AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 2003.
REGISTRATION NO. 333-101216
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 7371 13-3728359
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
500 GLENPOINTE CENTRE WEST
TEANECK, NEW JERSEY 07666
(201) 801-0233
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
STEVEN E. SCHWARTZ
VICE PRESIDENT AND CHIEF CORPORATE COUNSEL
500 GLENPOINTE CENTRE WEST
TEANECK, NEW JERSEY 07666
(201) 678-2758
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
---------------------
COPIES TO:
JOHN D. LOBRANO ROBERT H. STEINFELD ALAN J. SINSHEIMER ROBERT M. CHILSTROM
CAROLINE B. GOTTSCHALK SENIOR VICE PRESIDENT AND GENERAL SULLIVAN & CROMWELL SKADDEN, ARPS, SLATE,
SIMPSON THACHER & BARTLETT COUNSEL 125 BROAD STREET MEAGHER & FLOM LLP
425 LEXINGTON AVENUE IMS HEALTH INCORPORATED NEW YORK, NY 10004 FOUR TIMES SQUARE
NEW YORK, NY 10017 1499 POST ROAD (212) 558-4000 NEW YORK, NY 10036
(212) 455-2000 FAIRFIELD, CONNECTICUT 06824 (212) 735-2588
(203) 319-4700
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the filing of this registration statement and the other
conditions to the commencement of the exchange offer described herein have been
satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THIS PRELIMINARY OFFERING CIRCULAR-PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE EXCHANGED UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
OFFERING CIRCULAR-PROSPECTUS IS NOT AN OFFER TO EXCHANGE NOR DOES IT SEEK AN
OFFER TO EXCHANGE ANY SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR EXCHANGE
IS NOT PERMITTED.
Subject to completion, dated January 24, 2003
IMS HEALTH INCORPORATED
OFFER TO EXCHANGE 0.309 SHARES OF CLASS B COMMON STOCK OF
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
FOR EACH SHARE OF COMMON STOCK OF
IMS HEALTH INCORPORATED
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW
YORK CITY TIME, ON FEBRUARY 6, 2003, UNLESS WE EXTEND THE OFFER.
------------------------
IMS Health Incorporated will exchange 0.309 shares of Cognizant class B
common stock for each share of IMS Health common stock that it accepts in the
exchange offer. IMS Health will accept up to 36,540,129 IMS Health shares and
will distribute up to 11,290,900 shares of Cognizant class B common stock in the
exchange offer, representing all the Cognizant shares that IMS Health currently
owns. If IMS Health stockholders tender more than 36,540,129 IMS Health shares,
IMS Health will accept shares for exchange on a pro rata basis as described in
this document. The exchange offer is subject to various conditions described
later in this document, including that at least 27,400,000 IMS Health shares are
validly tendered in the exchange offer.
------------------------
The terms and conditions of the exchange offer are described in this
document and the related Letter of Transmittal, which you should read carefully.
None of IMS Health, Cognizant, any of their respective officers or directors or
the joint dealer managers makes any recommendation as to whether or not you
should tender your IMS Health shares. You must make your own decision after
reading this document and consulting with your advisors.
------------------------
The Cognizant class B common stock that IMS Health is offering in the
exchange offer is identical to the Cognizant class A common stock in all
respects, except that a holder of class B common stock is entitled to 10 votes
per share while a holder of class A common stock is entitled to one vote per
share. Each share of Cognizant class B common stock received in the exchange
offer will convert automatically into one share of Cognizant class A common
stock when it is first transferred after the exchange offer or in certain other
circumstances described in this document. Cognizant class B common stock will
not be separately listed or quoted on any exchange or in the Nasdaq National
Market and will not trade separately.
IMS Health's common stock is listed on the New York Stock Exchange under
the symbol "RX." Cognizant's class A common stock is listed for quotation on the
Nasdaq National Market under the symbol "CTSH."
------------------------
PARTICIPATING IN THE EXCHANGE OFFER INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 17.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Joint Dealer Managers for the exchange offer are:
GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC.
Offering Circular-Prospectus dated , 2003.
TABLE OF CONTENTS
PAGE
----
Questions and Answers About the Exchange Offer.............. 1
Summary..................................................... 6
Risk Factors................................................ 17
Special Note on Forward-Looking Information................. 30
The Transaction............................................. 33
The Exchange Offer.......................................... 35
Market Prices and Dividend Information...................... 46
Capitalization.............................................. 48
IMS Health Selected Financial Data.......................... 49
IMS Health Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... 51
Cognizant Selected Financial Data........................... 58
Management's Discussion and Analysis of Results of
Operations and Financial Condition of Cognizant........... 59
Business of Cognizant....................................... 74
Shares Eligible for Future Sale............................. 85
Description of Capital Stock of Cognizant................... 86
Comparison of Rights of Stockholders of IMS Health and
Stockholders of Cognizant................................. 93
Certain Relationships Between IMS Health and Cognizant...... 96
Material United States Federal Income Tax Consequences...... 101
Legal Matters............................................... 104
Experts..................................................... 104
Where You Can Find More Information......................... 105
Index To Cognizant Financial Statements..................... F-1
------------------------
In this offering circular-prospectus, "IMS Health," "we," "us," and "our"
each refers to IMS Health Incorporated or, where the context requires, IMS
Health and its consolidated subsidiaries, and "IMS Health shares" refers to
shares of common stock of IMS Health. "Cognizant" refers to Cognizant Technology
Solutions Corporation or, where the context requires, Cognizant and its
subsidiaries, and "Cognizant shares" refers to shares of Cognizant class B
common stock or, where the context requires, Cognizant class A common stock.
When we describe a specified number of IMS Health shares tendered into the
exchange offer, we mean IMS Health shares that have been validly tendered into
the exchange offer and not properly withdrawn.
------------------------
You should rely only on the information contained in this document. None of
IMS Health, Cognizant, the joint dealer managers, the information agent or the
exchange agent has authorized anyone to provide you with information different
from that contained in this document. We are not offering to exchange, or
soliciting any offers to exchange, securities pursuant to the exchange offer in
any jurisdiction in which those offers or exchanges would not be permitted. The
information contained in this document is accurate only as of the date of this
document regardless of the time of delivery of this document or the time of any
exchange of securities in the exchange offer.
------------------------
This document incorporates by reference important business, financial and
other information about IMS Health and Cognizant that is not included in or
delivered with this document. See "Where You Can Find More Information" on page
105 for a list of the documents that have been incorporated by reference into
this document.
i
Requests for these documents may be directed to us or Cognizant, as the case may
be, at the following addresses and telephone numbers:
IMS Health Incorporated Cognizant Technology Solutions Corporation
1499 Post Road 500 Glenpointe Center West
Fairfield, Connecticut 06824 Teaneck, New Jersey 07666
Attn: Investor Relations Department Attn: Investor Relations Department
Telephone: (203) 319-4700 Telephone: (201) 801-0233
IF YOU WOULD LIKE TO REQUEST COPIES OF THESE DOCUMENTS, PLEASE DO SO BY
JANUARY 30, 2003 IN ORDER TO RECEIVE THEM BEFORE THE EXPIRATION OF THE EXCHANGE
OFFER. In the event that we extend the exchange offer, you must submit your
request at least five business days before the expiration date, as extended.
ii
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER
Q: WHY HAS IMS HEALTH DECIDED TO DISTRIBUTE ITS REMAINING INTEREST IN COGNIZANT?
A: IMS Health does not view its interest in Cognizant as strategically important
to IMS Health. Among other benefits, we believe the separation of Cognizant from
IMS Health will:
- enable the senior management personnel of both companies to focus more
completely on the opportunities and needs of their own lines of business;
- improve the stock of IMS Health as an equity incentive tool for
motivating key personnel;
- improve the ability of both companies to independently access the capital
markets; and
- enable both companies to more freely use their stock for acquisitions and
to raise capital.
Q: WHY DID IMS HEALTH CHOOSE THE EXCHANGE OFFER AS THE WAY TO SEPARATE
COGNIZANT?
A: We believe that the exchange offer is a tax efficient way to achieve full
separation of Cognizant from IMS Health. The exchange offer allows you to adjust
your investment between IMS Health and Cognizant and depending on the relative
prices of IMS Health and Cognizant shares, may provide an opportunity for you to
receive a premium for your IMS Health shares. The exchange offer also allows us
to acquire IMS Health shares in a manner that we believe will be neutral or
accretive to our ongoing earnings per share and demonstrates our continuing
confidence in the value of our shares.
Q: WHAT OTHER ALTERNATIVES DID IMS HEALTH CONSIDER BEFORE CHOOSING THE EXCHANGE
OFFER?
A: We considered three principal alternatives for the separation of Cognizant
from IMS Health: a sale of our Cognizant shares to a third party, a pro rata
spin-off of the Cognizant shares to our stockholders and this exchange offer. We
decided that a sale of our shares of Cognizant to a third party would not
accomplish our objectives in a tax-efficient manner. A spin-off would require
all our stockholders to become Cognizant stockholders and would be dilutive to
our earnings per share. The exchange offer allows our stockholders to make an
individual choice as to whether or not to participate. We expect the exchange
offer to be neutral or accretive to our earnings per share depending on the
final subscription level.
Q: DOES IMS HEALTH INTEND TO CONTINUE TO BE A CUSTOMER OF COGNIZANT?
A: Yes, we intend to continue our business relationship with Cognizant after the
exchange offer. Cognizant has been a major source of application design,
development and maintenance services for IMS Health for years. Cognizant is one
of our key business partners today, and we expect our relationship to continue.
Q: WHAT IS THE "EXCHANGE RATIO"? HOW MANY COGNIZANT SHARES WILL I RECEIVE FOR
EACH IMS HEALTH SHARE THAT I EXCHANGE?
A: You will receive 0.309 Cognizant shares for each IMS Health share that is
accepted for exchange. We sometimes refer to this number as the "exchange
ratio." You will receive cash in lieu of any fraction of a Cognizant share to
which you would otherwise be entitled.
Q: IS THE EXCHANGE OFFER AT A PREMIUM?
A: Based on the closing prices of the IMS Health and Cognizant shares on the
NYSE and Nasdaq National Market, respectively, on January 8, 2003, the exchange
ratio represented an approximate 20% premium over the price of the IMS Health
shares on that date.
1
We calculated this premium using the exchange ratio and the market price
per share for the Cognizant class A common stock and IMS common stock on January
8, 2003 as follows:
(0.309) x (market price per share of Cognizant class A
common stock) - 1) X 100
------------------------------------------------------------
market price per share of IMS Health common stock
The market price of Cognizant class A common stock is not necessarily
determinative of the value of the Cognizant class B common stock to be received
in the exchange offer. In addition, we do not know what premium, if any, will
apply at the closing of the exchange offer since the market prices for IMS
Health shares and Cognizant shares fluctuate. At any time during the exchange
offer you can use this formula to calculate the premium, if any, represented by
the exchange ratio based on recent market prices for IMS Health and Cognizant
class A shares.
Q: HOW DO I DECIDE WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER?
A: Your decision to participate in the exchange offer will depend on many
factors. You should examine carefully your specific financial position, plans
and needs before you decide whether to participate in the exchange offer. We
encourage you to consider, among other things:
- your view of the relative value of the IMS Health shares and Cognizant
shares;
- your individual investment strategy with regard to the two companies; and
- your opportunity to receive the premium, if any.
You must make your own decision after carefully reading this document and
consulting with your advisors based on your own financial position and
requirements. In addition, you should consider all the factors described in the
section of this document entitled "Risk Factors" starting on page 17.
Q: IS IT RECOMMENDED THAT I TENDER MY IMS HEALTH SHARES?
A: None of IMS Health, Cognizant, any of their respective officers or directors,
the joint dealer managers, the exchange agent or the information agent makes any
recommendation as to whether or not you should tender your IMS Health shares
into the exchange offer. You must make your own decision after reading this
document and consulting with your advisors. In addition, you should consider all
the factors described in the section of this document entitled "Risk Factors"
starting on page 17.
Q: HOW DO I TENDER INTO THE EXCHANGE OFFER?
A: We give you specific instructions in the section of this document entitled
"The Exchange Offer -- Procedures for Tendering Shares of IMS Health Common
Stock" beginning on page 37.
Q: CAN I TENDER ONLY A PORTION OF MY IMS HEALTH SHARES?
A: Yes. This is a voluntary exchange offer. You may tender all, some or none of
your IMS Health shares.
Q: WHAT IF I WANT TO TENDER BUT I HOLD IMS HEALTH SHARES IN "STREET NAME"?
A: You will need to instruct your broker to tender your shares on your behalf.
Q: CAN I CHANGE MY MIND AFTER I TENDER?
A: Yes. You may withdraw your tender at any time before the exchange offer
expires. We describe the procedures for withdrawing tendered IMS Health shares
in the section of this document entitled "The Exchange Offer -- Withdrawal
Rights" beginning on page 40.
2
Q: WHAT HAPPENS IF MORE THAN 36,540,129 IMS HEALTH SHARES ARE TENDERED?
A: If more than 36,540,129 IMS Health shares are tendered, we will reduce the
number of IMS Health shares that we will accept in the exchange offer on a pro
rata basis in proportion to the number of shares tendered. We refer to this pro
rata reduction as "proration." Stockholders who own an "odd-lot," which is a
total of less than 100 IMS Health shares, and who tender all their shares will
not be subject to proration.
Q: WHEN WILL THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS EXPIRE?
A: The exchange offer and withdrawal rights will expire at 12:00 midnight, New
York City time, on February 6, 2003, unless they are extended.
Q: CAN IMS HEALTH EXTEND THE EXCHANGE OFFER, AND UNDER WHAT CIRCUMSTANCES?
A: Yes. We can extend the exchange offer at any time, in our sole discretion,
even if all the conditions to the exchange offer have been satisfied. If we
extend the exchange offer, we will publicly announce the extension and the new
expiration date by press release no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
Q: ARE THERE ANY CONDITIONS TO IMS HEALTH'S OBLIGATION TO COMPLETE THE EXCHANGE
OFFER?
A: Yes. We are not required to complete the exchange offer unless the conditions
that we describe in the section of this document entitled "The Exchange
Offer -- Conditions for Completion of the Exchange Offer" starting on page 42
are satisfied or waived. For example, we may choose not to complete the exchange
offer unless at least 27,400,000 IMS Health shares are tendered into the
exchange offer. We refer to this minimum number of IMS Health shares as the
"minimum amount." We may waive any or all of the conditions to the exchange
offer, including the requirement that the minimum number of IMS Health shares be
tendered.
Q: DOES COGNIZANT HAVE THE RIGHT TO WAIVE ANY CONDITIONS OF THE EXCHANGE OFFER
OR TO EXTEND THE EXCHANGE OFFER?
A: No. Any decision to waive any condition of the exchange offer or to extend
the exchange offer or any other decision related to the terms of the exchange
offer will be solely that of IMS Health.
Q: WHAT HAPPENS IF LESS THAN THE MINIMUM AMOUNT OF IMS HEALTH SHARES ARE
TENDERED?
A: If fewer than the minimum number of IMS Health shares are tendered into the
exchange offer, we may extend the exchange offer or we may choose not to
complete the exchange offer or we may waive the condition and choose to accept
the IMS Health shares tendered. If we choose not to complete the exchange offer,
we will promptly return any IMS Health shares that have been tendered.
Q: WHAT WILL IMS HEALTH DO WITH ANY COGNIZANT CLASS B COMMON STOCK IT DOES NOT
EXCHANGE?
A: If we otherwise would continue to own Cognizant class B shares after
completion of the exchange offer, we currently plan to either distribute them to
our stockholders or convert them into shares of Cognizant's class A common stock
prior to completion of the exchange offer and distribute them to our
stockholders or hold them for some period before we sell them in one or more
transactions. The timing of those sales could depend on market conditions and
other factors, but we expect that we would hold those shares for no more than
three years. If only the minimum amount of IMS Health shares are exchanged and
we do not otherwise distribute Cognizant shares to our stockholders, we will
hold 2,824,300 shares of Cognizant class A common stock immediately following
the completion of the exchange offer (representing 13.8%
3
of the outstanding Cognizant common stock). We will vote those shares in
proportion to the votes cast by all other holders of Cognizant stock.
Q: WILL I BE TAXED ON SHARES I EXCHANGE IN THE EXCHANGE OFFER?
A: We have received an opinion from McDermott, Will & Emery to the effect that
the exchange offer should be tax-free to IMS Health stockholders for U.S.
federal income tax purposes, except with respect to any cash received in lieu of
fractional Cognizant shares. This opinion does not address any state, local or
foreign tax consequences of the exchange offer. You should consult your tax
advisor as to the particular tax consequences to you of the exchange offer. In
addition, you should read the risk factor "The IRS may treat the exchange offer
as taxable to exchanging stockholders or IMS Health" in the section of this
document entitled "Risk Factors" on page 17.
Q: WHAT ARE THE PRINCIPAL DIFFERENCES BETWEEN THE CLASSES OF COGNIZANT COMMON
STOCK?
A: Cognizant has two classes of common stock: class A common stock and class B
common stock. IMS Health is offering only Cognizant class B common stock in the
exchange offer.
The Cognizant class A common stock is publicly held and listed for quotation on
the Nasdaq National Market under the symbol "CTSH". The Cognizant class B common
stock is identical to the Cognizant class A common stock in all respects, except
that a holder of Cognizant class B common stock is entitled to 10 votes per
share while a holder of Cognizant class A common stock is entitled to one vote
per share. Each share of Cognizant class B common stock received in the exchange
offer will convert automatically into one share of Cognizant class A common
stock when it is first transferred after the exchange offer. As a result,
Cognizant class B common stock will not be separately listed or quoted and will
not trade separately. In addition, all the Cognizant class B common stock will
automatically convert into Cognizant class A common stock on the fifth
anniversary of the completion of the exchange offer or, if earlier, when the
number of shares of Cognizant class B common stock represents less than 35% of
the aggregate number of shares of Cognizant common stock then outstanding.
Q: CAN I TRANSFER THE COGNIZANT CLASS B COMMON STOCK I RECEIVE IN THE EXCHANGE
OFFER?
A: Upon any transfer, the shares of Cognizant class B common stock you receive
in the exchange offer will convert automatically into an equal number of shares
of Cognizant class A common stock that will entitle the transferee to one vote
per share. In addition, if you are an "affiliate" of Cognizant under the
Securities Act of 1933, you may sell your Cognizant shares only under an
effective registration statement or pursuant to an exemption from the
registration requirements of the Securities Act.
Q: WILL I BE ABLE TO TAKE ADVANTAGE OF THE SPECIAL VOTING RIGHTS OF COGNIZANT
CLASS B COMMON STOCK AT STOCKHOLDER MEETINGS?
A: Yes. While you continue to hold the Cognizant class B common stock you
receive in the exchange offer, the Cognizant class B common stock will have 10
votes per share, subject to the class B common stock converting automatically
into Cognizant class A common stock with one vote per share upon the occurrence
of events beyond your control. Accordingly, you should not rely on having any
special voting rights at stockholder meetings as a basis for your decision to
participate in the exchange offer. Cognizant may implement procedures to ensure
the proper voting by holders of class A and class B common stock at stockholder
meetings.
4
Q: WHAT HAPPENS TO THE SPECIAL VOTING RIGHTS OF COGNIZANT CLASS B COMMON STOCK
IF IT CONVERTS TO CLASS A COMMON STOCK?
A: The special voting rights of the Cognizant class B common stock will cease
upon conversion into Cognizant class A common stock. Cognizant class A common
stock has one vote per share.
Q: WHEN WILL TENDERING STOCKHOLDERS KNOW THE OUTCOME OF THE EXCHANGE OFFER?
A: On the first business day after the expiration date, we will announce by
press release preliminary results of the exchange offer. Promptly after they are
known, we will announce by press release the final results of the exchange
offer, including the proration factor, if any.
Q: HAVE OTHER COMPANIES PURSUED SIMILAR TRANSACTIONS?
A: Yes. Examples of similar exchange offers include transactions involving Sara
Lee (Coach), DuPont (Conoco), The Limited (Abercrombie & Fitch), Lockheed Martin
Corporation (Martin Marietta Materials), Viacom International, Inc. (TCI
Pacific) and Eli Lilly and Company (Guidant Corp.).
Q: WHO SHOULD I CALL IF I HAVE QUESTIONS OR WANT ADDITIONAL COPIES OF THE
EXCHANGE OFFER DOCUMENTS?
A: If you have any questions about how to tender or you want additional copies
of the exchange offer documents, you may call Georgeson Shareholder
Communications Inc., the information agent, at one of its numbers listed on the
last page of this document. You may also contact either joint dealer manager at
its number listed on the last page of this document or your own broker for
assistance concerning the exchange offer.
5
SUMMARY
This summary highlights only some of the information in this document and
may not contain all the information that is important to you. To understand the
exchange offer fully and for a more complete description of the legal terms of
the exchange offer, you should read this entire document and the documents we
have referred you to in the section entitled "Where You Can Find More
Information." We have included page references to direct you to a more complete
description of the topics discussed in this summary.
THE COMPANIES
IMS HEALTH INCORPORATED
IMS Health Incorporated is a leading global provider of market information,
sales management and decision-support services to the pharmaceutical and
healthcare industries. Our key products include sales management information to
optimize sales force productivity, marketing effectiveness research for
prescription and over-the-counter pharmaceutical products, consulting and other
services. We are managed on a global business model with global leaders for the
majority of our critical business processes. In addition, our business includes
our venture capital unit, Enterprise Associates, LLC, which is focused on
investments in emerging businesses, and our approximately 26% equity interest in
The TriZetto Group, Inc. as of September 30, 2002.
We were organized under the laws of the State of Delaware on February 3,
1998. We began operating as an independent publicly-held company on July 1, 1998
as a result of the spin-off of our business from Cognizant Corporation (which
was subsequently renamed Nielsen Media Research, Inc.).
Our principal executive office is located at 1499 Post Road, Fairfield,
Connecticut 06824, and our telephone number is (203) 319-4700.
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
Cognizant Technology Solutions Corporation is a leading provider of custom
information technology, commonly referred to as IT, design, development,
integration and maintenance services primarily for Fortune 1000 companies
located in the United States and Europe. Cognizant's core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. Cognizant provides the IT services it offers
using an integrated on-site/offshore business model. This seamless
on-site/offshore model combines technical and account management teams located
on-site at the customer location and offshore at dedicated Cognizant development
centers located in India and Ireland. To support this business model, at
December 31, 2002, Cognizant employed over 3,900 programmers in India and over
5,400 globally. Cognizant believes that this on-site/offshore model enables it
to develop, deploy and maintain, on a cost-effective and timely basis, high
quality, large-scale IT systems for use in a wide range of industries. The
market's acceptance of the advantages to customers of Cognizant's integrated
business model has been well demonstrated by Cognizant's growth and financial
performance. Between 1999 and 2001, Cognizant's revenues and net income grew at
a compound annual growth rate exceeding 40%. For the year ended December 31,
2001 and the nine months ended September 30, 2002, Cognizant had revenues of
$177.8 million and $162.1 million, respectively, and net income of $22.2 million
and $25.4 million, respectively.
For more details about Cognizant's business, see the section entitled
"Business of Cognizant."
6
Cognizant was organized under the laws of the State of Delaware on April 6,
1988. Cognizant began its IT development and maintenance services business in
early 1994, initially acting as an in-house technology development center for
The Dun & Bradstreet Corporation and its operating units. In 1996, Cognizant was
part of a group of companies that were spun-off from The Dun & Bradstreet
Corporation to form a new company. In 1998, this new company spun-off IMS
Health, including the controlling interest in Cognizant. Cognizant completed its
initial public offering on June 24, 1998. At September 30, 2002, IMS Health
owned approximately 56% of Cognizant's outstanding common stock and held
approximately 93% of the combined voting power of Cognizant's common stock.
Cognizant's principal executive office is located at 500 Glenpointe Centre
West, Teaneck, New Jersey 07666 and its telephone number is (201) 801-0233.
7
THE EXCHANGE OFFER
Terms of the exchange offer
(see page 35)................. We are offering IMS Health stockholders the
opportunity to exchange each of their IMS
Health shares for 0.309 Cognizant class B
shares. We sometimes refer to this number as
the "exchange ratio." You may tender all, some
or none of your IMS Health shares. The maximum
number of IMS Health shares that we will accept
from all IMS Health stockholders is 36,540,129
shares.
IMS Health shares accepted for exchange will be
exchanged at the exchange ratio, on the terms
and subject to the conditions of the exchange
offer, including the proration provisions. We
will promptly return to IMS Health stockholders
any IMS Health shares that are not accepted for
exchange following the expiration of the
exchange offer and determination of the final
proration factor, if any, as described below.
Expiration; extension;
termination; amendment (see
page 41)...................... The exchange offer, and your withdrawal rights,
will expire at 12:00 midnight, New York City
time, on February 6, 2003, unless we extend it.
You must tender your IMS Health shares prior to
this time if you want to participate in the
exchange offer. We may extend, terminate or
amend the exchange offer.
No fractional shares (see page
36)........................... You will not receive any fractional Cognizant
shares in the exchange offer. The exchange
agent, acting as the agent for tendering IMS
Health stockholders, will aggregate any
fractional shares and sell them. You will
receive the proceeds, if any, net of
commissions, from the sale of these shares in
accordance with your fractional interest.
Proration; odd-lots (see page
36)........................... If more than 36,540,129 IMS Health shares are
tendered into the exchange offer, we will
accept all tendered IMS Health shares on a pro
rata basis. We will announce the preliminary
proration factor by the first business day
after the exchange offer expires.
If you own fewer than 100 IMS Health shares and
tender all your shares for exchange, you may
request preferential treatment by completing
Section II. C. on the letter of transmittal
entitled "Odd-Lot Shares" and, if applicable,
on the notice of guaranteed delivery. If your
odd-lot shares are held by a broker for your
account, you can contact the broker and request
this preferential treatment. All your "odd-lot"
shares will be accepted for exchange without
proration if we complete the exchange offer.
Shares you own in the IMS Health Savings Plan
are not eligible for this preferential
treatment.
8
Withdrawal rights (see page
40)........................... You may withdraw tendered IMS Health shares at
any time before the exchange offer expires. If
you change your mind again, you may re-tender
your IMS Health shares by again following the
exchange offer procedures prior to the
expiration of the exchange offer.
Conditions for completion of
the exchange offer (see page
42)........................... The exchange offer is subject to various
conditions, including that at least 27,400,000
IMS Health shares are tendered so that we may
exchange at least 8,466,600 of the Cognizant
shares held by us. All conditions must be
satisfied or waived prior to the expiration of
the exchange offer.
Procedures for tendering (see
page 37)...................... If you hold certificates for IMS Health shares,
you must complete and sign the letter of
transmittal designating the number of IMS
Health shares you wish to tender. Send the
letter of transmittal, together with your IMS
Health stock certificates and any other
documents required by the letter of
transmittal, by courier or registered mail,
return receipt requested, so that it is
RECEIVED by the exchange agent at one of the
addresses listed on the back cover of this
document before the expiration of the exchange
offer.
DO NOT SEND YOUR CERTIFICATES TO IMS HEALTH,
COGNIZANT, THE JOINT DEALER MANAGERS OR THE
INFORMATION AGENT.
If you hold shares of IMS Health common stock
through a broker, you should receive
instructions from your broker on how to
participate. In this situation, do not complete
the letter of transmittal. Please contact your
broker directly if you have not yet received
instructions. Some financial institutions may
also effect tenders by book-entry transfer
through The Depository Trust Company.
If you wish to tender your IMS Health shares
but the shares are not immediately available,
or time will not permit the shares or other
required documentation to reach the exchange
agent before the expiration date, or the
procedure for book-entry transfer cannot be
completed on a timely basis, you may still
tender your IMS Health shares by following the
procedures for guaranteed delivery set forth
under "The Exchange Offer -- Guaranteed
Delivery Procedure."
If you participate in the IMS Health Savings
Plan, you will receive separate instructions on
how to tender these shares and a form of
election to tender your shares held under this
plan from the trustee or administrator of the
plan. Do not use the letter of transmittal to
tender shares held under this plan.
9
Delivery of Cognizant stock
certificates.................. We will deliver Cognizant stock certificates as
soon as reasonably practicable after we accept
IMS Health shares for exchange and, if
necessary, determine the proration factor. If
your IMS Health stock certificates are held by
a broker, your broker should inform you of
where and when your Cognizant stock
certificates will be delivered.
Terms of Cognizant class B
common stock delivered in the
exchange offer (see page 86).. The Cognizant class B common stock is identical
to the Cognizant class A common stock in all
respects, except that a holder of class B
common stock is entitled to 10 votes per share
while a holder of class A common stock is
entitled to one vote per share.
Conversion of Cognizant class
B common stock (see page
86)........................... Each share of Cognizant class B common stock
received in the exchange offer will convert
automatically into one share of Cognizant class
A common stock when it is first transferred
after the exchange offer. In addition, all the
Cognizant class B common stock will
automatically convert into Cognizant class A
common stock on the fifth anniversary of the
completion of the exchange offer or, if
earlier, when the number of shares of Cognizant
class B common stock represents less than 35%
of the aggregate number of shares of Cognizant
common stock then outstanding.
Comparative per share market
price information (see page
15)........................... IMS Health common stock is currently listed and
traded on the NYSE under the symbol "RX."
Cognizant class A common stock is currently
listed for quotation on the Nasdaq National
Market under the symbol "CTSH."
The Cognizant class B common stock will not be
listed or quoted on any exchange and will not
trade separately. You may transfer shares of
Cognizant class B common stock you receive in
the exchange offer, at which time they will
convert automatically into an equal number of
shares of Cognizant class A common stock that
will entitle the transferee to one vote per
share.
On November 13, 2002, the last trading day
before the announcement of the exchange offer,
the closing sale price of the IMS Health common
stock on the NYSE was $16.52 and the closing
sale price of the Cognizant class A common
stock on the Nasdaq National Market was $69.39.
On January 8, 2003, the last trading day before
commencement of the exchange offer, the closing
sale price of the IMS Health common stock on
the NYSE was $16.64 and the closing sale price
of the Cognizant class A common stock on the
Nasdaq National Market was $64.55.
10
U.S. federal income tax
consequences (see page 101)... We have received a tax opinion from McDermott,
Will & Emery to the effect that the exchange
offer should be tax-free to IMS Health
stockholders for U.S. federal income tax
purposes, except with respect to any cash
received in lieu of fractional shares of
Cognizant class B common stock, and that the
exchange offer should be tax-free to IMS
Health. This opinion does not address any
state, local or foreign tax consequences. You
should consult your tax advisor as to the
particular tax consequences to you of the
exchange offer. In addition you should read the
risk factor "The IRS may treat the exchange
offer as taxable to exchanging stockholders or
IMS Health" in the section of this document
entitled "Risk Factors" on page 17.
No appraisal rights (see
page 34)...................... No statutory appraisal rights are available to
stockholders of IMS Health or Cognizant in
connection with the exchange offer.
Exchange Agent................ American Stock Transfer & Trust Company
Information Agent............. Georgeson Shareholder Communications Inc.
Joint Dealer Managers......... Goldman, Sachs & Co. and Bear, Stearns & Co.
Inc.
Risk factors (see page 17).... You should consider carefully the matters
described in the section entitled "Risk
Factors," as well as the other information
included in this document and the documents to
which we have referred you.
Legal limitation.............. We are not making any offer to exchange, nor
are we soliciting any offer to exchange,
securities in any jurisdiction in which the
offer or exchange is not permitted.
11
IMS HEALTH SUMMARY FINANCIAL DATA
The following table presents summary financial data for IMS Health. This
data is derived from and should be read together with the audited and unaudited
consolidated financial statements of IMS Health and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in IMS Health's Form 10-K for 2001 and Form 10-Q for the
period ended September 30, 2002, all of which have been incorporated into this
document by reference. To find out where you can obtain copies of IMS Health's
documents that have been incorporated by reference, see "Where You Can Find More
Information."
We have also prepared selected pro forma financial data to show the effect
of the exchange offer on IMS Health. See "IMS Health Unaudited Pro Forma
Condensed Consolidated Financial Information."
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IMS HEALTH INCORPORATED
RESULTS OF OPERATIONS:
Revenue....................... $1,059,559 $1,186,513 $1,397,989 $1,424,359 $1,332,923 $ 992,048 $1,046,172
Costs and expenses(1)......... 831,949 1,054,029 1,058,966 1,287,166 1,008,762 664,922 727,290
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income(1)........... 227,610 132,484 339,023 137,193 324,161 327,126 318,882
Non-operating income (loss),
net(2)...................... 13,955 52,360 9,419 124,120 (140,360) (108,244) (23,688)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations, before provision
for income taxes............ 241,565 184,844 348,442 261,313 183,801 218,882 295,194
Provision for income taxes.... (55,614) (58,780) (98,076) (140,412) (38,415) (41,680) (91,044)
TriZetto equity loss, net of
income taxes................ -- -- -- (4,777) (6,985) (5,547) (701)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations.................. 185,951 126,064 250,366 116,124 138,401 171,655 203,449
Income from discontinued
operations, net of income
taxes(3).................... 126,399 94,494 25,695 4,692 47,025 47,025 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................... $ 312,350 $ 220,558 $ 276,061 $ 120,816 $ 185,426 $ 218,680 $ 203,449
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income per share --basic.. $ 0.95 $ 0.68 $ 0.88 $ 0.41 $ 0.63 $ 0.74 $ 0.71
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
shares outstanding --basic.. 330,326 324,584 311,976 296,077 295,162 295,335 287,486
Net income per share --
diluted..................... $ 0.93 $ 0.66 $ 0.86 $ 0.40 $ 0.62 $ 0.73 $ 0.70
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
shares
outstanding -- diluted...... 334,980 335,770 319,561 300,038 300,147 301,255 288,589
BALANCE SHEET DATA (AT THE END
OF THE PERIOD):
Total assets.................. $1,516,537 $1,789,205 $1,533,971 $1,308,161 $1,367,554 $1,249,226 $1,549,718
Post-retirement and post-
employment benefits......... 38,082 27,577 27,429 43,471 44,305 43,651 41,597
Long-term debt and other
liabilities................. 158,742 253,261 163,356 182,840 324,373 107,981 358,068
Shareholders' equity.......... $ 801,570 $ 825,270 $ 495,222 $ 103,540 $ 218,366 $ 304,768 $ 166,505
---------------
(1) 2001 includes charges related to severance, impairment and other charges of
$94,616, and terminated transaction costs of $6,457. 2000 includes charges
related to the Synavant spin-off of $37,626, the Synavant related impairment
charge of $115,453, the executive management transition charge of $31,133
and severance, impairment and other charges of $45,689. 1999 includes
charges related to the
12
Gartner spin-off of $9,500. 1998 includes charges related to the Cognizant
spin-off of $35,025 and one-time charges and In-Process Research and
Development write-offs related to the Walsh and PMSI acquisitions of $48,019
and $32,800, respectively.
(2) Non-operating Income, net in 2001 includes loss on Gartner shares of
$84,880, gains/(losses) from dispositions -- net of $27,642 and the SAB No.
51 loss related to issuance of investees' stock of $1,490. Non-operating
income, net in 2000 includes the gain on the sale of Erisco of $84,530,
gains from dispositions -- net of $78,139, loss on Gartner shares of $6,896
and the SAB No. 51 gain related to the issue of stock by TriZetto of $9,029.
Non-operating income, net in 1999 includes gains from dispositions-net of
$25,264. Non-operating income, net in 1998 includes the gain related to the
Cognizant's initial public offering of $12,777 and gains from
dispositions -- net of $33,341. Results for 1997 include gains from
dispositions -- net of $9,391 in non-operating income.
(3) Income from discontinued operations, net of income taxes, includes a tax
provision of $25,320, $25,320, $2,526, $12,635, $49,303 and $62,271 for the
nine months ended September 30, 2001 and the years ended December 31, 2001,
2000, 1999, 1998 and 1997, respectively.
13
COGNIZANT SUMMARY FINANCIAL DATA
The following table presents summary financial data for Cognizant. This
data is derived from and should be read together with the audited and unaudited
consolidated financial statements of Cognizant and related notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of Cognizant" appearing elsewhere in this document. In the opinion of
Cognizant's management, all adjustments considered necessary for a fair
presentation of the interim financial information have been included, and all
adjustments are of a normal and recurring nature. Operating results for the
interim periods are not necessarily indicative of results that may be expected
to occur for the entire year.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
STATEMENT OF OPERATIONS:
Revenues..................................... $13,898 $45,031 $74,084 $122,758 $158,969 $120,803 $146,510
Revenues -- related party.................... 10,846 13,575 14,820 14,273 18,809 13,514 15,565
------- ------- ------- -------- -------- -------- --------
Total revenues............................... 24,744 58,606 88,904 137,031 177,778 134,317 162,075
Cost of revenues............................. 14,359 31,919 46,161 70,437 90,848 68,859 86,507
------- ------- ------- -------- -------- -------- --------
Gross profit................................. 10,385 26,687 42,743 66,594 86,930 65,458 75,568
Selling, general and administrative
expenses................................... 6,898 15,547 23,061 35,959 44,942 34,306 37,933
Depreciation and amortization expense........ 1,358 2,222 3,037 4,507 6,368 4,566 5,679
------- ------- ------- -------- -------- -------- --------
Income from operations....................... 2,129 8,918 16,645 26,128 35,620 26,586 31,956
Other income (expense)....................... 25 721 1,300 2,119 (221) 1,402 1,216
------- ------- ------- -------- -------- -------- --------
Income before provision for income taxes..... 2,154 9,639 17,945 28,247 35,399 27,988 33,172
Provision for income taxes................... (581) (3,606) (6,711) (10,564) (13,239) (10,468) (7,749)
Minority interest............................ (545) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- --------
Net income................................... $ 1,028 $ 6,033 $11,234 $ 17,683 $ 22,160 $ 17,520 $ 25,423
------- ------- ------- -------- -------- -------- --------
Net income per share, basic.................. $ 0.08 $ 0.38 $ 0.61 $ 0.95 $ 1.17 $ 0.93 $ 1.30
Net income per share, diluted................ $ 0.08 $ 0.36 $ 0.58 $ 0.87 $ 1.09 $ 0.86 $ 1.21
Weighted average number of common shares
outstanding................................ 13,094 15,886 18,342 18,565 19,017 18,896 19,618
Weighted average number of common shares and
stock options outstanding.................. 13,210 16,538 19,416 20,256 20,371 20,382 21,040
STATEMENT OF FINANCIAL POSITION DATA (AT THE
END OF THE PERIOD):
Cash and cash equivalents.................... $ 2,715 $28,418 $42,641 $ 61,976 $ 84,977 $ 79,767 $123,082
Working capital.............................. 5,694 29,416 43,507 61,501 95,637 87,564 136,634
Total assets................................. 18,298 51,679 69,026 109,540 144,983 138,573 200,776
Due to related party......................... 6,646 9 -- 8 -- -- --
Stockholders' equity......................... $ 3,419 $32,616 $45,461 $ 66,116 $ 98,792 $ 92,496 $142,622
14
COMPARATIVE PER SHARE DATA
The following table compares certain historical, pro forma and equivalent
per share data for IMS Health and Cognizant. The data has been derived from and
should be read together with the audited and unaudited consolidated financial
statements of IMS Health and related notes thereto contained in IMS Health's
Form 10-K for 2001 and Form 10-Q for the period ended September 30, 2002 and the
audited and unaudited consolidated financial statements of Cognizant and related
notes thereto contained in Cognizant's Form 10-K for 2001 and Form 10-Q for the
period ended September 30, 2002.
Pro forma net income per share is presented as if the exchange offer had
occurred (and that 36,540,129 IMS Health shares had been exchanged for
11,290,900 Cognizant shares) as of January 1, 2001. Pro forma and equivalent pro
forma book value per share is presented as if the exchange offer had occurred
(and that 36,540,129 IMS Health shares had been exchanged for 11,290,900
Cognizant shares) as of September 30, 2002. You should not rely on the pro forma
information as being indicative of the historical results that would have
occurred or the future results that IMS Health or Cognizant will experience
after the exchange offer. Cognizant's earnings per share and book value per
share will be impacted only by Cognizant's share of the offering expenses,
estimated to be approximately $2 to $3 million. Any conversion of Cognizant's
class B common stock to class A common stock will not have an impact on
Cognizant's earnings per share or book value per share.
IMS HEALTH
PRO FORMA
FOR
IMS HEALTH EXCHANGE COGNIZANT EXCHANGE OFFER
HISTORICAL OFFER(1) HISTORICAL EQUIVALENT(2)
---------- ---------- ---------- --------------
EARNINGS PER SHARE FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 2001
Basic........................................ $0.63 $0.65 $1.17 $0.36
Diluted...................................... 0.62 0.64 1.09 0.34
EARNINGS PER SHARE FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Basic........................................ 0.71 0.72 1.30 0.40
Diluted...................................... 0.70 0.72 1.21 0.37
CASH DIVIDENDS PER SHARE DECLARED
For the twelve months ended December 31,
2001....................................... 0.08 0.08 0.00 0.00
For the nine months ended September 30,
2002....................................... 0.06 0.06 0.00 0.00
BOOK VALUE PER SHARE
As of September 30, 2002..................... $0.59 $0.33 $7.12 $2.20
---------------
(1) The "IMS Health Pro Forma for Exchange Offer" amounts assume that 36,540,129
IMS Health shares are exchanged for 11,290,900 Cognizant shares. However, if
we assumed that only 27,400,000 IMS Health shares -- the minimum amount that
IMS will accept in the exchange offer -- are exchanged for 8,466,600
Cognizant shares, then the "IMS Health Pro Forma for Exchange Offer" amounts
would not differ from the amounts presented as IMS Health would have
accounted for its investment in Cognizant on the cost method of accounting.
(2) The exchange offer equivalent amounts are calculated by multiplying the
historical Cognizant amounts by the exchange ratio in the exchange offer.
15
COMPARATIVE PER SHARE MARKET PRICE DATA
Set forth below are the closing sale prices of IMS Health common stock as
reported by the NYSE, and Cognizant class A common stock as listed for quotation
on the Nasdaq National Market on November 13, 2002 (the last full trading day
prior to the public announcement that IMS Health was considering the exchange
offer) and January 8, 2003 (the most recent practicable date prior to the date
of this offering circular-prospectus). Also set forth below are the exchange
offer equivalent sales prices of IMS Health common stock for each of these
dates, as determined by multiplying the sale price of Cognizant class A common
stock by the exchange ratio for the exchange offer.
IMS HEALTH COGNIZANT EXCHANGE OFFER
NYSE PRICE NASDAQ PRICE EQUIVALENT PRICE
PER SHARE PER SHARE PER SHARE(1)
---------- ------------ ----------------
November 13, 2002......................... $16.52 $69.39 $21.44
January 8, 2003........................... 16.64 64.55 19.95
---------------
(1) The exchange offer equivalent per share sales prices are calculated by
multiplying the Cognizant price per share by the exchange ratio for the
exchange offer.
16
RISK FACTORS
You should consider carefully all the information set forth or incorporated
by reference in this document and, in particular, the following risk factors, in
considering whether or not to tender your shares of IMS Health common stock. In
addition, for an important discussion of additional uncertainties associated
with the businesses of IMS Health and Cognizant and forward-looking information
in this document, please see "Special Note on Forward-Looking Information" on
page 30.
RISKS RELATED TO THE EXCHANGE OFFER
YOUR INVESTMENT IN SHARES OF IMS HEALTH COMMON STOCK WILL BE SUBJECT TO
DIFFERENT RISKS AFTER THE EXCHANGE OFFER REGARDLESS OF WHETHER YOU ELECT TO
PARTICIPATE IN THE OFFER.
Your investment will be subject to different risks as a result of the
exchange offer, regardless of whether you tender all, some or none of your
shares of IMS Health common stock.
- If you exchange all your IMS Health shares, you will no longer have an
interest in IMS Health, but instead will have an interest in Cognizant.
As a result, your investment will be subject to risks associated with
Cognizant and not risks associated with IMS Health.
- If you exchange some, but not all, of your IMS Health shares, your
interest in IMS Health will diminish, depending on the number of your
shares that are accepted for exchange, while your direct interest in
Cognizant may increase. As a result, your investment will be subject to
risks associated with IMS Health and Cognizant.
- If you do not exchange any of your IMS Health shares your interest in IMS
Health will increase, on a percentage basis, while your indirect interest
in Cognizant will decrease or be eliminated. As a result, your investment
will be subject to risks associated with IMS Health and not risks
associated with Cognizant, except to the extent we do not distribute all
our Cognizant shares.
YOU MAY NOT RECEIVE A PREMIUM FOR THE SHARES OF IMS HEALTH COMMON STOCK YOU
TENDER IN THE EXCHANGE OFFER.
The amount of the premium, if any, that you will receive if you participate
in the exchange offer will depend on the relative value of IMS Health shares and
Cognizant shares on the completion of the exchange offer. A number of factors
may influence the value of our and Cognizant's shares. We cannot predict what
the amount of the actual premium will be at the time of the exchange or whether,
in fact, there will be a premium at all. Changes in the prices of IMS Health
shares or Cognizant shares over time may also affect your ability to realize any
premium through sales in the market.
THE HISTORICAL FINANCIAL INFORMATION OF IMS HEALTH AND COGNIZANT MAY NOT BE
INDICATIVE OF THEIR RESULTS AS SEPARATE COMPANIES.
The historical financial information of IMS Health and Cognizant presented
in this document may not necessarily reflect what the results of operations,
financial condition and cash flows of each would have been had the companies
been separate, stand-alone entities pursuing independent strategies during the
periods presented. As a result, historical financial information is not
necessarily indicative of future results of operations, financial condition and
cash flows of either IMS Health or Cognizant.
17
THE PRIOR PERFORMANCE OF IMS HEALTH AND COGNIZANT COMMON STOCK MAY NOT BE
INDICATIVE OF THE PERFORMANCE OF THEIR COMMON STOCK AFTER THE EXCHANGE OFFER.
IMS Health and Cognizant common stock price history may not provide
investors with a meaningful basis for evaluating an investment in either
company's common stock. IMS has been a publicly traded company only since July
1, 1998 and Cognizant has been a publicly traded company only since June 24,
1998. The prior performance of IMS Health and Cognizant common stock may not be
indicative of the performance of their common stock after the exchange offer.
THE DISTRIBUTION OF SHARES OF COGNIZANT CLASS B COMMON STOCK IN THE EXCHANGE
OFFER MAY ADVERSELY AFFECT THE MARKET PRICE OF SHARES OF COGNIZANT CLASS A
COMMON STOCK.
The exchange offer will substantially increase the number of publicly held
shares of Cognizant common stock and the number of Cognizant stockholders. At
September 30, 2002, Cognizant common stock held by IMS Health represented
approximately 56% of the outstanding stock and approximately 93% of the combined
voting power of Cognizant's common stock. The shares of Cognizant class B common
stock to be distributed in the exchange offer will be immediately transferable
by non-affiliates of Cognizant. Each share of Cognizant class B common stock
will be automatically converted into one share of Cognizant class A common stock
when it is first transferred after the exchange offer. If a significant number
of persons who receive shares of Cognizant common stock in the exchange offer
attempt to, or are perceived as likely to, sell their shares of Cognizant common
stock after the exchange offer, the market price of shares of Cognizant class A
common stock could be adversely affected or fluctuate significantly after the
exchange offer.
MARKET PRICES FOR SHARES OF IMS HEALTH COMMON STOCK MAY DECLINE FOLLOWING THE
COMPLETION OF THE EXCHANGE OFFER.
Investors may purchase shares of IMS Health common stock in order to
participate in the exchange offer, which may have the effect of artificially
raising market prices for shares of IMS Health common stock during the pendency
of the exchange offer. Following the completion of the exchange offer, the
market prices for shares of IMS Health common stock may decline because any
exchange offer-related demand for shares of IMS Health common stock will cease.
Furthermore, persons who were unable to exchange their shares of IMS Health
common stock for any reason, including proration, may seek to sell these shares
in the market, which may also affect the market price for IMS Health common
stock. Market prices for shares of IMS Health common stock may also decline
following the completion of the exchange offer because shares of IMS Health
common stock will no longer include an investment, or will include a
significantly diminished investment, in the Cognizant business.
THE IRS MAY TREAT THE EXCHANGE OFFER AS TAXABLE TO EXCHANGING STOCKHOLDERS OR TO
IMS HEALTH.
We have received a tax opinion from McDermott, Will & Emery to the effect
that, for U.S. federal income tax purposes, the exchange offer should be
tax-free to IMS Health stockholders, except with respect to any cash received in
lieu of fractional shares of Cognizant class B common stock, and that the
exchange offer should be tax-free to IMS Health. Section 355 of the Internal
Revenue Code is highly technical and complex, and many aspects of the statute
have not yet been addressed by judicial decisions, Treasury regulations, or
other administrative guidance. In particular, there is uncertainty with respect
to the tax treatment of the exchange offer to IMS Health under Section 355(e) of
the Internal Revenue Code due to the absence of controlling legal authorities
addressing certain factual aspects of the exchange offer, including the
potential for automatic conversion of Cognizant class B common stock into
Cognizant class A common stock. The opinion of McDermott, Will & Emery is based
on certain factual representations and assumptions. If these factual
representations and assumptions are incorrect in any material respect, our
ability to rely on the tax-free opinion would be jeopardized. No ruling from the
18
Internal Revenue Service has been or will be sought with respect to any of the
tax matters relating to the exchange offer and the opinion is not binding on the
IRS. Accordingly, we cannot assure you that the IRS will agree with the
conclusions set forth in the opinion, and it is possible that the IRS or another
tax authority could adopt a position contrary to one or all of those conclusions
and that a court could sustain that contrary position. If we complete the
exchange offer and the exchange offer is held to be taxable, we could be subject
to tax as if the distribution were a taxable sale by us of our Cognizant shares
at market value, resulting in a material amount of taxes for us because our tax
basis in the Cognizant shares is not significant. Our stockholders who receive
Cognizant shares could be subject to taxes that would vary with the individual
circumstances of the stockholder and may be material for some of stockholders.
Neither IMS Health nor Cognizant will indemnify any individual stockholder for
any taxes that may be incurred in connection with the exchange offer.
IMS HEALTH AND COGNIZANT MAY NOT HAVE ADEQUATE FUNDS TO PERFORM THEIR RESPECTIVE
INDEMNITY OBLIGATIONS UNDER THE DISTRIBUTION AGREEMENT.
In connection with the exchange offer, IMS Health and Cognizant have made
tax-related representations to each other and agreed to tax-related covenants.
IMS Health and Cognizant also have agreed to indemnify each other for any
liability resulting from a breach of these representations and covenants and
liability resulting from the conduct of IMS Health's and Cognizant's businesses.
The resulting liabilities could have a material adverse effect on each company.
For a summary of IMS Health's and Cognizant's obligations in connection with the
potential tax and business liabilities, see "Certain Relationships between IMS
Health and Cognizant -- Distribution Agreement" on page 97.
SPECIAL VOTING RIGHTS ASSOCIATED WITH COGNIZANT CLASS B COMMON STOCK WILL NOT BE
TRANSFERABLE.
If you receive shares of Cognizant class B common stock in the exchange
offer, you will have ten votes for each share you receive only until such share
is converted into Cognizant class A common stock. You will not be able to
transfer to another person any value associated with these special voting rights
because each share of Cognizant class B common stock will be automatically
converted when it is first transferred after the exchange offer into one share
of Cognizant class A common stock with one vote.
THE SPECIAL VOTING RIGHTS ASSOCIATED WITH COGNIZANT CLASS B COMMON STOCK MAY
CEASE AT ANY TIME.
You may lose your special voting rights even if you do not transfer your
class B common stock because each share of class B common stock will convert
automatically into one share of class A common stock with one vote per share on
the fifth anniversary of completion of the exchange offer or, if earlier, the
date on which the number of shares of Cognizant class B common stock represents
less than 35% of the aggregate number of shares of Cognizant common stock then
outstanding. The number of shares of class B common stock may fall below the 35%
level as the result of transfers by other holders of class B common stock or an
increase in the number of shares of Cognizant class A common stock outstanding.
RISKS RELATED TO COGNIZANT
A SUBSTANTIAL PORTION OF COGNIZANT'S ASSETS AND OPERATIONS ARE LOCATED IN INDIA
AND COGNIZANT IS SUBJECT TO REGULATORY, ECONOMIC AND POLITICAL UNCERTAINTIES IN
INDIA.
Cognizant intends to continue to develop and expand its offshore facilities
in India where, as of December 31, 2002, approximately 73% of its technical
professionals were located. While wage costs are lower in India than in the
United States and other developed countries for
19
comparably skilled professionals, wages in India are increasing at a faster rate
than in the United States, which could result in Cognizant incurring increased
costs for technical professionals and reduced operating margins. In addition,
there is intense competition in India for skilled technical professionals and
Cognizant expects that competition to increase.
India has also experienced civil unrest and terrorism and has been involved
in conflicts with neighboring countries. In recent years there have been
military confrontations between India and Pakistan that have occurred in the
region of Kashmir and along the Indian-Pakistan border. The potential for
hostilities between the two countries has been high in light of tensions related
to recent terrorist incidents in India and the unsettled nature of the regional
geopolitical environment including events in and related to Afghanistan. If
India were to become engaged in armed hostilities, particularly if these
hostilities were protracted or involved the threat of or use of weapons of mass
destruction, Cognizant's operations would be materially adversely affected. In
addition, U.S. companies may decline to contract with Cognizant for services in
light of international terrorist incidents or armed hostilities even where India
is not involved because of more generalized concerns about relying on a service
provider utilizing international resources.
In the past, the Indian economy has experienced many of the problems
confronting the economies of developing countries including high inflation,
erratic gross domestic product growth and shortages of foreign exchange. The
Indian government has exercised and continues to exercise significant influence
over many aspects of the Indian economy, and Indian government actions
concerning the economy could have a material adverse effect on private sector
entities, including Cognizant. In the past, the Indian government has provided
significant tax incentives and relaxed certain regulatory restrictions in order
to encourage foreign investment in specified sectors of the economy, including
the software development services industry. Programs that have benefited
Cognizant include, among others, tax holidays, liberalized import and export
duties and preferential rules on foreign investment and repatriation.
Notwithstanding these benefits, India's central and state governments remain
significantly involved in the Indian economy as regulators. The elimination of
any of the benefits realized by Cognizant from its Indian operations could have
a material adverse effect on Cognizant's business, results of operations and
financial condition.
Since 1991, successive governments in India have pursued policies of
economic reform, including significantly relaxing restrictions on the private
sector. The current Indian government, formed in October 1999, is a coalition of
several parties, including some small regional parties. The withdrawal of one or
more of these parties from the current coalition could result in political
instability. Political instability or further changes in the government in India
could delay the reform of the Indian economy and adversely affect economic
conditions in India generally, which could impact Cognizant's financial results
and prospects. The current Indian government has generally pursued policies and
taken initiatives that support the continued economic reform policies that have
been pursued by previous governments. Cognizant cannot assure you, however, that
these policies and initiatives will continue in the future. The rate of economic
reform could change, and specific laws and policies affecting technology
companies, foreign investment, currency exchange and other matters affecting
Cognizant's business could change as well. A significant change in India's
economic reform and deregulation policies could adversely affect business and
economic conditions in India generally and Cognizant's business in particular.
No assurance can be given that Cognizant will not be adversely affected by
changes in inflation, interest rates, taxation, social stability or other
political, economic or diplomatic developments in or affecting India in the
future.
HOSTILITIES BETWEEN THE UNITED STATES AND IRAQ COULD ADVERSELY AFFECT
COGNIZANT'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND IMPAIR
ITS ABILITY TO SERVICE ITS CUSTOMERS.
Tensions between the United States and Iraq have recently escalated as the
United States has threatened to take military action against Iraq. Hostilities
involving the United States, or
20
military or travel disruptions and restrictions affecting Cognizant's employees,
could materially adversely affect Cognizant's operations and its ability to
service its customers. As of December 31, 2002, approximately 73% of Cognizant's
technical professionals were located in India, and the vast majority of
Cognizant's technical professionals in the United States and Europe are Indian
nationals who are able to work in the United States only because they hold
current visas. A military action by the United States against Iraq would likely
further disrupt travel and the ability to obtain visas to enter into the United
States. Travel restrictions could cause Cognizant to incur additional unexpected
labor costs and expenses or could restrain Cognizant's ability to retain the
skilled professionals it needs for its operations in the United States and
Europe.
COGNIZANT'S INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO MANY
UNCERTAINTIES.
Revenues from customers outside North America represented 16%, 14% and 13%
of Cognizant's revenues for 2000, 2001 and the nine months ended September 30,
2002, respectively. Cognizant anticipates that revenues from customers outside
North America will continue to account for a material portion of its revenues in
the foreseeable future and may increase as Cognizant expands its international
presence, particularly in Europe. In addition, a substantial majority of
Cognizant's employees and almost all of its IT development centers are located
in India. As a result, Cognizant may be subject to risks associated with
international operations, including risks associated with foreign currency
exchange rate fluctuations and risks associated with the application and
imposition of protective legislation and regulations relating to import or
export or otherwise resulting from foreign policy or the variability of foreign
economic conditions. To date, Cognizant has not engaged in any hedging
transactions to mitigate its risks relating to exchange rate fluctuations.
Additional risks associated with international operations include difficulties
in enforcing intellectual property rights, the burdens of complying with a wide
variety of foreign laws, potentially adverse tax consequences, tariffs, quotas
and other barriers and potential difficulties in collecting accounts receivable.
There can be no assurance that these and other factors will not have a material
adverse effect on Cognizant's business, results of operations and financial
condition.
COGNIZANT FACES INTENSE COMPETITION FROM OTHER IT SERVICE PROVIDERS.
The intensely competitive IT professional services market includes a large
number of participants and is subject to rapid change. This market includes
participants from a variety of market segments, including:
- systems integration firms;
- contract programming companies;
- application software companies;
- Internet solutions providers;
- the professional services groups of computer equipment companies; and
- facilities management and outsourcing companies.
The market also includes numerous smaller local competitors in the various
geographic markets in which Cognizant operates. Cognizant's direct competitors
who use the on-site/offshore business model include, among others, Infosys,
Inc., Satyam Computer Services Limited, Tata Consultancy Services and WIPRO Ltd.
In addition, many of Cognizant's competitors have significantly greater
financial, technical and marketing resources and greater name recognition than
does Cognizant. Some of these larger competitors, such as Accenture Ltd.,
Electronic Data Systems Corporation and IBM Global Services, have announced
their intentions to develop their offshore operations in order to lower their
cost structure. Cognizant cannot
21
assure you that it will be able to sustain its current levels of profitability
or growth as competitive pressures, including competition for skilled IT
development professionals and pricing pressure from competitors employing an
on-site/offshore business model, increase.
COGNIZANT'S BUSINESS WILL SUFFER IF IT FAILS TO DEVELOP NEW SERVICES AND ENHANCE
ITS EXISTING SERVICES IN ORDER TO KEEP PACE WITH THE RAPIDLY EVOLVING
TECHNOLOGICAL ENVIRONMENT.
The IT services market is characterized by rapid technological change,
evolving industry standards, changing customer preferences and new product and
service introductions. Cognizant's future success will depend on its ability to
develop solutions that keep pace with changes in the IT services market. There
can be no assurance that Cognizant will be successful in developing new services
addressing evolving technologies on a timely or cost-effective basis or, if
these services are developed, that Cognizant will be successful in the
marketplace. In addition, there can be no assurance that products, services or
technologies developed by others will not render Cognizant's services
non-competitive or obsolete. Cognizant's failure to address these developments
could have a material adverse effect on its business, results of operations and
financial condition.
Cognizant's ability to remain competitive will also depend on its ability
to design and implement, in a timely and cost-effective manner, solutions for
customers moving from the mainframe environment to client/server or other
advanced architectures. Cognizant's failure to design and implement solutions in
a timely and cost-effective manner could have a material adverse effect on
Cognizant's business, results of operations and financial condition.
COMPETITION FOR HIGHLY SKILLED TECHNICAL PERSONNEL IS INTENSE AND THE SUCCESS OF
COGNIZANT'S BUSINESS DEPENDS ON ITS ABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED
PROFESSIONALS.
Cognizant's future success will depend to a significant extent on its
ability to attract, train and retain highly skilled IT development
professionals. In particular, Cognizant needs to attract, train and retain
project managers, IT engineers and other senior technical personnel. Cognizant
believes there is a shortage of, and significant competition for, IT development
professionals in the United States and India with the advanced technological
skills necessary to perform the services Cognizant offers. Cognizant has
subcontracted, to a limited extent in the past, and may do so in the future,
with other service providers in order to meet its obligations to its customers.
Cognizant's ability to maintain and renew existing engagements and obtain new
business will depend, in large part, on its ability to attract, train and retain
technical personnel with the skills that keep pace with continuing changes in
information technology, evolving industry standards and changing customer
preferences. Further, Cognizant must train and manage its growing work force,
requiring an increase in the level of responsibility for both existing and new
management personnel. There can be no assurance that the management skills and
systems currently in place will be adequate or that Cognizant will be able to
train and assimilate new employees successfully. Cognizant's failure to attract,
train and retain current or future employees could have a material adverse
effect on its business, results of operations and financial condition.
COGNIZANT'S GROWTH MAY BE HINDERED BY IMMIGRATION RESTRICTIONS.
Cognizant's future success will depend on its ability to attract and retain
employees with technical and project management skills from developing
countries, especially India. The vast majority of Cognizant's IT professionals
in the United States and in Europe are Indian nationals. The ability of Indian
nationals to work in the United States depends on their ability and the ability
of Cognizant to obtain the necessary visas and work permits.
The H-1B visa classification enables U.S. employers to hire qualified
foreign workers in positions which require an education at least equal to a U.S.
Baccalaureate Degree in specialty occupations such as IT systems engineering and
systems analysis. The H-1B visa usually
22
permits an individual to work and live in the United States for a period of up
to six years. There is a limit on the number of new H-1B petitions that the U.S.
Immigration and Naturalization Service may approve in any federal fiscal year,
and in years in which this limit is reached, Cognizant may be unable to obtain
H-1B visas necessary to bring foreign employees to the United States. In the
current federal fiscal year, the limit is 195,000. This cap is currently not
expected to be reached. However, in the fiscal year beginning October 1, 2003,
because of changes in U.S. immigration law, the number of H-1B visas available
to employers will be reduced to 65,000. In addition, there are strict labor
regulations associated with the H-1B visa classification. Higher users of the
H-1B visa program are often subject to investigations by the Wage and Hour
Division of the U.S. Department of Labor. A finding by the U.S. Department of
Labor of willful or substantial failure by Cognizant to comply with existing
regulations on the H-1B classification may result in a bar on future
work-authorized nonimmigrant or immigrant petitions.
Cognizant also regularly transfers employees of its subsidiaries in India
to the United States to work on projects and at client sites, using the L-1 visa
classification. The L-1 visa allows companies abroad to transfer certain
managers, executives and employees with specialized company knowledge to related
U.S. companies such as a parent, subsidiary, affiliate, joint venture or branch
office. Cognizant has an approved "Blanket L Program," under which the corporate
relationships of its transferring and receiving entities have been pre-approved
by the INS, thus enabling individual L-1 applications to be presented directly
to a U.S. consular post abroad rather than undergoing the pre-approval process
in the United States. While there have been no major changes in the law or
regulations governing the L-1 categories, both the U.S. consular posts that
review initial L-1 applications and the INS office, which adjudicates extensions
of L-1 status, have become more restrictive with respect to this category in the
recent past. As a result, the rate of refusals of initial L-1 applications and
of extension denials has increased. In addition, even where L-1 visas are
ultimately granted and issued, security measures undertaken by U.S. consular
posts around the world have caused major delays in visa issuances. Cognizant's
inability to bring qualified technical personnel into the United States to staff
on-site customer locations would have a material adverse effect on Cognizant's
business, results of operations and financial condition.
Cognizant also processes immigrant visas for lawful permanent residence for
employees to fill positions for which there are no able, willing and qualified
U.S. workers available to fill the positions. Compliance with existing U.S.
immigration and labor laws, or changes in those laws making it more difficult to
hire foreign nationals or limiting Cognizant's ability to successfully obtain
permanent residence for its foreign employees in the United States, could
require Cognizant to incur additional unexpected labor costs and expenses or
could restrain Cognizant's ability to retain the skilled professionals it needs
for its operations in the United States. Any of these restrictions or
limitations on Cognizant's hiring practices could have a material adverse effect
on Cognizant's business, results of operations and financial condition.
In addition to immigration restrictions in the United States, there have
recently been changes to work permit legislation in the United Kingdom, where
Cognizant has experienced significant growth. Under the new regulations, in
order for Cognizant to transfer its employees to the United Kingdom, either from
the United States or from India, it must demonstrate that the employee had been
employed by Cognizant for at least six months prior to the transfer. These
restrictions restrain Cognizant's ability to retain the skilled professionals it
needs for its operations in Europe, and could have an adverse affect on
Cognizant's international strategy to expand its presence in Europe. As a
result, the changes to work permit legislation in the United Kingdom could have
a material adverse effect on Cognizant's business, results of operations and
financial condition.
Immigration and work permit laws and regulations in the United States, the
United Kingdom and other countries is subject to legislative and administrative
changes as well as changes in the application of standards and enforcement.
Immigration and work permit laws and regulation can
23
be significantly effected by political forces and levels of economic activity.
Cognizant's international expansion strategy and its business, results of
operations and financial condition may be materially adversely affected if
changes in immigration and work permit laws and regulations or the
administration or enforcement of such laws or regulations impairs Cognizant's
ability to staff projects with IT professionals who are not citizens of the
country where the work is to be performed.
COGNIZANT'S ABILITY TO OPERATE AND COMPETE EFFECTIVELY COULD BE IMPAIRED IF IT
LOSES KEY PERSONNEL.
Cognizant's future performance depends to a significant degree upon the
continued service of the key members of its management team, as well as
marketing, sales and technical personnel, and its ability to attract and retain
new management and other personnel. Cognizant does not maintain key man life
insurance on any of its executive officers or significant employees. Competition
for personnel is intense, and there can be no assurance that Cognizant will be
able to retain its key employees or that it will be successful in attracting and
retaining new personnel in the future. The loss of any one or more of
Cognizant's key personnel or the failure to attract and retain key personnel
could have a material adverse effect on Cognizant's business, results of
operations and financial condition.
Cognizant has entered into non-competition agreements with its executive
officers. There can be no assurance that the restrictions in these agreements
prohibiting the executive officers from engaging in competitive activities are
enforceable. Further, substantially all of Cognizant's professional
non-executive staff are not covered by agreements that would prohibit them from
working for Cognizant's competitors. If any of Cognizant's key professional
personnel leaves Cognizant and joins a competitor of Cognizant, Cognizant's
business could be adversely affected.
COGNIZANT'S EARNINGS MAY BE ADVERSELY AFFECTED IF IT CHANGES ITS INTENT NOT TO
REPATRIATE EARNINGS IN INDIA.
During the first quarter of 2002, Cognizant made a strategic decision to
pursue an international strategy that includes expanded infrastructure
investments in India and geographic expansion in Europe and Asia. As a component
of this strategy, Cognizant intends to use 2002 and future Indian earnings to
expand its operations outside the United States instead of repatriating those
earnings to the United States. Accordingly, effective January 1, 2002, pursuant
to Accounting Principles Bulletin 23, Cognizant will no longer accrue taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are now considered to be indefinitely reinvested outside the United
States. This change in intent resulted in an estimated effective tax rate for
the nine months ended September 30, 2002 of approximately 23%, compared to an
effective tax rate for fiscal 2001 of approximately 37%. However, Cognizant's
cash requirements could change over time, which could effectively force it to
change its intent on repatriating Indian earnings. If Cognizant's earnings are
intended to be repatriated in the future, or are no longer reinvested outside
the United States, Cognizant will have to accrue the applicable amount of taxes
associated with those earnings and pay taxes at a substantially higher tax rate
than the effective rate in 2002. These increased taxes could have a material
adverse effect on Cognizant's business, results of operations and financial
condition, as well as cash flows to fund such taxes. In addition, Cognizant may
need to accelerate the payment of significant deferred taxes, which would have a
significant impact on its cash position.
COGNIZANT'S EARNINGS MAY BE ADVERSELY AFFECTED IF IT CHANGES ITS ACCOUNTING
POLICY WITH RESPECT TO EMPLOYEE STOCK OPTIONS.
Stock options are an important component of compensation packages for most
of Cognizant's mid- and senior-level employees. Cognizant currently does not
deduct the expense of employee stock option grants from its income. Many
companies, however, are considering a change to their accounting policies to
record the value of stock options issued to employees as
24
an expense and changes in the accounting treatment of stock options are
currently under consideration by the International Accounting Standards Board
and other accounting standards-setting bodies. If Cognizant were to change its
accounting policy with respect to the treatment of employee stock option grants,
its earnings could be materially adversely affected.
A SIGNIFICANT PORTION OF COGNIZANT'S PROJECTS IS ON A FIXED-PRICE BASIS,
SUBJECTING COGNIZANT TO THE RISKS ASSOCIATED WITH COST OVER-RUNS AND OPERATING
COST INFLATION.
Cognizant contracts to provide services either on a time-and-materials
basis or on a fixed-price basis, with fixed-price contracts accounting for
approximately 24% and 26% of revenues for the year ended December 31, 2001 and
the nine months ended September 30, 2002, respectively. Cognizant expects that
an increasing number of its future projects will be contracted on a fixed-price
basis. Cognizant bears the risk of cost over-runs and operating cost inflation
in connection with projects covered by fixed-price contracts. Cognizant's
failure to estimate accurately the resources and time required for a fixed-price
project, or its failure to complete its contractual obligations within the time
frame committed, could have a material adverse effect on Cognizant's business,
results of operations and financial condition.
COGNIZANT'S BUSINESS MAY SUFFER IF IT IS UNABLE TO MANAGE ITS RAPID GROWTH.
Since Cognizant began providing software development and maintenance
services in early 1994, Cognizant's professional and support staff has increased
from approximately 25 to over 6,000 at December 31, 2002. Cognizant's
anticipated growth will continue to place significant demands on its management
and other resources. In particular, Cognizant will have to continue to increase
the number of its personnel, particularly skilled technical, marketing and
management personnel, and continue to develop and improve its operational,
financial, communications and other internal systems. Cognizant's inability to
manage its anticipated growth effectively could have a material adverse effect
on Cognizant's business, results of operations and financial condition.
As part of its growth strategy, Cognizant is expanding its operations in
Europe and Asia. Cognizant may not be able to compete effectively in these
markets and the cost of entering these markets may be substantially greater than
it expects. If it fails to compete effectively in the new markets it enters, or
if the cost of entering those markets is substantially greater than it expects,
Cognizant's business, results of operations and financial condition could be
adversely affected. In addition, if Cognizant cannot compete effectively, it may
be required to reconsider its strategy to invest in its international expansion
plans and change its intent on the repatriation of its earnings.
COGNIZANT RELIES ON A FEW CUSTOMERS FOR A LARGE PORTION OF ITS REVENUES.
Approximately 40%, 35% and 39% of Cognizant's revenues in years ended
December 31, 2000 and 2001 and the nine months ended September 30, 2002,
respectively, were generated from its top five customers, including IMS Health.
Approximately 10%, 11% and 10% of Cognizant's revenues in years ended December
31, 2000 and 2001 and the nine months ended September 30, 2002 were generated
from IMS Health and its subsidiaries. The volume of work performed for specific
customers is likely to vary from year to year, and a major customer in one year
may not use Cognizant's services in a subsequent year. The loss of one of
Cognizant's large customers could have a material adverse effect on its
business, results of operations and financial condition.
COGNIZANT GENERALLY DOES NOT HAVE LONG-TERM CONTRACTS WITH ITS CUSTOMERS.
Consistent with industry practice, Cognizant generally does not enter into
long-term contracts with its customers. As a result, Cognizant is substantially
exposed to volatility in the market for its services, and may not be able to
maintain its level of profitability. If Cognizant is unable to market its
services on terms it finds acceptable, its financial condition and results of
operations could suffer materially.
25
COGNIZANT'S OPERATING RESULTS EXPERIENCE SIGNIFICANT QUARTERLY FLUCTUATIONS.
Cognizant historically has experienced significant quarterly fluctuations
in its revenues and results of operations and expects these fluctuations to
continue. Among the factors causing these variations have been:
- the number, timing, scope and contractual terms of IT development and
maintenance projects in which Cognizant is engaged;
- delays incurred in the performance of those projects;
- the accuracy of estimates of resources and time required to complete
ongoing projects; and
- general economic conditions.
In addition, Cognizant's future revenues, operating results and margins may
fluctuate as a result of:
- changes in pricing in response to customer demand and competitive
pressures;
- the mix of on-site and offshore staffing;
- the ratio of fixed-price contracts versus time-and-materials contracts;
- employee wage levels and utilization rates;
- the timing of collection of accounts receivable; and
- the breakdown of revenues by distribution channel.
A high percentage of Cognizant's operating expenses, particularly personnel
and rent, are relatively fixed in advance of any particular quarter. As a
result, unanticipated variations in the number and timing of Cognizant's
projects or in employee wage levels and utilization rates may cause significant
variations in operating results in any particular quarter, and could result in
losses to Cognizant. Any significant shortfall of revenues in relation to
Cognizant's expectations, any material reduction in utilization rates for
Cognizant's professional staff or variance in the on-site, offshore staffing
mix, an unanticipated termination of a major project, a customer's decision not
to pursue a new project or proceed to succeeding stages of a current project or
the completion during a quarter of several major customer projects could require
Cognizant to pay underutilized employees and could therefore have a material
adverse effect on Cognizant's business, results of operations and financial
condition.
As a result of these factors, it is possible that in some future periods
Cognizant's revenues and operating results may be significantly below the
expectations of public market analysts and investors. In such an event, the
price of Cognizant's common stock would likely be materially and adversely
affected.
COGNIZANT MAY NOT BE ABLE TO SUSTAIN ITS CURRENT LEVEL OF PROFITABILITY.
Cognizant's gross margin of 49% and 47% for the year ended December 31,
2001 and the nine months ended September 30, 2002, respectively, may decline if
it experiences declines in demand and pricing for its services. In addition,
wages in India are increasing at a faster rate than in the United States, which
could result in Cognizant incurring increased costs for technical professionals.
Although Cognizant has been able to partially offset pricing pressures and wage
increases through its low-cost operating structure, it cannot assure you that it
will be able to continue to do so in the future.
LIABILITY CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON COGNIZANT'S BUSINESS.
Many of Cognizant's engagements involve projects that are critical to the
operations of its customers' businesses and provide benefits that are difficult
to quantify. Any failure in a
26
customer's computer system could result in a claim for substantial damages
against Cognizant, regardless of Cognizant's responsibility for the failure.
Although Cognizant attempts to limit by contract its liability for damages
arising from negligent acts, errors, mistakes or omissions in rendering its IT
development and maintenance services, there can be no assurance that any
contractual limitations on liability will be enforceable in all instances or
will otherwise protect Cognizant from liability for damages. Although Cognizant
has general liability insurance coverage, including coverage for errors or
omissions, there can be no assurance that 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
Cognizant that exceed available insurance coverage or changes in Cognizant's
insurance policies, including premium increases or the imposition of large
deductible or co-insurance requirements, could have a material adverse effect on
Cognizant's business, results of operations and financial condition.
COGNIZANT MAY BE SUBJECT TO LEGACY DUN & BRADSTREET LIABILITIES THAT COULD HAVE
AN ADVERSE EFFECT ON COGNIZANT'S RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In 1996, The Dun & Bradstreet Corporation, now known as R.H. Donnelly
Corporation, split itself into three separate companies: The Dun & Bradstreet
Corporation, Cognizant Corporation and ACNielsen Corporation. In connection with
the split-up transaction, The Dun & Bradstreet Corporation, Cognizant
Corporation (renamed Nielsen Media Research), of which Cognizant Technology
Solutions Corporation was once a part, and ACNielsen Corporation (now a
subsidiary of the Dutch company VNU N.A.) entered into a distribution agreement.
In the 1996 distribution agreement, each party assumed the liabilities relating
to the businesses allocated to it and agreed to indemnify the other parties and
their subsidiaries against those liabilities and certain other matters. The 1996
distribution agreement also prohibited each party thereto from distributing to
its stockholders any business allocated to it unless the distributed business
delivered undertakings agreeing to be jointly and severally liable to the other
parties under the 1996 distribution agreement for the liabilities of the
distributing parent company under the 1996 distribution agreement. IMS Health
made such undertaking when it was spun off by Nielsen Media Research in 1998
and, accordingly, IMS Health and Nielsen Media Research are jointly and
severally liable to R.H. Donnelly and ACNielsen for Cognizant Corporation
obligations under the terms of the 1996 distribution agreement. IMS Health has
requested similar undertakings from Cognizant Technology Solutions Corporation
as a condition to the distribution of Cognizant shares in the exchange offer.
IMS Health is obligated to procure similar undertakings from Cognizant
Technology Solutions Corporation to Nielsen Media Research and Synavant Inc.
with respect to liabilities allocated to IMS Health in connection with Nielsen
Media Research's spin-off of IMS Health and IMS Health's spin-off of Synavant
Inc. In connection with the exchange offer, Cognizant Technology Solutions
Corporation has given these undertakings and, as a result, Cognizant Technology
Solutions Corporation may be subject to claims in the future in relation to
legacy liabilities.
One possible legacy liability arises from a pending antitrust action filed
by Information Resources Inc. in 1996, which names as joint defendants all
parties to the 1996 distribution agreement. Information Resources' complaint
alleges damages in excess of $350 million, which amount it has asked to be
trebled, plus punitive damages. ACNielsen Corporation agreed in connection with
the 1996 distribution agreement to assume any and all liabilities resulting from
the Information Resources claim to the extent that ACNielsen remains financially
viable. In connection with VNU's acquisition of ACNielsen in 2001, VNU was
required to assume this liability and to be included with ACNielsen for purposes
of determining the amount that can be paid by ACNielsen in respect of any claim.
IMS Health and Nielsen Media Research, Inc., successors to Cognizant
Corporation, have agreed to share liabilities in excess of the amount ACNielsen
is required to pay under the 1996 distribution agreement in respect of this
claim on a 50-50 basis with The Dun & Bradstreet Corporation (subsequently
separated into The Dun &
27
Bradstreet Corporation and Moody's Corporation). IMS Health and Nielsen Media
Research, Inc. further agreed to share their portion of the liabilities in
relation to the Information Resources action on a 75-25 basis, subject to
Nielsen Media Research, Inc.'s liability in respect of the Information Resources
action and certain other contingent liabilities being capped at $125 million.
Pursuant to its undertaking, Cognizant Technology Solutions Corporation could be
held liable for those amounts that VNU, IMS Health, Nielsen Media Research,
Inc., and The Dun & Bradstreet Corporation and their successors are unable or
unwilling to pay.
Other claims have arisen in the past and may arise in the future under the
1996 distribution agreement or the distribution agreements relating to Nielsen
Media Research's spin-off of IMS Health and IMS Health's spin-off of Synavant
Inc., in which case Cognizant Technology Solutions Corporation may be jointly
and severally liable for any losses suffered by the parties entitled to
indemnification.
IMS Health has agreed to indemnify Cognizant Technology Solutions
Corporation for any and all liabilities that arise out of its undertakings to be
jointly and severally liable for these liabilities, but if for any reason IMS
Health does not perform on its indemnification obligation, these liabilities
could have a material adverse effect on Cognizant's financial condition and
results of operations.
COGNIZANT EXPECTS THAT THE COST OF INSURANCE WILL INCREASE, AND THE SCOPE OF ITS
COVERAGE WILL DECREASE, FOLLOWING COMPLETION OF THE EXCHANGE OFFER.
Historically, Cognizant has benefited from insurance coverage provided
under policies obtained by IMS Health for itself and its subsidiaries. Following
completion of the exchange offer, Cognizant will be required to obtain its own
separate insurance policies for director and officer liability and general
liability. Cognizant expects the costs associated with the new insurance
policies will be substantially higher than the cost of the shared policy due to
reduced leverage in negotiating terms and general increases in insurance
premiums. In addition, Cognizant expects that the scope of its coverage will
also be reduced under the new policies.
COGNIZANT MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS.
Cognizant's future success will depend in part on its ability to protect
its intellectual property rights. Cognizant presently holds no patents or
registered copyrights, and relies upon a combination of copyright and trade
secret laws, non-disclosure and other contractual arrangements and various
security measures to protect its intellectual property rights. India is a member
of the Berne Convention, and has agreed to recognize protections on copyrights
conferred under the laws of foreign countries, including the laws of the United
States. Cognizant believes that laws, rules, regulations and treaties in effect
in the United States and India are adequate to protect it from misappropriation
or unauthorized use of its copyrights. However, there can be no assurance that
these laws will not change and, in particular, that the laws of India will not
change in ways that may prevent or restrict the transfer of software components,
libraries and toolsets from India to the United States. There can be no
assurance that the steps taken by Cognizant to protect its intellectual property
rights will be adequate to deter misappropriation of any of its intellectual
property, or that Cognizant will be able to detect unauthorized use and take
appropriate steps to enforce its rights. Unauthorized use of Cognizant's
intellectual property may result in development of technology, products or
services which compete with Cognizant's products and unauthorized parties may
infringe upon or misappropriate Cognizant's products, services or proprietary
information.
Although Cognizant believes that its intellectual property rights do not
infringe on the intellectual property rights of any of its competitors or
others, there can be no assurance that infringement claims will not be asserted
against Cognizant in the future, that assertion of infringement claims will not
result in litigation or that Cognizant would prevail in that litigation or be
able to obtain a license for the use of any infringed intellectual property from
a third party on
28
commercially reasonable terms, if at all. Cognizant expects that the risk of
infringement claims against Cognizant will increase if Cognizant's competitors
are able to obtain patents for software products and processes. Any infringement
claims, regardless of their outcome, could result in substantial cost to
Cognizant and divert management's attention from Cognizant's operations. Any
infringement claim or litigation against Cognizant could, therefore, have a
material adverse effect on Cognizant's business, results of operations and
financial condition.
COGNIZANT MAY BE UNABLE TO INTEGRATE ACQUIRED COMPANIES OR TECHNOLOGIES
SUCCESSFULLY.
Cognizant believes that opportunities exist in the fragmented IT services
market to expand its business through selective strategic acquisitions and joint
ventures. Cognizant believes that acquisition and joint venture candidates may
enable it to expand its geographic presence, especially in the European market,
enter new technology areas or expand its capacity. There can be no assurance
that Cognizant will identify suitable acquisition candidates available for sale
at reasonable prices, consummate any acquisition or joint venture or
successfully integrate any acquired business or joint venture into its
operations. Further, acquisitions and joint ventures involve a number of special
risks, including diversion of management's attention, failure to retain key
personnel, unanticipated events or circumstances and legal liabilities, some or
all of which could have a material adverse effect on Cognizant's business,
results of operations and financial condition. Cognizant may finance any future
acquisitions with debt financing, the issuance of equity securities or a
combination of the foregoing. There can be no assurance that Cognizant will be
able to arrange adequate financing on acceptable terms. In addition,
acquisitions financed with the issuance of Cognizant's equity securities could
be dilutive.
PROVISIONS IN COGNIZANT'S CHARTER AND BY-LAWS, THE PROPOSED ADOPTION OF A
STOCKHOLDERS' RIGHTS PLAN AND PROVISIONS UNDER DELAWARE LAW MAY DISCOURAGE
UNSOLICITED TAKEOVER PROPOSALS.
Provisions in Cognizant's charter and by-laws, each as to be amended
following the completion of the exchange offer, the proposed stockholders'
rights plan expected to be adopted in connection with the completion of the
exchange offer and Delaware General Corporate Law may have the effect of
deterring unsolicited takeover proposals or delaying or preventing changes in
control or management of Cognizant, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices. In addition, these documents and provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. Cognizant's board of directors has the authority, without further
action by the stockholders, to fix the rights and preferences, and issue shares,
of preferred stock. Cognizant's charter, as it will be amended following
completion of the exchange offer, will provide for a classified board of
directors, which once implemented, will prevent a change of control of
Cognizant's board of directors at a single meeting of stockholders. The
elimination of Cognizant's stockholders' ability to act by written consent and
to call a special meeting will delay stockholder actions until annual meetings
or until a special meeting is called by Cognizant's chairman or chief executive
officer or its board of directors. The supermajority voting requirement for
specified amendments to Cognizant's charter and by-laws allows a minority of
Cognizant's stockholders to block those amendments. The DGCL also contains
provisions preventing stockholders from engaging in business combinations with
Cognizant, subject to certain exceptions. These provisions could also discourage
bids for Cognizant's common stock at a premium as well as create a depressive
effect on the market price of the shares of Cognizant's common stock.
29
SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This document, as well as information included in oral statements or other
written statements made or to be made by IMS Health and Cognizant, contain
forward-looking statements. The words such as "believe," "expect," "anticipate,"
"intend," "plan," "foresee," "likely," "project," "estimate," "will," "may,"
"should," "future," "predicts," "potential," "continue" and similar expressions
identify these forward-looking statements which appear in a number of places in
this document and include, but are not limited to, all statements relating to
the exchange offer, plans for future growth and other business development
activities as well as capital expenditures, financing sources, dividends and the
effects of regulation and competition, foreign currency conversion and all other
statements regarding the intent, plans, beliefs or expectations of IMS Health,
Cognizant or their directors or officers.
You are cautioned that such forward-looking statements are not assurances
for future performance or events and involve risks and uncertainties that could
cause actual results and developments to differ materially from those covered in
such forward-looking statements due to a number of factors, including those
discussed in the sections of this document entitled "Risk Factors" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of Cognizant" in this document and those discussed in our Form 10-K
for 2001, Form 10-Q for the period ended September 30, 2002 and in Cognizant's
Form 10-K for 2001 and Form 10-Q for the period ended September 30, 2002, each
of which have been incorporated into this document by reference. To find out
where you can obtain copies of our and Cognizant's incorporated documents, see
"Where You Can Find More Information." These factors are not necessarily all of
the important factors that could cause actual results to differ materially from
those expressed in any of the forward-looking statements contained in this
document.
With respect to IMS Health, these factors include, but are not limited to,
the following:
- operating on a global basis, including fluctuations in the value of
foreign currencies relative to the U.S. dollar, and the ability to
successfully hedge such risks -- IMS Health derived 54% of its revenue in
2001 from non-U.S. operations, including from Cognizant;
- to the extent IMS Health seeks growth through acquisitions, alliances or
joint ventures, the ability to identify, consummate and integrate
acquisitions, alliances and ventures on satisfactory terms;
- the ability to develop, update and replace new or advanced technologies,
including sophisticated information systems, software and other
technology used to deliver its products and services and the exposure to
the risk of obsolescence or incompatibility of these technologies with
those of its customers or suppliers;
- the ability of the Company to maintain and defend its intellectual
property rights in jurisdictions around the world;
- regulations to which the Company is or may become subject relating to
patient privacy and the collection and dissemination of data and,
specifically, the use of anonymized patient-specific information, which
the Company anticipates to be an increasingly important tool in the
design, development and marketing of pharmaceuticals;
- regulations to which customers of the Company in the pharmaceutical
industry are or may become subject restricting the prices that may be
charged for subscription or other pharmaceutical products or the manner
in which such products may be marketed or sold;
- increased restrictions on the use of data by, or the refusal to license
data to IMS Health by distributors of pharmaceutical products and other
suppliers of such information;
- deterioration in economic conditions, particularly in the pharmaceutical,
healthcare, or other industries in which IMS Health's customers may
operate;
30
- consolidation in the pharmaceutical industry and the other industries in
which IMS Health's customers operate;
- conditions in the securities markets which may affect the value or
liquidity of portfolio investments, including the investment in TriZetto,
and management's estimates of lives of assets, recoverability of assets,
fair market value, estimates and liabilities and accrued income tax
benefits and liabilities;
- to the extent unforeseen cash needs arise, the ability to obtain
financing on favorable terms;
- the ability to identify and implement cost-containment measures;
- the ability to successfully maintain historic effective tax rates and to
achieve estimated corporate overhead levels;
- competition, particularly in the markets for pharmaceutical information;
- terrorist activity, the threat of terrorist activity, and responses to
and results of terrorist activity and threats, including but not limited
to effects, domestically and/or internationally, on IMS Health, its
personnel and facilities, its customers and suppliers, financial markets
and general economic conditions; and
- general economic conditions.
With respect to Cognizant, these factors include, but are not limited to,
the following:
- the significant fluctuations of Cognizant's quarterly operating results
caused by a variety of factors, many of which are not within Cognizant's
control, including
- the number, timing, scope and contractual terms of application design,
development and maintenance projects,
- delays in the performance of projects,
- the accuracy of estimates of costs, resources and time to complete
projects,
- seasonal patterns of Cognizant's services required by customers,
- potential adverse impact of new tax legislation,
- levels of market acceptance for Cognizant's services, and
- the hiring of additional staff;
- changes in Cognizant's billing and employee utilization rates;
- Cognizant's ability to manage its growth effectively, which will require
Cognizant
- to increase the number of its personnel, particularly skilled
technical, marketing and management personnel,
- to find suitable acquisition and joint venture candidates to support
geographic expansion, and
- to continue to develop and improve its operational, financial,
communications and other internal systems, in the United States,
Europe and India;
- Cognizant's limited operating history with unaffiliated customers;
- Cognizant's reliance on key customers and large projects;
- the highly competitive nature of the markets for Cognizant's services;
31
- Cognizant's ability to successfully address the continuing changes in
information technology, evolving industry standards and changing customer
objectives and preferences;
- Cognizant's reliance on the continued services of its key executive
officers and leading technical personnel;
- Cognizant's ability to attract and retain a sufficient number of highly
skilled employees in the future;
- Cognizant's ability to protect its intellectual property rights;
- the concentration of Cognizant's operations in India and the related
geo-political risks of local and cross-border conflicts;
- terrorist activity, the threat of terrorist activity, and responses to
and results of terrorist activity and threats, including but not limited
to effects, domestically and/or internationally, on Cognizant, its
personnel and facilities, its customers and suppliers, financial markets
and general economic conditions;
- the effects, domestically and/or internationally, on Cognizant, its
personnel and facilities, its customers and suppliers, financial markets
and general economic conditions arising from hostilities involving the
United States in Iraq or elsewhere;
- general economic conditions; and
- uncertainties regarding the satisfaction or waiver of the conditions to
the exchange offer, and the effects on the exchange offer (as well as the
effects on the two companies and on tendering stockholders) of market
conditions, economic conditions, tax treatment, regulatory and legal
requirements and the results of negotiations between Cognizant and IMS
Health.
In addition, the exchange offer is also subject to risks and uncertainties,
including, but not limited to, risks associated with the tax consequences of the
exchange offer for IMS Health or persons participating in the exchange offer and
risks relating to the number of Cognizant shares owned by us that are not
distributed in the exchange offer and the manner and timing of any conversion,
disposition or other action by us in respect of these Cognizant shares.
32
THE TRANSACTION
BACKGROUND AND PURPOSE
In 1996, IMS Health and Cognizant, along with a group of other companies,
were spun-off from The Dun & Bradstreet Corporation (which was subsequently
renamed "R.H. Donnelley Corporation") to form a new company, Cognizant
Corporation.
When Cognizant completed its initial public offering on June 24, 1998, it
was a subsidiary of Cognizant Corporation. Shortly thereafter, the shares of
Cognizant held by Cognizant Corporation were contributed to IMS Health and on
July 1, 1998 IMS Health began operating as an independent company after having
been spun-off from Cognizant Corporation. Immediately following the spin-off of
IMS Health, Cognizant Corporation changed its name to Nielsen Media Research,
Inc. At the time of the spin-off, IMS Health held approximately 67% of the
outstanding stock of Cognizant representing approximately 95% of the combined
voting power of Cognizant's common stock. IMS Health was deemed the "accounting
successor" to Cognizant Corporation in connection with the spin-off.
IMS Health has owned Cognizant class B common stock since July, 1998. IMS
Health does not view its interest in Cognizant as strategically important to IMS
Health. Among other benefits, we believe the separation of Cognizant from IMS
Health will:
- enable the senior management personnel of both companies to focus more
completely on the opportunities and needs of their own lines of business;
- improve the stock of both companies as equity incentive tools for
motivating key personnel;
- improve the ability of both companies to independently access the capital
markets; and
- enable both companies to more freely use their stock for acquisitions and
to raise capital.
EFFECTS
If we complete the exchange offer and distribute all our Cognizant shares,
our financial statements will no longer reflect the assets, liabilities,
revenues, earnings or cash flows attributable to Cognizant.
Assuming the exchange offer is completed successfully, persons who remain
IMS Health stockholders after the exchange offer will own shares in a company
that no longer controls Cognizant. As a result, Cognizant's results will no
longer be consolidated with those of IMS Health for financial reporting
purposes. Revenues and operating income attributable to Cognizant's operations
represented approximately 14% and 10%, respectively, of our consolidated
revenues and operating income for the nine months ended September 30, 2002.
Shares of IMS Health common stock acquired by us in the exchange offer will
become authorized shares of IMS Health common stock held in treasury. We may
sell or distribute our authorized shares held in treasury without stockholder
action for general or other corporate purposes, including stock splits or
dividends, acquisitions, raising additional capital and pursuant to our stock
option and other employee benefit plans, except as may be required by applicable
law or the rules of the NYSE.
If we would otherwise continue to own shares of Cognizant class B common
stock after completion of the exchange offer, we currently plan to either
distribute them to our stockholders or to convert them into shares of Cognizant
class A common stock prior to completion of the exchange offer and distribute
them to our stockholders or hold them for some period before we sell them in one
or more transactions. The timing of those sales could depend on market
conditions and other factors, but we expect that we would hold any such shares
for no more than three years. We will vote those shares in the same proportion
as the votes cast by the other Cognizant stockholders. If the minimum amount of
IMS shares are exchanged and we do not otherwise distribute Cognizant shares to
our stockholders, we will hold 2,824,300 shares of
33
Cognizant class A common stock immediately following the completion of the
exchange offer (representing 13.8% of the outstanding common stock of
Cognizant).
PARTICIPATION BY IMS HEALTH DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of IMS Health who hold IMS Health
shares have informed IMS Health that they do not intend to participate in the
exchange offer.
NO APPRAISAL RIGHTS
No statutory appraisal rights are available to IMS Health or Cognizant
stockholders in connection with the exchange offer.
REGULATORY APPROVAL
No filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, are required in connection with the exchange offer generally.
However, if an IMS Health stockholder decides to participate in the exchange
offer and acquires enough shares of Cognizant class B common stock to exceed any
threshold stated in the regulations under the Hart-Scott-Rodino Act and if an
exemption under those regulations does not apply, that stockholder and IMS
Health would be required to make filings under the Hart-Scott-Rodino Act, and
the waiting period under the Hart-Scott-Rodino Act would have to expire or be
terminated before any exchanges of shares with that stockholder could be
effected. A filing requirement could delay exchanges with that stockholder for
several months.
Apart from the registration of the shares of Cognizant class B common stock
offered in the exchange offer under federal and state securities laws and the
filing of a Schedule TO with the SEC by us, we do not believe that any other
material U.S. federal or state regulatory filings or approvals will be necessary
to consummate the exchange offer.
ACCOUNTING TREATMENT
The shares of IMS Health common stock received by us pursuant to the
exchange offer will be recorded as an acquisition of treasury stock at a cost
equal to the market value at expiration of the exchange offer of the IMS Health
shares accepted in the exchange offer. Any excess of the market value of the
shares of IMS Health common stock acquired over the net book value of our
investment in Cognizant class B common stock at that date will be recognized by
us as a gain on the disposal of the Cognizant class B common stock after
deducting direct and incremental expenses of the exchange offer. Depending on
the market value and the number of the shares of IMS Health common stock
acquired in the exchange offer, the gain on the disposal may be significant. For
example, if the IMS Health shares have a market value on the date of expiration
of the exchange offer equal to the closing price of the IMS Health shares on
January 8, 2003, -- i.e. $16.64 per share -- and 36,540,129 IMS Health shares
are exchanged for 11,290,900 Cognizant shares, IMS Health estimates that it
would realize a gain of approximately $522,000,000. Assuming that 36,540,129 IMS
Health shares are exchanged for 11,290,900 Cognizant shares, the actual gain
will vary by approximately $36.5 million for each $1.00 change in the per share
market value of the IMS Health shares on the date of expiration of the exchange
offer. The disposal of substantially all of our investment in Cognizant would
result in discontinued operations treatment for accounting purposes.
The disposal of our investment in Cognizant will be accounted for as a
tax-free transaction for U.S. federal income tax purposes. If the tax-free
treatment of the exchange offer is challenged by the IRS and such challenge is
ultimately upheld by the courts, we could be subject to a material amount of
taxes because of our tax basis in Cognizant is not significant.
The disposition of our shares of Cognizant class B common stock will not
affect Cognizant's reported financial position or results of operations, except
for Cognizant's share of the offering expenses, which will be expensed as
incurred.
34
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are offering to exchange 0.309 shares of Cognizant class B common stock
for each share of IMS Health common stock that is validly tendered and not
properly withdrawn, on the terms and subject to the conditions described below
and in the related letter of transmittal, by 12:00 midnight, New York City time,
on February 6, 2003. We may extend this deadline for any reason in our sole
discretion. We refer to the last day on which tenders will be accepted, whether
on February 6, 2003 or any later date to which the exchange offer may be
extended, as the "expiration date." You may tender all, some or none of your
shares of IMS Health common stock.
Subject to the satisfaction or waiver of the conditions to the exchange
offer, we will accept up to an aggregate of 36,540,129 shares of IMS Health
common stock for exchange. This number of shares multiplied by the exchange
ratio equals the 11,290,900 shares of Cognizant class B common stock held by us,
which is the total number of shares of Cognizant class B common stock that we
own and that we are offering to exchange. If more than 36,540,129 shares of IMS
Health common stock are validly tendered and not properly withdrawn, the
tendered shares will be subject to proration when the exchange offer expires.
Our obligation to complete the exchange offer is subject to important conditions
that are described under the heading "Conditions for Completion of the Exchange
Offer" beginning on page 42.
In determining the exchange ratio, we considered, among other things:
- recent market prices on the NYSE and Nasdaq National Market for shares of
IMS Health common stock and Cognizant class A common stock, respectively;
and
- discussions with the joint dealer managers as to what exchange ratio
might result in enough shares of IMS Health common stock being tendered
in the exchange offer to enable us to distribute all (or the greatest
percentage) of our 11,290,900 shares of Cognizant class B common stock.
IMS Health common stock is currently listed and traded on the NYSE under
the symbol "RX." Cognizant class A common stock is currently listed and listed
for quotation on the Nasdaq National Market under the symbol "CTSH." Cognizant
class B common stock will not be separately listed or traded on any exchange or
on the Nasdaq National Market. Based on the closing trading prices for IMS
Health common stock and Cognizant class A common stock on January 8, 2003, the
exchange ratio would result in an IMS Health stockholder who participates in the
exchange offer receiving a premium of approximately 20% for each exchanged share
of IMS common stock. The market price for Cognizant class A common stock is not
necessarily determinative of the value of the Cognizant class B common stock to
be received in the exchange offer. In addition, because market prices for IMS
Health common stock and Cognizant class A common stock will fluctuate over the
course of the exchange offer, we cannot predict what the amount of the premium,
if any, will be at the closing of the exchange offer or the prices at which IMS
Health or Cognizant shares will trade over time.
You should obtain current market prices for shares of IMS Health common
stock and Cognizant class A common stock because we cannot assure you what the
market prices of these shares will be before, on or after the date the exchange
offer expires.
We are sending this document and related documents to IMS Health
stockholders of record on January 6, 2003. As of January 6, 2003, there were
281,085,182 shares of IMS Health common stock outstanding, which were held of
record by approximately 6,400 stockholders. We will also furnish this document
and related documents to brokers, banks and similar persons whose names or the
names of whose nominees appear on our stockholder list or, if applicable, who
are listed as participants in a clearing agency's security position listing for
subsequent
35
transmittal to beneficial owners of shares of IMS Health common stock. All
persons holding shares of IMS Health common stock are eligible to participate in
the exchange offer so long as they tender their shares in a jurisdiction where
the exchange offer is permitted under local law.
PRORATION; TENDERS FOR EXCHANGE BY HOLDERS OF FEWER THAN 100 SHARES OF IMS
HEALTH COMMON STOCK
On the expiration date, if IMS Health stockholders have validly tendered
more than 36,540,129 shares of IMS Health common stock, we will accept, on a pro
rata basis, up to 36,540,129 shares validly tendered and not properly withdrawn,
except as described in this section.
Except as otherwise provided below, beneficial holders of less than 100
shares of IMS Health common stock who validly tender all their shares will not
be subject to proration if more than 36,540,129 shares of IMS Health are validly
tendered and not properly withdrawn. Beneficial holders of 100 or more shares of
IMS Health common stock are not eligible for this preference, even if those
holders have separate stock certificates or accounts representing fewer than 100
shares of IMS Health common stock.
Holders of less than 100 shares of IMS Health common stock who wish to
tender all their shares must complete the section captioned "Odd-Lot Shares" on
the letter of transmittal and, if applicable, on the notice of guaranteed
delivery. If your odd-lot shares are held by a broker for your account, you can
contact your broker and request this preferential treatment. Shares held in the
IMS Health Savings Plan are not eligible for this preferential treatment.
We will announce preliminary results of the exchange offer by press release
on the first business day after the expiration date. Because of the difficulty
in determining the number of IMS Health shares validly tendered for exchange and
not properly withdrawn, IMS Health expects that the final results, including
proration, if any, will not be determined until approximately 5 business days
after the expiration date. We will announce by press release the final results
of the exchange offer promptly after they are known.
NO FRACTIONAL SHARES
You will not receive fractional shares of Cognizant class B common stock in
the exchange offer. The exchange agent, acting as agent for IMS Health
stockholders otherwise entitled to receive fractional shares of Cognizant class
B common stock, will aggregate all fractional shares of Cognizant class B common
stock and sell them for the accounts of these stockholders as shares of class A
common stock. The proceeds, if any, received by the exchange agent from the sale
of these shares will be distributed, net of commissions, to stockholders
entitled thereto in accordance with their fractional interests in the shares of
Cognizant class B common stock. These cash payments will be made through the
exchange agent. None of us, Cognizant, the joint dealer managers, the exchange
agent or the information agent guarantees any minimum proceeds from these sales,
nor will pay any interest on the proceeds.
EXCHANGE OF SHARES OF IMS HEALTH COMMON STOCK
If all the conditions of the exchange offer are satisfied or waived, we
will exchange shares of Cognizant class B common stock for each validly tendered
share of IMS Health common stock that was not properly withdrawn or deemed
withdrawn prior to the expiration date, except as described in the sections
entitled "Proration; Tenders for Exchange by Holders of Fewer than 100 Shares of
IMS Health Common Stock" on page 36 and "Extension of Tender Period;
Termination; Amendment" on page 41. We may, subject to the rules under the
Securities Exchange Act of 1934, as amended, delay accepting or exchanging any
shares of IMS Health common stock pending receipt of any governmental regulatory
approvals necessary to complete the exchange offer. For a more detailed
description of our right to delay, terminate or amend the
36
exchange offer, see the section entitled "Extension of Tender Period;
Termination; Amendment" on page 41.
If we notify the exchange agent either orally or in writing that we have
accepted the tenders of shares of IMS Health common stock for exchange, the
acceptance of these shares for exchange will be complete. Promptly following our
announcement of any final proration factor, the exchange agent will deliver the
tendered shares of IMS Health common stock to us. Simultaneously, the exchange
agent, as agent for the tendering stockholders, will receive from us the shares
of Cognizant class B common stock that, according to the exchange ratio,
correspond to the number of shares of IMS Health common stock accepted for
exchange. The exchange agent will notify Cognizant of the whole number of shares
of Cognizant class B common stock to be delivered as a result of the exchange
offer. Cognizant shall direct its transfer agent to issue, upon surrender for
cancellation of certificates of Cognizant class B common stock held by IMS
Health, certificates of Cognizant class B common stock duly executed in the name
of the person entitled to receive them and the books of Cognizant shall be
adjusted to reflect such transfers.
If any tendered shares of IMS Health common stock are not exchanged for any
reason, or if fewer shares are exchanged due to proration, the unexchanged
shares of IMS Health common stock will be returned to you by:
- mailing you a stock certificate, if you tendered your shares by
delivering a stock certificate to the exchange agent; or
- mailing a stock certificate to your broker or crediting your broker's
account in accordance with The Depository Trust Company's procedures, if
you tendered shares held by your broker.
Holders who tender their shares of IMS Health common stock for exchange
will generally not be obligated to pay any transfer tax in connection with the
exchange offer, except in the circumstances described under the instructions to
the letter of transmittal. We will not pay interest under the exchange offer,
regardless of any delay in making the exchange or crediting or delivering
shares.
PROCEDURES FOR TENDERING SHARES OF IMS HEALTH COMMON STOCK
To tender your shares of IMS Health common stock, you must complete the
following procedures before the expiration date:
SHARES OF IMS HEALTH COMMON STOCK YOU HOLD IN CERTIFICATED FORM
If you have stock certificates for your shares of IMS Health common stock,
you should send to the exchange agent by courier or registered mail, return
receipt requested, the following documents:
- a completed and executed letter of transmittal indicating the number of
shares of IMS Health common stock to be tendered and any other documents
required by the letter of transmittal; and
- the actual certificates representing the shares of IMS Health common
stock.
The exchange agent's address is listed on the back cover of this document.
The certificates must be endorsed by all registered holders of the shares or
accompanied by an appropriate stock power if, pursuant to the terms of the
letter of transmittal:
- a certificate representing shares of IMS Health common stock is
registered in the name of a person other than the signer of a letter of
transmittal; or
- delivery of shares of Cognizant class B common stock is to be made to a
person other than the registered owner of the shares of IMS Health common
stock tendered.
37
The signature on the letter of transmittal must be guaranteed by an
eligible institution unless the shares of IMS Health common stock tendered under
the letter of transmittal are tendered (a) by the registered holder of the
shares of IMS Health common stock tendered and such holder has not completed
Section IV. entitled "Special Transfer Instructions" on the letter of
transmittal or (b) for the account of an eligible institution. An eligible
institution is a member of the S.T.A.M.P. Medallion program, and generally
includes a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc., a commercial bank, or a
trust company having an office or a correspondent in the United States. Most
banks, brokerage firms and financial institutions are eligible institutions.
SHARES OF IMS HEALTH COMMON STOCK YOU HOLD THROUGH A BROKER
If you hold your shares of IMS Health common stock through a broker, you
should follow the instructions sent to you separately by your broker. Do not use
the letter of transmittal to direct the tender of your shares of IMS Health
common stock. Your broker must notify The Depository Trust Company and cause it
to transfer the shares into the exchange agent's account in accordance with The
Depository Trust Company's procedures. The broker must also ensure that the
exchange agent receives an agent's message from The Depository Trust Company
confirming the book-entry transfer of your shares of IMS Health common stock. An
agent's message is a message, transmitted by The Depository Trust Company and
received by the exchange agent, that forms a part of a book-entry confirmation,
which states that The Depository Trust Company has received an express
acknowledgment from the participant in The Depository Trust Company tendering
the shares that such participant has received and agrees to be bound by the
terms of the letter of transmittal.
SHARES OF IMS HEALTH COMMON STOCK YOU HOLD IN A BOOK-ENTRY FACILITY
If you are an institution that is a participant in The Depository Trust
Company's book-entry transfer facility, you should follow the same procedures
that are applicable to persons holding shares through a broker as described
above.
SHARES OF IMS HEALTH COMMON STOCK YOU HOLD THROUGH THE IMS HEALTH SAVINGS PLAN
If you hold your shares of IMS Health common stock as a participant in the
IMS Health Savings Plan, you should follow the instructions sent to you
separately by the plan trustee or the administrator of the plan or the exchange
agent. Do not use the letter of transmittal to tender of your shares of IMS
Health common stock held under the plan. Only those shares that have been
credited to your account before the expiration of the exchange offer are
eligible to be tendered.
Cigna Bank & Trust Company, FSB is the plan trustee and is the registered
holder of the shares of IMS Health common stock that is held in the IMS Health
Savings Plan. Under the terms of the plan, the trustee is required to permit IMS
Health employees to instruct the trustee to tender in the exchange offer shares
of IMS Health common stock held in the plan on their behalf. The trustee will
not tender shares of IMS Health without instructions from participants in the
IMS Health Savings Plan.
SHARES OF IMS HEALTH COMMON STOCK YOU HOLD IN THE IMS HEALTH EMPLOYEE STOCK
PURCHASE PLAN
Participants in the IMS Health Employee Stock Purchase Plan may tender the
shares of IMS Health common stock purchased through the plan prior to expiration
of the exchange offer under the general instructions for tendering shares
discussed above.
38
YOUR VESTED OPTIONS
Holders of vested but unexercised options to purchase shares of IMS Health
common stock may exercise these options in accordance with the terms of IMS
Health's stock option plans and tender the shares of IMS Health common stock
received upon such exercise prior to the expiration of the exchange offer under
the general instructions for tendering shares discussed above.
GENERAL CONSIDERATIONS
Trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity who
sign the letter of transmittal, notice of guaranteed delivery or any
certificates or stock powers must indicate the capacity in which they are
signing, and must submit evidence of their power to act in that capacity unless
waived by us.
If you validly tender your shares of IMS Health common stock and the shares
are accepted by us, there will be a binding agreement between you and us on the
terms and subject to the conditions described in this document and in the
accompanying letter of transmittal. A person who tenders shares of IMS Health
common stock for his or her own account violates federal securities law unless
the person owns:
- the shares of IMS Health common stock being tendered; or
- securities convertible into or exchangeable for shares of IMS Health
common stock or options, warrants or rights to purchase shares of IMS
Health common stock and intends to acquire the shares of IMS Health
common stock being tendered by conversion or exchange of these securities
or by exercise of these options, warrants or rights on or prior to the
record date established for stockholders to participate in the exchange
offer.
Federal securities law provides a similar restriction applicable to the
tender or guarantee of a tender on behalf of another person.
Do not send a letter of transmittal and certificates for shares of IMS
Health common stock to us, Cognizant, the joint dealer managers or the
information agent. These documents should be sent only to the exchange agent.
IT IS UP TO YOU TO DECIDE HOW TO DELIVER YOUR SHARES OF IMS HEALTH COMMON
STOCK AND ALL OTHER REQUIRED DOCUMENTS. IT IS YOUR RESPONSIBILITY TO ENSURE THAT
ALL NECESSARY MATERIALS ARE PROPERLY COMPLETED AND RECEIVED BY THE EXCHANGE
AGENT PRIOR TO THE EXPIRATION DATE. IF THE EXCHANGE AGENT DOES NOT RECEIVE ALL
THE REQUIRED MATERIALS BEFORE THE EXPIRATION DATE, YOUR SHARES WILL NOT BE
VALIDLY TENDERED.
GUARANTEED DELIVERY PROCEDURE
If you wish to tender your shares of IMS Health common stock but the shares
are not immediately available, or time will not permit the shares or other
required documentation to reach the exchange agent before the expiration date,
or the procedure for book-entry transfer cannot be completed on a timely basis,
you may still tender your shares of IMS Health common stock if:
- the tender is made through an eligible institution;
- the exchange agent receives from the eligible institution, before the
expiration of the exchange offer, a properly completed and duly executed
notice of guaranteed delivery, substantially in the form provided by us;
and
- the exchange agent receives the certificates for all physically tendered
shares of IMS Health common stock, in proper form for transfer, or a
book-entry confirmation, as the case may be, and a properly completed
letter of transmittal and all other documents
39
required by the letter of transmittal, within three NYSE trading days
after the date of execution of the notice of guaranteed delivery.
You may deliver the notice of guaranteed delivery by hand, facsimile
(receipt confirmed), courier or mail to the exchange agent and you must include
a guarantee by an eligible institution in the form set forth in the notice.
IMS HEALTH'S INTERPRETATIONS ARE BINDING
We will determine in our sole discretion all questions as to the form of
documents, including notices of withdrawal, and the validity, form, eligibility
(including time of receipt) and acceptance for exchange of any tender or
withdrawal of shares of IMS Health common stock. Our determination will be final
and binding on all tendering stockholders. We reserve the absolute right to:
- reject any and all tenders of shares of IMS Health common stock not
validly tendered;
- waive any conditions of the exchange offer before the expiration of the
exchange offer;
- waive any defects or irregularities in the tender of shares of IMS Health
common stock either before or after the expiration date; and
- request any additional information from any record or beneficial owner of
shares of IMS Health common stock that we deem necessary.
None of us, Cognizant, the joint dealer managers, the information agent,
the exchange agent or any other person will be under any duty to notify
tendering stockholders of any defect or irregularity in tenders or notices of
withdrawal.
LOST OR DESTROYED CERTIFICATES
If your certificate representing shares of IMS Health common stock has been
mutilated, destroyed, lost or stolen and you wish to tender your shares, please
notify IMS Health's transfer agent in writing. You will receive an affidavit to
complete, and you will be informed of the amount needed to pay for a surety bond
for your lost shares. Only after you complete the affidavit and surety bond
payment and submit a completed letter of transmittal, will your shares be
tendered in the exchange offer. If you wish to participate in the exchange
offer, you will need to act quickly to ensure that the lost certificates can be
replaced and delivered to the exchange agent prior to expiration of the exchange
offer.
WITHDRAWAL RIGHTS
You may withdraw tenders of shares of IMS Health common stock at any time
prior to the expiration of the exchange offer and, unless we have accepted your
tender as provided in this document, you may also withdraw tenders of shares of
IMS Health common stock after the expiration of 40 business days from the
commencement of the exchange offer.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the exchange agent at one of its addresses set forth on the back
cover of this document. The notice of withdrawal must:
- specify the name of the person having tendered the shares of IMS Health
common stock to be withdrawn;
- identify the number of shares of IMS Health common stock to be withdrawn;
and
- specify the name in which IMS Health share certificates are registered,
if different from that of the withdrawing holder.
40
If certificates for the shares of IMS Health common stock have been
delivered or otherwise identified to the exchange agent, then, before the
release of such certificates, the withdrawing holder must also submit the serial
numbers of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an eligible institution, unless such
holder is an eligible institution.
If the shares of IMS Health common stock have been tendered pursuant to the
procedure for book-entry transfer, any notice of withdrawal must specify the
name and number of the account at The Depository Trust Company to be credited
with the withdrawn shares and otherwise comply with the procedures of such
facility.
Any shares of IMS Health common stock properly withdrawn will be deemed not
to have been validly tendered for exchange for purposes of the exchange offer.
Properly withdrawn shares may be re-tendered by following one of the procedures
described in the section entitled "Procedures for Tendering Shares of IMS Health
Common Stock" on page 37 at any time prior to the expiration of the exchange
offer.
Except as otherwise provided above, any tender of shares of IMS Health
common stock made under the exchange offer is irrevocable.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
We expressly reserve the right, in our sole discretion, for any reason,
including the non-satisfaction of any of the conditions for completion of the
exchange offer described below, to extend the period of time during which the
exchange offer is open or to amend the terms of the exchange offer in any
respect, including changing the exchange ratio. If we do so, we will make a
public announcement of the extension or amendment promptly.
If we materially change the terms of or information concerning the exchange
offer, we may extend the exchange offer. The SEC has stated that, as a general
rule, it believes that an offer should remain open for a minimum of five
business days from the date that notice of a material change is first given. The
length of time will depend on the particular facts and circumstances. Subject to
the preceding paragraph, the exchange offer will be extended so that it remains
open for a minimum of ten business days following the announcement, if:
- we increase or decrease the exchange ratio, the number of shares of IMS
Health common stock eligible for exchange, the fees payable to the joint
dealer managers or any other similarly significant change; and
- the exchange offer is scheduled to expire within ten business days of
announcing such increase or decrease.
If any condition indicated in the next section has not been met prior to
the expiration of the exchange offer, we reserve the right, in our sole
discretion, to extend the exchange offer or to terminate the exchange offer and
not accept for exchange any shares of IMS Health common stock.
If we extend the exchange offer, are delayed in accepting any shares of IMS
Health common stock or are unable to accept shares of IMS Health common stock
for exchange under the exchange offer for any reason, then, without affecting
our rights under the exchange offer, the exchange agent may, on our behalf,
retain shares of IMS Health common stock tendered. These shares of IMS Health
common stock may not be withdrawn except as provided in the section entitled
"Withdrawal Rights" on page 40. Our reservation of the right to delay acceptance
of any shares of IMS Health common stock is subject to provisions under the
Securities Exchange Act that provide that an issuer making an exchange offer
shall either pay the consideration offered or return tendered securities
promptly after the termination or withdrawal of the exchange offer.
41
We will issue a press release or other public announcement no later than
9:00 a.m., New York City time, on the next business day following any extension
of the previously scheduled expiration date.
CONDITIONS FOR COMPLETION OF THE EXCHANGE OFFER
We may not complete the exchange offer if less than 27,400,000 shares of
IMS Health common stock are validly tendered. We refer to this number of shares
as the "minimum amount." The minimum amount represents approximately 9.7% of the
outstanding shares of IMS Health common stock as of January 6, 2003 and
constitutes a sufficient number of shares to ensure that approximately 75% of
the shares of Cognizant class B common stock owned by us, representing
approximately 87.6% of the current combined voting power of Cognizant's common
stock, are distributed in the exchange offer.
We also may not accept shares for exchange and may terminate or not
complete the exchange offer if:
- any action, proceeding or litigation against us or Cognizant seeking to
enjoin, make illegal or delay completion of the exchange offer or
otherwise relating in any manner to the exchange offer is instituted or
threatened;
- any order, stay, judgment or decree is issued by any court, government,
governmental authority or other regulatory or administrative authority
and is in effect, or any statute, rule, regulation, governmental order or
injunction shall have been proposed, enacted, enforced or deemed
applicable to the exchange offer, any of which would or might restrict,
prohibit or delay completion of the exchange offer or impair the
contemplated benefits of the exchange offer to us or to Cognizant as
described under "The Transaction -- Background and Purpose" on page 33;
- we reasonably determine that any of the representations or undertakings
made in connection with, or assumptions underlying, the opinion given by
McDermott, Will & Emery regarding the tax-free nature of the exchange
offer is not true and correct in all material respects, or we do not, for
any reason, receive an updated copy of such opinion dated as of the date
of expiration of the exchange offer in form and substance reasonably
satisfactory to us, or a change in law or fact occurs that leads us to
feel less confident about the tax-free nature of the exchange offer than
we feel on the date of this document;
- any of the following occurs and the adverse effect of such occurrence, in
our reasonable judgment, is continuing:
- any general suspension of trading in, or limitation on prices for,
securities on any national securities exchange or in the
over-the-counter market in the United States,
- any extraordinary or material adverse change in U.S. financial markets
generally, including, without limitation, a decline of at least ten
percent in either the Dow Jones Average of Industrial Stocks or the
Standard & Poor's 500 Index from their reported levels on the last
trading day prior to the date of this document,
- a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States,
- any limitation, whether or not mandatory, by any governmental entity
on, or any other event that would reasonably be expected to materially
adversely affect, the extension of credit by banks or other lending
institutions,
- a commencement of war or other national or international calamity
directly or indirectly involving the United States, which would
reasonably be expected to affect materially and adversely, or to delay
materially, the completion of the exchange offer, or
42
- a deterioration in any of the situations above to the extent that they
exist at the time of commencement of the exchange offer,
- any tender or exchange offer, other than this exchange offer by us, with
respect to some or all the outstanding Cognizant common stock or IMS
Health common stock or any merger, acquisition or other business
combination proposal involving IMS Health or Cognizant, shall have been
proposed, announced or made by any person or entity;
- any event or events occur that have resulted or may result, in our
reasonable judgment, in an actual or threatened material change in the
business condition (financial or otherwise), income, operations, stock
ownership (other than this exchange offer) or prospects of IMS Health and
its subsidiaries, taken as a whole, or of Cognizant and its subsidiaries,
taken as a whole; or
- as the term "group" is used in Section 13(d)(3) of the Securities
Exchange Act,
- any person, entity or group acquires more than five percent of the
outstanding shares of IMS Health common stock or Cognizant class A
common stock, other than a person, entity or group which had publicly
disclosed such ownership with the SEC on or before the last trading
day prior to the date of this document,
- any such person, entity or group which had publicly disclosed such
ownership on or prior to such date shall acquire additional shares of
IMS Health common stock or Cognizant class A common stock, as the case
may be, constituting more than two percent of the outstanding shares
of IMS Health common stock or Cognizant class A common stock, or
- any new group shall have been formed that beneficially owns more than
five percent of the outstanding shares of IMS Health common stock or
shares of Cognizant class A common stock,
which, in any of the above cases, in our reasonable judgment makes it
inadvisable to proceed with the exchange offer or accept any exchange of
shares.
If any of the above events occur, we may:
- terminate the exchange offer and promptly return all tendered shares of
IMS Health common stock to tendering stockholders;
- extend the exchange offer and, subject to the withdrawal rights described
in "Withdrawal Rights" on page 40, retain all tendered shares of IMS
Health common stock until the extended exchange offer expires;
- amend the terms of the exchange offer; or
- waive the unsatisfied condition and, subject to any requirement to extend
the period of time during which the exchange offer is open, complete the
exchange offer.
These conditions are solely for our benefit. We may assert these conditions
regardless of the circumstances giving rise to them. We may waive any condition
in whole or in part at any time in our discretion. Our failure to exercise our
rights under any of the above conditions does not represent a waiver of these
rights. Each right is an ongoing right that may be asserted at any time. All
conditions must be satisfied or waived prior to the expiration of the exchange
offer. Any determination by us concerning the conditions described above will be
final and binding on all parties.
If a stop order issued by the SEC is in effect with respect to the
registration statement of which this document is a part or if such registration
statement has not yet been declared effective by the SEC, we will not accept any
shares of IMS Health common stock tendered and will not exchange shares of
Cognizant class B common stock for any shares of IMS Health
43
common stock unless and until such stop order is no longer in effect or such
registration statement is declared effective by the SEC.
LEGAL LIMITATIONS
We are not offering to exchange, or soliciting any offers to exchange,
securities pursuant to the exchange offer in any jurisdiction in which those
offers or exchanges would not be permitted.
FEES AND EXPENSES
Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. are acting as the joint
dealer managers in the exchange offer. We will pay the joint dealer managers an
aggregate fee of up to $5 million for serving as the joint dealer managers and
providing financial advisory services to IMS Health in connection with the
exchange offer. Further, we may in our discretion pay an additional fee. We also
will reimburse the joint dealer managers for their reasonable out-of-pocket
expenses, including attorneys' fees, in connection with this exchange offer. We
and Cognizant have also agreed to indemnify the joint dealer managers against
certain liabilities, including liabilities under the federal securities laws.
From time to time, we have retained Goldman, Sachs & Co. and Bear, Stearns
& Co. Inc. to provide financial advisory and investment services. The joint
dealer managers may, from time to time, hold shares of IMS Health or Cognizant
in their proprietary accounts, and if they own shares of IMS Health common stock
in these accounts at the time of the exchange offer, the joint dealer managers
may tender these shares in the exchange offer.
We have retained Georgeson Shareholder Communications Inc. to act as
information agent and American Stock Transfer & Trust Company to act as exchange
agent for the exchange offer. The information agent may contact holders of
shares of IMS Health common stock by mail, telephone, facsimile transmission and
personal interviews. The information agent may also request that brokers,
dealers and other nominee stockholders forward materials relating to the
exchange offer to beneficial owners.
The information agent and the exchange agent will each:
- receive reasonable and customary compensation for their respective
services;
- be reimbursed for some reasonable out-of-pocket expenses; and
- be indemnified against certain liabilities in connection with their
services, including liabilities under federal securities laws.
Neither the information agent nor the exchange agent has been retained to
make solicitations or recommendations in their roles as information agent and
exchange agent, and the fees to be paid to them will not be based on the number
of shares of IMS Health common stock tendered under the exchange offer. The
exchange agent will, however, be compensated in part on the basis of the number
of letters of transmittal received, among other things.
We will not pay any fees or commissions to any broker or dealer or any
other person, other than the joint dealer managers, the information agent and
the exchange agent, for soliciting tenders of shares of IMS Health common stock
under the exchange offer. Brokers, dealers, commercial banks and trust companies
will, upon request, be reimbursed by us for reasonable and necessary costs and
expenses that they incur in forwarding materials to their customers.
CERTAIN MATTERS RELATING TO FOREIGN JURISDICTIONS
UK INVESTORS
This exchange offer is not a public offer of securities within the meaning
of the Public Offers of Securities Regulations 1995, as amended. This document
is communicated to persons which
44
IMS Health reasonably believes are persons falling within Article 43(2)(a)
("members and creditors of certain bodies corporate") of the Financial Services
and Markets Act 2000 (Financial Promotion) Order 2001 (as amended), which
includes the stockholders of IMS Health (all such persons together referred to
as "relevant persons"). This document must not be acted on or relied on by
persons who are not relevant persons. The exchange offer to which this document
relates is available only to relevant persons and will be engaged in only with
relevant persons.
FRENCH INVESTORS
This offering circular-prospectus has not been prepared in the context of a
public offering of securities in France within the meaning of article L. 411-1
of the Code monetaire et financier and regulations nos. 98-01 and 98-08 of the
Commission des operations de bourse and has therefore not been submitted to the
Commission des operations de bourse for prior approval.
It is made available only to qualified investors and/or to a limited circle
of investors (as defined in article L. 411-2 of the Code monetaire et financier
and in the Decree no. 98-880 of October 1, 1998), on the condition that it shall
not be passed on to any person nor reproduced, in whole or in part, and that
applicants shall only participate in the exchange offer described in this
prospectus for their own account in accordance with the terms set out by the
said decree, and undertake not to retransfer, directly or indirectly, the
securities in France other than in compliance with applicable laws and
regulations (articles L. 411-1, L. 411-2, L. 412-1 and L. 621-8 of the Code
monetaire et financier).
GERMAN INVESTORS
For the publication of this offering circular-prospectus IMS Health has
further relied upon the exemptions of sect. 2 no. 1 and 2 of the German Act on
the Publication of Sales Prospectuses (Verkaufsprospektgesetz) being applicable,
as the offer is made exclusively to institutional investors and to other
stockholders of IMS Health, which constitute a "limited number of persons"
(begrenzter Personenkreis) in the sense of sect. 2 no. 2 of the German Act on
the Publication of Sales Prospectuses."
ITALIAN INVESTORS
The exchange offer (as described herein) does not constitute a "Public
Offer" under Italian law within the meaning of Article 1, 1st Paragraph lett. V)
of the Legislative Decree no. 58 of 24 February 1998.
This document is personal to each addressee and does not constitute an
offer to any other person or to the public generally to subscribe for or
otherwise acquire the Cognizant class B common stock.
Each addressee, by accepting delivery of this document agrees to the
foregoing and not to distribute as aforesaid, or make photocopies of this
document. Persons into whose possession this document may come are required by
IMS Health to inform themselves about and to observe such restrictions.
45
MARKET PRICES AND DIVIDEND INFORMATION
SHARES OF IMS HEALTH COMMON STOCK
The following table describes the per share range of high and low closing
sale prices for IMS Health common stock, as reported by the NYSE, and the
quarterly cash dividend per share for the periods indicated. IMS Health common
stock is listed under the symbol "RX" on the NYSE.
NYSE PRICE CASH
------------------------------------ DIVIDEND
IMS HEALTH HIGH LOW PER SHARE
---------- --------------- --------------- ---------
2000(1)................................... $28.56 $14.69
1st Quarter............................. $27.19 $16.38 $0.02
2nd Quarter............................. 18.00 14.69 0.02
3rd Quarter............................. 20.75 16.00 0.02
4th Quarter............................. 28.56 19.94 0.02
2001...................................... 30.20 18.99
1st Quarter............................. 27.33 22.50 0.02
2nd Quarter............................. 30.20 24.30 0.02
3rd Quarter............................. 28.50 23.60 0.02
4th Quarter............................. 27.60 18.99 0.02
2002...................................... 22.45 13.25
1st Quarter............................. 22.45 18.67 0.02
2nd Quarter............................. 22.20 17.47 0.02
3rd Quarter............................. 18.14 13.58 0.02
4th Quarter............................. 16.99 13.25 0.02
2003......................................
1st Quarter (until January 23, 2003).... 17.48 16.21
---------------
(1) Share prices for periods prior to the spin-off of Synavant on August 31,
2000 are adjusted to give effect to the impact of that spin-off on IMS share
prices based on the share price of IMS and Synavant immediately prior and
immediately after the spin-off. The actual and historical 2000 high and low
per share price for the first and second quarters of 2000 were as follows:
$26.50 and $16.38 in the first quarter and $18.00 and $14.69 in the second
quarter, respectively.
The number of holders of record of shares of IMS Health common stock as of
January 22, 2003 was approximately 6,400.
On January 23, 2003, the closing sale price per common share of IMS Health
as reported by the NYSE was $16.39. You should obtain current market quotations
for shares of IMS Health common stock. No one can assure you what the market
price of shares of IMS Health common stock will be before, on or after the date
on which the exchange offer is completed.
SHARES OF COGNIZANT COMMON STOCK
The following table describes the per share range of high and low sale
prices for shares of Cognizant common stock, as listed for quotation on the
Nasdaq National Market, and the quarterly cash dividends per share for the
periods indicated. Cognizant class A common stock is listed for quotation on the
Nasdaq National Market under the symbol "CTSH". Cognizant class B
46
common stock is not listed on a stock exchange and does not trade. Cognizant has
never paid a dividend on its common stock.
NASDAQ PRICE CASH
------------------------------------ DIVIDEND
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION HIGH LOW PER SHARE
------------------------------------------ ---------------- ---------------- ---------
2000...................................... $69.88 $30.88
1st Quarter............................. $69.88 $37.63 $0.00
2nd Quarter............................. 63.38 33.19 0.00
3rd Quarter............................. 47.38 31.50 0.00
4th Quarter............................. 44.75 30.88 0.00
2001...................................... 50.25 20.00
1st Quarter............................. 50.25 28.38 0.00
2nd Quarter............................. 46.25 31.48 0.00
3rd Quarter............................. 45.55 20.94 0.00
4th Quarter............................. 45.10 20.00 0.00
2002...................................... 75.66 33.01
1st Quarter............................. 42.10 33.01 0.00
2nd Quarter............................. 54.22 37.71 0.00
3rd Quarter............................. 63.68 48.47 0.00
4th Quarter............................. 75.66 48.00 0.00
2003
1st Quarter (until January 23, 2003).... 72.25 58.22
The number of registered holders of Cognizant class A common stock as of
January 22, 2003 was 24.
On January 23, 2003, the closing sale price per share of Cognizant class A
common stock as reported on the NASDAQ was $58.70. You should obtain current
market quotations for shares of Cognizant class A common stock. No one can
assure you what the market price of shares of Cognizant class A common stock
will be before, on or after the date on which the exchange offer is completed.
DIVIDEND POLICIES
IMS Health has historically paid a quarterly dividend of $0.02 per share of
IMS Health common stock and has declared a quarterly dividend for 19 consecutive
quarters. After the consummation of the exchange offer, stockholders whose
shares of IMS Health common stock are exchanged in this exchange offer will not
be entitled to any future dividend on such shares. IMS Health stockholders will
continue to receive any dividends with respect to their shares of IMS Health
common stock not exchanged pursuant to the exchange offer.
The payment of dividends by IMS Health in the future will depend upon its
business and financial condition, earnings and other factors. There can be no
assurances as to the payment of dividends in the future, and the actual amount
of dividends paid, if any, may be more or less than the amount discussed above.
Cognizant does not currently pay dividends on its class A common stock or
class B common stock and has stated that it does not anticipate paying cash
dividends for the foreseeable future. Cognizant intends to retain future
earnings for the development and growth of its business, including its
international expansion strategy.
47
CAPITALIZATION
The following tables set forth the historical capitalization of IMS Health
and Cognizant as of September 30, 2002 and the pro forma capitalization of IMS
Health after giving effect to the exchange of 36,540,129 shares of IMS Health
common stock in return for 11,290,900 shares of Cognizant class B common stock
previously owned by IMS Health.
IMS HEALTH INCORPORATED
SEPTEMBER 30, 2002
--------------------------
ACTUAL PRO FORMA
------ ---------
(IN THOUSANDS)
Short-term debt............................................. $ 381,522 $ 381,522
Long-term debt.............................................. $ 175,000 $ 175,000
----------- -----------
Total debt.................................................. $ 556,522 $ 556,522
----------- -----------
Preferred stock, par value $.01, authorized 10,000,000
shares No shares issued................................... -- --
Series common stock, par value $.01, authorized 10,000,000
shares No shares issued................................... -- --
Common stock, par value $.01, authorized 800,000,000 shares;
335,045,390 shares issued and outstanding................. $ 3,350 $ 3,350
Capital in excess of par.................................... $ 498,637 $ 498,637
Retained earnings........................................... $ 1,108,050 1,630,512
Treasury stock, at cost, 53,647,664 shares (90,187,793
shares on a pro forma basis).............................. (1,314,445) (1,922,473)
Cumulative translation adjustment........................... (122,426) (122,170)
Minimum pension liability adjustment........................ (3,746) (3,746)
Unrealized loss on changes in fair value of cash flow
hedges, net of tax........................................ (3,017) (3,017)
Unrealized gain on investments, net of tax expense.......... 102 102
----------- -----------
Total equity................................................ $ 166,505 $ 81,195
----------- -----------
Total capitalization........................................ $ 723,027 $ 637,717
=========== ===========
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION(1)
SEPTEMBER 30, 2002
------------------
ACTUAL
------
(IN THOUSANDS)
Notes payable............................................... --
Long-term debt.............................................. --
Total debt.................................................. --
Preferred stock: (authorized 15,000,000 shares, $.10 par
value) No shares issued................................... --
Class A common stock: (authorized 100,000,000 shares, $.01
par value) 8,744,650 shares issued and outstanding........ $ 87
Class B common stock: (authorized 25,000,000 shares, $.01
par value) 11,290,900 shares issued and outstanding....... $ 113
Capital surplus............................................. $ 58,209
Retained earnings........................................... $ 84,469
Accumulated comprehensive loss.............................. $ (256)
Total equity................................................ $142,622
Total capitalization........................................ $142,622
---------------
(1) The total capitalization of Cognizant will be impacted only by Cognizant's
share of the offering expenses which will be expensed as incurred and which
is estimated at approximately $2 to $3 million. Conversion of class B common
stock to class A common stock will not have an impact on the total
capitalization of Cognizant.
48
IMS HEALTH SELECTED FINANCIAL DATA
The following table presents selected financial data for IMS Health. This
data is derived from and should be read together with the audited and unaudited
consolidated financial statements of IMS Health and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in IMS Health's Form 10-K for 2001 and Form 10-Q for the
period ended September 30, 2002, all of which have been incorporated into this
document by reference. The accompanying footnotes to the Selected Financial Data
are an integral part of the data. To find out where you can obtain copies of
documents that have been incorporated by reference, see "Where You Can Find More
Information."
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
IMS HEALTH INCORPORATED
RESULTS OF OPERATIONS:
Revenue....................... $1,059,559 $1,186,513 $1,397,989 $1,424,359 $1,332,923 $ 992,048 $1,046,172
Costs and expenses(1)......... 831,949 1,054,029 1,058,966 1,287,166 1,008,762 664,922 727,290
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income(1)........... 227,610 132,484 339,023 137,193 324,161 327,126 318,882
Non-operating income (loss),
net(2)...................... 13,955 52,360 9,419 124,120 (140,360) (108,244) (23,688)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations, before provision
for income taxes............ 241,565 184,844 348,442 261,313 183,801 218,882 295,194
Provision for income taxes.... (55,614) (58,780) (98,076) (140,412) (38,415) (41,680) (91,044)
TriZetto equity loss, net of
income taxes................ -- -- -- (4,777) (6,985) (5,547) (701)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations.................. 185,951 126,064 250,366 116,124 138,401 171,655 203,449
Income from discontinued
operations, net of income
taxes(3).................... 126,399 94,494 25,695 4,692 47,025 47,025 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................... $ 312,350 $ 220,558 $ 276,061 $ 120,816 $ 185,426 $ 218,680 $ 203,449
---------- ---------- ---------- ---------- ---------- ---------- ----------
Basic earnings per share of
common stock................
Income from continuing
operations.................. $ 0.57 $ 0.39 $ 0.80 $ 0.39 $ 0.47 $ 0.58 $ 0.71
Income from discontinued
operations, net of income
taxes.......................
Taxes......................... $ 0.38 $ 0.29 $ 0.08 $ 0.02 $ 0.16 $ 0.16 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................... $ 0.95 $ 0.68 $ 0.88 $ 0.41 $ 0.63 $ 0.74 $ 0.71
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
shares outstanding.......... 330,326 324,584 311,976 296,077 295,162 295,335 287,486
Diluted earnings per share of
common stock................
Income from continuing
operations.................. $ 0.55 $ 0.38 $ 0.78 $ 0.39 $ 0.46 $ 0.57 $ 0.70
Income from discontinued
operations, net of income
taxes....................... $ 0.38 $ 0.28 $ 0.08 $ 0.02 $ 0.16 $ 0.16 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.................... $ 0.93 $ 0.66 $ 0.86 $ 0.40 $ 0.62 $ 0.73 $ 0.70
---------- ---------- ---------- ---------- ---------- ---------- ----------
49
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Weighted average number of
shares
outstanding -- diluted...... 334,980 335,770 319,561 300,038 300,147 301,255 288,589
As a % of operating revenue...
Operating income(1)........... 21.5% 11.2% 24.3% 9.6% 24.3% 33.0% 30.5%
Income from continuing
operations, net of income
taxes(1).................... 17.5% 10.6% 17.9% 8.2% 10.4% 17.3% 19.5%
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash dividend declared per
common stock................ $ 0.06 $ 0.06 $ 0.08 $ 0.08 $ 0.08 $ 0.06 $ 0.06
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA (AT THE END
OF THE PERIOD):
Total assets.................. $1,516,537 $1,789,205 $1,533,971 $1,308,161 $1,367,554 $1,249,226 $1,549,718
Post-retirement and post-
employment benefits......... 38,082 27,577 27,429 43,471 44,305 43,651 41,597
Long-term debt and other
liabilities................. 158,742 253,261 163,356 182,840 324,373 107,981 358,068
Shareholders' equity.......... $ 801,570 $ 825,270 $ 495,222 $ 103,540 $ 218,366 $ 304,768 $ 166,505
---------------
(1) 2001 includes charges related to Severance, impairment and other charges of
$94,616, and terminated transaction costs of $6,457. 2000 includes charges
related to the Synavant spin-off of $37,626, the Synavant related impairment
charge of $115,453, the executive management transition charge of $31,133
and severance, impairment and other charges of $45,689. 1999 includes
charges related to the Gartner spin-off of $9,500. 1998 includes charges
related to the Cognizant spin-off of $35,025 and one-time charges and
In-Process Research & Development write-offs related to the Walsh and PMSI
acquisitions of $48,019 and $32,800, respectively.
(2) Non-operating income, net in 2001 includes loss on Gartner shares of
$84,880, gains/(losses) from dispositions -- net of $27,642 and the SAB No.
51 loss related to issuance of investees' stock of $1,490. Non-operating
income, net in 2000 includes the gain on the sale of Erisco of $84,530,
gains from dispositions -- net of $78,139, loss on Gartner shares of $6,896
and the SAB No. 51 gain related to the issue of stock by TriZetto of $9,029.
Non-operating income, net in 1999 includes gains from dispositions -- net of
$25,264. Non-operating Income, net in 1998 includes the gain related to the
Cognizant initial public offering of $12,777 and gains from dispositions-net
of $33,341. Results for 1997 include gains from dispositions -- net of
$9,391 in non-operating income.
(3) Income from discontinued operations, net of income taxes includes a tax
provision of $25,320, $25,320, $2,526, $12,635, $49,303 and $62,271 for the
nine months ended September 30, 2002 and the years ended December 31, 2001,
2000, 1999, 1998 and 1997, respectively.
50
IMS HEALTH
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information is based upon the historical financial statements of IMS Health,
adjusted for the disposal of its investment in 11,290,900 shares of Cognizant
class B common stock. The unaudited pro forma condensed consolidated statements
of income for the years ended December 31, 1999, 2000 and 2001 and the nine
months ended September 30, 2002 are presented as if the disposal had occurred on
January 1, 1999 and accounted for by IMS Health as a discontinued operation. The
unaudited pro forma condensed consolidated financial position at September 30,
2002 is presented as if the disposal of the Cognizant investment had occurred on
September 30, 2002 (See "The Transaction -- Accounting Treatment" on page 34).
The unaudited pro forma condensed consolidated financial information is for
illustrative purposes only and does not necessarily indicate the operating
results or financial position that would have been achieved had the disposal of
IMS Health's interest in Cognizant been completed as of the dates indicated or
of the results that may be achieved in the future.
51
IMS HEALTH
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
PRO FORMA
IMS ACTUAL ADJUSTMENTS(1) IMS PRO FORMA
---------- ------------------ -----------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenue............................ $1,397,989 $(74,084) $1,323,905
Operating and other costs.................... 1,058,966 (57,439) 1,001,527
---------- -------- ----------
Operating income............................. 339,023 (16,645) 322,378
---------- -------- ----------
Interest income (expense), net............... 635 (1,263) (628)
Gains from investments, net.................. 25,264 (5) 25,259
Other expense, net........................... (16,480) 4,376(2B) (12,104)
---------- -------- ----------
Non-operating income, net.................... 9,419 3,108 12,527
---------- -------- ----------
Income before provision for income taxes..... 348,442 (13,537) 334,905
Provision for income taxes................... (98,076) 5,763(2B) (92,313)
---------- -------- ----------
Income from continuing operations............ $ 250,366 $ (7,774) $ 242,592
========== ======== ==========
Basic earnings per share of common stock from
continuing operations...................... $ 0.80 $ 0.88
========== ==========
Diluted earnings per share of common stock
from continuing operations................. $ 0.78 $ 0.86
========== ==========
Weighted average number of shares
outstanding -- basic....................... 311,976 (36,540)(5) 275,436
========== ======== ==========
Weighted average number of shares
outstanding -- diluted..................... 319,561 (36,540)(5) 283,021
========== ======== ==========
---------------
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.
52
IMS HEALTH
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2000
PRO FORMA
IMS ACTUAL ADJUSTMENTS(1) IMS PRO FORMA
---------- -------------- -------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenue........................... $1,424,359 $(122,763) $1,301,596
Operating and other costs................... 1,287,166 (96,634) 1,190,532
---------- --------- ----------
Operating income............................ 137,193 (26,129) 111,064
---------- --------- ----------
Interest (expense) income, net.............. (13,308) (2,650) (15,958)
Loss on Gartner investment.................. (6,896) -- (6,896)
Gains from investments, net................. 78,139 (7) 78,132
Gain on sale of Erisco...................... 84,530 -- 84,530
Gain on issuance of investees' stock........ 9,029 -- 9,029
Other expense, net.......................... (27,374) 6,979 (2B) (20,395)
---------- --------- ----------
Non-operating income, net................... 124,120 4,322 128,442
---------- --------- ----------
Income before provision for income taxes.... 261,313 (21,807) 239,506
Provision for income taxes.................. (140,412) 9,494 (2B) (130,918)
TriZetto equity loss, net of income tax
benefit................................... (4,777) -- (4,777)
---------- --------- ----------
Income from continuing operations........... $ 116,124 $ (12,313) $ 103,811
========== ========= ==========
Basic earnings per share of common stock
from continuing operations................ $ 0.39 $ 0.40
========== ==========
Diluted earnings per share of common stock
from continuing operations................ $ 0.39 $ 0.39
========== ==========
Weighted average number of shares
outstanding -- basic...................... 296,077 (36,540)(5) 259,537
========== ========= ==========
Weighted average number of shares
outstanding -- diluted.................... 300,038 (36,540)(5) 263,498
========== ========= ==========
---------------
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.
53
IMS HEALTH
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
PRO FORMA
IMS ACTUAL ADJUSTMENTS(1) IMS PRO FORMA
---------- -------------- -------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenue............................ $1,332,923 $(158,969) $1,173,954
Operating and other costs.................... 1,008,762 (123,348) 885,414
---------- --------- ----------
Operating income............................. 324,161 (35,621) 288,540
---------- --------- ----------
Interest (expense) income, net............... (9,006) (2,501) (11,507)
Loss on Gartner investment................... (84,880) -- (84,880)
Loss from investments, net................... (27,642) 1,955 (25,687)
Gain (loss) on issuance of investees'
stock...................................... (1,490) (5,189)(2A) (6,679)
Other expense, net........................... (17,342) 9,234 (2B) (8,108)
---------- --------- ----------
Non-operating income (loss), net............. (140,360) 3,499 (136,861)
---------- --------- ----------
Income before provision for income taxes..... 183,801 (32,122) 151,679
Provision for income taxes................... (38,415) 14,433 (2A-B) (23,982)
TriZetto equity loss, net of income tax
benefit.................................... (6,985) -- (6,985)
---------- --------- ----------
Income from continuing operations............ $ 138,401 $ (17,689) $ 120,712
========== ========= ==========
Basic earnings per share of common stock from
continuing operations...................... $ 0.47 $ 0.47
========== ==========
Diluted earnings per share of common stock
from continuing operations................. $ 0.46 $ 0.46
========== ==========
Weighted average number of shares
outstanding -- basic....................... 295,162 (36,540)(5) 258,622
========== ========= ==========
Weighted average number of shares
outstanding -- diluted..................... 300,147 (36,540)(5) 263,607
========== ========= ==========
---------------
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.
54
IMS HEALTH
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002
PRO FORMA
IMS ACTUAL ADJUSTMENTS(1) IMS PRO FORMA
---------- -------------- -------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating revenue............................ $1,046,172 $(146,510) $899,662
Operating and other costs.................... 727,290 (114,553) 612,737
---------- --------- --------
Operating income............................. 318,882 (31,957) 286,925
---------- --------- --------
Interest (expense) income, net............... (4,643) (1,305) (5,948)
Gains from investments, net.................. 2,450 -- 2,450
Gain (loss) on issuance of investees'
stock...................................... 7,508 (8,083)(2A) (575)
Other expense, net........................... (29,003) 11,180(2B) (17,823)
---------- --------- --------
Non-operating income (loss), net............. (23,688) 1,792 (21,896)
---------- --------- --------
Income before provision for income taxes..... 295,194 (30,165) 265,029
Provision for income taxes................... (91,044) 8,308(2A-B) (82,736)
TriZetto equity loss, net of income tax
benefit.................................... (701) -- (701)
---------- --------- --------
Income from continuing operations............ $ 203,449 $ (21,857) $181,592
========== ========= ========
Basic earnings per share of common stock from
continuing operations...................... $ 0.71 $ 0.72
========== ========
Diluted earnings per share of common stock
from continuing operations................. $ 0.70 $ 0.72
========== ========
Weighted average number of shares
outstanding -- basic....................... 287,486 (36,540)(5) 250,946
========== ========= ========
Weighted average number of shares
outstanding -- diluted..................... 288,589 (36,540)(5) 252,049
========== ========= ========
---------------
See Notes to Unaudited Pro Forma Condensed Financial Information.
55
IMS HEALTH
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 2002
PRO FORMA
IMS ACTUAL ADJUSTMENTS(3) IMS PRO FORMA(5)
---------- -------------- ----------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Assets:
Current Assets:
Cash and cash equivalents................................... $ 387,972 $(123,083) $ 264,889
Accounts receivable, net of allowance for doubtful
accounts.................................................. 247,506 (40,780) 206,726
Other receivable............................................ 35,428 -- 35,428
Other current assets........................................ 125,755 10,231 135,986
----------- --------- -----------
Total Current Assets........................................ 796,661 (153,632) 643,029
----------- --------- -----------
Securities and other investments............................ 21,210 (112) 21,098(5)
TriZetto equity investment.................................. 118,167 -- 118,167
Property, plant and equipment, net of accumulated
depreciation.............................................. 152,084 (25,905) 126,179
Computer software........................................... 149,292 -- 149,292
Goodwill.................................................... 166,638 (878) 165,760
Other assets................................................ 145,666 (3,587) 142,079
----------- --------- -----------
Total Assets................................................ $ 1,549,718 $(184,114) $ 1,365,604
=========== ========= ===========
Liabilities, Minority Interests and Shareholders' Equity:
Current Liabilities:
Accounts payable............................................ $ 29,443 $ (3,202) $ 26,241
Accrued and other current liabilities....................... 187,680 (11,639)(4B) 176,041
Short-term debt............................................. 381,522 -- 381,522
Accrued income taxes........................................ 131,468 (818) 130,650
Short-term deferred tax liability........................... 12,220 (12,220) --
Deferred revenues........................................... 75,022 (1,602) 73,420
----------- --------- -----------
Total Current Liabilities................................... 817,355 (29,481) 787,874
----------- --------- -----------
Post-retirement and post-employment benefits................ 41,597 -- 41,597
Long-term debt.............................................. 175,000 -- 175,000
Other liabilities........................................... 183,068 (4,650) 178,418
----------- --------- -----------
Total Liabilities........................................... 1,217,020 (34,131) 1,182,889
----------- --------- -----------
Commitments and contingencies
Minority Interests.......................................... 166,193 (64,673)(4A) 101,520
Shareholders' Equity:
Common stock, par value $.01, authorized 800,000 shares;
issued 335,045 shares at September 30, 2002............... 3,350 -- 3,350
Capital in excess of par.................................... 498,637 -- 498,637
Retained earnings........................................... 1,108,050 522,462(4B) 1,630,512
Treasury stock, at cost, 53,648 shares at September 30, 2002
(90,188 shares on a pro forma basis)(5)................... (1,314,445) (608,028)(4B) (1,922,473)
Cumulative translation adjustment........................... (122,426) 256 (122,170)
Minimum pension liability adjustment........................ (3,746) -- (3,746)
Unrealized loss on changes in fair value of cash flow
hedges.................................................... (3,017) -- (3,017)
Unrealized gains on investments, net of tax expense......... 102 -- 102
----------- --------- -----------
Total Shareholders' Equity.................................. 166,505 (85,310) 81,195
----------- --------- -----------
Total Liabilities, Minority Interests and Shareholders'
Equity.................................................... $ 1,549,718 $(184,114) $ 1,365,604
=========== ========= ===========
---------------
See Notes to Unaudited Pro-Forma Condensed Financial Information.
56
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS AND PERCENTAGES)
1. The adjustments to the unaudited pro forma condensed consolidated
statements of income reflect the elimination of the unaudited results of
operations of Cognizant (See Cognizant Financial Statements beginning on
page F-1), after eliminating intercompany revenues and costs of $14,820,
$14,273, $18,809 and $15,565, for the years ended 1999, 2000 and 2001 and
the nine months ended September 30, 2002, respectively.
2. In addition, the pro forma adjustments to the unaudited pro forma
condensed consolidated statements of income reflect:
A. The elimination of the pre-tax gains recognized by IMS Health on the
issuance of Cognizant stock in the amounts of $0, $0, $5,189 and
$8,083 for the years ended December 31, 1999, 2000 and 2001 and the
nine months ended September 30, 2002, respectively, and the related
income tax expense of $0, $0, $1,816 and $2,834, respectively.
B. The elimination of minority interest in the amounts of $4,376, $6,979,
$9,234, and $11,180 for the years ended December 31, 1999, 2000 and
2001 and the nine months ended September 30, 2002, respectively.
3. The adjustments to the unaudited pro forma condensed consolidated
statement of financial position reflect the elimination of the unaudited
consolidated assets and liabilities of Cognizant as of September 30, 2002
(See Cognizant Financial Statements beginning on page F-1) and the
recognition of an intercompany payable to Cognizant in the amount of
$2,433.
4. In addition, the pro forma adjustments to the unaudited pro forma
condensed consolidated statement of financial position reflect:
A. The elimination of the minority interest in Cognizant as of September
30, 2002 in the amount of $64,673.
B. (i) The acquisition of 36,540 shares of IMS Health common stock
pursuant to the exchange offer, assuming the exchange offer is
fully subscribed, recorded at a cost equal to the closing price
on January 8, 2003 of $16.64 per share, amounts to $608,026.
(ii) The estimated tax-free gain on the disposal of IMS Health's
investment in Cognizant in the amount of $522,460, after
consideration of the cost basis of $72,566.
(iii) The accrual of the estimated direct and incremental costs of
the exchange offer in the amount of $13,000.
The gain on disposal is predicated upon the closing price of the IMS
Health common stock on the exchange offer expiration date and the number
of shares accepted in the exchange offer. The actual amount of gain may
differ significantly based on the number of shares of IMS Health stock
accepted and closing price for IMS Health common stock on the exchange
offer expiration date.
5. The unaudited pro forma condensed consolidated financial information
assumes that 36,540 shares of IMS Health common stock are acquired in the
exchange offer. If we assume that only 27,400 shares of IMS Health common
stock are acquired, the minimum amount that IMS Health will accept, IMS
Health would retain a number of Cognizant shares representing
approximately 13.8% of Cognizant's outstanding common stock. The estimated
gain on disposal of the investment in Cognizant would be approximately
$390,000 and IMS Health would have a remaining cost basis in Cognizant of
approximately $18,000.
57
COGNIZANT SELECTED FINANCIAL DATA
The following table presents selected financial data for Cognizant. This
data is derived from and should be read together with the audited and unaudited
consolidated financial statements of Cognizant and related notes thereto and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of Cognizant" appearing elsewhere in this document. In the opinion of
Cognizant's management, all adjustments considered necessary for a fair
presentation of the interim financial information have been included, and all
adjustments are of a normal and recurring nature. Operating results for the
interim periods are not necessarily indicative of results that may be expected
to occur for the entire year. Certain amounts for the nine months ended
September 30, 2001 have been reclassified to conform to the 2002 presentation.
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
---- ---- ---- ---- ---- ---- ----
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
COGNIZANT TECHNOLOGY SOLUTIONS
CORPORATION
STATEMENT OF OPERATIONS:
Revenues........................ $13,898 $45,031 $74,084 $122,758 $158,969 $120,803 $146,510
Revenues -- related party....... 10,846 13,575 14,820 14,273 18,809 13,514 15,565
------- ------- ------- -------- -------- -------- --------
Total revenues.................. 24,744 58,606 88,904 137,031 177,778 134,317 162,075
Cost of revenues................ 14,359 31,919 46,161 70,437 90,848 68,859 86,507
------- ------- ------- -------- -------- -------- --------
Gross profit.................... 10,385 26,687 42,743 66,594 86,930 65,458 75,568
Selling, general and
administrative expenses....... 6,898 15,547 23,061 35,959 44,942 34,306 37,933
Depreciation and amortization
expense....................... 1,358 2,222 3,037 4,507 6,368 4,566 5,679
------- ------- ------- -------- -------- -------- --------
Income from operations.......... 2,129 8,918 16,645 26,128 35,620 26,586 31,956
Other income (expense):
Interest income................. 25 638 1,263 2,649 2,501 2,006 1,305
Impairment loss on Investment... -- -- -- -- (1,955) -- --
Other income (expense) -- net... -- 83 37 (530) (767) (604) (89)
------- ------- ------- -------- -------- -------- --------
Total other income (expense).... 25 721 1,300 2,119 (221) 1,402 1,216
------- ------- ------- -------- -------- -------- --------
Income before provision for
income taxes.................. 2,154 9,639 17,945 28,247 35,399 27,988 33,172
Provision for income taxes...... (581) (3,606) (6,711) (10,564) (13,239) (10,468) (7,749)
Minority interest............... (545) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- --------
Net income...................... $ 1,028 $ 6,033 $11,234 $ 17,683 $ 22,160 $ 17,520 $ 25,423
------- ------- ------- -------- -------- -------- --------
Net income per share, basic..... $ 0.08 $ 0.38 $ 0.61 $ 0.95 $ 1.17 $ 0.93 $ 1.30
Net income per share, diluted... $ 0.08 $ 0.36 $ 0.58 $ 0.87 $ 1.09 $ 0.86 $ 1.21
Weighted average number of
common shares outstanding..... 13,094 15,886 18,342 18,565 19,017 18,896 19,618
Weighted average number of
common shares and stock
options outstanding........... 13,210 16,538 19,416 20,256 20,371 20,382 21,040
BALANCE SHEET DATA (AT THE END
OF THE PERIOD):
Cash and cash equivalents....... $ 2,715 $28,418 $42,641 $ 61,976 $ 84,977 $ 79,767 $123,082
Working capital................. 5,694 29,416 43,507 61,501 95,637 87,564 136,634
Total assets.................... 18,298 51,679 69,026 109,540 144,983 138,573 200,776
Due to related party............ 6,646 9 -- 8 -- -- --
Stockholders' equity............ 3,419 32,616 45,461 66,116 98,792 92,496 142,622
58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF COGNIZANT
GENERAL
Cognizant is a leading provider of custom IT design, development,
integration and maintenance services primarily for Fortune 1000 companies
located in the United States and Europe. Cognizant's core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. Cognizant provides the IT services it offers
using an integrated on-site/offshore business model. This seamless
onsite/offshore business model combines technical and account management teams
located on-site at the customer location and offshore at dedicated development
centers located in India and Ireland. Cognizant began its IT 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, Cognizant, along with certain other entities, was spun-off from the Dun
& Bradstreet Corporation to form a new company, Cognizant Corporation. On June
24, 1998, Cognizant completed its initial public offering. On June 30, 1998, a
majority interest in Cognizant, and certain other entities were spun-off from
Cognizant Corporation to form IMS Health Incorporated ("IMS Health").
Subsequently, Cognizant Corporation was renamed Nielsen Media Research,
Incorporated. At September 30, 2002, IMS Health owned 56.4% of the outstanding
stock of Cognizant (representing all of Cognizant's Class B common stock) and
held 92.8% of the combined voting power of Cognizant's common stock. Holders of
Cognizant's class A common stock have one vote per share and holders of
Cognizant's class B common stock have ten votes per share. IMS Health is seeking
to distribute all of the Cognizant class B common stock that IMS Health owns in
the exchange offer which is the subject of this document.
There will be no impact on the number of Cognizant's total shares
outstanding as a result of the exchange offer. However, the exchange offer may
impact Cognizant in a number of ways and these impacts could be significant as
discussed in "Risk Factors" and elsewhere in this document. Cognizant expects to
incur charges in the fourth quarter of 2002 and the first quarter of 2003
aggregating between $2 to $3 million in relation to one-time costs associated
with the exchange offer.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND RISKS
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 2 to Cognizant's consolidated financial statements
included elsewhere in this document includes a summary of the significant
accounting policies and methods used in the preparation of Cognizant's
consolidated financial statements. The following is a brief discussion of the
more significant accounting policies and methods used by Cognizant.
In addition, Financial Reporting Release No. 61 requires all companies to
include a discussion to address, among other things, liquidity, off-balance
sheet arrangements, contractual obligations and commercial commitments.
Cognizant's discussion and analysis of its financial condition and results
of operations are based upon its consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, including the recoverability of tangible and intangible
assets, disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reported period.
59
On an on-going basis, Cognizant evaluates its estimates. The most
significant estimates relate to the allowance for doubtful accounts, reserve for
warranties, reserves for employee benefits, income taxes, depreciation of fixed
assets and long-lived assets, contingencies and litigation and the recognition
of revenue and profits based on the percentage of completion method of
accounting for fixed bid contracts. Cognizant bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could vary from the
estimates and assumptions used in the preparation of the accompanying financial
statements.
Most of Cognizant's IT development centers, including a substantial
majority of its employees are located in India. As a result, Cognizant may be
subject to certain risks associated with international operations, including
risks associated with foreign currency exchange rate fluctuations and risks
associated with the application and imposition of protective legislation and
regulations relating to import and export or otherwise resulting from foreign
policy or the variability of foreign economic conditions. To date, Cognizant has
not engaged in any hedging transactions to mitigate its risks relating to
exchange rate fluctuations. Additional risks associated with international
operations include difficulties in enforcing intellectual property rights, the
burdens of complying with a wide variety of foreign laws, potentially adverse
tax consequences, tariffs, quotas and other barriers.
Cognizant believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
Revenue Recognition. Cognizant's services are entered into 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 primarily relate to application development and
significant application enhancement projects. Revenues related to such fixed-
price contracts are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the sales value of
performance, including estimated earnings thereon, is recognized on the basis of
the percentage that each contract's cost to date bears to the total estimated
cost. In general, fixed-price contracts are cancelable subject to a specified
notice period. All services provided by Cognizant through the date of
cancellation are due and payable under the contract terms. Cognizant issues
invoices related to fixed-price contracts based upon achievement of milestones
during a project or other contractual terms. Differences between the timing of
billings, based upon contract milestones or other contractual terms, and the
recognition of revenue, based upon the percentage-of-completion method of
accounting, are recognized as either unbilled or deferred revenue. Cognizant
does not incur significant up-front costs associated with these fixed-price
contracts and all costs related to the services provided are expensed as
incurred. 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 estimate becomes known and any
anticipated losses on contracts are recognized immediately. A reserve for
warranty provisions under such contracts, which generally exist for a period
ranging from thirty to ninety days past contract completion, is estimated and
accrued during the contract period. Cognizant's failure to estimate accurately
the resources and time required for a fixed-price project, or its failure to
complete its contractual obligations within the time frame committed, could have
a material adverse effect on Cognizant's business, results of operations and
financial condition.
Revenues related to services performed without a signed agreement or work
order are not recognized until such agreements or work orders are signed;
however the cost related to the performance of such work is recognized in the
period the services are rendered.
60
Foreign Currency Translation. The assets and liabilities of Cognizant's
Canadian and European subsidiaries are translated into U.S. dollars from local
currencies at current exchange rates and revenues and expenses are translated
from local currencies at average monthly exchange rates. The resulting
translation adjustments are recorded in a separate component of stockholders'
equity. For Cognizant's Indian subsidiary, CTS India, 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 CTS India 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. The resulting gain (loss) is included in other
income.
Allowance for Doubtful Accounts. Cognizant maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of Cognizant's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Income Taxes. Cognizant records a valuation allowance to reduce its
deferred tax assets to the amount that is more likely than not to be realized.
While Cognizant has considered future taxable income and on-going prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event Cognizant were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should Cognizant determine that it
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.
Cognizant's Indian subsidiary, CTS India, is an export-oriented company,
which, under the Indian Income Tax Act of 1961 is entitled to claim tax holidays
for a period of ten years with respect to its export profits. Substantially all
of the earnings of CTS India are attributable to export profits and are
therefore currently entitled to a 90% exemption from Indian income tax. These
tax holidays will begin to expire in 2004 and under current law will be
completely phased out by March of 2009. In prior years, it was management's
intent to repatriate all accumulated earnings from India to the United States;
accordingly, Cognizant has provided deferred income taxes in the amount of
approximately $25.5 million dollars on all such undistributed earnings through
December 31, 2001. During the first quarter of 2002, Cognizant made a strategic
decision to pursue an international strategy that includes expanded
infrastructure investments in India and geographic expansion in Europe and Asia.
As a component of this strategy, Cognizant intends to use 2002 and future Indian
earnings to expand operations outside of the United States instead of
repatriating these earnings to the United States. Accordingly, effective January
1, 2002, pursuant to Accounting Principles Bulletin 23, Cognizant will no longer
accrue taxes on the repatriation of earnings recognized in 2002 and subsequent
periods as these earnings are considered to be indefinitely reinvested outside
of the United States. If such earnings are repatriated in the future, or are no
longer deemed to be indefinitely reinvested, Cognizant will accrue the
applicable amount of taxes associated with such earnings. This change in intent,
as well as a change in the manner in which repatriated earnings are taxed in
India, resulted in an estimated effective tax rate for the three and nine months
ended September 30, 2002 of 23.3% and 23.4%, respectively. These rates compare
to an effective tax rate for the three and nine month periods ended September
30, 2001 of 37.4%.
61
RESULTS OF OPERATIONS
The following table sets forth certain results of operations as a
percentage of total revenue:
THREE MONTHS NINE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------- --------------
1999 2000 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ----
Total revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................... 51.9 51.4 51.1 53.8 50.8 53.4 51.3
----- ----- ----- ----- ----- ----- -----
Gross profit........................... 48.1 48.6 48.9 46.2 49.2 46.6 48.7
Selling, general and administrative
expense................................ 25.9 26.2 25.3 23.1 25.1 23.4 25.5
Depreciation and amortization expense.... 3.4 3.3 3.6 3.3 3.6 3.5 3.4
----- ----- ----- ----- ----- ----- -----
Income from operations................. 18.8 19.1 20.0 19.8 20.5 19.7 19.8
Other income (expense):
Interest income........................ 1.4 1.9 1.4 0.8 1.4 0.8 1.5
Impairment loss on investment............ -- -- (1.1) -- -- -- --
Other income (expense)................. -- (0.4) (0.4) (0.0) (0.5) (0.0) (0.5)
----- ----- ----- ----- ----- ----- -----
Total other income....................... 1.4 1.5 (0.1) 0.8 0.9 0.8 1.0
----- ----- ----- ----- ----- ----- -----
Income before provision for income
taxes.................................. 20.2 20.6 19.9 20.6 21.4 20.5 20.8
Provision for income taxes............... (7.6) (7.7) (7.4) (4.8) (8.0) (4.8) (7.8)
----- ----- ----- ----- ----- ----- -----
Net income............................... 12.6% 12.9% 12.5% 15.8% 13.4% 15.7% 13.0%
===== ===== ===== ===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Revenue. Revenue increased by 34.6%, or $15.7 million, from approximately
$45.5 million during the three months ended September 30, 2001 to approximately
$61.2 million during the three months ended September 30, 2002. This increase
resulted primarily from an increase in application management services. For
statement of operations purposes, revenues from related parties include only
revenues recognized during the period in which the related party was directly
affiliated with Cognizant. In the third quarter of 2002, sales to one related
party customer (IMS Health) accounted for 9.0% of revenues and sales to one
third party customer (Metropolitan Life Insurance Company) accounted 11.5%
revenues. In the third quarter of 2001, sales to one related party customer (IMS
Health) accounted for 11.2% of revenues and no third-party customer accounted
for sales in excess of 10% of revenues.
Gross Profit. Cognizant'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. Cognizant's cost of revenues
increased by 42.7%, or approximately $9.9 million, from approximately $23.1
million during the three months ended September 30, 2001 to approximately $33.0
million during the three months ended September 30, 2002. The increase was due
primarily to costs resulting from an increase in the number of Cognizant's
technical professionals from approximately 3,500 employees at September 30, 2001
to approximately 4,700 employees at September 30, 2002. The increased number of
Cognizant's technical professionals is a direct result of greater demand for
Cognizant's services. Cognizant's gross profit increased by 26.2%, or
approximately $5.9 million, from approximately $22.4 million during the three
months ended September 30, 2001 to approximately $28.3 million during the three
months ended September 30, 2002. Gross profit margin decreased from 49.2% of
revenues during the three months ended September 30, 2001 to 46.2% of revenues
during the three months ended September 30, 2002 primarily due to a higher 2002
incentive compensation accrual associated with increased revenues.
62
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 as well as depreciation and amortization expense. Selling,
general and administrative expenses, including depreciation and amortization,
increased by 23.6%, or approximately $3.1 million, from approximately $13.1
million during the three months ended September 30, 2001 to approximately $16.2
million during the three months ended September 30, 2002, representing 28.7% and
26.4% of revenues, respectively. The dollar increase in such expenses was due
primarily to a higher 2002 incentive compensation accrual associated with
increased revenues, as well as increased expenses incurred to expand Cognizant's
sales and marketing activities and increased infrastructure expenses to support
Cognizant's revenue growth. The decrease in such expenses as a percentage of
revenue resulted from Cognizant's increased volume of revenue, which outpaced
the increase in selling, general and administrative expenses.
Income from Operations. Income from operations increased 29.9%, or
approximately $2.8 million, from approximately $9.3 million during the three
months ended September 30, 2001 to approximately $12.1 million during the three
months ended September 30, 2002, representing 20.5% and 19.8% of revenues,
respectively. The decrease in operating margin was due primarily to a higher
2002 incentive compensation accrual associated with increased revenues.
Other Income. Other income consists primarily of interest income and
foreign currency exchange gains or losses. Interest income decreased by 26.7%,
or approximately $172,000, from $643,000 during the three months ended September
30, 2001 to $471,000 during the three months ended September 30, 2002. The
decrease in such interest income was attributable primarily to declining
interest rates, offset, in part, by higher invested cash balances. Cognizant
recognized a net foreign currency exchange loss of $209,000 during the three
months ended September 30, 2001 as compared to a gain of $24,000 in the current
period, as a result of the effect of changing exchange rates.
Provision for Income Taxes. The provision for income taxes decreased by
19.5%, or approximately $713,000, from approximately $3.6 million in the three
months ended September 30, 2001 to approximately $2.9 million in the three
months ended September 30, 2002, with an effective tax rate of 37.4% and 23.3%
for the three months ended September 30, 2001 and 2002, respectively. The lower
effective tax rate reflects Cognizant's change in its intention regarding the
repatriation of 2002 and future earnings from its subsidiary in India, as well
as a change in the manner in which repatriated earnings are taxed in India. (See
Note 5 to the Notes to the Unaudited Condensed Consolidated Financial
Statements.)
Net Income. Net income increased 58.3%, or approximately $3.6 million,
from approximately $6.1 million for the three months ended September 30, 2001 to
approximately $9.7 million for the three months ended September 30, 2002,
representing 13.4% and 15.8% of revenues, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
Revenue. Revenue increased by 20.7%, or approximately $27.8 million, from
approximately $134.3 million during the nine months ended September 30, 2001 to
approximately $162.1 million during the nine months ended September 30, 2002.
This increase resulted primarily from an increase in application management
services. For statement of operations purposes, revenues from related parties
include only revenues recognized during the period in which the related party
was directly affiliated with Cognizant. During the nine months ended September
30, 2002, sales to one related party customer (IMS Health) accounted for 9.6% of
revenues and no third party accounted for sales in excess of 10% of revenues.
During the nine months ended September 30, 2001, sales to one related party
customer (IMS Health) accounted for 10.1% of revenues and no third party
accounted for sales in excess of 10% of revenues.
63
Gross Profit. Cognizant's cost of revenues increased by 25.6%, or
approximately $17.6 million, from approximately $68.9 million during the nine
months ended September 30, 2001 to approximately $86.5 million during the nine
months ended September 30, 2002. The increase was due primarily to increased
costs resulting from the increase in the number of Cognizant's technical
professionals from approximately 3,500 employees at September 30, 2001 to
approximately 4,700 employees at September 30, 2002. Cognizant's gross profit
increased by 15.4%, or approximately $10.1 million, from approximately $65.5
million during the nine months ended September 30, 2001 to approximately $75.6
million during the nine months ended September 30, 2002. Gross profit margin
decreased from 48.7% to 46.6% of revenues during the nine months ended September
30, 2001 and 2002, respectively. The decrease in gross profit margin was due
primarily to a higher 2002 incentive compensation accrual associated with
increased revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, including depreciation and amortization, increased by
12.2%, or approximately $4.7 million, from approximately $38.9 million during
the nine months ended September 30, 2001 to approximately $43.6 million during
the nine months ended September 30, 2002, representing 28.9% and 26.9% of
revenues, respectively. The increase in such expenses in absolute dollars was
due primarily to a higher 2002 incentive compensation accrual associated with
increased revenues, as well as expenses incurred to expand Cognizant's sales and
marketing activities and increased infrastructure expenses to support
Cognizant's revenue growth. The decrease in such expenses as a percentage of
revenue resulted from Cognizant's increased volume of revenue, which outpaced
the increase in selling, general and administrative expenses.
Income from Operations. Income from operations increased 20.2%, or
approximately $5.4 million, from approximately $26.6 million during the nine
months ended September 30, 2001 to approximately $32.0 million during the nine
months ended September 30, 2002, representing 19.8% and 19.7% of revenues,
respectively.
Other Income. Interest income decreased by $701,000 from approximately
$2.0 million during the nine months ended September 30, 2001 to approximately
$1.3 million during the nine months ended September 30, 2002. The decrease in
such interest income was attributable primarily to declining interest rates,
offset, in part, by higher invested cash balances. Cognizant recognized a net
foreign currency exchange loss of $604,000 during the nine months ended
September 30, 2001 compared to a loss of $89,000 in the current period, as a
result of changes in exchange rates.
Provision for Income Taxes. The provision for income taxes decreased from
approximately $10.5 million for the nine months ended September 30, 2001 to
approximately $7.7 million for the nine months ended September 30, 2002, with an
effective tax rate of 37.4% and 23.4% for the nine months ended September 30,
2001 and 2002, respectively. The lower effective tax rate reflects Cognizant's
change in its strategy regarding the repatriation of 2002 and future earnings
from its subsidiary in India, as well as a change in the manner in which
repatriated earnings are taxed in India. (See Note 5 to the Notes to the
Unaudited Condensed Consolidated Financial Statements.)
Net Income. Net income increased from approximately $17.5 million for the
nine months ended September 30, 2001 to approximately $25.4 million for the nine
months ended September 30, 2002, representing 13.0% and 15.7% of revenues for
the nine months ended September 30, 2001 and 2002, respectively.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue increased by 29.7%, or $40.7 million, from $137.0 million
during 2000 to $177.8 million in 2001. This increase resulted primarily from a
$27.7 million, or 42.9%, increase in application management services provided by
Cognizant and a $13.5 million, or 18.8%, increase
64
in application development and integration services provided by Cognizant,
partially offset by an approximately $0.5 million, or 100.0% decrease in Year
2000 compliance services. Cognizant provides services through time-and-material
and fixed bid contracts. Over the course of the last three years fixed bid
contracts have increased as a percent of revenues from 15.0% in 1999 to 15.1% in
2000 to 23.9% in 2001.
Sales to related parties on a year-over-year basis were relatively stable
at 10.6% in 2001 compared to 10.4% in 2000. For statement of operations
purposes, revenues from related parties include only revenues recognized during
the period in which the related party was affiliated with Cognizant. During 2001
and 2000, no third party accounted for greater than 10% of revenues.
Gross Profit. Cognizant'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. Cognizant's
cost of revenues increased by 29.0%, or $20.4 million, from $70.4 million during
2000 to $90.8 million in 2001. The increase was due primarily to the increased
cost resulting from the increase in the number of Cognizant's technical
professionals from approximately 2,800 employees at December 31, 2000 to
approximately 3,470 employees at December 31, 2001. The increased number of
technical professionals is a direct result of greater demand for Cognizant's
services. Cognizant's gross profit increased by 30.5%, or approximately $20.3
million, from approximately $66.6 million during 2000 to $86.9 during 2001.
Gross profit margin increased from 48.6% of revenues during 2000 to 48.9% of
revenues in 2001. The increase in gross profit margin was primarily attributable
to a continued shift toward higher margin fixed bid contracts and a lower
incentive compensation accrual in 2001 as compared to 2000.
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 26.8%, or $10.8 million, from $40.5
million during 2000 to $51.3 million during 2001, and decreased as a percentage
of revenue from approximately 29.5% to 28.9%, respectively. The increase in
expenses in absolute dollars was due primarily to expenses incurred to expand
Cognizant's sales and marketing activities and increased infrastructure expenses
to support Cognizant's growth. The decrease in expenses as a percentage of
revenue was primarily due to the increased revenues that have resulted from
Cognizant's expanded sales and marketing activities in the current and prior
years.
Income from Operations. Income from operations increased 36.3%, or
approximately $9.5 million, from approximately $26.1 million during 2000 to
$35.6 million during 2001, representing approximately 19.1% and 20.0% of
revenues, respectively. The increase in operating margin was primarily due to a
continued shift toward higher margin fixed bid contracts and a lower incentive
compensation accrual in 2001 as compared to 2000.
Other Income/Expense. Other income/expense consists primarily of interest
income offset, by foreign currency exchange losses and, in 2001, an impairment
loss on an investment. Interest income decreased by approximately 5.6%, from
$2.6 million during 2000 to $2.5 million during 2001. The decrease in interest
income was attributable primarily to lower interest rates, offset, in part, by
higher operating cash balances. Cognizant recognized a net foreign currency
exchange loss of approximately $767,000 during 2001, as a result of the effect
of changing exchange rates on Cognizant's transactions. Cognizant recognized an
impairment loss on its investment in Questra Corporation of approximately $2.0
million during the fourth quarter of 2001 in recognition of an other than
temporary decline in value. The impairment loss was based upon an implied
valuation of Questra as a result of a recent new round of venture capital
funding in which Cognizant's equity interest in Questra was substantially
diluted and investors, other than Cognizant, received preferential liquidation
rights. The impairment loss, net of tax benefit, was $1.2 million or $0.06 per
diluted share. (See Note 5 to the Consolidated Financial Statements)
65
Provision for Income Taxes. Historically, through the date of its initial
public offering, Cognizant had been included in the consolidated federal income
tax returns of The Dun & Bradstreet Corporation and Cognizant Corporation.
Cognizant's provision for income taxes in the consolidated statements of income
reflects the federal and state income taxes calculated on Cognizant's
stand-alone basis. The provision for income taxes increased from $10.6 million
in 2000 to $13.2 million in 2001, with an effective tax rate of 37.4% in both
years. The provision for income taxes reflects Cognizant's intent to repatriate
earnings from its Indian subsidiary.
Net Income. Net income increased from approximately $17.7 million in 2000
to $22.2 million in 2001, representing approximately 12.9% and 12.5% as a
percentage of revenues, respectively. The lower percentage in 2001 reflects the
one-time write-off of Cognizant's investment in Questra, discussed previously.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenue. Revenue increased by 54.1%, or $48.1 million, from $88.9 million
during 1999 to $137.0 million in 2000. This increase resulted primarily from a
$61.5 million, or 82.0%, increase in application development and integration,
application management, re-engineering and other services provided by Cognizant
partially offset by an approximately $13.4 million, or 96.5%, decrease in Year
2000 compliance services. The percentage of revenues derived from unrelated
parties increased from 83.3% during 1999 to 89.6% during 2000. This increase
resulted from Cognizant's continued effort to pursue unaffiliated third-party
customers and expanded service offerings to existing unaffiliated customers. For
statement of operations purposes, revenues from related parties include only
revenues recognized during the period in which the related party was affiliated
with Cognizant. During 2000, sales to related party customers accounted for
10.4% of revenues and no third party accounted for greater than 10% of revenues.
During 1999, sales to related party customers accounted for 16.7% of revenues
and one third-party customer accounted for 17.4% of revenues.
Gross Profit. Cognizant's cost of revenues increased by 52.6%, or $24.3
million, from $46.2 million during 1999 to $70.4 million during 2000. The
increase was due primarily to the increased cost resulting from the increase in
the number of Cognizant's technical professionals from approximately 2,000
employees at December 31, 1999 to approximately 2,800 employees at December 31,
2000. The increased number of technical professionals is a direct result of
greater demand for Cognizant's services. Cognizant's gross profit increased by
55.8%, or approximately $23.9 million, from approximately $42.7 million during
1999 to approximately $66.6 million during 2000. Gross profit margin increased
from 48.1% of revenues during 1999 to 48.6% of revenues during 2000. The
increase in 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, including depreciation and amortization, increased by
55.1%, or $14.4 million, from $26.1 million during 1999 to $40.5 million during
2000, and increased as a percentage of revenue from approximately 29.4% to
29.5%, respectively. The increase in expenses in absolute dollars and as a
percentage of revenue was primarily due to expenses incurred to expand
Cognizant's sales and marketing activities and increased infrastructure expenses
to support Cognizant's revenue growth.
Income From Operations. Income from operations increased 57.0%, or
approximately $9.5 million, from approximately $16.6 million during 1999 to
approximately $26.1 million during 2000, representing approximately 18.7% and
19.1% of revenues, respectively. The increase in operating margin was primarily
attributable to the increased third-party revenue and the shift toward newer,
higher margin customers.
Other Income. Interest income increased by approximately 109.7%, from $1.3
million during 1999 to approximately $2.6 million during 2000. The increase in
interest income was attributable
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primarily to generally higher operating cash balances. Cognizant recognized a
net foreign currency exchange loss of approximately $538,000 during 2000, as a
result of the effect of changing exchange rates on Cognizant's transactions.
Provision For Income Taxes. Cognizant's provision for income taxes in the
consolidated statements of income reflects the federal and state income taxes
calculated on Cognizant's stand alone basis. The provision for income taxes
increased from $6.7 million in 1999 to $10.6 million in 2000, with an effective
tax rate of 37.4% in both 1999 and 2000.
Net Income. Net income increased from approximately $11.2 million in 1999
to approximately $17.7 million in 2000, representing approximately 12.6% and
12.9% as a percentage of revenues, respectively.
RESULTS BY BUSINESS SEGMENT
North America operations consist primarily of application design,
development and maintenance services in the United States and Canada. European
operations consist of application design, development and maintenance services
principally in the United Kingdom. Asian operations consist of application
design, development and maintenance services principally in India. Cognizant is
managed on a geographic basis. Accordingly, regional sales managers, sales
managers, account managers, project teams and facilities are segmented
geographically and decisions by Cognizant's chief operating decision maker
regarding the allocation of assets and assessment of performance are based on
such geographic segmentation. Revenues and resulting operating income are
attributed to regions based upon customer location, and exclude the effect of
intercompany revenue for services provided by CTS India to other Cognizant
entities.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
NORTH AMERICAN SEGMENT
Revenue. Revenue increased by 34.2%, or approximately $13.5 million, from
approximately $39.4 million for the three months ended September 30, 2001 to
approximately $52.9 million during the three months ended September 30, 2002.
The increase in revenue was attributable primarily to increased market awareness
and acceptance of the on-site/offshore application design, development and
maintenance services delivery model, as well as sales and marketing activities
directed at the U.S. market for Cognizant's services.
Income from Operations. Income from operations increased 29.5%, or
approximately $2.4 million, from approximately $8.1 million for the three months
ended September 30, 2001 to approximately $10.5 million for the three months
ended September 30, 2002. The increase in operating income was attributable
primarily to increased revenues and achieving leverage on prior sales and
marketing investments.
EUROPEAN SEGMENT
Revenue. Revenue increased by 41.8%, or approximately $2.4 million, from
approximately $5.7 million for the three months ended September 30, 2001 to
approximately $8.0 million for the three months ended September 30, 2002. The
increase in revenue was primarily attributable to increased demand for
Cognizant's services in the United Kingdom.
Income from Operations. Income from operations increased 36.8%, or
approximately $427,000, from approximately $1.2 million for the three months
ended September 30, 2001 to $1.6 million for the three months ended September
30, 2002. The increase in income from operations from the prior period was due
to expense reductions during the third quarter of 2002 coupled with increased
revenues.
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ASIAN SEGMENT
Revenue. Revenue decreased by 28.9%, or approximately $117,000, from
approximately $405,000 for the three months ended September 30, 2001 to
approximately $288,000 for the three months ended September 30, 2002.
Income from Operations. Income from operations was approximately $100,000
for each of the three months ended September 30, 2001 and 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
NORTH AMERICAN SEGMENT
Revenue. Revenue increased by 21.1%, or approximately $24.5 million, from
approximately $116.0 million for the nine months ended September 30, 2001 to
approximately $140.5 million for the nine months ended September 30, 2002. The
increase in revenue was attributable primarily to increased market awareness and
acceptance of the on-site/offshore application design, development and
application maintenance services delivery model, as well as sales and marketing
activities directed at the U.S. market for Cognizant's services.
Income from Operations. Income from operations increased 20.6%, or
approximately $4.7 million, from approximately $23.0 million for the nine months
ended September 30, 2001 to approximately $27.7 million for the nine months
ended September 30, 2002. The increase in operating income was attributable
primarily to increased revenues and achieving leverage on prior sales and
marketing investments.
EUROPEAN SEGMENT
Revenue. Revenue increased by 18.6%, or approximately $3.2 million, from
approximately $17.2 million for the nine months ended September 30, 2001 to
approximately $20.4 million for the nine months ended September 30, 2002. The
increase in revenue was primarily attributable to increased demand for
Cognizant's services in the United Kingdom.
Income from Operations. Income from operations increased by 18.2% or
approximately $619,000 from approximately $3.4 million for the nine months ended
September 30, 2001 to $4.0 million for the nine months ended September 30, 2002.
The increase in income from operations from the prior period was due to expense
reductions during 2002 coupled with increased revenues.
ASIAN SEGMENT
Revenue. Revenue increased by 9.5%, or approximately $107,000, from
approximately $1.1 million for the nine months ended September 30, 2001 to
approximately $1.2 million for the nine months ended September 30, 2002.
Income from Operations. Income from operations was approximately $200,000
for each of the three months ended September 30, 2001 and 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NORTH AMERICAN SEGMENT
Revenue. Revenue increased by 32.6%, or approximately $37.5 million, from
approximately $114.9 million during 2000 to approximately $152.4 million in
2001. The increase in revenue was attributable primarily to increased market
awareness and acceptance and use of the on-site/offshore software delivery
model, as well as sales and marketing activities directed at the U.S. market for
Cognizant's services.
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Income from Operations. Income from operations increased 39.3%, or
approximately $8.6 million, from approximately $21.9 million during 2000 to
approximately $30.5 million during 2001. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
EUROPEAN SEGMENT
Revenue. Revenue increased by 10.2%, or approximately $2.1 million, from
approximately $21.0 million during 2000 to approximately $23.1 million in 2001.
The increase in revenue was attributable to Cognizant's sales and marketing
activities in the United Kingdom, partially offset by weak demand for
Cognizant's services elsewhere in Europe.
Income From Operations. Income from operations increased 16.0%, or
approximately $0.6 million, from approximately $4.0 million during 2000 to $4.6
million during 2001. The increase in operating income was attributable primarily
to increased revenues and achieving leverage on prior sales and marketing
investments.
ASIAN SEGMENT
Revenue. Revenue increased by 98.6%, or $1.1 million, from $1.1 million
during 2000 to $2.2 million in 2001. The increase in revenue was attributable
primarily to Cognizant's success in India providing software services to
domestic Indian companies as well as to Indian divisions of Cognizant's
multi-national clients.
Income from Operations. Income from operations increased 109.3%, or
approximately $0.2 million, from approximately $0.2 million during 2000 to $0.5
million during 2001. The increase in operating income was attributable primarily
to increased revenues.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NORTH AMERICAN SEGMENT
Revenue. Revenue increased by 61.5%, or approximately $43.8 million, from
approximately $71.2 million during 1999 to approximately $114.9 million in 2000.
The increase in revenue was attributable primarily to increased market awareness
and acceptance of the on-site/offshore software delivery model, as well as sales
and marketing activities directed at the U.S. market for Cognizant's services.
Income from Operations. Income from operations increased 64.4%, or
approximately $8.6 million, from approximately $13.3 million during 1999 to
approximately $21.9 million during 2000. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
EUROPEAN SEGMENT
Revenue. Revenue increased by 20.8%, or approximately $3.6 million, from
approximately $17.4 million during 1999 to approximately $21.0 million in 2000.
The increase in revenue was attributable Cognizant's sales and marketing
activities in the United Kingdom.
Income from Operations. Income from operations increased 23.1%, or
approximately $0.7 million, from approximately $3.2 million during 1999 to
approximately $4.0 million during 2000. The increase in operating income was
attributable primarily to increased revenues and achieving leverage on prior
sales and marketing investments.
ASIAN SEGMENT
Revenue. Revenue increased by 199.2%, or $0.8 million, from approximately
$0.4 million during 1999 to approximately $1.2 million in 2000. The increase in
revenue was attributable
69
primarily to Cognizant's success in India providing software services to
domestic Indian companies.
Income From Operations. Income from operations increased 100.0%, or
approximately $0.1 million, from approximately $0.1 million during 1999 to
approximately $0.2 million during 2000. The increase in operating income was
attributable primarily to increased revenues.
LIQUIDITY AND CAPITAL RESOURCES
Historically, through the date of its initial public offering, Cognizant'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 then IMS Health. In June 1998, Cognizant consummated its
initial public offering of 5,834,000 shares of its Class A common stock at a
price to the public of $5.00 per share, of which 5,000,000 shares were issued
and sold by Cognizant and 834,000 shares were sold, at that time, by Cognizant
Corporation, Cognizant's then owner and controlling parent company. The net
proceeds to Cognizant from the offering were approximately $22.4 million after
$845,000 of direct expenses. The funds received by Cognizant from the offering
were invested in short-term, investment grade, interest-bearing securities,
after Cognizant used a portion of the net proceeds to repay approximately $6.6
million of non-trade related party balances to Cognizant Corporation. Cognizant
has used and will continue to use the remainder of the net proceeds from the
offering for (i) expansion of existing operations, including Cognizant's
offshore IT development centers; (ii) continued development of new service lines
and possible acquisitions of related businesses; and (iii) general corporate
purposes including working capital. At September 30, 2002, Cognizant had cash
and cash equivalents of approximately $123.1 million.
Net cash provided by operating activities was approximately $35.6 million
during the nine months ended September 30, 2002 as compared to net cash provided
by operating activities of approximately $23.7 million during the nine months
ended September 30, 2001. The increase resulted primarily from increased net
income and an increase in accrued and other liabilities, partially offset by an
increase in trade accounts receivable.
Trade accounts receivable, net of allowance for doubtful accounts was $30.2
million at September 30, 2002. Cognizant 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 Cognizant's finance staff. At
September 30, 2002, Cognizant's day's sales outstanding, including unbilled
receivables, was approximately 59 days compared to 55 days at September 30,
2001.
Cognizant's investing activities used net cash of approximately $10.3
million for the nine months ended September 30, 2002 as compared to net cash
used of approximately $10.7 million for the same period in 2001. The decrease in
2002 compared to 2001 primarily reflects a decrease in purchases of property and
equipment partially offset by the acquisition of certain assets from
UnitedHealthcare Ireland Ltd. (See Note 2 to the Notes to the Unaudited
Condensed Consolidated Financial Statements).
Cognizant's financing activities provided net cash of approximately $13.0
million for the nine months ended September 30, 2002 as compared to net cash
provided by financing activities of approximately $4.8 million for the same
period in 2001. The increase in net cash provided by financing activities was
related primarily to a higher level of cash proceeds from the exercise of stock
options and the purchase of employee stock purchase plan shares in 2002, as
compared to the prior year. The exercise of stock options and the purchase of
employee stock purchase plan shares resulted in an increase of approximately
680,000 shares in Cognizant's outstanding class A common stock during the nine
months ended September 30, 2002.
As of September 30, 2002, Cognizant had no significant third-party debt.
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Cognizant had working capital of $136.6 million at September 30, 2002 and
$95.6 million at December 31, 2001.
As of September 30, 2002, Cognizant has entered into fixed capital
commitments related to its India development center expansion program of
approximately $20.1 million, of which $10.9 million has been spent to date. The
multi-phase program will encompass the construction of three fully-owned
development centers containing approximately 620,000 sq. ft. of space in Pune,
Chennai and Calcutta. Total expenditures related to this program are expected to
be approximately $39.4 million. Cognizant completed construction of the two
facilities in Calcutta and Pune in 2002, and expects construction of the third
development center in Chennai to be completed in 2003. Cognizant expects that
its capital expenditures in 2003 will increase as compared to 2002 in light of
the continued expansion of its business.
Cognizant expects to incur charges in the fourth quarter of 2002 and the
first quarter of 2003 aggregating between $2 to $3 million in relation to
one-time costs associated with the exchange offer.
Cognizant 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 Cognizant'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 Cognizant'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 Cognizant's costs in
India is denominated in local currency and subject to exchange fluctuations,
which has not had any material adverse effect on Cognizant's results of
operations.
CONTINGENCIES
As of September 30, 2002, Cognizant has entered into fixed capital
commitments related to its India development center expansion program of
approximately $20,109, of which approximately $10,924 has been spent to date.
Cognizant 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 Cognizant's quarterly or annual operating results,
cash flows, or consolidated financial position. Additionally, many of
Cognizant'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 Cognizant, regardless of Cognizant's responsibility for such
failure. Although Cognizant attempts to contractually limit its liability for
damages arising from negligent acts, errors, mistakes, or omissions in rendering
its application design, 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 Cognizant from liability
for damages. Although Cognizant 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.
71
The successful assertion of one or more large claims against Cognizant that
exceed available insurance coverage or changes in Cognizant's insurance
policies, including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on Cognizant's
business, results of operations and financial condition.
In addition, in connection with the exchange offer, Cognizant is providing
undertakings to a number of entities formerly related to The Dun & Bradstreet
Corporation which undertakings could give rise to Cognizant liabilities in the
future. See "Risk Factors -- Risks Related to Cognizant -- Cognizant may be
subject to legacy Dun & Bradstreet liabilities that could have an adverse effect
on Cognizant's results of operations and financial condition."
EFFECTS OF INFLATION
Cognizant'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 Cognizant have caused wages to increase at a
rate greater than the general rate of inflation. As with other IT service
providers, Cognizant must adequately anticipate wage increases, particularly on
its fixed-price contracts. There can be no assurance that Cognizant 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
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ADOPTED:
In June 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" and Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" were issued. FAS 141 requires the
purchase method of accounting to be used for all business combinations initiated
after June 30, 2001. FAS 141 also specifies criteria that intangible assets
acquired must meet to be recognized and reported separately from goodwill. FAS
142 requires that goodwill and intangible assets with indefinite lives no longer
be amortized but instead be measured for impairment at least annually, or when
events indicate that there may be an impairment. FAS 142 is effective for fiscal
years beginning after December 15, 2001. The adoption of FAS 141 and FAS 142 did
not have a material effect on Cognizant's financial position or results of
operations. The following table sets forth Cognizant's results had FAS 142 been
applied to the prior-period financial statements presented herein.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2001
------------- -------------
Reported Net Income......................................... $6,108 $17,520
Reversal of Goodwill Amortization -- net of tax............. 79 238
------ -------
Adjusted Net Income excluding Goodwill Amortization......... $6,187 $17,758
Adjusted Basic EPS excluding Goodwill Amortization.......... $ 0.32 $ 0.94
Adjusted Diluted EPS excluding Goodwill Amortization........ $ 0.30 $ 0.87
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" was issued. FAS
144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-lived Assets to be Disposed of," and the accounting
and reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently occurring
Events and Transactions." FAS 144 also amends Accounting Research Bulletin No.
51, Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which
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control is likely to be temporary. FAS 144 retains the fundamental provisions of
FAS 121 for recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale, while resolving
significant implementation issues associated with FAS 121. Among other things,
FAS 144 provides guidance on how long-lived assets used as part of a group
should be evaluated for impairment, establishes criteria for when long-lived
assets are held for sale, and prescribes the accounting for long-lived assets
that will be disposed of other than by sale. FAS 144 is effective for fiscal
years beginning after December 15, 2001. The adoption of FAS 144 did not have a
material impact on Cognizant's financial position and results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" was issued. FAS 145 updates, clarifies and
simplifies existing accounting pronouncements and is generally effective for
transactions occurring after May 15, 2002. The adoption of this statement did
not have a material impact on the Company's financial position or results of
operations.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED:
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued. FAS 143 addresses
financial accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs
that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an increase in the carrying amount
of the related long-lived asset. The asset retirement cost is subsequently
allocated to expense using a systematic and rational method over the asset's
useful life. FAS 143 is effective for fiscal years beginning after June 15,
2002. The adoption of this statement is not expected to have a material impact
on Cognizant's financial position or results of operations.
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Exit or Disposal Activities" was issued. FAS 146 addresses the
accounting for costs to terminate a contract that is not a capital lease, costs
to consolidate facilities and relocate employees, and involuntary termination
benefits under one-time benefit arrangements that are not an ongoing benefit
program or an individual deferred compensation contract. A liability for
contract termination costs should be recognized and measured at fair value
either when the contract is terminated or when the entity ceases to use the
right conveyed by the contract. A liability for one-time termination benefits
should be recognized and measured at fair value at the communication date if the
employee would not be retained beyond a minimum retention period (i.e., either a
legal notification period or 60 days, if no legal requirement exists). For
employees that will be retained beyond the minimum retention period, a liability
should be accrued ratably over the future service period. The provisions of the
statement will be effective for disposal activities initiated after December 31,
2002. The adoption of this statement is not expected to have a material impact
on Cognizant's financial position or results of operations.
In October 2002, Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions" was issued. FAS 147 addresses
the financial accounting and reporting for the acquisition of all or part of a
financial institution, except for a transaction between two or more mutual
enterprises. FAS 147 also provides guidance on the accounting for the impairment
or disposal of acquired long-term customer-relationship intangible assets,
including those acquired in transactions between two or more mutual enterprises.
The provisions of the statement will be effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The adoption of this
statement is not expected to have a material impact on Cognizant's financial
position or results of operations.
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BUSINESS OF COGNIZANT
OVERVIEW
Cognizant Technology Solutions Corporation is a leading provider of custom
IT design, development, integration and maintenance services primarily for
Fortune 1000 companies located in the United States and Europe. Cognizant's core
competencies include web-centric applications, data warehousing, component-based
development and legacy and client-server systems. Cognizant provides the IT
services it offers using an integrated on-site/offshore business model. This
seamless on-site/offshore model combines technical and account management teams
located on-site at the customer location and offshore at dedicated Cognizant
development centers located in India and Ireland. Cognizant believes that this
on-site/offshore model enables it to develop, deploy and maintain, on a
cost-effective and timely basis, high quality, large-scale IT systems for use in
a wide range of industries.
INDUSTRY BACKGROUND
Many companies today face intense competitive pressure and rapidly changing
market dynamics. In addition, the evolution of technology and the
commercialization of the Internet have contributed to the rapid change in the
business environment. In response to these challenges, many companies are
focused on improving productivity, increasing service levels, lowering costs and
accelerating delivery times. In order to achieve these goals, companies are
implementing a broad range of technologies, such as:
- e-business and e-commerce applications;
- data warehousing;
- customer and supply chain management; and
- middleware/enterprise application integration.
These technologies facilitate faster, more responsive, lower-cost business
operations. However, their development, integration and on-going maintenance
present major challenges and require a large number of highly skilled
professionals trained in many diverse technologies. In addition, companies also
require additional technical resources to maintain, enhance and re-engineer
their core legacy IT systems and to address application maintenance projects.
Increasingly, companies are relying on custom IT solutions providers, such as
Cognizant, to provide these services.
In order to respond effectively to a changing and challenging business
environment, IT departments of many companies have focused increasingly on
improving returns on IT investments, lowering costs and accelerating the
delivery of new systems and solutions. To accomplish these objectives, many IT
departments have shifted all or a portion of their IT development, integration
and maintenance requirements to outside service providers. This outsourcing
enables companies to eliminate or reduce the large in-house IT staffs otherwise
required to evaluate, implement and manage IT initiatives, thereby reducing the
present and future investments required to maintain and continually train a
technical staff. In order to achieve greater cost savings and to increase
delivery times, companies are increasingly turning to IT services providers
operating with on-site/offshore business models.
Global demand for high quality, lower cost IT services from outside
providers has created a significant opportunity for IT service providers which
can successfully leverage the benefits of, and address the challenges in using,
an offshore talent pool. The effective use of offshore personnel can offer a
variety of benefits, including lower costs, faster delivery of new IT solutions
and more flexible scheduling. Certain developing countries, particularly India,
have a large talent pool of highly qualified technical professionals that can
provide high quality IT services at a lower
74
cost. India is a leader in IT services and is regarded as having one of the
largest pools of IT talent in the world. Historically, IT service providers have
used offshore labor pools primarily to supplement the internal staffing needs of
customers. However, evolving customer demands have led to the increasing
acceptance and use of offshore resources for higher value-added services. These
services include application design, development, integration and maintenance.
India's services and software exports have grown from $5.2 billion for the
fiscal year ended March 31, 2001 to $6.0 billion for the fiscal year ended March
31, 2002, as estimated by the National Association of Software and Services
Companies (NASSCOM) in India (converted from rupees to U.S. dollars at the
respective year-end noon-buying rates announced by the New York Federal Reserve
Bank). This represents a 15% growth over the period. NASSCOM has projected
India's services and software exports to grow at a rate of approximately 22% for
fiscal year 2002-03.
Using an offshore workforce to provide value-added services presents a
number of challenges to IT service providers. The offshore implementation of
value-added IT services requires that IT service providers continually and
effectively attract, train and retain highly skilled software development
professionals with the advanced technical skills necessary to keep pace with
continuing changes in information technology, evolving industry standards and
changing customer preferences. These skills are necessary to design, develop and
deploy high-quality technology solutions in a cost-effective and timely manner.
In addition, IT service providers must have the methodologies, processes and
communications capabilities to enable offshore workforces to be successfully
integrated with on-site personnel. Service providers must also have strong
research and development capabilities, technology competency centers and
relationship management skills in order to compete effectively.
THE COGNIZANT SOLUTION
Cognizant believes that it has developed an effective integrated
on-site/offshore business model, and that this business model will be a critical
element of Cognizant's continued growth. To support this business model, at
December 31, 2002, Cognizant employed over 3,900 programmers in India and over
5,400 globally. Cognizant has also established facilities, technology and
communications infrastructure in order to support its business model. By basing
certain technical operations in India, Cognizant has access to a large pool of
skilled, English-speaking IT professionals. These IT professionals provide high
quality services to Cognizant's customers at costs significantly lower than
services sourced exclusively in developed countries. Cognizant's strengths,
which Cognizant believes differentiate it from other IT service providers,
include the following:
ESTABLISHED AND SCALABLE PROPRIETARY PROCESSES.
Cognizant has developed proprietary methodologies for integrating on-site
and offshore teams to facilitate cost-effective, on-time delivery of
high-quality projects. These methodologies comprise Cognizant's proprietary
Q*VIEW software engineering process, which is available to all on-site and
offshore programmers. Cognizant uses this ISO 9000 certified process to define
and implement projects from the design, development and deployment stages
through to on-going application maintenance. For most projects, Q*VIEW is used
as part of an initial assessment that allows Cognizant to define the scope and
risks of the project and subdivide the project into smaller phases with frequent
deliverables and feedback from customers. Cognizant also uses its Q*VIEW process
to detect, mitigate and correct possible quality defects and to establish
appropriate contingencies for each project. In order to ensure implementation of
the quality process, Cognizant assigns a quality facilitator to each project who
reports to a centralized quality assurance and software engineering group. This
group performs, on a sample basis, quality audits, deliverables verifications,
metrics collection and analysis, which are used to improve processes and
methodologies. These processes and methodologies have proven to be scalable, as
Cognizant has significantly increased the number of offshore development
centers,
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customers and projects. In addition, all of Cognizant's principal development
centers have been assessed by KPMG at Level 5 (the highest possible rating) of
the Capability Maturity Model of the Software Engineering Institute at Carnegie
Mellon University, which is a widely recognized means of measuring the quality
and maturity of an organization's software development and maintenance
processes.
HIGHLY SKILLED WORKFORCE.
Cognizant's managers and senior technical personnel provide in-depth
project management expertise to customers. To maintain this level of expertise,
Cognizant has placed significant emphasis on recruiting and training its
workforce of highly skilled professionals. Cognizant has over 350 project
managers and senior technical personnel around the world, many of whom have
significant work experience in the United States and Europe. Cognizant also
maintains programs and personnel to hire and train the best available technical
professionals in both legacy systems and emerging technologies. Cognizant
provides five months of combined classroom and on-the-job training to newly
hired programmers, as well as additional annual training programs designed to
enhance the business practices, tools, technology and consulting skills of
Cognizant's professional staff. Cognizant was recently assessed at Level 5 of
the People Capability Maturity Model (P-CMM) version 2.0.
RESEARCH AND DEVELOPMENT AND COMPETENCY CENTERS.
Cognizant has project experience and expertise across multiple
architectures and technologies, and makes significant investments in its
competency centers and in research and development to keep abreast of the latest
technology developments. Most of Cognizant's programmers are trained in multiple
technologies and architectures. As a result, Cognizant is able to react to
customers' needs quickly and efficiently redeploy programmers to different
technologies. In order to develop and maintain this flexibility, Cognizant has
made a substantial investment in its competency centers where the experience
gained from particular projects and research and development efforts is
leveraged across the entire company. In addition, through its investment in
research and development activities and the continuing education of its
technical personnel, Cognizant enlarges its knowledge base and develops the
necessary skills to keep pace with emerging technologies. Cognizant believes
that its ability to work in new technologies allows it to foster long-term
relationships by having the capacity to continually address the needs of both
existing and new customers.
WELL-DEVELOPED INFRASTRUCTURE.
Cognizant's extensive facilities, technology and communications
infrastructure facilitate the seamless integration of its on-site and offshore
workforces. This is accomplished by permitting team members in different
locations to access common project information and to work directly on customer
projects. This infrastructure allows for:
- rapid completion of projects;
- highest level of quality;
- off-peak use of customers' technological resources; and
- real-time access to project information by the on-site account manager or
the customer.
International time differences enable Cognizant's offshore teams located in
India to access a customer's computing facilities located in the United States
and Europe during off-peak hours. This ability to perform services during
off-peak hours enables Cognizant to complete projects more rapidly and does not
require Cognizant's customers to invest in duplicative hardware and software. In
addition, for large projects with short time frames, Cognizant's offshore
facilities allow for parallel processing of various development phases to
accelerate delivery time. In
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addition, Cognizant can deliver services more rapidly than some competitors
without an offshore labor pool because Cognizant's lower labor costs enable it
to cost-effectively assign more professionals to a project.
BUSINESS STRATEGIES
Cognizant's objectives are to maximize stockholder value and enhance
Cognizant's position as a leading provider of custom IT design, development,
integration and maintenance services. Cognizant implements the following core
strategies to achieve these objectives:
FURTHER DEVELOP LONG-TERM CUSTOMER RELATIONSHIPS.
Cognizant has strong long-term strategic relationships with its customers
and business partners. Cognizant seeks to establish long-term relationships that
present recurring revenue opportunities, frequently trying to establish
relationships with its customers' chief information officers, or other IT
decision makers, by offering a wide array of cost-effective high quality
services. Over 80% of Cognizant's revenues in the nine months ended September
30, 2002 were derived from customers who had been using Cognizant's services for
one year or more. Cognizant also seeks to leverage its experience with a
customer's IT systems into new business opportunities. Knowledge of a customer's
IT systems gained during the performance of application maintenance services,
for example, may provide Cognizant with a competitive advantage in securing
additional development and maintenance projects from that customer.
EXPAND SERVICE OFFERINGS AND SOLUTIONS.
Cognizant has several teams dedicated to developing new, high value
services. These teams collaborate with customers to develop these services. For
example, Cognizant is currently developing new solutions for IT systems
portfolio analysis, program management, technology architecture and strategy,
systems testing, legacy restoration and digital security and forensics. In
addition, Cognizant invests in internal research and development and promotes
knowledge building and sharing across the organization in order to promote the
development of new solutions that it can offer to customers. Furthermore,
Cognizant continues to enhance its capabilities and service offerings in the
areas of Customer Relationship Management, or CRM, and Enterprise Resource
Planning, or ERP. Cognizant believes that the continued expansion of its service
offerings will reduce its reliance on any one technology initiative and will
help foster long-term relationships with customers by allowing Cognizant to
serve the needs of its customers better.
ENHANCE PROCESSES, METHODOLOGIES AND PRODUCTIVITY TOOLSETS.
Cognizant is committed to improving and enhancing its proprietary Q*VIEW
software engineering process and other methodologies and toolsets. In light of
the rapid evolution of technology, Cognizant believes that continued investment
in research and development is critical to its continued success. Cognizant is
constantly designing and developing additional productivity software tools to
automate testing processes and improve project estimation and risk assessment
techniques. In addition, Cognizant uses groupware technology to share project
experience and best practice methodologies across the organization with the
objective of improving productivity.
EXPAND DOMESTIC AND INTERNATIONAL GEOGRAPHIC PRESENCE.
As Cognizant expands its customer base, it plans to open additional sales
and marketing offices in the United States and internationally. It is expected
that this expansion will facilitate sales and service to existing and new
customers. Cognizant has established sales and marketing offices in Atlanta,
Chicago, Dallas, Minneapolis, Los Angeles, San Francisco and in Teaneck,
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New Jersey. In addition, Cognizant has been pursuing market opportunities in
Europe through its London office, which was established in the beginning of
1998, and its recently acquired development center in Limerick, Ireland.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS, JOINT VENTURES AND STRATEGIC
ALLIANCES.
Cognizant believes that opportunities exist in the fragmented IT services
market to expand its business through selective strategic acquisitions, joint
ventures and strategic alliances. Cognizant believes that acquisition and joint
venture candidates may enable it to expand its geographic presence and its
capabilities more rapidly, especially in the European market, as well as
accelerate its entry into areas of new technology. In addition, through its
working relationships with independent software vendors Cognizant obtains
projects using the detailed knowledge it gains in connection with a joint
development process. Finally, Cognizant will strategically partner with select
IT service firms that offer complementary services in order to best meet the
requirements of its customers.
SERVICES
Cognizant provides a broad range of IT services, including:
SERVICE SUMMARY DESCRIPTION OF SERVICE OFFERINGS
------- ----------------------------------------
Application Design, Development, Integration Define customer requirements, write
and Re-engineering specifications and design, develop, test and
integrate software across multiple platforms
including Internet technologies. Modify and
test applications to enable systems to
function in new operating environments.
Application Maintenance Support some or all of a customer's
applications ensuring that systems remain
operational and responsive to changing user
requirements, and to provide on-going
enhancement as required by the customer.
Cognizant uses its Q*VIEW software engineering process, its on-site and
offshore business model and well-developed technology and communications
infrastructure to deliver these services.
APPLICATION DEVELOPMENT, INTEGRATION AND RE-ENGINEERING SERVICES.
Cognizant follows either of two alternative approaches to application
development and integration:
- full life-cycle application development, in which Cognizant assumes
start-to-finish responsibility for analysis, design, implementation,
testing and integration of systems; or
- cooperative development, in which Cognizant employees work with a
customer's in-house IT personnel to jointly analyze, design, implement,
test and integrate new systems.
In both cases, Cognizant's on-site team members work closely with the
end-users of the application to define requirements and develop specifications.
Detailed design, implementation and testing are generally performed offshore at
Cognizant's ten IT development centers located in India, as well its development
center in Limerick, Ireland. In addition, Cognizant maintains an on-site
presence at each customer location in order to address evolving customer needs
and resulting changes to the project.
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A key part of Cognizant's application development and integration offering
is a suite of services to help organizations build and integrate business
applications with the rest of their operations. In this suite of services,
Cognizant leverages its skills in business application development and
enterprise application integration to build sophisticated business applications
and to integrate these new applications and websites with client server and
legacy systems. Cognizant builds and deploys robust, scalable and extensible
architectures for use in a wide range of industries. Cognizant maintains
competency centers specializing in Microsoft, IBM and Sun, among others, in
order to be able to provide application development and integration services to
a broad spectrum of customers.
Cognizant's re-engineering service offerings assist customers migrating
from systems based on legacy computing environments to newer, open systems-based
platforms and client/server architectures, often in response to the more
stringent demands of business. Cognizant's re-engineering tools automate many of
the processes required to implement advanced client/server technologies.
Cognizant believes that this automation substantially reduces the time and cost
to perform re-engineering services, savings that benefit both Cognizant and its
customers. These tools also enable Cognizant to perform source code analysis and
to re-design target databases and convert certain programming languages. If
necessary, Cognizant's programmers also help customers re-design and convert
user interfaces.
APPLICATION MAINTENANCE SERVICES.
Cognizant provides services to help ensure that a customer's core
operational systems are free of defects and responsive to the customer's
changing needs. As part of this process, Cognizant is often able to introduce
product and process enhancements and improve service levels to customers
requesting modifications and on-going support.
Cognizant's on-site/offshore business model enables Cognizant to provide a
range of rapid response and cost-effective support services to its customers.
Cognizant's on-site team members often provide help-desk services at the
customer's facility. These team members typically carry pagers in the event of
an emergency service request and are available to quickly resolve customer
problems from remote locations. In the case of more complex maintenance
services, including modifications, enhancements and documentation, which
typically have longer turnaround times, Cognizant takes full advantage of its
off-shore resources to develop solutions more cost-effectively than would be
possible relying on higher cost local professionals. The services provided by
Cognizant's offshore team members are delivered to customers using satellite and
fiber-optic telecommunications.
As part of Cognizant's application maintenance services, it assists
customers in renovating their core systems to meet the requirements imposed by
new regulations, new standards or other external events. These services include,
or have previously included, Year 2000 compliance, Eurocurrency compliance,
decimalization within the securities industry and compliance with the Health
Insurance Portability and Accountability Act for the healthcare industry.
Cognizant seeks to anticipate the operational environment of customer's IT
systems as it designs and develops such systems. Cognizant also offers
diagnostic services to customers to assist them in identifying shortcomings in
their IT systems and then optimizing the performance of their systems.
SALES AND MARKETING
Cognizant markets and sells its services directly through its professional
staff, senior management and direct sales personnel operating out of its
Teaneck, New Jersey headquarters and its business development offices in
Atlanta, Chicago, Dallas, Minneapolis, Los Angeles, San Francisco and London.
Cognizant manages its business and results of operations on a geographic basis.
At September 30, 2002, Cognizant had approximately 20 direct sales persons
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and 65 account managers. The sales and marketing group works with Cognizant's
technical team as the sales process moves closer to the customer's selection of
an IT service provider. The duration of the sales process varies depending on
the type of service, ranging from approximately two months to over one year. The
account manager or sales executive works with the technical team to:
- define the scope, deliverables, assumptions and execution strategies for
a proposed project;
- develop project estimates;
- prepare pricing and margin analyses; and
- finalize sales proposals.
Management reviews and approves proposals, which are then presented to the
prospective customer. Cognizant sales and account management personnel remain
actively involved in the project through the execution phase.
Cognizant focuses its marketing efforts on businesses with intensive
information processing needs. Cognizant maintains a prospect/customer database
that is continuously updated and used throughout the sales cycle from prospect
qualification to close. As a result of this marketing system, Cognizant
pre-qualifies sales opportunities, and direct sales representatives are able to
minimize the time spent on prospect qualification.
In addition, substantial emphasis is placed on customer retention and
expansion of services provided to existing customers. In this regard,
Cognizant's account managers play an important marketing role by leveraging
their ongoing relationship with the customer to identify opportunities to expand
and diversify the type of services provided to that customer.
CUSTOMERS
The number of customers served by Cognizant has increased significantly in
recent years. In 1999 Cognizant provided services to 57 customers whereas during
the first nine months of 2002, Cognizant provided services to 108 customers.
Cognizant's customers include:
ADP, Incorporated IMS Health
Brinker International, Incorporated Metropolitan Life Insurance Company
CCC Information Services Incorporated Nielsen Media Research, Incorporated
Computer Sciences Corporation PNC Bank
The Dun & Bradstreet Corporation Royal & SunAlliance USA
First Data Corporation
For the nine months ended September 30, 2002, Cognizant derived its
revenues from the following industries: 35% from financial related services, 24%
from healthcare services, 20% from retail, manufacturing and logistics and 14%
from information services. The remaining portions of Cognizant's revenues were
derived from strategic alliances and other sources. Cognizant dedicates a number
of its employees to each of the major industries it services to better serve its
customers.
Cognizant provides services either on a time-and-material basis or on the
basis of an agreed fixed bid. The volume of work performed for specific
customers is likely to vary from year to year, and a significant customer in one
year may not use Cognizant's services in a subsequent year. In 1999, IMS Health
and First Data Corporation each accounted for more than 10% of revenue. In 2000
and 2001, IMS Health accounted for more than 10% of revenue. In the first nine
months of 2002, IMS Health accounted for approximately 10% of revenue.
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Presented in the table below is additional information about Cognizant's
customers.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1999 2000 2001 2002
---- ---- ---- ----
Percent of revenues from top five customers... 57% 40% 35% 39%
Percent of revenues from top ten customers.... 75% 59% 53% 55%
Percent of revenues from IMS Health and
current subsidiaries........................ 17% 10% 11% 10%
Application development services as a percent
of revenues................................. 32% 46% 43% 43%
Application maintenance services as a percent
of revenues................................. 44% 47% 52% 57%
Fixed bid contracts as a percent of
revenues.................................... 15% 15% 24% 26%
COMPETITION
The intensely competitive IT services market includes a large number of
participants and is subject to rapid change. This market includes participants
from a variety of market segments, including:
- systems integration firms;
- contract programming companies;
- application software companies;
- Internet solutions providers;
- the professional services groups of computer equipment companies; and
- facilities management and outsourcing companies.
Cognizant's most direct competitors include, among others, WIPRO Ltd. and
Infosys Technologies Limited, which utilize an integrated on-site/offshore
business model comparable to that used by Cognizant. Cognizant also competes
with large IT service providers with greater resources, such as Accenture Ltd.,
Electronic Data Systems Corporation and IBM Global Services, who have announced
their intentions to develop more offshore capabilities to lower their cost
structure. In addition, Cognizant competes with numerous smaller local companies
in the various geographic markets in which Cognizant operates.
Many of Cognizant's competitors have significantly greater financial,
technical and marketing resources and greater name recognition than does
Cognizant. The principal competitive factors affecting the markets for
Cognizant's services include:
- performance and reliability;
- quality of technical support, training and services;
- responsiveness to customer needs;
- reputation, experience and financial stability; and
- competitive pricing of services.
Cognizant relies on the following to compete effectively:
- a well developed recruiting, training and retention model;
- a successful service delivery model;
- a broad referral base;
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- continual investment in process improvement and knowledge capture;
- investment in research and development; and
- continued focus on responsiveness to customer needs, quality of services,
competitive prices, project management capabilities and technical
expertise.
HISTORY
Cognizant Technology Solutions Corporation began its IT development and
maintenance services business in early 1994, initially acting as an in-house
technology development center for The Dun & Bradstreet Corporation and its
operating units. In 1996, Cognizant Technology Solutions Corporation, along with
certain other entities, was spun-off from The Dun & Bradstreet Corporation to
form a new company, Cognizant Corporation. On June 24, 1998, Cognizant
Technology Solutions Corporation completed its initial public offering. On June
30, 1998, a majority interest in Cognizant Technology Solutions Corporation and
certain other entities were spun-off from Cognizant Corporation to form IMS
Health Incorporated. Subsequently, Cognizant Corporation was renamed Nielsen
Media Research, Incorporated. At September 30, 2002, IMS Health owned
approximately 56% of Cognizant Technology Solution Corporation's outstanding
stock and held approximately 93% of the combined voting power of Cognizant
Technology Solution Corporation's common stock. For the nine months ended
September 30, 2002, Cognizant Technology Solution Corporation derived 10% of its
revenues from IMS Health, 14% of its revenues from other companies formerly
affiliated with The Dun & Bradstreet Corporation, and 76% of its revenues from
companies never affiliated with The Dun & Bradstreet Corporation.
INTELLECTUAL PROPERTY
Cognizant's intellectual property rights are important to its business.
Cognizant presently holds no patents or registered copyrights. Instead,
Cognizant relies on a combination of intellectual property laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
intellectual property. Cognizant requires its employees, independent
contractors, vendors and customers to enter into written confidentiality
agreements upon the commencement of their relationships with Cognizant. These
agreements generally provide that any confidential or proprietary information
developed by Cognizant or on its behalf be kept confidential. In addition, when
Cognizant discloses that any confidential or proprietary information to third
parties, it routinely requires those third parties to agree in writing to keep
that information confidential.
A portion of Cognizant's business involves the development for customers of
software applications and other technology deliverables. This intellectual
property includes written specifications and documentation in connection with
specific customer engagements. Cognizant's customers usually own the
intellectual property in the software Cognizant develops for them.
Pursuant to a license agreement with IMS Health, all rights to the
"Cognizant" name and certain related trade and service marks were transferred to
Cognizant in July 1998. As of September 30, 2002, Cognizant held three
trademarks in the United States and four trademark applications pending in
India.
EMPLOYEES
At December 31, 2002, Cognizant employed approximately 1,425 persons on a
full-time basis in its North American headquarters and satellite offices and
on-site North American customer locations. Cognizant also employed approximately
240 persons on a full-time basis in its European satellite offices and on-site
European customer locations and approximately 4,500 persons on a full-time basis
in its offshore IT development centers in India. None of Cognizant's employees
are subject to a collective bargaining arrangement. Cognizant considers its
relations with its employees to be good.
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Cognizant's future success depends to a significant extent on its ability
to attract, train and retain highly skilled IT development professionals. In
particular, Cognizant needs to attract, train and retain project managers,
programmers and other senior technical personnel. Cognizant believes there is a
shortage of, and significant competition for, IT development professionals in
the United States and in India with the advanced technological skills necessary
to perform the services Cognizant offers. Cognizant has an active recruitment
program in India, and has developed a recruiting system and database that
facilitates the rapid identification of skilled candidates. During the course of
the year, Cognizant conducts extensive recruiting efforts at premier colleges
and technical schools in India. Cognizant evaluates candidates based on academic
performance, the results of a written aptitude test measuring problem-solving
skills and a technical interview. In addition, Cognizant has an active lateral
recruiting program. A substantial majority of the personnel on most on-site
teams and virtually all the personnel staffed on offshore teams is comprised of
Indian nationals.
Cognizant's senior project managers are hired from leading consulting firms
in the United States and India. Cognizant's senior management and most of its
project managers have experience working in the United States and Europe. This
enhances Cognizant's ability to attract and retain other professionals with
experience in the United States.
Cognizant has also adopted a career and education management program to
define its employees' objectives and career plans. Cognizant has implemented an
intensive orientation and training program to introduce new employees to the
Q*VIEW software engineering process and Cognizant's services.
PROPERTIES
Cognizant has recently completed construction of two fully-owned
state-of-the-art development centers containing approximately 250,000 sq. ft. of
space in the Indian cities of Calcutta and Pune, and expects construction of a
third state-of-the-art development center in Chennai, India containing
approximately 370,000 sq. ft. to be completed in 2003. Each of these development
centers will contain up-to-date technology infrastructure and communications
capabilities. These three facilities will be able to accommodate approximately
6,000 employees in total. Cognizant believes that these new facilities will
provide Cognizant with an advantage in recruiting new employees and in retaining
customers.
Cognizant operates out of its Teaneck, New Jersey headquarters and its
regional and international offices. Cognizant believes that its current
facilities are adequate to support its existing operations. Cognizant also
believes that it will be able to obtain suitable additional facilities on
commercially reasonable terms on an "as needed" basis.
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Set forth below is a table summarizing the principal properties used in
Cognizant's business as of September 30, 2002:
APPROXIMATE
AREA
LOCATION (IN SQ. FEET) USE NATURE OF OCCUPANCY
-------- ------------- --- -------------------
Bangalore, India........ 25,850 IT Development Facility Multiple leases expiring 4/30/05 -- 6/30/06
with renewal options
Bangalore, India........ 35,475 IT Development Facility Lease expiring 10/31/05 with renewal option
Chennai, India.......... 84,900 IT Development Facility Lease expiring 6/30/03 -- 2/29/04 with
renewal options
Chennai, India.......... 15,500 IT Development Facility Multiple leases expiring 1/31/06 -- 4/30/06
with renewal options
Chennai, India.......... 43,350 IT Development Facility Multiple leases expiring 8/31/04 -- 12/31/06
with renewal options
Chennai, India.......... 35,100 IT Development Facility Multiple leases expiring 4/30/06 with renewal
options
Chennai, India.......... 33,700 IT Development Facility Lease expiring 12/15/06 with renewal options
Calcutta, India......... 129,600 IT Development Facility Owned Facility
Calcutta, India......... 13,900 IT Development Facility Lease expiring 10/6/07 with a renewal option
Calcutta, India......... 10,900 IT Development Facility Lease expiring 6/14/06 with a renewal option
Calcutta, India......... 9,300 IT Development Facility Lease expiring 11/30/03
Calcutta, India......... 4,000 IT Development Facility Multiple leases expiring 1/15/03 -- 4/30/05
with renewal options
Hyderabad, India........ 25,080 IT Development Facility Multiple leases expiring 1/17/03 -- 10/19/08
with renewal options
Pune, India............. 172,800 IT Development Facility Owned Facility
Teaneck, New Jersey..... 24,745 Executive and Business Multiple leases expiring 9/30/05 -- 12/31/10
Development Office
Atlanta, Georgia........ 1,000 Business Development Office Lease expiring 9/14/03
Chicago, Illinois....... 5,100 Business Development Office Lease expiring 7/31/05
Dallas, Texas........... 800 Business Development Office Lease expiring 3/31/03
Los Angeles, 1,000 Business Development Office Lease expiring 5/31/03
California............
Minneapolis, Minnesota.. 800 Business Development Office Lease expiring 6/30/03
Phoenix, Arizona........ 15,950 Development Facility Lease expiring 01/22/03
San Ramon, California... 5,700 Business Development Office Multiple leases expiring 10/15/06
Frankfurt, Germany...... 200 Business Development Office Lease expiring 3/31/03
London, England......... 2,080 Business Development Office Lease expiring 9/28/04
Limerick, Ireland....... 10,500 IT Development Facility Multiple leases expiring 1/19/25 -- 6/1/35
LEGAL PROCEEDINGS
Cognizant is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of Cognizant's management, the
outcome of these claims and legal actions, if decided adversely, is not expected
to have a material adverse effect on its quarterly or annual operating results,
cash flows or consolidated financial position.
MANAGEMENT OF COGNIZANT
Board of Directors
The current members of Cognizant's Board of Directors are Wijeyaraj
Mahadeva, chairman; Nancy E. Cooper; Robert W. Howe; John E. Klein; Venetia
Kontogouris; David M. Thomas; Robert E. Weissman and Thomas M. Wendel.
Effective upon the completion of the exchange offer, we expect certain of
the directors nominated by IMS Health, including Nancy E. Cooper and David M.
Thomas, will resign.
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SHARES ELIGIBLE FOR FUTURE SALE
The shares of Cognizant class B common stock that we distribute in the
exchange offer will be freely transferable, other than shares received by
persons who may be deemed to be "affiliates" of Cognizant under the Securities
Act of 1933, as amended (the "Securities Act"). Affiliates generally include
individuals or entities that control, are controlled by, or are under common
control with, Cognizant. The directors and principal executive officers of
Cognizant are affiliates of Cognizant. Significant stockholders of Cognizant may
also be affiliates. Affiliates of Cognizant may sell their shares of Cognizant
common stock only under an effective registration statement under the Securities
Act or pursuant to an available exemption from the registration requirements of
the Securities Act, if any, such as the exemption afforded by Rule 144 under the
Securities Act. Shares of the Cognizant class B common stock will convert
automatically into shares of Cognizant class A common stock when they are first
transferred after the exchange offer.
If we would otherwise continue to own Cognizant class B common stock after
completion of the exchange offer, we currently plan to either distribute them to
our stockholders or convert them into shares of Cognizant's class A common stock
prior to completion of the exchange offer and distribute them to our
stockholders or hold them for some period before we sell them in one or more
transactions. The timing of those sales could depend on market conditions and
other factors, but we expect that we would hold any such shares for no more than
three years. We will vote those shares in proportion to the votes cast by all
other holders of Cognizant common stock. If the minimum amount of IMS shares are
exchanged and we do not otherwise distribute Cognizant shares to our
stockholders, we will hold 2,824,300 shares of Cognizant class A common stock
immediately following the completion of the exchange offer (representing 13.8%
of the outstanding Cognizant common stock).
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DESCRIPTION OF CAPITAL STOCK OF COGNIZANT
The following is a summary of the material terms of Cognizant's capital
stock. For a complete description, refer to the Delaware General Corporation
Law, and to Cognizant's amended and restated certificate of incorporation and
bylaws, each as will be in effect following consummation of the exchange offer.
Cognizant has filed its amended and restated certificate of incorporation and
bylaws, each as will be in effect following consummation of the exchange offer,
as exhibits to the registration statement of which this offering
circular-prospectus forms a part.
Cognizant's authorized capital stock consists of 140,000,000 shares
consisting of (i) 100,000,000 shares of class A common stock, par value $.01 per
share, (ii) 25,000,000 shares of class B common stock, par value $.01 per share,
and (iii) 15,000,000 shares of preferred stock, par value $.10 per share. As of
September 30, 2002, Cognizant had issued and outstanding 8,744,650 shares of
class A common stock and 11,290,900 shares of class B common stock and had
granted options to purchase 3,868,858 shares of class A common stock at a
weighted average exercise price of $26.05 per share. No shares of preferred
stock have been designated or issued.
COMMON STOCK
The holders of Cognizant class A common stock and class B common stock
generally have identical rights except that holders of Cognizant class A common
stock are entitled to one vote per share while holders of Cognizant class B
common stock are entitled to ten votes per share on all matters to be voted on
by stockholders. The holders of common stock are not entitled to cumulative
voting rights. Generally, all matters to be voted on by stockholders, including
the election of directors, must be approved by a majority of the votes cast by
shares of Cognizant class A common stock and class B common stock present in
person or represented by proxy, voting together as a single class, subject to
any voting rights granted to holders of any preferred stock. Following
completion of the exchange offer, directors will be elected by a plurality of
the votes cast. A majority vote of the affected class, voting separately, is
also necessary for amendments to the certificate of incorporation that would
adversely affect the rights of that class of common stock. In the event of a
voluntary or involuntary liquidation, dissolution or winding up of Cognizant,
the holders of shares of common stock would be entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights owing to holders of shares of preferred stock then outstanding, if any.
Holders of the shares of common stock have no preemptive rights, and the shares
of common stock are not subject to further calls or assessment by Cognizant.
Holders of Cognizant class A common stock and class B common stock will
receive dividends in an equal amount per share in the event any dividend is
declared by the Cognizant Board of Directors. Dividends on the common stock of
each class are subject to any preferential rights of any outstanding preferred
stock. Dividends consisting of shares of Cognizant class A common stock and
class B common stock may be paid only as follows: (i) shares of Cognizant class
A common stock may be paid only to holders of Cognizant class A common stock and
shares of Cognizant class B common stock may be paid only to holders of
Cognizant class B common stock and (ii) shares shall be paid proportionally with
respect to each outstanding share of Cognizant class A common stock and class B
common stock.
CONVERSION OF CLASS B COMMON STOCK
Shares of Cognizant class B common stock will automatically convert into an
equal number of shares of class A common stock at certain times after the
exchange offer. The Cognizant class A common stock received by stockholders upon
conversion will be listed for quotation on the Nasdaq National Market and will
be freely transferable, subject to generally applicable restrictions on sales by
"affiliates" of Cognizant under the Securities Act. The Cognizant class A
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common stock will have only one vote per share. See "Risk Factors -- The special
voting rights associated with Cognizant class B common stock may cease at any
time" and "Risk Factors -- Special voting rights associated with Cognizant class
B common stock will not be transferable" on page 19.
At all times after the exchange offer Cognizant will reserve and keep
available, out of its authorized but unissued common stock, the number of shares
of Cognizant class A common stock as would become issuable upon the conversion
of all shares of Cognizant class B common stock then outstanding. Cognizant will
not reissue or resell any shares of Cognizant class B common stock that have
been converted.
CONVERSION OF CLASS B COMMON STOCK UPON TRANSFER BY HOLDERS
Each share of Cognizant class B common stock will convert automatically
into one share of Cognizant class A common stock when it is first transferred
after the exchange offer.
AUTOMATIC CONVERSION OF CLASS B COMMON STOCK
All outstanding shares of class B common stock will convert automatically
into an equal number of shares of class A common stock on the fifth anniversary
of the closing of the exchange offer or earlier if, at any time the number of
outstanding shares of class B common stock cease to represent at least 35% of
the aggregate number of outstanding shares of Cognizant common stock.
Cognizant will provide notice of any automatic conversion of all shares of
class B common stock to holders of record prior to or as soon as practicable
after the conversion. Immediately upon conversion, the rights of the holders of
class B common stock as such shall cease and such holders shall be treated for
all purposes as having become the owners of an equal number of shares of class A
common stock issuable upon such conversion. Dividends declared but unpaid at the
time of conversion will be payable to the holders of record of the converted
class B common stock.
PREFERRED STOCK
Cognizant's certificate of incorporation authorizes the issuance of
preferred stock with such designations, rights and preferences as may be
determined from time to time by its Board of Directors. Accordingly, Cognizant's
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividends, liquidation, voting or other rights that could
adversely affect the voting power or other rights of the holders of Cognizant
common stock. Pursuant to the Intercompany Agreement, IMS Health's consent would
be required to issue any preferred stock prior to the completion of the exchange
offer. In the event preferred stock is issued, it could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of Cognizant. No shares of preferred stock are issued or outstanding and
Cognizant has no present plans to issue any shares of preferred stock. However,
Cognizant expects to designate a new series of preferred stock in connection
with the stockholders' rights plan which is described below and which is
expected to be adopted by Cognizant's board of directors in connection with the
consummation of the exchange offer.
CERTAIN PROVISIONS OF DELAWARE LAW
Under Section 203 of the DGCL, a corporation is generally restricted from
engaging in a business combination with an interested stockholder for a
three-year period following the time the stockholder became an interested
stockholder. An interested stockholder is defined as a stockholder who, together
with its affiliates or associates, owns, or who is an affiliate or associate of
the corporation and within the prior three-year period did own, 15% or more in
voting power of the corporation's outstanding voting stock. This restriction
applies unless,
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- prior to the time the stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- the interested stockholder owned at least 85% of the voting stock of the
corporation, excluding specified shares, upon completion of the
transaction which resulted in the stockholder becoming an interested
stockholder; or
- at or subsequent to the time the stockholder became an interested
stockholder, the business combination was approved by the board of
directors of the corporation and authorized by the affirmative vote, at
an annual or special meeting, and not by written consent, of at least
66 2/3% of the outstanding voting shares of the corporation, excluding
shares held by that interested stockholder.
A business combination generally includes:
- mergers, consolidations and sales or other dispositions of 10% or more of
the assets of a corporation to or with an interested stockholder;
- transactions resulting in the issuance or transfer to an interested
stockholder of any capital stock of the corporation or its subsidiaries,
subject to certain exceptions;
- transactions having the effect of increasing the proportionate share of
the interested stockholder in the capital stock of the corporation or its
subsidiaries, subject to certain exceptions; and
- other transactions resulting in a disproportionate financial benefit to
an interested stockholder.
This makes a takeover of a company more difficult and may have the effect
of diminishing the possibility of certain types of two-step acquisitions of a
company or other unsolicited attempts to acquire a company. This may further
have the effect of preventing changes in the Board of Directors of a company and
it is possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests. See "Risk Factors -- Provisions in Cognizant's charter and by-laws,
the proposed adoption of a stockholders' rights plan and provisions under
Delaware law may discourage unsolicited takeover proposals" on page 29.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Cognizant's certificate of incorporation and by-laws provide that the
liability of the directors for monetary damages shall be limited to the fullest
extent permissible under Delaware law. This limitation of liability does not
affect the availability of injunctive relief or other equitable remedies.
Cognizant's by-laws provide that Cognizant will indemnify its directors and
officers to the fullest extent permissible under Delaware law. These
indemnification provisions require Cognizant to indemnify these persons against
certain liabilities and expenses to which they may become subject by reason of
their service as a director or officer of Cognizant or any of its affiliated
enterprises. In addition, Cognizant has indemnification agreements covering its
directors and executive officers providing indemnification to the fullest extent
permitted by applicable law and also setting forth certain procedures, including
the advancement of expenses, that apply in the event of a claim for
indemnification.
AMENDMENTS TO COGNIZANT'S CERTIFICATE OF INCORPORATION
In connection with the exchange offer, IMS Health has executed a written
consent in lieu of a special stockholders meeting to approve amendments to
Cognizant's certificate of incorporation that will include the provisions
described below and will become effective following consummation of the exchange
offer. Following completion of the exchange offer, Cognizant's certificate of
incorporation and by-laws will be amended and restated to include the provisions
described below. For complete information, you should read the full text of the
new restated certificate of
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incorporation, filed with the SEC as an exhibit to the registration statement of
which this offering circular-prospectus forms a part.
Cognizant's board of directors also expects to adopt a stockholders' rights
plan prior to the expiration of the exchange offer. Please refer to "Description
of Capital Stock of Cognizant-- Stockholders' Rights Plan" on page 92 herein.
EFFECTS OF THE AMENDMENTS
The exchange offer may make it easier for a single person or group of
related persons to gain control over Cognizant. Because IMS Health currently
holds approximately 55% of Cognizant's outstanding common stock, constituting
approximately 93% of the combined voting power of Cognizant's common stock, it
is impossible at present that a person other than IMS Health would gain control
of Cognizant without IMS Health's consent. Following the exchange offer,
however, the new holders of Cognizant's common stock will have the ability to
elect Cognizant's entire board of directors. Accordingly, a person or group of
related persons could gain control of Cognizant by acquiring a majority of the
outstanding common stock, or the votes represented by those shares. In addition,
the control position that IMS Health has in matters voted on by Cognizant
stockholders will be eliminated as a result of the exchange offer.
Eliminating IMS Health as holder of approximately 55% of Cognizant's
outstanding common stock, constituting approximately 93% of the combined voting
power of Cognizant's common stock, as a result of the exchange offer will also
increase Cognizant's vulnerability to an unsolicited takeover proposal. The
charter amendments, together with the by-law amendments and Cognizant's
anticipated stockholders' rights plan will make it more difficult for a
potential acquiror of Cognizant to take advantage of Cognizant's new capital
structure in acquiring Cognizant by means of a transaction that is not
negotiated with Cognizant's board of directors.
CLASSIFIED BOARD
Cognizant's certificate of incorporation will be amended to provide for a
classified board of directors, also known as a staggered board. The board of
directors, other than those directors who may be elected by the holders of
Cognizant's preferred stock, will be divided into three classes of directors
effective as of the first annual meeting of stockholders following the
completion of the exchange offer.
Cognizant's directors will be elected to three separate classes at
Cognizant's next annual meeting, as follows:
- two "Class I Directors" will be elected at Cognizant's next annual
meeting to serve for a term expiring at the first annual meeting of
stockholders to be held following that meeting;
- two "Class II Directors" will be elected at Cognizant's next annual
meeting to serve for a term expiring at the second annual meeting of
stockholders to be held following that meeting; and
- two "Class III Directors" will be elected at Cognizant's next annual
meeting to serve for a term expiring at the third annual meeting of
stockholders to be held following that meeting.
At each annual meeting following Cognizant's next annual meeting, only
directors of the class whose term is expiring that year will be required to
stand for election, and upon election each director will serve a three-year
term. Any newly created directorship that results from an increase in the number
of directors and any vacancy occurring in the board of directors can be filled
only by a majority of the directors then in office. No change may have the
effect of removing any director from office. Upon any change in the authorized
number of directors, the total number of directors will be allocated as evenly
as possible among the three classes, provided that the term of office may not be
shortened for any incumbent director. Any director elected to fill a vacancy not
resulting from an increase in the number of directors will have the same
remaining term as that of his or her predecessor. Any director elected to fill a
newly
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created directorship resulting from an increase in the size of any class will
have the same remaining term as the other directors of that class.
Cognizant's certificate of incorporation will provide that directors can be
removed only by the affirmative vote of at least 80% in voting power of all
outstanding shares of Cognizant common stock entitled to vote generally in the
election of directors. In addition, following Cognizant's next annual meeting
and the implementation of the classified board of directors, directors may be
removed only for cause.
BOARD SIZE
Cognizant's certificate of incorporation will be amended to provide that
the number of Cognizant's directors will be not less than three and that the
exact number of directors will be fixed from time to time by a majority of
Cognizant's board of directors. The board of directors has set the number of
directors at six, effective following consummation of the exchange offer.
STOCKHOLDERS MAY NOT ACT BY WRITTEN CONSENT
Unless otherwise provided in a company's certificate of incorporation,
Delaware law permits any action required or permitted to be taken by
stockholders of a company at a meeting to be taken without notice, without a
meeting and without a stockholder vote if a written consent setting forth the
action to be taken is signed by the holders of shares of outstanding stock
having the requisite number of votes that would be necessary to authorize the
action at a meeting of stockholders at which all shares entitled to vote were
present and voted. Upon consummation of the exchange offer, Cognizant's amended
and restated certificate of incorporation and amended by-laws will require that
stockholder action be taken only at an annual or special meeting of
stockholders, and will prohibit stockholder action by written consent.
STOCKHOLDERS MAY NOT CALL A SPECIAL MEETING
Under Cognizant's current by-laws, a special meeting of stockholders may be
called by the president of Cognizant or by Cognizant's board of directors and is
required to be called by the president at the written request of a majority of
the shares of common stock issued and outstanding and entitled to vote.
Following consummation of the exchange offer, Cognizant's certificate of
incorporation will be amended, and conforming changes will be made to
Cognizant's by-laws, to prohibit stockholders from calling a special meeting, to
provide that a special meeting of the stockholders may be called by the chief
executive officer of Cognizant or Cognizant's board of directors, and to require
that business transacted at any special meeting be limited to the purpose stated
in the notice of the meeting.
SUPERMAJORITY APPROVAL REQUIREMENTS
Currently, in addition to approval by Cognizant's board of directors, the
approval of the holders of a majority in voting power of Cognizant's outstanding
shares of stock entitled to vote is required to amend any provision of
Cognizant's certificate of incorporation. Delaware law permits a company to
include provisions in its certificate of incorporation that require a greater
vote than the vote otherwise required by law for any corporate action. Upon
completion of the exchange offer, Cognizant's certificate of incorporation will
be amended to require the affirmative vote of the holders of at least 80% in
voting power of the outstanding shares of Cognizant entitled to vote generally
in the election of directors, voting together as a single class, to amend,
alter, change, add to or repeal specified provisions of Cognizant's certificate
of incorporation and any provision of the by-laws. The provisions in Cognizant's
certificate of incorporation affected by this amendment are:
- the provisions concerning the classified board, the size of the board and
the filling of board vacancies and newly created directorships;
- the provision concerning the inability of Cognizant's stockholders to
call special meetings;
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- the provision concerning the inability of Cognizant's stockholders to act
by written consent; and
- the provisions concerning the ability of Cognizant's stockholders to
amend, alter, change, add to or repeal the foregoing provisions of the
certificate of incorporation or the by-laws.
This supermajority voting requirement may discourage or deter a person from
attempting to obtain control of Cognizant by making it more difficult to amend
Cognizant's by-laws, whether to eliminate provisions that have an anti-takeover
effect or those that protect the interests of minority stockholders. This
supermajority voting amendment permits a minority of Cognizant's shareholders to
block an attempt by its stockholders to amend or repeal its by-laws.
CONVERSION OF CLASS B COMMON STOCK TO COGNIZANT CLASS A COMMON STOCK
Cognizant's existing certificate of incorporation provides that upon the
completion of the exchange offer each share of class B common stock will
automatically convert into one share of class A common stock immediately prior
to the first transfer of the share. Cognizant's certificate of incorporation
will be amended to specify that a transfer will be deemed to occur upon any
change in the beneficial owner of the share. In addition, Cognizant's board of
directors will be authorized to determine in good faith, based on information it
deems appropriate, whether a transfer has occurred and whether at any time the
outstanding shares of Cognizant class B common stock represent less than 35% of
the economic ownership represented by the aggregate number of shares of common
stock then outstanding, which would result in the automatic conversion of all
outstanding shares of Cognizant class B common stock into class A common stock.
Cognizant's class B common stock certificates that will be distributed in
the exchange offer will include the following legend:
According to the Restated Certificate of Incorporation of Cognizant
Technology Solutions Corporation, the shares of Class B Common Stock
represented by this certificate will be automatically converted into shares
of Class A Common Stock upon any transfer of such shares of Class B Common
Stock. Consequently, no purported transferee of any shares of Class B
Common Stock is entitled to own or to be registered as the record holder of
such shares of Class B Common Stock but instead shall be entitled to own
and be registered as the record holder of a like number of shares of Class
A Common Stock. Each holder of this certificate, by accepting the same,
accepts and agrees to all of the foregoing.
AMENDMENTS TO COGNIZANT'S BY-LAWS
In connection with the exchange offer, Cognizant's board of directors has
also approved amendments to Cognizant's by-laws, to become effective following
completion of the exchange offer. For complete information, we refer you to the
full text of the form of amended and restated Cognizant by-laws, filed with the
SEC as an exhibit to the registration statement of which this offering
circular-prospectus forms a part.
Cognizant's amended by-laws will require that, at any annual or special
meeting of stockholders, the only nominations of persons for election to the
board of directors and proposals of business to be considered will be the
nominations made or proposals of business brought before the meeting:
- pursuant to Cognizant's notice of meeting;
- by or at the direction of the board of directors; and
- by a stockholder of Cognizant who was a stockholder of record of
Cognizant at the time of the delivery of the notice provided for in the
by-laws, who is entitled to vote at the meeting and who complies with the
notice procedures set forth in the by-laws.
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These amendments may preclude nominations or the conduct of business by
stockholders at a particular stockholders meeting if the proper procedures are
not followed, and may discourage or deter a third party from attempting to
obtain control of Cognizant, even if this attempt might be viewed as beneficial
to Cognizant by its stockholders.
STOCKHOLDERS' RIGHTS PLAN
In connection with the completion of the exchange offer, Cognizant's board
of directors expects to adopt a stockholders' rights plan. The stockholders'
rights plan will not require stockholder approval.
The stockholders' rights plan is expected to provide that holders of
Cognizant's outstanding class A or class B common stock will receive, in the
form of a dividend, a right to purchase 1/1000 of a share of a newly created
series of preferred stock, which will be the economic equivalent of one share of
Cognizant's common stock. The rights would become exercisable on the earlier of:
(1) the tenth day following the public announcement that a person or group has
acquired beneficial ownership of 15% or more of Cognizant's total voting power
represented by the class A common stock and class B common stock or (2) the
tenth business day (or such later date as may be determined by Cognizant's board
of directors) following the commencement or announcement of an intention to make
a tender offer or exchange offer pursuant to which a person would acquire more
than 15% of Cognizant's voting power. The rights would be redeemable at a price
of $.01 per right, by the vote of Cognizant's board of directors, at any time
prior to the time a person acquires more than 15% of the voting power. If any
person were to do so, each holder of a right (other than rights held by the
acquiring person, which would become void) would receive, upon exercise of the
right at the then-current exercise price, shares of Cognizant's common stock
having a market value on that date of twice the exercise price of the right,
commonly referred to as a "flip-in right." If the flip-in right were exercised,
the acquiring person's voting and economic interest in Cognizant would be
dramatically diluted by the issuance by Cognizant of large numbers of its shares
of common stock to its current stockholders other than the acquiring person at a
reduced price. If, after any person acquired shares of Cognizant's outstanding
common stock representing more than 15% of the voting power, Cognizant were
acquired in a business consolidation or 50% or more of its assets or earning
power were sold, each holder of a right (other than rights held by the acquiring
person, which would become void) would receive, upon exercise of the right at
the then-current exercise price, shares of the acquiror having a market value on
that date of twice the exercise price of the right, commonly referred to as a
"flip-over right." This would cause significant dilution to the acquiror's
existing shareholders.
Any person owning in excess of 15% of Cognizant's voting power on the date
of the adoption of the plan or as a result of the exchange offer would not
trigger these rights so long as that person does not acquire additional shares.
LISTING
Cognizant class A common stock is listed for quotation on the Nasdaq
National Market under the trading symbol "CTSH." Cognizant class B common stock
is not listed or quoted on any exchange or in the Nasdaq National Market and
will not trade separately, but after the exchange will generally be freely
transferable as described above.
TRANSFER AGENT AND REGISTRAR
The transfer agent for Cognizant's common stock is American Stock Transfer
& Trust Company.
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF
IMS HEALTH AND STOCKHOLDERS OF COGNIZANT
Upon completion of the exchange offer, IMS Health stockholders who exchange
their shares of IMS Health common stock for shares of Cognizant class B common
stock will become stockholders of Cognizant. These holders' rights will continue
to be governed by Delaware law and will be governed by Cognizant's certificate
of incorporation and bylaws as amended. Because each of us and Cognizant is
organized under the laws of Delaware, differences in the rights of a Cognizant
stockholder from those of an IMS Health stockholder arise principally from
differences in our and Cognizant's certificate of incorporation and by-laws.
As discussed in "Description of Capital Stock of Cognizant -- Amendments to
Cognizant's Certificate of Incorporation" beginning on page 88 hereof,
Cognizant's certificate of incorporation and by-laws will be amended and
restated following completion of the exchange offer. The following is a summary
of the material differences between our and Cognizant's certificates of
incorporation and by-laws, including those changes that will become effective
following the completion of the exchange offer. The summary is not a complete
statement of the rights of stockholders of the two companies or a complete
description of the specific provisions referred to below. The summary is
qualified in its entirety by reference to the governing corporate instruments of
IMS Health and Cognizant, in each case as will be in effect following the
consummation of the exchange offer, which you should read. Copies of the
governing corporate instruments of us and Cognizant to be in effect following
the completion of the exchange offer have been filed with the SEC. To find out
where you can get copies of these documents, see "Where You Can Find More
Information."
IMS HEALTH COGNIZANT
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AUTHORIZED CAPITAL
Common Stock
800,000,000 shares of common stock, $.01 par 100,000,000 shares of class A common stock,
value per share, of which 281,397,726 shares $.01 par value per share, of which 8,744,650
were issued and outstanding as of September shares were issued and outstanding as of
30, 2002. 10,000,000 shares of series common September 30, 2002. 25,000,000 shares of
stock, $.01 par value per share, none of class B common stock, $.01 par value per
which were issued and outstanding as of share, of which 11,290,900 shares were
September 30, 2002. issued and outstanding as of September 30,
2002.
Each share of class B common stock shall
convert automatically into one share of
class A common stock when it is first
transferred after consummation of the
exchange offer. All shares of class B common
stock shall automatically convert into an
equal number of class A common stock (i) on
the fifth anniversary of this exchange offer
or (ii) if at any time the outstanding
shares of class B common stock cease to
represent at least 35% of the aggregate
number of shares of common stock then
outstanding.
Preferred Stock
10,000,000 shares of preferred stock, $.01 15,000,000 shares of preferred stock, $.10
par value, none of which were issued and par value per share, none of which were
outstanding as of September 30, 2002. issued and outstanding as of December 31,
2002.
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IMS HEALTH COGNIZANT
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VOTING
One vote for each share of common stock held One vote for each share of class A common
of record on all matters submitted to a vote stock, ten votes for each share of class B
of the stockholders. common stock, in each case held of record on
all matters submitted to a vote of the
stockholders.
Any amendments to the certificate of
incorporation that would adversely affect
the rights of either the class A or class B
common stock also require a majority vote of
the affected class.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Any action required or permitted to be taken Any action required or permitted to be taken
by the holders of IMS Health's common stock by the holders of Cognizant's common stock
must be effected at a duly called special or must be effected at a duly called special or
annual meeting of the stockholders and may annual meeting of the stockholders and may
not be effected by any consent in writing of not be effected by any consent in writing of
the stockholders. the stockholders.
BOARD OF DIRECTORS
Number
9 members currently; must always be at least 8 members currently, 6 members upon
3 directors; number of directors may be consummation of the exchange offer; must
changed from time to time by a resolution of always be at least 3 directors; number of
the board of directors. directors may be changed from time to time
by a resolution of the board of directors. 2
directors who are IMS Health employees will
resign upon completion of the exchange
offer.
Election of Directors
Board of directors is classified with a Board of directors is classified with a
three-tier structure. One-third of the three-tier structure. One-third of the
directors are elected each year for a directors will be elected each year for a
three-year term. three-year term. See "Description of Capital
Stock of Cognizant -- Amendments to
Cognizant's Certificate of
Incorporation -- Classified Board."
Removal of Directors
Directors can be removed only for cause, and Directors can only be removed by the
only by the affirmative vote of at least 80% affirmative vote of at least 80% in voting
in voting power of all shares entitled to power of all shares entitled to vote in the
vote in the election of directors, voting as election of directors, voting as a single
a single class. class. In addition, following the election
of the Cognizant board of directors at
Cognizant's 2003 annual meeting of
stockholders, directors can be removed only
for cause.
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IMS HEALTH COGNIZANT
---------- ---------
SPECIAL STOCKHOLDER MEETINGS
May be held upon call of the board of May be held upon the call of the board of
directors or by the chief executive officer. directors or by the chief executive officer.
The purpose or purposes of the proposed The purpose or purposes of the proposed
meeting shall be included in the notice meeting shall be included in the notice
setting forth such call. setting forth such call.
AMENDMENTS TO CHARTER
The vote of at least 80% in voting power of The vote of at least 80% in voting power of
all the shares entitled to vote in the all the shares entitled to vote in the
election of directors, voting as a single election of directors will be required to
class, is required to alter, amend or repeal alter, amend or repeal provisions of the
provisions of the charter relating to by-law charter relating to by- law amendments, the
amendments, the classified board of classified board of directors, the inability
directors, the inability of the stockholders of the stockholders to act by written
to act by written consent or to call special consent or to call special meetings and the
meetings and this supermajority voting supermajority voting requirement, voting as
requirement. a single class.
AMENDMENTS TO BY-LAWS
By-laws may be amended by the board of By-laws may be amended by the board of
directors or holders of a majority of the directors or by holders of at least 80% in
voting power of IMS Health, except that the voting power of all the shares entitled to
vote of the holders of at least 80% in vote in the election of directors, voting as
voting power of all the shares entitled to a single class.
vote in the election of directors, voting as
a single class, shall be required to alter,
amend or repeal provisions of the by-laws
related to the ability of stockholders to
call special meetings, the ability of
stockholders to act by written consent, the
classified board of directors and the
super-majority voting requirements.
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CERTAIN RELATIONSHIPS BETWEEN IMS HEALTH AND COGNIZANT
The following is a summary of the terms of the agreements in place between
IMS Health and Cognizant. For complete information, you should read the full
text of these agreements, which have been filed with the SEC as exhibits to the
registration statement of which this offering circular-prospectus forms a part.
To find out where you can get copies of these documents, see "Where You Can Find
More Information."
EXISTING INTERCOMPANY AGREEMENTS
In May of 1998, IMS Health's and Cognizant's predecessor entered into a
number of agreements in contemplation of Cognizant's initial public offering. We
have assumed rights and obligations under two of those agreements, the
Intercompany Services Agreement and the Intercompany Agreement. We are also
party to a Master Services Agreement with Cognizant. The material terms of these
agreements are summarized below. Because Cognizant was controlled by our
predecessor at the time these agreements were executed, none of these agreements
resulted from arms-length negotiations and, therefore, the terms of these
agreements may be more or less favorable to Cognizant than those obtainable from
unaffiliated third parties.
INTERCOMPANY SERVICES AGREEMENT
Pursuant to the Intercompany Services Agreement, IMS Health currently
provides Cognizant with certain administrative services, including payroll and
payables processing and permits Cognizant to participate in IMS Health's
business insurance plans. In addition, two of Cognizant's officers participate
in IMS Health's employee benefit plans and four of Cognizant's officers hold IMS
stock options. In the past, IMS Health provided certain other services such as
tax planning and compliance, which were transitioned to Cognizant in December
2001. IMS Health and Cognizant plan to enter into an amended and restated
Intercompany Services Agreement following consummation of the exchange offer,
which will provide for the continued provision of payroll, payables processing
and certain other administrative services for a term of up to one year and at
prices to be agreed between us and Cognizant.
INTERCOMPANY AGREEMENT
The Intercompany Agreement provides us with certain rights until we and our
affiliates cease to control at least 50% of the combined voting power of the
outstanding voting stock of Cognizant, including the right to approve certain
corporate decisions of Cognizant. These rights will terminate upon the
consummation of the exchange offer.
We also have the right under the Intercompany Agreement to require
Cognizant to file a registration statement in connection with subsequent
dispositions by us from time to time of our Cognizant shares. We have the right
to request up to two registrations of this type in each calendar year, but not
more than six in any five-year period. Cognizant may postpone such a demand
under certain circumstances for up to 90 days. In addition, if Cognizant files a
registration statement on its own behalf or on behalf of another stockholder in
respect of Cognizant common stock, we will have the right to include shares of
common stock held by us, subject to certain limitations. The Intercompany
Agreement provides that Cognizant will pay all costs and expenses in connection
with each such registration, except underwriting discounts and commissions
applicable to the shares of common stock sold by us. The Intercompany Agreement
contains customary terms and provisions with respect to, among other things,
registration procedures and indemnification obligations. We delivered a request
for registration of our Cognizant shares to Cognizant in connection with the
exchange offer on November 14, 2002. Our registration rights will survive the
consummation of the exchange offer and, if we hold common stock of Cognizant
after the exchange offer, we may rely on our registration rights from time to
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time to dispose of any Cognizant class B common stock not exchanged and
converted by us into Cognizant class A common stock as described in the section
of this document entitled "Questions and Answers About the Exchange Offer."
The Intercompany Agreement also contains mutual promises by us and
Cognizant concerning indemnification for liabilities relating to our respective
businesses. We have agreed to indemnify Cognizant and its subsidiaries,
officers, directors, employees and agents against certain liabilities relating
to the conduct of our business; and Cognizant has agreed to indemnify us and our
subsidiaries, officers, directors, employees and agents against certain
liabilities relating to the conduct of Cognizant's business. The indemnification
provisions of the Intercompany Agreement also will survive the consummation of
the exchange offer.
MASTER SERVICES AGREEMENT
Cognizant and IMS Health have entered into a Master Services Agreement
pursuant to which Cognizant provides software development and maintenance
services to IMS Health. The software development and maintenance services are
provided to IMS Health on terms that are comparable to those provided to
unrelated third parties. Cognizant also provides similar services on comparable
terms to other former affiliates of ours and Cognizant including Dun &
Bradstreet Corporation and Nielsen Media Research, Inc. Any work order issued
pursuant to the Master Services Agreement may be terminated by us with or
without cause on 30 days prior written notice. For 2002, Cognizant expects to
recognize related party revenues totaling $21 million, or 9% of Cognizant's
total revenues, for services performed for IMS Health. In 2001, Cognizant
recognized related party revenues totaling $18.8 million for services performed
for IMS Health under the Master Services Agreement. In 2000, Cognizant
recognized related party revenues totaling $14.3 million including revenues from
IMS Health and Synavant through August 30, 2000. In 1999, Cognizant recognized
related party revenues totaling $14.8 million including revenues from IMS Health
and Synavant.
DISTRIBUTION AGREEMENT
We have entered into a Distribution Agreement with Cognizant, the terms of
which have been approved by a special committee of the board of directors of
Cognizant, which is comprised of Cognizant's independent directors. The
Distribution Agreement sets forth certain rights and obligations of IMS Health
and Cognizant in respect of the exchange offer in addition to those provided in
the Intercompany Agreement. For a more complete description of the terms of the
Distribution Agreement, we urge you to read the entire Distribution Agreement,
which has been filed with the SEC as an exhibit to the registration statement of
which this offering circular-prospectus forms a part.
AGREEMENTS RELATING TO THE DISTRIBUTION
Director Resignations. We have agreed to cause David M. Thomas and Nancy
E. Cooper to resign as of the consummation of the exchange offer from their
positions as directors of Cognizant and from any boards of directors of
Cognizant's subsidiaries on which they serve.
Indemnification. The parties have agreed to indemnification provisions in
respect of the respective disclosure in the exchange offer documents, the
conduct of the exchange offer and any failure to perform the Distribution
Agreement.
Joint and Several Undertakings. IMS Health has requested, as a condition
to the distribution of Cognizant shares in the exchange offer, that Cognizant
agree to undertake to be jointly and severally liable to certain of our prior
affiliates for liabilities arising out of or in connection with our business and
the businesses of Cognizant and other successors to the businesses of Cognizant
Corporation in accordance with the terms of the Distribution Agreement dated as
of October 28, 1996 among Cognizant Corporation, which has been renamed Nielsen
Media
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Research, Inc., The Dun & Bradstreet Corporation, which has been renamed the
R.H. Donnelly Corporation and ACNielsen Corporation and related agreements. In
addition, IMS Health is obligated to procure similar undertakings from Cognizant
to Nielsen Media Research and Synavant Inc. with respect to liabilities
allocated to IMS Health in connection with the Distribution Agreement, dated as
of June 30, 1998 between Nielsen Media Research, Inc. and IMS Health and related
agreements and the Distribution Agreement, dated as of August 31, 2000, between
IMS Health and Synavant Inc. Cognizant has agreed to deliver these undertakings.
However, subject to the general allocation of liabilities arising from the
respective businesses of IMS Health and Cognizant, we have agreed to indemnify
and reimburse Cognizant for liabilities incurred with respect to these
undertakings.
Commercial Arrangements. We agreed to enter into an amended and restated
intercompany services agreement to be effective as of the consummation of the
exchange offer, as described in "Certain Relationships Between IMS Health and
Cognizant -- Intercompany Services Agreement" on page 96. We also agreed to the
continuation of certain commercial relationships with Cognizant for a period of
at least three years on terms and conditions to be mutually agreed.
Conversion of Retained Shares. We have agreed that if we would otherwise
continue to hold Cognizant class B common stock after the consummation of the
exchange offer, we would either distribute such Cognizant class B common stock
to our stockholders at or prior to the consummation of the exchange offer or
convert such shares into Cognizant class A common stock prior to the
consummation of the exchange offer and hold them or distribute them to our
stockholders.
Voting of Retained Shares. If we own Cognizant shares after the exchange
offer, we have agreed that, in all matters requiring a vote of the holders of
Cognizant common stock, we will vote such shares in proportion to the votes cast
affirmatively or negatively by all other holders of Cognizant common stock
voting.
Restrictions on Disposition of Retained Shares. If we hold Cognizant
shares after the exchange offer, we have agreed not to transfer such shares
until 90 days after consummation of the exchange offer, except in the case of a
pro rata distribution to our stockholders. After the initial 90-day period, we
may sell any retained Cognizant shares only:
- in a public offering pursuant to our registration rights under the
Intercompany Agreement;
- in sales on the NASDAQ National Market in an amount in any day not in
excess of 25% of the average daily trading volume of Cognizant shares for
the immediately preceding four weeks;
- in a transaction in which we and Cognizant agree in good faith would not
reasonably be expected to have an adverse impact on the trading prices of
Cognizant shares; and
- to institutional investors who agree in writing not to sell, transfer or
otherwise dispose of, or issue any derivative security with respect to,
such shares until at least the later of 30 days from the date of their
acquisition or the one year anniversary of the consummation of the
exchange offer.
Right of First Offer. If we own 5% or more of the outstanding Cognizant
common stock after the exchange offer, we have agreed to give Cognizant a right
of first offer during the two-year period following consummation of the exchange
offer before we attempt to transfer 5% or more of the outstanding shares of
Cognizant common stock to an entity or group, subject to certain exceptions.
Insurance. The Distribution Agreement includes provisions governing the
administration of certain insurance programs and procedures for making claims
and it also allocates the right to proceeds and the allocation of deductibles
under these programs.
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Expenses. We and Cognizant have agreed to modify the provisions of the
Intercompany Agreement relating to the fees and expenses arising as the result
of our exercise of our registration rights so that we, rather than Cognizant,
are responsible for the fees and expenses of our own legal counsel and certain
other agreed fees and expenses.
TAX MATTERS
The Distribution Agreement provides that IMS Health and Cognizant will
comply with, and not take any action during the relevant time period that is
inconsistent with, the representations made to and relied upon by McDermott,
Will & Emery in connection with rendering its opinion regarding the U.S. federal
income tax consequences of the exchange offer.
In addition, under Section 355(e) of the Internal Revenue Code, the
exchange offer will be taxable to IMS Health if the exchange offer is part of a
plan or series of related transactions pursuant to which one or more persons
acquire directly or indirectly stock representing a 50% or greater interest,
based on either vote or value, in IMS Health or Cognizant. If we become subject
to tax under Section 355(e) of the Code, our tax liability will be based upon
the difference between the fair market value of the Cognizant class B common
stock at the time of the exchange offer and our adjusted basis in the Cognizant
class B common stock at that time. This tax liability could be a material
amount.
If a breach by Cognizant of the representations made by it to McDermott,
Will & Emery in connection with its tax opinion or the covenants in the
distribution agreement is the "but for" cause of the exchange offer either
failing to qualify as a tax-free distribution under Section 355(a) of the Code
or becoming taxable to us under Section 355(e) of the Code, then Cognizant has
agreed to indemnify us and each member of the consolidated group of which we are
a member from and against any liability, including any taxes, interest or
penalties or additions to tax, that is imposed upon us or any member of our
consolidated group as a result of the exchange offer becoming taxable under
Section 355 of the Code. Cognizant will be entitled to rely upon certain
representations made by us to McDermott, Will & Emery in connection with its tax
opinion. In the event any of these representations are not true, correct or
complete, Cognizant will not be obligated to indemnify us or the members of our
consolidated group against any liability arising under Section 355 of the Code
if Cognizant's breach of a representation would not have resulted in this type
of liability had all of IMS Health's representations made in connection with
McDermott, Will & Emery's tax opinion been true, complete and correct.
As a result of the representations made to McDermott, Will & Emery in
connection with its tax opinion and the covenants in the Distribution Agreement,
the acquisition of control of Cognizant during the two-year period following the
exchange offer may be more difficult or less likely to occur because of the
potential indemnification liability associated with a breach of these
representations or covenants. In addition, Cognizant's ability to undertake
acquisitions and other transactions may be substantially restricted during the
two-year period following the exchange offer.
TERMINATION
We may terminate the Distribution Agreement upon notice to Cognizant prior
to the consummation of the exchange offer.
OTHER RELATIONSHIPS AND TRANSACTIONS
Cognizant has a strategic business relationship with The TriZetto Group
Inc. that includes helping its healthcare customers integrate TriZetto's
products with their existing information systems and, within TriZetto,
supporting further development of these software applications. As of September
30, 2002, IMS Health owned approximately 26% of the outstanding common stock
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of TriZetto. During the three- and nine-month periods ended September 30, 2002,
Cognizant recorded revenues from TriZetto of approximately $1,199,000 and
$1,302,000, respectively, and expenses related to TriZetto commissions of
approximately $123,000 and $456,000 for the three-and nine-month periods ended
September 30, 2002, respectively. During the three- and nine-month periods ended
September 30, 2001, Cognizant recorded revenues from TriZetto of approximately
$401,000 and expenses related to TriZetto commissions of approximately $0 and
$793,000 for the three- and nine-month periods ended September 30, 2001,
respectively.
In December 2001, Cognizant paid IMS Health a one-time fee of approximately
$825,000 under an alliance agreement in which Cognizant was named "vendor of
choice" for IT services to the pharmaceutical industry. This agreement was
negotiated between the parties on an arms-length basis.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences to IMS Health stockholders as a result of the exchange offer and
the substantially simultaneous distribution, if any, to the IMS Health
stockholders of any Cognizant class B common stock that we would otherwise
continue to own after completion of the exchange offer. For purposes of this
summary, the exchange offer and any substantially simultaneous distribution are
referred to collectively as the "exchange offer." The summary is based on the
Internal Revenue Code, the Treasury regulations promulgated thereunder, and
interpretations of the Internal Revenue Code and Treasury regulations by the
courts and the IRS, all as they exist as of the date of this document. This
summary does not discuss all tax considerations that may be relevant to IMS
Health stockholders in light of their particular circumstances, nor does it
address the consequences to IMS Health stockholders subject to special treatment
under the U.S. federal income tax laws, such as tax-exempt entities,
non-resident alien individuals, foreign entities, foreign trusts and estates and
beneficiaries thereof, persons who acquire such shares of IMS Health common
stock pursuant to the exercise of employee stock options or otherwise as
compensation, insurance companies, and dealers in securities. In addition, this
summary does not address the U.S. federal income tax consequences to IMS Health
stockholders who do not hold their shares of IMS Health common stock as capital
assets. This summary does not address any state, local or foreign tax
consequences. IMS Health stockholders are urged to consult their tax advisors as
to the particular tax consequences to them of the exchange offer.
TAX OPINION -- U.S. FEDERAL INCOME TAX CONSEQUENCES
We have received a tax opinion from McDermott, Will & Emery stating that,
for U.S. federal income tax purposes, the exchange offer should qualify under
Section 355 of the Code as a distribution that is tax-free to IMS Health
stockholders, except with respect to any cash received in lieu of fractional
shares of Cognizant class B common stock and that the exchange offer should be
tax-free to IMS Health. Section 355 of the Code is highly technical and complex,
and many aspects of the statute have not yet been addressed by judicial
decisions, Treasury regulations, or other administrative guidance. In
particular, there is uncertainty with respect to the tax treatment of the
exchange offer to IMS Health under Section 355(e) of the Code due to the absence
of controlling legal authorities addressing certain factual aspects of the
exchange offer, including the automatic conversion of Cognizant class B common
stock into Cognizant class A common stock. The opinion of McDermott, Will &
Emery represents their best interpretation of the legal requirements of Section
355 of the Code as applied to the exchange offer. No ruling from the IRS has
been or will be sought with respect to any of the tax matters relating to the
exchange offer and the opinion will not be binding on the IRS. Accordingly, we
cannot assure you that the IRS will agree with the conclusions set forth in the
tax opinion of McDermott, Will & Emery, and it is possible that the IRS or
another tax authority could adopt a position contrary to one or all of those
conclusions and that a court could sustain that contrary position.
We will not be able to rely on the tax opinion if any factual
representations made to counsel are incorrect or untrue in any material respect
or any undertakings made to counsel are not complied with. Neither we nor
Cognizant are aware of any facts or circumstances that would cause any such
representations to be incorrect or untrue in any material respect. If we
complete the exchange offer and it is held to be taxable for U.S. federal income
tax purposes, we and our stockholders that receive shares of Cognizant class B
common stock could be subject to material amounts of taxes as a result of the
exchange offer. Neither we nor Cognizant will indemnify any individual
stockholder for any taxes that may be incurred in connection with the exchange
offer.
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The tax opinion provides that for U.S. federal income tax purposes:
- the distribution of the Cognizant class B common stock by IMS Health
pursuant to the exchange offer should be tax free to IMS Health;
- no gain or loss should be recognized by, and no amount should be required
to be included in the income of, the IMS Health stockholders upon their
receipt of shares of Cognizant class B common stock in the exchange
offer, except to the extent of cash received in lieu of fractional shares
of Cognizant class B common stock;
- for those IMS Health stockholders that surrender all of their shares of
IMS Health common stock for Cognizant class B common stock, the aggregate
tax basis of the shares of Cognizant class B common stock held by the IMS
Health stockholders after the exchange offer, including any fractional
share interests with respect to which cash is received as described
below, should be the same as the aggregate tax basis of the shares of IMS
Health common stock exchanged in the exchange offer;
- for those IMS Health stockholders that do not surrender all of their
shares of IMS Health common stock in the exchange offer, each such
stockholder's aggregate tax basis in the shares of IMS Health common
stock held before the completion of the exchange offer should be
allocated between the shares of IMS Health common stock and shares of
Cognizant class B common stock, including any fractional share interests
with respect to which cash is received as described below, held by such
stockholder after the exchange offer in proportion to their relative fair
market values;
- the holding period of the shares of Cognizant class B common stock
received by the IMS Health stockholders in the exchange offer, including
any fractional share interests with respect to which cash is received, as
described below, should include the period during which such stockholder
held the IMS Health stock, provided that the IMS Health stock is held as
a capital asset by such stockholder on the date the exchange offer is
completed; and
- if a stockholder of IMS Health receives cash as the result of an
independent exchange agent sale of a fractional share of Cognizant class
B common stock on behalf of the stockholder, the stockholder should
recognize gain or loss in an amount equal to the difference between the
tax basis allocable to such fractional share interest and the amount of
cash received.
The opinion does not specifically address tax basis issues with respect to
holders of shares of IMS Health common stock who own blocks of shares of IMS
Health common stock with different per share tax bases. These holders are urged
to consult their tax advisors regarding the possible tax basis consequences to
them of the exchange offer.
The Treasury regulations require each IMS Health stockholder that receives
shares of Cognizant class B common stock in the exchange offer to attach to the
holder's U.S. federal income tax return for the year in which the stock is
received a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 of the Code to the exchange
offer. Within a reasonable time after the exchange offer, IMS Health will
provide IMS Health stockholders who participated in the exchange offer with the
information necessary to comply with such requirement, and will provide
information regarding the allocation of tax basis as described above.
If, contrary to the opinion of McDermott, Will & Emery, the exchange offer
does not qualify as a tax-free distribution under Section 355 of the Code, the
exchange would be a taxable transaction for U.S. federal income tax purposes.
Accordingly, an exchanging IMS Health stockholder would, depending on the
stockholder's particular circumstances, be treated either as having sold IMS
Health shares in exchange for Cognizant class B common stock or as having
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received a distribution on IMS Health stock. The following is a discussion of
the U.S. federal income tax consequences to stockholders if the exchange offer
does not qualify as a tax-free distribution:
Under Section 302 of the Code, an IMS Health stockholder whose IMS Health
stock is exchanged in the exchange offer would be treated as having sold IMS
Health stock in exchange for Cognizant class B common stock, and thus would
recognize capital gain or loss, if the exchange:
- results in a "complete termination" of the stockholder's equity interest
in IMS Health;
- results in a "substantially disproportionate" redemption with respect to
the stockholder; or
- is "not essentially equivalent to a dividend" with respect to the
stockholder.
Each of these tests, referred to as the "Section 302 tests," is explained
in more detail below.
If a stockholder satisfies any of the Section 302 tests explained below,
the stockholder would recognize capital gain or loss equal to the difference
between the (i) sum of the value of the Cognizant class B common stock and the
amount of any cash in lieu of fractional shares received in the exchange offer
and (ii) the stockholder's adjusted tax basis in the IMS Health stock
surrendered in exchange therefor. This gain or loss would be long-term capital
gain or loss if the stockholder's holding period for the IMS Health stock
exchanged exceeded one year as of the date of acquisition of the IMS Health
stock by IMS Health in the exchange offer. Limitations may apply to a
stockholder's ability to deduct capital losses.
If a stockholder does not satisfy any of the Section 302 tests explained
below, the stockholder's exchange of IMS Health stock for Cognizant class B
common stock would not be treated as a sale or exchange under Section 302 of the
Code. Instead, the Cognizant class B common stock received by the stockholder in
the exchange offer (including any fractional share interest deemed received and
sold for cash) would be treated as a dividend distribution under Section 301 of
the Code on the stockholder's remaining IMS Health stock, taxable at ordinary
income tax rates, to the extent of the stockholder's share of the current and
accumulated earnings and profits (within the meaning of the Code) of IMS Health.
To the extent the amount exceeds the stockholder's share of the current and
accumulated earnings and profits of IMS Health, the excess first would be
treated as a tax-free return of capital to the extent, generally, of the
stockholder's adjusted tax basis in its IMS Health stock and any remainder would
be treated as capital gain (which may be long-term capital gain as described
above). To the extent that an exchange of IMS Health stock in the exchange offer
is treated as a dividend, the stockholder's adjusted tax basis in the IMS Health
stock exchanged would be added to any IMS Health stock retained by the
stockholder.
In applying each of the Section 302 tests explained below, IMS Health
stockholders would have to take into account not only IMS Health stock that they
actually own but also stock they are treated as owning under the constructive
ownership rules of Section 318 of the Code. Under the constructive ownership
rules, a stockholder is treated as owning any shares that are owned (actually
and in some cases constructively) by certain related individuals and entities as
well as shares that the stockholder has the right to acquire by exercise of an
option.
Section 302 Tests. One of the following tests would have to be satisfied
for the exchange of IMS Health stock in the exchange offer to be treated as a
sale or exchange for U.S. federal income tax purposes:
- Complete Termination Test. The exchange of a stockholder's shares in the
exchange offer would result in a "complete termination" of the
stockholder's equity interest in IMS Health if (i) the stockholder
disposes of all of the IMS Health stock that the stockholder actually
owns either in the exchange offer for Cognizant class B common stock or
otherwise, and (ii) after the exchange offer is completed, the
stockholder does not constructively own
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any IMS Health stock, or, with respect to IMS Health stock owned by
certain related individuals, the stockholder effectively waives, in
accordance with Section 302(c) of the Code, attribution of shares which
otherwise would be considered as constructively owned by the stockholder.
- Substantially Disproportionate Test. The exchange of IMS Health stock
for Cognizant class B common stock in the exchange offer would result in
a "substantially disproportionate" redemption if, among other things, the
percentage of the then outstanding shares actually and constructively
owned by the stockholder immediately after the exchange is less than 80%
of the percentage of the shares actually and constructively owned by the
stockholder immediately before the exchange (treating as outstanding all
IMS Health stock acquired by IMS Heath in the exchange offer).
- Not Essentially Equivalent to a Dividend Test. The exchange of IMS
Health stock for Cognizant class B common stock in the exchange offer
would be treated as "not essentially equivalent to a dividend" if the
reduction in the stockholder's proportionate interest in IMS Health as a
result of the exchange constitutes a "meaningful reduction" of the
stockholder's interest in IMS Health given the stockholder's particular
circumstances. The Internal Revenue Service has indicated in a published
revenue ruling that even a small reduction in the percentage interest of
a stockholder whose relative stock interest in a publicly held
corporation is minimal (for example, an interest of less than 1%) and who
exercises no control over corporate affairs should constitute a
"meaningful reduction" of that stockholder's interest.
If, contrary to the opinion of McDermott, Will & Emery, the transaction is
taxable to IMS Health, IMS Health would be treated as if it had sold the
Cognizant class B stock that it exchanged for the value of that stock, which
would result in a material amount of tax because IMS Health's basis in that
stock is not significant.
IMS Health stockholders are urged to consult their tax advisors as to the
particular tax consequences to them of the exchange offer, including the
application of state, local and foreign tax laws and any changes in federal tax
laws that occur after the date of this document.
LEGAL MATTERS
The validity of the shares of Cognizant class B common stock offered hereby
will be passed upon by Simpson Thacher & Bartlett, counsel to Cognizant. Certain
legal matters with respect to the U.S. federal income tax consequences to IMS
Health stockholders with respect to the exchange offer will be passed upon by
McDermott, Will & Emery, tax counsel to IMS Health.
EXPERTS
The IMS Health consolidated financial statements incorporated in this
document by reference to the Annual Report on Form 10-K for the year ended
December 31, 2001 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The Cognizant consolidated financial statements as of December 31, 2001 and
2000 and for each of the three years in the period ended December 31, 2001
included in this document have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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WHERE YOU CAN FIND MORE INFORMATION
We and Cognizant file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by either company at the SEC's
public reference room at 450 5th Street NW, Washington DC 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms. In
addition, the SEC maintains an Internet site that contains reports, proxy
statements and other information regarding registrants that file electronically,
such as us and Cognizant. The address of the SEC's Internet site is
http://www.sec.gov.
Cognizant has filed a registration statement on Form S-4 under the
Securities Act, of which this document forms a part, to register the shares of
Cognizant class B common stock offered in the exchange offer. We will file a
Schedule TO Issuer Tender Offer Statement with the SEC with respect to the
exchange offer. This offering circular-prospectus, and the related letter of
transmittal, constitute our offer to exchange. This document does not contain
all the information set forth in the registration statement or in the Schedule
TO, selected portions of which are omitted in accordance with the rules and
regulations of the SEC. For further information pertaining to us, the shares of
IMS Health common stock, Cognizant and the shares of Cognizant common stock,
reference is made to the registration statement and its exhibits.
Statements contained in this document or in any document incorporated in
this document by reference as to the contents of any contract or other document
referred to within this document or other documents that are incorporated by
reference are not necessarily complete and, in each instance, reference is made
to the copy of the applicable contract or other document filed as an exhibit to
the registration statement or otherwise filed with the SEC. Each statement
contained in this document is qualified in its entirety by reference to the
underlying documents.
The following documents that we and Cognizant have filed with the SEC are
incorporated into this document by reference:
- IMS Health's
- Annual Report on Form 10-K for the year ended December 31, 2001, filed
on March 21, 2002;
- Quarterly Report on Form 10-Q for the first quarter ended March 31,
2002, filed on May 9, 2002;
- Quarterly Report on Form 10-Q for the second quarter ended June 30,
2002, filed on August 12, 2002;
- Quarterly Report on Form 10-Q for the third quarter ended September
30, 2002, filed on November 14, 2002;
- Current Report on Form 8-K filed August 12, 2002;
- Current Report on Form 8-K filed January 16, 2003;
- Current Report on Form 8-K filed January 23, 2003; and
- Proxy Statement on Schedule 14A, dated March 28, 2002.
- Cognizant's
- Annual Report on Form 10-K for the year ended December 31, 2001, filed
on March 11, 2002; and
- Quarterly Report on Form 10-Q for the first quarter ended March 31,
2002, filed on May 13, 2002;
- Quarterly Report on Form 10-Q for the second quarter ended June 30,
2002, filed on August 8, 2002;
- Quarterly Report on Form 10-Q for the third quarter ended September
30, 2002, filed on November 14, 2002;
105
- Current Report on Form 8-K filed April 16, 2002;
- Current Report on Form 8-K filed October 31, 2002;
- Current Report on Form 8-K filed January 6, 2003; and
- Proxy Statement on Schedule 14A, dated April 26, 2002.
Disclosures regarding us and Cognizant contained in this document supersede
the corresponding disclosure contained in the documents listed above which are
incorporated by reference.
In addition, we and Cognizant also incorporate by reference additional
documents we or Cognizant file with the SEC between the date of this document
and the date the exchange offer expires or terminates. These documents may
include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements.
IMS Health has supplied all information contained in this document relating
to IMS Health and Cognizant has supplied all information contained in this
document relating to Cognizant.
Documents incorporated by reference are available from IMS Health or
Cognizant without charge, excluding any exhibits to those documents unless the
exhibits are specifically incorporated into this document by reference. Requests
for these documents should be directed to us or Cognizant, as the case may be,
at the following addresses and telephone numbers:
IMS Health Incorporated Cognizant Technology Solutions Corporation
1499 Post Road 500 Glen Pointe Center West
Fairfield, Connecticut 06824 Teaneck, New Jersey 07666
Attn: Investor Relations Department Attn: Investor Relations Department
Telephone: (203) 319-4700 Telephone: (201) 801-0233
You will not be charged for any of these documents that you request. If you
request any documents incorporated by reference herein from IMS Health or
Cognizant, the documents will be mailed to you by first class mail, or another
equally prompt means, within one business day after your request is received.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE REQUESTED DOCUMENTS, REQUESTS
SHOULD BE MADE BY JANUARY 30, 2003. In the event that we extend the exchange
offer, you must submit your request at least five business days before the
expiration date, as extended.
106
INDEX TO COGNIZANT CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Consolidated Financial Statements:
Report of Independent Accountants......................... F-2
Consolidated Statements of Financial Position as of
December 31, 2001 and 2000............................. F-3
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statement Schedule:
Schedule of Valuation and Qualifying Accounts............. F-22
Unaudited Condensed Consolidated Statements:
Condensed Consolidated Statements of Income and
Comprehensive Income (Unaudited) for the Three Months
and Nine Months Ended September 30, 2002 and 2001...... F-23
Condensed Consolidated Statements of Financial Position
(Unaudited) as of September 30, 2002 and December 31,
2001................................................... F-24
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended September 30,
2002 and 2001.......................................... F-25
Notes to Unaudited Condensed Consolidated Financial
Statements............................................. F-26
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cognizant Technology Solutions Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and stockholders'
equity listed in the accompanying index on page F-1 present fairly, in all
material respects, the financial position of Cognizant Technology Solutions
Corporation and its subsidiaries at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 4, 2002
F-2
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT PAR VALUES)
AT DECEMBER 31,
--------------------
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................... $ 84,977 $ 61,976
Trade accounts receivable, net of allowances of $882 and
$516, respectively........................................ 21,063 19,187
Trade accounts receivable -- related party.................. 1,481 1,361
Unbilled accounts receivable................................ 5,005 1,941
Unbilled accounts receivable -- related party............... 417 --
Other current assets........................................ 4,392 3,758
-------- --------
Total current assets................................... 117,335 88,223
-------- --------
Property and equipment, net of accumulated depreciation of
$16,805 and $10,997, respectively......................... 24,339 15,937
Goodwill, net............................................... 878 1,195
Investment.................................................. -- 1,955
Other assets................................................ 2,431 2,230
-------- --------
Total assets........................................... $144,983 $109,540
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 3,652 $ 2,849
Accounts payable-related party.............................. -- 8
Accrued expenses and other liabilities...................... 18,046 23,865
-------- --------
Total current liabilities.............................. 21,698 26,722
Deferred income taxes....................................... 24,493 16,702
-------- --------
Total liabilities...................................... 46,191 43,424
-------- --------
Commitments and contingencies (See Notes 11 and 12 to the
Consolidated Financial Statements)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares authorized,
none issued............................................... -- --
Class A common stock, $.01 par value, 100,000 shares
authorized, 8,065 and 7,362 shares issued and outstanding
at December 31, 2001 and 2000, respectively............... 80 73
Class B common stock, $.01 par value, 25,000 shares
authorized, 11,290 shares issued and outstanding at
December 31, 2001 and 2000, respectively.................. 113 113
Additional paid-in capital.................................. 39,711 29,094
Retained earnings........................................... 59,046 36,886
Cumulative translation adjustment........................... (158) (50)
-------- --------
Total stockholders' equity............................. 98,792 66,116
-------- --------
Total liabilities and stockholders' equity............. $144,983 $109,540
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----
Revenues.................................................. $158,969 $122,758 $74,084
Revenues-related party.................................... 18,809 14,273 14,820
-------- -------- -------
Total revenues....................................... 177,778 137,031 88,904
Cost of revenues.......................................... 90,848 70,437 46,161
-------- -------- -------
Gross profit.............................................. 86,930 66,594 42,743
Selling, general and administrative expenses.............. 44,942 35,959 23,061
Depreciation and amortization expense..................... 6,368 4,507 3,037
-------- -------- -------
Income from operations.................................... 35,620 26,128 16,645
Other(expense) income:
Interest income........................................... 2,501 2,649 1,263
Impairment loss on investment............................. (1,955) -- --
Other (expense) income, net............................... (767) (530) 37
-------- -------- -------
Total other (expense) income......................... (221) 2,119 1,300
-------- -------- -------
Income before provision for income taxes.................. 35,399 28,247 17,945
Provision for income taxes................................ (13,239) (10,564) (6,711)
-------- -------- -------
Net income................................................ $ 22,160 $ 17,683 $11,234
======== ======== =======
Net income per share, Basic............................... $ 1.17 $ 0.95 $ 0.61
======== ======== =======
Net income per share, Diluted............................. $ 1.09 $ 0.87 $ 0.58
======== ======== =======
Weighted average number of common shares outstanding --
Basic................................................... 19,017 18,565 18,342
Dilutive effect of shares issuable as of period-end under
stock option plans...................................... 1,354 1,691 1,074
-------- -------- -------
Weighted average number of common shares -- Diluted....... 20,371 20,256 19,416
-------- -------- -------
Comprehensive Income:
Net income.............................................. $ 22,160 $ 17,683 $11,234
Foreign currency translation adjustment................. (108) (41) 2
-------- -------- -------
Total comprehensive income................................ $ 22,052 $ 17,642 $11,236
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B
COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE
--------------- --------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------ ------ ---------- -------- ----------- -----
(IN THOUSANDS)
Balance, December 31,
1998.................... 7,010 $70 11,290 $113 $24,475 $ 7,969 $ (11) $32,616
===== === ====== ==== ======= ======= ===== =======
Translation Adjustment.... -- -- -- -- -- -- 2 2
Exercise of Stock
Options................. 192 2 -- -- 549 -- -- 551
Tax Benefit related to
Option Exercises........ -- -- -- -- 886 -- -- 886
Compensatory Grant........ -- -- -- -- 340 -- -- 340
Less Prior year
charge................ -- -- -- -- (122) -- -- (122)
Less Unearned portion... -- -- -- -- (46) -- -- (46)
Net income................ -- -- -- -- -- 11,234 -- 11,234
----- --- ------ ---- ------- ------- ----- -------
Balance, December 31,
1999.................... 7,202 72 11,290 113 26,082 19,203 (9) 45,461
===== === ====== ==== ======= ======= ===== =======
Translation Adjustment.... -- -- -- -- -- -- (41) (41)
Exercise of Stock
Options................. 129 1 -- -- 782 -- -- 783
Tax Benefit related to
Option Exercises........ -- -- -- -- 1,258 -- -- 1,258
Employee Stock Purchase
Plan.................... 32 -- -- -- 937 -- -- 937
Compensatory Grant........ -- -- -- -- 340 -- -- 340
Less Prior year
charges............... -- -- -- -- (294) -- -- (294)
Less Unearned portion... -- -- -- -- (11) -- -- (11)
Net Income................ -- -- -- -- -- 17,683 -- 17,683
----- --- ------ ---- ------- ------- ----- -------
Balance, December 31,
2000.................... 7,363 73 11,290 113 29,094 36,886 (50) 66,116
===== === ====== ==== ======= ======= ===== =======
Translation Adjustment.... -- -- -- -- -- -- (108) (108)
Exercise of Stock
Options................. 665 7 -- -- 5,131 -- -- 5,138
Tax Benefit related to
Stock Plans............. -- -- -- -- 4,633 -- -- 4,633
Employee Stock Purchase
Plan.................... 37 -- -- -- 842 -- -- 842
Compensatory Grant........ -- -- -- -- 340 -- -- 340
Less Prior year
charges............... -- -- -- -- (329) -- -- (329)
Net Income................ -- -- -- -- -- 22,160 -- 22,160
----- --- ------ ---- ------- ------- ----- -------
Balance, December 31,
2001.................... 8,065 $80 11,290 $113 $39,711 $59,046 $(158) $98,792
===== === ====== ==== ======= ======= ===== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 22,160 $ 17,683 $11,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 6,367 4,507 3,037
Provision/(reduction) for doubtful accounts............. 1,837 572 (31)
Deferred income taxes................................... 7,791 6,341 4,258
Impairment loss on investment........................... 1,955 -- --
Tax benefit related to option exercises................. 4,633 1,258 886
Changes in assets and liabilities:
Trade accounts receivable................................. (3,833) (10,825) 1,068
Other current assets...................................... (4,115) (1,924) (1,143)
Other assets.............................................. 300 (902) (116)
Accounts payable.......................................... 803 1,414 (309)
Accrued and other liabilities............................. (5,819) 12,096 562
-------- -------- -------
Net cash provided by operating activities................. 32,079 30,220 19,446
-------- -------- -------
Cash flows used in investing activities:
Purchase of property and equipment........................ (14,953) (10,652) (5,924)
Investment................................................ -- (1,955) --
-------- -------- -------
Net cash used in investing activities..................... (14,953) (12,607) (5,924)
Cash flows from financing activities:
Proceeds from stock plans/compensatory grant.............. 5,991 1,755 723
(Payments to) proceeds from related party................. (8) 8 (24)
-------- -------- -------
Net cash provided by financing activities................. 5,983 1,763 699
Effect of currency translation............................ (108) (41) 2
Increase in cash and cash equivalents..................... 23,001 19,335 14,223
Cash and cash equivalents, at beginning of year........... 61,976 42,641 28,418
-------- -------- -------
Cash and cash equivalents, at end of year................. $ 84,977 $ 61,976 $42,641
======== ======== =======
Supplemental information:
Cash paid for income taxes during the year................ $ 3,797 $ 1,186 $ 2,546
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
Cognizant Technology Solutions Corporation (the "Company" or "CTS") is
principally engaged in providing high-quality, cost-effective, full life cycle
solutions to complex software development and maintenance requirements that
companies face as they transition to e-business. The Company has operations and
subsidiaries in India, the United Kingdom, Germany, Canada and the United
States. These IT services are delivered through the use of a seamless on-site
and offshore consulting project team. These solutions include application
development and integration, application management, and re-engineering
services.
The Company began its software development and maintenance services
business in early 1994 as an in-house technology development center for The Dun
& Bradstreet Corporation ("D&B") and its operating units. These operating units
principally included A.C.Nielsen, Dun & Bradstreet Information Services, Dun &
Bradstreet Software, Erisco, Inc. ("Erisco"), IMS International, Inc. ("IMS
International"), NCH Promotional Services, Inc., Nielsen Media Research, Inc.
("Nielsen Media Research"), The Reuben H. Donnelley Corporation, Pilot Software,
Inc. ("Pilot Software") and Strategic Technologies, Inc. ("Strategic
Technologies"), and a majority interest in Gartner Group, Inc. ("Gartner
Group"). In November 1996, the Company, Erisco, IMS International, Nielsen Media
Research, Pilot Software, Strategic Technologies and certain other entities,
plus a majority interest in Gartner Group, were spun-off from D&B to form
Cognizant, the then majority owner and controlling parent of the Company. At
that time, ACNielsen was separately spun-off from D&B and Dun & Bradstreet
Software was sold to GEAC Software. In 1997, Cognizant sold Pilot Software to a
third party.
In 1997, the Company purchased the 24.0% minority interest in its Indian
subsidiary from a third party for $3,468 making the Indian subsidiary wholly
owned by the Company.
On January 15, 1998, Cognizant announced that it would, subject to certain
conditions, reorganize itself (the "Reorganization"), by spinning the Nielsen
Media Research business from the rest of its businesses, creating two publicly
traded companies, IMS Health Corporation ("IMS Health") and Nielsen Media
Research. The reorganization became effective on July 1, 1998. The shares of the
Company previously held by Cognizant are now held by IMS Health and all services
previously provided to the Company by Cognizant are now being provided by IMS
Health.
In June 1998, the Company completed its IPO. (See Note 3 to the
Consolidated Financial Statements.) As of December 31, 2001, IMS Health owned a
majority and controlling interest in the outstanding Common Stock of the Company
(58.3%) and held approximately 93.3% 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 and permits the Company to
participate in IMS Health's business insurance plans. In prior periods, IMS
Health provided certain other services such as tax planning and compliance,
which have now been transitioned to the Company. Certain employees also
participate in IMS Health's 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 and charged
to the Company under the CTS/IMS Health intercompany services agreement. (See
also Note 10 to the Consolidated Financial Statements.)
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
of Class A and Class B Common Stock effected by a 100% dividend payable on March
16, 2000 to stockholders
F-7
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of record on March 2, 2000. The stock split has been reflected in the
accompanying financial statements, and all applicable references to the number
of outstanding common shares and per share information has been restated.
Appropriate adjustments have been made in the exercise price and number of
shares subject to stock options. Stockholders' equity account 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements reflect
the consolidated financial position, results of operations and cash flows of the
Company and its consolidated subsidiaries as if it were a separate entity for
all periods presented. All intercompany transactions are eliminated.
Cash and Cash Equivalents. Cash and cash equivalents primarily include
time and demand deposits in the Company's operating bank accounts. The Company
considers all highly liquid instruments with an initial maturity of three months
or less to be cash equivalents.
Investments. Investments in business entities in which the Company does
not have control or the ability to exercise significant influence over the
operating and financial policies are accounted for under the cost method.
Investments are evaluated, at each balance sheet date, for impairment.
Property and Equipment. Property and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated on the straight-line basis
over the estimated useful lives of the assets. Leasehold improvements are
amortized on a straight-line basis over the shorter of the term of the lease or
the estimated useful life of the improvement. Maintenance and repairs are
expensed as incurred, while renewals and betterments are capitalized.
Purchased Software. Purchased software that is intended for internal use
is capitalized, including the salaries and benefits of employees that are
directly involved in the installation of such software. The capitalized costs
are amortized on a straight-line method over the lesser of three years or its
useful life.
Goodwill. Goodwill represents the excess of the purchase price of the
former minority interest in the Company's Indian subsidiary over the fair values
of amounts assigned to the incremental net assets acquired. Amortization expense
has been recorded using the straight-line method over a period of seven years.
Amortization expense was $317 for each of the years ended December 31, 2001,
2000 and 1999. Accumulated amortization was $1,345, $1,028 and $711 at December
31, 2001, 2000 and 1999, respectively. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets"
("FAS 142"), the Company will no longer amortize its remaining goodwill balance
for years beginning after December 31, 2001.
Impairment of Long-Lived Assets. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
reviews for impairment of long-lived assets and certain identifiable intangibles
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In general, the Company will recognize an
impairment loss when the sum of undiscounted expected future cash flows is less
than the carrying amount of such assets. The measurement for such an impairment
loss is then based on the fair value of the asset.
F-8
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition. The Company's services are entered into on either a
time-and-materials or fixed-price basis. Revenues related to time-and-material
contracts are recognized as the service is performed. Revenues related to
fixed-price contracts are recognized as the service is performed using the
percentage-of-completion method of accounting, under which the sales value of
performance, including estimated earnings thereon, is recognized on the basis of
the percentage that each contract's cost to date bears to the total estimated
cost. Fixed price contracts are cancellable subject to a specified notice
period. All services provided by the Company through the date of cancellation
are due and payable under the contract terms.
The Company issues invoices related to fixed price contracts based upon
achievement of milestones during a project or other contractual terms.
Differences between the timing of billings, based upon contract milestones or
other contractual terms, and the recognition of revenue, based upon the
percentage-of-completion method of accounting, are recognized as either unbilled
or deferred revenue. Estimates are subject to adjustment as a project progresses
to reflect changes in expected completion costs. The cumulative impact of any
revision in estimates is reflected in the financial reporting period in which
the change in estimate becomes known and any anticipated losses on contracts are
recognized immediately. A reserve for warranty provisions under such contracts,
which generally exist for ninety days past contract completion, is estimated and
accrued during the contract period.
Unbilled Accounts Receivable. Unbilled accounts receivable represent
revenues on contracts to be billed, in subsequent periods, as per the terms of
the contracts.
Foreign Currency Translation. The assets and liabilities of the Company's
Canadian and European subsidiaries are translated into U.S. dollars from local
currencies at current exchange rates and revenues and expenses are translated
from local currencies at average monthly exchange rates. The resulting
translation adjustments are recorded in a separate component of stockholders'
equity. For the Company's Indian subsidiary ("CTS India"), 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 CTS
India 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. The resulting gain (loss) is included
in other income.
Risks and Uncertainties. The preparation of financial statements in
accordance with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including the recoverability of tangible and
intangible assets, disclosure of contingent assets and liabilities as of the
date of the financial statements, and the reported amounts of revenues and
expenses during the reported period. The most significant estimates relate to
the allowance for doubtful accounts, reserve for warranties, reserves for
employee benefits, depreciation of fixed assets and long-lived assets,
contingencies and litigation and the recognition of revenue and profits based on
the percentage of completion method of accounting for fixed bid contracts.
Actual results could vary from the estimates and assumptions used in the
preparation of the accompanying financial statements.
All of the Company's software development centers, including a substantial
majority of its employees are located in India. As a result, the Company may be
subject to certain risks associated with international operations, including
risks associated with foreign currency exchange rate fluctuations and risks
associated with the application and imposition of protective legislation and
regulations relating to import and export or otherwise resulting from foreign
policy or the variability of foreign economic conditions. To date, the Company
has not engaged in any
F-9
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
significant hedging transactions to mitigate its risks relating to exchange rate
fluctuations. Additional risks associated with international operations include
difficulties in enforcing intellectual property rights, the burdens of complying
with a wide variety of foreign laws, potentially adverse tax consequences,
tariffs, quotas and other barriers.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
primarily of cash and cash equivalents and trade accounts receivable. The
Company maintains its cash investments with high credit quality financial
institutions in investment-grade, short term debt securities and limits the
amount of credit exposure to any one commercial issuer.
Income Taxes. Prior to the consummation of the Company's IPO, the Company
had been included in the federal and certain state income tax returns of
Cognizant and D&B. The provision for income taxes in the Company's consolidated
financial statements has been calculated on a separate company basis. Income tax
benefits realized by the Company and utilized by Cognizant or D&B are included
in stockholders' equity. The Company is no longer included in the consolidated
return of its majority owner and controlling parent company, and is required to
file separate income tax returns.
On a stand-alone basis, the Company provides for income taxes utilizing the
asset and liability method of accounting for income taxes. Under this method,
deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each balance sheet date, based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. If it is determined that it is more
likely than not that future tax benefits associated with a deferred tax asset
will not be realized, a valuation allowance is provided. The effect on deferred
tax assets and liabilities of a change in the tax rates is recognized in income
in the period that includes the enactment date.
CTS India is an export oriented company that is entitled to claim a tax
holiday for a period of nine years from April 1995 through March 2004 in respect
to its export profits. Under the Indian Income Tax Act of 1961, substantially
all of the earnings of the Company's Indian subsidiary are currently exempt from
Indian Income Tax as profits are attributable to export operations. However,
since management currently intends to repatriate all accumulated earnings from
India to the United States, the Company has provided deferred U.S. income taxes
on all such Indian undistributed earnings. Deferred U.S. income taxes on
unremitted earnings from other foreign entities have not been provided for as it
is the Company's intent to reinvest such earnings. Such income taxes are
immaterial.
Net Income per Share. Basic earnings per share ("EPS") excludes dilution
and is computed by dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
includes all dilutive potential common stock in the weighted average shares
outstanding. (See Note 8 to the Consolidated Financial Statements)
Stock-Based Compensation. With respect to stock options granted to
employees, SFAS No. 123 "Accounting for Stock-Based Compensation" permits
companies to continue using the accounting method promulgated by the Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees," to measure compensation or to adopt the fair value based method
prescribed by SFAS No. 123. Management has decided to continue to use the
provisions of APB 25 and not to adopt SFAS No. 123's accounting provisions, but
has included the required pro forma disclosures.
F-10
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassifications. Certain prior-year amounts have been reclassified to
conform with the 2001 presentation.
Recently Issued Accounting Standards. In June 2001, Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("FAS 141") and Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("FAS 142") were issued. FAS 141 requires the purchase method of accounting to
be used for all business combinations initiated after June 30, 2001. FAS 141
also specifies criteria that intangible assets acquired must meet to be
recognized and reported separately from goodwill. The Company does not
anticipate that adoption of FAS 141 will have any material effect on the
Company's financial position or results of operations. FAS 142 requires that
goodwill and intangible assets with indefinite lives no longer be amortized but
instead be measured for impairment at least annually, or when events indicate
that there may be an impairment. FAS 142 is effective for fiscal years beginning
after December 15, 2001. The adoption of FAS 142 in the first quarter of 2002
will not have a material effect on the Company's financial position or results
of operations.
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("FAS 143") was issued. FAS 143
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and the associated retirement
costs that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an increase in the carrying amount
of the related long-lived asset. The asset retirement cost is subsequently
allocated to expense using a systematic and rational method over the assets
useful life. FAS 143 is effective for fiscal years beginning after June 15,
2002. The adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.
In August 2001, Statement of Financial Standards No. 144, "Accounting for
the Impairment or Disposal of Long-lived Assets" ("FAS 144") was issued. FAS 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets to be Disposed of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently occurring Events and Transactions." FAS
144 also amends ARB ("Accounting Research Bulletins") No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. FAS 144 retains the
fundamental provisions of FAS 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while resolving significant implementation issues associated with FAS
121. Among other things, FAS 144 provides guidance on how long-lived assets used
as part of a group should be evaluated for impairment, establishes criteria for
when long-lived assets are held for sale, and prescribes the accounting for
long-lived assets that will be disposed of other than by sale. FAS 144 is
effective for fiscal years beginning after December 15, 2001. The Company does
not anticipate, that adoption of FAS 144 will have a material impact on the
Company's financial position and results of operations.
3. INITIAL PUBLIC OFFERING
On June 24, 1998, the Company consummated its Initial Public Offering
("IPO") of 5,834,000 shares of its Common Stock at a price of $5.00 per share
(on a post-split basis), 5,000,000 of which were issued and sold by the Company
and 834,000 of which were sold by Cognizant Corporation ("Cognizant"), the
Company's then majority owner and controlling parent
F-11
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
company. The net proceeds to the Company from the IPO were approximately $22,407
after $843 of direct expenses. In July 1998, IMS Health (the accounting
successor to Cognizant) sold 875,000 shares of Class B Common Stock, which were
converted to Class A Common Stock pursuant to an over allotment option granted
to the underwriters of the IPO. Of the total net proceeds received by the
Company upon the consummation of its IPO, approximately $6,637 was used to repay
the related party balance then owed to Cognizant. The related party balance
resulted from certain advances to the Company from Cognizant used to purchase
the minority interest of the Company's Indian subsidiary and to fund payroll and
accounts payable. Concurrent with the IPO, the Company reclassified the amounts
in mandatorily redeemable common stock to stockholders' equity as the redemption
feature was voided. (See Note 8 to the Consolidated Financial Statements.)
4. SUPPLEMENTAL FINANCIAL DATA
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
ESTIMATED DECEMBER 31,
USEFUL LIFE --------------------
(YEARS) 2001 2000
----------- ---- ----
Buildings........................................ 40 $ 3,930 $ 1,544
Computer equipment and purchased software........ 3 27,160 18,106
Furniture and equipment.......................... 5 - 9 1,958 1,753
Land............................................. 1,678 1,580
Leasehold improvements........................... Various 6,418 3,951
------- -------- --------
Sub-total........................................ 41,144 26,934
Accumulated depreciation and amortization........ (16,805) (10,997)
-------- --------
Property and Equipment -- Net.................... $ 24,339 $ 15,937
======== ========
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
------------------
2001 2000
---- ----
Accrued compensation and benefits........................... $ 7,676 $10,581
Deferred revenue............................................ 2,696 2,199
Accrued vacation............................................ 2,465 1,873
Accrued travel and entertainment............................ 1,705 2,398
Accrued income taxes........................................ 0 1,446
Other....................................................... 3,504 5,368
------- -------
$18,046 $23,865
======= =======
5. 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 $1,955 in Questra Corporation, an e-business software and
consulting firm headquartered in Rochester, New York, in return for a
F-12
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Company reviews for impairment certain assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Questra Corporation recently issued Preferred B shares in
exchange for $19 million of new venture capital financing. Since the Company did
not participate, it's ownership interest in Preferred A shares was reduced from
5.8% to 2.1%. Based on the implied fair value of Questra, as measured by the
latest round of financing, and considering the preferential liquidation rights
that the Preferred B shareholders received, the Company has concluded that it
will not recover its investment in Questra and has recorded an impairment loss
of $1,955 to recognize the other than temporary decline in value of its
investment.
6. EMPLOYEE BENEFITS
Beginning in 1997, certain U.S. employees of the Company were eligible to
participate in Cognizant's and now IMS Health's 401(k) plan. The Company matches
up to 50.0% of the eligible employee's contribution. The amount charged to
expense for the Company's matching contribution was $0, $31 and $49 for the
years ended December 31, 2001, 2000 and 1999, respectively. In 2000, the Company
established a 401(k) plan, which certain U.S. employees of the Company became
eligible to participate in. The Company matches up to 50.0% of the eligible
employee's contribution. The amount charged to expense for the matching
contribution was $351 and $195 for the years ended December 31, 2001 and 2000,
respectively.
Certain of the Company's employees participate in IMS Health's defined
benefit pension plan and a defined contribution plan in the United Kingdom
sponsored by the Company. The costs to the Company recognized as postretirement
benefit costs and related liabilities were not material to the Company's results
of operations or financial position for the years presented. (See Note 10 to the
Consolidated Financial Statements.)
CTS India maintains an employee benefit plan that covers substantially all
India-based employees. The employees' provident fund, pension and family pension
plans are statutory defined contribution retirement benefit plans. Under the
plans, employees contribute up to twelve percent of their base compensation,
which is matched by an equal contribution by CTS India. Contribution expense
recognized was $790, $501 and $338 for the years ended December 31, 2001, 2000
and 1999, respectively.
CTS India also maintains a statutory gratuity plan that is a statutory
postemployment benefit plan providing defined lump sum benefits. CTS India makes
annual contributions to an employees' gratuity fund established with a
government-owned insurance corporation to fund a portion of the estimated
obligation. The Company estimates its obligation based upon employees' salary
and years of service. Expense recognized by the Company was $902, $511,and $358
for the years ended December 31, 2001, 2000 and 1999, respectively.
F-13
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Income (loss) before provision for income taxes consisted of the following
for years ended December 31:
2001 2000 1999
---- ---- ----
U.S................................................. $ 7,236 $ 7,469 $ 7,553
Non-U.S............................................. 28,163 20,778 10,392
------- ------- -------
Total............................................... $35,399 $28,247 $17,945
======= ======= =======
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
2001 2000 1999
---- ---- ----
U.S. Federal and state:
Current............................................ $ 2,986 $ 3,276 $3,079
Deferred........................................... 8,620 6,409 3,354
------- ------- ------
Total U.S. Federal and state....................... 11,606 9,685 6,433
------- ------- ------
Non-U.S.:
Current............................................ 1,466 961 315
Deferred........................................... 167 (82) (37)
------- ------- ------
Total non-U.S...................................... 1,633 879 278
------- ------- ------
Total.............................................. $13,239 $10,564 $6,711
======= ======= ======
The following table sets forth the significant differences between the U.S.
federal statutory taxes and the Company's provision for income taxes for
consolidated financial statement purposes:
2001 2000 1999
---- ---- ----
Tax expense at U.S. Federal statutory rate........... $12,390 $ 9,604 $6,101
State and local income taxes, net of Federal
benefit............................................ 361 375 398
Non-deductible Goodwill amortization................. 111 108 109
Other................................................ 377 477 103
------- ------- ------
Total income taxes................................... $13,239 $10,564 $6,711
======= ======= ======
The Company's deferred tax assets (liabilities) are comprised of the
following at December 31:
2001 2000
---- ----
Deferred tax assets:
Net operating losses...................................... $ -- $ 120
Timing differences........................................ 1,042 367
Net deferred tax assets..................................... 1,042 487
Deferred tax liabilities:
Undistributed Indian income................................. 25,535 17,189
Total deferred tax liabilities.............................. 25,535 17,189
Net deferred tax liability.................................. $24,493 $16,702
F-14
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CTS India is an export oriented company that is entitled to claim a tax
holiday for a period of nine years from April 1995 through March 2004 in respect
to its export profits. Under the Indian Income Tax Act of 1961, substantially
all of the earnings of the Company's Indian subsidiary are currently exempt from
Indian Income Tax as profits are attributable to export operations. However,
since management currently intends to repatriate all accumulated earnings from
India to the United States, the Company has provided deferred U.S. income taxes
on all such undistributed earnings. Deferred U.S. income taxes on unremitted
earnings from other foreign entities have not been provided for as it is the
Company's intent to reinvest such earnings. Such income taxes are not material.
The Company has determined that the income taxes recorded by the Company would
not be materially different in the absence of the current tax exemption and,
therefore, the tax exemption had no material effect on earnings per share.
8. CAPITAL STOCK
A. Common Stock. On June 12, 1998, the Company amended and restated its
certificate of incorporation to authorize 100,000,000 shares of Class A common
stock, par value $.01 per share, 15,000,000 shares of Class B common stock, par
value $.01 per share, and 15,000,000 shares of preferred stock, par value $.10
per share, and effected a 0.65 for one reverse stock split. Holders of Class A
common stock have one vote per share and holders of Class B common stock have
ten votes per share. Holders of Class B common stock are entitled to convert
their shares into Class A common stock at any time on a share for share basis.
Shares of Class B Common Stock transferred to stockholders of IMS Health in a
transaction intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the
Code shall not convert to shares of Class A Common Stock upon the occurrence of
such Tax-Free Spin-Off. No preferred stock has been issued.
Subsequent to the IPO, the underwriters exercised their right to purchase
an additional 875,100 shares of Class A Common Stock. As a result, IMS Health,
the majority owner and controlling parent of the Company, converted 875,100
shares of Class B Common stock into Class A Common Stock and subsequently sold
such shares.
On February 11, 2000, the Board of Directors declared a 2-for-1 stock split
of Class A and Class B Common Stock 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 financial statements, and all applicable references to the
number of outstanding common shares and per share information has been restated.
Appropriate adjustments have been made in the exercise price and number of
shares subject to stock options. Stockholders' equity account 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.
On May 23, 2000, the stockholders of the Company approved an increase in
the number of authorized Class B common Stock from 15,000,000 shares to
25,000,000 shares.
B. Redeemable Common Stock. On July 25, 1997, certain management employees
of the Company and its affiliates subscribed and subsequently purchased Common
Stock under the "Key Employees Restricted Stock Purchase Plan." These shares
were purchased by the employees at the then estimated fair market value of $1.93
per share. Holders of the stock may put, at any time, to the Company their
shares at the lower of the purchase price or the share price based on a
valuation of the Company at the time of the put. Upon consummation of the IPO,
this put right terminated. The Company initially recorded the value of the
purchased stock outside the equity section. In 1998, upon the completion of the
initial public offering, all redemption conditions were removed, and the shares
were reclassified to common stock.
F-15
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EMPLOYEE STOCK OPTION PLAN
In July 1997, CTS adopted a Key Employees Stock Option Plan, which provides
for the grant of up to 1,397,500 stock options to eligible employees. Options
granted under this plan may not be granted at an exercise price less than fair
market value of the underlying shares on the date of grant. As a result of the
IPO, all options have a life of ten years, vest proportionally over four years
and have an exercise price equal to the fair market value of the common stock on
the grant date.
In December 1997, CTS adopted a Non-Employee Directors' Stock Option Plan,
which provides for the grant of up to 143,000 stock options to eligible
directors. Options granted under this plan may not be granted at an exercise
price less than fair market value of the underlying shares on the date of grant.
As a result of the IPO, all options have a life of ten years, vest
proportionally over two years and have an exercise price equal to the fair
market value of the common stock on the grant date.
In March 1998, CTS granted non-qualified stock options to purchase an
aggregate of 97,500 shares to CTS's Chairman and Chief Executive Officer at an
exercise price of $13.84 per share, an amount less than the then fair market
value of the shares on the date of the grant. The Company has recorded the
related compensation expense over the vesting period of these options.
In May 1999, CTS adopted the 1999 Incentive Compensation Plan, which
provides for the grant of up to 2,000,000 stock options to eligible employees,
nonemployee Directors and independent contractors. Options granted under this
plan may not be granted at an exercise price less than fair market value of the
underlying shares on the date of grant. All options have a life of ten years,
vest proportionally over four years, unless specified otherwise, and have an
exercise price equal to the fair market value of the common stock on the grant
date. On May 23, 2000, the stockholders of the Company approved an increase in
the number of shares available for issuance under this plan from 2,000,000 to
3,000,000 shares. On May 30, 2001, the stockholders of the Company approved an
increase in the number of shares available for issuance under this plan from
3,000,000 to 6,000,000.
A summary of the Company's stock option activity, and related information
is as follows as of December 31, 2001, 2000 and 1999:
------------------------------------------------------------------
2001 2001 2000 2000 1999 1999
------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year............................ 3,681,312 $18.90 2,551,808 $ 8.37 1,370,052 $ 2.93
Granted, Employee Option Plan... -- -- -- -- 122,400 $13.73
Granted, Directors Option
Plan.......................... -- -- -- -- 40,000 11.16
Granted, 1999 Incentive Comp.
Plan.......................... 1,541,600 $31.71 1,408,000 $37.59 1,277,000 12.58
Exercised....................... (666,019) $ 7.71 (129,868) $ 6.01 (191,494) 2.88
Cancelled....................... (238,352) $37.57 (147,878) $26.43 (66,150) 4.51
Expired......................... (13,000) $53.70 (750) $12.22 -- --
--------- --------- ---------
Outstanding -- end of year........ 4,305,541 $24.08 3,681,312 $18.90 2,551,808 $ 8.37
Exercisable -- end of year........ 1,192,510 $13.99 956,608 $ 5.83 441,902 $ 3.40
F-16
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at December 31, 2001:
---------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE AVERAGE
EXERCISE PRICES OUTSTANDING IN YEARS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- ----------- ---------------- -------------- ------- --------------
$1.93 - $1.93 386,404 5.5 Years $ 1.93 386,404 $ 1.93
$3.46 - $5.00 206,532 6.3 Years $ 4.24 162,276 $ 4.04
$5.44 - $8.06 16,500 6.7 Years $ 6.23 5,000 $ 5.96
$10.75 - $15.36 1,064,055 7.4 Years $12.39 351,155 $12.36
$20.78 - $30.94 1,069,800 9.3 Years $28.12 2,000 $29.94
$31.50 - $45.50 1,404,250 8.9 Years $35.43 229,175 $33.35
$47.91 - $68.75 158,000 8.3 Years $56.53 56,500 $56.89
--------- ---------
Total 4,305,541 8.2 Years $24.08 1,192,510 $13.99
Compensation cost recognized by the Company under APB 25 was $11, $35 and
$172 for 2001, 2000 and 1999, respectively.
Had compensation cost for the Company's stock-based compensation plans, as
well as the IMS Health options held by certain executive officers (See Note 10
to the Consolidated Financial Statements), been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS No. 123, the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
DECEMBER 31,
---------------------------
2001 2000 1999
---- ---- ----
Net income
As reported......................................... $22,160 $17,683 $11,234
Pro forma........................................... $15,033 $12,815 $10,047
As reported
Net income per share, basic......................... $ 1.17 $ 0.95 $ 0.61
Net income per share, diluted....................... $ 1.09 $ 0.87 $ 0.58
Pro forma
Net income per share, basic......................... $ 0.79 $ 0.69 $ 0.55
Net income per share, diluted....................... $ 0.74 $ 0.63 $ 0.52
The pro forma disclosures shown above are not representative of the effects
on net income and earnings per share in future years.
For purposes of pro forma disclosures only, the fair value for all Company
options was estimated at the date of grant using the Black-Scholes option model
with the following weighted average assumptions in 2001; risk-free interest rate
of 4.3%, expected dividend yield of 0.0%, expected volatility of 78% and
weighted average expected life of 3.0 years. 2000 assumptions; risk-free
interest rate of 6.1%, expected dividend yield of 0.0%, expected volatility of
75% and expected life of 3.9 years. 1999 assumptions; risk-free interest rate of
5.6%, expected dividend yield of 0.0%, expected volatility of 75.0% and expected
life of 3.9 years. The weighted-average fair value of the Company's options
granted during 2001, 2000 and 1999 was $16.68, $21.71 and $7.45, respectively.
The assumptions used in 1999 for IMS Health stock options were: risk-free
interest rate of 4.8%, expected dividend yield of 0.3%, expected volatility of
35.0% and expected life of 3.0 years. The assumptions used in 1998 for IMS
Health stock options were: risk-free
F-17
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest rate of 5.5%, expected dividend yield of 0.3%, expected volatility of
25.0% and expected life of 3.0 years. The weighted average fair value of IMS
Health stock options granted to certain executive officers in 1998 was $7.14 and
in 1999 was $9.99.
10. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
Revenues. The Company and IMS Health have entered into Master Services
Agreements pursuant to which the Company provides IT services to IMS Health. In
2001, the Company recognized related party revenues totaling $18,809 including
revenues from IMS Health. In 2000, the Company recognized related party revenues
totaling $14,273 including revenues from IMS Health and Strategic Technologies
(through August 30, 2000). In 1999, the Company recognized related party
revenues totaling $14,820 including revenues from IMS Health and Strategic
Technologies.
Affiliated Agreements. In 1997, the Company entered into various
agreements with Cognizant which were assigned to IMS Health as part of the 1998
Reorganization. The agreements include an Intercompany Services Agreement for
services provided by IMS Health such as payroll and payables processing, tax,
real estate and risk management services, a License Agreement to use the
"Cognizant" trade name and an Intercompany Agreement. On July 1, 1998, IMS
Health transferred all of its rights to the "Cognizant" name and related trade
and service marks to the Company.
Services. IMS Health currently provides the Company with certain
administrative services, including payroll and payables processing and permits
the Company to participate in IMS Health's business insurance plans. In prior
periods, IMS Health provided certain other services such as tax planning and
compliance, which have now been transitioned to the Company. All services were
performed under the CTS/IMS Health intercompany services agreement. Total costs
charged to the Company by IMS Health in connection with these services were
$440, $254 and $350 for the years ended December 31, 2001, 2000 and 1999,
respectively.
In December 2001, the Company paid IMS Health a one-time fee of
approximately $825 under an alliance agreement in which the Company was named
"vendor of choice" for IT services to the pharmaceutical industry.
Intercompany receivables/payables to IMS Health at December 31, 2001, 2000
and 1999 are as follows:
2001 2000 1999
---- ---- ----
Proceeds from (payments to), net............................ -- $8 $(24)
In addition, the Company has a certain relationship with the former Erisco
Managed Care Technologies ("Erisco"), which is now a wholly owned subsidiary of
The Trizetto Group, Inc. ("Trizetto"). As of December 31, 2001, IMS Health owned
approximately 26.8% of the outstanding common stock of Trizetto. During 2001 the
Company recorded revenues from Erisco of approximately $401 and payments to
Erisco for commissions and marketing fees of approximately $1,012.
Pension Plans. Certain U.S. employees of the Company participate in IMS
Health's defined benefit pension plans. The plans are cash balance pension plans
under which six percent of creditable compensation plus interest is credited to
the employee's retirement account on a monthly basis. The cash balance earns
monthly investment credits based on the 30-year Treasury bond yield. At the time
of retirement, the vested employee's account balance is
F-18
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
actuarially converted into an annuity. The Company's cost for these plans is
included in the allocation of expense from IMS Health for employee benefits
plans.
Stock Options. In November 1996, in consideration for services to the
Company, Cognizant Corporation granted an executive officer and director of the
Company options to purchase an aggregate of 114,900 shares (on a pre-split
basis) of the common stock of Cognizant Corporation at an exercise price of
$33.38 per share. Such executive officer and director agreed to forfeit options
to purchase 58,334 shares (on a pre-split basis) of Cognizant Corporation common
stock upon the consummation of the Company's initial public offering. In July
1998, IMS Health granted an executive officer options to purchase an aggregate
of 8,158 shares (on a pre-split basis) of the common stock of IMS Health at an
exercise price of $30.17 per share. All remaining such options have since been
converted into options to purchase the common stock of IMS Health as a result of
the Reorganization that occurred on July 1, 1998, the two-for-one split of IMS
Health stock that occurred on January 15, 1999, the distribution of Gartner
Group shares that occurred on July 26, 1999 and the distribution of
Synavant Inc. (formerly known as Strategic Technologies) shares that occurred on
August 30, 2000. At December 31, 2001 after adjusting for the Reorganization,
the split of IMSH stock and the distribution of Gartner Group and Synavant Inc.
shares, such officer had 143,687 options in IMS Health outstanding at a weighted
average exercise price of $14.47 per share. At December 31, 2001, 127,470
options were exercisable.
In November 1996, Cognizant Corporation granted an executive officer
options to purchase an aggregate of 60,000 shares (on a pre-split basis) of the
common stock of Cognizant Corporation at an exercise price of $33.38 per share.
In addition, in November 1996, such executive officer was granted options to
purchase an aggregate of 20,000 shares (on a pre-split basis) of the common
stock of Cognizant Corporation at an exercise price of $33.38 per share, which
was equal to the fair market value at the grant date, by paying ten percent of
the option exercise price as an advance payment toward such exercise. The
unvested portion of such advance payment is refundable under certain conditions.
The remaining 90 percent is payable at exercise. In July 1998, IMS Health
granted an executive officer options to purchase an aggregate of 9,106 shares
(on a pre-split basis) of the common stock of IMS Health at an exercise price of
$30.17 per share. All remaining such options have since been converted into
options to purchase the common stock of IMS Health as a result of the
Reorganization, the two-for-one split of IMS Health stock, the distribution of
Gartner Group and Synavant Inc. shares discussed above. At December 31, 2001,
after adjusting for the Reorganization, the split of IMSH stock and the
distribution of Gartner Group and Synavant Inc. shares, such officer had 68,222
options in IMS Health outstanding at a weighted average exercise price of $17.07
per share. At December 31, 2001, 39,326 options were exercisable.
11. COMMITMENTS
As of December 31, 2001, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $10.7 million, of which $7.6 million has been spent to date.
The Company leases office space and equipment under operating leases, which
expire at various dates through the year 2010. Certain leases contain renewal
provisions and generally require the Company to pay utilities, insurance, taxes,
and other operating expenses. Future
F-19
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum rental payments under operating leases that have initial or remaining
lease terms in excess of one year as of December 31, 2001 are as follows:
2002........................................................ $ 4,761
2003........................................................ 4,296
2004........................................................ 2,819
2005........................................................ 1,400
2006........................................................ 785
Thereafter.................................................. 2,033
-------
Total minimum lease payments................................ $16,094
Rental expense totaled $3,175, $3,472, and $1,823 for years ended December
31, 2001, 2000 and 1999, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the outcome of such
claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, many of the Company's engagements involve
projects that are critical to the operations of its customers' business and
provide benefits that are difficult to quantify. Any failure in a customer's
computer system could result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure. Although
the Company attempts to contractually limit its liability for damages arising
from negligent acts, errors, mistakes, or omissions in rendering its software
development and maintenance services, there can be no assurance that the
limitations of liability set forth in its contracts will be enforceable in all
instances or will otherwise protect the Company from liability for damages.
Although the Company has general liability insurance coverage, including
coverage for errors or omissions, there can be no assurance that such coverage
will continue to be available on reasonable terms or will be available in
sufficient amounts to cover one or more large claims, or that the insurer will
not disclaim coverage as to any future claim. The successful assertion of one or
more large claims against the Company that exceed available insurance coverage
or changes in the Company's insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, would have a
material adverse effect on the Company's business, results of operations and
financial condition.
12. SEGMENT INFORMATION
The Company, operating globally, provides software services for medium and
large businesses. North American operations consist primarily of software
services in the United States and Canada. European operations consist of
software services principally in the United Kingdom. Asian operations consist of
software services principally in India. The Company is managed on a geographic
basis. Accordingly, regional sales managers, sales managers, account managers,
project teams and facilities are segmented geographically and decisions by the
Company's chief operating decision maker regarding the allocation of assets and
assessment of performance are based on such geographic segmentation.
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Information about the Company's operations
and total assets in North
F-20
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
America, Europe and Asia for the years ended December 31, 2001, 2000 and 1999
are as follows:
2001 2000 1999
---- ---- ----
REVENUES(1)(1a)
North America(2).................................... $152,422 $114,932 $71,171
Europe(3)........................................... 23,092 20,959 17,352
Asia................................................ 2,264 1,140 381
-------- -------- -------
Consolidated........................................ $177,778 $137,031 $88,904
======== ======== =======
OPERATING INCOME(1)
North America(2).................................... $ 30,536 $ 21,918 $13,328
Europe(3)........................................... 4,632 3,994 3,245
Asia................................................ 452 216 72
-------- -------- -------
Consolidated........................................ $ 35,620 $ 26,128 $16,645
======== ======== =======
IDENTIFIABLE ASSETS
North America(2).................................... $ 88,328 $ 71,464 $43,671
Europe(4)........................................... 5,322 7,293 3,408
Asia................................................ 51,333 30,783 21,947
-------- -------- -------
Consolidated........................................ $144,983 $109,540 $69,026
======== ======== =======
---------------
(1) Revenues and resulting operating income are attributed to regions based
upon customer location.
(1a) Application development and integration services represented approximately
32.3%, 46.1% and 42.9% of revenues in 1999, 2000 and 2001, respectively.
Application management services accounted for 44.0%, 47.0% and 51.8% of
revenues in 1999, 2000 and 2001, respectively. Year 2000 compliance
services represented approximately 15.6% of revenues in 1999.
(2) Substantially all relates to operations in the United States.
(3) Includes revenue from operations in the United Kingdom of $18,129, $13,718,
and $9,933 for the year ended December 31, 2001, 2000 and 1999,
respectively.
(4) Includes identifiable assets in the United Kingdom of $5,184, $7,012, and
$3,325 at December 31, 2001, 2000 and 1999, respectively.
During 1999, 2000 and 2001, the Company's top five customers accounted for,
in the aggregate, 57.3%, 39.5% and 34.7% of revenues, respectively. The
Company's ten largest customers accounted for, in the aggregate, approximately
75.3%, 59.1% and 53.0% of the Company's revenues in 1999, 2000 and 2001,
respectively. In 2001, sales to related party customers accounted for 10.6% of
revenues. No third party customer accounted for sales in excess of 10% of
revenues in 2000. In 2000, sales to related party customers accounted for 10.4%
of revenues. No third party customer accounted for sales in excess of 10% of
revenues in 2000. In 1999, sales to related party customers accounted for 16.7%
of revenues and one third party customer accounted for 17.4% of revenues. 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.
F-21
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Accounts Receivable Allowance:
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
YEAR OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
---- ---------- ---------- ---------- ---------- -------------
2001...................... $516 $1,895 -- $1,529 $882
2000...................... $225 $ 572 -- $ 281 $516
1999...................... $274 $ (31) -- $ 18 $225
F-22
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues......................................... $55,714 $40,403 $146,510 $120,803
Revenues -- related party........................ 5,519 5,099 15,565 13,514
------- ------- -------- --------
Total revenues.............................. 61,233 45,502 162,075 134,317
Cost of revenues................................. 32,970 23,109 86,507 68,859
------- ------- -------- --------
Gross profit..................................... 28,263 22,393 75,568 65,458
Selling, general and administrative expenses..... 14,150 11,441 37,933 34,306
Depreciation and amortization expense............ 2,005 1,629 5,679 4,566
------- ------- -------- --------
Income from operations........................... 12,108 9,323 31,956 26,586
Other income (expense):
Interest income................................ 471 643 1,305 2,006
Other income (expense) -- net.................. 24 (209) (89) (604)
------- ------- -------- --------
Total other income.......................... 495 434 1,216 1,402
------- ------- -------- --------
Income before provision for income taxes......... 12,603 9,757 33,172 27,988
Provision for income taxes....................... (2,936) (3,649) (7,749) (10,468)
------- ------- -------- --------
Net income....................................... $ 9,667 $ 6,108 $ 25,423 $ 17,520
======= ======= ======== ========
Basic earnings per share......................... $ 0.49 $ 0.32 $ 1.30 $ 0.93
======= ======= ======== ========
Diluted earnings per share....................... $ 0.45 $ 0.30 $ 1.21 $ 0.86
======= ======= ======== ========
Weighted average number of common shares
outstanding -- Basic........................... 19,862 19,184 19,618 18,896
======= ======= ======== ========
Dilutive effect of shares issuable as of
period-end under stock option plans............ 1,589 1,331 1,422 1,486
======= ======= ======== ========
Weighted average number of common shares
outstanding -- Diluted......................... 21,451 20,515 21,040 20,382
======= ======= ======== ========
Comprehensive income:
Net income....................................... $ 9,667 $ 6,108 $ 25,423 $ 17,520
Foreign currency translation adjustments......... (194) 50 (98) (59)
------- ------- -------- --------
Comprehensive income............................. $ 9,473 $ 6,158 $ 25,325 $ 17,461
======= ======= ======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-23
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $123,082 $ 84,977
Trade accounts receivable, net of allowance of $881 and
$882, respectively..................................... 30,206 21,063
Trade accounts receivable-related party................... 1,614 1,481
Unbilled accounts receivable.............................. 6,719 5,005
Unbilled accounts receivable-related party................ 818 417
Other current assets...................................... 6,877 4,392
-------- --------
Total current assets................................... 169,316 117,335
-------- --------
Property and equipment, net of accumulated depreciation of
$22,622 and $16,805, respectively......................... 25,906 24,339
Goodwill, net............................................... 878 878
Other assets................................................ 4,676 2,431
-------- --------
Total assets........................................... $200,776 $144,983
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,817 $ 3,652
Accrued and other current liabilities..................... 27,865 18,046
-------- --------
Total current liabilities.............................. 32,682 21,698
Deferred income taxes....................................... 25,472 24,493
-------- --------
Total liabilities...................................... 58,154 46,191
-------- --------
Commitments and Contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.10 par value, 15,000 shares authorized,
none issued............................................... -- --
Class A common stock, $.01 par value, 100,000 shares
authorized, 8,745 shares and 8,065 shares issued and
outstanding at September 30, 2002 and December 31, 2001,
respectively.............................................. 87 80
Class B common stock, $.01 par value, 25,000 shares
authorized, 11,291 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively.... 113 113
Additional paid-in-capital.................................. 58,209 39,711
Retained earnings........................................... 84,469 59,046
Cumulative translation adjustment........................... (256) (158)
-------- --------
Total stockholders' equity............................. 142,622 98,792
-------- --------
Total liabilities and stockholders' equity............. $200,776 $144,983
======== ========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-24
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2002 2001
--------- --------
Cash flows from operating activities:
Net income.................................................. $ 25,423 $17,520
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 5,679 4,566
Provision for doubtful accounts........................... 541 1,388
Deferred income taxes..................................... 979 5,675
Tax benefit related to option exercises................... 5,545 4,101
Changes in assets and liabilities:
Trade accounts receivable................................. (9,817) (1,320)
Other current assets...................................... (4,600) (5,318)
Other assets.............................................. 852 133
Accounts payable.......................................... 1,165 146
Accrued and other liabilities............................. 9,819 (3,176)
-------- -------
Net cash provided by operating activities................... 35,586 23,715
-------- -------
Cash flows from investing activities:
Purchases of property and equipment-net..................... (7,599) (10,691)
Acquisition of assets....................................... (2,744) --
-------- -------
Net cash used in investing activities....................... (10,343) (10,691)
-------- -------
Cash flows from financing activities:
Proceeds from issued shares/contributed capital............. 12,960 4,818
Payments to related party................................... -- 8
-------- -------
Net cash provided by financing activities................... 12,960 4,826
-------- -------
Effect of currency translation.............................. (98) (59)
-------- -------
Increase in cash and cash equivalents....................... 38,105 17,791
Cash and cash equivalents, beginning of year................ 84,977 61,976
-------- -------
Cash and cash equivalents, end of period.................... $123,082 $79,767
======== =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
F-25
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 -- INTERIM UNAUDITED 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 in
the United States and Article 10 of Regulation S-X under the Securities 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
2001 Annual Report on Form 10-K and the Company's unaudited condensed
consolidated financial statements (and notes thereto) included in the Company's
Quarterly Reports on Form 10-Q for the periods ended March 31, 2002 and June 30,
2002. In the opinion of the Company's management, all adjustments considered
necessary for a fair presentation of the accompanying unaudited 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-year amounts have been reclassified to conform to the 2002
presentation.
NOTE 2 -- ACQUISITION OF ASSETS:
On June 30, 2002, Cognizant Technology Solutions Ireland Limited ("CTS
Ireland"), a newly formed, wholly-owned subsidiary of the Company, purchased
certain assets and assumed certain liabilities from UnitedHealthcare Ireland
Limited ("UHC Ireland"), a subsidiary of UnitedHealth Group, for $2,900. UHC
Ireland previously provided, and will continue to provide through CTS Ireland,
application design, development and maintenance services, using its existing
staff of 70 Information Technology ("IT") professionals. The acquisition of the
assets of UHC Ireland will enable the Company to provide a wide range of
services to the Company's clients in Europe and worldwide and represents the
initial phase of the implementation of the Company's previously announced
international expansion strategy.
The Company has completed a preliminary assessment of the allocation of the
purchase price to the tangible and amortizable intangible assets acquired and
liabilities assumed. Based upon that preliminary assessment, the Company has
assigned estimated values to the workforce and customer relationship acquired,
and expects the useful lives of such assets to range between three and ten
years. Amortization expense associated with these intangible assets of $114 has
been included in the Company's Statements of Operations for the three and
nine-month periods ended September 30, 2002. The Company expects that
adjustments related to the finalization of the valuation of such intangible
assets will not have a material effect on the Company's results of operations.
Pending finalization of the valuation, the purchase price, net of amounts
assigned to fixed assets of approximately $260, has been included in long-term
"Other Assets" in the accompanying Balance Sheet. Such net assets have been
included as identifiable assets in the European segment in Note 8 of the Notes
to the Unaudited Condensed Consolidated Financial Statements.
The results of CTS Ireland have been included in the unaudited condensed
consolidated financial statements of the Company effective July 1, 2002.
F-26
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2002 and September 30, 2001 are as follows:
CUMULATIVE
TRANSLATION
ADJUSTMENT
-----------
Balance, December 31, 2001.................................. $(158)
Foreign currency translation adjustments.................... (98)
-----
Balance, September 30, 2002................................. $(256)
=====
Balance, December 31, 2000.................................. $ (50)
Foreign currency translation adjustments.................... (59)
-----
Balance, September 30, 2001................................. $(109)
=====
NOTE 4 -- RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES:
As of September 30, 2002, IMS Health Incorporated ("IMS Health") owned
56.4% of the outstanding common stock of the Company (representing all of the
Company's Class B common stock) and held 92.8% of the combined voting power of
the Company's common stock. Holders of Class A common stock have one vote per
share and holders of Class B common stock have ten votes per share. Holders of
Class B common stock are entitled to convert their shares into shares of Class A
common stock at any time on a share for share basis. Shares of Class B common
stock transferred to stockholders of IMS Health in a transaction intended to be
on a tax-free basis (a "Tax-Free Transaction") under the Internal Revenue Code
shall not convert into shares of Class A common stock upon the occurrence of
such Tax-Free Transaction. No preferred stock has been issued.
IMS Health currently provides the Company with certain administrative
services including payroll and payables processing and permits the Company to
participate in certain of IMS Health's business insurance plans. In prior
periods, IMS Health provided certain other services such as tax planning and
compliance, which have since been transitioned to the Company. All services are
performed and charged to the Company under an intercompany services agreement
with IMS Health. Total costs in connection with these services were
approximately $139 and $110 for the three-month periods ended September 30, 2002
and 2001, respectively. Total costs in connection with these services were
approximately $417 and $330 for the nine-month periods ended September 30, 2002
and 2001, respectively.
The Company has a strategic relationship with The TriZetto Group Inc.
("TriZetto") that includes helping its healthcare customers integrate TriZetto's
products with their existing information systems and, within TriZetto,
supporting further development of these software applications. As of September
30, 2002, IMS Health owned approximately 26.5% of the outstanding common stock
of TriZetto. During the three- and nine-month periods ended September 30, 2002,
the Company recorded revenues from TriZetto of approximately $1,199 and $1,302,
respectively, and recorded expense related to TriZetto commissions of
approximately $123 and $456 for the three- and nine-month periods ended
September 30, 2002, respectively. During the three- and nine-month periods ended
September 30, 2001, the Company recorded revenues from TriZetto of approximately
$401 and recorded expense related to TriZetto
F-27
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commissions of approximately $0 and $793 for the three- and nine-month periods
ended September 30, 2001, respectively.
Other related party disclosures are included in Note 8 of the Notes to the
Unaudited Condensed Consolidated Financial Statements.
NOTE 5 -- INCOME TAXES:
The Company's Indian subsidiary, CTS India, is an export-oriented company
which, under the Indian Income Tax Act of 1961, is entitled to claim tax
holidays for a period of ten years with respect to its export profits.
Substantially all of the earnings of CTS India are attributable to export
profits and are therefore currently entitled to a 90% exemption from Indian
income tax. These tax holidays will begin to expire in 2004 and under current
law will be completely phased out by March of 2009. In prior years, it was
management's intent to repatriate all accumulated earnings from India to the
United States; accordingly, the Company has provided deferred income taxes in
the amount of approximately $25,535 on all such undistributed earnings through
December 31, 2001.
During the first quarter of 2002, the Company made a strategic decision to
pursue an international strategy that includes expanded infrastructure
investments in India and geographic expansion in Europe and Asia. As a component
of this strategy, the Company intends to use 2002 and future Indian earnings to
expand operations outside of the United States, instead of repatriating these
earnings to the United States. Accordingly, effective January 1, 2002, pursuant
to Accounting Principles Bulletin 23, the Company will no longer accrue taxes on
the repatriation of earnings recognized in 2002 and subsequent periods as these
earnings are considered to be indefinitely reinvested outside of the United
States. As of September 30, 2002, the amount of unrepatriated earnings upon
which no provision for taxation has been recorded is approximately $21,224. If
such earnings are repatriated in the future, or are no longer deemed to be
indefinitely reinvested, the Company will accrue the applicable amount of taxes
associated with such earnings. This change in intent, as well as a change in the
second quarter in the manner in which repatriated earnings are taxed in India,
resulted in an estimated effective tax rate for the three-and nine-month periods
ended September 30, 2002 of 23.3% and 23.4%, respectively. These rates compare
to an effective tax rate for the three- and nine-month periods ended September
30, 2001 of 37.4%.
During the nine-month period ended September 30, 2002, stock option
exercises resulted in a tax benefit to the Company of approximately $5,546. This
benefit is netted against certain short-term tax obligations and included in the
caption "Other Current Assets" on the accompanying balance sheet.
NOTE 6 -- ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
Statements of Financial Accounting Standards Adopted:
In June 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("FAS 141") and Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") were
issued. FAS 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001. FAS 141 also specifies
criteria that intangible assets acquired must meet to be recognized and reported
separately from goodwill. FAS 142 requires that goodwill and intangible assets
with indefinite lives no longer be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. FAS 142 is effective for fiscal years beginning
F-28
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
after December 15, 2001. The adoption of FAS 141 and FAS 142 did not have a
material effect on the Company's financial position or results of operations.
The following table sets forth the Company's results had FAS 142 been applied to
the prior-period financial statements presented herein.
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
Reported Net Income............................. $6,108 $17,520
Reversal of Goodwill Amortization -- net of
tax........................................... 79 238
------ -------
Adjusted Net Income excluding Goodwill
Amortization.................................. $6,187 $17,758
Adjusted Basic EPS excluding Goodwill
Amortization.................................. $ 0.32 $ 0.94
Adjusted Diluted EPS excluding Goodwill
Amortization.................................. $ 0.30 $ 0.87
In August 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 144") was
issued. FAS 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently occurring
Events and Transactions." FAS 144 also amends Accounting Research Bulletin No.
51, "Consolidated Financial Statements", to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. FAS
144 retains the fundamental provisions of FAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while resolving significant implementation issues
associated with FAS 121. Among other things, FAS 144 provides guidance on how
long-lived assets used as part of a group should be evaluated for impairment,
establishes criteria for when long-lived assets are held for sale, and
prescribes the accounting for long-lived assets that will be disposed of other
than by sale. FAS 144 is effective for fiscal years beginning after December 15,
2001. The adoption of FAS 144 did not have a material impact on the Company's
financial position and results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145") was issued. FAS 145 updates,
clarifies and simplifies existing accounting pronouncements and is generally
effective for transactions occurring after May 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations.
Statements of Financial Accounting Standards Not Yet Adopted:
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("FAS 143") was issued. FAS 143
addresses financial accounting and reporting for legal obligations associated
with the retirement of tangible long-lived assets and the associated retirement
costs that result from the acquisition, construction, or development and normal
operation of a long-lived asset. Upon initial recognition of a liability for an
asset retirement obligation, FAS 143 requires an increase in the carrying amount
of the related long-lived asset. The asset retirement cost is subsequently
allocated to expense using a systematic
F-29
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and rational method over the asset's useful life. FAS 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of this statement is
not expected to have a material impact on the Company's financial position or
results of operations.
In June 2002, Statement of Financial Accounting Standards No. 146,
"Accounting for Exit or Disposal Activities" ("FAS 146") was issued. FAS 146
addresses the accounting for costs to terminate a contract that is not a capital
lease, costs to consolidate facilities and relocate employees, and involuntary
termination benefits under one-time benefit arrangements that are not an ongoing
benefit program or an individual deferred compensation contract. A liability for
contract termination costs should be recognized and measured at fair value
either when the contract is terminated or when the entity ceases to use the
right conveyed by the contract. A liability for one-time termination benefits
should be recognized and measured at fair value at the communication date if the
employee would not be retained beyond a minimum retention period (i.e., either a
legal notification period or 60 days, if no legal requirement exists). For
employees that will be retained beyond the minimum retention period, a liability
should be accrued ratably over the future service period. The provisions of the
statement will be effective for disposal activities initiated after December 31,
2002. The adoption of this statement is not expected to have a material impact
on the Company's financial position or results of operations.
In October 2002, Statement of Financial Accounting Standards No. 147,
"Acquisitions of Certain Financial Institutions" ("FAS 147") was issued. FAS 147
addresses the financial accounting and reporting for the acquisition of all or
part of a financial institution, except for a transaction between two or more
mutual enterprises. FAS 147 also provides guidance on the accounting for the
impairment or disposal of acquired long-term customer-relationship intangible
assets, including those acquired in transactions between two or more mutual
enterprises. The provisions of the statement will be effective for acquisitions
for which the date of acquisition is on or after October 1, 2002. The adoption
of this statement is not expected to have a material impact on the Company's
financial position or results of operations.
NOTE 7 -- CONTINGENCIES AND COMMITMENTS:
As of September 30, 2002, the Company has entered into fixed capital
commitments related to its India development center expansion program of
approximately $20,109, of which approximately $10,924 has been spent to date.
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 by contract to limit its liability for
damages arising from negligent acts, errors, mistakes, or omissions in rendering
its application design, 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
F-30
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 8 -- SEGMENT INFORMATION:
The Company is a leading provider of custom IT design, development,
integration and maintenance services primarily for Fortune 1000 companies
located in the United States and Europe. The Company's core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. The Company provides the IT services it offers
using an integrated on-site/offshore business model. This seamless
onsite/offshore model combines technical and account management teams located
on-site at the customer location and offshore at dedicated development centers
located in India and Ireland. North American operations consist primarily of
application design, development and maintenance services in the United States
and Canada. European operations consist primarily of application design,
development and maintenance services principally in the United Kingdom, Germany
and Ireland. European identifiable assets include the net assets resulting from
the acquisition of certain assets and liabilities from UHC Ireland (See Note 2
to the Notes to the Unaudited Condensed Consolidated Financial Statements).
Asian operations consist primarily of application design, development and
maintenance services principally in India. The Company is managed on a
geographic basis. Accordingly, regional sales managers, sales managers, account
managers, project teams and facilities are segmented geographically and
decisions by the Company's chief operating decision maker regarding the
allocation of assets and assessment of performance are based on such geographic
segmentation. Revenues and resulting operating income are attributed to regions
based upon customer location, and exclude the effect of intercompany revenue for
services provided by CTS India to other CTS entities.
Information about the Company's operations and total assets in North
America, Europe and Asia for the periods ended September 30, 2002 and 2001 are
presented in accordance with Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information," as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES(1)
North America(2)......................... $52,913 $39,432 $140,445 $115,989
Europe................................... 8,032 5,665 20,398 17,203
Asia..................................... 288 405 1,232 1,125
------- ------- -------- --------
Consolidated............................. $61,233 $45,502 $162,075 $134,317
======= ======= ======== ========
OPERATING INCOME(1)
North America(2)......................... $10,463 $ 8,079 $ 27,692 $ 22,959
Europe................................... 1,588 1,161 4,021 3,403
Asia..................................... 57 83 243 224
------- ------- -------- --------
Consolidated............................. $12,108 $ 9,323 $ 31,956 $ 26,586
======= ======= ======== ========
F-31
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF SEPTEMBER 30,
-------------------
IDENTIFIABLE ASSETS 2002 2001
------------------- ---- ----
North America(2)............................................ $ 84,458 $ 89,576
Europe...................................................... 11,741 5,946
Asia........................................................ 104,577 43,051
-------- --------
Consolidated................................................ $200,776 $138,573
======== ========
---------------
(1) Revenues and resulting operating income are attributed to regions based upon
customer location.
(2) Primarily relates to operations in the United States.
In the third quarter of 2002, sales to one related party customer (IMS
Health) accounted for 9.0% of revenues and sales to one third-party customer
(Metropolitan Life Insurance Company) accounted for 11.5% of revenues. In the
third quarter of 2001, sales to one related party customer (IMS Health)
accounted for 11.2% of revenue and no third party accounted for sales in excess
of 10% of revenue. During the nine months ended September 30, 2002, sales to IMS
Health accounted for 9.6% of revenues and no third party customer accounted for
sales in excess of 10% of revenue. During the none months ended September 30,
2001 sales to IMS Health accounted for 10.1% of revenues and no third party
customer accounted for sales in excess of 10% of revenue.
Revenues related to services performed without a signed agreement or work
order are not recognized until such agreements or work orders are signed;
however the cost related to the performance of such work is recognized in the
period the services are rendered.
A majority of the Company's employees and a significant portion of the
Company's assets are located in India. Accordingly, the Company bears certain
geo-political risks of local and cross-border conflicts within this geographic
region.
NOTE 9 -- SUBSEQUENT EVENTS:
ACQUISITION OF ASSETS
On October 29, 2002, the Company completed the transfer of Silverline
Technologies, Inc.'s American Express practice to the Company. The Company will
now provide application design, development and maintenance services to American
Express through an acquired workforce of approximately three hundred IT and
support professionals located primarily in the United States and India.
The Company has commenced a preliminary assessment of the allocation of the
consideration paid of approximately $10,400 to the amortizable intangible assets
acquired in this transaction. Since the transfer was effected on October 29,
2002, the results of operations of this transfer will be included in the
consolidated financial statements of the Company commencing from that date. The
operating results from this transaction are not expected to be material to the
Company.
PROPOSED SPLIT-OFF TRANSACTION
The Company intends to file a registration statement on Form S-4 with the
Securities and Exchange Commission (SEC) concurrently with the filing of this
Quarterly Report. The registration statement is being filed for the purpose of
registering a proposed offer by IMS Health
F-32
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to exchange shares of the Company's Class B common stock owned by IMS Health for
a yet to be determined number of shares of common stock of IMS Health (the
"Exchange Offer"). At September 30, 2002, IMS Health owned approximately 56.4%
of the outstanding stock of the Company (representing all of the Company's
outstanding Class B common stock) and held approximately 92.8% of the combined
voting power of the Company's outstanding common stock. It is expected that IMS
Health will seek to exchange up to 11,291 shares of the Company's Class B common
stock in the Exchange Offer, representing all Class B shares of the Company that
are currently owned by IMS Health. The exchange offer, which is subject to SEC
review and certain conditions, is expected to occur in the first quarter of
2003. The Company expects to incur significant costs in connection with this
proposed transaction. Such costs will be expensed as incurred.
The shares of the Company's Class B common stock are identical to the
shares of the Company's Class A common stock, except that a holder of shares of
Class B common stock is entitled to 10 votes per share, while a holder of shares
of Class A common stock is entitled to one vote per share. Each share of Class B
received in the Exchange Offer will convert automatically into one share of
Class A common stock when it is transferred after the Exchange Offer as well as
under certain other specified circumstances. The Class B common stock will not
be separately listed or quoted on any exchange and will not trade separately.
There will be no impact on the number of the Company's total shares
outstanding as a result of the Exchange Offer.
F-33
The letter of transmittal, certificates for shares of IMS Health common
stock and any other required documents should be sent or delivered by each IMS
Health stockholder or his or her broker, dealer, commercial bank, trust company
or other nominee to the exchange agent at one of the following addresses:
By Mail: By Hand: By Overnight Delivery:
American Stock Transfer & Trust American Stock Transfer & Trust American Stock Transfer & Trust
Company Company Company
59 Maiden Lane 59 Maiden Lane Operations Center
Plaza Level Plaza Level 6201 15th Avenue
New York, New York 10038 New York, New York 10038 Brooklyn, New York 11219
Attn: Reorg. Department
For information about submitting the letter of transmittal or delivery of your
shares call
(800) 937-5449 (Toll-Free) in the United States
and (718) 921-8200 ext. 6820 elsewhere
If you have any questions about how to tender or you want additional copies
of the exchange offer documents, you may call the information agent at one of
its numbers listed below. You may also contact either dealer manager at one of
the numbers listed below or your own broker for assistance concerning the
exchange offer
The Information Agent for the Exchange Offer is:
[GEORGESON SHAREHOLDER LOGO]
17 State Street, 10th Floor
New York, New York 10004
Toll Free: (866) 203-1913
Banks and Brokers may call collect: (212) 440-9800
The Joint Dealer Managers for the Exchange Offer are:
GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC.
85 Broad Street 383 Madison Avenue
New York, New York 10004 New York, New York 10179
(800) 323-5678 (Toll-Free) (866) 827-9756 (Toll-Free)
(212) 902-1000 (212) 272-9756
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Cognizant's amended and restated certificate of incorporation and by-laws
provide that the liability of the directors for monetary damages shall be
limited to the fullest extent permissible under Delaware law. This limitation of
liability does not affect the availability of injunctive relief or other
equitable remedies. Cognizant's by-laws provide that Cognizant will indemnify
its directors and officers to the fullest extent permissible under Delaware law.
These indemnification provisions require Cognizant to indemnify these persons
against certain liabilities and expenses to which they may become subject by
reason of their service as a director or officer of Cognizant or any of its
affiliated enterprises. In addition, Cognizant has indemnification agreements
covering its directors and executive officers providing indemnification to the
fullest extent permitted by applicable law and also setting forth certain
procedures, including the advancement of expenses, that apply in the event of a
claim for indemnification.
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification may be made in respect to any claim, issue or matter as to which
the person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which the action
or suit was brought shall determine that despite the adjudication of liability
but in view of all the circumstances of the case the person is fairly and
reasonably entitled to indemnify for such expenses which the Court of Chancery
or the other court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) or (b) or in the
defense of any claim, issue or matter therein, the person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection therewith; that indemnification or advancement of
expenses provided for by Section 145 shall not be deemed exclusive of any other
rights to which the indemnified party may be entitled; and empowers the
corporation to purchase and maintain insurance on behalf of a director, officer,
employee or agent of the corporation against any liability asserted against the
person or incurred by the person in any above capacity or arising out of the
person's status as such whether or not the corporation would have the power to
indemnify the person against such liabilities under Section 145.
II-1
For information concerning Cognizant's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 22 hereof.
Cognizant maintains insurance, at its expense, to protect any director or
officer of the Company against certain expenses, liabilities or losses.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) See the Exhibit Index included immediately preceding the exhibits to
this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus that is a part of this registration statement
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415 will be filed
as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(4) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(5) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 3 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Teaneck,
state of New Jersey, on January 24, 2003.
COGNIZANT TECHNOLOGY SOLUTIONS
CORPORATION
By: /s/ WIJEYARAJ MAHADEVA
------------------------------------
Wijeyaraj Mahadeva
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WIJEYARAJ MAHADEVA Chairman of the Board and Chief January 24, 2003
------------------------------------------------ Executive Officer (Principal
Wijeyaraj Mahadeva Executive Officer)
/s/ GORDON COBURN Chief Financial Officer, January 24, 2003
------------------------------------------------ Treasurer and Secretary
Gordon Coburn (Principal Financial and
Accounting Officer)
* Director January 24, 2003
------------------------------------------------
Nancy E. Cooper
* Director January 24, 2003
------------------------------------------------
Robert W. Howe
* Director January 24, 2003
------------------------------------------------
John E. Klein
* Director January 24, 2003
------------------------------------------------
Venetia Kontogouris
* Director January 24, 2003
------------------------------------------------
David M. Thomas
* Director January 24, 2003
------------------------------------------------
Robert E. Weissman
* Director January 24, 2003
------------------------------------------------
Thomas M. Wendel
* By: /s/ STEVEN SCHWARTZ
------------------------------------------
(as attorney-in-fact for each of the
persons indicated)
II-3
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
3.2 Certificate of Amendment to the Registrant's Amended and
Restated Certificate of Incorporation. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.)
3.3* Form of Restated Certificate of Incorporation to take effect
following completion of the exchange offer.
3.4 By-laws. (Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
3.5* Form of Amended and Restated By-laws to take effect
following completion of the exchange offer.
4.1* Specimen Certificate for shares of class B common stock.
5.1* Opinion of Simpson Thacher & Bartlett.
8.1* Tax opinion of McDermott, Will & Emery.
10.1 Form of Indemnification Agreement for Directors and
Officers. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.2 Amended and Restated Cognizant Technology Solutions Key
Employees' Stock Option Plan. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-1 (File Number 333-49783) which became effective on
June 18, 1998.)
10.3 Amended and Restated Cognizant Technology Solutions
Non-Employee Directors' Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1 (File Number 333-49783) which became
effective on June 18, 1998.)
10.4 Option Agreement between the Registrant and Wijeyaraj
Mahadeva. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1 (File Number
333-49783) which became effective on June 18, 1998.)
10.5 Form of Master Services Agreement between the Registrant and
each of I.M.S. International, Inc., IMS America, Ltd. and
Nielsen Media Research, Inc. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on
Form S-1 (File Number 333-49783) which became effective on
June 18, 1998.)
10.6 Intercompany Agreement between the Registrant and Cognizant
Corporation. (Incorporated by reference to Exhibit 10.7 to
the Registrant's Registration Statement on Form S-1 (File
Number 333-49783) which became effective on June 18, 1998.)
10.7 Intercompany Services Agreement between the Registrant and
Cognizant Corporation. (Incorporated by reference to Exhibit
10.8 to the Registrant's Registration Statement on Form S-1
(File Number 333-49783) which became effective on June 18,
1998.)
10.8 Form of Severance and Non-Competition Agreement between the
Registrant and each of its Executive Officers. (Incorporated
by reference to Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1 (File Number 333-49783)
which became effective on June 18, 1998.)
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.9 Sublease dated August 28, 1998 by and between Trans Tec
Services, Inc., as Sublessor, and the Registrant, as
Sublessee (Incorporated by reference to Exhibit 10.10 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.)
10.10 1999 Incentive Compensation Plan, as amended. (Incorporated
by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001.)
10.11 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.)
10.12 Sublease dated as of April 6, 2001 by and between American
Express Travel Related Services Company, Inc., as Sublessor,
and the Registrant, as Sublessee. (Incorporated by reference
to Exhibit 10.13 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002.)
10.13* Distribution Agreement between IMS Health Incorporated and
the Registrant dated January 7, 2003.
21* List of subsidiaries of the Registrant.
23.1** Consents of PricewaterhouseCoopers LLP.
23.2* Consent of Simpson Thacher & Bartlett (included in Exhibit
5.1).
23.3* Consent of McDermott, Will & Emery (included in Exhibit
8.1).
24* Power of Attorney.
99.1* Form of Letter of Transmittal and Substitute Form W-9.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Brokers.
99.4* Form of Letter to Clients.
99.5* Form of Participation Instructions.
99.6* Form of Form of Election.
99.7* Form of Instructions to Form of Election.
99.8* Form of Letter to Stockholders from David M. Thomas.
---------------
* Previously filed.
** Filed herewith.