SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File No. 0-24429
Cognizant Technology Solutions Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(201) 801-0233
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of November 1, 2000:
Class Number of Shares
----- ----------------
Class A Common Stock, par 7,335,479
value $.01 per share
Class B Common Stock, par 11,290,900
value $.01 per share
<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)..... 1
Condensed Consolidated Statements of Income and
Comprehensive Income (Unaudited) for the Three Months and
Nine Months Ended September 30, 2000 and 1999............... 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of September 30, 2000 and December 31, 1999.. 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2000 and 1999....... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 5
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............... 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 18
SIGNATURES........................................................... 19
<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
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................................... $ 33,376 $ 19,077 $ 84,992 $ 54,112
Revenues - related party......................... 3,731 3,799 10,986 10,688
--------- -------- -------- --------
Total revenues........................... 37,107 22,876 95,978 64,800
Cost of revenues................................. 19,110 11,873 49,425 33,733
--------- ------ -------- --------
Gross profit..................................... 17,997 11,003 46,553 31,067
Selling, general and administrative expenses..... 9,673 6,019 25,068 16,809
Depreciation and amortization expense............ 1,245 808 3,242 2,149
--------- -------- -------- --------
Income from operations........................... 7,079 4,176 18,243 12,109
Other income:
Interest income.............................. 732 331 1,779 853
Other (expense)/ income- net................. (167) 61 (431) 94
--------- -------- -------- --------
Total other income....................... 565 392 1,348 947
--------- -------- -------- --------
Income before provision for income taxes......... 7,644 4,568 19,591 13,056
Provision for income taxes....................... (2,859) (1,708) (7,327) (4,883)
--------- -------- -------- --------
Net income....................................... $ 4,785 $ 2,860 $ 12,264 $ 8,173
========= ======== ======== ========
Basic earnings per share......................... $ 0.26 $ 0.16 $ 0.66 $ 0.45
========= ======== ======== ========
Diluted earnings per share....................... $ 0.24 $ 0.15 $ 0.61 $ 0.42
========= ======== ======== ========
Weighted average number of common
shares outstanding - Basic.................... 18,584 18,323 18,538 18,313
Dilutive effect of shares issuable as of
period-end under stock option plans.............. 1,525 854 1,688 929
--------- -------- -------- --------
Weighted average number of common
shares outstanding - Diluted.................. 20,109 19,177 20,226 19,242
========= ======== ======== ========
Comprehensive income:
Net income....................................... $ 4,785 $ 2,860 $ 12,264 $ 8,173
Foreign currency translation adjustments......... (20) 29 (45) 15
--------- -------- -------- --------
Other comprehensive (loss)/ income, net of tax:.. (20) 29 (45) 15
--------- -------- -------- --------
Comprehensive income............................. $ 4,765 $ 2,889 $ 12,219 $ 8,188
========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited 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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 52,836 $ 42,641
Trade accounts receivable, net of allowance of $267 and
$225, respectively................................................ 16,988 8,166
Trade accounts receivable-related party........................... 1,378 1,848
Unbilled accounts receivable...................................... 1,587 1,071
Unbilled accounts receivable-related party........................ 103 73
Other current assets.............................................. 4,630 2,912
--------- ---------
Total current assets.......................................... 77,522 56,711
--------- ---------
Property and equipment, net of accumulated depreciation of $9,786 and
$6,817, respectively.............................................. 12,859 9,474
Goodwill, net......................................................... 1,275 1,513
Investment............................................................ 1,955 --
Other assets.......................................................... 1,767 1,328
--------- ---------
Total assets.................................................. $ 95,378 $ 69,026
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 1,903 $ 1,435
Accrued and other current liabilities............................. 17,917 11,769
--------- ---------
Total current liabilities..................................... 19,820 13,204
Deferred income taxes................................................. 15,426 10,361
--------- ---------
Total liabilities............................................. 35,246 23,565
--------- ---------
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,
7,328 shares and 7,202 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively............ 73 72
Class B common stock, $.01 par value, 25,000 shares authorized,
11,291 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively................................... 113 113
Additional paid-in-capital............................................ 28,533 26,082
Retained earnings..................................................... 31,467 19,203
Cumulative translation adjustment..................................... (54) (9)
--------- ---------
Total stockholders' equity.................................... 60,132 45,461
--------- ---------
Total liabilities and stockholders' equity.................... $ 95,378 $ 69,026
========= =========
</TABLE>
The accompanying notes are an integral part of the unaudited 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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
<S> <C> <C>
Net income......................................................... $ 12,264 $ 8,173
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 3,242 2,150
Provision for doubtful accounts............................ 269 (18)
Deferred income taxes...................................... 5,065 2,455
Tax benefit related to option exercises............... 1,095 --
Changes in assets and liabilities (increase)/decrease:
Trade accounts receivable.................................. (8,621) (884)
Other current assets....................................... (2,264) (209)
Other assets............................................... (473) (238)
Accounts payable........................................... 468 (563)
Accrued and other liabilities.............................. 6,148 (959)
--------- ---------
Net cash provided by operating activities.......................... 17,193 9,907
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment................................. (6,355) (4,903)
Investments........................................................ (1,955) --
--------- ---------
Net cash used in investing activities.............................. (8,310) (4,903)
--------- ---------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital.................... 1,357 257
Payments to related party.......................................... -- (9)
--------- ---------
Net cash provided by financing activities.......................... 1,357 248
--------- ---------
Effect of currency translation..................................... (45) 15
--------- ---------
Increase in cash and cash equivalents ............................. 10,195 5,267
Cash and cash equivalents, beginning of year....................... 42,641 28,418
--------- ---------
Cash and cash equivalents, end of period................... $ 52,836 $ 33,685
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes................... $ 767 $ 1,062
</TABLE>
The accompanying notes are an integral part of the unaudited 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 1999 Annual
Report on Form 10-K and subsequent Form 10-Q's. 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 2000 presentation.
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
effected by a 100% dividend payable on March 16, 2000 to stockholders of record
on March 2, 2000. The stock split has been reflected in the accompanying
financial statements, and all applicable references as to the number of common
shares and per share information have been restated. Stockholder equity accounts
have been restated to reflect the reclassification of an amount equal to the par
value of the increase in issued common shares from the additional
paid-in-capital account to the common stock accounts.
NOTE 2 - INVESTMENT
In June 2000, the Company announced a strategic relationship with Trident
Capital, a leading venture capital firm, to jointly invest in emerging
e-business service and technology companies. In accordance with this strategy,
the Company invested approximately $2,000 in Questra Corporation, an e-business
consulting firm headquartered in Rochester, New York, in return for a 5.8%
equity interest. Trident Capital also independently made a direct investment in
Questra Corporation. The Company's investment is being accounted for under the
cost basis of accounting.
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<PAGE>
NOTE 3 - COMPREHENSIVE INCOME:
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments. Accumulated balances of Cumulative Translation
Adjustments, as of September 30, 2000 and 1999 are as follows:
Cumulative
Translation
Adjustment
-----------
Balance, December 31, 1999............................ $ (9)
Period Net Change..................................... (45)
-------
Balance, September 30, 2000........................... $ (54)
=======
Balance, December 31, 1998............................ $ (11)
Period Net Change..................................... 15
-------
Balance, September 30, 1999........................... $ 4
=======
NOTE 4 - RELATED PARTY TRANSACTIONS:
As of September 30, 2000, IMS Health Incorporated ("IMS Health") owned
approximately 60.6% of the outstanding Common Stock of the Company (representing
all of the Company's Class B Common Stock) and held approximately 93.9% 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 certain of IMS Health's
insurance plans. In 1999, certain employees of the Company also participated in
IMS Health's employee benefit plans. In 2000, the Company initiated its own
employee benefit plans for its employees. Costs for these services for all
periods prior to the IPO were allocated to the Company based on utilization of
certain specific services. Services provided subsequent to the IPO were
performed under an intercompany services agreement with IMS Health. Total costs
in connection with these services were approximately $162 and $263 for the
nine-month periods ended September 30, 2000 and 1999, respectively.
NOTE 5 - ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
In July 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 SFAS No. 133, which establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 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
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<PAGE>
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 SFAS 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 does not expect the
adoption of this pronouncement to have a material effect on the Company's
results of operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. Management believes
that its revenue recognition policies and practices are in conformance with SAB
101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying APB Opinion 25. The
provisions of FIN No. 44 were effective July 1, 2000. Adoption of FIN No. 44 had
no effect on the Company's financial statements.
NOTE 6 - SEGMENT INFORMATION:
The Company delivers full life cycle solutions to complex software
development and maintenance challenges that companies face as they transition to
e-business. These services are delivered through the use of a seamless on-site
and offshore consulting project team. The Company's primary service offerings
include: application development and integration; application management;
re-engineering; and mass change. 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. Information about the Company's operations and
total assets in North America, Europe and Asia for the period ended September
30, 2000 and 1999 are presented in accordance with SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information," as follows:
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<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES (1)
North America..................... $ 31,263 $ 18,481 $ 80,013 $ 51,139
Europe............................ 5,530 4,294 15,085 13,335
Asia.............................. 314 101 880 326
--------- --------- --------- ---------
Consolidated...................... $ 37,107 $ 22,876 $ 95,978 $ 64,800
========= ========= ========= =========
OPERATING INCOME (1)
North America..................... $ 5,963 $ 3,373 $ 15,207 $ 9,557
Europe............................ 1,056 784 2,868 2,490
Asia.............................. 60 19 168 62
--------- --------- --------- ---------
Consolidated...................... $ 7,079 $ 4,176 $ 18,243 $ 12,109
========= ========= ========= =========
AS OF SEPTEMBER 30,
-------------------
IDENTIFIABLE ASSETS 2000 1999
---- ----
North America..................... $ 61,740 $ 37,629
Europe............................ 6,177 3,809
Asia.............................. 27,461 19,611
--------- ---------
Consolidated...................... $ 95,378 $ 61,049
========= =========
</TABLE>
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
In the third quarter of 2000, sales to one related party customer accounted
for 10.1% of revenues and one third-party customer accounted for 11.1% of
revenues. In the third quarter of 1999, sales to one related party customer
accounted for 16.6% of revenues and one third-party customer accounted for 17.1%
of revenues. During the nine months ended September 30, 2000, sales to one
related party customer accounted for 11.4% of revenues and one third-party
customer accounted for 9.3% of revenues. During the nine months ended September
30, 1999, sales to one related party customer accounted for 16.5% of revenues
and one third-party customers accounted for 19.0% 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 quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of the
Company's engagements involve projects that are critical to the operations of
its customers' business and provide benefits that are difficult to quantify. Any
failure in a customer's computer system could result in a claim for substantial
damages against the Company, regardless of the Company's responsibility for such
failure. Although the Company attempts to contractually limit its liability for
possible 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
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<PAGE>
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
Cognizant Technology Solutions Corporation (the "Company") delivers
high-quality, cost-effective, full life cycle solutions to complex software
development and maintenance problems that companies face as they transition to
e-business. These services are delivered through the use of a seamless on-site
and offshore consulting project team. The Company's primary service offerings
include:
o application development and integration;
o application management;
o re-engineering; and
o mass change.
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, along
with Erisco, IMS International, Nielsen Media Research, Pilot Software and Sales
Technologies and certain other entities, plus a majority interest in Gartner
Group were spun-off from The Dun & Bradstreet Corporation to form a new company,
Cognizant Corporation. 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 initial public offering. On June
30, 1998, a majority interest in the Company, Erisco, IMS International and
certain other entities were spun-off from Cognizant Corporation to form IMS
Health. At September 30, 2000, IMS Health owned approximately 60.6% of the
outstanding stock of the Company and held approximately 93.9% of the combined
voting power of the Company's common stock.
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
effected by a 100% dividend payable on March 16, 2000 to stockholders of record
on March 2, 2000. The stock split has been reflected in the accompanying
consolidated financial statements, and all applicable references as to the
number of common shares and per share information have been restated.
Appropriate adjustments have been made in the exercise price and number of
shares subject to stock options. Stockholder equity accounts have been restated
to reflect the reclassification of an amount equal to the par value of the
increase in issued common shares from the additional paid-in-capital account to
the common stock accounts.
The Company's services are performed on either a time-and-materials or
fixed-price basis. 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
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<PAGE>
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 significant 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 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;
and (xi) general economic conditions. The Company's actual results may differ
materially from the results disclosed in such forward-looking statements.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................... 51.5 51.9 51.5 52.1
------ ------ ------ ------
Gross profit........................ 48.5 48.1 48.5 47.9
Selling, general and administrative
expense............................... 26.1 26.3 26.1 25.9
Depreciation and amortization expense.. 3.4 3.5 3.4 3.3
------ ------ ------ ------
Income from operations.............. 19.1 18.3 19.0 18.7
Other (expense) income:
Interest income..................... 2.0 1.4 1.9 1.3
Other (expense) income.............. (0.5) 0.3 (0.5) 0.1
------ ------ ------ ------
Total other income..................... 1.5 1.7 1.4 1.4
------ ------ ------ ------
Income before provision for income
taxes............................... 20.6 20.0 20.4 20.1
Provision for income taxes............. (7.7) (7.5) (7.6) (7.5)
------ ------ ------ ------
Net income ............................ 12.9% 12.5% 12.8% 12.6%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue. Revenue increased by 62.2%, or $14.2 million, from $22.9 million
during the three months ended September 30, 1999 to $37.1 million during the
three months ended September 30, 2000. This increase resulted primarily from a
$16.8 million increase in application development and integration, application
management, reengineering and other services from $20.3 million during the three
months ended September 30, 1999 to $37.1 million during the three months ended
September 30, 2000. Partially offsetting this increase was an approximately $2.5
million decrease in Year 2000 Compliance Services from $2.5 million during the
three months ended September 30, 1999 to $0 during the three months ended
September 30, 2000. The percentage of revenues derived from unrelated parties
increased from 83.4% during the three months ended September 30, 1999 to 89.9%
during the three months ended September 30, 2000. This increase resulted
primarily from the Company's continued efforts to pursue unaffiliated
third-party customers and expand service offerings to existing unaffiliated
customers. For statement of operations purposes, revenues from related parties
only include revenues recognized during the period in which the related party
was affiliated with the Company. In the third quarter of 2000, sales to one
related party customer accounted for 10.1% of revenues and one third-party
customer accounted for 11.1% of revenues. In the third quarter of 1999, sales to
one related party customer accounted for 16.6% of revenues and one third-party
customer accounted for 17.1% of revenues.
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 61.0%, or approximately $7.2
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<PAGE>
million, from approximately $11.9 million during the three months ended
September 30, 1999 to approximately $19.1 million during the three months ended
September 30, 2000. The increase was due primarily to the increased cost
resulting from the increase in the number of the Company's technical
professionals from approximately 1,900 employees at September 30, 1999 to
approximately 2,600 employees at September 30, 2000. The increased number of the
Company's technical professionals is a direct result of greater demand for the
Company's services. The Company's gross profit increased by 63.6%, or
approximately $7.0 million, from approximately $11.0 million during the three
months ended September 30, 1999 to approximately $18.0 million during the three
months ended September 30, 2000. Gross profit margin increased from 48.1% of
revenues during the three months ended September 30, 1999 to 48.5% of revenues
during the three months ended September 30, 2000. The increase in such gross
profit margin was primarily attributable to the increased third-party revenue,
which generally have higher margins and the shift toward newer, higher margin
customer services.
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 59.9%, or approximately $4.1
million, from approximately $6.8 million during the three months ended September
30, 1999 to approximately $10.9 million during the three months ended September
30, 2000, and decreased as a percentage of revenue from 29.8% to 29.4%. The
dollar increase in such expenses was primarily due to expenses incurred to
expand the Company's sales and marketing activities and increased infrastructure
expenses to support the Company's revenue growth. The decrease in such expenses
as a percentage of revenue resulted from the Company's increased volume of
revenue.
Income from Operations. Income from operations increased 69.5%, or
approximately $2.9 million, from approximately $4.2 million during the three
months ended September 30, 1999 to approximately $7.1 million during the three
months ended September 30, 2000, representing 18.3% and 19.1% of revenues,
respectively. The increase in operating margin was primarily due to the
increased third-party revenue and the shift toward newer higher margin customer
services.
Other Income. Other income consists primarily of interest income offset, in
part, by foreign currency exchange losses. Interest income increased by $401,000
from $331,000 during the three months ended September 30, 1999 to $732,000
during the three months ended September 30, 2000. The increase in such interest
income was attributable primarily to generally higher operating cash balances.
The Company recognized a net foreign currency exchange gain/ (loss) of $61,000
and $(170,000) during the three months ended September 30, 1999 and 2000,
respectively, as a result of the effect of changing exchange rates on the
Company's transactions.
Provision for Income Taxes. The provision for income taxes increased from
approximately $1.7 million in the three months ended September 30, 1999 to
approximately $2.9 million in the three months ended September 30, 2000, with an
effective tax rate of 37.4% for the three months ended September 30, 1999 and
2000.
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Net Income. Net income increased from approximately $2.9 million for the
three months ended September 30, 1999 to approximately $4.8 million for the
three months ended September 30, 2000, representing 12.5% and 12.9% of revenues,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenue. Revenue increased by 48.1%, or approximately $31.2 million, from
approximately $64.8 million during the nine months ended September 30, 1999 to
approximately $96.0 million during the nine months ended September 30, 2000.
This increase resulted primarily from a $42.8 million increase in application
development and integration, application management, reengineering and other
services from $52.7 million during the nine months ended September 30, 1999 to
$95.5 million during the nine months ended September 30, 2000. Partially
offsetting this increase was an approximately $11.6 million decrease in Year
2000 Compliance Services from $12.1 million during the nine months ended
September 30, 1999 to approximately $500,000 during the nine months ended
September 30, 2000. The percentage of revenues derived from unrelated parties
increased from 83.5% during the six months ended September 30, 1999 to 88.6%
during the nine months ended September 30, 2000. This increase resulted
primarily from the Company's continued efforts to pursue unaffiliated
third-party customers and expand service offerings to existing unaffiliated
customers. For statement of operations purposes, revenues from related parties
only include revenues recognized during the period in which the related party
was affiliated with the Company. During the nine months ended September 30,
2000, sales to one related party customer accounted for 11.4% of revenues and
one third-party customer accounted for 9.3% of revenues. During the nine months
ended September 30, 1999, sales to one related party customer accounted for
16.5% of revenues and one third-party customers accounted for 19.0% of revenues.
Gross profit. The Company's cost of revenues increased by 46.5%, or
approximately $15.7 million, from approximately $33.7 million during the nine
months ended September 30, 1999 to approximately $49.4 million during the nine
months ended September 30, 2000. The increase was due primarily to increased
costs resulting from the increase in the number of the Company's technical
professionals from approximately 1,900 employees at September 30, 1999 to
approximately 2,600 employees at September 30, 2000. The Company's gross profit
increased by 49.8%, or approximately $15.5 million, from approximately $31.1
million during the nine months ended September 30, 1999 to approximately $46.6
million during the nine months ended September 30, 2000. Gross profit margin
increased from 47.9% of revenues during the nine months ended September 30, 1999
to 48.5% of revenues during the nine months ended September 30, 2000. The
increase in such gross profit margin was primarily attributable to the increased
third-party revenue and the shift toward newer higher margin customer services.
Selling, general and administrative expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased by
49.3%, or approximately $9.4 million, from approximately $19.0 million during
the nine months ended September 30, 1999 to approximately $28.3 million during
the nine months ended September 30, 2000, and increased as a percentage of
revenue from 29.3% to 29.5%. The increase in such expenses in absolute dollars
and as a percentage of revenue was primarily due to expenses incurred to expand
the Company's
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sales and marketing activities and increased infrastructure expenses to support
the Company's revenue growth.
Income from Operations. Income from operations increased 50.7%, or
approximately $6.1 million, from approximately $12.1 million during the nine
months ended September 30, 1999 to approximately $18.2 million during the nine
months ended September 30, 2000, representing 18.7% and 19.0% of revenues,
respectively. The increase in operating margin was primarily due to the
increased third-party revenue and the shift toward newer higher margin customer
services.
Other Income. Interest income increased by approximately $926,000 from
approximately $853,000 during the nine months ended September 30, 1999 to
approximately $1.8 million during the nine months ended September 30, 2000. The
increase in such interest income was attributable primarily to generally higher
operating cash balances. The Company recognized a net foreign currency exchange
loss of $438,000 during the nine months ended September 30, 2000, compared to a
gain of $94,000 in the prior year period, 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 $4.9 million for the nine months ended September 30, 1999 to
approximately $7.3 million for the nine months ended September 30, 2000, with an
effective tax rate of 37.4% in both 1999 and 2000.
Net Income. Net income increased from approximately $8.2 million for the
nine months ended September 30, 1999 to approximately $12.3 million for the nine
months ended September 30, 2000, representing 12.6% and 12.8% of revenues in
1999 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, through the date of the IPO, 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 Cognizant Corporation and IMS
Health. In June 1998, the Company consummated its initial public offering of
5,834,000 (2,917,000 pre-split) shares of its Class A Common Stock at a price to
the public of $5.00 ($10.00 pre-split) per share, of which 5,000,000 (2,500,000
pre-split) shares were issued and sold by the Company and 834,000 (417,000
pre-split) 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 then-existing non-trade related party balances to Cognizant Corporation. The
Company has used and plans to use the remainder of the net proceeds from the
offering as well as other cash 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 (iii) general corporate purposes, including working capital.
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Net cash provided by operating activities was approximately $17.2 million
during the nine months ended September 30, 2000 as compared to net cash provided
by operating activities of approximately $9.9 million during the nine months
ended September 30, 1999. The increase results primarily from increased levels
of accrued liabilities and accounts payable, increased net income and an
increase in deferred taxes, partially offset by larger increases in accounts
receivable and other current assets. Trade accounts receivable, net of
allowance, increased from $10.0 million at December 31, 1999 to $18.4 million at
September 30, 2000 due to increased revenues. 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. At September 30, 2000, the Company's day's sales outstanding,
including unbilled receivables, was approximately 50 days.
The Company's investing activities used net cash of approximately $8.3
million for the nine months ended September 30, 2000, as compared to net cash
used of approximately $4.9 million for the same period in 1999. The increase in
2000 compared to 1999 primarily reflects the Company's investment in Questra
Corporation of approximately $2.0 million in June 2000 and an increase in
purchases of property and equipment.
The Company's financing activities provided net cash of approximately $1.4
million for the nine months ended September 30, 2000, as compared to net cash
provided by financing activities of approximately $248,000 for the same period
in 1999. The increase in net cash provided by financing activities was primarily
related to a higher level of cash proceeds from the exercise of stock options
during 2000, as compared to the prior year.
As of September 30, 2000, the Company had no significant third-party debt.
The Company had working capital of $57.7 million at September 30, 2000 and
$43.5 million at December 31, 1999.
The Company believes that its available funds and the cash flows expected
to be generated from operations, will be adequate to satisfy its current and
planned operations and needs through at least the next 12 months.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's Canadian and European
subsidiaries are translated into U.S. dollars at current exchange rates and
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in a separate component of
stockholders' equity. For the Company's Indian subsidiary, the functional
currency is the U.S. dollar since its sales are made primarily in the United
States, the sales price is predominantly in U.S. dollars and there is a high
volume of intercompany transactions denominated in U.S. dollars between the
Indian subsidiary and its U.S. affiliates. Non-monetary assets and liabilities
are translated at historical exchange rates, while monetary assets and
liabilities are translated at current exchange rates. A portion of the Company's
costs in India are denominated in local currency and subject to exchange
fluctuations, which to date, has not had any material adverse effect on the
Company's results of operations.
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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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 SFAS No. 133, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. SFAS 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 SFAS 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 does not expect the adoption of this pronouncement to
have a material effect on the Company's results of operations, financial
position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the Securities and Exchange Commission. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Management believes that
its revenue recognition policies and practices are in conformance with SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25" ("FIN No. 44"). The
interpretation provides guidance for certain issues relating to stock
compensation involving employees that arose in applying APB Opinion 25. The
provisions of FIN No. 44 were effective July 1, 2000. Adoption of FIN No. 44 had
no effect on the Company's financial statements.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27. Financial Data Schedule for the period ended September 30,
2000.
(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: November 9, 2000 By: /s/ Wijeyaraj Mahadeva
---------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: November 9, 2000 By: /s/ Gordon Coburn
---------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
