing investments.
European Segment
REVENUE. Revenue decreased by 4.6%, or approximately $0.3 million, from
approximately $5.8 million during the first quarter of 2001 to approximately
$5.6 million during the first quarter of 2002. The decrease in revenue was
primarily attributable to lower demand for the Company's services in Germany,
partially offset by increased demand in the United Kingdom.
INCOME FROM OPERATIONS. Income from operations of approximately $1.1
million in each period remained relatively constant during the first quarter of
2002 as compared to the first quarter of 2001. The decrease in revenues from the
prior period was essentially offset by expense reductions during the first
quarter of 2002.
Asian Segment
REVENUE. Revenue increased by 79.4%, or approximately $0.3 million, from
approximately $0.3 million during the first quarter of 2001 to approximately
$0.6 million during the first quarter of 2002. The increase in revenue was
attributable primarily to the Company's success in providing services to the
Japanese market.
INCOME FROM OPERATIONS. Income from operations of $0.1 million in each
period remained relatively constant during the first quarter of 2002 as compared
to the first quarter of 2001.
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 Cognizant Corporation and IMS
Health. In June 1998, the Company consummated its initial public offering of
5,834,000 (2,917,000 pre-split) shares of its Class A Common Stock at a price to
the public of $5.00 ($10.00 pre-split) per share, of which 5,000,000 (2,500,000
pre-split) shares were issued and sold by the Company and 834,000 (417,000
pre-split) shares were sold, at that time, by Cognizant Corporation, the
Company's then owner and controlling parent company. The net proceeds to the
Company from the offering were approximately $22.4 million after $843,000 of
direct expenses. The funds received by the Company from the IPO 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 has used
and will continue to use the remainder of the net proceeds from the offering for
(i) expansion of existing operations, including the Company's offshore software
development centers; (ii) continued development of new service lines and
possible acquisitions of related businesses; (iii) planned infrastructure
investments in India and geographic expansion in Europe and Asia, and (iv)
general corporate purposes, including working capital. At March 31, 2002, the
Company had cash and cash equivalents of approximately $91.2 million.
Net cash provided by operating activities was approximately $7.5 million
during the three months ended March 31, 2002 as compared to net cash provided by
operating activities of approximately $1.5 million during the three months ended
March 31, 2001. The increase results primarily from increased net income and
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a lower level of incentive compensation payments during the first quarter of
2002 as compared to the first quarter of 2001. Trade accounts receivable, net of
allowance, increased from $22.5 million at December 31, 2001 to $23.8 million at
March 31, 2002. The increase in trade accounts receivable during 2002 was due
primarily to increased revenue. The Company monitors turnover, aging and the
collection of accounts receivable through the use of management reports which
are prepared on a customer basis and evaluated by the Company's finance staff.
At March 31, 2002, the Company's day's sales outstanding, including unbilled
receivables, were approximately 58 days compared to approximately 50 days at
March 31, 2001.
The Company's investing activities used net cash of approximately $1.9
million for the three months ended March 31, 2002 as compared to net cash used
of approximately $3.1 million for the same period in 2001. The decrease in 2002
compared to 2001 primarily reflects timing associated with purchases of property
and equipment.
The Company's financing activities provided net cash of approximately $0.7
million for the three months ended March 31, 2002 as compared to net cash
provided by financing activities of approximately $0.8 million for the same
period in 2001. The decrease in net cash provided by financing activities was
related primarily to a lower level of cash proceeds from the exercise of stock
options and the purchase of employee stock purchase plan shares in 2002, as
compared to the prior year. The exercise of stock options and the purchase of
employee stock purchase plan shares resulted in an increase of approximately
52,000 shares in the Company's outstanding Class A Common Stock during the three
months ended March 31, 2002.
As of March 31, 2002, the Company had no significant third-party debt.
The Company had working capital of $104.7 million at March 31, 2002 and
$95.6 million at December 31, 2001.
As of March 31, 2002, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $11.4 million, of which $8.6 million has been spent to date. The
multi-phase program will encompass the construction of three fully owned
development centers containing approximately 620,000 sq. ft. of space in Pune,
Chennai and Calcutta. Total costs related to this program are expected to be
approximately $39.4 million.
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 through at least the next 12 months, including its planned
infrastructure investments in India and geographic expansion in Europe and Asia.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate component of
stockholders' equity. For the Company's Indian subsidiary, the functional
currency is the U.S. dollar since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between the
Indian subsidiary and its U.S. affiliates. Non-monetary assets and liabilities
are translated at historical exchange rates, while monetary assets and
liabilities are translated at current exchange rates. A portion of the Company's
costs in India are denominated in local currency and subject to exchange
fluctuations, which has not had any material adverse effect on the Company's
results of operations.
EFFECTS OF INFLATION
The Company's most significant costs are the salaries and related benefits
for its programming staff and other professionals. As with other IT service
providers, the Company must adequately anticipate wage
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increases, particularly on its fixed-price contracts. There can be no assurance
that the Company will be able to recover cost increases through increases in the
prices that it charges for its services in the United States and elsewhere.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("FAS 141") and Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") were
issued. FAS 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001. FAS 141 also specifies
criteria that intangible assets acquired must meet to be recognized and reported
separately from goodwill. FAS 142 requires that goodwill and intangible assets
with indefinite lives no longer be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. FAS 142 is effective for fiscal years beginning after December 15,
2001. The adoption of FAS 141 and FAS 142 did not have a material effect on the
Company's financial position or results of operations. See Note 4 to the Notes
to Condensed Consolidated Financial Statements.
In August 2001, Statement of Financial Standards No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets" ("FAS 144") was issued. FAS 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently occurring Events and Transactions." FAS
144 also amends ARB ("Accounting Research Bulletins") No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. FAS 144 retains the
fundamental provisions of FAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while resolving significant implementation issues associated with FAS
121. Among other things, FAS 144 provides guidance on how long-lived assets used
as part of a group should be evaluated for impairment, establishes criteria for
when long-lived assets are held for sale, and prescribes the accounting for
long-lived assets that will be disposed of other than by sale. FAS 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
FAS 144 did not have a material impact on the Company's financial position and
results of operations.
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("FAS 143") was issued. FAS 143
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and the associated retirement
costs that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an increase in the carrying amount
of the related long-lived asset. The asset retirement cost is subsequently
allocated to expense using a systematic and rational method over the assets
useful life. FAS 143 is effective for fiscal years beginning after June 15,
2002. The adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145") was issued. FAS 145 updates,
clarifies and simplifies existing accounting pronouncements and is generally
effective for transactions occurring after May 15, 2002. The adoption of this
statement is not expected to have a material impact on the Company's financial
position or results of operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On April 16, 2002, subsequent to the quarter ended March 31, 2002, the
Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission relating to its approval of an international
strategy that includes extensive infrastructure investments in India,
geographic expansion in Europe and Asia, and the change in policy with
respect to repatriation of its 2002 and future earnings in India.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cognizant Technology Solutions Corporation
DATE: May 13, 2002 By: /s/ Wijeyaraj Mahadeva
--------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief
Executive Officer (Principal Executive
Officer)
DATE: May 13, 2002 By: /s/ Gordon Coburn
--------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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