SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File No. 0-24429
Cognizant Technology Solutions Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1700 Broadway, 26th Floor, New York, New York 10019
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 887-2385
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: X*
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of July 31, 1998:
Class Number of Shares
----- ----------------
Class A Common Stock, par value $.01 3,468,300
per share
Class B Common Stock, par value $.01
per share 5,645,450
- -----------------
*Registrant became subject to the filing requirements of the Securities Exchange
Act of 1934 on June 18, 1998, when its Registration Statement on Form S-1 and
Form 8-A were declared effective by the Commission. On June 24, 1998, the
Company consummated its Initial Public Offering of 2,917,000 shares of its
common stock at a price of $10.00 per share, 2,500,000 of which were issued and
sold by the Company and 417,000 of which were sold by Cognizant Corporation, the
Registrant's parent Company.
<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements............. 1
Condensed Consolidated Statements of Financial Position
(unaudited) as of June 30, 1998 and December 31, 1997... 2
Condensed Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 1998 and 1997 (unaudited)...................... 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 (unaudited)..... 4
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................. 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition .......... 7
PART II. OTHER INFORMATION
Item 1. Changes in Securities and Use of Proceeds............... 15
Item 6. Exhibits and Reports on Form 8-K........................ 15
SIGNATURES............................................................. 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
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<PAGE>
<TABLE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of June 30, 1998 and December 31, 1997
(dollars in thousands, except par values)
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................. $ 21,515 $ 2,715
Trade accounts receivable-net ............................................. 7,113 4,733
Trade accounts receivable-related party ................................... 1,768 2,670
Other current assets ...................................................... 2,075 778
-------- --------
Total current assets .................................................. 32,471 10,896
-------- --------
Property and equipment, net .................................................... 5,427 4,453
Goodwill, net .................................................................. 1,988 2,147
Other assets ................................................................... 171 802
-------- --------
Total assets .......................................................... $ 40,057 $ 18,298
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .......................................................... $ 919 $ 1,543
Accrued and other current liabilities ..................................... 7,165 3,659
-------- --------
Total current liabilities ............................................. 8,084 5,202
Deferred income taxes .......................................................... 3,845 2,593
Due to related party ........................................................... 23 6,646
-------- --------
Total liabilities ..................................................... 11,952 14,441
-------- --------
Commitments and Contingencies
Mandatorily redeemable common stock (113,750 shares issued and
outstanding at December 31, 1997, none at June 30, 1998) .................. -- 438
-------- --------
Stockholders equity:
Preferred stock, $.10 par value, 15,000,000 shares authorized none issued ...... -- --
Class A common stock, $.01 par value, 100,000,000 shares authorized,
2,917,000 shares and 417,000 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively ......................... 30 4
Class B common stock, $.01 par value, 15,000,000 shares authorized,
6,083,000 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively ......................... 61 61
Additional paid-in-capital ..................................................... 24,300 1,420
Retained earnings .............................................................. 3,714 1,936
Cumulative translation adjustment .............................................. -- (2)
-------- --------
Total stockholders' equity ............................................ 28,105 3,419
-------- --------
Total liabilities and stockholders' equity ............................ $ 40,057 $ 18,298
======== ========
See accompanying notes to consolidated financial statements (unaudited).
</TABLE>
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<PAGE>
<TABLE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ................................................. $ 8,493 $ 2,730 $ 15,022 $ 4,869
Revenues - related party ................................. 4,175 2,589 7,884 4,706
-------- -------- -------- --------
Total revenues ........................................ 12,668 5,319 22,906 9,575
Cost of revenues ......................................... 7,326 3,144 13,255 5,551
-------- -------- -------- --------
Gross profit ............................................. 5,342 2,175 9,651 4,024
Selling, general and administrative
expenses .............................................. 3,225 1,525 5,930 2,928
Depreciation and amortization expense .................... 535 320 1,015 601
-------- -------- -------- --------
Income from operations ................................... 1,582 330 2,706 495
Other income:
Interest income ....................................... 48 2 79 3
Other income - net .................................... 74 -- 57 --
-------- -------- -------- --------
Total other income .................................. 122 2 136 3
-------- -------- -------- --------
Income before provision for income taxes ................. 1,704 332 2,842 498
Provision for income taxes ............................... (638) (55) (1,064) (74)
Minority interest ........................................ -- (170) -- (274)
-------- -------- -------- --------
Net income ............................................... $ 1,066 $ 107 $ 1,778 $ 150
======== ======== ======== ========
Basic earnings per share ................................. $ 0.15 $ 0.02 $ 0.26 $ 0.02
======== ======== ======== ========
Diluted earnings per share ............................... $ 0.15 $ 0.02 $ 0.25 $ 0.02
======== ======== ======== ========
Weighted average number of common
shares outstanding .................................... 6,943 6,500 6,779 6,500
======== ======== ======== ========
Weighted average number of common
shares and stock options outstanding .................. 7,173 6,500 7,003 6,500
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
For the Six Months Ended
------------------------
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 1,778 $ 150
Adjustments to Reconcile of net income to net cash provided by operating
activities:
Depreciation and amortization ................................. 1,015 601
Provision for doubtful accounts ............................... (62) --
Deferred income taxes ......................................... 1,252 329
Minority interest ............................................. -- 274
Changes in assets and liabilities:
Accounts receivable ........................................... (1,478) (2,327)
Other current assets .......................................... (1,297) (1,047)
Other assets .................................................. 631 410
Accounts payable .............................................. (624) 1,122
Accrued and other liabilities ................................. 3,506 (214)
-------- --------
Net cash provided by (used in) operating activities .................... 4,721 (702)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (1,830) (1,272)
-------- --------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital ........................ 22,532 (130)
Proceeds (to) from related party ....................................... (6,623) 945
-------- --------
Net cash provided by financing activities ..................... 15,909 815
-------- --------
Effect of exchange rate changes on cash and cash equivalents:
(Decrease) Increase in cash and cash equivalents ...................... 18,800 (1,159)
Cash and cash equivalents, beginning of year ........................... 2,715 1,810
-------- --------
Cash and cash equivalents, end of period ...................... $ 21,515 $ 651
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .......................... $ -- $ 9
Cash paid during the period for income taxes ...................... $ -- $ --
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar Amounts in Thousands)
Note 1 - Interim Condensed Consolidated Financial Statements:
- -------------------------------------------------------------
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
(the "Company") in accordance with generally accepted accounting principles for
the interim financial information and Article 10 of Regulation S-X under the
Securities and Exchange Act of 1934, as amended. The condensed consolidated
financial statements and related notes as of June 30, 1998 and for the three and
six month periods ended June 30, 1998 and 1997 should be read in conjunction
with the Company's consolidated financial statements (and notes thereto)
included in the Company's consolidated financial statements on Form S-1
(Registration No. 333-49783). Accordingly, the accompanying condensed
consolidated financial statements do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company's management, all adjustments
considered necessary for a fair presentation of the accompanying condensed
consolidated financial statements have been included, and all adjustments are of
a normal and recurring nature. Operating results for the interim period are not
necessarily indicative of the results that may be expected for the entire year.
Note 2 - Comprehensive Income:
- ------------------------------
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires presentation of information on comprehensive income and its
components in the financial statements. For the Company, comprehensive income
includes net income and foreign currency translation adjustments. Total
comprehensive income and its components for the three months ended June 30, 1997
and 1998 and the six months ended June 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income................................ $1,066 $ 107 $1,778 $ 150
Foreign currency translation
adjustment ............................... -- -- 1 --
------ ------ ------ ------
Total comprehensive income ............... $1,066 $ 107 $1,779 $ 150
====== ====== ====== ======
</TABLE>
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<PAGE>
Note 3 - Adoption of Statements of Financial Accounting Standards:
- ------------------------------------------------------------------
In June 1998, the FASB issued SFAS No.133, " Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized foreign-currency-denominated forecasted transaction. The Company
will be required to implement SFAS No. 133 for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company expects the adoption of this
pronouncement will not have a material effect on the Company's financial
statements.
Note 4 - Initial Public Offering:
- ---------------------------------
On June 24, 1998, the Company consummated its Initial Public Offering
("IPO") of 2,917,000 shares of its Common Stock at a price of $10.00 per share,
2,500,000 of which were issued and sold by the Company and 417,000 of which were
sold by IMS Health, formerly Cognizant Corporation ("Cognizant"), the Company's
parent company. The net proceeds to the Company from the IPO were approximately
$22.4 million. In July 1998, the Company's parent sold 437,550 shares of Class A
Common Stock. After such sale, the parent's ownership percentage of the Company
was 61.9%.
Of the total net proceeds received by the Company upon the consummation
of its Initial Public Offering, approximately $6.6 million was used to repay the
related party balance owed to Cognizant. The related party balance resulted from
certain advances to the Company from Cognizant used to purchase the minority
interest of the Company's Indian subsidiary and to fund payroll and accounts
payable. Concurrent with the IPO, the Company reclassified the amounts in
mandatorily redeemable common stock to stockholders' equity.
- 6 -
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
General
- -------
The Company delivers full cycle software development and maintenance
services to its customers through the use of a seamless on-site and offshore
project team. These services include application development and maintenance
services, Year 2000 and Eurocurrency compliance services, testing and quality
assurance services and re-hosting and re-engineering services.
The Company began its software development and maintenance services
business in early 1994, as an in-house technology development center for The Dun
& Bradstreet Corporation and its operating units. In 1996, the Company, Erisco,
Inc. ("Erisco"), IMS International Inc. ("IMS"), Nielsen Media Research, Inc.,
Pilot Software Inc. and Sales Technologies, Inc. and certain other entities,
plus a majority interest in Gartner Group, Inc. were spun-off from The Dun &
Bradstreet Corporation to form Cognizant. In 1997, the Company purchased the
24.0% minority interest in its Indian subsidiary from a third party for $3.4
million, making the subsidiary wholly owned by the Company. In June 1998, the
Company completed its IPO. On June 30, 1998, a majority interest in the Company,
Erisco, IMS and certain other entities were spun-off from Cognizant to form IMS
Health Incorporated ("IMS HEALTH").
The Company's services are performed on either a time-and-materials or
fixed-price basis. The Company expects that an increasing number of its future
projects will be fixed-price rather than time-and-materials (which has
historically been the basis for its contracts). Revenues related to
time-and-materials contracts are recognized as the service is performed.
Revenues related to fixed-price contracts are recognized using the
percentage-of-completion method of accounting, under which the sales value of
performance, including earnings thereon, is recognized on the basis of the
percentage that each contract's cost to date bears to the total estimated cost.
Estimates are subject to adjustment as a project progresses to reflect changes
in expected completion costs or dates. The cumulative impact of any revision in
estimates of the percentage of work completed is reflected in the financial
reporting period in which the change in the estimate becomes known, and any
anticipated losses are recognized immediately. Since the Company bears the risk
of cost over-runs and inflation associated with fixed-price projects, the
Company's operating results may be adversely affected by changes in estimates of
contract completion costs and dates.
The statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended) that involve
risks and uncertainties. Such forward-looking statements may be identified by,
among other things, the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. From time to time, the Company or
its representatives have made or may make forward-looking statements, orally or
in writing. Such forward-looking statements may be
- 7 -
<PAGE>
included in various filings made by the Company with the Securities and Exchange
Commission, or press releases or oral statements made by or with the approval of
an authorized executive officer of the Company. These forward-looking
statements, such as statements regarding anticipated future revenues, capital
expenditures, and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not limited
to: (i) the significant fluctuations of the Company's quarterly operating
results caused by a variety of factors, many of which are not within the
Company's control, including (a) the number, timing, scope and contractual terms
of software development and maintenance projects, (b) delays in the performance
of projects, (c) the accuracy of estimates of resources and time to complete
projects, (d) seasonal patterns of the Company's services required by customers,
(e) levels of market acceptance for the Company's services, and (f) the hiring
of additional staff; (ii) changes in the Company's billing and employee
utilization rates; (iii) the Company's ability to manage its growth effectively,
which will require the Company (a) to increase the number of its personnel,
particularly skilled technical, marketing and management personnel, and (b) to
continue to develop and improve its operational, financial, communications and
other internal systems, both in the United States and India; (iv) the Company's
limited operating history with unaffiliated customers; (v) the Company's
reliance on key customers and large projects; (vi) the highly competitive nature
of the markets for the Company's services; (vii) the Company's ability to
successfully address the continuing changes in information technology, evolving
industry standards and changing customer objectives and preferences; (viii) the
Company's reliance on the continued services of its key executive officers and
leading technical personnel; (ix) the Company's ability to attract and retain a
sufficient number of highly skilled employees in the future; and (x) the
Company's ability to protect its intellectual property rights. The Company's
actual results may differ materially from the results disclosed in such
forward-looking statements.
- 8 -
<PAGE>
Results of Operations
- ---------------------
The following table sets forth certain results of operations as a
percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues ................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................... 57.8 59.1 57.9 58.0
------- ------- ------- -------
Gross profit ............................... 42.2 40.9 42.1 42.0
Selling, general and administrative expense
25.4 28.7 25.9 30.6
Depreciation and amortization expense .......... 4.2 6.0 4.4 6.3
------- ------- ------- -------
Income from operations ..................... 12.5 6.2 11.8 5.2
Other income (expense):
Interest income ............................ 0.4 -- 0.3 --
Other income (expense) ..................... 0.6 -- 0.2 --
------- ------- ------- -------
Total other income (expense) ................... 1.0 -- 0.6 --
Income (loss) before provision for income
taxes ...................................... 13.5 6.2 12.4 5.2
Provision (benefit) for income taxes ........... (5.0) (1.0) (4.6) (0.8)
Minority interest .............................. -- (3.2) -- (2.9)
------- ------- ------- -------
Net income ..................................... 8.4% 2.0% 7.8% 1.6%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenue. Revenue increased by 138.2%, or $7.3 million, from $5.3
million during the three months ended June 30, 1997 to $12.7 million during the
three months ended June 30, 1998. This increase included $4.2 million of
increased Year 2000 compliance services, and increased sales of software
development, maintenance and Eurocurrency compliance services. The percentage of
revenues from unrelated parties increased from 51.3% during the three months
ended June 30, 1997 to 67.0% during the three months ended June 30, 1998. This
increase resulted from the Company's continued efforts to pursue unaffiliated
third-party customers.
Gross profit. The Company's cost of revenues consists primarily the
cost of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions related to revenues. The Company's
cost of revenues increased by 133.0%, or $4.2 million, from $3.1 million during
the three months ended June 30, 1997 to $7.3 million during the three months
ended June 30, 1998. The increase was due primarily to the increased cost
resulting from the increase in the number of the Company's technical
professionals from approximately 800 employees at June 30, 1997 to approximately
1,200 employees at June 30, 1998. The Company's gross profit increased by
145.6%, or approximately $3.2 million, from approximately $2.2 million during
the three months ended June 30, 1997 to approximately $5.3 million during the
three months ended June 30, 1998. Gross profit margin increased from 40.9% of
revenues during the three months ended June 30, 1997 to 42.2% of revenues during
the three
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<PAGE>
months ended June 30, 1998. The increase in such gross profit margin was
primarily attributable to a higher utilization level of technical professionals
during the three months ended June 30, 1998 compared to the three months ended
June 30, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs. Selling, general and administrative expenses increased by
103.8%, or $1.9 million, from $1.8 million during the three months ended June
30, 1997 to $3.8 million during the three months ended June 30, 1998, but
decreased as a percentage of revenue from 34.7% to 29.7% of revenues. The
increase in such expenses in absolute dollars was due primarily from expenses
incurred to expand the Company's sales and marketing activities and increased
infrastructure expenses to support the Company's revenue growth. The Company
expects selling, general and administrative expenses to continue to increase in
absolute dollars to support the Company's planned expansion.
Income from Operations. Income from operations increased 379.4% or $1.3
million, from $330,000 during the three months ended June 30 1997 to $1.6
million during the three months ended June 30, 1998, representing 6.2% and 12.5%
of revenues, respectively. The increase in operating margin was primarily due to
the increased third-party revenue resulting from the Company's expanded sales
and marketing efforts.
Other Income (Expense), Net. Other income and expense consist primarily
of interest income and foreign currency exchange gains. Interest income
increased by $46,000, from $2,000 during the three months ended June 30 1997 to
$48,000 during the three months ended June 30, 1998. The increase in such
interest income was attributable primarily to increased interest income
resulting from the investment of the net proceeds generated from the Company's
IPO and generally higher cash balances. The Company recognized a net foreign
currency exchange gain of $74,000 during the three months ended June 30, 1998,
as a result of the effect of changing exchange rates on the Company's
transactions.
Provision for Income Taxes. Historically, the Company has been included
in the consolidated federal income tax returns of IMS HEALTH, (formerly, The Dun
& Bradstreet Corporation and Cognizant). The Company's provision for income
taxes in the consolidated statements of income reflects federal and state income
taxes calculated on the Company's separate income. The provision for income
taxes increased from $55,000 in the three months ended June 30, 1997 to $638,000
in the three months ended June 30, 1998 resulting in an effective tax rate of
16.6% in 1997 and 37.4% in 1998. Without the effect of minority interest, the
effective tax rate would have been 34.0% in 1997.
Minority Interest. In the three months ended June 30, 1997, minority
interest expense was $170,000. This expense was attributable to profitability of
the Company's Indian subsidiary in which an unaffiliated third party held a
24.0% minority interest. The Company purchased the minority interest in October
1997 for $3.4 million. The Company has not recognized any minority expense
subsequent to such purchase.
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<PAGE>
Net Income. Net income increased from $107,000 for the three months
ended June 30, 1997 to $1.1 million for the three months ended June 30, 1998,
representing 2.0% and 8.4% as a percentage of revenues, respectively.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenue. Revenue increased by 139.2%, or $13.3 million, from $9.6
million during the six months ended June 30, 1997 to $22.9 million during the
six months ended June 30, 1998. This increase included $7.3 million of increased
Year 2000 compliance services, and $6.0 million of increased sales of software
development, maintenance and Eurocurrency compliance services. The percentage of
revenues from unrelated parties increased from 50.9% during the six months ended
June 30, 1997 to 65.6% during the six months ended June 30, 1998. This increase
resulted from the Company's continued efforts to pursue unaffiliated third-party
customers.
Gross profit. The Company's cost of revenues increased by 138.8%, or
$7.7 million, from $5.6 million during the six months ended June 30, 1997 to
$13.3 million during the six months ended June 30, 1998. The increase was due
primarily to the increased cost resulting from the increase in the number of the
Company's technical professionals from approximately 800 employees at June 30,
1997 to approximately 1,200 employees at June 30, 1998. The Company's gross
profit increased by 139.8%, or approximately $5.6 million, from approximately
$4.0 million during the six months ended June 30, 1997 to approximately $9.7
million during the six months ended June 30, 1998. Gross profit margin was
relatively constant at 42.0% of revenue during the six months ended June 30,
1997 and 42.1% of revenue during the six months ended June 30, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 96.8%, or $3.4 million, from $3.5 million
during the six months ended June 30, 1997 to $6.9 million during the six months
ended June 30, 1998, but decreased as a percentage of revenue from 36.9% to
30.3% of revenue. The increase in such expenses in absolute dollars was due
primarily from expenses incurred to expand the Company's sales and marketing
activities and increased infrastructure expenses to support the Company's
revenue growth.
Income from Operations. Income from operations increased 446.7% or $2.2
million, from $495,000 during the six months ended June 30 1997 to $2.7 million
during the six months ended June 30, 1998, representing 5.2% and 11.8% of
revenues, respectively. The increase in operating margin was primarily due to
the increased third-party revenue resulting from the Company's expanded sales
and marketing efforts.
Other Income (Expense), Net. Other income and expense consist primarily
of interest income and foreign currency exchange gains. Interest income
increased by $76,000, from $3,000 during the six months ended June 30, 1997 to
$79,000 during the six months ended June 30, 1998. The increase in such interest
income was attributable primarily to increased interest income resulting from
the investment of the net proceeds generated from the Company's IPO and
generally higher cash balances. The Company recognized a net foreign currency
exchange gain
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<PAGE>
of $57,000 during the six months ended June 30, 1998, as a result of the effect
of changing exchange rates on the Company's transactions.
Provision for Income Taxes. The provision for income taxes increased
from $74,000 in the six months ended June 30, 1997 to $1.1 million in the six
months ended June 30, 1998 resulting in an effective tax rate of 14.9% in 1997
and 37.4% in 1998. Without the effect of minority interest, the effective tax
rate would have been 33.0% in 1997.
Minority Interest. In the six months ended June 30, 1997, minority
interest expense was $274,000. This expense was attributable to profitability of
the Company's Indian subsidiary in which an unaffiliated third party held a
24.0% minority interest. The Company purchased the minority interest in October
1997 for $3.4 million. The Company has not recognized any minority expense
subsequent to such purchase.
Net Income. Net income increased from $150,000 for the six months ended
June 30, 1997 to $1.8 million for the six months ended June 30, 1998,
representing 1.6% and 7.8% as a percentage of revenues, respectively.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's primary sources of funding have been cash
flow from operations and intercompany cash transfers with Cognizant. In June
1998, the Company consummated its IPO of 2,917,000 shares of its Class A Common
Stock at a price to the public of $10.00 per share, of which 2,500,000 shares
were issued and sold by the Company and 417,000 shares were sold by a Selling
Stockholder. The net proceeds to the Company from the offering were
approximately $22.4 million. The funds received by the Company from the IPO were
invested in short-term, investment grade, interest bearing securities. During
the three months ended June 30, 1998, the Company used the net proceeds to repay
approximately $6.6 million of non-trade related party balances. The Company
expects to use the remainder of the net proceeds from the offering for (i)
expansion of existing operations, including the Company's offshore software
development center; (ii) continued development of new service lines and possible
acquisitions of related businesses; and (ii) general corporate purposes
including working capital.
Net cash provided by operating activities was approximately $4.7
million during the six months ended June 30, 1998 as compared to net cash used
in operating activities of $702,000 during the six months ended June 30, 1997.
The increase results primarily from a higher level of accrued liabilities,
increased net income, and an increase in deferred taxes, partially offset by
increased accounts receivable. Accounts receivable increased from $7.4 million
at December 31, 1997 to $8.9 million at June 30, 1998. The increase in accounts
receivable was due primarily to the Company's increase in revenue partially
offset by improved collection efforts. The Company monitors turnover, aging and
the collection of accounts receivable through the use of management reports
which are prepared on a customer basis and evaluated by the Company's finance
staff.
- 12 -
<PAGE>
The Company's investing activities used net cash of $1.3 million for
the six months ended June 30, 1997 as compared to net cash used of $1.8 million
for the same period in 1998. The increase in 1998 compared to 1997 reflects the
increased purchases of equipment to expand the Company's offshore development
infrastructure.
The Company's financing activities provided net cash of $815,000 for
the six months ended June 30, 1997 as compared to $15.8 million for the same
period in 1998. The increase in 1998 compared to 1997 resulted primarily from
the net proceeds generated from the IPO of $22.4 million, offset by the
repayment of the related party balance due to Cognizant of approximately $6.6
million.
The Company anticipates capital expenditures will be approximately $3.5
million during the remainder of 1998, primarily for hardware, software and
leasehold improvements to support the addition of technical professionals
located in India.
As of June 30, 1998, the Company had no significant third-party debt.
The Company had working capital of $24.4 million at June 30, 1998 and
$5.7 million December 31, 1997.
The Company believes that its available funds and the cash flows
expected to be generated from operations, will be adequate to satisfy its
current and planned operations through at least the next 18 months.
Foreign Currency Translation
- ----------------------------
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate component of
stockholders' equity. For the Company's Indian subsidiary, the functional
currency is the U.S. dollar since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between the
Indian subsidiary and its U.S. affiliates. Non-monetary assets and liabilities
are translated at historical exchange rates, while monetary assets and
liabilities are translated at current exchange rates. A portion of the Company's
costs in India are denominated in local currency and subject to exchange
fluctuations, which has no material adverse effect on the Company's results of
operations.
Effects of Inflation
- --------------------
The Company's most significant costs are the salaries and related
benefits for its programming staff and other professionals. Competition in India
and the United States for professionals with advanced technical skills necessary
to perform the services offered by the Company have caused wages to increase at
a rate greater than the general rate of inflation. As with other IT service
providers, the Company must adequately anticipate wage increases, particularly
on its fixed-price contracts. There can be no assurance that the Company will be
- 13 -
<PAGE>
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
Risks Associated with the Year 2000
- -----------------------------------
The Company does not believe that it has any material exposure to the
Year 2000 issue with respect to its own information systems. With the exception
of the Company's financial accounting system, all of the Company's systems
correctly define the Year 2000 and subsequent years. The Company expects to
install the available year 2000 compliant upgrade to its financial accounting
software at the end of 1998. However, the Company might face additional exposure
to the Year 2000 problem if it were to acquire a business with exposure to the
Year 2000 problem.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, the FASB issued SFAS No.133, " Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized foreign-currency-denominated forecasted transaction. The Company
will be required to implement SFAS No. 133 for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company expects the adoption of this
pronouncement will not have a material effect Company's financial statements.
- 14 -
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Use of Proceeds
- ---------------
On June 18, 1998, the SEC declared effective the Company's Registration
Statement on Form S-1 (Registration Statement No. 333-43827) as filed with the
SEC in connection with the Company's initial public offering of Class A Common
Stock, which was co-managed by BancAmerica Robertson Stephens, Cowen & Company
and Adams, Harkness & Hill, Inc. Pursuant to such Registration Statement, the
Company registered and sold an aggregate of 2,500,000 shares of its Class A
Common Stock, for a gross aggregate offering price of $25.0 million. The Company
incurred underwriting discounts, commissions and offering expenses of
approximately $2.6 million resulting in net proceeds to the Company of
approximately $22.4 million. Of the net proceeds, the Company used an
approximately $6.6 million to repay the related party balance with Cognizant.
The remainder of the proceeds have been temporarily invested in short-term,
investment grade, interest bearing securities.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule for the period ended June 30, 1998.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report on Form 10-Q is filed.
- 15 -
<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 Technology Solutions Corporation
DATE: August 12, 1998 By: /s/ Wijeyaraj Mahadeva
-------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATE: August 12, 1998 By: /s/ Gordon Coburn
-------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
- 16 -
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