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 March 31, 2000
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
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(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:
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of May 1, 2000:
Class Number of Shares
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Class A Common Stock, par value
$.01 per share 7,228,335
Class B Common Stock, par value
$.01 per share 11,290,900
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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 (Unaudited)
for the Three Months Ended March 31, 2000 and 1999............ 2
Condensed Consolidated Statements of Financial Position
(Unaudited) as of March 31, 2000 and December 31, 1999........ 3
Condensed Consolidated Statements of Cash Flows (Unaudited
for the Three Months Ended March 31, 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................. 9
PART II. OTHER INFORMATION
Item 5. Other Information............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
SIGNATURES............................................................ 16
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(unaudited)
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<PAGE>
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
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<S> <C> <C>
Revenues................................................. $ 23,564 $ 17,135
Revenues - related party................................. 3,506 3,291
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Total revenues........................................ 27,070 20,426
Cost of revenues......................................... 13,939 10,711
---------- ----------
Gross profit............................................. 13,131 9,715
Selling, general and administrative
expenses.............................................. 7,037 5,014
Depreciation and amortization expense.................... 971 631
---------- ----------
Income from operations................................... 5,123 4,070
Other income:
Interest income....................................... 505 276
Other (expense) income - net.......................... (99) 62
---------- ----------
Total other income............................... 406 338
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Income before provision for income taxes................. 5,529 4,408
Provision for income taxes............................... (2,068) (1,649)
---------- ----------
Net income............................................... $ 3,461 $ 2,759
========== ==========
Basic earnings per share................................. $ 0.19 $ 0.15
========== ==========
Diluted earnings per share............................... $ 0.17 $ 0.14
========== ==========
Weighted average number of common
shares outstanding - Basic............................ 18,500 18,302
========== ==========
Dilutive Effect of Shares Issuable as of Period-End
Under Stock Option Plans.............................. 1,687 916
========== ==========
Weighted average number of common
shares outstanding - Diluted.......................... 20,187 19,218
========== ==========
Comprehensive Income:
Net Income............................................... $ 3,461 $ 2,759
Foreign Currency Translation Adjustments................. $ 4 $ 62
---------- ----------
Other Comprehensive Income/(Loss), net of Tax:........... $ 4 $ (5)
========== ==========
Comprehensive Income..................................... $ 3,465 $ 2,754
========== ==========
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,
2000 1999
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Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 40,360 $ 42,641
Trade accounts receivable, net of allowance of $238 and $225,
respectively...................................................... 12,871 8,166
Trade accounts receivable-related party............................. 1,719 1,848
Unbilled accounts receivable........................................ 1,236 1,071
Unbilled accounts receivable - related party........................ 618 73
Other current assets................................................ 3,740 2,912
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Total current assets............................................ 60,544 56,711
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Property and equipment, net of accumulated depreciation of $7,699 and
$6,817, respectively................................................ 9,376 9,474
Goodwill, net........................................................... 1,433 1,513
Other assets............................................................ 1,456 1,328
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Total assets.................................................... $ 72,809 $ 69,026
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................... $ 1,771 $ 1,435
Accrued and other current liabilities............................... 9,731 11,769
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Total current liabilities....................................... 11,502 13,204
Deferred income taxes................................................... 12,000 10,361
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Total liabilities............................................... 23,502 23,565
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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, and
7,227 and 7,202 shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively................................. 72 72
Class B common stock, $.01 par value, 15,000 shares authorized,
11,291 shares issued and outstanding at March 31, 2000
and December 31, 1999, respectively................................. 114 114
Additional paid-in-capital.............................................. 26,462 26,081
Retained earnings....................................................... 22,664 19,203
Cumulative translation adjustment....................................... (5) (9)
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Total stockholders' equity...................................... 49,307 45,461
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Total liabilities and stockholders' equity...................... $ 72,809 $ 69,026
=========== ==========
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 CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 3,461 $ 2,759
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................... 971 631
Provision for doubtful accounts................................. 13 --
Deferred income taxes........................................... 1,639 1,613
Changes in assets and liabilities:
Trade accounts receivable....................................... (4,589) (3,703)
Other current assets............................................ (1,538) (961)
Other assets.................................................... (128) (221)
Accounts payable................................................ 336 (8)
Accrued and other liabilities................................... (2,046) (2,277)
-------- --------
Net cash used in operating activities................................... (1,881) (2,167)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment...................................... (793) (1,219)
-------- --------
Net cash used in investing activities................................... (793) (1,219)
-------- --------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital, net.................... 351 96
Payments from (to) related party........................................ 8 (21)
Tax Benefit Related to Option Exercises................................. 30 --
-------- --------
Net cash provided by financing activities............................... 389 75
-------- --------
Effect of currency translation.......................................... 4 (5)
-------- --------
Decrease in cash and cash equivalents .................................. (2,281) (3,316)
Cash and cash equivalents, beginning of year............................ 42,641 28,418
-------- --------
Cash and cash equivalents, end of period........................ $ 40,360 $ 25,102
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes........................ $ 227 $ 23
The accompanying notes are an integral part of the condensed 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 1999 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
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. Shareholder 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 capital in excess of par
value account to the common stock accounts.
NOTE 2 - COMPREHENSIVE INCOME:
The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments. Accumulated balances of Cumulative Translation
Adjustments, as of March 31, 2000 and 1999 are as follows:
Cumulative
Translation
Adjustment
Balance December 31, 1999........................ $ (9)
Period Change.................................... 4
-------
Balance March 31, 2000........................... $ (5)
=======
Balance December 31, 1998........................ $ (11)
Period Change.................................... (5)
-------
Balance March 31, 1999........................... $ (16)
=======
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
NOTE 3 - RELATED PARTY TRANSACTIONS:
As of March 31, 2000, IMS Health Incorporated ("IMS Health") owned
approximately 61.0% of the outstanding Common Stock of the Company (representing
all of the Company's Class B Common Stock) and held approximately 94.0% 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 $26 and $87 for the three-month periods ended March 31, 2000 and
1999, respectively.
NOTE 4 - ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of the FASB
Statement No. 133, an Amendment of FASB Statement No. 133". SFAS No. 137 defers
the effective date of FASB No. 133, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. FASB No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variability in cash flows attributable to a particular risk, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security and a forecasted
transaction. As a result of FASB No. 137, the Company will be required to
implement SFAS No. 133 for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company 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, "SAB 101," 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.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
NOTE 5 - SEGMENT INFORMATION
The Company delivers 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: application development and integration; application management;
re-engineering; and mass change. Information about the Company's operations and
total assets in North America, Europe and Asia for the three month period ended
March 31, 2000 and 1999 are presented in accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," as
follows:
THREE MONTHS ENDED
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REVENUES (1) 2000 1999
---- ----
North America..................... $ 22,575 $ 16,145
Europe............................ 4,217 4,164
Asia.............................. 278 117
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Consolidated...................... $ 27,070 $ 20,426
========= =========
OPERATING INCOME (1)
North America..................... $ 4,272 $ 3,217
Europe............................ 798 830
Asia.............................. 53 23
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Consolidated...................... $ 5,123 $ 4,070
========= =========
AS OF MARCH 31,
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TOTAL ASSETS 2000 1999
---- ----
North America..................... $ 46,111 $ 36,008
Europe............................ 3,841 3,769
Asia.............................. 22,857 14,072
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Consolidated...................... $ 72,809 $ 53,849
========= =========
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(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
The Company operates globally and provides software development and
maintenance services. 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 2000, sales to one related party customer accounted
for 13.0% of revenues and one third-party customer accounted for 10.9 % of
revenues. 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.
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COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollar amounts in thousands)
NOTE 6 - 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
damages arising from negligent acts, errors, mistakes, or omissions in rendering
its software development and maintenance services, there can be no assurance
that the limitations of liability set forth in its contracts will be enforceable
in all instances or will otherwise protect the Company from liability for
damages. Although the Company has general liability insurance coverage,
including coverage for errors or omissions, there can be no assurance that such
coverage will continue to be available on reasonable terms or will be available
in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
GENERAL
The Company delivers 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.
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. Appropriate adjustments
have been made in the exercise price and number of shares subject to stock
options. Shareholder 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 capital in excess of par value account to the common
stock accounts.
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 March 31, 2000, IMS Health owned approximately 61.0% of the
outstanding stock of the Company and held approximately 94.0% of the combined
voting power of the Company's common stock.
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
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recognized on the basis of the percentage that each contract's incurred cost to
date bears to the total estimated cost. Estimates are subject to adjustment as a
project progresses to reflect changes in expected completion costs or dates. The
cumulative impact of any revision in estimates of the percentage of work
completed is reflected in the financial reporting period in which the change in
the estimate becomes known, and any anticipated losses are recognized
immediately. Since the Company bears the risk of cost over-runs and inflation
associated with fixed-price projects, the Company's operating results may be
adversely affected by changes in estimates of contract completion costs and
dates.
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. From time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in various filings made
by the Company with the Securities and Exchange Commission, or press releases or
oral statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements regarding
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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RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
Three Months Ended
March 31,
-------------------------------
2000 1999
---- ----
Total revenues................................. 100.0% 100.0%
Cost of revenues............................... 51.5 52.4
------- --------
Gross profit................................ 48.5 47.6
Selling, general and administrative expense.... 26.0 24.5
Depreciation and amortization expense.......... 3.6 3.1
------- --------
Income from operations...................... 18.9 19.9
Other income (expense):
Interest income............................. 1.9 1.4
Other income (expense)...................... (0.4) 0.3
-------- --------
Total other income (expense) 1.5 1.7
------- --------
Income before provision for income taxes....... 20.4 21.6
Provision for income taxes..................... (7.6) (8.1)
------- --------
Net income .................................... 12.8% 13.5%
======= ========
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Revenue. Revenue increased by 32.5%, or $6.6 million, from $20.4 million
during the three months ended March 31, 1999 to $27.1 million during the three
months ended March 31, 2000. This increase resulted primarily from a $11.5
million (76.8%) increase in application development and integration, application
management, reengineering and other services partially offset by an
approximately $4.9 million (91.1%) decrease in Year 2000 Compliance Services.
The percentage of revenue from unrelated third-parties increased to 87.0% during
the three months ended March 31, 2000 from 82.9% in the prior quarter and 83.0%
in the comparable quarter last year. 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 first quarter
of 2000, sales to one related party customer accounted for 13.0% of revenues and
one third-party customer accounted for 10.9% of revenues. 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.
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 related to revenues. The Company's
cost of revenues increased by 30.1%, or $3.2 million, from $10.7 million during
the three months ended March 31, 1999 to $13.9 million during the three months
ended March 31, 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 1,570 employees at March 31, 1999 to
approximately 2,140 employees at March 31, 2000. The increased number of
technical professionals is a direct result of greater demand for the Company's
services. The Company's gross profit increased by 35.2%, or approximately
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$3.4 million, from approximately $9.7 million during the three months ended
March 31, 1999 to approximately $13.1 million during the three months ended
March 31, 2000. Gross profit margin increased from 47.6% of revenues during the
three months ended March 31, 1999 to 48.5% of revenues during the three months
ended March 31, 2000. The increase in such gross profit margin was primarily
attributable to the increased third-party revenue and the shift toward newer,
higher margin customers.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries, employee benefits,
travel, promotion, communications, management, finance, administrative and
occupancy costs. Selling, general and administrative expenses, including
depreciation and amortization, increased by 41.9%, or $2.4 million, from $5.6
million during the three months ended March 31, 1999 to $8.0 million during the
three months ended March 31, 2000, and increased as a percentage of revenue from
27.6% to 29.6%, respectively. 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 increase in selling, general and administrative expenses as a percentage of
revenue resulted from the Company's increased revenues.
Income from Operations. Income from operations increased 25.9%, or $1.0
million, from $4.1 million during the three months ended March 31, 1999 to $5.1
million during the three months ended March 31, 2000, representing 19.9% and
18.9% of revenues, respectively. The decrease in operating margin was primarily
due to sales and marketing investments in North America and Europe as well as
infrastructure investments in India to support anticipated growth.
Other Income. Other income consists primarily of interest income and
foreign currency exchange gains. Interest income increased by approximately
$229,000 from approximately $276,000 during the three months ended March 31,
1999 to approximately $505,000 during the three months ended March 31, 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 approximately $99,000 during the three months ended March 31, 2000, 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 $1.6 million in the three months ended March 31, 1999 to $2.1
million in the three months ended March 31, 2000, with an effective tax rate of
37.4% in 1999 and 2000.
Net Income. Net income increased from approximately $2.8 million for the
three months ended March 31, 1999 to $3.5 million for the three months ended
March 31, 2000, representing 13.5% and 12.8% as a percentage of revenues,
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 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
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<PAGE>
that time, by Cognizant Corporation. The net proceeds to the Company from the
offering were approximately $22.4 million after $845,000 of direct expenses. The
funds received by the Company from the IPO were invested in short-term,
investment grade, interest bearing securities, after the Company used a portion
of the net proceeds to repay approximately $6.6 million of non-trade related
party balances to Cognizant Corporation. The Company has used and will continue
to use the remainder of the net proceeds from the offering for (i) expansion of
existing operations, including the Company's offshore software development
centers; (ii) continued development of new service lines and possible
acquisitions of related businesses; and (iii) general corporate purposes
including working capital.
Net cash used by operating activities was approximately $1.9 million during
the three months ended March 31, 2000 as compared to net cash used by operating
activities of $2.2 million during the three months ended March 31, 1999. The
decrease resulted primarily from increased net income partially offset by larger
increases in accounts receivable and other current assets during the first
quarter of 2000, as compared to the first quarter of 1999. Trade accounts
receivable, net of allowance, decreased from $14.8 million at March 31, 1999 to
$14.6 million at March 31, 2000. The Company controls cash levels and its
accounts receivable by monitoring turnover, aging and the collection of accounts
receivable through the use of management reports which are prepared on a
customer basis and evaluated by the Company's finance staff.
The Company's investing activities used net cash of $793,000 for the three
months ended March 31, 2000 as compared to net cash used of $1.2 million for the
same period in 1999. The decrease in 2000 compared to 1999 primarily reflects a
lower level of capital expenditures during the quarter.
The Company's financing activities provided net cash of approximately
$389,000 for the three months ended March 31, 2000 as compared to net cash
provided by financing activities of approximately $75,000 for the same period in
1999. The increase in 2000 compared to 1999 is primarily attributable to a
higher level of stock option exercises during the quarter.
As of March 31, 2000, the Company had no significant third-party debt.
The Company had working capital of $49.0 million at March 31, 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
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<PAGE>
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.
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 FASB No. 133, which establishes accounting and reporting
standards for derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. FASB No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variability in cash flows attributable to a particular risk, or (c) a hedge of
the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security and a forecasted
transaction. As a result of FASB No. 137, the Company will be required to
implement SFAS No. 133 for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company expects the adoption of this pronouncement will not
have a material effect on the Company's results of operations, financial
position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition, "SAB 101," 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.
- 14 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On February 11, 2000, the Company's Board of Directors declared a 2-for-1
stock split effected by a 100% dividend paid on March 16, 2000 to stockholders
of record on March 2, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Financial Data Schedule for the period ended March 31, 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.
- 15 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cognizant Technology Solutions Corporation
DATE: May 11, 2000 By: /s/ Wijeyaraj Mahadeva
-----------------------------------------
Wijeyaraj Mahadeva,
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
DATE: May 11, 2000 By: /s/ Gordon Coburn
-----------------------------------------
Gordon Coburn,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
- 16 -
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
REGISTRANT'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<NAME> Cognizant Technology Solutions Corporation
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