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, 1996
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 1-12275
COGNIZANT CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 06-145069
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(State of Incorporation) (I.R.S. Employer Identification No.)
200 Nyala Farms, Westport, CT 06880
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 222-4200
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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 No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Shares Outstanding
Title of Class at November 4, 1996
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Common Stock,
par value $.01 per share 170,257,540
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COGNIZANT CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Combined Statement of Income (Unaudited)
Three Months Ended September 30, 1996 and 1995 3
Nine Months Ended September 30, 1996 and 1995 4
Condensed Combined Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 1996 and 1995 5
Condensed Combined Statement of Financial Position (Unaudited)
September 30, 1996 and December 31, 1995 6
Notes to Condensed Combined Financial Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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<TABLE>
PART I. FINANCIAL INFORMATION
Item I. FINANCIAL STATEMENTS
COGNIZANT CORPORATION
CONDENSED COMBINED STATEMENT OF INCOME (Unaudited)
(Dollar amounts in thousands except per share amounts)
<CAPTION>
Three Months Ended
September 30
------------------------------------------
1996 1995
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<S> <C> <C>
Operating Revenue $424,188 $374,521
Operating Costs 208,687 175,926
Selling and Administrative Expenses 121,289 119,265
Depreciation & Amortization 34,017 32,080
Restructuring Expense - 12,800
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Operating Income 60,195 34,450
Interest Income 1,781 3,023
Interest Expense (246) (168)
Other Income (Expense) - Net 9,444 (8,984)
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Non-Operating Income (Expense) - Net 10,979 (6,129)
Income Before Provision for Taxes 71,174 28,321
Provision for Income Taxes 31,316 12,836
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Net Income $ 39,858 $ 15,485
============== ==================
Pro Forma Unaudited Earnings Per Share
of Common Stock $.23 $.09
============== ==================
Pro Forma Unaudited Average Number of
Shares Outstanding 170,140,000 169,598,000
<FN>
The computation of pro forma earnings per share is based on the average number
of shares of The Dun & Bradstreet Corporation (D&B) common stock outstanding
during the respective periods. (See Notes 2 and 4)
See accompanying notes to the condensed combined financial statements
(unaudited).
</FN>
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</TABLE>
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<TABLE>
COGNIZANT CORPORATION
CONDENSED COMBINED STATEMENT OF INCOME (Unaudited)
(Dollar amounts in thousands except per share data)
<CAPTION>
Nine Months Ended
September 30
--------------------------------------
1996 1995
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<S> <C> <C>
Operating Revenue $1,209,910 $1,084,270
Operating Costs 543,369 458,504
Selling and Administrative Expenses 365,623 364,364
Depreciation & Amortization 99,833 99,245
Restructuring Expense - 12,800
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Operating Income 201,085 149,357
Interest Income 5,483 7,611
Interest Expense (657) (516)
Other Income (Expense) - Net 1,250 (12,647)
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Non-Operating Income (Expense) - Net 6,076 (5,552)
Income Before Provision for Taxes 207,161 143,805
Provision for Income Taxes 91,151 65,177
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Net Income $ 116,010 $ 78,628
=============== ================
Pro Forma Unaudited Earnings Per Share
of Common Stock $.68 $.46
=============== ================
Pro Forma Unaudited Average Number of
Shares Outstanding 169,916,000 169,579,000
<FN>
The computation of pro forma earnings per share is based on the average number
of shares of D&B common stock outstanding during the respective periods. (See
Notes 2 and 4)
See accompanying notes to the condensed combined financial statements
(unaudited).
</FN>
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<TABLE>
COGNIZANT CORPORATION
CONDENSED COMBINED STATEMENT OF CASH FLOWS (Unaudited)
(Dollar amounts in thousands)
<CAPTION>
Nine Months Ended
September 30
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1996 1995
<S> <C> <C>
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Cash Flows from Operating Activities:
Net Income $116,010 $ 78,628
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 99,833 99,245
Write-off of Purchased In-Process Research and Development 33,233 -
Restructuring Provisions - 12,800
Restructuring Payments (6,845) (10,044)
Postemployment Benefits Expense 666 36,206
Postemployment Benefits Payments (7,325) (11,833)
Payments Related to 1995 Non-recurring Charge (10,675) -
Net Decrease in Accounts Receivable 21,239 32,059
Net Increase in Deferred Revenues 57,970 13,081
Gartner Minority Interest Expense 2,357 9,808
Deferred Income Taxes 48,523 15,230
Non-U.S. Income Taxes Paid (30,820) (14,291)
Non-U.S. Income Tax Refunds 298 920
Net Changes in Other Working Capital Items 19,228 (21,737)
Other 1,077 1,236
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Net Cash Provided by Operating Activities 344,769 241,308
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Cash Flows from Investing Activities:
Proceeds from Maturities of Marketable Securities 81,970 -
Payments for Marketable Securities (113,287) -
Payments for Acquisitions of Businesses (24,386) (9,356)
Capital Expenditures (51,469) (54,512)
Additions to Computer Software (34,668) (41,393)
Increase in Investments (19,425) (2,543)
Payments for Purchase of Gartner Group Stock (42,998) (8,372)
Other 6,033 22,801
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Net Cash Used in Investing Activities (198,230) (93,375)
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Cash Flows from Financing Activities:
Net Amount Remitted to
The Dun & Bradstreet Corporation (122,886) (35,045)
Other (7,093) (6,664)
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Net Cash Used in Financing Activities (129,979) (41,709)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents (1,450) 4,321
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Increase in Cash and Cash Equivalents 15,110 110,545
Cash and Cash Equivalents, Beginning of Year 157,105 127,984
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Cash and Cash Equivalents, End of Period $172,215 $238,529
================================================================================================== =============
<FN>
Supplemental disclosure:
Cash paid during the period for interest $782 $526
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Non-cash value of Gartner Group stock issued for acquisition $36,719 -
============= =============
See accompanying notes to the condensed combined financial statements
(unaudited).
</FN>
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<TABLE>
COGNIZANT CORPORATION
CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION (Unaudited)
(Dollar amounts in thousands)
<CAPTION>
September 30 December 31
1996 1995
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<S> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents $ 172,215 $ 157,105
Accounts Receivable-Net 412,745 432,957
Other Current Assets 161,747 114,177
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Total Current Assets 746,707 704,239
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Investments 73,346 50,566
Property, Plant and Equipment-Net 260,386 247,127
Other Assets-Net
Computer Software 135,454 137,700
Goodwill 235,162 230,888
Other Assets 73,399 71,570
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Total Other Assets-Net 444,015 440,158
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Total Assets $1,524,454 $1,442,090
================== ===================
Liabilities and Divisional Equity
Current Liabilities
Accounts and Notes Payable $ 41,052 $ 60,966
Accrued and Other Current Liabilities 277,179 297,465
Accrued Income Taxes 52,289 37,747
Deferred Revenues 329,118 270,731
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Total Current Liabilities 699,638 666,909
Postretirement and Postemployment Benefits 43,438 48,602
Deferred Income Taxes 119,174 68,724
Other Liabilities and Minority Interests 73,708 53,267
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Total Liabilities 935,958 837,502
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Divisional Equity 588,496 604,588
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Total Liabilities and Divisional Equity $1,524,454 $1,442,090
================== ===================
<FN>
See accompanying notes to the condensed combined financial statements
(unaudited).
</FN>
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COGNIZANT CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Interim Combined Financial Statements
These interim combined financial statements have been prepared in accordance
with the instructions to Form 10-Q and should be read in conjunction with the
combined financial statements and related notes of Cognizant Corporation (the
"Company") in the Form 10 Registration Statement effective October 9, 1996. The
combined results for interim periods are not necessarily indicative of results
for the full year or any subsequent period. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of financial position, results of operations and cash flows at
the dates and for the periods presented have been included.
Note 2- Basis of Presentation
On January 9, 1996, The Dun & Bradstreet Corporation ("D&B") announced a plan to
reorganize into three publicly-traded independent companies by spinning off
through a tax-free distribution (the "Distribution") two of its businesses to
shareholders. Under the plan, the Company was to become a publicly traded
company consisting of the D&B businesses and operations that comprised the
Company, and substantially all of the assets and liabilities of such businesses.
For purposes of these financial statements, all references to the Company
include the assets and liabilities related to the businesses that were
transferred by D&B to the Company prior to the Distribution (which occurred on
November 1, 1996 - see Note 4). Additionally, the Company, D&B and third party
investors have in the past contributed assets to a limited partnership in which
they are partners. The partnership is a separate legal entity engaged in the
business of licensing database assets and software.
The combined financial statements have been prepared using D&B's historical
basis in the assets and liabilities and historical results of operations related
to the Company's businesses, except for accounting for income taxes. The Company
has been included in the Federal and certain state and non-U.S. income tax
returns of D&B. The provision for income taxes in the Company's combined
financial statements has been calculated on a separate-company basis. Income
taxes paid on behalf of the Company by D&B are included in divisional equity.
Effective after the Distribution, the Company will file separate income tax
returns.
The combined financial statements generally reflect the combined financial
position, results of operations, and cash flows of the Company as if it were a
separate entity for all periods presented. The combined financial statements
include allocations of certain D&B corporate assets, liabilities and expenses
relating to the Company's businesses that were transferred to the Company from
D&B. Management believes these allocations are reasonable. However, the
financial information included herein may not necessarily reflect the combined
financial position, results of operations, and cash flows of the Company in the
future or what they would have been had the Company been a separate entity
during the periods presented.
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<PAGE>
Note 3 - 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, claims 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 combined 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 I.M.S. International,
Inc. ("IMS"), a company that is owned by the Company (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
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 the defendants and that the defendants induced SRG to
breach that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount IRI has
asked to be trebled under the antitrust laws. IRI also seeks punitive damages in
an unspecified amount.
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 have agreed (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 stockholder
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 the matter could materially affect the
Company's results of operations, cash flows or financial position.
-8-
<PAGE>
Note 4- Subsequent Event
Effective on November 1, 1996 (the Distribution Date), the Company became an
independent, publicly owned company as a result of the Distribution by D&B of
the Company's $.01 par value Common Stock to holders of D&B Common Stock, at a
distribution ratio of one for one.
Note 5 - Financial Instruments with Off-Balance-Sheet Risk
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. The counter parties to these instruments are
major international financial institutions. The forward contracts typically have
maturities of three months or less. At September 30, 1996, the Company had
approximately $165.2 million in foreign exchange forward contracts outstanding
with various expiration dates through the fourth quarter of 1996. Realized and
unrealized gains and losses on these contracts and the offsetting losses and
gains on hedged transactions are included in other expense - net.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reported Nine Month Year-to-Date Results
The Company's net income for nine months increased 47.5% to $116,010 from
$78,628 in the comparable period of the prior year. Pro Forma earnings per share
for nine months increased 47.8% to $.68 from $.46 in the prior year. On July 31,
1996, Gartner Group acquired J3 Learning Corporation and incurred an
acquisition-related pre-tax charge of $33,233, primarily for in-process research
and development costs. The Company recorded an after-tax charge of approximately
$17,000 for this non-recurring acquisition-related charge, reflecting its 51%
investment in Gartner Group. In addition, net income in 1995 includes the
one-time impact of conforming fiscal quarters between the Company and Gartner
Group; revenues from 1995 discontinued product lines; and an after-tax
incremental provision for postemployment benefits expense of $17,778 and
restructuring expense of $7,002. Excluding non-recurring items in both years,
1996 net income increased approximately 19%.
Revenue for the first nine months increased 11.6% to $1,209,910 from $1,084,270
in the prior year. Revenue growth was held down by the one-time impact in 1995
of conforming fiscal quarters between the Company and Gartner Group, and by the
absence of revenue from 1995 discontinued product lines, discussed previously.
Excluding these items, revenue growth was approximately 15%, reflecting
excellent growth at Gartner Group, principally from the introduction of new
products and delivery options; strong revenue performance at IMS; and
double-digit revenue growth at Nielsen Media, driven by revenue growth from new
products and services and the continued impact of new broadcast and cable
network subscribers.
-9-
<PAGE>
Operating income for nine months increased 34.6% to $201,085 from $149,357 for
the comparable period a year ago. Operating income in 1996 includes the
previously discussed acquisition-related charge at Gartner Group, and operating
income in 1995 includes the previously discussed incremental provision for
postemployment benefits expense of $32,500 and restructuring expense of $12,800.
Excluding non-recurring items in both years, 1996 operating income increased
approximately 25%, which includes the adverse impact of a stronger U.S. dollar
of approximately 3%. Operating income growth outpaced revenue growth primarily
due to the continued trend at IMS and Gartner Group of taking advantage of
economies of scale and leveraging their resources.
Non-operating income-net for the first nine months was $6,076 compared with
non-operating expense-net of $5,552 for the prior year. The change in
non-operating income/expense-net in 1996 was due principally to lower minority
interest expense as a result of the acquisition-related charge at Gartner Group,
discussed previously.
The Company's effective tax rate was 44.0% for the first nine months of 1996,
compared with an effective tax rate of 45.3% for the first nine months of 1995.
Tax rates are computed on a separate-company basis and accordingly, do not
reflect the impact of D&B's global tax-planning actions, which have historically
yielded lower effective tax rates.
Reported Third Quarter Results
The Company's reported net income for the third quarter increased 157.4% to
$39,858 from $15,485 in the comparable period of the prior year. Pro-Forma
earnings per share for the third quarter increased $.14 per share to $.23 from
$.09 in 1995. Excluding the acquisition- related charge at Gartner Group and the
1995 incremental provision for postemployment benefits expense and restructuring
expense, discussed above, 1996 net income increased approximately 20%.
Reported revenue for the third quarter increased 13.3% to $424,188 from $374,521
for the prior year's third quarter. Excluding the impact of a stronger U.S.
dollar, revenue growth was approximately 16%.
Reported third quarter operating income increased 74.7% to $60,195 from $34,450
from last year. Excluding the acquisition-related charge at Gartner Group,
discussed above, and the 1995 incremental provision for postemployment benefits
expense and restructuring expense, discussed above, operating income increased
approximately 26%. Excluding the impact of a stronger U.S. dollar, operating
income growth was approximately 32%.
Non-operating income - net for the third quarter was $10,979 compared with
non-operating expense-net of $6,129 from a year ago. The change in non-operating
income/(expense)-net in 1996 was due principally to lower minority interest
expense as a result of the acquisition-related charge at Gartner Group,
discussed previously.
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<PAGE>
Condensed Combined Statement of Cash Flows
Nine Months Ended September 30, 1996 and 1995
Net cash provided by operating activities totaled $344,769 for the nine months
ended September 30, 1996 compared with $241,308 for the comparable period in
1995. The increase of $103,461 principally reflects an increase in business
operating results ($37,382), a increase in deferred revenue ($44,889), a
decrease in other working capital ($40,965), an increase in deferred taxes
($33,293), and the previously discussed non-cash acquisition-related charge at
Gartner Group ($33,233), partially offset by an increase in non-U.S. income
taxes paid, net of refunds ($17,151), lower non-cash expenses for restructuring
and postemployment benefits ($48,340), payments related to the 1995
non-recurring charge ($10,675), and a lower decrease in accounts receivables
($10,820).
Net cash used in investing activities totaled $198,230 for 1996 compared with
$93,375 for the comparable period in 1995. The increase of $104,555 is
principally due to payments for purchases of Gartner Group stock, net purchases
of marketable securities, and increased acquisition and investment spending.
Net cash used in financing activities totaled $129,979 for the nine months
compared with $41,709 for the comparable period in 1995. The increase in cash
usage of $88,270 primarily reflected higher cash remittances to D&B in
connection with D&B's centralized cash management system.
Changes in Financial Position at September 30, 1996 Compared to
December 31, 1995
Deferred Revenues increased to $329,118 at September 30, 1996, from $270,731 at
December 31, 1995, primarily reflecting an increase in subscription sales at
Gartner Group .
Deferred Income Taxes increased to $119,174 at September 30, 1996, from $68,724
at December 31, 1995, primarily reflecting the utilization of benefits related
to restructuring, postemployment benefits and non-recurring charges.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(27) Financial Data Schedule (filed electronically)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1996.
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<PAGE>
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: November 22, 1996 By: /s/ JAMES C. MALONE
=====================================
James C. Malone
Vice President Finance and Controller
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 172,215
<SECURITIES> 0
<RECEIVABLES> 412,745
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 746,707
<PP&E> 556,750
<DEPRECIATION> 296,364
<TOTAL-ASSETS> 1,524,454
<CURRENT-LIABILITIES> 699,638
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 588,496
<TOTAL-LIABILITY-AND-EQUITY> 1,524,454
<SALES> 0
<TOTAL-REVENUES> 1,209,910
<CGS> 0
<TOTAL-COSTS> 1,008,825
<OTHER-EXPENSES> (1,250)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 657
<INCOME-PRETAX> 207,161
<INCOME-TAX> 91,151
<INCOME-CONTINUING> 116,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,010
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
