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, 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
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(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 July 31, 1999:
Class Number of Shares
----- ----------------
Class A Common Stock, par value 3,514,611
$.01 per share
Class B Common Stock, par value
$.01 per share 5,645,450
<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
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Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................ 1
Condensed Consolidated Statements of Income (Unaudited)
for the Three Months and Six Months Ended June 30, 1999
and 1998................................................... 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of June 30, 1999 and December 31, 1998 ..... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders........ 17
Item 5. Other Information.......................................... 17
Item 6. Exhibits and Reports on Form 8-K........................... 18
SIGNATURES.......................................................... 19
(i)
<PAGE>
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................................... $ 17,900 $ 8,493 $ 35,035 $ 15,022
Revenues - related party......................... 3,598 4,175 6,889 7,884
-------- -------- -------- --------
Total revenues................................ 21,498 12,668 41,924 22,906
Cost of revenues................................. 11,149 7,326 21,860 13,255
-------- -------- -------- --------
Gross profit..................................... 10,349 5,342 20,064 9,651
Selling, general and administrative
expenses...................................... 5,776 3,225 10,790 5,930
Depreciation and amortization expense............ 710 535 1,341 1,015
-------- -------- -------- --------
Income from operations........................... 3,863 1,582 7,933 2,706
Other income:
Interest income............................... 247 48 522 79
Other income/(expense) - net.................. (29) 74 33 57
-------- -------- -------- --------
Total other income....................... 218 122 555 136
-------- -------- -------- --------
Income before provision for income taxes......... 4,081 1,704 8,488 2,842
Provision for income taxes....................... (1,526) (638) (3,174) (1,064)
-------- -------- -------- --------
Net income....................................... $ 2,555 $ 1,066 $ 5,314 $ 1,778
======== ======== ======== ========
Basic earnings per share......................... $ 0.28 $ 0.15 $ 0.58 $ 0.26
======== ======== ======== ========
Diluted earnings per share....................... $ 0.27 $ 0.15 $ 0.55 $ 0.25
======== ======== ======== ========
Weighted average number of common
shares outstanding - Basic.................... 9,157 6,943 9,154 6,779
======== ======== ======== ========
Dilutive Effect of Shares Issuable as of
Period-End Under Stock Option Plans.............. 405 230 439 224
======== ======== ======== ========
Adjustment of Shares Applicable to Exercised
Stock Options During the Period.................. 3 -- 10 --
======== ======== ======== ========
Weighted average number of common
shares outstanding - Diluted.................. 9,565 7,173 9,603 7,003
======== ======== ======== ========
Comprehensive Income:
Net Income....................................... $ 2,555 $ 1,066 $ 5,314 $ 1,778
Foreign Currency Translation Adjustments......... (8) -- (13) 2
-------- -------- -------- --------
Other Comprehensive Income/(Loss), net of Tax:... $ (8) $ -- $ (13) $ 2
======== ======== ======== ========
Comprehensive Income............................. $ 2,547 $ 1,066 $ 5,301 $ 1,780
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in thousands, except par values)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 29,359 $ 28,418
Trade accounts receivable, net of allowance of $274
for each period presented...................................... 10,811 9,230
Trade accounts receivable-related party........................... 1,854 1,877
Unbilled accounts receivable...................................... 892 1,088
Other current assets.............................................. 2,148 1,754
---------- ----------
Total current assets.......................................... 45,064 42,367
---------- ----------
Property and equipment, net of accumulated depreciation of $5,288 and
$4,121, respectively............................................ 8,334 6,270
Goodwill, net......................................................... 1,671 1,830
Other assets.......................................................... 1,304 1,212
---------- ----------
Total assets.................................................. $ 56,373 $ 51,679
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 1,077 $ 1,744
Accrued and other current liabilities............................. 9,252 11,207
---------- ----------
Total current liabilities..................................... 10,329 12,951
Deferred income taxes................................................. 7,903 6,103
Due to related party.................................................. 2 9
---------- ----------
Total liabilities............................................. 18,234 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,
3,514 shares and 3,505 shares issued and outstanding at
June 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 June 30, 1999 and
December 31, 1998, respectively................................. 57 57
Additional paid-in-capital............................................ 24,788 24,566
Retained earnings..................................................... 13,283 7,969
Cumulative translation adjustment..................................... (24) (11)
---------- ----------
Total stockholders' equity.................................... 38,139 32,616
---------- ----------
Total liabilities and stockholders' equity.................... $ 56,373 $ 51,679
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 5,314 $ 1,778
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,341 1,015
Provision for doubtful accounts............................ -- (62)
Deferred income taxes...................................... 1,800 1,252
Changes in assets and liabilities:
Accounts receivable........................................ (1,558) (1,478)
Other current assets....................................... (198) (1,297)
Other assets............................................... (92) 631
Accounts payable........................................... (667) (624)
Accrued and other liabilities.............................. (1,955) 3,506
-------- --------
Net cash provided by operating activities.......................... 3,985 4,721
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................. (3,247) (1,830)
-------- --------
Net cash used in investing activities.............................. (3,247) (1,830)
-------- --------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital, net............... 223 22,532
Payments to related party.......................................... (7) (6,623)
-------- --------
Net cash provided by financing activities.......................... 216 15,909
-------- --------
Effect of Currency Translation..................................... (13) --
-------- --------
Increase in cash and cash equivalents ............................. 941 18,800
Cash and cash equivalents, beginning of year....................... 28,418 2,715
-------- --------
Cash and cash equivalents, end of period................... $ 29,359 $ 21,515
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes................... $ 1,314 $ --
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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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 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 June 30, 1999 and 1998 are as follows:
Cumulative
Translation
Adjustment
Balance December 31, 1998............................. $ (11)
Period Change......................................... (13)
-------
Balance June 30, 1999................................. $ (24)
=======
Balance December 31, 1997............................. $ (2)
Period Change......................................... 2
-------
Balance June 30, 1998................................. $ 0
=======
NOTE 3 - 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 Cognizant Corporation ("Cognizant"), the Company's then majority owner
and controlling parent company. The net proceeds to the Company from the IPO
were approximately $22.4 million after $845 of direct
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<PAGE>
expenses. In July 1998, IMS Health Incorporated ("IMS Health") (the accounting
successor to Cognizant) sold 437,550 shares of Class B Common Stock, which were
converted to Class A Common Stock, pursuant to an over allotment option granted
to the underwriters of the IPO. Of the total net proceeds received by the
Company upon the consummation of its IPO, approximately $6.6 million was used to
repay the related party balance then 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 as
the redemption feature was voided.
NOTE 4 - RELATED PARTY TRANSACTIONS:
In July 1998, IMS Health sold 437,550 shares of Class B Common Stock
pursuant to an over allotment option granted to the underwriters of the IPO. As
of June 30, 1999, IMS Health owned approximately 61.6% of the outstanding Common
Stock of the Company and held approximately 94.1% of the combined voting power
of the Company's Common Stock.
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 $175 and $850 for the six-month periods ended June 30, 1999 and
1998, respectively.
NOTE 5 - 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 financial statements.
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 financial statements.
- 6 -
<PAGE>
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 financial statements.
NOTE 6 - 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
six month period ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES (1)
North America..................... $ 16,513 $ 10,468 $ 32,658 $ 19,012
Europe............................ 4,877 2,184 9,041 3,794
Asia.............................. 108 16 225 100
--------- --------- --------- ----------
Consolidated...................... $ 21,498 $ 12,668 $ 41,924 $ 22,906
========= ========= ========= ==========
OPERATING INCOME (1)
North America..................... $ 2,967 $ 1,307 $ 6,184 $ 2,245
Europe............................ 876 273 1,706 450
Asia.............................. 20 2 43 11
--------- --------- --------- ----------
Consolidated...................... $ 3,863 $ 1,582 $ 7,933 $ 2,706
========= ========= ========= ==========
As of June 30,
IDENTIFIABLE ASSETS 1999 1998
---- ----
North America..................... $ 36,028 $ 31,050
Europe............................ 3,602 996
Asia.............................. 16,743 8,011
--------- ---------
Consolidated...................... $ 56,373 $ 40,057
========= =========
</TABLE>
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
- 7 -
<PAGE>
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.
In the second quarter of 1999, sales to one related party customer
accounted for 16.7% of revenues and one third-party customer accounted for 19.7%
of revenues. In the second quarter of 1998, sales to one related party customer
accounted for 33.0% of revenues and one third-party customer accounted for 13.2%
of revenues.
NOTE 7 - CONTINGENCIES
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 business, financial condition and
results of operations. 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 officer
of the Company. These forward-looking statements, such as statements regarding
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<PAGE>
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 JUNE 30, SIX MONTHS ENDED JUNE 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 57.8 52.1 57.9
------- ------- ------- -------
Gross profit........................ 48.1 42.2 47.9 42.1
Selling, general and administrative
expense................................ 26.9 25.5 25.7 25.9
Depreciation and amortization expense.. 3.2 4.2 3.3 4.4
------- ------- ------- -------
Income from operations.............. 18.0 12.5 18.9 11.8
Other income (expense):
Interest income..................... 1.1 0.4 1.2 0.3
Other income (expense).............. (0.1) 0.6 0.1 0.3
------- ------- ------- -------
Total other income (expense) 1.0 1.0 1.3 0.6
------- ------- ------- -------
Income before provision for income
taxes............................... 19.0 13.5 20.2 12.4
Provision for income taxes............. (7.1) (5.1) (7.5) (4.6)
------- ------- ------- -------
Net income ............................ 11.9% 8.4% 12.7% 7.8%
======= ======= ======= =======
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenue. Revenue increased by 69.7%, or $8.8 million, from $12.7 million
during the three months ended June 30, 1998 to $21.5 million during the three
months ended June 30, 1999. This increase resulted primarily from a $11.0
million increase in software development, maintenance and Eurocurrency
compliance services partially offset by an approximately $2.2 million decrease
in Year 2000 Compliance Services. The percentage of revenues derived from
unrelated parties increased from 67.0% during the three months ended June 30,
1998 to 83.3% during the three months ended June 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. In the second quarter of 1999, sales to one related
party customer accounted for 16.7% of revenues and one third-party customer
accounted for 19.7% of revenues. In the second quarter of 1998, sales to one
related party customer accounted for 33.0% of revenues and one third-party
customer accounted for 13.2% 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 52.2%, or $3.8 million, from $7.3 million during the three months
ended June 30, 1998 to $11.1 million during the three months ended June 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 1,200 employees at June 30, 1998 to approximately 1,635 employees
at June 30, 1999. The Company's gross profit increased by 93.7%, or
approximately $5.0 million, from approximately $5.3 million during the three
months ended June 30, 1998 to approximately $10.3 million during the three
months ended June 30, 1999. Gross profit margin increased from 42.2% of revenues
during the three months ended June 30, 1998 to 48.1% of revenues during the
three months ended June 30, 1999. The increase in such gross profit margin was
primarily attributable to the increased third-
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<PAGE>
party revenue, which generally has higher margins, and a higher utilization
level of technical professionals during the three months ended June 30, 1999
compared to the three months ended June 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 72.5%, or $2.7 million, from $3.8
million during the three months ended June 30, 1998 to $6.5 million during the
three months ended June 30, 1999, and increased as a percentage of revenue from
29.7% to 30.2%. The 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.
Income from Operations. Income from operations increased 144.2%, or $2.3
million, from $1.6 million during the three months ended June 30, 1998 to $3.9
million during the three months ended June 30, 1999, representing 12.5% and
18.0% 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
$199,000 from approximately $48,000 during the three months ended June 30, 1998
to approximately $247,000 during the three months ended June 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 loss of approximately $29,000 during
the three months ended June 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 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 $638,000 in the three months ended June 30, 1998 to
$1.5 million in the three months ended June 30, 1999, with an effective tax rate
of 37.4% in 1998 and 1999.
Net Income. Net income increased from approximately $1.1 million for the
three months ended June 30, 1998 to $2.6 million for the three months ended June
30, 1999, representing 8.4% and 11.9% as a percentage of revenues, respectively.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenue. Revenue increased by 83.0%, or $19.0 million, from $22.9 million
during the six months ended June 30, 1998 to $41.9 million during the six months
ended June 30, 1999. This increase resulted primarily from a $20.6 million
increase in software development,
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maintenance and Eurocurrency compliance services partially offset by an
approximately $1.6 million decrease in Year 2000 Compliance Services. The
percentage of revenues derived from unrelated parties increased from 65.6%
during the six months ended June 30, 1998 to 83.6% during the six months ended
June 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 six
months ended June 30, 1999, sales to one related party customer accounted for
16.4% of revenues and one third-party customer accounted for 20.0% of revenues.
During the six months ended June 30, 1998, sales to one related party customer
accounted for 34.4% of revenues and two third-party customers accounted for
13.8% and 10.5% of revenues, respectively.
Gross profit. The Company's cost of revenues increased by 64.9%, or $8.6
million, from $13.3 million during the six months ended June 30, 1998 to $21.9
million during the six months ended June 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 1,200 employees at June 30,
1998 to approximately 1,635 employees at June 30, 1999. The Company's gross
profit increased by 107.9%, or approximately $10.4 million, from approximately
$9.7 million during the six months ended June 30, 1998 to approximately $20.1
million during the six months ended June 30, 1999. Gross profit margin increased
from 42.1% of revenues during the six months ended June 30, 1998 to 47.9% of
revenues during the six months ended June 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
74.7%, or $5.2 million, from $6.9 million during the six months ended June 30,
1998 to $12.1 million during the six months ended June 30, 1999, but decreased
as a percentage of revenue from 30.3% to 28.9%. 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.
Income from Operations. Income from operations increased 193.2%, or $5.2
million, from $2.7 million during the six months ended June 30, 1998 to $7.9
million during the six months ended June 30, 1999, representing 11.8% and 18.9%
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 $443,000 from
approximately $79,000 during the six months ended June 30, 1998 to approximately
$522,000 during the six months ended June 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 $33,000 during the six months
ended June 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 $1.1 million in the six months ended June 30, 1998 to $3.2 million
in the six months ended June 30, 1999, with an effective tax rate of 37.4% in
1998 and 1999.
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Net Income. Net income increased from approximately $1.8 million for the
six months ended June 30, 1998 to $5.3 million for the six months ended June 30,
1999, representing 7.8% and 12.7% 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 $4.0 million
during the six months ended June 30, 1999 as compared to net cash provided by
operating activities of $4.7 million during the six months ended June 30, 1998.
The decrease results primarily from decreased level of accrued liabilities and
increased other assets partially offset by increased net income and an increase
in deferred taxes. Accounts receivable increased from $11.1 million at December
31, 1998 to $12.7 million at June 30, 1999. 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.
The Company's investing activities used net cash of $3.2 million for the
six months ended June 30, 1999 as compared to net cash used of $1.8 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
$216,000 for the six months ended June 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 June 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 June 30, 1999, the Company had no significant third-party debt.
The Company had working capital of $34.7 million at June 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.
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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.
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. Costs incurred to date to
address the Year 2000 problem have been immaterial 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. There can be no assurance,
however, that the Year 2000 Problem will not adversely affect the Company's
business, operating results and financial condition.
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 will address facilities and equipment,
telecommunications infrastructure, and internal administrative
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<PAGE>
processes. In addition, these plans will 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. There can be no assurance that the Year 2000 Problem
will not adversely affect the Company's business, operating results and
financial condition. 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.
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 financial statements.
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 financial statements.
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 financial statements.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on May 25, 1999.
There were present at the meeting in person or by proxy stockholders
holding an aggregate of 3,348,640 shares of Class A Common Stock and an
aggregate of 56,454,500 shares of Class B Common Stock. The results of the vote
taken at such meeting with respect to each nominee for director were as follows:
Common Stock Nominees For Withheld
--------------------- --- --------
Wijeyaraj Mahadeva 59,801,520 1,620
Anthony Bellomo 59,801,366 1,774
Victoria Fash 59,688,670 114,470
Robert W. Howe 59,801,566 1,574
John Klein 59,801,566 1,574
Venetia Kontogouris 59,801,570 1,570
A vote was taken on the proposal to adopt the 1999 Incentive Compensation
Plan. Of the shares present at the meeting in person or by proxy, 57,865,712
shares were voted in favor of such proposal, 820,114 shares were voted against
such proposal and 7,021 shares abstained from voting.
A vote was taken on the proposal to adopt the Employee Stock Purchase Plan.
Of the shares present at the meeting in person or by proxy, 58,671,418 shares
were voted in favor of such proposal, 15,139 shares were voted against such
proposal and 6,920 shares abstained from voting.
Finally, a vote was taken on the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the independent accountants of the Company for the
fiscal year ending December 31, 1999. Of the shares present at the meeting in
person or by proxy, 59,797,942 shares were voted in favor of such proposal,
1,073 shares were voted against such proposal and 4,125 shares of Common Stock
abstained from voting.
ITEM 5. Other Information.
On April 13, 1999, Paul Cosgrave, a member of the Board of Directors of the
Company (the "Board") since 1998, resigned from the Board. Concurrent with the
effectiveness of such resignation, the Board elected Robert W. Howe to the Board
in order to fill the vacancy created by Mr. Cosgrave's resignation.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 1999 Incentive Compensation Plan
10.2 Employee Stock Purchase Plan
27.1 Financial Data Schedule for the period ended June 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.
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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 10, 1999 By: /s/ Wijeyaraj Mahadeva
----------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: August 10, 1999 By: /s/ Gordon Coburn
----------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
1999 INCENTIVE COMPENSATION PLAN
1.0 DEFINITIONS
The following terms shall have the following meanings unless the context
indicates otherwise:
1.1 "Award" shall mean either a Stock Option, an SAR, a Stock Award, a Stock
Unit, a Performance Share, a Performance Unit, or a Cash Award.
1.2 "Award Agreement" shall mean a written agreement between the Company and
the Participant that establishes the terms, conditions, restrictions and/or
limitations applicable to an Award in addition to those established by the
Plan and by the Committee's exercise of its administrative powers.
1.3 "Board" shall mean the Board of Directors of the Company.
1.4 "Cash Award" shall mean the grant by the Committee to a Participant of an
award of cash as described in Section 11 below.
1.5 "Cause" shall mean (i) willful malfeasance or willful misconduct by the
Employee in connection with his employment, (ii) continuing failure to
perform such duties as are requested by the Company and/or its
subsidiaries, (iii) failure by the Employee to observe material policies of
the Company and/or its subsidiaries applicable to the Employee or (iv) the
commission by the Employee of (x) any felony or (y) any misdemeanor
involving moral turpitude.
1.6 "Change in Control of the Company" shall mean the occurrence of any of the
following events:
(a) any Person, as such term is used for purposes of Section 13(d) or
14(d) of the Exchange Act, or any successor section thereto, (other
than (i) the Company, (ii) any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, (iii) any
Subsidiaries of the Company, (iv) any company owned, directly or
indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company or (v) IMS
Health Incorporated or its Subsidiaries), becomes the beneficial
owner, directly or indirectly, of securities of the Company
representing 35% or more of the combined voting power of the Company's
then-outstanding securities; provided however, that the acquisition of
securities in a bona fide public offering or private placement of
securities by an investor who is acquiring such securities for passive
investment purposes only shall not constitute a "Change in Control".
(b) during any period of twenty-four months, individuals who at the
beginning of such period constitute the Board, and any new director
(other than (i) a director nominated by a Person who has entered into
an agreement with the Company to effect a transaction described in
Sections 1.6 (a), (c) or (d) of the Plan, (ii) a director nominated by
any Person (including the Company) who publicly announces an intention
to take or to consider taking actions (including, but not limited to,
an actual or threatened proxy contest) which if consummated would
constitute a Change in Control or (iii) a director nominated by any
Person who is the beneficial owner, directly or indirectly, of
securities of the Company
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<PAGE>
representing 10% or more of the combined voting power of the Company's
securities) whose election by the Board or nomination for election by
the Company's shareholders is or was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or
nomination for election was previously, so approved, cease for any
reason to constitute at least a majority thereof;
(c) the effective date or date of consummation of any transaction or
series of transactions (other than a transaction to which only the
Company and one or more of its subsidiaries are parties) under which
the Company is merged or consolidated with any other company, other
than a merger or consolidation (i) which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 66
2/3% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such
merger or consolidation and (ii) after which no Person holds 35% or
more of the combined voting power of the then-outstanding securities
of the Company or such surviving entity; or
(d) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets;
1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
1.8 "Committee" shall mean (i) the Board or (ii) a committee or subcommittee
of the Board appointed by the Board from among its members. The Committee
may be the Board's Compensation Committee. Unless the Board determines
otherwise, the Committee shall be comprised solely of not less than two
members who each shall qualify as:
(a) a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3)
(or any successor rule) under the Exchange Act, and
(b) an "outside director" within the meaning of Code Section 162(m)
and the Treasury Regulations thereunder.
1.9 "Common Stock" shall mean the Class A common stock, $.01 par value per
share, of the Company.
1.10 "Company" shall mean Cognizant Technology Solutions Corporation, a
Delaware corporation.
1.11 "Disability" shall mean shall mean the inability to engage in any
substantial gainful activity by reason of a medically determinable
physical or mental impairment which constitutes a permanent and total
disability, as defined in Section 22(e) (3) of the Code (or any successor
section thereto). The determination whether a Participant has suffered a
Disability shall be made by the Committee based upon such evidence as it
deems necessary and appropriate, and shall be conclusive and binding on
the Participant. A Participant shall not be considered disabled unless he
or she
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<PAGE>
furnishes such medical or other evidence of the existence of the
Disability as the Committee, in its sole discretion, may require.
1.12 "Dividend Equivalent Right" shall mean the right to receive an amount
equal to the amount of any dividend paid with respect to a share of Common
Stock multiplied by the number of shares of Common Stock underlying or
with respect to a Stock Option, a SAR, a Stock Unit or a Performance Unit,
and which shall be payable in cash, in Common Stock, in the form of Stock
Units or Performance Units, or a combination of any or all of the
foregoing.
1.13 "Effective Date" shall mean the date on which the Plan is adopted by the
Board.
1.14 "Employee" shall mean an employee of the Company or any Subsidiary as
described in Treasury Regulation Section 1.421-7(h).
1.15 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time, including applicable regulations thereunder.
1.16 "Fair Market Value of the Common Stock" shall mean:
(a) if the Common Stock is readily tradable on a national securities
exchange or other market system, the closing price of the Common Stock
on the date of calculation (or on the last preceding trading date if
Common Stock was not traded on such date), or
(b) if the Common Stock is not readily tradable on a national
securities exchange or other market system:
(i) the book value of a share of Common Stock as of the last day
of the last completed fiscal quarter preceding the date of
calculation; or
(ii) any other value as otherwise determined in good faith by the
Board.
1.17 "Independent Contractor" shall mean a person (other than a person who is
an Employee or a Nonemployee Director) or an entity that renders services
to the Company.
1.18 "ISO" shall mean an "incentive stock option" as such term is used in Code
Section 422.
1.19 "Nonemployee Director" shall mean a member of the Board who is not an
Employee.
1.20 "Nonqualified Stock Option" shall mean a Stock Option that does not
qualify as an ISO.
1.21 "Participant" shall mean any Employee, Nonemployee Director or Independent
Contractor to whom an Award has been granted by the Committee under the
Plan.
1.22 "Performance-Based Award" shall mean an Award subject to the achievement
of certain performance goal or goals as described in Section 12 below.
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<PAGE>
1.23 "Performance Share" shall mean the grant by the Committee to a Participant
of an Award as described in Section 10.1 below.
1.24 "Performance Unit" shall mean the grant by the Committee to a Participant
of an Award as described in Section 10.2 below.
1.25 "Plan" shall mean the Cognizant Technology Solutions Corporation 1999
Incentive Compensation Plan.
1.26 "SAR" shall mean the grant by the Committee to a Participant of a stock
appreciation right as described in Section 8 below.
1.27 "Stock Award" shall mean the grant by the Committee to a Participant of an
Award of Common Stock as described in Section 9.1 below.
1.28 "Stock Option" shall mean the grant by the Committee to a Participant of
an option to purchase Common Stock as described in Section 7 below.
1.29 "Stock Unit" shall mean the grant by the Committee to a Participant of an
Award as described in Section 9.2 below.
1.30 "Subsidiary" shall mean a corporation of which the Company directly or
indirectly owns more than 50 percent of the Voting Stock or any other
business entity in which the Company directly or indirectly has an
ownership interest of more than 50 percent.
1.31 "Treasury Regulations" shall mean the regulations promulgated under the
Code by the United States Department of the Treasury, as amended from time
to time.
1.32 "Vest" shall mean:
(a) with respect to Stock Options and SARs, when the Stock Option or
SAR (or a portion of such Stock Option or SAR) first becomes
exercisable and remains exercisable subject to the terms and
conditions of such Stock Option or SAR; or
(b) with respect to Awards other than Stock Options and SARs, when
the Participant has:
(i) an unrestricted right, title and interest to receive the
compensation (whether payable in Common Stock, cash or a
combination of both) attributable to an Award (or a portion of
such Award) or to otherwise enjoy the benefits underlying such
Award; and
(ii) a right to transfer an Award subject to no Company-imposed
restrictions or limitations other than restrictions and/or
limitations imposed by Section 14 below.
1.33 "Vesting Date" shall mean the date or dates on which an Award Vests.
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1.34 "Voting Stock" shall mean the capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
2.0 PURPOSE AND TERM OF PLAN
2.1 Purpose. The purpose of the Plan is to motivate certain Employees,
Nonemployee Directors and Independent Contractors to put forth maximum
efforts toward the growth, profitability, and success of the Company and
Subsidiaries by providing incentives to such Employees, Nonemployee
Directors and Independent Contractors either through cash payments and/or
through the ownership and performance of the Common Stock. In addition,
the Plan is intended to provide incentives which will attract and retain
highly qualified individuals as Employees and Nonemployee Directors and to
assist in aligning the interests of such Employees and Nonemployee
Directors with those of its stockholders.
2.2 Term. The Plan shall be effective as of the Effective Date; provided,
however, that the Plan shall be approved by the stockholders of the
Company at an annual meeting or any special meeting of stockholders of the
Company within 12 months before or after the Effective Date, and such
approval by the stockholders of the Company shall be a condition to the
right of each Participant to receive Awards hereunder. Any Award granted
under the Plan prior to the approval by the stockholders of the Company
shall be effective as of the date of grant (unless the Committee specifies
otherwise at the time of grant), but no such Award may Vest, be paid out,
or otherwise be disposed of prior to such stockholder approval. If the
stockholders of the Company fail to approve the Plan in accordance with
this Section 2.2, any Award granted under the Plan shall be cancelled. The
Plan shall terminate on the 10th anniversary of the Effective Date (unless
sooner terminated by the Board under Section 16.1 below.
3.0 ELIGIBILITY AND PARTICIPATION
3.1 Eligibility. All Employees of the Company, all Nonemployee Directors and
all Independent Contractors shall be eligible to participate in the Plan
and to receive Awards.
3.2 Participation. Participants shall consist of such Employees, Nonemployee
Directors and Independent Contractors as the Committee in its sole
discretion designates to receive Awards under the Plan. Designation of a
Participant in any year shall not require the Committee to designate such
person or entity to receive an Award in any other year or, once
designated, to receive the same type or amount of Award as granted to the
Participant in any other year. The Committee shall consider such factors
as it deems pertinent in selecting Participants and in determining the
type and amount of their respective Awards.
4.0 ADMINISTRATION
4.1 Responsibility. The Committee shall have the responsibility, in its sole
discretion, to control, operate, manage and administer the Plan in
accordance with its terms.
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4.2 Award Agreement. Each Award granted under the Plan shall be evidenced by an
Award Agreement which shall be signed by the Committee and the Participant;
provided, however, that in the event of any conflict between a provision of
the Plan and any provision of an Award Agreement, the provision of the Plan
shall prevail.
4.3 Authority of the Committee. The Committee shall have all the discretionary
authority that may be necessary or helpful to enable it to discharge its
responsibilities with respect to the Plan, including but not limited to the
following:
(a) to determine eligibility for participation in the Plan;
(b) to determine eligibility for and the type and size of an Award
granted under the Plan;
(c) to supply any omission, correct any defect, or reconcile any
inconsistency in the Plan in such manner and to such extent as it
shall deem appropriate in its sole discretion to carry the same into
effect;
(d) to issue administrative guidelines as an aid to administer the
Plan and make changes in such guidelines as it from time to time deems
proper;
(e) to make rules for carrying out and administering the Plan and
make changes in such rules as it from time to time deems proper;
(f) to the extent permitted under the Plan, grant waivers of Plan
terms, conditions, restrictions, and limitations;
(g) to accelerate the Vesting of any Award when such action or
actions would be in the best interest of the Company;
(h) to grant Award in replacement of Awards previously granted under
this Plan or any other executive compensation plan of the Company; and
(i) to take any and all other actions it deems necessary or advisable
for the proper operation or administration of the Plan.
4.4 Action by the Committee. The Committee may act only by a majority of its
members. Any determination of the Committee may be made, without a meeting,
by a writing or writings signed by all of the members of the Committee. In
addition, the Committee may authorize any one or more of its members to
execute and deliver documents on behalf of the Committee.
4.5 Delegation of Authority. The Committee may delegate to one or more of its
members, or to one or more agents, such administrative duties as it may
deem advisable; provided, however, that any such delegation shall be in
writing. In addition, the Committee, or any person to whom it has delegated
duties under this Section 4.5, may employ one or more persons to render
advice with respect to any responsibility the Committee or such person may
have under the Plan. The Committee may employ such legal or other counsel,
consultants and agents as it may deem
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desirable for the administration of the Plan and may rely upon any opinion
or computation received from any such counsel, consultant or agent.
Expenses incurred by the Committee in the engagement of such counsel,
consultant or agent shall be paid by the Company, or the Subsidiary whose
employees have benefited from the Plan, as determined by the Committee.
4.6 Determinations and Interpretations by the Committee. All determinations and
interpretations made by the Committee shall be binding and conclusive on
all Participants and their heirs, successors, and legal representatives.
4.7 Liability. No member of the Board, no member of the Committee and no
employee of the Company shall be liable for any act or failure to act
hereunder, except in circumstances involving his or her bad faith, gross
negligence or willful misconduct, or for any act or failure to act
hereunder by any other member or employee or by any agent to whom duties in
connection with the administration of the Plan have been delegated.
4.8 Indemnification. The Company shall indemnify members of the Committee and
any agent of the Committee who is an employee of the Company, against any
and all liabilities or expenses to which they may be subjected by reason of
any act or failure to act with respect to their duties on behalf of the
Plan, except in circumstances involving such person's bad faith, gross
negligence or willful misconduct.
5.0 SHARES SUBJECT TO PLAN
5.1 Available Shares. The aggregate number of shares of Common Stock which
shall be available for grants or payments of Awards under the Plan during
its term shall be 1,000,000 shares. Such shares of Common Stock available
for issuance under the Plan may be either authorized but unissued shares,
shares of issued stock held in the Company's treasury, or both, at the
discretion of the Company, and subject to any adjustments made in
accordance with Section 5.2 below. Any shares of Common Stock underlying
Awards which terminate by expiration, forfeiture, cancellation or otherwise
without the issuance of such shares shall again be available for grants of
Awards under the Plan. Awards that are payable only in cash are not subject
to this Section 5.1.
5.2 Adjustment to Shares. If there is any change in the Common Stock of the
Company, through merger, consolidation, reorganization, recapitalization,
stock dividend, stock split, reverse stock split, split-up, split-off,
spin-off, combination of shares, exchange of shares, dividend in kind or
other like change in capital structure or distribution (other than normal
cash dividends) to stockholders of the Company, an adjustment shall be made
to each outstanding Award so that each such Award shall thereafter be with
respect to or exercisable for such securities, cash and/or other property
as would have been received in respect of the Common Stock subject to such
Award had such Award been paid, distributed or exercised in full
immediately prior to such change or distribution. Such adjustment shall be
made successively each time any such change shall occur. In addition, in
the event of any such change or distribution, in order to prevent dilution
or enlargement of Participants' rights under the Plan, the Committee shall
have the authority to adjust, in an equitable manner, the number and kind
of shares that may be issued under the Plan, the number and kind of shares
subject to outstanding Awards, the exercise price applicable to outstanding
Stock Options, and the Fair Market Value of the Common Stock and other
value determinations applicable to outstanding Awards. Appropriate
adjustments may also be made by
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the Committee in the terms of any Awards granted under the Plan to reflect
such changes or distributions and to modify any other terms of outstanding
Awards on an equitable basis, including modifications of performance goals
and changes in the length of performance periods; provided, however, that
with respect to Performance-Based Awards, such modifications and/or changes
do not disqualify compensation attributable to such Awards as
"performance-based compensation" under Code Section 162(m). In addition,
the Committee is authorized to make adjustments to the terms and conditions
of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events affecting the Company or the financial statements of
the Company, or in response to changes in applicable laws, regulations, or
accounting principles. Notwithstanding anything contained in the Plan, any
adjustment with respect to an ISO due to a change or distribution described
in this Section 5.2 shall comply with the rules of Code Section 424(a), and
in no event shall any adjustment be made which would render any ISO granted
hereunder other than an incentive stock option for purposes of Code Section
422.
6.0 MAXIMUM INDIVIDUAL AWARDS
6.1 Maximum Aggregate Number of Shares Underlying Stock-Based Awards Granted
Under the Plan to Any Single Participant. The maximum aggregate number of
shares of Common Stock underlying all Awards measured in shares of Common
Stock (whether payable in Common Stock, cash or a combination of both) that
may be granted to any single Participant during the life of the Plan shall
be 750,000 shares, subject to adjustment as provided in Section 5.2 above.
For purposes of the preceding sentence, such Awards that are cancelled or
repriced shall continue to be counted in determining such maximum aggregate
number of shares of Common Stock that may be granted to any single
Participant during the life of the Plan.
6.2 Maximum Dollar Amount Underlying Cash-Based Awards Granted Under the Plan
to Any Single Participant. The maximum dollar amount that may be paid to
any single Participant with respect to all Awards measured in cash (whether
payable in Common Stock, cash or a combination of both) during the life of
the Plan shall be $10,000,000.
7.0 STOCK OPTIONS
7.1 In General. The Committee may, in its sole discretion, grant Stock Options
to Employees, Nonemployee Directors and Independent Contractors on or after
the Effective Date. The Committee shall, in its sole discretion, determine
the Employees, the Nonemployee Directors and Independent Contractors who
will receive Stock Options and the number of shares of Common Stock
underlying each Stock Option. With respect to Employees who become
Participants, the Committee may grant such Participants ISOs or
Nonqualified Stock Options or a combination of both. With respect to
Nonemployee Directors and Independent Contractors who become Participants,
the Committee may grant such Participants only Nonqualified Stock Options.
Each Stock Option shall be subject to such terms and conditions consistent
with the Plan as the Committee may impose from time to time. In addition,
each Stock Option shall be subject to the following terms and conditions
set forth in Sections 7.2 through 7.8 below.
7.2 Exercise Price. The Committee shall specify the exercise price of each
Stock Option in the Award Agreement; provided, however, that (i) the
exercise price of any ISO shall not be less than 100 percent of the Fair
Market Value of the Common Stock on the date of grant, and (ii) the
exercise
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price of any Nonqualified Stock Option shall not be less than 100 percent
of the Fair Market Value of the Common Stock on the date of grant unless
the Committee in its sole discretion and due to special circumstances
determines otherwise on the date of grant.
7.3 Term of Stock Option. The Committee shall specify the term of each Stock
Option in the Award Agreement; provided, however, that (i) no ISO shall be
exercised after the 10th anniversary of the date of grant of such ISO and
(ii) no Nonqualified Stock Option shall be exercised after the 10th
anniversary of the date of grant of such Nonqualified Stock Option. Each
Stock Option shall terminate at such earlier times and upon such conditions
or circumstances as the Committee shall, in its sole discretion, set forth
in the Award Agreement on the date of grant.
7.4 Vesting Date. The Committee shall specify the Vesting Date with respect to
each Stock Option in the Award Agreement. The Committee may grant Stock
Options that are Vested, either in whole or in part, on the date of grant.
If the Committee fails to specify a Vesting Date in the Award Agreement, 25
percent of such Stock Option shall become exercisable on each of the first
4 anniversaries of the date of grant and shall remain exercisable following
such anniversary date until the Stock Option expires in accordance with its
terms under the Award Agreement or under the terms of the Plan. The Vesting
of a Stock Option may be subject to such other terms and conditions as
shall be determined by the Committee, including, without limitation,
accelerating the Vesting if certain performance goals are achieved.
7.5 Exercise of Stock Options. The Stock Option exercise price may be paid in
cash or, in the sole discretion of the Committee, by the delivery of shares
of Common Stock then owned by the Participant, by the withholding of shares
of Common Stock for which a Stock Option is exercisable, or by a
combination of these methods. In the sole discretion of the Committee,
payment may also be made by delivering a properly executed exercise notice
to the Company together with a copy of irrevocable instructions to a broker
to deliver promptly to the Company the amount of sale or loan proceeds to
pay the exercise price. To facilitate the foregoing, the Company may enter
into agreements for coordinated procedures with one or more brokerage
firms. The Committee may prescribe any other method of paying the exercise
price that it determines to be consistent with applicable law and the
purpose of the Plan, including, without limitation, in lieu of the exercise
of a Stock Option by delivery of shares of Common Stock then owned by a
Participant, providing the Company with a notarized statement attesting to
the number of shares owned by the Participant, where upon verification by
the Company, the Company would issue to the Participant only the number of
incremental shares to which the Participant is entitled upon exercise of
the Stock Option. In determining which methods a Participant may utilize to
pay the exercise price, the Committee may consider such factors as it
determines are appropriate; provided, however, that with respect to ISOs,
all such discretionary determinations by the Committee shall be made at the
time of grant and specified in the Award Agreement.
7.6 Restrictions Relating to ISOs. In addition to being subject to the terms
and conditions of this Section 7, ISOs shall comply with all other
requirements under Code Section 422. Accordingly, ISOs may be granted only
to Participants who are employees (as described in Treasury Regulation
Section 1.421-7(h)) of the Company or of any "Parent Corporation" (as
defined in Code Section 424(e)) or of any "Subsidiary Corporation" (as
defined in Code Section 424(f)) on the date of grant. The aggregate market
value (determined as of the time the ISO is granted) of the Common Stock
with respect to which ISOs (under all option plans of the Company and of
any Parent
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Corporation and of any Subsidiary Corporation) are exercisable for the
first time by a Participant during any calendar year shall not exceed
$100,000. For purposes of the preceding sentence, (i) ISOs shall be taken
into account in the order in which they are granted and (ii) ISOs granted
before 1987 shall not be taken into account. ISOs shall not be transferable
by the Participant otherwise than by will or the laws of descent and
distribution and shall be exercisable, during the Participant's lifetime,
only by such Participant. The Committee shall not grant ISOs to any
Employee who, at the time the ISO is granted, owns stock possessing (after
the application of the attribution rules of Code Section 424(d)) more than
10 percent of the total combined voting power of all classes of stock of
the Company or of any Parent Corporation or of any Subsidiary Corporation
unless the exercise price of the ISO is fixed at not less than 110 percent
of the Fair Market Value of the Common Stock on the date of grant and the
exercise of such ISO is prohibited by its terms after the 5th anniversary
of the ISO's date of grant. In addition, no ISO shall be issued to a
Participant in tandem with a Nonqualified Stock Option issued to such
Participant in accordance with Treasury Regulation Section 14a.422A-1,
Q/A-39.
7.7 Additional Terms and Conditions. The Committee may, by way of the Award
Agreements or otherwise, establish such other terms, conditions,
restrictions and/or limitations, if any, of any Stock Option, provided they
are not inconsistent with the Plan, including, without limitation, the
requirement that the Participant not engage in competition with the
Company.
7.8 Conversion Stock Options. The Committee may, in its sole discretion, grant
a Stock Option to any holder of an option (hereinafter referred to as an
"Original Option") to purchase shares of the stock of any corporation:
(a) the stock or assets of which were acquired, directly or
indirectly, by the Company or any Subsidiary, or
(b) which was merged with and into the Company or a Subsidiary,
so that the Original Option is converted into a Stock Option (hereinafter
referred to as a "Conversion Stock Option"); provided, however, that such
Conversion Stock Option as of the date of its grant (the "Conversion Stock
Option Grant Date") shall have the same economic value as the Original
Option as of the Conversion Stock Option Grant Date. In addition, unless
the Committee, in its sole discretion determines otherwise, a Conversion
Stock Option which is converting an Original Option intended to qualify as
an ISO shall have the same terms and conditions as applicable to the
Original Option in accordance with Code Section 424 and the Treasury
Regulations thereunder so that the conversion (x) is treated as the
issuance or assumption of a stock option under Code Section 424(a) and (y)
is not treated as a modification, extension or renewal of a stock option
under Code Section 424(h).
8.0 SARS
8.1 In General. The Committee may, in its sole discretion, grant SARs to
Employees, Nonemployee Directors, and/or Independent Contractors. An SAR is
a right to receive a payment in cash, Common Stock or a combination of
both, in an amount equal to the excess of (x) the Fair Market Value of the
Common Stock, or other specified valuation, of a specified number of shares
of Common Stock on the date the SAR is exercised over (y) the Fair Market
Value of the Common
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Stock, or other specified valuation (which shall be no less than the Fair
Market Value of the Common Stock), of such shares of Common Stock on the
date the SAR is granted, all as determined by the Committee; provided,
however, that if a SAR is granted retroactively in tandem with or in
substitution for a Stock Option, the designated Fair Market Value of the
Common Stock in the Award Agreement may be the Fair Market Value of the
Common Stock on the date such Stock Option was granted. Each SAR shall be
subject to such terms and conditions, including, but not limited to, a
provision that automatically converts a SAR into a Stock Option on a
conversion date specified at the time of grant, as the Committee shall
impose from time to time in its sole discretion and subject to the terms of
the Plan.
9.0 STOCK AWARDS AND STOCK UNITS
9.1 Stock Awards. The Committee may, in its sole discretion, grant Stock Awards
to Employees, Nonemployee Directors, and/or Independent Contractors as
additional compensation or in lieu of other compensation for services to
the Company. A Stock Award shall consist of shares of Common Stock which
shall be subject to such terms and conditions as the Committee in its sole
discretion determines appropriate including, without limitation,
restrictions on the sale or other disposition of such shares, the Vesting
Date with respect to such shares, and the right of the Company to reacquire
such shares for no consideration upon termination of the Participant's
employment within specified periods. The Committee may require the
Participant to deliver a duly signed stock power, endorsed in blank,
relating to the Common Stock covered by such Stock Award and/or that the
stock certificates evidencing such shares be held in custody or bear
restrictive legends until the restrictions thereon shall have lapsed. With
respect to the shares of Common Stock subject to a Stock Award, the
Participant shall have all of the rights of a holder of shares of Common
Stock, including the right to receive dividends and to vote the shares,
unless the Committee determines otherwise on the date of grant.
9.2 Stock Units. The Committee may, in its sole discretion, grant to Employees,
Nonemployee Directors, and/or Independent Contractor Stock Units as
additional compensation or in lieu of other compensation for services to
the Company. A Stock Unit is a hypothetical share of Common Stock
represented by a notional account established and maintained (or caused to
be established or maintained) by the Company for such Participant who
receives a grant of Stock Units. Stock Units shall be subject to such terms
and conditions as the Committee, in its sole discretion, determines
appropriate including, without limitation, determinations of the Vesting
Date with respect to such Stock Units and the criteria for the Vesting of
such Stock Units. A Stock Unit granted by the Committee shall provide for
payment in shares of Common Stock at such time or times as the Award
Agreement shall specify. The Committee shall determine whether a
Participant who has been granted a Stock Unit shall also be entitled to a
Dividend Equivalent Right.
9.3 Payout of Stock Units. Subject to a Participant's election to defer in
accordance with Section 17.3 below, upon the Vesting of a Stock Unit, the
shares of Common Stock representing the Stock Unit shall be distributed to
the Participant, unless the Committee, in its sole discretion, provides for
the payment of the Stock Unit in cash (or partly in cash and partly in
shares of Common Stock) equal to the value of the shares of Common Stock
which would otherwise be distributed to the Participant.
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10.0 PERFORMANCE SHARES AND PERFORMANCE UNITS
10.1 Performance Shares. The Committee may, in its sole discretion, grant
Performance Shares to Employees, Nonemployee Directors, and/or Independent
Contractors as additional compensation or in lieu of other compensation
for services to the Company. A Performance Share shall consist of a share
or shares of Common Stock which shall be subject to such terms and
conditions as the Committee, in its sole discretion, determines
appropriate including, without limitation, determining the performance
goal or goals which, depending on the extent to which such goals are met,
will determine the number and/or value of the Performance Shares that will
be paid out or distributed to the Participant who has been granted
Performance Shares. Performance goals may be based on, without limitation,
Company-wide, divisional and/or individual performance, as the Committee,
in its sole discretion, may determine, and may be based on the performance
measures listed in Section 12.3 below.
10.2 Performance Units. The Committee may, in its sole discretion, grant to
Employees, Nonemployee Directors, and/or Independent Contractors
Performance Units as additional compensation or in lieu of other
compensation for services to the Company. A Performance Unit is a
hypothetical share or shares of Common Stock represented by a notional
account which shall be established and maintained (or caused to be
established or maintained) by the Company for such Participant who
receives a grant of Performance Units. Performance Units shall be subject
to such terms and conditions as the Committee, in its sole discretion,
determines appropriate including, without limitation, determining the
performance goal or goals which, depending on the extent to which such
goals are met, will determine the number and/or value of the Performance
Units that will be accrued with respect to the Participant who has been
granted Performance Units. Performance goals may be based on, without
limitation, Company-wide, divisional and/or individual performance, as the
Committee, in its sole discretion, may determine, and may be based on the
performance measures listed in Section 12.3 below.
10.3 Adjustment of Performance Goals. With respect to those Performance Shares
or Performance Units that are not intended to qualify as Performance-Based
Awards (as described in Section 12 below), the Committee shall have the
authority at any time to make adjustments to performance goals for any
outstanding Performance Shares or Performance Units which the Committee
deems necessary or desirable unless at the time of establishment of the
performance goals the Committee shall have precluded its authority to make
such adjustments.
10.4 Payout of Performance Shares or Performance Units. Subject to a
Participant's election to defer in accordance with Section 17.3 below,
upon the Vesting of a Performance Share or a Performance Unit, the shares
of Common Stock representing the Performance Share or the Performance Unit
shall be distributed to the Participant, unless the Committee, in its sole
discretion, provides for the payment of the Performance Share or a
Performance Unit in cash (or partly in cash and partly in shares of Common
Stock) equal to the value of the shares of Common Stock which would
otherwise be distributed to the Participant.
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11.0 CASH AWARDS
11.1 In General. The Committee may, in its sole discretion, grant Cash Awards
to Employees, Nonemployee Directors, and/or Independent Contractors as
additional compensation or in lieu of other compensation for services to
the Company. A Cash Award shall be subject to such terms and conditions as
the Committee, in its sole discretion, determines appropriate including,
without limitation, determining the Vesting Date with respect to such Cash
Award, the criteria for the Vesting of such Cash Award, and the right of
the Company to require the Participant to repay the Cash Award (with or
without interest) upon termination of the Participant's employment within
specified periods.
12.0 PERFORMANCE-BASED AWARDS
12.1 In General. The Committee, in its sole discretion, may designate Awards
granted under the Plan as Performance-Based Awards (as defined below) if
it determines that such compensation might not be tax deductible by the
Company due to the deduction limitation imposed by Code Section 162(m).
Accordingly, an Award granted under the Plan may be granted in such a
manner that the compensation attributable to such Award is intended by the
Committee to qualify as "performance-based compensation" (as such term is
used in Code Section 162(m) and the Treasury Regulations thereunder) and
thus be exempt from the deduction limitation imposed by Code Section
162(m) ("Performance-Based Awards").
12.2 Qualification of Performance-Based Awards. Awards shall only qualify as
Performance-Based Awards under the Plan if:
(a) at the time of grant the Committee is comprised solely of two or
more "outside directors" (as such term is used in Code Section 162(m)
and the Treasury Regulations thereunder);
(b) with respect to either the granting or Vesting of an Award (other
than (i) a Nonqualified Stock Option or (ii) an SAR, which are granted
with an exercise price at or above the Fair Market Value of the Common
Stock on the date of grant), such Award is subject to the achievement
of a performance goal or goals based on one or more of the performance
measures specified in Section 12.3 below;
(c) the Committee establishes in writing (i) the objective
performance-based goals applicable to a given performance period and
(ii) the individual employees or class of employees to which such
performance-based goals apply no later than 90 days after the
commencement of such performance period (but in no event after 25
percent of such performance period has elapsed);
(d) no compensation attributable to a Performance-Based Award will be
paid to or otherwise received by a Participant until the Committee
certifies in writing that the performance goal or goals (and any other
material terms) applicable to such performance period have been
satisfied; and
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(e) after the establishment of a performance goal, the Committee
shall not revise such performance goal (unless such revision will not
disqualify compensation attributable to the Award as
"performance-based compensation" under Code Section 162(m)) or
increase the amount of compensation payable with respect to such Award
upon the attainment of such performance goal.
12.3 Performance Measures. The Committee may use the following performance
measures (either individually or in any combination) to set performance
goals with respect to Awards intended to qualify as Performance-Based
Awards: net sales; pretax income before allocation of corporate overhead
and bonus; budget; cash flow; earnings per share; net income; division,
group or corporate financial goals; return on stockholders' equity; return
on assets; attainment of strategic and operational initiatives;
appreciation in and/or maintenance of the price of the Common Stock or any
other publicly-traded securities of the Company; market share; gross
profits; earnings before interest and taxes; earnings before interest,
taxes, depreciation and amortization; economic value-added models;
comparisons with various stock market indices; increase in number of
customers; and/or reductions in costs.
12.4 Stockholder Reapproval. As required by Treasury Regulation Section
1.162-27(e)(vi), the material terms of performance goals as described in
this Section 12 shall be disclosed to and reaaproved by the Company's
stockholders no later than the first stockholder meeting that occurs in
the 5th year following the year in which the Company's stockholders
previously approved such performance goals.
13.0 CHANGE IN CONTROL
13.1 Accelerated Vesting. Notwithstanding any other provision of this Plan to
the contrary, if there is a Change in Control of the Company, the
Committee, in its sole discretion, may take such actions as it deems
appropriate with respect to outstanding Awards, including, without
limitation, accelerating the Vesting Date and/or payout of such Awards;
provided, however, that such action shall not conflict with any provision
contained in an Award Agreement unless such provision is amended in
accordance with Section 16.3 below.
13.2 Cashout. The Committee, in its sole discretion, may determine that, upon
the occurrence of a Change in Control of the Company, all or a portion of
certain outstanding Awards shall terminate within a specified number of
days after notice to the holders, and each such holder shall receive an
amount equal to the value of such Award on the date of the change in
control, and with respect to each share of Common Stock subject to a Stock
Option or SAR, an amount equal to the excess of the Fair Market Value of
such shares of Common Stock immediately prior to the occurrence of such
change in control over the exercise price per share of such Stock Option
or SAR. Such amount shall be payable in cash, in one or more kinds of
property (including the property, if any, payable in the transaction) or
in a combination thereof, as the Committee, in its sole discretion, shall
determine.
13.3 Assumption or Substitution of Awards. Notwithstanding anything contained
in the Plan to the contrary, the Committee may, in its sole discretion,
provide that an Award may be assumed by any entity which acquires control
of the Company or may be substituted by a similar award under such
entity's compensation plans.
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14.0 TERMINATION OF EMPLOYMENT IF PARTICIPANT IS AN EMPLOYEE
14.1 Termination of Employment Due to Death or Disability. Subject to any
written agreement between the Company and a Participant, if a
Participant's employment is terminated due to death or Disability:
(a) all non-Vested portions of Awards held by the Participant on the
date of the Participant's death or the date of the termination of his
or her employment, as the case may be, shall immediately be forfeited
by such Participant as of such date; and
(b) all Vested portions of Stock Options and SARs held by the
Participant on the date of the Participant's death or the date of the
termination of his or her employment, as the case may be, shall remain
exercisable until the earlier of:
(i) the end of the 12-month period following the date of the
Participant's death or the date of the termination of his or her
employment, as the case may be, or
(ii) the date the Stock Option or SAR would otherwise expire.
14.2 Termination of Employment for Cause. Subject to any written agreement
between the Company and a Participant, if a Participant's employment is
terminated by the Company for cause, all Awards held by a Participant on
the date of the termination of his or her employment for cause, whether
Vested or non-Vested, shall immediately be forfeited by such Participant
as of such date.
14.3 Other Terminations of Employment. Subject to any written agreement between
the Company and a Participant, if a Participant's employment is terminated
for any reason other than for cause or other than due to death or
Disability:
(a) all non-Vested portions of Awards held by the Participant on the
date of the termination of his or her employment shall immediately be
forfeited by such Participant as of such date; and
(b) all Vested portions of Stock Options and/or SARs held by the
Participant on the date of the termination of his or her employment
shall remain exercisable until the earlier of (i) the end of the
90-day period following the date of the termination of the
Participant's employment or (ii) the date the Stock Option or SAR
would otherwise expire.
14.4 Committee Discretion. Notwithstanding anything contained in the Plan to
the contrary, the Committee may, in its sole discretion, provide that:
(a) any or all non-Vested portions of Stock Options and/or SARs held
by the Participant on the date of the Participant's death and/or the
date of the termination of his or her employment shall immediately
become exercisable as of such date and, except with respect to ISOs,
shall remain exercisable until a date that occurs on or prior to the
date the Stock Option or SAR is scheduled to expire;
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(b) any or all Vested portions of Nonqualified Stock Options and/or
SARs held by the Participant on the date of the Participant's death
and/or the date of the termination of his or her employment shall
remain exercisable until a date that occurs on or prior to the date
the Stock Option or SAR is scheduled to expire; and/or
(c) any or all non-Vested portions of Stock Awards, Stock Units,
Performance Shares, Performance Units, and/or Cash Awards held by the
Participant on the date of the Participant's death and/or the date of
the termination of his or her employment shall immediately Vest or
shall become Vested on a date that occurs on or prior to the date the
Award is scheduled to vest.
14.5 ISOs. Notwithstanding anything contained in the Plan to the contrary, (i)
the provisions contained in this Section 14 shall be applied to an ISO
only if the application of such provision maintains the treatment of such
ISO as an ISO and (ii) the exercise period of an ISO in the event of a
termination of the Participant's employment due to Disability provided in
Section 14.1 above shall be applied only if the Participant is
"permanently and totally disabled" (as such term is defined in Code
Section 22(e)(3)).
15.0 TAXES
15.1 Withholding Taxes. With respect to Employees, the Company, or the
applicable Subsidiary, may require a Participant who has become vested in
his or her Stock Award, Stock Unit, Performance Share or Performance Unit
granted hereunder, or who exercises a Stock Option or SAR granted
hereunder to reimburse the corporation which employs such Participant for
any taxes required by any governmental regulatory authority to be withheld
or otherwise deducted and paid by such corporation or entity in respect of
the issuance or disposition of such shares or the payment of any amounts.
In lieu thereof, the corporation or entity which employs such Participant
shall have the right to withhold the amount of such taxes from any other
sums due or to become due from such corporation or entity to the
Participant upon such terms and conditions as the Committee shall
prescribe. The corporation or entity that employs such Participant may, in
its discretion, hold the stock certificate to which such Participant is
entitled upon the vesting of a Stock Award, Stock Unit, Performance Share
or Performance Unit or the exercise of a Stock Option or SAR as security
for the payment of such withholding tax liability, until cash sufficient
to pay that liability has been accumulated.
15.2 Use of Common Stock to Satisfy Withholding Obligation. With respect to
Employees, at any time that the Company, Subsidiary or other entity that
employs such Participant becomes subject to a withholding obligation under
applicable law with respect to the vesting of a Stock Award, Stock Unit,
Performance Share or Performance Unit or the exercise of a Nonqualified
Stock Option (the "Tax Date"), except as set forth below, a holder of such
Award may elect to satisfy, in whole or in part, the holder's related
personal tax liabilities (an "Election") by (i) directing the Company,
Subsidiary or other entity that employs such Participant to withhold from
shares issuable in the related vesting or exercise either a specified
number of shares or shares of Common Stock having a specified value (in
each case equal to the related minimum statutory personal withholding tax
liabilities with respect to the applicable taxing jurisdiction in order to
comply with
-16-
<PAGE>
the requirements for a "fixed plan" under Accounting Principals Board
Opinion No. 25), (ii) tendering shares of Common Stock previously issued
pursuant to the exercise of a Stock Option or other shares of the Common
Stock owned by the holder, or (iii) combining any or all of the foregoing
Elections in any fashion. An Election shall be irrevocable. The withheld
shares and other shares of Common Stock tendered in payment shall be
valued at their Fair Market Value of the Common Stock on the Tax Date. The
Committee may disapprove of any Election, suspend or terminate the right
to make Elections or provide that the right to make Elections shall not
apply to particular shares or exercises. The Committee may impose any
additional conditions or restrictions on the right to make an Election as
it shall deem appropriate, including conditions or restrictions with
respect to Section 16 of the Exchange Act.
15.3 No Guarantee of Tax Consequences. No person connected with the Plan in any
capacity, including, but not limited to, the Company and any Subsidiary
and their directors, officers, agents and employees makes any
representation, commitment, or guarantee that any tax treatment,
including, but not limited to, federal, state and local income, estate and
gift tax treatment, will be applicable with respect to amounts deferred
under the Plan, or paid to or for the benefit of a Participant under the
Plan, or that such tax treatment will apply to or be available to a
Participant on account of participation in the Plan.
16.0 AMENDMENT AND TERMINATION
16.1 Termination of Plan. The Board may suspend or terminate the Plan at any
time with or without prior notice; provided, however, that no action
authorized by this Section 16.1 shall reduce the amount of any outstanding
Award or change the terms and conditions thereof without the Participant's
consent.
16.2 Amendment of Plan. The Board may amend the Plan at any time with or
without prior notice; provided, however, that no action authorized by this
Section 16.2 shall reduce the amount of any outstanding Award or change
the terms and conditions thereof without the Participant's consent. No
amendment of the Plan shall, without the approval of the stockholders of
the Company:
(a) increase the total number of shares which may be issued under the
Plan;
(b) increase the maximum number of shares with respect to all Awards
measured in Common Stock that may be granted to any individual under
the Plan;
(c) increase the maximum dollar amount that may be paid with respect
to all Awards measured in cash; or
(d) modify the requirements as to eligibility for Awards under the
Plan.
In addition, the Plan shall not be amended without the approval of such
amendment by the Company's stockholders if such amendment (i) is required
under the rules and regulations of the stock exchange or national market
system on which the Common Stock is listed or (ii) will disqualify any ISO
granted hereunder.
-17-
<PAGE>
16.3 Amendment or Cancellation of Award Agreements. The Committee may amend or
modify any Award Agreement at any time by mutual agreement between the
Committee and the Participant or such other persons as may then have an
interest therein. In addition, by mutual agreement between the Committee
and a Participant or such other persons as may then have an interest
therein, Awards may be granted to an Employee, Nonemployee Director or
Independent Contractor in substitution and exchange for, and in
cancellation of, any Awards previously granted to such Employee,
Nonemployee Director or Independent Contractor under the Plan, or any
award previously granted to such Employee, Nonemployee Director or
Independent Contractor under any other present or future plan of the
Company or any present or future plan of an entity which (i) is purchased
by the Company, (ii) purchases the Company, or (iii) merges into or with
the Company.
17.0 MISCELLANEOUS
17.1 Other Provisions. Awards granted under the Plan may also be subject to
such other provisions (whether or not applicable to the Award granted to
any other Participant) as the Committee determines on the date of grant to
be appropriate, including, without limitation, for the installment
purchase of Common Stock under Stock Options, to assist the Participant in
financing the acquisition of Common Stock, for the forfeiture of, or
restrictions on resale or other disposition of, Common Stock acquired
under any Stock Option, for the acceleration of Vesting of Awards in the
event of a change in control of the Company, for the payment of the value
of Awards to Participants in the event of a change in control of the
Company, or to comply with federal and state securities laws, or
understandings or conditions as to the Participant's employment in
addition to those specifically provided for under the Plan.
17.2 Transferability. Each Award granted under the Plan to a Participant shall
not be transferable otherwise than by will or the laws of descent and
distribution, and Stock Options and SARs shall be exercisable, during the
Participant's lifetime, only by the Participant. In the event of the death
of a Participant, each Stock Option or SAR theretofore granted to him or
her shall be exercisable during such period after his or her death as the
Committee shall, in its sole discretion, set forth in the Award Agreement
on the date of grant and then only by the executor or administrator of the
estate of the deceased Participant or the person or persons to whom the
deceased Participant's rights under the Stock Option or SAR shall pass by
will or the laws of descent and distribution. Notwithstanding the
foregoing, the Committee, in its sole discretion, may permit the
transferability of a Stock Option (other than an ISO) by a Participant
solely to members of the Participant's immediate family or trusts or
family partnerships or other similar entities for the benefit of such
persons, and subject to such terms, conditions, restrictions and/or
limitations, if any, as the Committee may establish and include in the
Award Agreement.
17.3 Election to Defer Compensation Attributable to Award. The Committee may,
in its sole discretion, allow a Participant to elect to defer the receipt
of any compensation attributable to an Award under guidelines and
procedures to be established by the Committee after taking into account
the advice of the Company's tax counsel.
17.4 Listing of Shares and Related Matters. If at any time the Committee shall
determine that the listing, registration or qualification of the shares of
Common Stock subject to any Award on any securities exchange or under any
applicable law, or the consent or approval of any governmental regulatory
authority, is necessary or desirable as a condition of, or in connection
with, the granting
-18-
<PAGE>
of an Award or the issuance of shares of Common Stock thereunder, such
Award may not be exercised, distributed or paid out, as the case may be,
in whole or in part, unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any
conditions not acceptable to the Committee.
17.5 No Right, Title, or Interest in Company Assets. Participants shall have no
right, title, or interest whatsoever in or to any investments which the
Company may make to aid it in meeting its obligations under the Plan.
Nothing contained in the Plan, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind, or
a fiduciary relationship between the Company and any Participant,
beneficiary, legal representative or any other person. To the extent that
any person acquires a right to receive payments from the Company under the
Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall
be paid from the general funds of the Company and no special or separate
fund shall be established and no segregation of assets shall be made to
assure payment of such amounts except as expressly set forth in the Plan.
The Plan is not intended to be subject to the Employee Retirement Income
Security Act of 1974, as amended.
17.6 No Right to Continued Employment or Service or to Grants. The
Participant's rights, if any, to continue to serve the Company as a
director, officer, employee, independent contractor or otherwise, shall
not be enlarged or otherwise affected by his or her designation as a
Participant under the Plan, and the Company or the applicable Subsidiary
reserves the right to terminate the employment of any Employee or the
services of any Independent Contractor or director at any time. The
adoption of the Plan shall not be deemed to give any Employee, Nonemployee
Director, Independent Contractor or any other individual any right to be
selected as a Participant or to be granted an Award.
17.7 Awards Subject to Foreign Laws. The Committee may grant Awards to
individual Participants who are subject to the tax laws of nations other
than the United States, and such Awards may have terms and conditions as
determined by the Committee as necessary to comply with applicable foreign
laws. The Committee may take any action which it deems advisable to obtain
approval of such Awards by the appropriate foreign governmental entity;
provided, however, that no such Awards may be granted pursuant to this
Section 16.6 and no action may be taken which would result in a violation
of the Exchange Act or any other applicable law.
17.8 Governing Law. The Plan, all Awards granted hereunder, and all actions
taken in connection herewith shall be governed by and construed in
accordance with the laws of the State of Delaware without reference to
principles of conflict of laws, except as superseded by applicable federal
law.
17.9 Other Benefits. No Award granted under the Plan shall be considered
compensation for purposes of computing benefits under any retirement plan
of the Company or any Subsidiary nor affect any benefits or compensation
under any other benefit or compensation plan of the Company or any
Subsidiary now or subsequently in effect.
17.10 No Fractional Shares. No fractional shares of Common Stock shall be issued
or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, Common Stock, Stock Options, or other property
shall be issued or paid in lieu of fractional shares or whether such
fractional shares or any rights thereto shall be forfeited or otherwise
eliminated.
-19-
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
I. DEFINITIONS
--------------
Account means the Employee Stock Purchase Plan Account established for a
Participant under Section IX hereunder.
Board of Directors shall mean the Board of Directors of the Company.
Code shall mean the Internal Revenue Code of 1986, as amended.
Committee shall mean the Compensation Committee appointed and acting in
accordance with the terms of the Plan.
Common Stock shall mean shares of the Company's Class A Common Stock, par
value $.01 per share, and any security into which such stock shall be converted
or shall become by reason of changes in its nature such as by way of
recapitalization, reclassification, changes in par value, merger, consolidation
or similar transaction.
Company shall mean Cognizant Technology Solutions Corporation, a Delaware
corporation. When used in the Plan with reference to employment, Company shall
include Subsidiaries.
Compensation shall mean the total cash compensation paid to an Eligible
Employee by the Company, as reportable on IRS Form W-2. Notwithstanding the
foregoing, Compensation shall exclude severance pay, stay-on bonuses, long term
bonuses, retirement income, change-in-control payments, contingent payments,
income derived from stock options, stock appreciation rights and other
equity-based compensation and other forms of special remuneration.
Effective Date shall mean July 1, 1999.
Eligible Employees shall mean only those persons who, as of the first day
of a Purchase Period, are Employees of the Company and who are not, as of the
day preceding the first day of the Purchase Period, deemed for purposes of
Section 423(b)(3) of the Code to own stock possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company.
Employees shall mean all persons who are employed by the Company as
common-law employees, excluding persons (i) whose customary employment is 20
hours or less per week, or (ii) whose customary employment is for not more than
five months in a calendar year.
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<PAGE>
Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
Exercise Date shall mean the last day of a Purchase Period.
Fair Market Value shall mean as of any date: (i) the average of the closing
bid and asked prices on such date of the Common Stock as quoted by Nasdaq; or
(ii), as the case may be, the last reported sales price of the Common Stock on
such date as reported by the Nasdaq National Market or the principal national
securities exchange on which such stock is listed and traded, or in each such
case where there is no trading on such date, on the first previous date on which
there is such trading.
Participant shall mean an Eligible Employee who elects to participate in
the Plan under Section VII hereunder.
Plan shall mean the Cognizant Technology Solutions Corporation Employee
Stock Purchase Plan, as set forth herein and as amended from time to time.
Purchase Period shall mean (a) for 1999, the period commencing on the
Effective Date and ending on January 1, 2000; and (b) thereafter, purchase
periods shall be annual, semi-annual or quarterly, in each case as elected by
the Committee not less than 60 days in advance of the commencement of such
period. A Purchase Period shall begin on the first business day of, and end on
the last business day of, each such calendar period. In the absence of any such
election, Purchase Periods subsequent to the first period shall be for one
calendar year. The last Purchase Period under the Plan shall terminate on or
before the date of termination of the Plan provided in Section XXIV.
Subsidiary shall mean any corporation which is a subsidiary of the Company
within the meaning of Section 425(f) of the Code.
Termination of Service shall mean the earliest of the following events with
respect to a Participant: his retirement, death, quit, discharge or permanent
separation from service with the Company.
The masculine gender includes the feminine, the singular number includes
the plural and the plural number includes the singular unless the context
otherwise requires.
II. PURPOSE
-----------
It is the purpose of this Plan to provide a means whereby Eligible
Employees may purchase Common Stock through payroll deductions. It is intended
to provide a further incentive for Employees to promote the best interests of
the Company and to encourage stock ownership by Employees in order to
participate in the Company's economic progress.
It is the intention of the Company to have the Plan qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Code and the
provisions of the Plan shall be construed in a manner consistent with the Code.
2
<PAGE>
III. ADMINISTRATION
-------------------
The Plan shall be administered by the Compensation Committee of the Board
of Directors. The Committee shall have authority to make rules and regulations
for the administration of the Plan, and its interpretations and decisions with
regard thereto shall be final and conclusive. The Committee shall have all
necessary authority to communicate, from time to time, with Eligible Employees
and Participants for purposes of administering the Plan, and shall notify
Eligible Employees promptly of its election of the term of each forthcoming
Purchase Period, if other than a calendar year, and of its election to utilize
the Trust Administration Option referred to in Section IX.
IV. SHARES
----------
There shall be 400,000 shares of Common Stock reserved for issuance to and
purchase by Participants under the Plan, subject to adjustment in accordance
with Section XXI hereof. The shares of Common Stock subject to the Plan shall be
either shares of authorized but unissued Common Stock or shares of Common Stock
reacquired by the Company. Shares of Common Stock involved in any unexercised
portion of any terminated option may again be subject to options to purchase
granted under the Plan.
V. PURCHASE PRICE
-----------------
The purchase price per share of the shares of Common Stock sold to
Participants under this Plan for any Purchase Period shall be the lesser of (a)
85% of the Fair Market Value of a share of Common Stock on the first day of such
Purchase Period, or (b) 85% of the Fair Market Value of a share of Common Stock
on the Exercise Date of such Purchase Period.
VI. GRANT OF OPTION TO PURCHASE SHARES
--------------------------------------
Each Eligible Employee shall be granted an option effective on the first
day of each Purchase Period to purchase a number of full shares of Common Stock
(subject to adjustment as provided in Section XXI). No Eligible Employee shall
be permitted to purchase shares under this Plan (or under any other "employee
stock purchase plan" within the meaning of Section 423(b) of the Code, of the
Company ) with an aggregate Fair Market Value (as determined as of the first day
of the Purchase Period) in excess of $25,000 for any one calendar year within
the meaning of Section 423(b)(8) of the Code. For a given Purchase Period,
payroll deductions shall commence on the first day of the Purchase Period and
shall end on the related Exercise Date, unless sooner altered or terminated as
provided in the Plan.
3
<PAGE>
Anything herein to the contrary notwithstanding, if, as of the first day of
a Purchase Period, any Eligible Employee entitled to purchase shares hereunder
would be deemed for the purposes of Section 423(b)(3) of the Code to own stock
(including any number of shares which such person would be entitled to purchase
hereunder) possessing 5% or more of the total combined voting power or value of
all classes of stock of the Company, the maximum number of shares which such
person shall be entitled to purchase pursuant to the Plan shall be reduced to
that number which when added to the number of shares of stock of the Company
which such person is so deemed to own (excluding any number of shares which such
person would be entitled to purchase hereunder), is one less than such 5%.
VII. ELECTION TO PARTICIPATE
----------------------------
An Eligible Employee may elect to become a Participant in this Plan by
completing a "Stock Purchase Agreement" form prior to the first day of the
Purchase Period. In the Stock Purchase Agreement, the Eligible Employee shall
authorize regular payroll deductions from his Compensation subject to the
limitations in Section VIII below. Options granted to Eligible Employees who
fail to authorize payroll deductions will automatically lapse. If a
Participant's payroll deductions allow him to purchase fewer than the maximum
number of shares of Common Stock to which his option entitles him, the option
with respect to the shares which he does not purchase will lapse as of the last
day of the Purchase Period.
The execution and delivery of the Stock Purchase Agreement as between the
Participant and the Company shall be conditioned upon the compliance by the
Company at such time with Federal (and any applicable state) securities laws.
VIII. PAYROLL DEDUCTIONS
------------------------
An Eligible Employee may authorize payroll deductions from his Compensation
for each payroll period of a specified percentage of such Compensation, not less
than 1% and not more than 15%, in multiples of 1%.
The amount of payroll deduction shall be established at the beginning of a
Purchase Period and may not be altered, except for complete discontinuance under
Section XI, XIII or XIV hereunder.
IX. EMPLOYEE STOCK PURCHASE ACCOUNT
AND TRUST ADMINISTRATION OPTION
-----------------------------------
An Employee Stock Purchase Account will be established for each Participant
in the Plan. Payroll deductions made under Section VIII will be credited to the
individual Accounts. In the event the Committee determines with respect to any
Purchase Period, not to utilize the "Trust Administration Option" set forth in
the next paragraph, no interest or other earnings will be credited to a
Participant's Account.
4
<PAGE>
With respect to any one or more Purchase Periods, the Committee may elect
to utilize, in addition to the separate accounting for payroll deductions
provided in the Plan, the option to administer the funding of the Accounts
through a trust established pursuant to a trust agreement between the Company
and an institution exercising fiduciary powers (the "Trust Administration
Option") as hereinafter set forth in this paragraph. The Company shall provide
for the funding of each Account on a regular basis during each Purchase Period
reflecting payroll deductions of Participants and shall cause such sums to be
deposited within 15 days following such deductions in a trust account at such
institution and upon such terms as are established by the Committee. The trust
account assets shall be invested in shares of a tax-exempt money-market
registered investment company designated in the trust agreement, which
designation shall not be changed during the Purchase Period. Assets deposited in
the aforesaid trust account shall be commingled, but a separate accounting shall
be kept for each Participant's interest therein. Each Participant shall be
credited with his allocable share of the earnings of the trust account, which
credits shall be reflected in each Participant's Account balance hereunder. At
all times, the funds in such trust account shall be considered the property of
the respective Participants, and no part of the trust account assets may at any
time revert to, or be subject to any lien or claim of, the Company; provided,
--------
however, that such trust account assets may be used only for the purchase of
- -------
shares as provided in Section X hereof or for withdrawal by or return to
Participants (or their beneficiaries) as provided in Sections XI, XIII or XXIV
hereof.
X. PURCHASE OF SHARES
---------------------
If, as of any Exercise Date, there is credited to the Account of a
Participant an amount at least equal to the purchase price of one share of
Common Stock for the current Purchase Period, as determined in Section V, the
Participant shall buy and the Company shall sell at such price the largest
number of whole shares of Common Stock which can be purchased with the amount in
his Account.
Any balance remaining in a Participant's Account at the end of a Purchase
Period will be carried forward into the Participant's Account for the following
Purchase Period. In no event will the balance carried forward be equal to or
exceed the purchase price of one share of Common Stock as determined in Section
V above. Notwithstanding the foregoing provisions of this paragraph, if as of
any Exercise Date the provisions of Section XV are applicable to the Purchase
Period ending on such Exercise Date, and the Committee reduces the number of
shares which would otherwise be purchased by Participants on such Exercise Date,
the entire balance remaining credited to the Account of each Participant after
the purchase of the applicable number of shares of Common Stock on such Exercise
Date shall be refunded to each such Participant. Except with respect to a
Purchase Period for which the Trust Administration Option has been elected, no
refund of an Account balance made pursuant to the Plan shall include any amount
in respect of interest or other imputed earnings.
Anything herein to the contrary notwithstanding, no Participant may, in any
calendar year, purchase a number of shares of Common Stock under this Plan
which, together with all other shares of stock of the Company and its
Subsidiaries which he may be entitled to purchase in such year under all other
employee stock purchase plans of the Company and its subsidiaries which meet the
requirements of Section 423(b) of the Code, have an aggregate Fair Market Value
(measured as of the first day of
5
<PAGE>
each applicable Purchase Period) in excess of $25,000. The limitation described
in the preceding sentence shall be applied in a manner consistent with Section
423(b)(8) of the Code.
XI. WITHDRAWAL
--------------
A Participant may withdraw from the Plan at any time prior to the Exercise
Date of a Purchase Period by filing a notice of withdrawal. Upon a Participant's
withdrawal, the payroll deductions shall cease for the next payroll period and
the entire amount credited to his Account shall be refunded to him. Any
Participant who withdraws from the Plan may again become a Participant hereunder
at the start of the next Purchase Period in accordance with Section VII.
XII. ISSUANCE OF STOCK CERTIFICATES
-----------------------------------
The shares of Common Stock purchased by a Participant shall, for all
purposes, be deemed to have been issued and sold at the close of business on the
Exercise Date. Prior to that date, none of the rights or privileges of a
stockholder of the Company shall exist with respect to such shares. Stock
certificates shall be registered either in the Participant's name or jointly in
the names of the Participant and his spouse, as the Participant shall designate
in his Stock Purchase Agreement. Such designation may be changed at any time by
filing notice thereof. Certificates representing shares of purchased Common
Stock shall be delivered promptly to the Participant following issuance.
XIII. TERMINATION OF SERVICE
----------------------------
(a) Upon a Participant's Termination of Service for any reason other than
death or voluntary termination of employment on or after attaining age 55
("Retirement"), no payroll deduction may be made from any Compensation due him
as of the date of his Termination of Service and the entire balance credited to
his Account shall be automatically refunded to him.
(b) Upon a Participant's Retirement, no payroll deduction shall be made
from any Compensation due him as of the date of his retirement. Such a
Participant may, prior to Retirement, elect:
(1) to have the entire amount credited to his Account as of the date of
his Retirement refunded to him, or
(2) to have the entire amount credited to his Account held therein and
utilized to purchase shares on the Exercise Date as provided in
Section X.
(c) Upon the death of a Participant, no payroll deduction shall be made
from any Compensation due him at time of death, and the entire balance in the
deceased Participant's Account shall be paid to the Participant's designated
beneficiary, or otherwise to his estate.
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<PAGE>
XIV. TEMPORARY LAYOFF, AUTHORIZED LEAVE
OF ABSENCE, DISABILITY
---------------------------------------
Payroll deductions shall cease during a period of absence without pay from
work due to a Participant's temporary layoff, authorized leave of absence,
disability or for any other reason. If such Participant shall return to active
service prior to the Exercise Date for the current Purchase Period, payroll
deductions shall be resumed in accordance with his prior authorization.
If the Participant shall not return to active service prior to the Exercise
Date for the current Purchase Period, the balance of his Stock Purchase Account
will be used to purchase shares on the Exercise Date as provided in Section X,
unless the Participant elects to withdraw from the Plan in accordance with
Section XI.
XV. PROCEDURE IF INSUFFICIENT SHARES AVAILABLE
----------------------------------------------
In the event that on any Exercise Date the aggregate funds available for
the purchase of shares of Common Stock pursuant to Section X hereof would result
in purchases of shares in excess of the number of shares of Common Stock then
available for purchase under the Plan, the Committee shall proportionately
reduce the number of shares which would otherwise be purchased by each
Participant on the Exercise Date in order to eliminate such excess, and the
provisions of the second paragraph of Section X shall apply.
XVI. RIGHTS NOT TRANSFERABLE
----------------------------
The right to purchase shares of Common Stock under this Plan is exercisable
only by the Participant during his lifetime and is not transferable by him. If a
Participant attempts to transfer his right to purchase shares under the Plan, he
shall be deemed to have requested withdrawal from the Plan and the provisions of
Section XI hereof shall apply with respect to such Participant.
XVII. NO OBLIGATION TO EXERCISE OPTION
--------------------------------------
Granting of an option under this Plan shall impose no obligation on an
Eligible Employee to exercise such option.
XVIII. NO GUARANTEE OF CONTINUED EMPLOYMENT
-------------------------------------------
Granting of an option under this Plan shall imply no right of continued
employment with the Company for any Eligible Employee.
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<PAGE>
XIX. NOTICE
-----------
Any notice which an Eligible Employee or Participant files pursuant to this
Plan shall be in writing and shall be delivered personally or by mail addressed
to the Committee, c/o Chief Executive Officer at 500 Glenpointe Center West,
Teaneck, New Jersey 07666 or such other person or location as may be specified
by the Committee.
XX. REPURCHASE OF STOCK
-----------------------
The Company shall not be required to repurchase from any Participant shares
of Common Stock acquired under this Plan.
XXI. ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.
--------------------------------------------------
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted hereunder, the number of shares of Common Stock
covered by each outstanding option, and the purchase price thereof for each such
option shall be appropriately adjusted for any increase or decrease in the
number of outstanding shares of Common Stock resulting from a stock split or
other subdivision or consolidation of shares of Common Stock or for other
capital adjustments or payments of stock dividends or distributions or other
increases or decreases in the outstanding shares of Common Stock affected
without receipt of consideration of the Company.
Subject to any required action by the stockholders, if the Company shall be
the surviving corporation in any merger, reorganization or other business
combination, any option granted hereunder shall cover the securities or other
property to which a holder of the number of shares of Common Stock would have
been entitled pursuant to the terms of the merger. A dissolution or liquidation
of the Company or a merger or consolidation in which the Company is not the
surviving entity shall cause every option outstanding hereunder to terminate.
The foregoing adjustments and the manner of application of the foregoing
provisions shall be determined by the Committee in its sole discretion. Any such
adjustment shall provide for the elimination of any fractional share which might
otherwise become subject to an option.
XXII. AMENDMENT OF THE PLAN
---------------------------
The Board of Directors may, without the consent of the Participants, amend
the Plan at any time, provided that no such action shall adversely affect
options theretofore granted hereunder, and provided that no such action by the
Board of Directors, without approval of the Company's stockholders, may:
(a) increase the total number of shares of Common Stock which may be
purchased by all Participants, except as contemplated in Section XXI;
8
<PAGE>
(b) change the class of Employees eligible to receive options under the
Plan;
(c) decrease the minimum purchase price under Section V;
(d) extend a Purchase Period hereunder; or
(e) extend the term of the Plan.
XXIII. INTERNATIONAL PARTICIPANTS
---------------------------------
With respect to Eligible Employees who reside or work outside the United
States of America, the Committee may, in its sole discretion, amend the terms of
the Plan with respect to such Eligible Employees in order to conform such terms
with the requirements of local law.
XXIV. TERM OF THE PLAN
----------------------
This Plan shall become effective as of the Effective Date upon its adoption
by the Board of Directors, provided that it is approved at a duly-held meeting
of stockholders of the Company, by an affirmative majority of the total votes
present and voting thereat, within 12 months after the earlier of the Effective
Date or the date of adoption by the Board of Directors. If the Plan is not so
approved, no Common Stock shall be purchased under the Plan and the balance of
each Participant's Account shall be promptly returned to the Participant. The
Plan shall continue in effect through the December 31st following the fourth
anniversary of the Effective Date, unless terminated prior thereto pursuant to
Section XV or XXI hereof, or pursuant to the next succeeding sentence. The Board
of Directors shall have the right to terminate the Plan at any time, effective
as of the next succeeding Exercise Date. In the event of the expiration of the
Plan or its termination, outstanding options shall not be affected, except to
the extent provided in Section XV and any remaining balance credited to the
Account of each Participant as of the applicable Exercise Date shall be refunded
to each such Participant.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001058290
<NAME> Cognizant Technology Solutions Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 29,359
<SECURITIES> 0
<RECEIVABLES> 12,939
<ALLOWANCES> 274
<INVENTORY> 0
<CURRENT-ASSETS> 45,064
<PP&E> 13,622
<DEPRECIATION> 5,288
<TOTAL-ASSETS> 56,373
<CURRENT-LIABILITIES> 10,329
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 38,047
<TOTAL-LIABILITY-AND-EQUITY> 56,373
<SALES> 41,924
<TOTAL-REVENUES> 41,924
<CGS> 21,860
<TOTAL-COSTS> 21,860
<OTHER-EXPENSES> 12,131
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (522)
<INCOME-PRETAX> 8,488
<INCOME-TAX> 3,174
<INCOME-CONTINUING> 5,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,314
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.55
</TABLE>
