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 March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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Commission file number 001-12275
COGNIZANT CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-1450569
- - -------------------------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
200 Nyala Farms, Westport, CT 06880
- - --------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Class Shares Outstanding
Common Stock, at March 31, 1998
par value $.01 per share 162,848,673
COGNIZANT CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1998 and 1997 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Financial Position (Unaudited)
March 31, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
-2-
PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
COGNIZANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollar amounts in thousands, except per share data)
Three Months Ended
March 31,
-------------------------
1998 1997
--------------------- -----------------
Operating Revenue $ 337,032 $ 315,576
Operating Costs 166,784 147,959
Selling and Administrative Expenses 96,955 86,786
Depreciation and Amortization 28,816 32,944
--------------------- -----------------
Operating Income 44,477 47,887
Interest Income 4,098 3,616
Interest Expense (200) (450)
Gartner Equity Income 15,574 15,534
Gain from Sale of Subsidiary Stock (SAB 51 Gain) 7,987 0
Gains from Dispositions, Net 13,600 5,436
Other Expense - Net (2,772) (763)
--------------------- -----------------
Non-Operating Income - Net 38,287 23,373
Income Before Provision for Taxes 82,764 71,260
Provision for Income Taxes (22,677) (18,355)
--------------------- -----------------
Net Income $ 60,087 $ 52,905
===================== =================
Earnings Per Share of Common Stock - Basic $.37 $.31
Earnings Per Share of Common Stock - Diluted $.36 $.31
===================== =================
Average Number of Shares Outstanding - Basic 162,406,000 169,770,000
===================== =================
Dilutive Effect of Shares Issuable as of March 31, 1998 Under Stock Option 4,276,000 178,000
Plans
Adjustment of Shares to Reflect Options Exercised During the Period 600,000 14,000
===================== =================
Average Number of Shares Outstanding - Diluted 167,282,000 169,962,000
===================== =================
<FN>
See accompanying notes to the condensed consolidated financial statements (unaudited)
</FN>
-3-
COGNIZANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollar amounts in thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
--------------------- -----------------
Net Income $60,087 $52,905
Other Comprehensive Income/(Loss), net of tax:
Foreign Currency Translation Adjustments 903 (28,835)
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) Arising During the Period (Net of tax
(expense)/benefit of ($19) and $1,805 in 1998 and 1997,
respectively) 71 (6,589)
Less: Reclassification Adjustment for Realized Gains included in Net Income
(net of tax benefit of $2,113 in 1998) (7,710) 0
--------------------- -----------------
Net Unrealized Losses (7,639) (6,589)
--------------------- -----------------
Other Comprehensive Loss (6,736) (35,424)
--------------------- -----------------
Comprehensive Income $ 53,351 $ 17,481
===================== =================
<FN>
See accompanying notes to the condensed consolidated financial statements (unaudited)
</FN>
-4-
COGNIZANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
(Dollar amounts in thousands)
March 31, December 31,
1998 1997
------------------- --------------------
Assets
Current Assets
Cash and Cash Equivalents $ 344,251 $ 318,435
Accounts Receivable-Net 303,047 303,609
Other Current Assets 77,209 72,368
------------------- --------------------
Total Current Assets 724,507 694,412
------------------- --------------------
Investment in Gartner Group 212,863 195,695
Marketable Securities and Other Investments 100,707 109,712
Property, Plant and Equipment-Net 233,578 233,583
Other Assets-Net
Computer Software 147,911 142,268
Goodwill 91,464 87,430
Other Assets 119,301 116,420
------------------- --------------------
Total Other Assets-Net 358,676 346,118
------------------- --------------------
Total Assets $ 1,630,331 $ 1,579,520
=================== ====================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts and Notes Payable $ 59,630 $ 58,796
Accrued and Other Current Liabilities 203,264 212,944
Accrued Income Taxes 48,335 57,549
Deferred Revenues 114,173 111,921
------------------- --------------------
Total Current Liabilities 425,402 441,210
Postretirement and Postemployment Benefits 47,915 49,927
Deferred Income Taxes 108,373 113,749
Minority Interests 102,891 101,209
Other Liabilities 73,488 71,855
------------------- --------------------
Total Liabilities 758,069 777,950
------------------- --------------------
Shareholders' Equity 872,262 801,570
------------------- --------------------
Total Liabilities and Shareholders' Equity $ 1,630,331 $ 1,579,520
=================== ====================
<FN>
See accompanying notes to the condensed consolidated financial
statements (unaudited).
</FN>
-5-
COGNIZANT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
Three Months Ended
March 31,
-----------------------------
1998 1997
-------------- --------------
Cash Flows from Operating Activities:
Net Income $ 60,087 $ 52,905
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 28,816 32,944
Gains from Sale of Investments, Net (13,600) (5,436)
Postemployment Benefit Payments (1,391) (3,157)
Payments Related to 1995 Non-recurring Charge (955) (2,180)
Net Decrease in Accounts Receivable 579 450
Net Increase in Deferred Revenues 2,245 17,521
Gartner Group Equity Income, Net of Taxes (9,181) (8,902)
Gain from Sale of Subsidiary Stock (7,987) 0
Minority Interest Expense 2,146 156
Deferred Income Taxes 1,460 (13,012)
Net Decrease in Accrued Income Taxes (9,210) (1,144)
Net Increase in Other Working Capital Items (17,040) (11,608)
- - -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 35,969 58,537
- - -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Payments for Acquisitions of Businesses (2,938) 0
Proceeds from Sale of Investments 23,165 7,004
Capital Expenditures (12,691) (14,778)
Additions to Computer Software (15,415) (15,726)
Additions to Other Assets (9,254) (5,644)
Increase in Investments (8,092) (10,693)
Other (721) 2,454
- - -----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (25,946) (37,383)
- - -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Payments for Purchase of Treasury Shares 0 (95,069)
Proceeds from Exercise of Stock Options 17,833 1,151
Payments of Dividends (4,900) (5,117)
Employee Stock Purchase Plan 2,733 0
Other (3) (276)
- - ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by / (Used in) Financing Activities 15,663 (99,311)
- - ----------------------------------------------------------------------------------------------------------------------
Change of Gartner Group to Equity Basis 0 (123,697)
Effect of Exchange Rate Changes on Cash and Cash Equivalents 130 (7,244)
- - ---------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 25,816 (209,098)
Cash and Cash Equivalents, Beginning of Year 318,435 428,520
- - -------------------------------------------------------------------------------------------------------- --------------
Cash and Cash Equivalents, End of Period $ 344,251 $ 219,422
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 200 $ 255
Cash paid during the period for income taxes $ 30,728 $ 21,524
Non-Cash Investing Activities:
Stock Issued in Connection with the ChinaMetrik Acquisition $ 1,412 $ 0
<FN>
See accompanying notes to the condensed consolidated financial statements
(unaudited).
</FN>
-6-
COGNIZANT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands
Note 1 - Interim Consolidated Financial Statements
These interim condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the consolidated financial statements and related notes of Cognizant
Corporation (the "Company") in the 1997 Annual Report on Form 10-K. In the
opinion of management, all adjustments considered necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented have been included. Certain prior-period amounts have been
reclassified to conform with the 1998 presentation.
Note 2 - Investments
In the third quarter of 1997, the Company's voting interest in Gartner Group,
Inc. ("Gartner") fell below 50% as a result of the exercise of Gartner employee
stock options and employee stock purchases. Accordingly, effective January 1,
1997, the Company has deconsolidated Gartner and is accounting for its ownership
interest on the equity basis. Prior-period amounts have been reclassified
to conform with the 1998 presentation.
The Company recognizes as income any gains or losses related to the sale or
issuance of stock by a consolidated subsidiary or a company accounted for under
the equity basis ("SAB 51 Gain"). In the first quarter of 1998, proceeds from
the issuance of shares to Gartner employees, including associated tax benefits,
increased Gartner's equity by $24,032 and reduced the Company's ownership
interest by less than 2% to 47.2% at March 31, 1998. Accordingly, the Company
recognized a pre-tax unrealized gain on Gartner stock of $7,987 corresponding to
the net increase in the value of its underlying investment in Gartner. In
addition, Gartner equity income for the first quarter includes the Company's
share of an in-process R&D write-off at Gartner of $2,998.
Note 3 - Dispositions
During the first quarter of 1998, the Company recorded a $13,600 pre-tax net
gain on the sale of its investments in Aspect Development, Inc., Pegasus Systems
Inc., and certain other investments which were part of Cognizant Enterprises'
portfolio. These sales generated cash proceeds of $23,165.
Note 4 - Announcement of Spin
On January 15, 1998, the Company announced a plan to separate into two
independent, publicly traded companies - IMS HEALTH and Nielsen Media Research.
The transaction, which has been structured as a tax-free dividend of one share
of IMS HEALTH common stock for each share of Cognizant Corporation common stock,
is targeted for completion by June 30, 1998. Concurrent with the transaction,
Cognizant Corporation will change its name to Nielsen Media Research. The
separation would create IMS HEALTH as the premier global provider of information
solutions to the pharmaceutical and healthcare industries, and establish an
independent Nielsen Media Research, the leader in television audience
measurement services.
-7-
COGNIZANT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands, except per share data
Note 4 - Announcement of Spin (continued)
The transaction is subject to final approval by the Company's board of directors
and obtaining a ruling from the Internal Revenues Service with respect to the
tax-free treatment of the transaction. During the first quarter of 1998, $4,900
of one-time spin-related costs were incurred.
Note 5 - Acquisitions
On March 23, 1998 the Company announced that it had signed two definitive
agreements to acquire Walsh International Inc. ("Walsh") and Pharmaceutical
Marketing Services Inc. ("PMSI"), subject to regulatory and other approvals.
These acquisitions are separate transactions and will be accounted for as
purchases. The transactions have been independently authorized by the Cognizant,
Walsh, and PMSI boards of directors, and are subject to approval by Walsh and
PMSI shareholders. Under terms of the agreements, Walsh shareholders will
receive .3041 shares of Cognizant common stock per Walsh share (or based on a
Cognizant share price of $51.792, consideration of approximately $167,000), and
PMSI shareholders will receive .2800 shares of Cognizant common stock per PMSI
share (or based on a Cognizant share price of $51.792, consideration of
$180,000). The number of shares of Cognizant Corporation common stock to be
issued in connection with each of the acquisitions is subject to a collar
adjustment based upon the price of Cognizant Corporation common stock during a
period prior to the closing of the acquisitions. A one-time, non-cash charge to
write-off in-process research and development is expected, in the range of
$110,000 to $125,000 for both acquisitions combined. The Company expects to
issue approximately 6,700,000 shares from treasury stock to consummate these
transactions, assuming they occur prior to the spin.
Note 6 - Public Offering of a Subsidiary
During the first quarter, Cognizant Technology Solutions Corporation ("CTS"), a
subsidiary of the Company, filed a registration statement with the Securities
and Exchange Commission for an initial public offering of 2,917,000 shares of
its Class A Common Stock. The offering is expected to be between $11 and $13 per
share. CTS will sell 2,500,000 shares and Cognizant will sell 417,000 shares in
the contemplated offering. Application has been made for quotation of CTS's
stock on the Nasdaq National Market under the symbol "CTSH". Upon completion of
the offering, the Company is expected to hold approximately 67% of the
outstanding stock of CTS and accordingly, will continue to consolidate CTS
results within its financial statements. The transaction is expected to result
in a significant one-time gain to the Company.
Note 7 - Investment Partnership
Three of the Company's subsidiaries participate in a limited partnership, one of
which serves as general partner. During 1997, third party investors contributed
$100,000 to the partnership, in exchange for limited partnership interests. The
partnership, which is a separate and distinct legal entity, is in the business
of licensing database assets and computer software.
-8-
COGNIZANT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands
Note 7 - Investment Partnership (Continued)
For financial reporting purposes, the assets, liabilities, results of operations
and cash flows of the partnership are included in the Company's consolidated
financial statements.
Note 8 - Litigation
The Company and its subsidiaries are involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings and litigation, if
decided adversely, could have a material effect on quarterly or annual operating
results or cash flows when resolved in a future period. However, in the opinion
of management, these matters will not materially affect the Company's
consolidated financial position.
In addition, on July 29, 1996, Information Resources, Inc. ("IRI") filed a
complaint in the United States District Court for the Southern District of New
York, naming as defendants D&B, A.C. Nielsen Company and IMS (the"IRI Action").
The complaint alleges various violations of the United States antitrust laws,
including alleged violations of Sections 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
latter claims relate to the acquisition by defendants of Survey Research Group
Limited ("SRG"). IRI alleges that SRG violated an alleged agreement with IRI
when it agreed to be acquired by defendants and that the defendants induced SRG
to breach that agreement.
IRI's complaint alleges damages in excess of $350,000, which amount IRI has
asked to be trebled under the antitrust laws. IRI also seeks punitive damages in
an unspecified amount.
On October 15, 1996, defendants moved for an order dismissing all claims in the
complaint. On May 6, 1997 the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an amended and restated
complaint repleading its alleged claim of attempted monopolization in the United
States and realleging its other claims. On August 18, 1997, defendants moved for
an order dismissing the amended claims. On December 1, 1997, the court denied
the motion and, on December 16, 1997, defendants filed a supplemental answer
denying the remaining material allegations of the amended complaint.
-9-
COGNIZANT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands
Note 8 - Litigation (continued)
In connection with the IRI Action, D&B, ACNielsen Corporation ("ACNielsen") (the
parent company of A.C. Nielsen Company) and the Company have entered into an
Indemnity and Joint Defense Agreement (the "Indemnity and Joint Defense
Agreement") pursuant to which they agree (i) to certain arrangements allocating
potential liabilities ("IRI Liabilities") that may arise out of or in connection
with the IRI Action, and (ii) to conduct a joint defense of such action. In
particular, the Indemnity and Joint Defense Agreement provides that ACNielsen
will assume exclusive liability for IRI Liabilities up to a maximum amount to be
calculated at the time such liabilities, if any, become payable (the "ACN
Maximum Amount"), and that the Company and D&B will share liability equally for
any amounts in excess of the ACN Maximum Amount.
The ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount which ACNielsen is able to pay after giving effect to (i) any
plan submitted by such investment bank which is designed to maximize the claims
paying ability of ACNielsen without impairing the investment banking firm's
ability to deliver a viability opinion (but which will not require any action
requiring shareholder approval), and (ii) payment of related fees and expenses.
For these purposes, financial viability means the ability of ACNielsen, after
giving effect to such plan, the payment of related fees and expenses and the
payment of the ACN Maximum Amount, to pay its debts as they become due and to
finance the current and anticipated operating and capital requirements of its
business, as reconstituted by such plan, for two years from the date any such
plan is expected to be implemented.
Management of the Company is unable to predict at this time the final outcome of
this matter or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
Note 9 - Financial Instruments with Off-Balance-Sheet Risk
The Company uses foreign currency options and forward contracts to hedge a
portion of its committed revenues. While these hedging instruments are subject
to fluctuations in value, such fluctuations are offset by changes in the value
of the underlying exposures being hedged. The principal currencies hedged were
the Japanese Yen, German Mark, Swiss Franc and Italian Lira. At February 28,
1998, the notional amount hedged was $122,000. Gains and costs on foreign
currency options are included in deferred revenues and are deferred until such
revenues are recognized.
In addition, foreign exchange forward contracts are entered into in the normal
course of business to hedge against foreign exchange movements on certain assets
and liabilities of subsidiaries that are denominated in currencies other than
the subsidiary's functional currency. At February 28, 1998, IMS had
approximately $46,000 in foreign exchange forward contracts outstanding with
various expiration dates through November 1998.
-10-
COGNIZANT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands
Note 10. Operations by Business Segment
In 1997, the Company adopted Statement of Financial Accounting Standard No. 131
"Disclosures About Segments of an Enterprise and Related Information". As
required, the Company has restated prior period segment results in order to
conform to the new statement.
The Company, operating globally in approximately 80 countries, delivers
information, software and related services principally through the strategic
business segments referenced below.
IMS is the leading global provider of market information and decision-support
services to the pharmaceutical and healthcare industries. Nielsen Media Research
is the leading provider of television audience measurement services, both
nationally and locally, in the United States and Canada.
Emerging Markets includes Erisco Inc., the premier supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, an
outsourcer of software applications and development services specializing in
Year 2000 conversion services; S.S.J. K.K., a marketer of financial application
software products to the Japanese market; Cognizant Enterprises ("Enterprises"),
the Company's venture capital unit, focused on investments in emerging
healthcare businesses; and Pilot Software Inc., which was sold on July 31, 1997.
The accounting policies of these reportable segments are the same as those
described for the consolidated entity. The Company evaluates the performance of
its operating segments based on revenue and operating income.
Three Months Ended March 31, 1998
Nielsen
Media Emerging
IMS Research Markets (1) Total
--------------- -------------- ---------------- --------------
Operating Revenue $223,401 $96,064 $17,567 $337,032
Segment Operating Income $30,926 $25,749 $902 $57,577
General Corporate Expenses (2) $(13,100)
Interest Income (3) $2,060 - $32 $2,092
Interest Expense (4) $ (184) - - $ (184)
Non-Operating Income - Net
Gartner Equity Income $15,574
Gain on Gartner Stock (SAB 51 Gain) $7,987
Gains from Dispositions - Net $13,600 $13,600
Other - Net $(782)
--------------
Income Before Provision for Income Taxes $82,764
Provision for Income Taxes $(22,677)
==============
Net Income $60,087
==============
<FN>
See Notes to Operations by Business Segments
</FN>
-11-
COGNIZANT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Unaudited)
Dollar amounts in thousands
Note 10. Operations by Business Segment (continued)
Nielsen
Three Months Ended March 31, 1997 Media Emerging
- - ---------------------------------
IMS Research Markets (1) Total
--------------- -------------- ---------------- --------------
Operating Revenue $209,822 $86,271 $19,483 $315,576
Segment Operating Income $37,316 $26,279 $(8,808) $54,787
General Corporate Expenses $(6,900)
Interest Income (3) $1,097 - $61 $1,158
Interest Expense $(221) - $(229) $(450)
Non-Operating Income - Net
Gartner Equity Income $15,534
Gains from Dispositions - Net $5,436 $5,436
Other - Net $1,695
--------------
Income Before Provision for Income Taxes $71,260
Provision for Income Taxes $(18,355)
==============
Net Income $52,905
==============
<FN>
Notes to Operations by Business Segments:
(1) Intersegment sales of $3,734, and $2,385 in 1998, and 1997,
respectively, consisting primarily of sales from CTS to IMS and Nielsen Media
Research, have been excluded. These sales are accounted for on a time and
materials basis and recognized as the service is performed.
(2) General Corporate Expenses in 1998 include $4,900 of one-time spin-related
charges.
(3) Interest income excludes amounts recorded at corporate of $2,006 and $2,458
in 1998 and 1997, respectively.
(4) Interest expense excludes amounts recorded at corporate of $16 in 1998.
</FN>
Note 11. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. This statement, which the Company adopted in the first
quarter of 1998, establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Where applicable, earlier periods have been restated to
conform to the standards set forth in SFAS No. 130. The Company's Comprehensive
Income consists of net income, foreign currency translation adjustments and
unrealized holding gains on securities (see Condensed Consolidated Statements of
Comprehensive Income). Accumulated balances of Cumulative Translation
Adjustments and Unrealized Gains/(Losses) on Investments, as of March 31, 1998
are as follows:
Cumulative Unrealized Total Other
Translation Gains/(Losses) Comprehensive
Adjustment on Investments Items
Balance December 31, 1997 $(76,771) $32,650 $(44,121)
Current Period Change 903 (7,639)(1) (6,736)
==================================================================================================
Balance March 31, 1998 $(75,868) $25,011 $(50,857)
==================================================================================================
<FN>
(1) Current period change is principally due to the sale of Cognizant
Enterprises' investments in Aspect Development, Inc. and Pegasus Systems Inc.
</FN>
-12-
COGNIZANT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Dollar amounts in thousands, except per share data)
On January 15, 1998, the Company announced a plan to separate into two
independent, publicly traded companies - IMS HEALTH and Nielsen Media Research.
The transaction, which has been structured as a tax-free dividend of one share
of IMS HEALTH common stock for each share of Cognizant Corporation common stock,
is targeted for completion by June 30, 1998. Concurrent with the transaction,
Cognizant Corporation will change its name to Nielsen Media Research. The
separation would create IMS HEALTH as the premier global provider of information
solutions to the pharmaceutical and healthcare industries, and establish an
independent Nielsen Media Research, the leader in television audience
measurement services. The transaction is subject to final approval by the
Company's board of directors and obtaining a ruling from the Internal Revenue
Service with respect to the tax-free treatment of the transaction.
On March 23, 1998 the Company announced that it had signed two definitive
agreements to acquire Walsh International Inc. ("Walsh") and Pharmaceutical
Marketing Services Inc. ("PMSI"), subject to regulatory and other approvals.
These acquisitions are separate transactions and will be accounted for as
purchases. The transactions have been independently authorized by the Cognizant,
Walsh, and PMSI boards of directors, and are subject to approval by Walsh and
PMSI shareholders. Under terms of the agreements, Walsh shareholders will
receive .3041 shares of Cognizant common stock per Walsh share (or based on a
Cognizant share price of $51.792, consideration of approximately $167,000), and
PMSI shareholders will receive .2800 shares of Cognizant common stock per PMSI
share (or based on a Cognizant share price of $51.792 consideration of
$180,000). The number of shares of Cognizant Corporation common stock to be
issued in connection with each of the acquisitions is subject to a collar
adjustment based upon the price of Cognizant Corporation common stock during a
period prior to the closing of the acquisitions. A one-time, non-cash charge to
write-off in-process research and development is expected, in the range of
$110,000 to $125,000 for both acquisitions combined. The company expects to
issue approximately 6,700,000 shares from treasury stock to consummate these
transactions, assuming they occur prior to the spin.
During the first quarter, Cognizant Technology Solutions Corporation ("CTS"), a
subsidiary of the Company, filed a registration statement with the Securities
and Exchange Commission for an initial public offering of 2,917,000 shares of
its Class A Common Stock. The offering is expected to be between $11 and $13 per
share. CTS will sell 2,500,000 shares and Cognizant will sell 417,000 shares in
the contemplated offering. Application has been made for quotation of CTS's
stock on the Nasdaq National Market under the symbol "CTSH". Upon completion of
the offering, the Company is expected to hold approximately 67% of the
outstanding stock of CTS and accordingly, will continue to consolidate CTS
results within its financial statements. The transaction is expected to result
in a significant one-time gain to the Company.
-13-
COGNIZANT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollar amounts in thousands, except per share data)
In September 1997, the Company's voting interest in Gartner fell below 50% as a
result of the exercise of Gartner employee stock options and employee stock
purchases. Accordingly, effective January 1, 1997, the Company has
deconsolidated Gartner (the "Gartner Deconsolidation") and is accounting for its
ownership interest on the equity basis. Prior-period amounts have been
reclassified to conform with the 1998 presentation.
Revenue for the first quarter increased by 6.8% to $337,032 from $315,576 for
the first quarter of the prior year. Revenue growth for the quarter was held
down by the absence of Pilot revenues since its divestiture and the impact of a
stronger U.S. dollar. Adjusting for these items revenue for the first quarter of
1998 increased by 13.7%. This increase reflected double-digit constant dollar
revenue growth at IMS and Nielsen Media Research, Inc. ("Nielsen Media
Research"). The impact of a stronger U.S. dollar decreased reported revenue by
approximately 4% in the first quarter, including the impact of gains related to
the Company's hedging strategy.
Operating income for the first quarter decreased by 7.1% to $44,477 from $47,887
for the first quarter of the prior year. Operating income in the first quarter
includes Year 2000 costs of $13,157, and one-time spin-related charges of
$4,900. Adjusting for these items and the impact of a stronger U.S. dollar,
operating income for the first quarter of 1998 increased by 36.5%. Operating
income growth outpaced revenue growth primarily due to the absence of Pilot
operating losses since its divestiture. The impact of a stronger U.S. dollar
decreased reported operating income by approximately 5% in the first quarter,
including the impact of gains related to the Company's hedging strategy.
Non-operating income-net for the first quarter was $38,287 compared with $23,373
for the first quarter of the prior year. This increase is primarily related to
realizing higher gains in 1998 related to Enterprises' investments ($13,600) as
compared with 1997 ($5,436), and recording a pre-tax unrealized gain on Gartner
stock of $7,987 corresponding to the net increase in the value of the Company's
investment in Gartner ("SAB 51 Gain"); partially offset by recording, within
Gartner equity income, the Company's share of an in-process R&D write-off at
Gartner of $2,998.
The Company's effective tax rate was 27.4% for the first quarter, compared
with an effective tax rate of 25.8% in the comparable period of the prior year.
The Company's net income for the first quarter increased 13.6% to $60,087 from
$52,905 in the first quarter of the prior year. Excluding the after-tax impact
of Year 2000 costs, the one-time spin-related charges, the SAB 51 Gain, the
Company's share of the in-process R&D write-off at Gartner, and gains associated
with the sale of Cognizant Enterprises' investments, net income for the quarter
increased 22.2%.
Basic earnings per share for the first quarter increased 19.4% to $.37 from $.31
for the first quarter of the prior year. Excluding the after-tax impact of the
items in the preceding paragraph, basic earnings per share for the quarter
increased 27.6%.
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COGNIZANT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollar amounts in thousands, except per share data)
Results by Business Segment
As discussed in Note 10, in 1997, the Company adopted SFAS No. 131 "Disclosures
About Segments of an Enterprise and Related Information" which changes the way
public companies report information about segments. As required, the Company has
restated the prior period in order to conform to the 1998 presentation.
IMS is the leading global provider of market information and decision-support
services to the pharmaceutical and healthcare industries. IMS revenue for the
first quarter of 1998 increased 6.5% to $223,401 from $209,822 in the first
quarter of the prior year. Adjusting for the impact of a stronger U.S. dollar,
revenue for the first quarter 1998 increased by 12.6%. IMS revenue growth
benefited from strong performance of its sales management products, geographic
expansion and excellent growth of its electronic territory management product.
IMS operating income for the first quarter of 1998 decreased 17.1% to $30,926
from $37,316 in the first quarter of the prior year. Operating income in the
first quarter of 1998 includes $9,972 of costs related to Year 2000. Excluding
these costs and the impact of a stronger U.S. dollar, operating income for the
first quarter of 1998 increased 17.2%.
Nielsen Media Research is the leading provider of television audience
measurement services, both nationally and locally, in the United States and
Canada. Nielsen Media Research revenue for the first quarter 1998 increased
11.4% to $96,064 from $86,271 in the first quarter of the prior year. Nielsen
Media Research achieved continuing growth from new metered markets, additional
cable networks and its local Hispanic and Monitor Plus measurement services.
Nielsen Media Research operating income for the first quarter 1998 decreased
2.0% to $25,749 from $26,279 in the first quarter of the prior year. Operating
income in the first quarter of 1998 includes $3,185 of costs related to Year
2000. Excluding these costs, operating income for the first quarter of 1998
increased 10.1%.
Emerging Markets includes Erisco, the premier supplier of software-based
administrative and analytical solutions to the managed care industry; CTS, an
outsourcer of software applications and development services specializing in
Year 2000 conversion services; Super Systems Japan, a marketer of financial
application software products to the Japanese market; Enterprises, the
Company's venture capital unit, focused on investments in emerging healthcare
businesses; and Pilot Software, which was sold on July 31, 1997.
Emerging Markets revenue for the first quarter 1998 decreased 9.8% to $17,567
from $19,483 in the first quarter of the prior year. This decrease was primarily
due to the absence of revenues from Pilot since its divestiture.
Excluding the effect of Pilot and the impact of a stronger U.S. dollar,
revenue for the first quarter 1998 increased 50.9%, primarily due to strong
growth at CTS and Erisco. Emerging Markets operating income for the first
quarter 1998 increased to $902 from an operating loss of $8,808 in the first
quarter of the prior year. This increase was primarily due to the absence of
losses from Pilot since its divestiture.
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COGNIZANT CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
(Dollar amounts in thousands, except per share data)
Condensed Consolidated Statement of Cash Flows
Three Months Ended March 31, 1998 and 1997
Net cash provided by operating activities totaled $35,969 for the three months
ended March 31, 1998 compared with $58,537 for the comparable period in 1997.
The decrease of $22,568 principally reflects a lower increase in deferred
revenues ($15,276), and a net increase in Other Working Capital items ($5,432).
Net cash used in investing activities totaled $25,946 for 1998 compared with
$37,383 for the comparable period in 1997. The decrease in cash usage of $11,437
is principally due to higher proceeds from the sale of investments in 1998 as
compared with 1997 ($16,161), partially offset by payments for acquisitions for
businesses ($2,938).
Net cash provided by / (used in) financing activities totaled $15,663 for the
three months ended March 31, 1998 compared with ($99,311) for the comparable
period in 1997. The increase in cash provided by financing activities of
$114,974 was primarily due to the purchase of treasury shares in 1997 ($95,069)
and higher proceeds from the exercise of stock options in 1998 ($17,833), as
compared with 1997 ($1,151).
Changes in Financial Position at March 31, 1998 Compared to December 31, 1997
Marketable Securities & Other Investments decreased to $100,707 at March 31,
1998, from $109,712 at December 31, 1997, primarily reflecting the sale of
certain Enterprise investments.
Accrued Income Taxes decreased to $48,335 at March 31, 1998, from $57,549 at
December 31, 1997, primarily reflecting tax payments during 1998, partially
offset by the first quarter 1998 tax provision.
-16-
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) On March 31, 1998 the Company issued 16,635 shares of Common Stock to the
shareholders of ChinaMetrik, Inc. ("ChinaMetrik") (and deposited an additional
9,116 shares of Common Stock in an escrow account for future issuance to
certain such shareholders upon the satisfaction of certain conditions) as
consideration in the merger of ChinaMetrik with a subsidiary of the Company.
Exemption from registration was claimed on the basis of Rule 501 under the
Securities Act of 1933. Each stockholder of ChinaMetrik represented that he or
she was an "accredited investor" under Rule 501 and met the other conditions of
the Rule. Exemption was also claimed under Section 4(2) of the Securities Act
on the basis that the issuance did not involve a public offering in that there
were fewer than 5 shareholders of ChinaMetrik.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(Filed Electronically)
(b) Reports on Form 8-K:
A report on Form 8-K was filed on January 15, 1998 to report under Item
5, Other Events, the issuance of a press release by the Company
announcing that its Board of Directors had approved a plan, subject to
regulatory and other approval, to separate into two publicly traded
companies, IMS HEALTH Incorporated and Nielsen Media Research, Inc.
-17-
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 CORPORATION
Date: May 14, 1998 By:/S/ James C. Malone
=============================================
James C. Malone
Senior Vice President - Finance & Controller
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