Exhibit 99.2
RISKS RELATED TO THE EXCHANGE OFFER
YOUR INVESTMENT IN SHARES OF IMS HEALTH COMMON STOCK WILL BE SUBJECT TO
DIFFERENT RISKS AFTER THE EXCHANGE OFFER REGARDLESS OF WHETHER YOU ELECT TO
PARTICIPATE IN THE OFFER.
Your investment will be subject to different risks as a result of the
exchange offer, regardless of whether you tender all, some or none of your
shares of IMS Health common stock.
- If you exchange all your IMS Health shares, you will no longer have an
interest in IMS Health, but instead will have an interest in Cognizant.
As a result, your investment will be subject to risks associated with
Cognizant and not risks associated with IMS Health.
- If you exchange some, but not all, of your IMS Health shares, your
interest in IMS Health will diminish, depending on the number of your
shares that are accepted for exchange, while your direct interest in
Cognizant may increase. As a result, your investment will be subject to
risks associated with IMS Health and Cognizant.
- If you do not exchange any of your IMS Health shares your interest in IMS
Health will increase, on a percentage basis, while your indirect interest
in Cognizant will decrease or be eliminated. As a result, your investment
will be subject to risks associated with IMS Health and not risks
associated with Cognizant, except to the extent we do not distribute all
our Cognizant shares.
YOU MAY NOT RECEIVE A PREMIUM FOR THE SHARES OF IMS HEALTH COMMON STOCK YOU
TENDER IN THE EXCHANGE OFFER.
The amount of the premium, if any, that you will receive if you participate
in the exchange offer will depend on the relative prices for shares of IMS
Health common stock and shares of Cognizant class A common stock on the
completion of the exchange offer. A number of factors may influence the market
prices of our and Cognizant's shares. We cannot predict what the amount of the
actual premium will be at the time of the exchange or whether, in fact, there
will be a premium at all. Changes in the prices of shares of IMS Health common
stock or shares of Cognizant class A common stock over time may also affect your
ability to realize any premium through sales in the market.
THE HISTORICAL FINANCIAL INFORMATION OF IMS HEALTH AND COGNIZANT MAY NOT BE
INDICATIVE OF THEIR RESULTS AS SEPARATE COMPANIES.
The historical financial information of IMS Health and Cognizant presented
in this document may not necessarily reflect what the results of operations,
financial condition and cash flows of each would have been had the companies
been separate, stand-alone entities pursuing independent strategies during the
periods presented. As a result, historical financial information is not
necessarily indicative of future results of operations, financial condition and
cash flows of either IMS Health or Cognizant.
THE PRIOR PERFORMANCE OF IMS HEALTH AND COGNIZANT COMMON STOCK MAY NOT BE
INDICATIVE OF THE PERFORMANCE OF THEIR COMMON STOCK AFTER THE EXCHANGE OFFER.
IMS Health and Cognizant common stock price history may not provide
investors with a meaningful basis for evaluating an investment in either
company's common stock. IMS has been a publicly traded company only since July
1, 1998 and Cognizant has been a publicly traded company only since June 24,
1998. The prior performance of IMS Health and Cognizant common stock may not be
indicative of the performance of their common stock after the exchange offer.
THE DISTRIBUTION OF SHARES OF COGNIZANT CLASS B COMMON STOCK IN THE EXCHANGE
OFFER MAY ADVERSELY AFFECT THE MARKET PRICE OF SHARES OF COGNIZANT CLASS A
COMMON STOCK.
The exchange offer will substantially increase the number of publicly held
shares of Cognizant common stock and the number of Cognizant stockholders. At
September 30, 2002, Cognizant common stock held by IMS Health represented
approximately 56% of the outstanding stock and approximately 93% of the combined
voting power of Cognizant's common stock. The shares of Cognizant class B common
stock to be distributed in the exchange offer will be immediately transferable
by non-affiliates of Cognizant. Each share of Cognizant class B common stock
will be automatically converted into one share of Cognizant class A common stock
when it is first transferred after the exchange offer. If a significant number
of persons who receive shares of Cognizant common stock in the exchange offer
attempt to, or are perceived as likely to, sell their shares of Cognizant common
stock after the exchange offer, the market price of shares of Cognizant class A
common stock could be adversely affected or fluctuate significantly after the
exchange offer.
MARKET PRICES FOR SHARES OF IMS HEALTH COMMON STOCK MAY DECLINE FOLLOWING THE
COMPLETION OF THE EXCHANGE OFFER.
Investors may purchase shares of IMS Health common stock in order to
participate in the exchange offer, which may have the effect of artificially
raising market prices for shares of IMS Health common stock during the pendency
of the exchange offer. Following the completion of the exchange offer, the
market prices for shares of IMS Health common stock may decline because any
exchange offer-related demand for shares of IMS Health common stock will cease.
Furthermore, persons who were unable to exchange their shares of IMS Health
common stock for any reason, including proration, may seek to sell these shares
in the market, which may also affect the market price for IMS Health common
stock. Market prices for shares of IMS Health common stock may also decline
following the completion of the exchange offer because shares of IMS Health
common stock will no longer include an investment, or will include a
significantly diminished investment, in the Cognizant business.
THE IRS MAY TREAT THE EXCHANGE OFFER AS TAXABLE TO EXCHANGING STOCKHOLDERS OR TO
IMS HEALTH.
We expect to receive a tax opinion from McDermott, Will & Emery to the
effect that, for U.S. federal income tax purposes, the exchange offer should be
tax-free to IMS Health stockholders, except with respect to any cash received in
lieu of fractional shares of Cognizant class B common stock, and that it is more
likely than not that the exchange offer will be tax-free to IMS Health. Section
355 of the Internal Revenue Code is highly technical and complex, and many
aspects of the statute have not yet been addressed by judicial decisions,
Treasury regulations, or other administrative guidance. In particular, there is
uncertainty with respect to the tax treatment of the exchange offer to IMS
Health under Section 355(e) of the Internal Revenue Code due to the absence of
controlling legal authorities addressing certain factual aspects of the exchange
offer, including the potential for automatic conversion of Cognizant class B
common stock into Cognizant class A common stock. The opinion of McDermott, Will
& Emery will be based on certain factual representations and assumptions. If
these factual representations and assumptions are incorrect in any material
respect, our ability to rely on the tax-free opinion would be jeopardized. No
ruling from the Internal Revenue Service has been or will be sought with respect
to any of the tax matters relating to the exchange offer and the opinion is not
binding on the IRS. Accordingly, we cannot assure you that the IRS will agree
with the conclusions expected to be set forth in the opinion, and it is possible
that the IRS or another tax authority could adopt a position contrary to one or
all of those conclusions and that a court could sustain that contrary position.
If we complete the exchange offer and the exchange offer is held to be taxable,
we could be subject to tax as if the distribution were a taxable sale by us of
our Cognizant shares at market value, resulting in a material amount of taxes
for us because our tax basis in the Cognizant shares is not significant. Our
stockholders who receive Cognizant shares could be subject to taxes that would
vary with the individual circumstances of the stockholder and may be material
for some stockholders. Neither IMS Health nor Cognizant will indemnify any
individual stockholder for any taxes that may be incurred in connection with the
exchange offer.
IMS HEALTH AND COGNIZANT MAY NOT HAVE ADEQUATE FUNDS TO PERFORM THEIR RESPECTIVE
INDEMNITY OBLIGATIONS UNDER THE DISTRIBUTION AGREEMENT.
In connection with the exchange offer, IMS Health and Cognizant plan to
make tax-related representations to each other and plan to agree to tax-related
covenants. IMS Health and Cognizant also plan to agree to indemnify each other
for any liability resulting from a breach of these representations and covenants
and liability resulting from the conduct of IMS Health's and Cognizant's
businesses. The resulting liabilities could have a material adverse effect on
each company.
SPECIAL VOTING RIGHTS ASSOCIATED WITH COGNIZANT CLASS B COMMON STOCK WILL NOT BE
TRANSFERABLE.
If you receive shares of Cognizant class B common stock in the exchange
offer, you will have ten votes for each share you receive only until such share
is converted into Cognizant class A common stock. You will not be able to
transfer to another person the value of these special voting rights because each
share of Cognizant class B common stock will be automatically converted when it
is first transferred after the exchange offer into one share of Cognizant class
A common stock with one vote.
THE SPECIAL VOTING RIGHTS ASSOCIATED WITH COGNIZANT CLASS B COMMON STOCK MAY
CEASE AT ANY TIME.
You may lose your special voting rights even if you do not transfer your
class B common stock because each share of class B common stock will convert
into one share of class A common stock with one vote per share on the fifth
anniversary of completion of the exchange offer or, if earlier, the date on
which the number of shares of Cognizant class B common stock represents less
than 35% of the aggregate number of shares of Cognizant common stock then
outstanding. The number of shares of class B common stock may fall below the 35%
level as the result of transfers by other holders of class B common stock or an
increase in the number of shares of Cognizant class A common stock outstanding.
RISKS RELATED TO COGNIZANT
A SUBSTANTIAL PORTION OF COGNIZANT'S ASSETS AND OPERATIONS ARE LOCATED IN INDIA
AND COGNIZANT IS SUBJECT TO REGULATORY, ECONOMIC AND POLITICAL UNCERTAINTIES IN
INDIA.
Cognizant intends to continue to develop and expand its offshore facilities
in India where, as of September 30, 2002, approximately 72% of its technical
professionals were located. While
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wage costs are lower in India than in the United States and other developed
countries for comparably skilled professionals, wages in India are increasing at
a faster rate than in the United States, which could result in Cognizant
incurring increased costs for technical professionals and reduced operating
margins. In addition, there is intense competition in India for skilled
technical professionals and Cognizant expects that competition to increase.
India has also experienced civil unrest and terrorism and has been involved
in conflicts with neighboring countries. In recent years there have been
military confrontations between India and Pakistan that have occurred in the
region of Kashmir and along the Indian-Pakistan border. The potential for
hostilities between the two countries has been high in light of tensions related
to recent terrorist incidents in India and the unsettled nature of the regional
geopolitical environment including events in and related to Afghanistan. If
India were to become engaged in armed hostilities, particularly if these
hostilities were protracted or involved the threat of or use of weapons of mass
destruction, Cognizant's operations would be materially adversely affected. In
addition, U.S. companies may decline to contract with Cognizant for services in
light of international terrorist incidents or armed hostilities even where India
is not involved because of more generalized concerns about relying on a service
provider utilizing international resources.
In the past, the Indian economy has experienced many of the problems
confronting the economies of developing countries including high inflation,
erratic gross domestic product growth and shortages of foreign exchange. The
Indian government has exercised and continues to exercise significant influence
over many aspects of the Indian economy, and Indian government actions
concerning the economy could have a material adverse effect on private sector
entities, including Cognizant. In the past, the Indian government has provided
significant tax incentives and relaxed certain regulatory restrictions in order
to encourage foreign investment in specified sectors of the economy, including
the software development services industry. Programs that have benefited
Cognizant include, among others, tax holidays, liberalized import and export
duties and preferential rules on foreign investment and repatriation.
Notwithstanding these benefits, India's central and state governments remain
significantly involved in the Indian economy as regulators. The elimination of
any of the benefits realized by Cognizant from its Indian operations could have
a material adverse effect on Cognizant's business, results of operations and
financial condition.
Since 1991, successive governments in India have pursued policies of
economic reform, including significantly relaxing restrictions on the private
sector. The current Indian government, formed in October 1999, is a coalition of
several parties, including some small regional parties. The withdrawal of one or
more of these parties from the current coalition could result in political
instability. Political instability or further changes in the government in India
could delay the reform of the Indian economy and adversely affect economic
conditions in India generally, which could impact Cognizant's financial results
and prospects. The current Indian government has generally pursued policies and
taken initiatives that support the continued economic reform policies that have
been pursued by previous governments. Cognizant cannot assure you, however, that
these policies and initiatives will continue in the future. The rate of economic
reform could change, and specific laws and policies affecting technology
companies, foreign investment, currency exchange and other matters affecting
Cognizant's business could change as well. A significant change in India's
economic reform and deregulation policies could adversely affect business and
economic conditions in India generally and Cognizant's business in particular.
No assurance can be given that Cognizant will not be adversely affected by
changes in inflation, interest rates, taxation, social stability or other
political, economic or diplomatic developments in or affecting India in the
future.
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HOSTILITIES BETWEEN THE UNITED STATES AND IRAQ COULD ADVERSELY AFFECT
COGNIZANT'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND IMPAIR
ITS ABILITY TO SERVICE ITS CUSTOMERS.
Tensions between the United States and Iraq have recently escalated as the
United States has threatened to take military action against Iraq. Hostilities
involving the United States, or military or travel disruptions and restrictions
affecting Cognizant's employees, could materially adversely affect Cognizant's
operations and its ability to service its customers. Approximately 72% of
Cognizant's technical professionals are located in India, and the vast majority
of Cognizant's technical professionals in the United States and Europe are
Indian nationals who are able to work in the United States only because they
hold current visas. A military action by the United States against Iraq would
likely further disrupt travel and the ability to obtain visas to enter into the
United States. Travel restrictions could cause Cognizant to incur additional
unexpected labor costs and expenses or could restrain Cognizant's ability to
retain the skilled professionals it needs for its operations in the United
States and Europe.
COGNIZANT'S INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO MANY
UNCERTAINTIES.
Revenues from customers outside North America represented 16%, 14% and 13%
of Cognizant's revenues for 2000, 2001 and the nine months ended September 30,
2002, respectively. Cognizant anticipates that revenues from customers outside
North America will continue to account for a material portion of its revenues in
the foreseeable future and may increase as Cognizant expands its international
presence, particularly in Europe. In addition, a substantial majority of
Cognizant's employees and almost all of its IT development centers are located
in India. As a result, Cognizant may be subject to risks associated with
international operations, including risks associated with foreign currency
exchange rate fluctuations and risks associated with the application and
imposition of protective legislation and regulations relating to import or
export or otherwise resulting from foreign policy or the variability of foreign
economic conditions. To date, Cognizant has not engaged in any hedging
transactions to mitigate its risks relating to exchange rate fluctuations.
Additional risks associated with international operations include difficulties
in enforcing intellectual property rights, the burdens of complying with a wide
variety of foreign laws, potentially adverse tax consequences, tariffs, quotas
and other barriers and potential difficulties in collecting accounts receivable.
There can be no assurance that these and other factors will not have a material
adverse effect on Cognizant's business, results of operations and financial
condition.
COGNIZANT FACES INTENSE COMPETITION FROM OTHER IT SERVICE PROVIDERS.
The intensely competitive IT professional services market includes a large
number of participants and is subject to rapid change. This market includes
participants from a variety of market segments, including:
- systems integration firms;
- contract programming companies;
- application software companies;
- Internet solutions providers;
- the professional services groups of computer equipment companies; and
- facilities management and outsourcing companies.
The market also includes numerous smaller local competitors in the various
geographic markets in which Cognizant operates. Cognizant's direct competitors
who use the on-site/offshore business model include, among others, Infosys,
Inc., Satyam Computer Services Limited, Tata Consultancy Services and WIPRO Ltd.
In addition, many of Cognizant's competitors have significantly greater
financial, technical and marketing resources and greater name
3
recognition than does Cognizant. Some of these larger competitors, such as
Accenture Ltd., Electronic Data Systems Corporation and IBM Global Services,
have announced their intentions to develop their offshore operations in order to
lower their cost structure. Cognizant cannot assure you that it will be able to
sustain its current levels of profitability or growth as competitive pressures,
including competition for skilled IT development professionals and pricing
pressure from competitors employing an on-site/offshore business model,
increase.
COGNIZANT'S BUSINESS WILL SUFFER IF IT FAILS TO DEVELOP NEW SERVICES AND ENHANCE
ITS EXISTING SERVICES IN ORDER TO KEEP PACE WITH THE RAPIDLY EVOLVING
TECHNOLOGICAL ENVIRONMENT.
The IT services market is characterized by rapid technological change,
evolving industry standards, changing customer preferences and new product and
service introductions. Cognizant's future success will depend on its ability to
develop solutions that keep pace with changes in the IT services market. There
can be no assurance that Cognizant will be successful in developing new services
addressing evolving technologies on a timely or cost-effective basis or, if
these services are developed, that Cognizant will be successful in the
marketplace. In addition, there can be no assurance that products, services or
technologies developed by others will not render Cognizant's services
non-competitive or obsolete. Cognizant's failure to address these developments
could have a material adverse effect on its business, results of operations and
financial condition.
Cognizant's ability to remain competitive will also depend on its ability
to design and implement, in a timely and cost-effective manner, solutions for
customers moving from the mainframe environment to client/server or other
advanced architectures. Cognizant's failure to design and implement solutions in
a timely and cost-effective manner could have a material adverse effect on
Cognizant's business, results of operations and financial condition.
COMPETITION FOR HIGHLY SKILLED TECHNICAL PERSONNEL IS INTENSE AND THE SUCCESS OF
COGNIZANT'S BUSINESS DEPENDS ON ITS ABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED
PROFESSIONALS.
Cognizant's future success will depend to a significant extent on its
ability to attract, train and retain highly skilled IT development
professionals. In particular, Cognizant needs to attract, train and retain
project managers, IT engineers and other senior technical personnel. Cognizant
believes there is a shortage of, and significant competition for, IT development
professionals in the United States and India with the advanced technological
skills necessary to perform the services Cognizant offers. Cognizant has
subcontracted, to a limited extent in the past, and may do so in the future,
with other service providers in order to meet its obligations to its customers.
Cognizant's ability to maintain and renew existing engagements and obtain new
business will depend, in large part, on its ability to attract, train and retain
technical personnel with the skills that keep pace with continuing changes in
information technology, evolving industry standards and changing customer
preferences. Further, Cognizant must train and manage its growing work force,
requiring an increase in the level of responsibility for both existing and new
management personnel. There can be no assurance that the management skills and
systems currently in place will be adequate or that Cognizant will be able to
train and assimilate new employees successfully. Cognizant's failure to attract,
train and retain current or future employees could have a material adverse
effect on its business, results of operations and financial condition.
COGNIZANT'S GROWTH MAY BE HINDERED BY IMMIGRATION RESTRICTIONS.
Cognizant's future success will depend on its ability to attract and retain
employees with technical and project management skills from developing
countries, especially India. The vast majority of Cognizant's IT professionals
in the United States and in Europe are Indian nationals. The ability of Indian
nationals to work in the United States depends on their ability and the ability
of Cognizant to obtain the necessary visas and work permits.
4
The H-1B visa classification enables U.S. employers to hire qualified
foreign workers in positions which require an education at least equal to a U.S.
Baccalaureate Degree in specialty occupations such as IT systems engineering and
systems analysis. The H-1B visa usually permits an individual to work and live
in the United States for a period of up to six years. There is a limit on the
number of new H-1B petitions that the U.S. Immigration and Naturalization
Service may approve in any federal fiscal year, and in years in which this limit
is reached, Cognizant may be unable to obtain H-1B visas necessary to bring
foreign employees to the United States. In the current federal fiscal year, the
limit is 195,000. This cap is currently not expected to be reached. However, in
the fiscal year beginning October 1, 2003, because of changes in U.S.
immigration law, the number of H-1B visas available to employers will be reduced
to 65,000. In addition, there are strict labor regulations associated with the
H-1B visa classification. Higher users of the H-1B visa program are often
subject to investigations by the Wage and Hour Division of the U.S. Department
of Labor. A finding by the U.S. Department of Labor of willful or substantial
failure by Cognizant to comply with existing regulations on the H-1B
classification may result in a bar on future work-authorized nonimmigrant or
immigrant petitions.
Cognizant also regularly transfers employees of its subsidiaries in India
to the United States to work on projects and at client sites, using the L-1 visa
classification. The L-1 visa allows companies abroad to transfer certain
managers, executives and employees with specialized company knowledge to related
U.S. companies such as a parent, subsidiary, affiliate, joint venture or branch
office. Cognizant has an approved "Blanket L Program," under which the corporate
relationships of its transferring and receiving entities have been pre-approved
by the INS, thus enabling individual L-1 applications to be presented directly
to a U.S. consular post abroad rather than undergoing the pre-approval process
in the United States. While there have been no major changes in the law or
regulations governing the L-1 categories, both the U.S. consular posts that
review initial L-1 applications and the INS office, which adjudicates extensions
of L-1 status, have become more restrictive with respect to this category in the
recent past. As a result, the rate of refusals of initial L-1 applications and
of extension denials has increased. In addition, even where L-1 visas are
ultimately granted and issued, security measures undertaken by U.S. consular
posts around the world have caused major delays in visa issuances. Cognizant's
inability to bring qualified technical personnel into the United States to staff
on-site customer locations would have a material adverse effect on Cognizant's
business, results of operations and financial condition.
Cognizant also processes immigrant visas for lawful permanent residence for
employees to fill positions for which there are no able, willing and qualified
U.S. workers available to fill the positions. Compliance with existing U.S.
immigration and labor laws, or changes in those laws making it more difficult to
hire foreign nationals or limiting Cognizant's ability to successfully obtain
permanent residence for its foreign employees in the United States, could
require Cognizant to incur additional unexpected labor costs and expenses or
could restrain Cognizant's ability to retain the skilled professionals it needs
for its operations in the United States. Any of these restrictions or
limitations on Cognizant's hiring practices could have a material adverse effect
on Cognizant's business, results of operations and financial condition.
In addition to immigration restrictions in the United States, there have
recently been changes to work permit legislation in the United Kingdom, where
Cognizant has experienced significant growth. Under the new regulations, in
order for Cognizant to transfer its employees to the United Kingdom, either from
the United States or from India, it must demonstrate that the employee had been
employed by Cognizant for at least six months prior to the transfer. These
restrictions restrain Cognizant's ability to retain the skilled professionals it
needs for its operations in Europe, and could have an adverse affect on
Cognizant's international strategy to expand its presence in Europe. As a
result, the changes to work permit legislation in the United Kingdom could have
a material adverse effect on Cognizant's business, results of operations and
financial condition.
5
Immigration and work permit laws and regulations in the United States, the
United Kingdom and other countries is subject to legislative and administrative
changes as well as changes in the application of standards and enforcement.
Immigration and work permit laws and regulation can be significantly effected by
political forces and levels of economic activity. Cognizant's international
expansion strategy and its business, results of operations and financial
condition may be materially adversely affected if changes in immigration and
work permit laws and regulations or the administration or enforcement of such
laws or regulations impairs Cognizant's ability to staff projects with IT
professionals who are not citizens of the country where the work is to be
performed.
COGNIZANT'S ABILITY TO OPERATE AND COMPETE EFFECTIVELY COULD BE IMPAIRED IF IT
LOSES KEY PERSONNEL.
Cognizant's future performance depends to a significant degree upon the
continued service of the key members of its management team, as well as
marketing, sales and technical personnel, and its ability to attract and retain
new management and other personnel. Cognizant does not maintain key man life
insurance on any of its executive officers or significant employees. Competition
for personnel is intense, and there can be no assurance that Cognizant will be
able to retain its key employees or that it will be successful in attracting and
retaining new personnel in the future. The loss of any one or more of
Cognizant's key personnel or the failure to attract and retain key personnel
could have a material adverse effect on Cognizant's business, results of
operations and financial condition.
Cognizant has entered into non-competition agreements with its executive
officers. There can be no assurance that the restrictions in these agreements
prohibiting the executive officers from engaging in competitive activities are
enforceable. Further, substantially all of Cognizant's professional
non-executive staff are not covered by agreements that would prohibit them from
working for Cognizant's competitors. If any of Cognizant's key professional
personnel leaves Cognizant and joins a competitor of Cognizant, Cognizant's
business could be adversely affected.
COGNIZANT'S EARNINGS MAY BE ADVERSELY AFFECTED IF IT CHANGES ITS INTENT NOT TO
REPATRIATE EARNINGS IN INDIA.
During the first quarter of 2002, Cognizant made a strategic decision to
pursue an international strategy that includes expanded infrastructure
investments in India and geographic expansion in Europe and Asia. As a component
of this strategy, Cognizant intends to use 2002 and future Indian earnings to
expand its operations outside the United States instead of repatriating those
earnings to the United States. Accordingly, effective January 1, 2002, pursuant
to Accounting Principles Bulletin 23, Cognizant will no longer accrue taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are now considered to be indefinitely reinvested outside the United
States. This change in intent resulted in an estimated effective tax rate for
the nine months ended September 30, 2002 of approximately 23%, compared to an
effective tax rate for fiscal 2001 of approximately 37%. However, Cognizant's
cash requirements could change over time, which could effectively force it to
change its intent on repatriating Indian earnings. If Cognizant's earnings are
intended to be repatriated in the future, or are no longer reinvested outside
the United States, Cognizant will have to accrue the applicable amount of taxes
associated with those earnings and pay taxes at a substantially higher tax rate
than the effective rate in 2002. These increased taxes could have a material
adverse effect on Cognizant's business, results of operations and financial
condition, as well as cash flows to fund such taxes. In addition, Cognizant may
need to accelerate the payment of significant deferred taxes, which would have a
significant impact on its cash position.
6
COGNIZANT'S EARNINGS MAY BE ADVERSELY AFFECTED IF IT CHANGES ITS ACCOUNTING
POLICY WITH RESPECT TO EMPLOYEE STOCK OPTIONS.
Stock options are an important component of compensation packages for most
of Cognizant's mid- and senior-level employees. Cognizant currently does not
deduct the expense of employee stock option grants from its income. Many
companies, however, are considering a change to their accounting policies to
record the value of stock options issued to employees as an expense and changes
in the accounting treatment of stock options are currently under consideration
by the International Accounting Standards Board and other accounting standards-
setting bodies. If Cognizant were to change its accounting policy with respect
to the treatment of employee stock option grants, its earnings could be
materially adversely affected.
A SIGNIFICANT PORTION OF COGNIZANT'S PROJECTS IS ON A FIXED-PRICE BASIS,
SUBJECTING COGNIZANT TO THE RISKS ASSOCIATED WITH COST OVER-RUNS AND OPERATING
COST INFLATION.
Cognizant contracts to provide services either on a time-and-materials
basis or on a fixed-price basis, with fixed-price contracts accounting for
approximately 24% and 26% of revenues for the year ended December 31, 2001 and
the nine months ended September 30, 2002, respectively. Cognizant expects that
an increasing number of its future projects will be contracted on a fixed-price
basis. Cognizant bears the risk of cost over-runs and operating cost inflation
in connection with projects covered by fixed-price contracts. Cognizant's
failure to estimate accurately the resources and time required for a fixed-price
project, or its failure to complete its contractual obligations within the time
frame committed, could have a material adverse effect on Cognizant's business,
results of operations and financial condition.
COGNIZANT'S BUSINESS MAY SUFFER IF IT IS UNABLE TO MANAGE ITS RAPID GROWTH.
Since Cognizant began providing software development and maintenance
services in early 1994, Cognizant's professional and support staff has increased
from approximately 25 to over 5,200 at September 30, 2002. Cognizant's
anticipated growth will continue to place significant demands on its management
and other resources. In particular, Cognizant will have to continue to increase
the number of its personnel, particularly skilled technical, marketing and
management personnel, and continue to develop and improve its operational,
financial, communications and other internal systems. Cognizant's inability to
manage its anticipated growth effectively could have a material adverse effect
on Cognizant's business, results of operations and financial condition.
As part of its growth strategy, Cognizant is expanding its operations in
Europe and Asia. Cognizant may not be able to compete effectively in these
markets and the cost of entering these markets may be substantially greater than
it expects. If it fails to compete effectively in the new markets it enters, or
if the cost of entering those markets is substantially greater than it expects,
Cognizant's business, results of operations and financial condition could be
adversely affected. In addition, if Cognizant cannot compete effectively, it may
be required to reconsider its strategy to invest in its international expansion
plans and change its intent on the repatriation of its earnings.
COGNIZANT RELIES ON A FEW CUSTOMERS FOR A LARGE PORTION OF ITS REVENUES.
Approximately 40%, 35% and 39% of Cognizant's revenues in years ended
December 31, 2000 and 2001 and the nine months ended September 30, 2002,
respectively, were generated from its top five customers, including IMS Health.
Approximately 10%, 11% and 10% of Cognizant's revenues in years ended December
31, 2000 and 2001 and the nine months ended September 30, 2001 were generated
from IMS Health and its subsidiaries. The volume of work performed for specific
customers is likely to vary from year to year, and a major customer in one year
may not use Cognizant's services in a subsequent year. The loss of one of
Cognizant's
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large customers could have a material adverse effect on its business, results of
operations and financial condition.
COGNIZANT GENERALLY DOES NOT HAVE LONG-TERM CONTRACTS WITH ITS CUSTOMERS.
Consistent with industry practice, Cognizant generally does not enter into
long-term contracts with its customers. As a result, Cognizant is substantially
exposed to volatility in the market for its services, and may not be able to
maintain its level of profitability. If Cognizant is unable to market its
services on terms it finds acceptable, its financial condition and results of
operations could suffer materially.
COGNIZANT'S OPERATING RESULTS EXPERIENCE SIGNIFICANT QUARTERLY FLUCTUATIONS.
Cognizant historically has experienced significant quarterly fluctuations
in its revenues and results of operations and expects these fluctuations to
continue. Among the factors causing these variations have been:
- the number, timing, scope and contractual terms of IT development and
maintenance projects in which Cognizant is engaged;
- delays incurred in the performance of those projects;
- the accuracy of estimates of resources and time required to complete
ongoing projects; and
- general economic conditions.
In addition, Cognizant's future revenues, operating results and margins may
fluctuate as a result of:
- changes in pricing in response to customer demand and competitive
pressures;
- the mix of on-site and offshore staffing;
- the ratio of fixed-price contracts versus time-and-materials contracts;
- employee wage levels and utilization rates;
- the timing of collection of accounts receivable; and
- the breakdown of revenues by distribution channel.
A high percentage of Cognizant's operating expenses, particularly personnel
and rent, are relatively fixed in advance of any particular quarter. As a
result, unanticipated variations in the number and timing of Cognizant's
projects or in employee wage levels and utilization rates may cause significant
variations in operating results in any particular quarter, and could result in
losses to Cognizant. Any significant shortfall of revenues in relation to
Cognizant's expectations, any material reduction in utilization rates for
Cognizant's professional staff or variance in the on-site, offshore staffing
mix, an unanticipated termination of a major project, a customer's decision not
to pursue a new project or proceed to succeeding stages of a current project or
the completion during a quarter of several major customer projects could require
Cognizant to pay underutilized employees and could therefore have a material
adverse effect on Cognizant's business, results of operations and financial
condition.
As a result of these factors, it is possible that in some future periods
Cognizant's revenues and operating results may be significantly below the
expectations of public market analysts and investors. In such an event, the
price of Cognizant's common stock would likely be materially and adversely
affected.
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COGNIZANT MAY NOT BE ABLE TO SUSTAIN ITS CURRENT LEVEL OF PROFITABILITY.
Cognizant's gross margin of 49% and 47% for the year ended December 31,
2001 and the nine months ended September 30, 2002, respectively, may decline if
it experiences declines in demand and pricing for its services. In addition,
wages in India are increasing at a faster rate than in the United States, which
could result in Cognizant incurring increased costs for technical professionals.
Although Cognizant has been able to partially offset pricing pressures and wage
increases through its low-cost operating structure, it cannot assure you that it
will be able to continue to do so in the future.
LIABILITY CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON COGNIZANT'S BUSINESS.
Many of Cognizant'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 Cognizant, regardless of Cognizant's
responsibility for the failure. Although Cognizant attempts to limit by contract
its liability for damages arising from negligent acts, errors, mistakes or
omissions in rendering its IT development and maintenance services, there can be
no assurance that any contractual limitations on liability will be enforceable
in all instances or will otherwise protect Cognizant from liability for damages.
Although Cognizant has general liability insurance coverage, including coverage
for errors or omissions, there can be no assurance that coverage will continue
to be available on reasonable terms or will be available in sufficient amounts
to cover one or more large claims, or that the insurer will not disclaim
coverage as to any future claim. The successful assertion of one or more large
claims against Cognizant that exceed available insurance coverage or changes in
Cognizant's insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could have a material adverse
effect on Cognizant's business, results of operations and financial condition.
COGNIZANT EXPECTS THAT THE COST OF INSURANCE WILL INCREASE, AND THE SCOPE OF ITS
COVERAGE WILL DECREASE, FOLLOWING COMPLETION OF THE EXCHANGE OFFER.
Historically, Cognizant has benefited from insurance coverage provided
under policies obtained by IMS Health for itself and its subsidiaries. Following
completion of the exchange offer, Cognizant will be required to obtain its own
separate insurance policies for director and officer liability and general
liability. Cognizant expects the costs associated with the new insurance
policies will be substantially higher than the cost of the shared policy due to
reduced leverage in negotiating terms and general increases in insurance
premiums. In addition, Cognizant expects that the scope of its coverage will
also be reduced under the new policies.
COGNIZANT MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS.
Cognizant's future success will depend in part on its ability to protect
its intellectual property rights. Cognizant presently holds no patents or
registered copyrights, and relies upon a combination of copyright and trade
secret laws, non-disclosure and other contractual arrangements and various
security measures to protect its intellectual property rights. India is a member
of the Berne Convention, and has agreed to recognize protections on copyrights
conferred under the laws of foreign countries, including the laws of the United
States. Cognizant believes that laws, rules, regulations and treaties in effect
in the United States and India are adequate to protect it from misappropriation
or unauthorized use of its copyrights. However, there can be no assurance that
these laws will not change and, in particular, that the laws of India will not
change in ways that may prevent or restrict the transfer of software components,
libraries and toolsets from India to the United States. There can be no
assurance that the steps taken by Cognizant to protect its intellectual property
rights will be adequate to deter misappropriation of any of its intellectual
property, or that Cognizant will be able to detect unauthorized use and take
appropriate steps to enforce its rights. Unauthorized use of Cognizant's
intellectual property may
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result in development of technology, products or services which compete with
Cognizant's products and unauthorized parties may infringe upon or
misappropriate Cognizant's products, services or proprietary information.
Although Cognizant believes that its intellectual property rights do not
infringe on the intellectual property rights of any of its competitors or
others, there can be no assurance that infringement claims will not be asserted
against Cognizant in the future, that assertion of infringement claims will not
result in litigation or that Cognizant would prevail in that litigation or be
able to obtain a license for the use of any infringed intellectual property from
a third party on commercially reasonable terms, if at all. Cognizant expects
that the risk of infringement claims against Cognizant will increase if
Cognizant's competitors are able to obtain patents for software products and
processes. Any infringement claims, regardless of their outcome, could result in
substantial cost to Cognizant and divert management's attention from Cognizant's
operations. Any infringement claim or litigation against Cognizant could,
therefore, have a material adverse effect on Cognizant's business, results of
operations and financial condition.
COGNIZANT MAY BE UNABLE TO INTEGRATE ACQUIRED COMPANIES OR TECHNOLOGIES
SUCCESSFULLY.
Cognizant believes that opportunities exist in the fragmented IT services
market to expand its business through selective strategic acquisitions and joint
ventures. Cognizant believes that acquisition and joint venture candidates may
enable it to expand its geographic presence, especially in the European market,
enter new technology areas or expand its capacity. There can be no assurance
that Cognizant will identify suitable acquisition candidates available for sale
at reasonable prices, consummate any acquisition or joint venture or
successfully integrate any acquired business or joint venture into its
operations. Further, acquisitions and joint ventures involve a number of special
risks, including diversion of management's attention, failure to retain key
personnel, unanticipated events or circumstances and legal liabilities, some or
all of which could have a material adverse effect on Cognizant's business,
results of operations and financial condition. Cognizant may finance any future
acquisitions with debt financing, the issuance of equity securities or a
combination of the foregoing. There can be no assurance that Cognizant will be
able to arrange adequate financing on acceptable terms. In addition,
acquisitions financed with the issuance of Cognizant's equity securities could
be dilutive.
PROVISIONS IN COGNIZANT'S CHARTER AND PROVISIONS UNDER DELAWARE LAW MAY
DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS.
Cognizant's Amended and Restated Certificate of Incorporation and the
Delaware General Corporate Laws, or DGCL, contain provisions that may have the
effect of deterring unsolicited takeover proposals or delaying or preventing
changes in control or management of Cognizant, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. Cognizant's board of directors has the authority, without further
action by the stockholders, to fix the rights and preferences, and issue shares,
of preferred stock. The DGCL also contains provisions preventing certain
stockholders from engaging in business combinations with Cognizant, subject to
certain exceptions. These provisions could also discourage bids for Cognizant's
common stock at a premium as well as create a depressive effect on the market
price of the shares of Cognizant common stock.
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