SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission File No. 0-24429
Cognizant Technology Solutions Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
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(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 April 30, 1999:
Class Number of Shares
----- ----------------
Class A Common Stock, par 3,506,411
value $.01 per share
Class B Common Stock, par 5,645,450
value $.01 per share
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.............. 1
Condensed Consolidated Statements of Income (Unaudited)
for the Three Months Ended March 31, 1999 and 1998....... 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of March 31, 1999 and December 31, 1998... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended March 31, 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 5. Other Information........................................ 16
Item 6. Exhibits and Reports on Form 8-K......................... 16
SIGNATURES........................................................ 17
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
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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 MARCH 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues...................................................... $ 17,135 $ 6,529
Revenues - related party...................................... 3,291 3,709
-------- --------
Total revenues............................................. 20,426 10,238
Cost of revenues.............................................. 10,711 5,929
-------- --------
Gross profit.................................................. 9,715 4,309
Selling, general and administrative
expenses................................................... 5,014 2,705
Depreciation and amortization expense......................... 631 480
-------- --------
Income from operations........................................ 4,070 1,124
Other income:
Interest income............................................ 276 31
Other income/(expense) - net............................... 62 (17)
-------- --------
Total other income.................................... 338 14
-------- --------
Income before provision for income taxes...................... 4,408 1,138
Provision for income taxes.................................... (1,649) (426)
-------- --------
Net income.................................................... $ 2,759 $ 712
======== ========
Basic earnings per share...................................... $ 0.30 $ 0.11
======== ========
Diluted earnings per share.................................... $ 0.29 $ 0.10
======== ========
Weighted average number of common
shares outstanding - Basic................................. 9,151 6,614
======== ========
Dilutive Effect of Shares Issuable as of Period-End
Under Stock Option Plans................................... 457 204
======== ========
Adjustment of Shares Applicable to Exercised Stock Options
During the Period.......................................... 1 --
======== ========
Weighted average number of common
shares outstanding - Diluted............................... 9,609 6,818
======== ========
Comprehensive Income:
Net Income.................................................... $ 2,759 $ 712
Foreign Currency Translation Adjustments...................... (5) 3
-------- --------
Other Comprehensive Income/(Loss), net of Tax:................ $ (5) $ 715
======== ========
Comprehensive Income.......................................... $ 2,754 $ 715
======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited)
(in thousands, except par values)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 25,102 $ 28,418
Trade accounts receivable, net of allowance of $274
for each period presented...................................... 11,610 9,230
Trade accounts receivable-related party........................... 3,212 1,877
Unbilled accounts receivable...................................... 1,539 1,088
Other current assets.............................................. 2,264 1,754
---------- ----------
Total current assets.......................................... 43,727 42,367
---------- ----------
Property and equipment, net of accumulated depreciation of $4,654 and
$4,121, respectively............................................ 6,938 6,270
Goodwill, net......................................................... 1,751 1,830
Other assets.......................................................... 1,433 1,212
---------- ----------
Total assets $ 53,849 $ 51,679
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Current liabilities:
Accounts payable.................................................. $ 1,736 $ 1,744
Accrued and other current liabilities............................. 8,931 11,207
---------- ----------
Total current liabilities..................................... 10,667 12,951
Deferred income taxes................................................. 7,716 6,103
Due to related party.................................................. -- 9
---------- ----------
Total liabilities............................................. 18,383 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,
3,506 shares and 3,505 shares issued and outstanding at
March 31, 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 March 31, 1999 and
December 31, 1998, respectively................................... 57 57
Additional paid-in-capital............................................ 24,662 24,566
Retained earnings..................................................... 10,728 7,969
Cumulative translation adjustment..................................... (16) (11)
----------- -----------
Total stockholders' equity.................................... 35,466 32,616
---------- ----------
Total liabilities and stockholders' equity.................... $ 53,849 $ 51,679
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 2,759 $ 712
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 631 480
Provision for doubtful accounts............................ -- (62)
Deferred income taxes...................................... 1,613 426
Changes in assets and liabilities:
Accounts receivable........................................ (3,703) (1,269)
Other current assets....................................... (961) (538)
Other assets............................................... (221) 747
Accounts payable........................................... (8) (249)
Accrued and other liabilities.............................. (2,277) 371
-------- --------
Net cash (used in)/provided by operating activities................ (2,167) 618
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................. (1,219) (906)
-------- --------
Net cash used in investing activities.............................. (1,219) (906)
-------- --------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital, net............... 96 (58)
Payments to related party.......................................... (21) (172)
-------- --------
Net cash provided by/(used in) financing activities................ 75 (230)
-------- --------
Effect of Currency Translation (5) --
-------- --------
Decrease in cash and cash equivalents ............................. (3,316) (518)
Cash and cash equivalents, beginning of year....................... 28,418 2,715
-------- --------
Cash and cash equivalents, end of period....................... $ 25,102 $ 2,197
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes................... $ 23 $ 2
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar Amounts in Thousands)
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by Cognizant Technology Solutions Corporation
(the "Company") in accordance with generally accepted accounting principles and
Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as
amended and should be read in conjunction with the Company's consolidated
financial statements (and notes thereto) included in the Company's 1998 Annual
Report on Form 10-K. In the opinion of the Company's management, all adjustments
considered necessary for a fair presentation of the accompanying condensed
consolidated financial statements have been included, and all adjustments are of
a normal and recurring nature. Operating results for the interim period are not
necessarily indicative of results that may be expected to occur for the entire
year. Certain prior period amounts have been reclassified to conform with the
1999 presentation.
NOTE 2 - COMPREHENSIVE INCOME:
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments (see Condensed Consolidated Statements of
Comprehensive Income). Accumulated balances of Cumulative Translation
Adjustments, as of March 31, 1999 and 1998, are as follows:
Cumulative
Translation
Adjustment
----------
Balance December 31, 1998............................. $ (11)
Quarter Change........................................ (5)
---------
Balance March 31, 1999................................ $ (16)
=========
Balance December 31, 1997............................. $ (2)
Quarter Change........................................ 3
---------
Balance March 31, 1998................................ $ (1)
=========
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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expenses. In July 1998, 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 March 31, 1999, IMS Health owned approximately 61.7% of the outstanding
Common Stock of the Company and held approximately 94.2% 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 $87 and $405 for the three month periods ended March 31, 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.
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In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to 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. The Company will be required to implement SFAS No. 133
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company expects the adoption of this pronouncement will not have a material
effect on the Company's financial statements.
NOTE 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
three month period ended March 31, 1999 and 1998 are as follows:
1999 1998
---- ----
Revenues (1)
North America.............................. $16,145 $ 8,544
Europe..................................... 4,164 1,610
Asia....................................... 117 84
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Consolidated.............................. $20,426 $10,238
======= =======
Operating income (1)
North America.............................. $ 3,217 $ 938
Europe..................................... 830 177
Asia....................................... 23 9
------- -------
Consolidated............................... $ 4,070 $ 1,124
======= =======
Identifiable assets
North America.............................. $36,008 $10,551
Europe..................................... 3,769 1,702
India...................................... 14,072 7,199
------- -------
Consolidated............................... $53,849 $19,452
======= =======
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
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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 first quarter of 1999, sales to one related party customer accounted
for 16.1% of revenues and two third-party customers accounted for 20.5% and
10.6% of revenues, respectively. In the first quarter of 1998, sales to one
related party customer accounted for 36.2% of revenues and two third-party
customers accounted for 14.5% and 12.1 of revenues, respectively.
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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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.
The Company's services are performed on either a time-and-materials or
fixed-price basis. The Company expects that an increasing number of its future
projects will be fixed-price rather than time-and-materials (which has
historically been the basis for its contracts). Revenues related to
time-and-materials contracts are recognized as the service is performed.
Revenues related to fixed-price contracts are recognized using the
percentage-of-completion method of accounting, under which the sales value of
performance, including earnings thereon, is recognized on the basis of the
percentage that each contract's cost to date bears to the total estimated cost.
Estimates are subject to adjustment as a project progresses to reflect changes
in expected completion costs or dates. The cumulative impact of any revision in
estimates of the percentage of work completed is reflected in the financial
reporting period in which the change in the estimate becomes known, and any
anticipated losses are recognized immediately. Since the Company bears the risk
of cost over-runs and inflation associated with fixed-price projects, the
Company's operating results may be adversely affected by changes in estimates of
contract completion costs and dates.
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
anticipated future revenues, contract percentage completions, capital
expenditures, and other
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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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RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
Three Months Ended Mar. 31,
---------------------------
1999 1998
---- ----
Total revenues......................... 100.0% 100.0%
Cost of revenues....................... 52.4 57.9
------- -------
Gross profit........................ 47.6 42.1
Selling, general and administrative
expense............................... 24.5 26.4
Depreciation and amortization expense.. 3.1 4.7
------- -------
Income from operations.............. 19.9 11.0
Other income (expense):
Interest income..................... 1.4 0.3
Other income (expense).............. 0.3 (0.2)
------- -------
Total other income (expense)........... 1.7 0.1
------- -------
Income before provision for income
taxes............................... 21.6 11.1
Provision for income taxes............. (8.1) (4.2)
Net income ............................ 13.5% 7.0%
======= =======
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenue. Revenue increased by 100.0%, or $10.2 million, from $10.2 million
during the three months ended March 31, 1998 to $20.4 million during the three
months ended March 31, 1999. This increase resulted primarily from a $9.5
million increase in software development, maintenance and Eurocurrency
compliance services and, to a lesser extent, from an approximately $600,000
increase in Year 2000 Compliance Services. The percentage of revenues derived
from unrelated parties increased from 63.8% during the three months ended March
31, 1998 to 83.9% during the three months ended March 31, 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.
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 80.7%, or $4.8 million, from $5.9 million during the three months
ended March 31, 1998 to $10.7 million during the three months ended March 31,
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 1,060 employees at March 31, 1998 to approximately 1,570 employees
at March 31, 1999. The Company's gross profit increased by 125.5%, or
approximately $5.4 million, from approximately $4.3 million during the three
months ended March 31, 1998 to approximately $9.7 million during the three
months ended March 31, 1999. Gross profit margin increased from 42.1% of
revenues during the three months ended March 31, 1998 to 47.6% of revenues
during the three months ended March 31, 1999. The increase in such gross profit
margin was primarily attributable to the
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increased third-party revenue which generally have higher margins and a higher
utilization level of technical professionals during the three months ended March
31, 1999 compared to the three months ended March 31, 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 77.2%, or $2.5 million, from $3.2
million during the three months ended March 31, 1998 to $5.6 million during the
three months ended March 31, 1999, but decreased as a percentage of revenue from
31.1% to 27.6%. The increase in such expenses in absolute dollars was primarily
due to expenses incurred to expand the Company's sales and marketing activities
and increased infrastructure expenses to support the Company's revenue growth.
The Company expects selling, general and administrative expenses to continue to
increase in absolute dollars to support the Company's planned expansion. The
decrease in selling, general and administrative expenses as a percentage of
revenue resulted from the Company's increased volume of revenue.
Income from Operations. Income from operations increased 262.1%, or $2.9
million, from $1.1 million during the three months ended March 31, 1998 to $4.1
million during the three months ended March 31, 1999, representing 11.0% and
19.9% 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
$245,000 from approximately $31,000 during the three months ended March 31, 1998
to approximately $276,000 during the three months ended March 31, 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 cash balances. The Company recognized a
net foreign currency exchange gain of approximately $59,000 during the three
months ended March 31, 1999, as a result of the effect of changing exchange
rates on the Company's transactions.
Provision for Income Taxes. Historically, the Company has been included in
the consolidated federal income tax returns of 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 $426,000 in the three months ended March 31, 1998
to $1.6 million in the three months ended March 31, 1999 resulting in an
effective tax rate of 37.4% in 1998 and 1999.
Net Income. Net income increased from approximately $712,000 for the three
months ended March 31, 1998 to $2.8 million for the three months ended March 31,
1999, representing 7.0% and 13.5% as a percentage of revenues, respectively.
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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 expects to use the
remainder of the net proceeds from the offering for (i) expansion of existing
operations, including the Company's offshore software development centers; (ii)
continued development of new service lines and possible acquisitions of related
businesses; and (ii) general corporate purposes including working capital.
Net cash used in operating activities was approximately $2.2 million during
the three months ended March 31, 1999 as compared to net cash provided by
operating activities of $618,000 during the three months ended March 31, 1998.
The decrease results primarily from increased accounts receivable and a lower
level of accrued liabilities partially offset by increased net income and an
increase in deferred taxes. Accounts receivable increased from $11.1 million at
December 31, 1998 to $14.8 million at March 31, 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 $1.2 million for the
three months ended March 31, 1999 as compared to net cash used of $906,000 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
$75,000 for the three months ended March 31, 1999 as compared to a use of cash
of approximately $230,000 for the same period in 1998.
As of March 31, 1999, the Company had no significant third-party debt.
The Company had working capital of $33.0 million at March 31, 1999 and
$29.4 million at December 31, 1998.
The Company believes that its available funds and the cash flows expected
to be generated from operations, will be adequate to satisfy its current and
planned operations and needs through at least the next 12 months.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate
- 13 -
<PAGE>
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 is underway in all of the Company's operations. These
plans will address facilities and equipment, telecommunications infrastructure,
and internal administrative processes. In addition, these plans will take into
account human resource and communications issues that relate to the Company's
employees. By the end of June 1999, the Company expects to have such contingency
plans in place to address the most likely effects on the Company from external
risks. As more information emerges about services upon which the Company is
critically reliant, these plans will be adjusted accordingly.
- 14 -
<PAGE>
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 June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to 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. The Company will be required to implement SFAS No. 133
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company expects the adoption of this pronouncement will not have a material
effect on the Company's financial statements.
- 15 -
<PAGE>
PART II. OTHER INFORMATION
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule for the period ended March 31, 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.
- 16 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cognizant Technology Solutions Corporation
DATE: May 14, 1999 By: /s/ Wijeyaraj Mahadeva
--------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: May 14, 1999 By: /s/ Gordon Coburn
--------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRANT'S FORM 10-Q FOR THE
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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