UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003
------------------
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
to -----------
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Commission File Number 0-24429
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
- ----------------------------------- -----------------------------------
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
500 Glenpointe Centre West
Teaneck, New Jersey 07666
(201) 801-0233
(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes: X No:
-----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 31, 2003:
Class Number of Shares
----- ----------------
Class A Common Stock, par value $.01 per share 63,890,331
Class B Common Stock, par value $.01 per share 0
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
Condensed Consolidated Statements of Income and
Comprehensive Income (Unaudited) for three months ended
September 30, 2003 and 2002 and nine months ended
September 30, 2003 and 2002................................ 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of September 30, 2003 and December 31,
2002 ...................................................... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended September 30, 2003
and 2002................................................... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................ 27
Item 4. Controls and Procedures.................................... 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 28
SIGNATURES......................................................... 29
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues ............................. $ 98,111 $ 55,714 $ 257,498 $ 146,510
Revenues - related party ............. -- 5,519 2,575 15,565
--------- --------- --------- ---------
Total revenues ................. 98,111 61,233 260,073 162,075
Cost of revenues ..................... 52,968 32,970 141,126 86,507
--------- --------- --------- ---------
Gross profit ......................... 45,143 28,263 118,947 75,568
Selling, general and administrative
expenses ........................... 22,861 14,150 59,624 37,933
Depreciation and amortization expense 3,008 2,005 8,397 5,679
--------- --------- --------- ---------
Income from operations ............... 19,274 12,108 50,926 31,956
Other income (expense):
Other income (expense) ............ (21) 24 (120) (89)
Interest income .................... 617 471 1,358 1,305
Split-off costs (See Note 2) ....... -- -- (2,010) --
--------- --------- --------- ---------
Total other income (expense) ... 596 495 (772) 1,216
--------- --------- --------- ---------
Income before provision for income
taxes .............................. 19,870 12,603 50,154 33,172
Provision for income taxes ........... (3,910) (2,936) (10,514) (7,749)
--------- --------- --------- ---------
Net income ........................... $ 15,960 $ 9,667 $ 39,640 $ 25,423
========= ========= ========= =========
Basic earnings per share (1) ......... $ 0.25 $ 0.16 $ 0.64 $ 0.43
========= ========= ========= =========
Diluted earnings per share (1) ....... $ 0.23 $ 0.15 $ 0.59 $ 0.40
========= ========= ========= =========
Weighted average number of common
shares outstanding - Basic (1) .... 62,902 59,586 62,031 58,853
========= ========= ========= =========
Dilutive effect of shares issuable as
of period-end under stock option
plans(1) ........................... 6,180 4,768 5,075 4,267
========= ========= ========= =========
Weighted average number of common
shares outstanding - Diluted(1) .... 69,082 64,354 67,106 63,120
========= ========= ========= =========
Comprehensive income:
Net income ........................... $ 15,960 $ 9,667 $ 39,640 $ 25,423
Foreign currency translation
adjustments ........................ 292 (194) 422 (98)
--------- --------- --------- ---------
Comprehensive income ................. $ 16,252 $ 9,473 $ 40,062 $ 25,325
========= ========= ========= =========
(1) Reflects a 3-for-1 stock split effected by a 200% stock dividend paid on April 1, 2003
(See Note 3).
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in thousands, except par values)
September 30, December 31,
2003 2002
--------- ------------
Assets
Current assets:
Cash and cash equivalents ............................ $ 159,749 $ 126,211
Trade accounts receivable, net of allowance of $996
and $861, respectively .............................. 53,215 35,092
Trade accounts receivable-related party .............. -- 1,605
Unbilled accounts receivable ......................... 8,519 4,159
Unbilled accounts receivable-related party ........... -- 149
Current tax asset ................................ 13,248 3,711
Other current assets ................................. 8,139 4,907
--------- ---------
Total current assets .............................. 242,870 175,834
--------- ---------
Property and equipment, net of accumulated depreciation
of $31,130 and $24,559 respectively .................... 51,656 39,090
Goodwill, net ........................................... 4,477 878
Other intangible assets, net ............................ 11,959 12,870
Other assets ............................................ 3,031 2,801
--------- ---------
Total assets ...................................... $ 313,993 $ 231,473
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ..................................... $ 6,289 $ 6,948
Accrued and other current liabilities ................ 43,281 34,539
--------- ---------
Total current liabilities ......................... 49,570 41,487
Deferred income taxes ................................... 27,454 24,505
--------- ---------
Total liabilities ................................. 77,024 65,992
--------- ---------
Commitments and Contingencies (See Note 10)
Stockholders' equity: (See Notes 1, 2 and 3)
Preferred stock, $.10 par value, 15,000 shares
authorized, none issued ................................ -- --
Class A common stock, $.01 par value, 100,000 shares
authorized, 63,640 shares and 61,260 shares issued and
outstanding at September 30, 2003 and December 31, 2002,
respectively (1) ...................................... 636 612
Class B common stock, $.01 par value, 25,000 shares
authorized, none outstanding (1) ....................... -- --
Additional paid-in-capital (1) .......................... 102,848 71,446
Retained earnings ....................................... 133,248 93,608
Cumulative translation adjustment ....................... 237 (185)
--------- ---------
Total stockholders' equity ........................ 236,969 165,481
--------- ---------
Total liabilities and stockholders' equity ........ $ 313,993 $ 231,473
========= =========
(1) Restated to reflect the conversion of shares of Class B common stock to shares
of Class A common stock on February 21, 2003 (See Note 2) and 3-for-1 stock split
effected by a 200% stock dividend paid on April 1, 2003 (See Note 3).
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months
Ended
September 30,
--------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income.............................................. $ 39,640 $ 25,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 8,397 5,679
Split-off costs (See Note 2) ............. 2,010 --
Provision for doubtful accounts................... 52 541
Deferred income taxes............................. 2,949 979
Tax benefit related to option exercises........... 13,228 5,545
Changes in assets and liabilities:
Trade accounts receivable......................... (15,669) (9,817)
Other current assets.............................. (16,419) (4,600)
Other assets...................................... 466 852
Accounts payable.................................. (1,276) 1,165
Accrued and other liabilities..................... 8,582 9,819
--------- ---------
Net cash provided by operating activities............... 41,960 35,586
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................... (20,262) (7,599)
Acquisition, net of cash acquired....................... (3,816) (2,744)
--------- ---------
Net cash used in investing activities................... (24,078) (10,343)
--------- ---------
Cash flows from financing activities:
Proceeds from issued shares ............................ 18,197 12,960
Split-off costs (See Note 2)............................ (2,963) --
--------- ---------
Net cash provided by financing activities............... 15,234 12,960
--------- ---------
Effect of currency translation.......................... 422 (98)
--------- ---------
Increase in cash and cash equivalents .................. 33,538 38,105
Cash and cash equivalents, beginning of year............ 126,211 84,977
--------- ---------
Cash and cash equivalents, end of period................ $ 159,749 $123,082
========= ========
The accompanying notes are an integral part of the
unaudited condensed consolidated financial statements.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollar amounts in thousands)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
("Cognizant" or the "Company") in accordance with generally accepted accounting
principles in the United States and Article 10 of Regulation S-X under the
Securities and Exchange Act of 1934, as amended, and should be read in
conjunction with the Company's consolidated financial statements (and notes
thereto) included in the Company's 2002 Annual Report on Form 10-K, as amended
on the Company's Current Report on Form 8-K filed on April 25, 2003, and the
Company's condensed consolidated financial statements (and notes thereto)
included in the Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 2003 and June 30, 2003. In the opinion of the Company's management,
all adjustments considered necessary for a fair presentation of the accompanying
condensed consolidated financial statements have been included, and all
adjustments are of a normal and recurring nature. Operating results for the
interim period are not necessarily indicative of results that may be expected to
occur for the entire year. Certain prior period amounts have been restated to
conform to the presentation of the Company's financial statements for fiscal
year 2003. (See Notes 2 and 3).
NOTE 2 - SPLIT-OFF FROM IMS HEALTH
As of December 31, 2002, IMS Health Incorporated ("IMS Health") owned
approximately 55.3% of the outstanding common stock of the Company (representing
all of the Company's Class B common stock) and held approximately 92.5% of the
combined voting power of the Company's common stock. On February 13, 2003 (the
"Split-Off Date"), IMS Health distributed all of the Cognizant Class B common
stock that IMS Health owned (a total of 33,872,700 shares, on a post-split
basis) in an exchange offer to IMS Health stockholders (the "Split-Off"). There
was no impact on the number of outstanding shares of Cognizant common stock as a
result of the completion of the Split-Off.
As a result of the Split-Off, IMS Health and its affiliates are no longer
related parties of Cognizant as of the Split-Off Date. Accordingly, only
services rendered to or received from IMS Health and its affiliates during the
period January 1, 2003 to the Split-Off Date are classified as related party
transactions. Services rendered to or received from IMS Health subsequent to the
Split-Off Date are classified as third party transactions.
In connection with the Split-Off, Cognizant was obligated to pay the
costs associated with the Split-Off (the "Split-Off Costs") in connection with
the exchange offer under the provisions of an Intercompany Agreement, dated as
of May 15, 1998. The Intercompany Agreement provided that Cognizant would pay
its own costs, without reimbursement, and the costs of IMS Health (other than
underwriting discounts, commissions and certain other specified costs)
necessary to facilitate a sale or spin-off of IMS Health's ownership interest
in the Company.
During the nine months ended September 30, 2003, Cognizant incurred direct
and incremental costs of approximately $2,000 resulting from external costs
contractually incurred related to the Split-Off. Such costs included direct
legal, accounting, printing and other costs, including a non-cash charge
calculated in accordance with Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees and Related Interpretations" of
approximately $488 related to the retention, acceleration and extended life of
Cognizant common stock options by two
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former Directors of Cognizant who resigned on the Split-Off Date as a condition
of the Split-Off. Such former Directors were, and are, officers of IMS Health.
Of the total of approximately $3,700 of Split-Off Costs incurred and
recorded, including approximately $1,700 recorded in fiscal 2002, all costs have
either been invoiced or paid as of September 30, 2003. Cognizant did not receive
any proceeds from the IMS Health exchange offer.
NOTE 3 - CAPITAL STOCK
As of February 21, 2003, pursuant to the Company's Restated Certificate
of Incorporation, all 33,872,700 shares (on a post-split basis) of Class B
common stock converted into shares of Class A common stock. Accordingly, as of
such date, there are no shares of Class B common stock outstanding. The
conversion of Class B common stock to Class A common stock has been reflected
in the accompanying financial statements, including all applicable references
as to the number of outstanding shares of Class A and Class B common stock.
Stockholders' equity accounts have been restated to reflect a $113
reclassification of an amount equal to the par value of the Class B shares to
the Class A common stock account.
In connection with the Split-Off, IMS Health, as the Company's majority
stockholder at that time, approved amendments to Cognizant's certificate of
incorporation that became effective following consummation of the Split-Off. The
material terms of these amendments:
o provide for a classified board of directors;
o set the number of Cognizant's directors; and
o provide for supermajority approval requirements for actions to amend,
alter, change, add to or repeal specified provisions of Cognizant's
certificate of incorporation and any provision of the by-laws.
In connection with the Split-Off, Cognizant's Board of Directors also
approved amendments to Cognizant's by-laws, which became effective following
completion of the Split-Off. The material terms of these amendments made to
Cognizant's by-laws affect nominations of persons for election to the Board of
Directors and proposals of business at annual or special meetings of
stockholders. Cognizant's Board of Directors also adopted a stockholders' rights
plan providing certain rights to stockholders under certain circumstances.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend paid on April 1, 2003 to stockholders of
record on March 19, 2003. The stock split has been reflected in the accompanying
financial statements, and all applicable references as to the number of
outstanding shares of common stock and per share information have been restated.
Stockholders' equity accounts have been restated to reflect a $408
reclassification of an amount equal to the par value of the increase in the
issued and outstanding shares of Class A common stock from the additional
paid-in-capital account to the Class A common stock account.
NOTE 4 - RELATED PARTY TRANSACTIONS
Revenues from IMS Health prior to the Split-Off Date have been classified
as related party revenues. As a result of the Split-Off, IMS Health is no longer
a related party to the Company as of the Split-Off Date. Accordingly, revenues
from IMS Health subsequent to the Split-Off Date are classified as third party
revenues. Related party revenues from IMS Health were $0 and approximately
$5,519 for the three months ended September 30, 2003 and September 30, 2002,
respectively. Total revenues from IMS Health for the nine months ended September
30, 2003, including related party
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revenues during the period January 1 through February 13, 2003, were
approximately $16,430 as compared to total revenues from IMS Health of
approximately $15,565 for the nine months ended September 30, 2002, during which
IMS Health was classified as a related party.
Since the Split-off Date, IMS Health continues to provide the Company
with certain administrative services, including payroll and payables
processing, under the provisions of an amended and restated Intercompany
Services Agreement entered into in connection with the Split-Off. In prior
periods, IMS Health permitted the Company to participate in certain of IMS
Health's business insurance plans and provided certain other services such as
tax planning and compliance, which have since been transitioned to the Company.
All services were performed and charged to the Company under the Intercompany
Services Agreement with IMS Health that was in effect prior to the Split-Off.
Related party costs in connection with these services were approximately $0 and
$139 for the three months ended September 30, 2003 and September 30, 2002,
respectively. Total costs, including related party costs in the period January
1 through the Split-Off Date, in connection with these services were $172 and
$417 for the nine-month periods ended September 30, 2003 and September 30,
2002, respectively.
The Company has a strategic relationship with The Trizetto Group Inc.
("Trizetto") that includes helping its healthcare customers integrate Trizetto's
products with their existing information systems and, within Trizetto,
supporting further development of these software applications. As of the
Split-Off Date, IMS Health owned approximately 26.4% of the outstanding common
stock of Trizetto as compared to 26.6% as on September 30, 2002. The Company
recorded revenues from Trizetto of approximately $831 from January 1, 2003
through the Split-Off Date and $1,199 and $1,302 for the three and nine month
periods ended September 30, 2002, respectively. The Company recorded expenses
related to Trizetto commissions of approximately $9 from January 1, 2003 through
the Split-Off Date and $123 and $456 for the three and nine month periods ended
September 30, 2002, respectively.
NOTE 5 - COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and foreign
currency translation adjustments. Accumulated balances of cumulative translation
adjustments, as of September 30, 2003 and September 30, 2002 are as follows:
Cumulative
Translation
Adjustment
----------
Balance, December 31, 2002................... $ (185)
Period Change................................ 422
------
Balance, September 30, 2003.................. $ 237
======
Balance, December 31, 2001................... $ (158)
Period Change................................ (98)
------
Balance, September 30, 2002.................. $ (256)
======
NOTE 6 - ACCOUNTING FOR STOCK-BASED EMPLOYEE COMPENSATION PLANS
In the first quarter of 2003, the Company adopted the interim disclosures
required by Statement of Financial Accounting Standards ("SFAS") No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure." Such
disclosures are provided below.
At September 30, 2003, the Company had four stock-based employee
compensation plans. The Company accounts for these plans under the recognition
and measurement principles of APB No.
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25. Except for approximately $488 calculated in accordance with APB No. 25
related to the retention, acceleration and extended life of Cognizant common
stock options by two former Directors of Cognizant included in Split-Off Costs,
no stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share for the three and
nine months ended September 30, 2003 and 2002, if the Company had applied the
fair value recognition provisions of the Financial Accounting Standards Board
(the "FASB") SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation.
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2003 30, 2002 30, 2003 30, 2002
----------------------------------------------------
Net income as reported... $ 15,960 $ 9,667 $ 39,640 $ 25,423
Add: Stock-based
compensation, net of
tax benefit, included
in net income........... 0 0 488 0
Deduct: Total
stock-based
compensation expense
determined under the
fair value method for
all awards, net of tax
related benefits........ (4,115) (2,757) (11,766) (8,111)
----------------------------------------------------
Pro forma net income...... $ 11,845 $ 6,910 $ 28,362 $ 17,312
Earnings per share:
- -------------------
As reported - basic....... $0.25 $0.16 $0.64 $0.43
Pro forma - basic......... $0.19 $0.12 $0.46 $0.29
As reported - diluted..... $0.23 $0.15 $0.59 $0.40
Pro forma - diluted....... $0.17 $0.11 $0.42 $0.27
NOTE 7 - INCOME TAXES
The Company's Indian subsidiary, Cognizant Technology Solutions India Pvt.
Limited ("CTS India"), is an export oriented company which, under the Indian
Income Tax Act of 1961, is entitled to claim tax holidays for a period of ten
years with respect to its export profits. Substantially all of the earnings of
CTS India are attributable to export profits and are therefore currently
substantially exempt from Indian income tax. These tax holidays will begin to
expire in 2004 and under current law will be completely phased out by March
2010. During the year ended December 31, 2002, the effect of the income tax
holiday was to reduce the overall income tax provision and increase net income
by approximately $7,683 and increase diluted earnings per share by $0.12. There
was no impact on the Company's overall income tax provision, net income or
diluted earnings per share in 2001 because, prior to 2002, the Company was
providing deferred income taxes on such untaxed Indian earnings due to its
intent to repatriate all accumulated earnings from India to the United States.
Accordingly, the Company has provided deferred income taxes as of September 30,
2003 of approximately $27,741 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
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future Indian earnings to expand operations outside of the United States instead
of repatriating these earnings to the United States. Accordingly, effective
January 1, 2002, pursuant to APB No. 23, the Company no longer accrues taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are considered to be permanently reinvested outside of the United
States. As of September 30, 2003, the amount of unrepatriated earnings upon
which no provision for taxation has been recorded is approximately $65,619. If
such earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, the Company will accrue the applicable amount of taxes
associated with such earnings. Due to the various methods by which such earnings
could be repatriated in the future, it is not currently practicable to determine
the amount of applicable taxes that would result from such repatriation.
Effective April 1, 2002, the government of India passed various tax law
changes which affected the way in which the Company's earnings are taxed in
India. The tax exemption for export earnings was reduced from 100% to 90%, a
surtax was imposed increasing the Indian statutory rate from 35.7% to 36.75% for
income that is subject to tax, and the corporate level tax on the payment of
dividends was replaced with a withholding tax on dividends.
Effective April 1, 2003, the tax exemption in India for export earnings
reverted back to 100% from 90% under the law in effect for the tax year ended
March 31, 2003. In addition, effective April 1, 2003, the surtax was reduced to
2.5% from 5.0% for income that is subject to the tax. The corporate level tax
on distributed Indian earnings has been reinstated and the withholding tax on
dividends was repealed. The effective tax rate of 19.7% for the three months
ended September 30, 2003 and 21.0% for the nine months ended September 30, 2003
reflects these statutory tax law changes, which were enacted in the second
quarter of 2003. The provision for income taxes increased from approximately
$2.9 million during the three months ended September 30, 2002 to approximately
$3.9 million during the three months ended September 30, 2003. The effective
tax rates for the three and nine months ended September 30, 2003 were 19.7% and
21.0%, respectively, as compared to 23.3% and 23.4%, respectively, for the
three and nine months ended September 30, 2002. The decrease in the effective
tax rate for the three and nine month periods ended September 30, 2003, as
compared to the prior year periods, was due primarily to a lower overall
effective income tax rate on foreign earnings. The principal difference between
the effective tax rates during the 2002 and 2003 periods and the Company's U.S.
federal statutory rate is the effect of the tax holiday in India.
NOTE 8 - ACQUISITION
On April 1, 2003, the Company acquired Aces International, Inc. ("Aces"),
a company specializing in Customer Relationship Management solutions, serving
clients in healthcare, financial services and telecommunications verticals, for
approximately $4,700 (including approximately $500 of estimated direct deal
costs). Aces, a U.S.-based company, will operate as a 100% consolidated
subsidiary.
The Company has accounted for the acquisition as a business combination
under the provisions of SFAS No. 141, "Business Combinations." In accordance
with the provisions of SFAS No. 142 the Company has made a preliminary
allocation of purchase price, based upon an independent appraisal, which is
subject to adjustment when additional information concerning asset and liability
valuations is finalized. Based upon that preliminary assessment, the Company has
allocated the purchase price to the tangible and amortizable intangible assets,
goodwill and liabilities acquired. Approximately $120 has been allocated to
amortizable intangible assets that relate to customer backlog, which has been
determined to have a useful life of 18 months and approximately $4,580 has been
allocated to goodwill, which includes, in accordance with SFAS No. 142, the
value that has been allocated to an assembled workforce. Amortization of $17 and
$33 related to the acquisition of the backlog has been included in the
accompanying condensed consolidated statements of operations for the three and
nine months ended September 30, 2003, respectively. The estimated amortization
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expense for such intangible asset is $49, $66 and $5 for fiscal years 2003, 2004
and 2005, respectively.
NOTE 9- STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. SFAS No. 143 was effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143
effective January 1, 2003 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the accounting for costs to
terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. A liability for contract termination
costs should be recognized and measured at fair value either when the contract
is terminated or when the entity ceases to use the right conveyed by the
contract. A liability for one-time termination benefits should be recognized and
measured at fair value at the communication date if the employee would not be
retained beyond a minimum retention period (i.e., either a legal notification
period or 60 days, if no legal requirement exists). For employees that will be
retained beyond the minimum retention period, a liability should be accrued
ratably over the future service period. The provisions of the statement were
effective for disposal activities initiated after December 31, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also requires that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted the
recognition and measurement provisions of FIN 45 beginning in the first quarter
of fiscal 2003. The adoption of FIN 45 did not have a material impact on the
Company's financial position, results of operations or cash flows.
On July 1, 2003, the Company adopted Emerging Issues Task Force ("EITF")
consensus EITF 00-21 "Revenue Arrangements with Multiple Deliverables." This
consensus requires the Company to evaluate, at the inception of each new
contract, all deliverables in an arrangement to determine whether they represent
separate units of accounting. For arrangements with multiple units of
accounting, primarily fixed-bid contracts that provide both application
maintenance and application development service and certain application
maintenance contracts, arrangement consideration must be allocated among the
separate units of accounting, where separable, based on their relative fair
values and recognized separately based on the Company's revenue recognition
policy. EITF 00-21 indicates that the best evidence of fair value is the price
of a deliverable when it is regularly sold on a stand-alone basis. Fair value
evidence often consists of entity-specific or vendor-specific objective evidence
of fair value. The adoption of EITF 00-21 did not have a material impact on the
Company's financial position, results of operations or cash flows. (See Note
12.)
-10-
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of FIN 46 and the consolidation requirements for
variable interest entities created or acquired subsequent to January 31, 2003
became effective for financial statements issued by the Company beginning in the
first quarter of 2003. For variable interest entities created or acquired prior
to February 1, 2003, the consolidation requirements of FIN 46 become effective
for the Company in the third quarter of 2003. The Company currently has no
significant contractual relationship or other business relationship with a
variable interest entity and therefore the adoption of FIN 46 did not have a
material effect on the Company's consolidated results of operations, financial
position or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The changes are intended to improve financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. Additionally, those changes are expected to result in more consistent
reporting of contracts as either derivatives or hybrid instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS No. 149 did not have a material effect on the
Company's consolidated results of operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The changes are intended to result in a more complete representation of
an entity's liabilities and equity and will, thereby, assist investors and
creditors in assessing the amount, timing, and likelihood of potential future
cash outflows and equity share issuances. This statement also requires that
certain obligations that could be settled by the issuance of equity, but lack
other characteristics of equity, be reported as liabilities even though the
obligation does not meet the definition of a liability. The requirements of SFAS
No. 150 became effective for the Company for financial instruments entered into
or modified after May 31, 2003, or otherwise at the beginning of the third
quarter of fiscal 2003. The adoption of this statement did not have a material
impact on the Company's financial position, results of operations, or cash
flows.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
As of September 30, 2003, the Company has entered into fixed capital
commitments related to its India development center expansion program of
$30,616, of which $26,421 has been spent to date.
The Company entered into a Distribution Agreement, dated January 7, 2003,
with IMS Health (the "Distribution Agreement"), the terms of which were approved
by a special committee of the Board of Directors of the Company, which was
comprised of the Company's independent directors. The Distribution Agreement
sets forth certain rights and obligations of IMS Health and the Company in
respect of the Split-Off in addition to those provided in the amended and
restated Intercompany Services Agreement. The material terms of the Distribution
Agreement include:
o the resignation of David M. Thomas and Nancy E. Cooper from any boards
of directors of the Company's subsidiaries on which they served;
-11-
o indemnification provisions in respect of the respective disclosure in
the Split-Off documents, the conduct of the Split-Off and any failure to perform
the Distribution Agreement; and
o the agreement of the Company to undertake to be jointly and severally
liable to certain of IMS Health's prior affiliates for liabilities arising out
of or in connection with IMS Health's business and the businesses of the Company
and other successors to the businesses of Cognizant Corporation in accordance
with the terms of the Distribution Agreement dated as of October 28, 1996, among
Cognizant Corporation, which has been renamed Nielsen Media Research, Inc., The
Dun & Bradstreet Corporation, which has been renamed the R.H. Donnelly
Corporation and AC Nielsen Corporation and related agreements. However, subject
to the general allocation of liabilities arising from the respective businesses
of IMS Health and the Company, IMS Health has agreed to indemnify and reimburse
the Company for liabilities incurred with respect to these undertakings.
The Distribution Agreement also provides that IMS Health and the Company
will comply with, and not take any action during the relevant time period that
is inconsistent with, the representations made to and relied upon by McDermott,
Will & Emery in connection with rendering its opinion regarding the U.S. federal
income tax consequences of the Split-Off. In addition, pursuant to the
Distribution Agreement, the Company indemnifies IMS Health for any tax liability
to which they may be subject as a result of the Split-Off, but only to the
extent that such tax liability resulted solely from a breach in the
representations the Company made to and were relied upon by McDermott, Will &
Emery in connection with rendering its opinion regarding the U.S. federal income
tax consequences of the Split-Off. This indemnification liability could be
material to the Company's quarterly and annual operating results, financial
position and cash flows.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' businesses and provide benefits that are difficult to quantify.
Any failure in a customer's computer system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to contractually
limit its liability for damages arising from negligent acts, errors, mistakes,
or omissions in rendering its 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.
-12-
NOTE 11 - SEGMENT INFORMATION
The Company, operating globally, provides information technology
consulting services for medium and large businesses. North American operations
consist primarily of information technology consulting services in the United
States and Canada. European operations consist of information technology
consulting services principally in the United Kingdom and Ireland. Asian
operations consist of information technology consulting services principally in
India. The Company is managed on a geographic basis. Accordingly, regional sales
managers, sales managers, account managers, project teams and facilities are
segmented geographically and decisions by the Company's chief operating decision
maker regarding the allocation of assets and assessment of performance are based
on such geographic segmentation.
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", information about the Company's operations
in North America, Europe and Asia for the three and nine months ended September
30, 2003 and September 30, 2002 and total assets as of September 30, 2003 and
December 31, 2002 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- -------- --------
Revenues (1)
North America(2).......... $87,272 $52,912 $230,595 $140,445
Europe.................... 10,153 8,023 27,524 20,388
Asia...................... 686 298 1,954 1,242
------- ------- -------- --------
Consolidated.............. $98,111 $61,233 $260,154 $162,075
======= ======= ======== ========
$98,111 $61,233 $260,073 $162,075
======= ======= ======== ========
Operating income (1)
North America(2).......... $17,145 $10,462 $45,154 $27,690
Europe.................... 1,994 1,587 5,389 4,021
Asia...................... 135 59 383 245
------- ------- -------- --------
Consolidated.............. $19,274 $12,108 $50,926 $31,956
======= ======= ======== ========
Revenues by Service
Application Development and
Integration Services...... $41,562 $25,664 $104,989 $69,653
Application Maintenance
Services............... 56,549 35,569 155,084 92,422
------- ------- -------- --------
Consolidated.............. $98,111 $61,233 $260,073 $162,075
======= ======= ======== ========
Identifiable assets As of As of
September 30, December 31,
2003 2002
------- -------
North America(2)......... $177,019 $133,417
Europe................... 14,640 12,972
Asia..................... 122,334 85,083
-------- --------
Consolidated............. $313,993 $231,473
======== ========
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
(2) Primarily relates to operations in the United States.
Related party revenues were 9.0% and 9.6% of total revenues for the three
and nine months ended September 30, 2002, respectively. Related party revenue
for the three and nine months ended
-13-
September 30, 2003 were not material in the period January 1, 2003 through
February 13, 2003, during which IMS was a related party (See Note 4).
No third party customer accounted for revenues in excess of 10% of total
revenues for the three and nine month periods ended September 30, 2003. One
third party customer accounted for approximately 11.5% of revenues for the three
months ended September 30, 2002.
NOTE 12- REVENUE RECOGNITION
The Company's services are entered into on either a time-and-materials
basis or fixed-price basis. Revenues related to time-and-materials contracts
are recognized as the service is performed. Revenues related to fixed-price
contracts that provide for highly complex information technology application
development services are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the total value of
revenue during the term of an agreement is recognized on the basis of the
percentage that each contract's cost to date bears to the total estimated cost.
Revenues related to fixed-priced contracts that provide for application
maintenance services or a combination of application maintenance and
application development services that are not separable are recognized on a
straight-line basis or as services are rendered or as transactions are
processed in accordance with contractual terms.
Information technology consulting services provided through time and
materials contracts, as well as applications maintenance services contracts
only, are recognized as revenue in accordance with SAB 101. Accordingly,
revenue is recognized when: 1) persuasive evidence of an arrangement exists; 2)
there is a fixed and determinable price for the services rendered; 3) delivery
has occurred; and 4) collectibility is assured. Expenses are recorded as
incurred over the contract period.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
- -------
Cognizant Technology Solutions Corporation ("Cognizant", "CTS" or the
"Company") is a leading provider of information technology ("IT") consulting
services related to IT design, development, integration and maintenance services
primarily for Fortune 1000 companies located in the United States and Europe.
Cognizant's core competencies include web-centric applications, data
warehousing, and component-based development and legacy and client-server
systems. Cognizant provides the IT consulting services it offers using an
integrated on-site/offshore business model. This seamless on-site/offshore
business model combines technical and account management teams located on-site
at the customer location and offshore at dedicated IT centers located in India
and Ireland.
Cognizant began its IT development and maintenance services business in
early 1994, as an in-house technology development center for The Dun &
Bradstreet Corporation and its operating units. In 1996, Cognizant, along with
certain other entities, was spun-off from The Dun & Bradstreet Corporation to
form a new company, Cognizant Corporation. On June 24, 1998, Cognizant completed
its initial public offering (the "IPO"). On June 30, 1998, a majority interest
in Cognizant, and certain other entities were spun-off from Cognizant
Corporation to form IMS Health Incorporated ("IMS Health"). At December 31,
2002, IMS Health owned 55.3% of the outstanding stock of Cognizant (representing
all of Cognizant's Class B common stock) and held 92.5% of the combined voting
power of Cognizant's common stock.
On February 13, 2003 (the "Split-Off Date"), IMS Health distributed all of
the Cognizant Class B common stock that IMS Health owned (a total of 33,872,700
shares, on a post-split basis) in an exchange offer to IMS stockholders (the
"Split-Off"). IMS Health distributed 0.927 shares of Cognizant Class B common
stock to its stockholders for every one share of IMS Health's common stock
tendered. There was no impact on the number of Cognizant's total shares
outstanding upon the completion of the exchange offer. Accordingly, as of
February 13, 2003, IMS Health is no longer a related party.
As of February 21, 2003, pursuant to Cognizant's Restated Certificate of
Incorporation, all of the shares of Class B common stock automatically
converted into shares of Class A common stock. Accordingly, as of February 21,
2003, there are no shares of Class B common stock outstanding.
The conversion of Class B common stock into Class A common stock has been
reflected in the accompanying condensed consolidated financial statements,
including the restatement of all applicable references as to the number of
issued and outstanding shares of Class A and Class B common stock on the
accompanying condensed consolidated statements of financial position.
Stockholders' equity accounts have been restated to reflect a $113,000
reclassification of an amount equal to the par value of the shares of Class B
common stock to the Class A common stock account.
Revenues from IMS Health prior to the Split-Off Date have been classified
as related party revenues. As of the Split-Off Date, IMS Health is no longer a
related party to the Company. Accordingly, revenues from IMS Health subsequent
to the Split-Off Date are classified as third party revenues. Aggregate
revenues from IMS Health for the nine months ended September 30, 2003,
including related party revenues in the period January 1 through the Split-Off
Date, were approximately $16.4 million compared to approximately $15.6 million
for the nine months ended September 30, 2002, during which IMS Health was
classified as a related party.
-15-
The Company does not anticipate a material change in total revenues
received from IMS Health in the year ended December 31, 2003, including
revenues from IMS Health when it was a related party, as compared to total
revenues from IMS Health in the year ended December 31, 2002. There can be no
assurance, however, that the expected revenues from IMS Health in 2003 or
beyond will actually approximate the level of revenue received from IMS Health
during fiscal 2002.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend paid on April 1, 2003 to stockholders of
record on March 19, 2003. The stock split has been reflected in the accompanying
condensed consolidated financial statements, and all applicable references as to
the number of outstanding shares of common stock and per share information have
been restated. Stockholders' equity accounts have been restated to reflect a
$408,000 reclassification of an amount equal to the par value of the increase in
the issued and outstanding shares of Class A common stock from the additional
paid-in-capital account to the Class A common stock account.
Changes to Critical Accounting Policies, Estimates and Risks
- ------------------------------------------------------------
Income Taxes.
Effective April 1, 2003, the government of India passed various tax law
changes which affected the way in which the Company's earnings are taxed in
India. The tax exemption for export earnings was increased from 90% to 100%, the
surtax was reduced decreasing the Indian statutory tax rate from 36.75% to
35.875% for income that is subject to tax and the corporate level tax on the
payment of dividends was reinstated with the withholding tax on dividends
repealed.
Forward Looking Statements
- --------------------------
The statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), that involve risks and uncertainties. Such forward-looking statements
may be identified by, among other things, the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. From time to time,
the Company or its representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in various filings made by the Company with the Securities and Exchange
Commission, or press releases or oral statements made by or with the approval of
an authorized executive officer of the Company. These forward-looking
statements, such as statements regarding anticipated future revenues, contract
percentage completions, capital expenditures, and other statements regarding
matters that are not historical facts, involve predictions. The Company's actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Potential risks
and uncertainties that could affect the Company's future operating results
include, but are not limited: (i) the significant fluctuations of Cognizant's
quarterly operating results caused by a variety of factors, many of which are
not within Cognizant's control, including (a) the number, timing, scope and
contractual terms of application design, development and maintenance projects,
(b) delays in the performance of projects, (c) the accuracy of estimates of
costs, resources and time to complete projects, (d) seasonal patterns of
Cognizant's services required by customers, (e) levels of market acceptance for
Cognizant's services, (f) potential adverse impacts of new tax legislation, and
(g) the hiring of additional staff; (ii) changes in Cognizant's billing and
employee utilization rates; (iii) Cognizant's ability to manage its growth
effectively, which will require Cognizant to (a) increase the number of its
personnel, particularly skilled technical, marketing and management personnel,
(b) find suitable acquisition candidates to support geographic expansion, and
(c) continue to develop and improve its operational, financial, communications
and other internal systems, in the United States,
-16-
India and Europe; (iv) Cognizant's reliance on key customers and large projects;
(v) the highly competitive nature of the markets for Cognizant's services; (vi)
Cognizant's ability to successfully address the continuing changes in
information technology, evolving industry standards and changing customer
objectives and preferences; (vii) Cognizant's reliance on the continued services
of its key executive officers and leading technical personnel; (viii)
Cognizant's ability to attract and retain a sufficient number of highly skilled
employees in the future; (ix) Cognizant's ability to protect its intellectual
property rights; (x) the concentration of Cognizant's operations in India and
the related geo-political risks of local and cross-border conflicts; (xi)
terrorist activity, the threat of terrorist activity, and responses to and
results of terrorist activity and threats, including, but not limited to,
effects, domestically and/or internationally, on Cognizant, its personnel and
facilities, its customers and suppliers, financial markets and general economic
conditions; (xii) the effects, domestically and/or internationally, on
Cognizant, its personnel and facilities, its customers and suppliers, financial
markets and general economic conditions arising from hostilities involving the
United States in Iraq or elsewhere; (xiii) a breach of the Distribution
Agreement entered into between the Company and IMS Health; (xiv) a change in the
Company's intent to repatriate undistributed earnings; and (xv) general economic
conditions. Such forward-looking statements include risks and uncertainties;
consequently, actual transactions and results may differ materially from those
expressed or implied thereby.
Results of Operations
- ---------------------
The following table sets forth certain results of operations as a
percentage of total revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Total revenues.................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................. 54.0 53.8 54.3 53.4
------ ------ ------ ------
Gross profit................... 46.0 46.2 45.7 46.6
Selling, general and
administrative expense........... 23.3 23.1 22.9 23.4
Depreciation and amortization
expense.......................... 3.1 3.3 3.2 3.5
------ ------ ------ ------
Income from operations......... 19.6 19.8 19.6 19.7
Other income (expense):
Interest income................ 0.6 0.8 0.5 0.8
Other income (expense)......... 0.0 0.0 0.0 0.0
Split off costs (1)............ 0.0 0.0 (0.8) 0.0
------ ------- ------- ------
Total other income (expense)...... 0.6 0.8 (0.3) 0.8
------ ------ ------- ------
Income before provision for
income taxes................... 20.3 20.6 19.3 20.5
Provision for income taxes........ (4.0) (4.8) (4.1) (4.8)
------- ------- ------- -------
Net income ....................... 16.3% 15.8% 15.2% 15.7%
====== ====== ====== ======
(1) The Company was obligated to pay the costs associated with the Split-Off
(the "Split-Off Costs") in connection with the exchange offer under the
provisions of an Intercompany Agreement with IMS Health, dated as of May
15, 1998. The Intercompany Agreement provided that Cognizant would pay its
own costs, without reimbursement, and the costs of IMS Health (other than
underwriting discounts, commissions and certain other specified costs)
necessary to facilitate a sale or spin-off of IMS Health's ownership
interest in the Company. (See Note 2 of the Notes to Condensed
Consolidated Financial Statements).
-17-
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
- ------------------------------------------------------------------------------
REVENUE. Revenue increased by 60.2%, or approximately $36.9 million, from
approximately $61.2 million during the three months ended September 30, 2002 to
approximately $98.1 million during the three months ended September 30, 2003.
This increase resulted primarily from an increase in both application management
and application development services, and revenue generated from the acquisition
of Aces International Inc. ("Aces") (See Note 8 of the Notes to Condensed
Consolidated Financial Statements). During the three months ended September 30,
2003, no customer accounted for sales of 10.0% or more of revenues. During the
three months ended September 30, 2002, one third party customer accounted for
approximately 11.5% of revenues.
GROSS PROFIT. The Company's cost of revenues consists primarily of the
cost of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. The Company's
cost of revenues increased by 60.7%, or approximately $20.0 million, from
approximately $33.0 million during the three months ended September 30, 2002 to
approximately $53.0 million during the three months ended September 30, 2003.
The increase was due primarily to costs resulting from an increase in the number
of the Company's technical professionals from approximately 4,700 employees at
September 30, 2002 to approximately 7,000 employees at September 30, 2003. The
increased number of the Company's technical professionals is a direct result of
greater demand for the Company's services. The Company's gross profit increased
by 59.7%, or approximately $16.9 million, from approximately $28.3 million
during the three months ended September 30, 2002 to approximately $45.1 million
during the three months ended September 30, 2003. Gross profit margin decreased
marginally from 46.2% for the three months ended September 30, 2002 to 46.0% for
the three months ended September 30, 2003 primarily due to a higher 2003
incentive compensation accrual associated with increased revenues and the
appreciation of the Indian Rupee versus the U.S. dollar.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs as well as depreciation and amortization expense. Selling,
general and administrative expenses, including depreciation and amortization,
increased by 60.1%, or approximately $9.7 million, from approximately $16.2
million during the three months ended September 30, 2002 to approximately $25.9
million during the three months ended September 30, 2003, and remained constant
as a percentage of revenue at 26.4%. The increase in such expenses in absolute
dollars was due primarily to expenses incurred to expand the Company's sales and
marketing activities and increased infrastructure expenses to support the
Company's revenue growth.
INCOME FROM OPERATIONS. Income from operations increased 59.2%, or
approximately $7.2 million, from approximately $12.1 million during the three
months ended September 30, 2002 to approximately $19.3 million during the three
months ended September 30, 2003, representing operating margins of 19.8% and
19.6 % of revenues, respectively. The decrease in operating margin was due
primarily to the increase in incentive compensation costs and the appreciation
of the Indian Rupee versus the U.S. dollar.
OTHER INCOME/(EXPENSE). Other income/ (expense) consists primarily of
interest income and foreign currency exchange gains/losses. Interest income
increased from approximately $0.5 million during the three months ended
September 30, 2002 to approximately $0.6 million during the three months ended
September 30, 2003 primarily due to higher invested cash balances partially
offset by reductions in global interest rates.
-18-
The Company recognized a net foreign currency exchange gain of
approximately $24,000 and a loss of $21,000 during the three month periods ended
September 30, 2002 and September 30, 2003, respectively, as a result of the
effect of changing exchange rates on the Company's transactions.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
approximately $2.9 million during the three months ended September 30, 2002 to
approximately $3.9 million during the three months ended September 30, 2003.
The effective income tax rate of 23.3% for the three months ended September 30,
2002 decreased to 19.7% for the three months ended September 30, 2003 primarily
due to a lower overall effective income tax rate on foreign earnings. (See Note
7 of the Notes to Condensed Consolidated Financial Statements).
NET INCOME. Net income increased from approximately $9.7 million for the
three months ended September 30, 2002 to approximately $16.0 million for the
three months ended September 30, 2003, representing 15.8% and 16.3% of revenues,
respectively. The increase in net income as a percentage of revenues compared to
the prior year period was due primarily to a lower effective income tax rate.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September
30, 2002
- ----------------------------------------------------------------------------
REVENUE. Revenue increased by 60.5%, or approximately $98.0 million, from
approximately $162.1 million during the nine months ended September 30, 2002 to
approximately $260.1 million during the nine months ended September 30, 2003.
This increase resulted primarily from an increase in both application management
and development services, and revenue generated from the acquisition of Aces.
During the nine months ended September 30, 2003 and nine months ended September
30, 2002, no third-party customer accounted for sales of 10.0% or more of
revenues.
GROSS PROFIT. The Company's cost of revenues increased by 63.1%, or
approximately $54.6 million, from approximately $86.5 million during the nine
months ended September 30, 2002 to approximately $141.1 million during the nine
months ended September 30, 2003. The increase was due primarily to costs
resulting from an increase in the number of the Company's technical
professionals from approximately 4,700 employees at September 30, 2002 to
approximately 7,000 employees at September 30, 2003. The increased number of the
Company's technical professionals is a direct result of greater demand for the
Company's services. The Company's gross profit increased by 57.4%, or
approximately $43.4 million, from approximately $75.6 million during the nine
months ended September 30, 2002 to approximately $119.0 million during the nine
months ended September 30, 2003. Gross profit margin decreased from 46.6% for
the nine months ended September 30, 2002 to 45.7% for the nine months ended
September 30, 2003. The decrease in gross profit margin was due primarily to a
higher 2003 incentive compensation accrual associated with increased revenues
and the appreciation of the Indian Rupee versus the U.S. dollar.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including depreciation and amortization, increased by
56.0%, or approximately $24.4 million, from approximately $43.6 million during
the nine months ended September 30, 2002 to approximately $68.0 million during
the nine months ended September 30, 2003, however, selling and general
administrative expenses decreased as a percentage of revenue from 26.9% to 26.2%
for the nine months ended September 30, 2002 and 2003, respectively. The
increase in such expenses in absolute dollars was due primarily to expenses
incurred to expand the Company's sales and marketing activities and increased
infrastructure expenses to support the Company's revenue growth. The decrease in
such expenses as a percentage of revenue resulted from the Company's ability to
leverage prior sales and marketing investments.
INCOME FROM OPERATIONS. Income from operations increased 59.4%, or
approximately $19.0 million, from approximately $31.9 million during the nine
months ended September 30, 2002 to
-19-
approximately $50.9 million during the nine months ended September 30, 2003,
representing relatively flat operating margins of 19.7% and 19.6 %,
respectively. The decrease in operating margin was due primarily to the lower
gross margin partially offset by the Company's ability to leverage its prior
sales and marketing investments.
OTHER INCOME/(EXPENSE). Interest income increased marginally from $1.3
million during the nine months ended September 30, 2002 to $1.4 million during
the nine months ended September 30, 2003 due to higher invested cash balances
partially offset by reductions in global interest rates.
PROVISION FOR INCOME TAXES. The provision for income taxes increased from
approximately $7.7 million during the nine months ended September 30, 2002 to
approximately $10.5 million during the nine months ended September 30, 2003. The
effective income tax rate of 23.4% for the nine months ended September 30, 2002
decreased to 21.0% for the nine months ended September 30, 2003 primarily due to
a lower overall effective income tax rate on foreign earnings. (See Note 7 of
the Notes to Condensed Consolidated Financial Statements).
NET INCOME. Net income increased from approximately $25.4 million for the
nine months ended September 30, 2002 to approximately $39.6 million for the nine
months ended September 30, 2003, representing 15.7% and 15.2% of revenues,
respectively. The decrease in net income as a percentage of revenues compared to
the prior period was due primarily to a lower gross margin and the impact of the
one-time, non-recurring Split-Off Costs incurred in the first quarter of 2003,
partially offset by the Company's ability to leverage its prior sales and
marketing investments.
Results by Business Segment
- ---------------------------
The Company, operating globally, provides IT consulting services primarily
for Fortune 1000 companies located in the United States and Europe. North
American operations consist primarily of providing IT consulting services in the
United States and Canada. European operations consist of providing IT consulting
services principally in the United Kingdom. Asian operations consist of
providing IT consulting services principally in India, Singapore, Japan and
Australia. The Company is managed on a geographic basis. Accordingly, regional
sales managers, sales managers, account managers, project teams and facilities
are segmented geographically and decisions by the Company's chief operating
decision maker regarding the allocation of assets and assessment of performance
are based on such geographic segmentation. Revenues and resulting operating
income are attributed to regions based upon customer location, and exclude the
effect of intercompany revenue for services provided by CTS India to other
Cognizant entities.
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
- ------------------------------------------------------------------------------
NORTH AMERICAN SEGMENT
REVENUE. Revenue increased by 64.9%, or approximately $34.4 million, from
approximately $52.9 million during the three months ended September 30, 2002 to
approximately $87.3 million during the three months ended September 30, 2003.
The increase in revenue was attributable primarily to greater acceptance of the
on-site/offshore consulting services delivery model as a means of reducing a
customer's internal IT costs, as well as increased sales and marketing
activities directed at the U.S. market for the Company's services.
INCOME FROM OPERATIONS. Income from operations increased 63.9%, or
approximately $6.7 million, from approximately $10.5 million during the three
months ended September 30, 2002 to approximately $17.2 million during the three
months ended September 30, 2003. The increase in
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operating income was attributable primarily to increased revenues and achieving
leverage on prior sales and marketing investments.
EUROPEAN SEGMENT
REVENUE. Revenue increased by 26.5%, or approximately $2.1 million, from
approximately $8.0 million during the three months ended September 30, 2002 to
approximately $10.1 million during the three months ended September 30, 2003.
The increase in revenue was attributable to the increased acceptance of the
Company's services, particularly in the United Kingdom.
INCOME FROM OPERATIONS. Income from operations increased 25.6%, or
approximately $0.4 million, from $1.6 million during the three months ended
September 30, 2002 as compared to $2.0 million during the three months ended
September 30, 2003. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments.
ASIAN SEGMENT
REVENUE. Revenue increased by 130.2%, or approximately $0.4 million, from
approximately $0.3 million during the three months ended September 30, 2002 to
approximately $0.7 million during the three months ended September 30, 2003. The
increase in revenue was primarily attributable to increased acceptance of
Company's on-site/offshore delivery model by clients based in Japan, Singapore
and Australia.
INCOME FROM OPERATIONS. Income from operations increased by 128.8%, or
approximately $76,000, from approximately $59,000 during the three months ended
September 30, 2002 to approximately $135,000 during the three months ended
September 30, 2003. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September
30, 2002
- ----------------------------------------------------------------------------
NORTH AMERICAN SEGMENT
REVENUE. Revenue increased by 64.2%, or approximately $90.2 million, from
approximately $140.4 million during the nine months ended September 30, 2002 to
approximately $230.6 million during the nine months ended September 30, 2003.
The increase in revenue was attributable primarily to greater acceptance of the
on-site/offshore consulting services delivery model as a means of reducing a
customer's internal IT costs, as well as increased sales and marketing
activities directed at the U.S. market for the Company's services.
INCOME FROM OPERATIONS. Income from operations increased 63.1%, or
approximately $17.5 million, from approximately $27.7 million during the nine
months ended September 30, 2002 to approximately $45.2 million during the nine
months ended September 30, 2003. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
EUROPEAN SEGMENT
REVENUE. Revenue increased by 35.0%, or approximately $7.1 million, from
approximately $20.4 million during the nine months ended September 30, 2002 to
approximately $27.5 million during the nine months ended September 30, 2003. The
increase in revenue was attributable to the increased acceptance of the
Company's services, particularly in the United Kingdom.
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INCOME FROM OPERATIONS. Income from operations increased 34.0%, or
approximately $1.4 million from $4.0 million during the nine months ended
September 30, 2002 as compared to $5.4 million during the nine months ended
September 30, 2003. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments.
ASIAN SEGMENT
REVENUE. Revenue increased by 57.3%, or approximately $0.7 million, from
approximately $1.2 million during the nine months ended September 30, 2002 as
compared to approximately $1.9 million during the nine months ended September
30, 2003. The increase in revenue was primarily attributable to increased
acceptance of Company's on-site/offshore delivery model by clients based in
Japan, Singapore and Australia.
INCOME FROM OPERATIONS. Income from operations increased by 56.3%, or
approximately $0.1 million, from approximately $0.3 million during the nine
months ended September 30, 2002 as compared to approximately $0.4 million during
the nine months ended September 30, 2003. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
Liquidity and Capital Resources
- -------------------------------
At September 30, 2003, the Company had cash and cash equivalents of
approximately $159.8 million. The Company has used and plans to use such cash
for (i) expansion of existing operations, including its offshore development
centers; (ii) continued development of new service lines; (iii) possible
acquisitions of related businesses; (iv) formation of joint ventures; and (v)
general corporate purposes, including working capital.
Net cash provided by operating activities was approximately $42.0 million
during the nine months ended September 30, 2003 as compared to net cash provided
by operating activities of approximately $35.6 million during the nine months
ended September 30, 2002. This increase resulted primarily from increased cash
earnings driven by higher revenue offset, in part, by a greater increase in
trade accounts receivable as compared to the prior year period. Trade accounts
receivable, net of allowance, increased from $35.1 million at December 31, 2002
to $53.2 million at September 30, 2003. The increase in trade accounts
receivable during 2003 was due primarily to increased revenue and the
acquisition of Aces. Unbilled accounts receivable increased from $4.2 million at
December 31, 2002 to $8.5 million at September 30, 2003. The increase in
unbilled accounts receivable was due primarily to volume associated with strong
sequential revenue growth and an increase in percentage of revenue coming from
fixed-price contracts. The Company monitors turnover, aging and the collection
of accounts receivable through the use of management reports which are prepared
on a customer basis and evaluated by the Company's finance staff. At September
30, 2003, the Company's days sales outstanding, including unbilled receivables,
was approximately 58 days compared to approximately 59 days at September 30,
2002.
The Company's investing activities used net cash of approximately $24.1
million for the nine months ended September 30, 2003 as compared to net cash
used of approximately $10.3 million for the same period in 2002. The increase in
2003 as compared to 2002 primarily reflects the Company's investment in property
and equipment for newly constructed owned facilities in India and the
acquisition of Aces.
The Company's financing activities provided net cash of approximately
$15.2 million for the nine months ended September 30, 2003 as compared to
approximately $13.0 million for the same period in 2002. The increase in net
cash provided by financing activities was related primarily to a
-22-
higher level of cash proceeds from the exercise of stock options and the
purchase of employee stock purchase plan shares in 2003 partially offset by a
payment of one-time, non-recurring Split-Off Costs in the first quarter of 2003,
as compared to the prior year.
As of September 30, 2003, the Company had no third-party debt.
The Company had working capital of $193.3 million at September 30, 2003
and $134.3 million at December 31, 2002. Accordingly, the Company does not
anticipate any near-term liquidity issues.
The Company believes that its available funds and the cash flows expected
to be generated from operations, will be adequate to satisfy its current and
planned operations and needs for at least the next 12 months. The Company's
ability to expand and grow its business in accordance with current plans, to
make acquisitions and form joint ventures and to meet its long-term capital
requirements beyond this 12-month period will depend on many factors, including
the rate, if any, at which its cash flow increases, its ability and willingness
to accomplish acquisitions and joint ventures with capital stock, its continued
intent not to repatriate earnings from India, its ability not to breach the
Distribution Agreement, dated January 7, 2003, between the Company and IMS
Health (the "Distribution Agreement"), especially as it relates to tax
indemnities, and the availability to the Company of public and private debt and
equity financing. The Company cannot be certain that additional financing, if
required, will be available on terms favorable to it, if at all.
The Company does not engage in hedging activities nor has it entered into
off-balance sheet transactions, arrangements or other relationships with
unconsolidated entities or other persons that are likely to affect liquidity or
the availability of or requirements for capital resources.
Commitments and Contingencies
- -----------------------------
As of September 30, 2003, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $30.6 million, of which $26.4 million has been spent to date. The
multi-phase program encompasses the construction of three fully-owned IT
facilities containing approximately 622,000 square feet of space in Pune,
Calcutta and Chennai. The facilities in Calcutta and Pune were completed in
2002. The facility in Chennai is expected to be fully completed in late 2003.
Total expenditures related to this program are expected to be approximately
$35.6 million, which the Company expects to fund internally.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' businesses and provide benefits that are difficult to quantify.
Any failure in a customer's computer system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to contractually
limit its liability for damages arising from negligent acts, errors, mistakes,
or omissions in rendering its application design, development and maintenance
services, there can be no assurance that the limitations of liability set forth
in its contracts will be enforceable in all instances or will otherwise protect
the Company from liability for damages. Although the Company has general
liability insurance coverage, including coverage for errors or omissions, there
can be no assurance that such coverage will continue to be available on
reasonable terms or will be available in sufficient amounts to cover one or more
large claims, or that the insurer will not disclaim coverage as to any future
claim. The successful assertion of one or more large claims against the Company
that exceed available insurance coverage or changes in the Company's insurance
policies, including premium increases or the imposition of large
-23-
deductible or co-insurance requirements, could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company also entered into the Distribution Agreement, the terms of
which were approved by a special committee of the Board of Directors of the
Company, which was comprised of the Company's independent directors. The
Distribution Agreement sets forth certain rights and obligations of IMS Health
and the Company in respect of the Split-Off in addition to those provided in the
amended and restated Intercompany Services Agreement. The material terms of the
Distribution Agreement include:
o the resignation of David M. Thomas and Nancy E. Cooper from any
boards of directors of the Company's subsidiaries on which they
served;
o indemnification provisions in respect of the respective disclosure
in the Split-Off documents, the conduct of the Split-Off and any
failure to perform the Distribution Agreement; and
o the agreement of the Company to undertake to be jointly and
severally liable to certain of IMS Health's prior affiliates for
liabilities arising out of or in connection with IMS Health's
business and the businesses of the Company and other successors to
the businesses of Cognizant Corporation in accordance with the terms
of the Distribution Agreement dated as of October 28, 1996, among
Cognizant Corporation, which has been renamed Nielsen Media
Research, Inc., The Dun & Bradstreet Corporation, which has been
renamed the R.H. Donnelly Corporation and AC Nielsen Corporation and
related agreements. However, subject to the general allocation of
liabilities arising from the respective businesses of IMS Health and
the Company, IMS Health has agreed to indemnify and reimburse the
Company for liabilities incurred with respect to these undertakings.
The Distribution Agreement also provides that IMS Health and the Company
will comply with, and not take any action during the relevant time period that
is inconsistent with, the representations made to and relied upon by McDermott,
Will & Emery in connection with rendering its opinion regarding the U.S. federal
income tax consequences of the Split-Off. In addition, pursuant to the
Distribution Agreement, the Company indemnifies IMS Health for any tax liability
to which they may be subject as a result of the Split-Off but only to the extent
that such tax liability resulted solely from a breach in the representations the
Company made to and were relied upon by McDermott, Will & Emery in connection
with rendering its opinion regarding the U.S. federal income tax consequences of
the Split-Off. This indemnification liability could be material to the Company's
quarterly and annual operating results, financial position and cash flows.
Foreign Currency Translation
- ----------------------------
The assets and liabilities of the Company's Canadian, European and Asian
subsidiaries (excluding India) are translated into U.S. dollars at current
exchange rates and revenues and expenses are translated at average monthly
exchange rates. The resulting translation adjustments are recorded in a separate
component of stockholders' equity. For the Company's Indian subsidiary, the
functional currency is the U.S. dollar since its sales are made primarily in the
United States, the sales price is predominantly in U.S. dollars and there is a
high volume of intercompany transactions denominated in 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.
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Effects of Inflation
- --------------------
The Company's most significant costs are the salaries and related benefits
for its programming staff and other professionals. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. There can be no assurance that the Company will be
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. SFAS No. 143 was effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143
effective January 1, 2003 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses the accounting for costs to
terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. A liability for contract termination
costs should be recognized and measured at fair value either when the contract
is terminated or when the entity ceases to use the right conveyed by the
contract. A liability for one-time termination benefits should be recognized and
measured at fair value at the communication date if the employee would not be
retained beyond a minimum retention period (i.e., either a legal notification
period or 60 days, if no legal requirement exists). For employees that will be
retained beyond the minimum retention period, a liability should be accrued
ratably over the future service period. The provisions of the statement were
effective for disposal activities initiated after December 31, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also requires that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted the
recognition and measurement provisions of FIN 45 beginning in the first quarter
of fiscal 2003. The adoption of FIN 45 did not have a material impact on the
Company's financial position, results of operations or cash flows.
On July 1, 2003, the Company adopted Emerging Issues Task Force ("EITF")
consensus EITF 00-21 "Revenue Arrangements with Multiple Deliverables." This
consensus requires the Company to evaluate, at the inception of each new
contract, all deliverables in an arrangement to determine whether they represent
separate units of accounting. For arrangements with multiple units of
accounting, primarily fixed-bid contracts that provide both application
maintenance and application development service and certain application
maintenance contracts, arrangement consideration must be allocated among the
separate units of accounting, where separable, based on their relative fair
-25-
values and recognized separately based on the Company's revenue recognition
policy. EITF 00-21 indicates that the best evidence of fair value is the price
of a deliverable when it is regularly sold on a stand-alone basis. Fair value
evidence often consists of entity-specific or vendor-specific objective evidence
of fair value. The adoption of EITF 00-21 did not have a material impact on the
Company's financial position, results of operations or cash flows.
The Company's services are entered into on either a time-and-materials
basis or fixed-price basis. Revenues related to time-and-materials contracts are
recognized as the service is performed. Revenues related to fixed-price
contracts that provide for highly complex information technology application
development services are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the total value of
revenue during the term of an agreement is recognized on the basis of the
percentage that each contract's cost to date bears to the total estimated cost.
Revenues related to fixed-priced contracts that provide for application
maintenance services or a combination of application maintenance and application
development services that are not separable are recognized on a straight-line
basis or as services are rendered or transactions processed in accordance with
contractual terms.
Information technology consulting services provided through time and
materials contracts, as well as applications maintenance services contracts
only, are recognized as revenue in accordance with SAB 101. Accordingly, revenue
is recognized when: 1) persuasive evidence of an arrangement exists; 2) there is
a fixed and determinable price for the services rendered; 3) delivery has
occurred; and 4) collectibility is assured. Expenses are recorded as incurred
over the contract period.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of FIN 46 and the consolidation requirements for
variable interest entities created or acquired subsequent to January 31, 2003
became effective for financial statements issued by the Company beginning in the
first quarter of 2003. For variable interest entities created or acquired prior
to February 1, 2003, the consolidation requirements of FIN 46 become effective
for the Company in the third quarter of 2003. The Company currently has no
significant contractual relationship or other business relationship with a
variable interest entity and therefore the adoption of FIN 46 did not have a
material effect on the Company's consolidated results of operations, financial
position or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The changes are intended to improve financial reporting
by requiring that contracts with comparable characteristics be accounted for
similarly. Additionally, those changes are expected to result in more consistent
reporting of contracts as either derivatives or hybrid instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS No. 149 did not have a material effect on the
Company's consolidated results of operations, financial position or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
changes are intended to result in a more complete representation of an entity's
liabilities and equity and will, thereby, assist investors and creditors in
assessing the amount, timing,
-26-
and likelihood of potential future cash outflows and equity share issuances.
This statement also requires that certain obligations that could be settled by
the issuance of equity, but lack other characteristics of equity, be reported as
liabilities even though the obligation does not meet the definition of a
liability. The requirements of SFAS No. 150 became effective for the Company for
financial instruments entered into or modified after May 31, 2003, or otherwise
at the beginning of the third quarter of fiscal 2003. The adoption of this
statement did not have a material impact on the Company's financial position,
results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it does not have operations subject to material
risks of foreign currency fluctuations, nor does it use derivative financial
instruments in its operations or investment portfolio. Nonetheless, the Company
periodically evaluates the need for hedging strategies to mitigate the effect of
foreign currency fluctuations. The Company believes that it is does not have
exposure to material market risks associated with changes in interest rates, as
it does not have any variable interest rate debt outstanding. The Company does
not believe that it has any other material exposure to market risks associated
with interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this
evaluation, the Company's chief executive officer and chief financial officer
concluded that, as of September 30, 2003, the Company's disclosure controls and
procedures were (1) designed to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to the Company's
chief executive officer and chief financial officer by others within those
entities, particularly during the period in which this report was being prepared
and (2) effective, in that they provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
No change in the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the fiscal quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-27-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of principal executive officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of principal financial officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On July 22, 2003, the Company furnished a Current Report on Form 8-K
with the Securities and Exchange Commission under Item 9 containing
a copy of its earnings release for the period ended June 30, 2003
(including financial statements) pursuant to Item 12 (Results of
Operations and Financial Condition).
On October 21, 2003, the Company furnished a Current Report on Form
8-K with the Securities and Exchange Commission under Item 9
containing a copy of its earnings release for the period ended
September 30, 2003 (including financial statements) pursuant to Item
12 (Results of Operations and Financial Condition).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cognizant Technology Solutions Corporation
DATE: November 12, 2003 By: /s/ Wijeyaraj Mahadeva
---------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATE: November 12, 2003 By: /s/ Gordon Coburn
---------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)