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 September 30, 1999
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)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(201) 801-0233
-------------------------------
(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:
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of October 29, 1999:
Class Number of Shares
----- ----------------
Class A Common Stock, par 3,548,811
value $.01 per share
Class B Common Stock, par 5,645,450
value $.01 per share
<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 1
Condensed Consolidated Statements of Income (Unaudited)
for the Three Months and Nine Months Ended September 30,
1999 and 1998............................................... 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of September 30, 1999 and December 31, 1998.. 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1999 and 1998....... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 18
SIGNATURES....................................................... 19
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(unaudited)
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................................... $ 19,077 $ 13,559 $ 54,112 $ 28,581
Revenues - related party......................... 3,799 2,641 10,688 10,525
-------- -------- -------- --------
Total revenues................................. 22,876 16,200 64,800 39,106
Cost of revenues................................. 11,873 8,925 33,733 22,180
-------- -------- -------- --------
Gross profit..................................... 11,003 7,275 31,067 16,926
Selling, general and administrative
expenses...................................... 6,019 4,254 16,809 10,184
Depreciation and amortization expense............ 808 586 2,149 1,602
-------- -------- -------- --------
Income from operations........................... 4,176 2,435 12,109 5,140
Other income:
Interest income................................ 331 254 853 334
Other income/(expense) - net................... 61 25 94 82
-------- -------- -------- --------
Total other income.......................... 392 279 947 416
-------- -------- -------- --------
Income before provision for income taxes......... 4,568 2,714 13,056 5,556
Provision for income taxes....................... (1,708) (1,014) (4,883) (2,079)
-------- -------- -------- --------
Net income....................................... $ 2,860 $ 1,700 $ 8,173 $ 3,477
======== ======== ======== ========
Basic earnings per share......................... $ 0.31 $ 0.19 $ 0.89 $ 0.46
======== ======== ======== ========
Diluted earnings per share....................... $ 0.30 $ 0.18 $ 0.85 $ 0.44
======== ======== ======== ========
Weighted average number of common
shares outstanding - Basic..................... 9,162 9,121 9,157 7,566
======== ======== ======== ========
Dilutive Effect of Shares Issuable as of
Period-End Under Stock Option Plans............ 426 296 464 254
======== ======== ======== ========
Weighted average number of common
shares outstanding - Diluted................... 9,588 9,417 9,621 7,820
======== ======== ======== ========
Comprehensive Income:
Net Income....................................... $ 2,860 $ 1,700 $ 8,173 $ 3,477
Foreign Currency Translation Adjustments......... 29 2 15 1
-------- -------- -------- --------
Other Comprehensive Income/(Loss), net of Tax:... $ 29 $ 2 $ 15 $ 1
======== ======== ======== ========
Comprehensive Income............................. $ 2,889 $ 1,702 $ 8,188 $ 3,478
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in thousands, except par values)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 33,685 $ 28,418
Trade accounts receivable, net of allowance of $256 and $274,
respectively...................................................... 10,119 9,230
Trade accounts receivable-related party............................. 1,890 1,877
Unbilled accounts receivable........................................ 1,215 1,088
Other current assets................................................ 1,836 1,754
--------- ---------
Total current assets............................................ 48,745 42,367
--------- ---------
Property and equipment, net of accumulated depreciation of $6,017 and
$4,121, respectively.............................................. 9,262 6,270
Goodwill, net........................................................... 1,592 1,830
Other assets............................................................ 1,450 1,212
--------- ---------
Total assets.................................................... $ 61,049 $ 51,679
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,181 $ 1,744
Accrued and other current liabilities............................... 10,248 11,207
--------- ---------
Total current liabilities....................................... 11,429 12,951
Deferred income taxes................................................... 8,558 6,103
Due to related party.................................................... -- 9
--------- ---------
Total liabilities............................................... 19,987 19,063
--------- ---------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares authorized, none issued.. -- --
Class A common stock, $.01 par value, 100,000 shares authorized,
3,518 shares and 3,505 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively.............. 35 35
Class B common stock, $.01 par value, 15,000 shares authorized,
5,645 shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively..................................... 57 57
Additional paid-in-capital.............................................. 24,823 24,566
Retained earnings....................................................... 16,143 7,969
Cumulative translation adjustment....................................... 4 (11)
--------- ---------
Total stockholders' equity...................................... 41,062 32,616
--------- ---------
Total liabilities and stockholders' equity...................... $ 61,049 $ 51,679
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 8,173 $ 3,477
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................... 2,150 1,602
Provision for doubtful accounts................................. (18) 39
Deferred income taxes........................................... 2,455 2,223
Changes in assets and liabilities:
Accounts receivable............................................. (884) (1,114)
Other current assets............................................ (209) (1,835)
Other assets.................................................... (238) 649
Accounts payable................................................ (563) (633)
Accrued and other liabilities................................... (959) 5,430
------- -------
Net cash provided by operating activities............................... 9,907 9,838
------- -------
Cash flows from investing activities:
Purchase of property and equipment...................................... (4,903) (2,400)
------- -------
Net cash used in investing activities................................... (4,903) (2,400)
------- -------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital, net.................... 257 22,546
Payments to related party............................................... (9) (6,646)
------- -------
Net cash provided by financing activities............................... 248 15,900
------- -------
Effect of currency translation.......................................... 15 --
------- -------
Increase in cash and cash equivalents .................................. 5,267 23,338
Cash and cash equivalents, beginning of year............................ 28,418 2,715
------- -------
Cash and cash equivalents, end of period........................ $33,685 $26,053
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes........................ $ 1,062 $ 2
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
(the "Company") in accordance with generally accepted accounting principles and
Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as
amended and should be read in conjunction with the Company's consolidated
financial statements (and notes thereto) included in the Company's 1998 Annual
Report on Form 10-K. In the opinion of the Company's management, all adjustments
considered necessary for a fair presentation of the accompanying condensed
consolidated financial statements have been included, and all adjustments are of
a normal and recurring nature. Operating results for the interim period are not
necessarily indicative of results that may be expected to occur for the entire
year. Certain prior period amounts have been reclassified to conform with the
1999 presentation.
NOTE 2 - COMPREHENSIVE INCOME:
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments (see unaudited Condensed Consolidated
Statements of Comprehensive Income). Accumulated balances of Cumulative
Translation Adjustments, as of September 30, 1999 and 1998 are as follows:
Cumulative
Translation
Adjustment
Balance December 31, 1998............................. $ (11)
Period Change......................................... 15
-------
Balance September 30, 1999............................ $ 4
=======
Balance December 31, 1997............................. $ (2)
Period Change......................................... 1
-------
Balance September 30, 1998............................ $ (1)
========
NOTE 3 - RELATED PARTY TRANSACTIONS:
As of September 30, 1999, IMS Health Incorporated ("IMS Health") owned
approximately 61.6% of the outstanding Common Stock of the Company (representing
all of the Company's Class B Common Stock) and held approximately 94.1% of the
combined voting power of the Company's Common Stock.
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
IMS Health currently provides the Company with certain administrative
services including payroll and payables processing, e-mail, tax planning and
compliance, and permits the Company to participate in IMS Health's insurance and
employee benefit plans. Costs for these services for all periods prior to the
IPO were allocated to the Company based on utilization of certain specific
services. All subsequent services were performed under an intercompany services
agreement with IMS Health. Total costs in connection with these services were
approximately $263 and $1,251 for the nine-month periods ended September 30,
1999 and 1998, respectively. The decrease in such costs during 1999 was a result
of the majority of the Company's employees no longer participating in IMS
Health's employee benefits plan effective January 1, 1999.
NOTE 4 - ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting For The Costs of
Computer Software Developed Or Obtained For Internal Use." SOP 98-1 provides
guidance on costs to be capitalized and when capitalization of such costs should
commence. SOP 98-1 applies to costs incurred after adoption, including costs for
software projects that are in progress at the time of the adoption. The Company
has evaluated the impact of this SOP on its financial position and results of
operations. The implementation of SOP 98-1 effective January 1, 1999 did not
have a material effect on the Company's results of operations, financial
position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Accounting For The Costs Of
Start-up Activities." SOP 98-5 requires all costs of start-up activities to be
expensed as incurred. SOP 98-5 is effective for financial statements for the
years beginning after December 15, 1998. The Company has evaluated the impact of
this SOP on its financial position and results of operations. The implementation
of SOP 98-5 effective January 1, 1999 did not have a material effect on the
Company's results of operations, financial position or cash flows.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of the FASB
Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers
the effective date of FASB No. 133, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. FASB No. 133 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
variability in cash flows attributable to a particular risk, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security and a forecasted
transaction. As a result of FASB No. 137, the
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
Company will be required to implement SFAS No. 133 for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of this pronouncement to have a material effect on the Company's
results of operations, financial position or cash flows.
NOTE 5 - SEGMENT INFORMATION
The Company delivers full life cycle solutions to complex software
development and maintenance problems through the use of a seamless on-site and
offshore consulting project team. These solutions 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 has adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." Information about the
Company's operations and total assets in North America, Europe and Asia for the
nine month period ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
REVENUES (1) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
North America..................... $ 18,481 $ 13,158 $ 51,139 $ 32,170
Europe............................ 4,294 2,998 13,335 6,792
Asia.............................. 101 44 326 144
--------- --------- --------- ---------
Consolidated...................... $ 22,876 $ 16,200 $ 64,800 $ 39,106
========= ========= ========= =========
OPERATING INCOME (1)
North America..................... $ 3,373 $ 1,977 $ 9,557 $ 4,221
Europe............................ 784 451 2,490 901
Asia.............................. 19 7 62 18
--------- --------- --------- ----------
Consolidated...................... $ 4,176 $ 2,435 $ 12,109 $ 5,140
========= ========= ========= ==========
AS OF SEPTEMBER 30,
IDENTIFIABLE ASSETS 1999 1998
---- ----
North America..................... $ 37,629 $ 32,816
Europe............................ 3,809 1,952
Asia.............................. 19,611 9,928
--------- ---------
Consolidated...................... $ 61,049 $ 44,696
========= =========
</TABLE>
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
The Company, operating globally, provides software development and
maintenance services for medium and large businesses. North American operations
consist primarily of software development and maintenance consulting services in
the United States and Canada. European operations consist primarily of software
development and maintenance services principally in the United Kingdom and
Germany. Asian operations consist primarily of software development and
maintenance consulting services principally in India.
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
In the third quarter of 1999, sales to one related party customer accounted
for 16.6% of revenues and one third-party customer accounted for 17.1% of
revenues. In the third quarter of 1998, sales to one related party customer
accounted for 16.3% of revenues and two third-party customers each accounted for
11.0% of revenues. During the nine months ended September 30, 1999, sales to one
related party customer accounted for 16.5% of revenues and one third-party
customer accounted for 19.0% of revenues. During the nine months ended September
30, 1998, sales to one related party customer accounted for 26.9% of revenues
and one third-party customer accounted for 12.6% of revenues.
NOTE 6 - CONTINGENCIES
On August 17, 1999 the Company settled a trademark opposition by Cognizant
Design Group of Incline Village, Nevada ("CDG") alleging infringement by the
Company of CDG's purportedly prior rights to the name "Cognizant." CDG requested
that the Company, among other things, refrain from further use of the name
"Cognizant" in the future. The Company and CDG reached a mutually satisfactory
agreement whereby CDG has transferred and assigned its right and title to the
Cognizant mark to the company in return for a one-time payment of $400.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' business and provide benefits that are difficult to quantify. Any
failure in a customer's computer system could result in a claim for substantial
damages against the Company, regardless of the Company's responsibility for such
failure. Although the Company attempts to contractually limit its liability for
damages arising from negligent acts, errors, mistakes, or omissions in rendering
its software development and maintenance services, there can be no assurance
that the limitations of liability set forth in its contracts will be enforceable
in all instances or will otherwise protect the Company from liability for
damages. Although the Company has general liability insurance coverage,
including coverage for errors or omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company delivers full life cycle software development and maintenance
technology consulting 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 Indian 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 incurred 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 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
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<PAGE>
officer of the Company. These forward-looking statements, such as statements
regarding anticipated future revenues, contract percentage completions, capital
expenditures, and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Potential risks and uncertainties that
could affect the Company's future operating results include, but are not limited
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 costs, 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; (x) the Company's ability to protect its intellectual property rights;
(xi) general economic conditions; (xii) year 2000 compliance of vendors'
products and related issues, including impact of the year 2000 problem on
customer buying patterns, and (xiii) the outcome of the impact of year 2000. The
Company's actual results may differ materially from the results disclosed in
such forward-looking statements.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 51.9 55.1 52.1 56.7
------ ------ ------ ------
Gross profit............................... 48.1 44.9 47.9 43.3
Selling, general and administrative expense... 26.3 26.3 25.9 26.0
Depreciation and amortization expense......... 3.5 3.6 3.3 4.1
------ ------ ------ ------
Income from operations..................... 18.3 15.0 18.7 13.1
Other income (expense):
Interest income............................ 1.4 1.6 1.3 0.9
Other income (expense)..................... 0.3 0.2 0.1 0.2
------ ------ ------ ------
Total other income (expense) 1.7 1.8 1.4 1.1
------ ------ ------ ------
Income before provision for income taxes...... 20.0 16.8 20.1 14.2
Provision for income taxes.................... (7.5) (6.3) (7.5) (5.3)
------ ------ ------ ------
Net income ................................... 12.5% 10.5% 12.6% 8.9%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenue. Revenue increased by 41.2%, or $6.7 million, from $16.2 million
during the three months ended September 30, 1998 to $22.9 million during the
three months ended September 30, 1999. This increase resulted primarily from a
$12.1 million increase in application development, maintenance and Eurocurrency
compliance services partially offset by an approximately $5.4 million decrease
in Year 2000 Compliance Services. The percentage of revenue from unrelated
third-parties was 83.4% during the three months ended September 30, 1999,
relatively constant when compared to the prior 1999 quarter (83.3%) and
comparable quarter last year (83.7%). For statement of operations purposes,
revenues from related parties only include revenues recognized during the period
in which the related party was affiliated with the Company. In the third quarter
of 1999, sales to one related party customer accounted for 16.6% of revenues and
one third-party customer accounted for 17.1% of revenues. In the third quarter
of 1998, sales to one related party customer accounted for 16.3% of revenues and
two third-party customers each accounted for 11.0% of revenues.
Gross profit. The Company's cost of revenues consists primarily of the cost
of salaries, payroll taxes, benefits, immigration and travel for technical
personnel, and the cost of sales commissions. The Company's cost of revenues
increased by 33.0%, or $2.9 million, from $8.9 million during the three months
ended September 30, 1998 to $11.9 million during the three months ended
September 30, 1999. The increase was due primarily to the increased cost
resulting from the increase in the number of the Company's technical
professionals from approximately 1,300 employees at September 30, 1998 to
approximately 1,900 employees at September 30, 1999. The increased number of
technical professionals is a direct result of greater
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<PAGE>
demand for the Company's services. The Company's gross profit increased by
51.2%, or approximately $3.7 million, from approximately $7.3 million during the
three months ended September 30, 1998 to approximately $11.0 million during the
three months ended September 30, 1999. Gross profit margin increased from 44.9%
of revenues during the three months ended September 30, 1998 to 48.1% of
revenues during the three months ended September 30, 1999. The increase in such
gross profit margin was primarily attributable to the increased third-party
revenue, which generally has higher margins, and a higher utilization level of
technical professionals during the three months ended September 30, 1999
compared to the three months ended September 30, 1998.
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, including
depreciation and amortization, increased by 41.1%, or $2.0 million, from $4.8
million during the three months ended September 30, 1998 to $6.8 million during
the three months ended September 30, 1999, but decreased slightly as a
percentage of revenue from 29.9% to 29.8%. The dollar increase in such expenses
was primarily due to expenses incurred to expand the Company's sales and
marketing activities and increased infrastructure expenses to support the
Company's revenue growth. The slight decrease in selling, general and
administrative expenses as a percentage of revenue resulted from the Company's
increased revenues.
Income from Operations. Income from operations increased 71.5%, or $1.7
million, from $2.4 million during the three months ended September 30, 1998 to
$4.2 million during the three months ended September 30, 1999, representing
15.0% and 18.3% of revenues, respectively. The increase in operating margin was
primarily due to the increased third-party revenue, which generally has higher
margins, and the higher utilization level of technical professionals mentioned
above.
Other Income. Other income consists primarily of interest income and
foreign currency exchange gains. Interest income increased by approximately
$77,000, from approximately $254,000 during the three months ended September 30,
1998 to approximately $331,000 during the three months ended September 30, 1999.
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 operating cash balances. The Company
recognized a net foreign currency exchange gain of approximately $61,000 during
the three months ended September 30, 1999, as a result of the effect of changing
exchange rates on the Company's transactions.
Provision for Income Taxes. Up to the date of the IPO, the Company had been
included in the consolidated federal income tax returns of The Dun & Bradstreet
Corporation and/or Cognizant Corporation. The Company's provision for income
taxes in the consolidated statements of income reflects federal and state income
taxes calculated on the Company's stand alone basis. The provision for income
taxes increased from approximately $1.0 million in the three months ended
September 30, 1998 to $1.7 million in the three months ended September 30, 1999,
with an effective tax rate of 37.4% in 1998 and 1999.
- 12 -
<PAGE>
Net Income. Net income increased from approximately $1.7 million for the
three months ended September 30, 1998 to $2.9 million for the three months ended
September 30, 1999, representing 10.5% and 12.5% as a percentage of revenues,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenue. Revenue increased by 65.7%, or $25.7 million, from $39.1 million
during the nine months ended September 30, 1998 to $64.8 million during the nine
months ended September 30, 1999. This increase resulted primarily from a $32.8
million increase in application development, maintenance and Eurocurrency
compliance services partially offset by an approximately $7.1 million decrease
in Year 2000 Compliance Services. The percentage of revenues derived from
unrelated parties increased from 73.1% during the nine months ended September
30, 1998 to 83.5% during the nine months ended September 30, 1999. This increase
resulted primarily from the Company's continued efforts to pursue unaffiliated
third-party customers and the impact of the spin-off in June 1998 of a majority
interest in the Company, Erisco, IMS and certain other entities to form IMS
Health. For statement of operations purposes, revenues from related parties only
include revenues recognized during the period in which the related party was
affiliated with the Company. During the nine months ended September 30, 1999,
sales to one related party customer accounted for 16.5% of revenues and one
third-party customer accounted for 19.0% of revenues. During the nine months
ended September 30, 1998, sales to one related party customer accounted for
26.9% of revenues and one third-party customer accounted for 12.6% of revenues.
Gross profit. The Company's cost of revenues increased by 52.1%, or $11.6
million, from $22.2 million during the nine months ended September 30, 1998 to
$33.7 million during the nine months ended September 30, 1999. The increase was
due primarily to the increased cost resulting from the increase in the number of
the Company's technical professionals from approximately 1,300 employees at
September 30, 1998 to approximately 1,900 employees at September 30, 1999. The
increased number of technical professionals is a direct result of greater demand
for the Company's services. The Company's gross profit increased by 83.5%, or
approximately $14.1 million, from approximately $16.9 million during the nine
months ended September 30, 1998 to approximately $31.1 million during the nine
months ended September 30, 1999. Gross profit margin increased from 43.3% of
revenues during the nine months ended September 30, 1998 to 47.9% of revenues
during the nine months ended September 30, 1999. The increase in such gross
profit margin was primarily attributable to the increased third-party revenue
and higher utilization levels of technical professionals discussed above.
Selling, general and administrative expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased by
60.9%, or $7.2 million, from $11.8 million during the nine months ended
September 30, 1998 to $19.0 million during the nine months ended September 30,
1999, but decreased as a percentage of revenue from 30.1% to 29.3%. The dollar
increase in such expenses was primarily due to expenses incurred to expand the
Company's sales and marketing activities and increased infrastructure expenses
to support the Company's revenue growth. The decrease in selling, general and
administrative expenses as a percentage of revenue resulted from the Company's
increased revenues.
- 13 -
<PAGE>
Income from Operations. Income from operations increased 135.6%, or $7.0
million, from $5.1 million during the nine months ended September 30, 1998 to
$12.1 million during the nine months ended September 30, 1999, representing
13.1% and 18.7% of revenues, respectively. The increase in operating margin was
primarily due to the increased third-party revenue higher utilization levels of
technical professionals discussed above.
Other Income. Interest income increased by approximately $519,000, from
approximately $334,000 during the nine months ended September 30, 1998 to
approximately $853,000 during the nine months ended September 30, 1999. 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 operating cash balances. The Company
recognized a net foreign currency exchange gain of approximately $94,000 during
the nine months ended September 30, 1999, as a result of changes in exchange
rates on the Company's transactions.
Provision for Income Taxes. The provision for income taxes increased from
approximately $2.1 million in the nine months ended September 30, 1998 to $4.9
million in the nine months ended September 30, 1999, with an effective tax rate
of 37.4% in 1998 and 1999.
Net Income. Net income increased from approximately $3.5 million for the
nine months ended September 30, 1998 to $8.2 million for the nine months ended
September 30, 1999, representing 8.9% and 12.6% as a percentage of revenues,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary sources of funding had been cash flow
from operations and intercompany cash transfers with its majority owner and
controlling parent company IMS Health, accounting successor to 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, at that
time, by Cognizant Corporation. The net proceeds to the Company from the
offering were approximately $22.4 million after $845,000 of direct expenses. The
funds received by the Company from the IPO were invested in short-term,
investment grade, interest bearing securities, after the Company used a portion
of the net proceeds to repay approximately $6.6 million of non-trade related
party balances to Cognizant Corporation. The Company has used and will continue
to use the remainder of the net proceeds from the offering for (i) expansion of
existing operations, including the Company's offshore software development
centers; (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 $9.9 million
during the nine months ended September 30, 1999 as compared to net cash provided
by operating activities of $9.8 million during the nine months ended September
30, 1998. The increase resulted primarily from increased net income and a
smaller increase in other current assets during 1999, as compared to 1998,
substantially offset by a lower increase in accrued liabilities during 1999 as
compared to 1998. Accounts receivable increased from $11.1 million at December
31, 1998 to $12.0 million at September 30, 1999. The Company's accounts
receivable increased only slightly, especially when compared to the increase in
revenues. The Company controls cash
- 14 -
<PAGE>
levels and its accounts receivable by monitoring 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.
The Company's investing activities used net cash of $4.9 million for the
nine months ended September 30, 1999 as compared to net cash used of $2.4
million for the same period in 1998. The increase in 1999 compared to 1998
primarily reflects increased purchases of equipment to expand the Company's
offshore development infrastructure.
The Company's financing activities provided net cash of approximately
$248,000 for the nine months ended September 30, 1999 as compared to net cash
provided by financing activities of approximately $15.9 million for the same
period in 1998. Net cash provided by financing activities as of September 30,
1998 includes net proceeds from the IPO after the settlement of approximately
$6.6 million of non-trade related-party balances to Cognizant Corporation.
As of September 30, 1999, the Company had no significant third-party debt.
The Company had working capital of $37.3 million at September 30, 1999 and
$29.4 million at December 31, 1998.
The Company believes that its available funds and the cash flows expected
to be generated from operations, will be adequate to satisfy its current and
planned operations and needs through at least the next 12 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 not had any 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
able to recover cost increases through increases in the prices that it charges
for its services in the United States and elsewhere.
- 15 -
<PAGE>
RISKS ASSOCIATED WITH THE YEAR 2000
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than 2000. This
in turn, could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000 Problem". The Company believes that it
has sufficiently assessed its state of readiness with respect to its Year 2000
compliance. As the assessment was completed using internal personnel, costs and
time for such personnel were not specifically tracked. The Company, however,
estimates that such costs were immaterial. There were no external costs incurred
by the Company relating to its Year 2000 assessment and the Company does not
believe that Year 2000 compliance will result in material investments by the
Company in the future. The Company does not anticipate that the Year 2000
Problem will have any material adverse effects on the business operations or
financial performance of the Company. The Company does not believe that it has
any material exposure to the Year 2000 Problem with respect to its own
information systems and believes that all of its business-critical systems
correctly define the Year 2000 and subsequent years.
Contingency planning has been essentially completed in all of the Company's
operations in order to address the most likely effects on the Company from
external risks. These plans address facilities and equipment, telecommunications
infrastructure, and internal administrative processes. In addition, these plans
take into account human resource and communications issues that relate to the
Company's employees. As more information emerges about services upon which the
Company is critically reliant, these plans will be adjusted accordingly.
The purchasing patterns of customers and potential customers may be
affected by issues associated with the Year 2000 Problem. As companies expend
significant resources to correct their current data storage solutions, these
expenditures may result in reduced funds to undertake projects such as those
offered by the Company. Conversely, the Year 2000 Problem may cause other
companies to accelerate purchases, thereby causing an increase in short-term
demand and a consequent decrease in long-term demand for the Company's services.
There can be no assurance, however, that the Year 2000 Problem will not
adversely affect the Company's business, operating results and financial
condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting For The Costs of
Computer Software Developed Or Obtained For Internal Use." SOP 98-1 provides
guidance on costs to be capitalized and when capitalization of such costs should
commence. SOP 98-1 applies to costs incurred after adoption, including costs for
software projects that are in progress at the time of the adoption. The Company
has evaluated the impact of this SOP on its financial position and results of
operations. The implementation of SOP 98-1 effective January 1, 1999 did not
have a material effect on the Company's results of operations, financial
position or cash flows.
- 16 -
<PAGE>
In April 1998, the AICPA issued SOP 98-5, "Accounting For The Costs Of
Start-up Activities." SOP 98-5 requires all costs of start-up activities to be
expensed as incurred. SOP 98-5 is effective for financial statements for the
years beginning after December 15, 1998. The Company has evaluated the impact of
this SOP on its financial position and results of operations. The implementation
of SOP 98-5 effective January 1, 1999 did not have a material effect on the
Company's results of operations, financial position or cash flows.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of the FASB
Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers
the effective date of FASB No. 133, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. FASB No. 133 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
variability in cash flows attributable to a particular risk, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security and a forecasted
transaction. As a result of FASB No. 137, the Company will be required to
implement SFAS No. 133 for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company expects the adoption of this pronouncement will not
have a material effect on the Company's results of operations, financial
position or cash flows.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule for the period ended
September 30, 1999.
(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.
- 18 -
<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: November 8, 1999 By: /s/ Wijeyaraj Mahadeva
--------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: November 8, 1999 By: /s/ Gordon Coburn
--------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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