Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
-----------------
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 0-24429
COGNIZANT TECHNOLOGY SOLUTIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3728359
- ------------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Glenpointe Centre West, Teaneck, New Jersey 07666
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 801-0233
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $0.01 par value per share
- --------------------------------------------------------------------------------
(Title of Class)
Class B Common Stock, par value $0.01 per share
- --------------------------------------------------------------------------------
(Title of Class)
- --------------------------------------------------------------------------------
Preferred Share Purchase Rights
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No | |
The aggregate market value of the registrant's voting shares of common stock
held by non-affiliates of the registrant on June 30, 2003, based on $24.39 per
share, the last reported sale price on the NASDAQ National Market on that date,
was $1,515,361,188.
The number of shares of Class A common stock, $0.01 par value, of the registrant
outstanding as of March 5, 2004 was 64,580,041 shares. There were no shares of
Class B common stock, $0.01 par value, of the registrant outstanding as of March
5, 2004.
The following documents are incorporated by reference into the Annual Report on
Form 10-K: Portions of the registrant's definitive Proxy Statement for its 2004
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
TABLE OF CONTENTS
-----------------
Item Page
---- ----
PART I 1. Business............................................. 4
2. Properties........................................... 30
3. Legal Proceedings.................................... 33
4. Submission of Matters to a Vote of Security Holders.. 33
PART II 5. Market for Our Common Equity and
Related Stockholder Matters......................... 34
6. Selected Consolidated Financial Data................. 36
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 38
7A. Quantitative and Qualitative Disclosures
Amount Market Risk................................. 50
8. Financial Statements and Supplementary Data.......... 51
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............. 51
9A. Controls and Procedures.............................. 51
PART III 10. Our Directors and Executive Officers................. 52
11. Executive Compensation............................... 52
12. Security Ownership of Certain Beneficial Owners52
and Management and Related Stockholder Matters...... 52
13. Certain Relationships and Related Transactions....... 52
14. Principal Accountant Fees and Services............... 52
PART IV 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................. 53
SIGNATURES............................................................. 54
EXHIBIT INDEX.......................................................... 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-1
3
PART I
ITEM 1. BUSINESS
Overview
- --------
Cognizant Technology Solutions Corporation is a leading provider of custom
information technology ("IT") services related to IT design, development,
integration and maintenance services primarily for Fortune 1000 companies
located in the United States and Europe. Our core competencies include
web-centric applications, data warehousing, component-based development and
legacy and client-server systems. We provide the IT services we offer using an
integrated on-site/offshore business model. This seamless on-site/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.
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,
o e-business and e-commerce applications;
o data warehousing;
o customer and supply chain management; and
o 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
us, 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 operating with
on-site/offshore business models.
4
Global demand for high quality, lower cost IT services from outside
providers has created a significant opportunity for IT service providers that
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 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 $7.60 billion for the fiscal year ended
March 31, 2002 to $9.55 billion for the fiscal year ended March 31, 2003, as
estimated by the National Association of Software and Services Companies
(NASSCOM) in India. This represents a 26% growth over the prior period. NASSCOM
has projected India's services and software exports to grow at a rate of
approximately 28% for fiscal year 2003-04.
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.
Our Solution
- ------------
We believe that we have developed an effective integrated on-site/offshore
business model, and that this business model will be a critical element of our
continued growth. To support this business model, at December 31, 2003, we
employed over 8,500 programmers globally. We have also established facilities,
technology and communications infrastructure in order to support our business
model. By basing certain technical operations in India, we have access to a
large pool of skilled, English-speaking IT professionals. These IT professionals
provide high quality services to our customers at costs significantly lower than
services sourced exclusively in developed countries. Our strengths, which we
believe differentiate us from other IT service providers, include the following:
ESTABLISHED AND SCALABLE PROPRIETARY PROCESSES. We have developed
proprietary methodologies for integrating on-site and offshore teams to
facilitate cost-effective, on-time delivery of high-quality projects. These
methodologies comprise our proprietary Q*VIEW software engineering process,
which is available to all on-site and offshore programmers. We use this ISO
9001:2000 certified process to define and implement projects from the design,
development and deployment stages through to on-going application maintenance.
For most
5
projects, Q*VIEW is used as part of an initial assessment that allows us to
define the scope and risks of the project and subdivide the project into smaller
phases with frequent deliverables and feedback from customers. We also use our
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, we assign 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 we have significantly increased the number of offshore development
centers, customers and projects. In addition, all of our principal development
centers have been assessed by KPMG at Level 5 (the highest possible rating) of
both the Capability Maturity Model and the Capability Maturity Model Integration
of the Software Engineering Institute at Carnegie Mellon University, which are
widely recognized means of measuring the quality and maturity of an
organization's software development and maintenance processes. In addition, all
of our principal development centers have been certified by the STQC Directorate
Ministry of Communications and Information Technology, Government of India (the
accreditation authority for companies in India) under the internationally
recognized BS 7799 Part 2:2002 Information Security Standards, a comprehensive
set of controls comprising best practices in information security and business
continuity planning. Our quality management system has also been certified by
KPMG to International Standard ISO 9001:2000 of the International Organization
for Standardization, an internationally recognized standard for quality
management systems directed to the achievement of business results, including
satisfaction of customers and others.
HIGHLY SKILLED WORKFORCE. Our managers and senior technical personnel
provide in-depth project management expertise to customers. To maintain this
level of expertise, we have placed significant emphasis on recruiting and
training our workforce of highly skilled professionals. We have over 600 project
managers and senior technical personnel around the world, many of whom have
significant work experience in the United States and Europe. We also maintain
programs and personnel to hire and train the best available technical
professionals in both legacy systems and emerging technologies. We provide 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 our professional staff. We
were recently assessed by KPMG at Level 5 (the highest possible rating) of the
People Capability Maturity Model (P-CMM) version 2.0 of the Software Engineering
Institute at Carnegie Mellon University, a widely recognized means of
implementing best current practices in fields such as human resources, knowledge
management, and organizational development which improves our processes for
managing and developing our workforce and addressing critical people issues.
RESEARCH AND DEVELOPMENT AND COMPETENCY CENTERS. We have project
experience and expertise across multiple architectures and technologies, and
have made significant investments in our competency centers and in research and
development to keep abreast of the latest technology developments. Most of our
programmers are trained in multiple technologies and architectures. As a result,
we are able to react to customers' needs quickly and efficiently redeploy
programmers to different technologies. In order to develop and maintain this
flexibility, we have made a substantial investment in our competency centers
where the experience gained
6
from particular projects and research and development efforts is leveraged
across our entire organization. In addition, through our investment in research
and development activities and the continuing education of our technical
personnel, we enlarge our knowledge base and develop the necessary skills to
keep pace with emerging technologies. We believe that our ability to work in new
technologies allows us to foster long-term relationships by having the capacity
to continually address the needs of both existing and new customers.
WELL-DEVELOPED INFRASTRUCTURE. Our extensive facilities, technology and
communications infrastructure facilitate the seamless integration of our 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:
o rapid completion of projects;
o highest level of quality;
o off-peak use of customers' technological resources; and
o real-time access to project information by the on-site account
manager or the customer.
International time differences enable our 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 us to complete projects more rapidly and does not require our
customers to invest in duplicative hardware and software. In addition, for large
projects with short time frames, our offshore facilities allow for parallel
processing of various development phases to accelerate delivery time. In
addition, we can deliver services more rapidly than some competitors without an
offshore labor pool because our lower labor costs enable us to cost-effectively
assign more professionals to a project.
Business Strategies
- -------------------
Our objectives are to maximize stockholder value and enhance our position
as a leading provider of custom IT design, development, integration and
maintenance services. We implement the following core strategies to achieve
these objectives:
FURTHER DEVELOP LONG-TERM CUSTOMER RELATIONSHIPS. We have strong long-term
strategic relationships with our customers and business partners. We seek to
establish long-term relationships that present recurring revenue opportunities,
frequently trying to establish relationships with our customers' chief
information officers, or other IT decision makers, by offering a wide array of
cost-effective high quality services. Over 80% of our revenues in the year ended
December 31, 2003, were derived from customers who had been using our services
for one year or more. We also seek to leverage our 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 us with a competitive advantage in securing additional development
and maintenance projects from that customer.
7
EXPAND SERVICE OFFERINGS AND SOLUTIONS. We have several teams dedicated to
developing new, high value services. These teams collaborate with customers to
develop these services. For example, we are 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, we invest in internal research and development and
promote knowledge building and sharing across the organization in order to
promote the development of new services and solutions that we can offer to our
customers. Furthermore, we continue to enhance our capabilities and service
offerings in the areas of Customer Relationship Management, or CRM, and
Enterprise Resource Planning, or ERP. We believe that the continued expansion of
our service offerings will reduce our reliance on any one technology initiative
and will help foster long-term relationships with customers by allowing us to
serve the needs of our customers better.
ENHANCE PROCESSES, METHODOLOGIES AND PRODUCTIVITY TOOLSETS. We are
committed to improving and enhancing our proprietary Q*VIEW software engineering
process and other methodologies and toolsets. In light of the rapid evolution of
technology, we believe that continued investment in research and development is
critical to our continued success. We are constantly designing and developing
additional productivity software tools to automate testing processes and improve
project estimation and risk assessment techniques. In addition, we use 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 we expand our
customer base, we plan 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. We have established
sales and marketing offices in Atlanta, Chicago, Dallas, Minneapolis, Phoenix,
Los Angeles, San Francisco and Teaneck. In addition, we have been pursuing
market opportunities in Europe through our offices in London, England, Limerick,
Ireland, Frankfurt, Germany, Zurich, Switzerland and Amsterdam, The Netherlands.
PURSUE SELECTIVE STRATEGIC ACQUISITIONS, JOINT VENTURES AND STRATEGIC
ALLIANCES. We believe that opportunities exist in the fragmented IT services
market to expand our business through selective strategic acquisitions, joint
ventures and strategic alliances. We believe that acquisition and joint venture
candidates may enable us to expand our geographic presence and our capabilities
more rapidly, especially in the European market, as well as accelerate our entry
into areas of new technology. In addition, through our working relationships
with independent software vendors we obtain projects using the detailed
knowledge we gain in connection with a joint development process. Finally, we
will strategically partner with select IT service firms that offer complementary
services in order to best meet the requirements of our customers.
8
Services
- --------
We provide a broad range of IT services, including:
Service Summary Description of Service Offerings
- ------- ----------------------------------------
Application Design, Development, Define customer requirements, write
Integration 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.
We use our Q*VIEW software engineering process, our on-site and offshore
business model and well-developed technology and communications infrastructure
to deliver these services.
APPLICATION DEVELOPMENT, INTEGRATION AND RE-ENGINEERING SERVICES. We
follow either of two alternative approaches to application development and
integration:
o full life-cycle application development, in which we assume
start-to-finish responsibility for analysis, design, implementation,
testing and integration of systems; or
o cooperative development, in which our employees work with a
customer's in-house IT personnel to jointly analyze, design,
implement, test and integrate new systems.
In both cases, our 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 our
twelve IT development centers located in India, as well our development centers
in Limerick, Ireland and Phoenix, Arizona. In addition, we maintain an on-site
presence at each customer location in order to address evolving customer needs
and resulting changes to the project.
A key part of our 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, we
leverage our skills in business application development and enterprise
application integration to build sophisticated business applications and to
integrate these new applications and Web sites with client server and legacy
systems. We build and deploy robust, scalable and extensible architectures for
use in a wide range of industries. We maintain competency centers specializing
in Microsoft, IBM and Sun technologies, among others, in order
9
to be able to provide application development and integration services to a
broad spectrum of customers.
Our 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. Our re-engineering tools automate many of the
processes required to implement advanced client/server technologies. We believe
that this automation substantially reduces the time and cost to perform
re-engineering services, savings that benefit both us and our customers. These
tools also enable us to perform source code analysis and to re-design target
databases and convert certain programming languages. If necessary, our
programmers also help customers re-design and convert user interfaces.
APPLICATION MAINTENANCE SERVICES. We provide 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, we are often able to
introduce product and process enhancements and improve service levels to
customers requesting modifications and on-going support.
Our on-site/offshore business model enables us to provide a range of rapid
response and cost-effective support services to our customers. Our 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, we take full
advantage of our offshore resources to develop solutions more cost-effectively
than would be possible relying on higher cost local professionals. The services
provided by our offshore team members are delivered to customers using satellite
and fiber-optic telecommunications.
As part of our application maintenance services, we assist 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.
Application maintenance service contracts are usually long term in nature
and, at times, can include an element of application development.
We seek to anticipate the operational environment of customer's IT systems
as we design and develop such systems. We also offer diagnostic services to
customers to assist them in identifying shortcomings in their IT systems and
optimizing the performance of their systems.
Sales and Marketing
- -------------------
We market and sell our services directly through our professional staff,
senior management and direct sales personnel operating out of our Teaneck
headquarters and our business development offices in Atlanta, Chicago, Dallas,
Minneapolis, Phoenix, Los Angeles, San Francisco, Limerick, London, Amsterdam,
Frankfurt and Zurich. In 2003, we managed our business and results of operations
on a geographic basis. At December 31, 2003, we had
10
approximately 29 direct sales persons and 111 account managers. The sales and
marketing group works with our 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:
o define the scope, deliverables, assumptions and execution strategies
for a proposed project;
o develop project estimates;
o prepare pricing and margin analyses; and
o finalize sales proposals.
Management reviews and approves proposals, which are then presented to the
prospective customer. Our sales and account management personnel remain actively
involved in the project through the execution phase. We focus our marketing
efforts on businesses with intensive information processing needs. We maintain 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, we pre-qualify 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, our 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 us has increased significantly in recent
years. At the end of the years ended December 31, 2001, 2002 and 2003, we were
providing services to 100 customers, 115 customers and 153 customers,
respectively.
For the year ended December 31, 2003, we derived our revenues from the
following industries: 46% from financial related services, 22% from healthcare
services, 15% from retail, manufacturing and logistics and 10% from information
services. The remaining portions of our revenues were derived from strategic
alliances and other sources. We dedicate a number of our employees to each of
the major industries we service to better serve our customers.
We provide 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 our services in a subsequent year. Approximately 10.1% of our revenues in
the fiscal year ended December 31, 2003 were generated from JP Morgan Chase.
11
Our customers include:
ACNielsen Corporation First Data Corporation
ADP, Incorporated IMS Health Incorporated ("IMS Health")
Brinker International, Incorporated JP Morgan Chase
CCC Information Services Incorporated Metropolitan Life Insurance Company
Computer Sciences Corporation Royal & SunAlliance USA
The Dun & Bradstreet Corporation United Healthcare
Presented in the table below is additional information about our
customers.
Year Ended December 31,
2001 2002 2003
---- ---- ----
Percent of revenues from top five customers,
including IMS Health............................ 35% 38% 36%
Percent of revenues from top ten customers,
including IMS Health............................ 53% 54% 54%
Percent of revenues from IMS Health............... 11% 9% 6%
Application development services as a percent
of revenues..................................... 48% 43% 41%
Application maintenance services as a percent
of revenues..................................... 52% 57% 59%
Revenues under fixed-bid contracts as a percent
of revenues..................................... 24% 25% 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:
o systems integration firms;
o contract programming companies;
o application software companies;
o Internet solutions providers;
o the professional services groups of computer equipment companies;
and
o facilities management and outsourcing companies.
Our most direct competitors include, among others, Infosys, Inc., Tata
Consultancy Services and WIPRO Ltd., which utilize an integrated
on-site/offshore business model comparable to that used by us. We also compete
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, we compete with numerous smaller local companies in the
various geographic markets in which we operate.
12
Many of our competitors have significantly greater financial, technical
and marketing resources and greater name recognition than we do. The principal
competitive factors affecting the markets for our services include:
o performance and reliability;
o quality of technical support, training and services;
o responsiveness to customer needs;
o reputation, experience and financial stability; and
o competitive pricing of services.
We rely on the following to compete effectively:
o a well developed recruiting, training and retention model;
o a successful service delivery model;
o a broad referral base;
o continual investment in process improvement and knowledge capture;
o investment in research and development;
o continued focus on responsiveness to customer needs, quality of
services, competitive prices; and
o project management capabilities and technical expertise.
Intellectual Property
- ---------------------
Our intellectual property rights are important to our business. We
presently hold no patents or registered copyrights. Instead, we rely on a
combination of intellectual property laws, trade secrets, confidentiality
procedures and contractual provisions to protect our intellectual property. We
require our employees, independent contractors, vendors and customers to enter
into written confidentiality agreements upon the commencement of their
relationships with us. These agreements generally provide that any confidential
or proprietary information developed by us or on our behalf be kept
confidential. In addition, when we disclose any confidential or proprietary
information to third parties, we routinely require those third parties to agree
in writing to keep that information confidential.
A portion of our business involves the development for customers of highly
complex information technology software applications and other technology
deliverables. This intellectual property includes written specifications and
documentation in connection with specific customer engagements. Our customers
usually own the intellectual property in the software we develop for them.
13
Pursuant to a license agreement with IMS Health, all rights to the
"Cognizant" name and certain related trade and service marks were transferred to
us in July 1998. As of December 31, 2003, we held three trademark registrations
in the United States and had four pending trademark applications in India. In
addition, as of December 31, 2003, we held 230 other trademark registrations in
56 other countries.
Employees
- ---------
At December 31, 2003, we employed approximately 2,150 persons on a
full-time basis in various locations throughout North America. We also employed
approximately 320 persons on a full-time basis in various locations throughout
Europe, principally in the United Kingdom and Ireland, and approximately 6,770
persons on a full-time basis in our offshore IT development centers in India.
None of our employees are subject to a collective bargaining arrangement. We
consider our relations with our employees to be good.
Our future success depends to a significant extent on our ability to
attract, train and retain highly skilled IT development professionals. In
particular, we need to attract, train and retain project managers, programmers
and other senior technical personnel. We believe 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 we offer. We have an active recruitment program in India, and have
developed a recruiting system and database that facilitates the rapid
identification of skilled candidates. During the course of the year, we conduct
extensive recruiting efforts at premier colleges and technical schools in India.
We evaluate candidates based on academic performance, the results of a written
aptitude test measuring problem-solving skills and a technical interview. In
addition, we have 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.
Our senior project managers are hired from leading consulting firms in the
United States and India. Our senior management and most of our project managers
have experience working in the United States and Europe. This enhances our
ability to attract and retain other professionals with experience in the United
States. We have also adopted a career and education management program to define
our employees' objectives and career plans. We have implemented an intensive
orientation and training program to introduce new employees to the Q*VIEW
software engineering process, our other technologies and our services.
14
Our Executive Officers
- ----------------------
The following table identifies our current executive officers:
Capacities in In Current
Name Age Which Served Position Since
- ---- --- ------------- --------------
Lakshmi Narayanan(1).... 51 President and Chief 2003
Executive Officer
Francisco D'Souza(2).... 35 Chief Operating Officer 2003
Gordon Coburn(3)........ 40 Executive Vice President, 2003
Chief Financial Officer,
Treasurer and Secretary
Ramakrishnan Executive Vice President 2004
Chandrasekaran(4)....... 47 & Managing Director
(1) Lakshmi Narayanan was elected Chief Executive Officer in December 2003.
Mr. Narayanan continues to serve as our President, a position he has held
since his election in March 1998. Mr. Narayanan joined our Indian
subsidiary as Chief Technology Officer in 1994 and was elected President
of such subsidiary on January 1, 1996. Prior to joining us, from 1975 to
1994, Mr. Narayanan was the regional head of Tata Consultancy Services, a
large consulting and software services company located in India. Mr.
Narayanan holds a Bachelor of Science degree, a Master of Science degree
and a Master of Business Administration degree from the Indian Institute
of Science.
(2) Francisco D'Souza was elected Chief Operating Officer in December 2003.
Prior to that, from November 1999 to December 2003, he served as our
Senior Vice President, North American Operations and Business Development.
From March 1998 to November 1999, he served as our Vice President, North
American Operations and Business Development and as our Director-North
American Operations and Business Development from June 1997 to March 1998.
From January 1996 to June 1997, Mr. D'Souza was engaged as our consultant.
From February 1995 to December 1995, Mr. D'Souza was employed as Product
Manager at Pilot Software. Between 1992 and 1995, Mr. D'Souza held various
marketing, business development and technology management positions as a
Management Associate at The Dun & Bradstreet Corporation. While working at
The Dun & Bradstreet Corporation, Mr. D'Souza was part of the team that
established the software development and maintenance business conducted by
us. Mr. D'Souza holds a Bachelor of Business Administration degree from
the University of East Asia and a Master of Business Administration degree
from Carnegie-Mellon University.
(3) Gordon Coburn was elected Executive Vice President in December 2003. Mr.
Coburn continues to serve as our Chief Financial Officer, Treasurer and
Secretary, positions he has held since his election in March 1998. From
November 1999 to December 2003, he
15
served as our Senior Vice President. He previously was our Vice President
from 1996 to November 1999. Mr. Coburn served as Senior Director - Group
Finance & Operations for Cognizant Corporation from November 1996 to
December 1997. From 1990 to October 1996, Mr. Coburn held key financial
positions with The Dun & Bradstreet Corporation. Mr. Coburn holds a
Bachelor of Arts degree from Wesleyan University and a Master of Business
Administration degree from the Amos Tuck School at Dartmouth College.
(4) Ramakrishnan Chandrasekaran was elected Executive Vice President and
Managing Director in January 2004. Prior to that, from November 1999 to
January 2004, he served as our Senior Vice President responsible for the
ISV relationships, key alliances, capacity growth, process initiatives,
business development and offshore delivery. Mr. Chandrasekaran joined us
as Assistant Vice President in December 1994, before getting promoted to
Vice President in January 1997. Mr. Chandrasekaran has more than 20 years
of experience working in the IT services industry. Prior to joining us,
Mr. Chandrasekaran worked with Tata Consultancy Services. Mr.
Chandrasekaran holds a Mechanical Engineering degree and Master of
Business Administration degree from the Indian Institute of Management.
None of our executive officers is related to any other executive officer
or to any of our Directors. Our executive officers are elected annually by the
Board of Directors and serve until their successors are duly elected and
qualified.
Corporate History
- -----------------
We began our 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, we, along with certain other
entities, were spun-off from The Dun & Bradstreet Corporation to form a new
company, Cognizant Corporation. On June 24, 1998, we completed an initial public
offering of our Class A common stock. On June 30, 1998, a majority interest in
us, and certain other entities were spun-off from Cognizant Corporation to form
IMS Health. Subsequently, Cognizant Corporation was renamed Nielsen Media
Research, Incorporated. At December 31, 2002, IMS Health owned 55.3% of our
outstanding stock (representing all of our Class B common stock) and held 92.5%
of the combined voting power of our common stock.
On January 30, 2003, we filed a tender offer in which IMS Health
stockholders could exchange IMS Health shares held by them for our Class B
common stock held by IMS Health.
On February 13, 2003, IMS Health distributed all of our Class B common
stock that IMS Health owned (a total of 33,872,700 shares) in an exchange offer
to its stockholders. IMS Health distributed 0.927 shares of our Class B common
stock to its stockholders for every one share of IMS Health's common stock
tendered. There was no impact on the number of our total shares outstanding upon
the completion of the exchange offer.
As of February 21, 2003, pursuant to our Restated Certificate of
Incorporation, all of the shares of Class B common stock automatically converted
into shares of Class A common stock. According to our Restated Certificate of
Incorporation, if at any time the outstanding shares of
16
our Class B common stock ceased to represent at least 35% of the economic
ownership represented by the aggregate number of shares of our common stock then
outstanding, each share of our Class B common stock shall automatically convert
into one share of Class A common stock. This automatic conversion occurred on
February 21, 2003 based on share numbers received by us from our transfer agent
(American Stock Transfer and Trust Company) as of the close of business February
20, 2003, which indicated that the Class B common stock represented less than
35% ownership represented by the aggregate number of shares of our common stock
then outstanding. Accordingly, as of February 21, 2003, there are no shares of
Class B common stock outstanding.
On February 11, 2000, the Board of Directors declared a 2-for-1 stock
split effected by a 100% dividend payable on March 16, 2000 to stockholders of
record on March 2, 2000.
On May 23, 2000, our stockholders approved an increase in the number of
authorized Class B common stock from 15,000,000 shares to 25,000,000 shares.
On March 5, 2003, the Board of Directors declared a 3-for-1 stock split
effected by a 200% stock dividend payable on April 1, 2003 to stockholders of
record on March 19, 2003. The stock splits have been reflected in the
accompanying consolidated financial statements, and all applicable references as
to the number of common shares and per share information were restated.
Appropriate adjustments have been made in the exercise and number of shares
subject to stock options. Stockholder equity accounts were restated to reflect
the reclassification of an amount equal to the par value of the increase in
issued common shares from the additional paid-in-capital account to the common
stock accounts.
Acquisitions
- ------------
On April 2, 2003, we completed the acquisition of Aces International,
Inc., a company specializing in Customer Relationship Management solutions,
serving clients in the healthcare, financial services and telecommunications
verticals. This acquisition is designed to help us lay a strong foundation for
growth in the Customer Relationship Management solutions.
On November 24, 2003, we completed the acquisition of Infopulse Nederland
B.V. ("Infopulse"), a Netherlands-based IT services firm specializing in the
banking and financial services industry. The acquisition is designed to allow us
to better serve customers in the Benelux region by adding local client partners,
industry expertise, and local language capability.
Available Information
- ---------------------
We make available the following public filings with the Securities and
Exchange Commission (the "SEC") free of charge through our Web site at
www.cognizant.com as soon as reasonably practicable after we electronically file
such material with, or furnishes such material to, the SEC:
o our Annual Reports on Form 10-K and any amendments thereto;
o our Quarterly Reports on Form 10-Q and any amendments thereto; and
17
o our Current Reports on Form 8-K and any amendments thereto.
In addition, we will make available our code of business conduct and
ethics free of charge through our Web site. We intend to disclose any amendments
to, or waivers from, our code of business conduct and ethics that are required
to be publicly disclosed pursuant to rules of the SEC and the Nasdaq National
Market by filing such amendment or waiver with the Securities and Exchange
Commission and posting it on our Web site.
No information on our Internet Web site is incorporated by reference into
this Form 10-K or any other public filing made by us with the SEC.
Additional Factors That May Affect Future Results
- -------------------------------------------------
IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR PROSPECTS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
A SUBSTANTIAL PORTION OF OUR ASSETS AND OPERATIONS ARE LOCATED IN INDIA AND WE
ARE SUBJECT TO REGULATORY, ECONOMIC AND POLITICAL UNCERTAINTIES IN INDIA.
We intend to continue to develop and expand our offshore facilities in
India where, as of December 31, 2003, a majority of our technical professionals
were located. While wage costs are lower in India than in the United States and
other developed countries for comparably skilled professionals, wages in India
are increasing at a faster rate than in the United States, which could result in
our incurring increased costs for technical professionals and reduced operating
margins. In addition, there is intense competition in India for skilled
technical professionals and we expect 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, our operations would be materially adversely affected. In addition,
U.S. companies may decline to contract with us 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 us. In the past, the Indian government has provided
significant tax incentives and relaxed certain regulatory restrictions in order
to encourage foreign investment in
18
specified sectors of the economy, including the software development services
industry. Programs that have benefited us 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 us from our
Indian operations could have a material adverse effect on our business, results
of operations and financial condition.
GENERAL ELECTIONS ARE DECLARED TO TAKE PLACE IN INDIA IN APRIL 2004. THE OUTCOME
OF THE ELECTIONS WILL DETERMINE THE NEW GOVERNMENT, WHICH MAY BE A COALITION OF
DIFFERENT PARTIES THAN EXISTING. THE APPROACH OF THE NEW GOVERNMENT ON THE
ECONOMIC REFORMS, IF DIFFERENT, MAY HAVE AN IMPACT ON OUR FINANCIAL RESULTS. WE
CANNOT ASSURE THE POSITIVE TREND IN CURRENT REFORMS MAY CONTINUE AND SUCH
CHANGES MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIALS.
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 our 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. These economic reform policies have also
been advocated by the opposition parties. We cannot be assured, 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 our
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 our business in particular.
No assurance can be given that we 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 OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND IMPAIR OUR ABILITY
TO SERVICE OUR CUSTOMERS.
Tensions between the United States and Iraq have escalated due to the
United States invasion of and ongoing conflict with Iraq. Hostilities involving
the United States, or military or travel disruptions and restrictions affecting
our employees, could materially adversely affect our operations and our ability
to service our customers. As of December 31, 2003, a majority of our technical
professionals were located in India, and the vast majority of our technical
professionals in the United States and Europe are Indian nationals who are able
to work in the United States and Europe only because they hold current visas.
Travel restrictions could cause
19
us to incur additional unexpected labor costs and expenses or could restrain our
ability to retain the skilled professionals we need for our operations in the
United States and Europe.
OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO MANY UNCERTAINTIES.
Revenues from customers outside North America represented 12%, 13% and 15%
of our revenues for the years ended December 31, 2003, 2002 and 2001,
respectively. We anticipate that revenues from customers outside North America
will continue to account for a material portion of our revenues in the
foreseeable future and may increase as we expand our international presence,
particularly in Europe. In addition, a substantial majority of our employees and
almost all of our IT development centers are located in India. As a result, we
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, we have not
engaged in any hedging transactions to mitigate our 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 our business, results of
operations and financial condition.
WE FACE 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:
o systems integration firms;
o contract programming companies;
o application software companies;
o Internet solutions providers;
o the professional services groups of computer equipment companies;
and
o facilities management and outsourcing companies.
The market also includes numerous smaller local competitors in the various
geographic markets in which we operate. Our direct competitors who use the
on-site/offshore business model include, among others, Infosys, Inc., Tata
Consultancy Services and WIPRO Ltd. In addition, many of our competitors have
significantly greater financial, technical and marketing resources and greater
name recognition than we do. 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. We
20
cannot assure you that we will be able to sustain our 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.
OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP NEW SERVICES AND ENHANCE OUR
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. Our future success will depend on our ability to develop
solutions that keep pace with changes in the IT services market. There can be no
assurance that we will be successful in developing new services addressing
evolving technologies on a timely or cost-effective basis or, if these services
are developed, that we will be successful in the marketplace. In addition, there
can be no assurance that products, services or technologies developed by others
will not render our services non-competitive or obsolete. Our failure to address
these developments could have a material adverse effect on our business, results
of operations and financial condition.
Our ability to remain competitive will also depend on our 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. Our failure to design and implement solutions in a
timely and cost-effective manner could have a material adverse effect on our
business, results of operations and financial condition.
COMPETITION FOR HIGHLY SKILLED TECHNICAL PERSONNEL IS INTENSE AND THE SUCCESS OF
OUR BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN HIGHLY SKILLED
PROFESSIONALS.
Our future success will depend to a significant extent on our ability to
attract, train and retain highly skilled IT development professionals. In
particular, we need to attract, train and retain project managers, IT engineers
and other senior technical personnel. We believe 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 we offer. We have subcontracted, to a limited extent in the past, and
may do so in the future, with other service providers in order to meet our
obligations to our customers. Our ability to maintain and renew existing
engagements and obtain new business will depend, in large part, on our 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, we must train and manage our 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 we
will be able to train and assimilate new employees successfully. Our failure to
attract, train and retain current or future employees could have a material
adverse effect on our business, results of operations and financial condition.
OUR GROWTH MAY BE HINDERED BY IMMIGRATION RESTRICTIONS.
Our future success will depend on our ability to attract and retain
employees with technical and project management skills from developing
countries, especially India. The vast
21
majority of our 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 our ability to obtain the necessary visas and work permits.
The H-1 B 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-1 B visa usually 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-1 B petitions that U.S. Citizenship and Immigration Services
("CIS," one of the successor agencies to the Immigration and Naturalization
Service) may approve in any federal fiscal year, and in years in which this
limit is reached, we may be unable to obtain H-1 B visas necessary to bring
foreign employees to the United States. In the current federal fiscal year, the
limit is 65,000. This cap has been reached as of February 17, 2004. New H-1 B
petitions may not be filed until April 1, 2004, and these petitions must be for
positions beginning no earlier than October 1, 2004. However, as a part of our
advanced planning process, we have sufficient employees visa-ready to meet our
anticipated business growth in the current year. In addition, there are strict
labor regulations associated with the H-1 B visa classification. Higher users of
the H-1 B 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 us to comply with existing
regulations on the H-1 B classification may result in a bar on future use of the
H-1 B program.
We also regularly transfer employees of our subsidiary 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. We have an approved "Blanket L Program," under which the corporate
relationships of our transferring and receiving entities have been pre-approved
by the CIS, 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 CIS 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. Our inability
to bring qualified technical personnel into the United States to staff on-site
customer locations would have a material adverse effect on our business, results
of operations and financial condition.
In the past year, the press has covered allegations of abuse of the L-1
visa category by certain companies. The companies are alleged to have used the
L-1 category to bring workers into the U.S. who then displace U.S. workers.
Because of this press attention, Congress has held hearings on the L-1 visa
category and legislators have introduced bills to change or restrict the
standards for the L-1 category. While none of the proposed legislation has moved
out of the introductory stage, it is possible that new restrictions on the L
visa category will become law. If
22
such restrictive proposals become law, this could impair our ability to staff
our projects in the U.S. with resources from our entities abroad.
We also process 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 our ability to successfully obtain permanent
residence for our foreign employees in the United States, could require us to
incur additional unexpected labor costs and expenses or could restrain our
ability to retain the skilled professionals we need for our operations in the
United States. Any of these restrictions or limitations on our hiring practices
could have a material adverse effect on our 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 we
have experienced significant growth. Under the new regulations, in order for us
to transfer our employees to the United Kingdom, either from the United States
or from India, we must demonstrate that the employee had been employed by us for
at least six months prior to the transfer. These restrictions restrain our
ability to add the skilled professionals we need for our operations in Europe,
and could have an adverse affect on our international strategy to expand our
presence in Europe. As a result, the changes to work permit legislation in the
United Kingdom could have a material adverse effect on our 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 be significantly affected by
political forces and levels of economic activity. Our international expansion
strategy and our 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 our ability to staff projects with IT professionals who are not citizens
of the country where the work is to be performed.
POTENTIAL ANTI-OUTSOURCING LEGISLATION COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND IMPAIR OUR ABILITY TO SERVICE
OUR CUSTOMERS.
In the past few months, the issue of outsourcing of services abroad by
American companies has become a topic of political discussion in the United
States. Measures aimed at limiting or restricting outsourcing by U.S. companies
are under discussion in Congress and in as many as one-half of the state
legislatures. While no substantive anti-outsourcing legislation has been
introduced to date, given the intensifying debate over this issue, the
introduction of such legislation is possible. If introduced, such measures are
likely to fall within two categories: (1) a broadening of restrictions on
outsourcing by federal government agencies and on government contracts with
firms that outsource services directly or indirectly, and/or (2) measures that
impact private industry, such as tax disincentives or intellectual property
transfer restrictions. In the event that any such measures become law, our
business, financial condition and results of operations could be adversely
affected and our ability to service our customer could be impaired.
23
OUR ABILITY TO OPERATE AND COMPETE EFFECTIVELY COULD BE IMPAIRED IF WE LOSE KEY
PERSONNEL.
Our future performance depends to a significant degree upon the continued
service of the key members of our management team, as well as marketing, sales
and technical personnel, and our ability to attract and retain new management
and other personnel. We do not maintain key man life insurance on any of our
executive officers or significant employees. Competition for personnel is
intense, and there can be no assurance that we will be able to retain our key
employees or that we will be successful in attracting and retaining new
personnel in the future. The loss of any one or more of our key personnel or the
failure to attract and retain key personnel could have a material adverse effect
on our business, results of operations and financial condition.
RESTRICTIONS IN NON-COMPETITION AGREEMENTS WITH OUR EXECUTIVE OFFICERS MAY NOT
BE ENFORCEABLE.
We have entered into non-competition agreements with a majority of our
executive officers. There can be no assurance, however, that the restrictions in
these agreements prohibiting the executive officers from engaging in competitive
activities are enforceable. Further, substantially all of our professional
non-executive staff are not covered by agreements that would prohibit them from
working for our competitors. If any of our key professional personnel leaves our
employment and joins one of our competitors, our business could be adversely
affected.
OUR EARNINGS MAY BE ADVERSELY AFFECTED IF WE CHANGE OUR INTENT NOT TO REPATRIATE
EARNINGS IN INDIA.
During the first quarter of 2002, we 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, we intend to use 2002 and future Indian earnings to expand our
operations outside the United States instead of repatriating those earnings to
the United States. Accordingly, effective January 1, 2002, pursuant to
Accounting Principles Board Opinion No. 23, "Accounting for Income Taxes-Special
Areas", we no longer have to accrue taxes on all foreign earnings recognized in
2002 and subsequent periods as these earnings are now considered to be
indefinitely reinvested outside the United States. While we have no plans to do
so, events may occur in the future that could effectively force us to change our
intent on repatriating Indian earnings. If we change our intent and repatriate
such earnings, we will have to accrue the applicable amount of taxes associated
with such earnings and pay taxes at a substantially higher rate than the
effective rate in 2003. These increased taxes could have a material adverse
effect on our business, results of operations and financial condition.
OUR EARNINGS MAY BE ADVERSELY AFFECTED IF WE CHANGE OUR ACCOUNTING POLICY WITH
RESPECT TO EMPLOYEE STOCK OPTIONS.
Stock options are an important component of compensation packages for most
of our mid- and senior-level employees. We currently do not deduct the expense
of employee stock option grants from our income. Many companies, however, are
considering a change to their
24
accounting policies to record the value of stock options issued to employees as
an expense and changes in the accounting treatment of stock options are
currently under consideration by the Financial Accounting Standards Board and
other accounting standards-setting bodies. If we are required to or decide to
change our accounting policy with respect to the treatment of employee stock
option grants, our earnings could be materially adversely affected.
A SIGNIFICANT PORTION OF OUR PROJECTS ARE ON A FIXED-PRICE BASIS, SUBJECTING US
TO THE RISKS ASSOCIATED WITH COST OVER-RUNS AND OPERATING COST INFLATION.
We contract to provide services either on a time-and-materials basis or on
a fixed-price basis, with fixed-price contracts accounting for approximately 25%
and 26% of our revenues for the years ended December 31, 2002 and 2003,
respectively. We expect that an increasing number of our future projects will be
contracted on a fixed-price basis. We bear the risk of cost over-runs and
operating cost inflation in connection with projects covered by fixed-price
contracts. Our failure to estimate accurately the resources and time required
for a fixed-price project, or our failure to complete our contractual
obligations within the time frame committed, could have a material adverse
effect on our business, results of operations and financial condition.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MANAGE OUR RAPID GROWTH.
Since we began providing software development and maintenance services in
early 1994, our professional and support staff has increased from approximately
25 to over approximately 9,240 at December 31, 2003. Our anticipated growth will
continue to place significant demands on our management and other resources. In
particular, we will have to continue to increase the number of our personnel,
particularly skilled technical, marketing and management personnel, and continue
to develop and improve our operational, financial, communications and other
internal systems. Our inability to manage our anticipated growth effectively
could have a material adverse effect on our business, results of operations and
financial condition.
As part of our growth strategy, we are expanding our operations in Europe
and Asia. We may not be able to compete effectively in these markets and the
cost of entering these markets may be substantially greater than we expect. If
we fail to compete effectively in the new markets we enter, or if the cost of
entering those markets is substantially greater than we expect, our business,
results of operations and financial condition could be adversely affected. In
addition, if we cannot compete effectively, we may be required to reconsider our
strategy to invest in our international expansion plans and change our intent on
the repatriation of our earnings.
WE RELY ON A FEW CUSTOMERS FOR A LARGE PORTION OF OUR REVENUES.
Approximately 35%, 38% and 36% of our revenues in years ended December 31,
2001 and 2002 and 2003, respectively, were generated from our top five
customers. Approximately 10.1% of our revenues in the fiscal year ended December
31, 2003 were generated from JP Morgan Chase. 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 our services in a subsequent year. The loss of one of our
large customers could have a material adverse effect on our business, results of
operations and financial condition.
25
WE GENERALLY DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS.
Consistent with industry practice, we generally do not enter into
long-term contracts with our customers. As a result, we are substantially
exposed to volatility in the market for our services, and may not be able to
maintain our level of profitability. If we are unable to market our services on
terms we find acceptable, our financial condition and results of operations
could suffer materially.
OUR OPERATING RESULTS EXPERIENCE SIGNIFICANT QUARTERLY FLUCTUATIONS.
We historically have experienced significant quarterly fluctuations in our
revenues and results of operations and expect these fluctuations to continue.
Among the factors causing these variations have been:
o the number, timing, scope and contractual terms of IT development
and maintenance projects in which we are engaged;
o delays incurred in the performance of those projects;
o the accuracy of estimates of resources and time required to complete
ongoing projects; and
o general economic conditions.
In addition, our future revenues, operating results and margins may
fluctuate as a result of:
o changes in pricing in response to customer demand and competitive
pressures;
o the mix of on-site and offshore staffing;
o the ratio of fixed-price contracts versus time-and-materials
contracts;
o employee wage levels and utilization rates;
o the timing of collection of accounts receivable; and
o the breakdown of revenues by distribution channel.
A high percentage of our 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 our projects or in employee
wage levels and utilization rates may cause significant variations in our
operating results in any particular quarter, and could result in losses. Any
significant shortfall of revenues in relation to our expectations, any material
reduction in utilization rates for our 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
26
major customer projects could require us to pay underutilized employees and
could therefore have a material adverse effect on our business, results of
operations and financial condition.
As a result of these factors, it is possible that in some future periods,
our revenues and operating results may be significantly below the expectations
of public market analysts and investors. In such an event, the price of our
common stock would likely be materially and adversely affected.
WE MAY NOT BE ABLE TO SUSTAIN OUR CURRENT LEVEL OF PROFITABILITY.
Our gross margin of 46.4% and 45.8% for the years ended December 31, 2002
and 2003, respectively, may decline if we experience declines in demand and
pricing for our services. In addition, wages in India are increasing at a faster
rate than in the United States, which could result in us incurring increased
costs for technical professionals. Although we have been able to partially
offset pricing pressures and wage increases through our low-cost operating
structure, there can be no assurance that we will be able to continue to do so
in the future.
LIABILITY CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Many of our engagements involve projects that are critical to the
operations of our customers' businesses 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 us, regardless of our responsibility for the
failure. Although we attempt to limit by contract our liability for damages
arising from negligent acts, errors, mistakes or omissions in rendering our 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 us from liability for damages. Although we have 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 us that exceed
available insurance coverage or changes in our insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on our business, results of
operations and financial condition.
WE MAY HAVE POTENTIAL LIABILITY ARISING FROM THE IMS HEALTH EXCHANGE OFFER IN
THE EVENT THAT WE BREACH ANY OF OUR REPRESENTATIONS IN CONNECTION WITH THE
DISTRIBUTION AGREEMENT ENTERED INTO WITH IMS HEALTH.
We entered into a Distribution Agreement, dated January 7, 2003, with IMS
Health (the "Distribution Agreement"), that provides, among other things, that
IMS Health and we 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 U.S. federal income tax consequences of the exchange offer. In
addition, pursuant to the Distribution Agreement, we agreed to indemnify IMS
Health for any tax liability to which they may be subject as a result of the
exchange offer but only to the extent that such tax liability resulted solely
from a breach of the representations that we made and were
27
relied upon by McDermott, Will & Emery in connection with rendering its opinion
regarding the U.S. federal income tax consequences of the exchange offer. If we
breach any of our representations in connection with the Distribution Agreement,
the related indemnification liability could have a material adverse effect on
our results of operations, financial position and cash flows.
WE MAY BE SUBJECT TO LEGACY DUN & BRADSTREET LIABILITIES THAT COULD HAVE AN
ADVERSE EFFECT ON OUR 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 AC Nielsen 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
our 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 our 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 & Bradstreet Corporation and Moody's Corporation). IMS
Health and Nielsen Media Research,
28
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
our 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 our undertakings to be
jointly and severally liable for these liabilities, but if for any reason IMS
Health does not perform on our indemnification obligation, these liabilities
could have a material adverse effect on our financial condition and results of
operations.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS.
Our future success will depend in part on our ability to protect our
intellectual property rights. We presently hold no patents or registered
copyrights, and rely upon a combination of copyright and trade secret laws,
non-disclosure and other contractual arrangements and various security measures
to protect our 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. We
believe that laws, rules, regulations and treaties in effect in the United
States and India are adequate to protect us from misappropriation or
unauthorized use of our 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 we have taken to protect our intellectual property
rights will be adequate to deter misappropriation of any of our intellectual
property, or that we will be able to detect unauthorized use and take
appropriate steps to enforce our rights. Unauthorized use of our intellectual
property may result in development of technology, products or services which
compete with our products and unauthorized parties may infringe upon or
misappropriate our products, services or proprietary information.
Although we believe that our intellectual property rights do not infringe
on the intellectual property rights of any of our competitors or others, there
can be no assurance that infringement claims will not be asserted against us in
the future, that assertion of infringement claims will not result in litigation
or that we 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
commercially reasonable terms, if at all. We expect that the risk of
infringement claims against us will increase if our competitors are able to
obtain patents for software products and processes. Any infringement claims,
regardless of their outcome, could result in substantial cost to us and divert
management's attention from our operations. Any infringement claim or litigation
against us
29
could, therefore, have a material adverse effect on our business, results of
operations and financial condition.
WE MAY BE UNABLE TO INTEGRATE ACQUIRED COMPANIES OR TECHNOLOGIES SUCCESSFULLY.
We believe that opportunities exist in the fragmented IT services market
to expand our business through selective strategic acquisitions and joint
ventures. We believe that acquisition and joint venture candidates may enable us
to expand our geographic presence, especially in the European market, enter new
technology areas or expand our capacity. There can be no assurance that we 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 our 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 our business, results of
operations and financial condition. We 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 we will be able to arrange adequate
financing on acceptable terms. In addition, acquisitions financed with the
issuance of our equity securities could be dilutive.
PROVISIONS IN OUR CHARTER, BY-LAWS AND STOCKHOLDERS' RIGHTS PLAN AND PROVISIONS
UNDER DELAWARE LAW MAY DISCOURAGE UNSOLICITED TAKEOVER PROPOSALS.
Provisions in our charter and by-laws, each as amended, our stockholders'
rights plan and Delaware General Corporate Law ("DGCL") may have the effect of
deterring unsolicited takeover proposals or delaying or preventing changes in
our control or management, 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. Our
board of directors has the authority, without further action by the
stockholders, to fix the rights and preferences, and issue shares, of preferred
stock. Our charter provides for a classified board of directors, which will
prevent a change of control of our board of directors at a single meeting of
stockholders. The elimination of our 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 our chairman or chief
executive officer or our board of directors. The supermajority-voting
requirement for specified amendments to our charter and by-laws allows a
minority of our stockholders to block those amendments. The DGCL also contains
provisions preventing stockholders from engaging in business combinations with
us, subject to certain exceptions. These provisions could also discourage bids
for our common stock at a premium as well as create a depressive effect on the
market price of the shares of our common stock.
ITEM 2. PROPERTIES
As of December 31, 2003, we have substantially completed the initial phase
of our India development center expansion program, which was announced in July
2001. This program encompassed the construction of three fully-owned development
centers containing approximately 650,000 square feet of space in Chennai,
Calcutta and Pune. Each of these
30
development centers contain up-to-date technology infrastructure and
communications capabilities.
On December 22, 2003, we announced building plans for three additional
fully-owned development centers containing over 600,000 square feet of space in
Pune, Chennai and Bangalore. These additional facilities will be able to
accommodate approximately 6,500 employees in total.
In addition, we operate eleven leased development facilities in the
following cities: Bangalore, Chennai, Calcutta and Hyderabad in India, Phoenix,
Arizona and Limerick, Ireland.
We operate out of our Teaneck, New Jersey headquarters and our regional
and international offices. We believe that our current facilities are adequate
to support our existing operations. We also believe that we will be able to
obtain suitable additional facilities on commercially reasonable terms on an "as
needed" basis.
We occupy the following properties:
Approximate
Area
Location (in sq. feet) Use Nature of Occupancy
- ------------------ ------------- ------------- ------------------------
Bangalore, India 25,849 Software Multiple leases
Development expiring 04/30/05 -
Facility 06/30/06 with renewal
options
Bangalore, India 35,475 Software Lease expires 10/31/11
Development with renewal option
Facility
Chennai, India 84,888 Software Multiple leases
Development expiring 11/30/04 with
Facility renewal options
Chennai, India 15,536 Software Multiple leases
Development expiring 1/31/06 -
Facility 4/30/06 with renewal
options
Chennai, India 34,700 Software Multiple leases
Development expiring 8/31/04
Facility -03/14/06 with renewal
options
Chennai, India 35,126 Software Multiple leases
Development expiring 4/30/06 with
Facility renewal options
Chennai, India 33,688 Software Lease expires 12/15/06
Development with renewal options
Facility
Chennai, India 400,000 Software Owned
Development
Facility
31
Approximate
Area
Location (in sq. feet) Use Nature of Occupancy
- ------------------ ------------- ------------- ------------------------
Pune, India 135,723 Software Owned
Development
Facility
Calcutta, India 114,120 Software Owned
Development
Facility
Calcutta, India 13,928 Software Lease expires 10/06/06
Development with a renewal option
Facility
Hyderabad, India 31,019 Software Multiple leases
Development expiring 10/19/08 -
Facility 12/31/08
Teaneck, New Jersey 24,745 Executive and Multiple leases
Business expiring 09/30/05 -
Development 12/30/10
Office
Atlanta, Georgia 957 Business Lease expires 9/30/06
Development
Office
Chicago, Illinois 5,113 Business Lease expires 7/31/05
Development
Office
Dallas, Texas 2,613 Business Lease expires 11/30/06
Development
Office
Los Angeles, 1,018 Business Lease expires 7/31/04
California Development
Office
Minneapolis, 766 Business Lease expires 9/30/06
Minnesota Development
Office
San Ramon, 5,670 Business Lease expires 10/15/06
California Development
Office
Phoenix, Arizona 15,953 Software Lease expires 06/30/06
Development
Facility
Toronto, Canada 200 Business Lease on Month to Month
Development basis
Office
Frankfurt, Germany 284 Business Lease expires 03/31/07
Development
Office
Limerick, Ireland 10,495 Software Multiple lease expiring
Development 03/27/23 - 05/31/32,
Facility cancelable with 12
month notice
32
Approximate
Area
Location (in sq. feet) Use Nature of Occupancy
- ------------------ ------------- ------------- ------------------------
London, England 2,080 Business Lease expires 9/28/04
Development
Office
Zurich, Switzerland 102 Business Lease expires 09/30/04
Development
Office
Geneva, Switzerland 100 Business Lease expires 09/30/04
Development
Office
Singapore 200 Business Lease expires 09/30/04
Development
Office
Amsterdam, The 7,131 Business Multiple leases
Netherlands Development expiring 7/31/05 -
Office 12/31/05
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of our management, the outcome of
such claims and legal actions, if decided adversely, is not expected to have a
material adverse effect on our quarterly or annual operating results, cash flows
or consolidated financial position.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Not applicable.
33
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to June 1998, there was no established market for our Class B common
stock. Since June 19, 1998, the Class A common stock has traded on the Nasdaq
National Market ("NNM") under the symbol "CTSH". Our Class B common stock is not
listed on a stock exchange and does not trade.
Prior to February 13, 2003, all of the issued and outstanding shares of
our Class B common stock were held by IMS Health. On February 13, 2003, IMS
Health distributed all of our Class B common stock that IMS Health owned (a
total of 33,872,700 shares, on a post-split basis) in an exchange offer to its
stockholders. IMS Health distributed 0.927 shares of our Class B common stock to
its stockholders for every one share of IMS Health's common stock tendered. As
of February 21, 2003, pursuant to our Restated Certificate of Incorporation, all
of the shares of Class B common stock automatically converted into shares of
Class A common stock. According to our Restated Certificate of Incorporation, if
at any time the outstanding shares of our Class B common stock ceases to
represent at least 35% of the economic ownership represented by the aggregate
number of shares of our common stock then outstanding, each share of our Class B
common stock shall automatically convert into one share of our Class A common
stock. This automatic conversion occurred on February 21, 2003 based on share
numbers we received from our transfer agent (American Stock Transfer and Trust
Company) as of the close of business February 20, 2003, which indicated that the
Class B common stock represented less than 35% ownership represented by the
aggregate number of shares of our common stock then outstanding. Accordingly, as
of February 21, 2003, there are no shares of Class B common stock outstanding.
The following table describes the per share range of high and low sale
prices for shares of our Class A common stock, as listed for quotation on the
NNM, and the quarterly cash dividends per share for the periods indicated. This
table has been restated to reflect our 3-for-1 stock split which became
effective on April 1, 2003.
Cash
Dividend Per
Quarter Ended High Low Share
- -------------------------- ------ ------ ------------
March 31, 2002............ $14.03 $11.00 $0.00
June 30, 2002............. $18.07 $12.57 $0.00
September 30, 2002........ $21.23 $16.16 $0.00
December 31, 2002......... $25.22 $16.00 $0.00
March 31, 2003............ $24.08 $18.77 $0.00
June 30, 2003............. $25.20 $17.49 $0.00
September 30, 2003........ $40.80 $25.07 $0.00
December 31, 2003......... $48.40 $37.18 $0.00
As of March 5, 2004, the approximate number of holders of record of our
Class A common stock was 352 and the approximate number of beneficial holders of
our Class A common stock was 13,501.
34
We have never declared or paid cash dividends on our Class A or Class B
common stock. We currently intend to retain any future earnings to finance the
growth of the business and, therefore, do not currently anticipate paying any
cash dividends in the foreseeable future.
Equity Compensation Plan Information
------------------------------------
The following table provides information as of December 31, 2003 with
respect to the shares of our common stock that may be issued under our existing
equity compensation plans.
----------------------------------------------------------------------
Number of Number of
Securities Weighted Securities
to be Issued Average Available for
Upon Exercise Future Issuance
Exercise of Price of Under Equity
Outstanding Outstanding Compensation
Plan Category Options Options Plans
----------------------------------------------------------------------
Equity compensation
plans that have been
approved by security
holders................ 12,471,665 $14.79 1,165,768
----------------------------------------------------------------------
In addition, as of December 31, 2003, there are 2,028,249 shares available
for issuance under our Employee Stock Purchase Plan, which is an equity
compensation plan approved by security holders. There are no equity compensation
plans that have not been approved by security holders.
35
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated historical
financial data as of the dates and for the periods indicated. Our selected
consolidated financial data set forth below as of December 31, 2002 and 2003 and
for each of the three years in the period ended December 31, 2003 has been
derived from the audited financial statements included elsewhere herein. Our
selected consolidated financial data set forth below as of December 31, 1999,
2000 and 2001 and for each of the years ended December 31, 1999 and 2000 are
derived from the audited financial statements not included elsewhere herein. Our
selected consolidated financial information for 2001, 2002 and 2003 should be
read in conjunction with the Consolidated Financial Statements and the Notes and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" which are included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues .......................... $ 74,084 $ 122,758 $ 158,969 $ 208,657 $ 365,656
Revenues - related party .......... 14,820 14,273 18,809 20,429 2,575
--------- --------- --------- --------- ---------
Total revenues ................ 88,904 137,031 177,778 229,086 368,231
Cost of revenues .................. 46,161 70,437 90,848 122,701 199,724
--------- --------- --------- --------- ---------
Gross profit ...................... 42,743 66,594 86,930 106,385 168,507
Selling, general and
administrative expenses ......... 23,061 35,959 44,942 53,345 84,259
Depreciation and
amortization expense ............ 3,037 4,507 6,368 7,842 11,936
--------- --------- --------- --------- ---------
Income from operations ............ 16,645 26,128 35,620 45,198 72,312
Other income (expense):
Interest income ................. 1,263 2,649 2,501 1,808 2,128
Split-off costs ................. -- -- -- (1,680) (2,010)
Impairment loss on investment ... -- -- (1,955) -- --
Other income (expense) - net .... 37 (530) (767) (235) (199)
--------- --------- --------- --------- ---------
Total other income (expense)... 1,300 2,119 (221) (107) (81)
--------- --------- --------- --------- ---------
Income before provision for
income taxes .................... 17,945 28,247 35,399 45,091 72,231
Provision for income taxes ........ (6,711) (10,564) (13,239) (10,529) (14,866)
--------- --------- --------- --------- ---------
Net income ........................ $ 11,234 $ 17,683 $ 22,160 $ 34,562 $ 57,365
========= ========= ========= ========= =========
Basic earnings per share .......... $ 0.20 $ 0.32 $ 0.39 $ 0.58 $ 0.92
========= ========= ========= ========= =========
Diluted earnings per share ........ $ 0.19 $ 0.29 $ 0.36 $ 0.54 $ 0.84
========= ========= ========= ========= =========
Weighted average number of
common shares outstanding ....... 55,026 55,695 57,051 59,241 62,505
========= ========= ========= ========= =========
Weighted average number of
common shares and stock
options outstanding ............. 58,246 60,767 61,113 63,693 67,907
========= ========= ========= ========= =========
36
Year Ended December 31,
-----------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Financial
Position Data:
Cash and cash equivalents.......... $ 42,641 $ 61,976 $ 84,977 $ 126,211 $ 194,221
Working capital.................... 43,507 61,501 95,637 134,347 215,861
Total assets....................... 69,026 109,540 144,983 231,473 360,589
Due to related party............... -- 8 -- -- --
Stockholders' equity............... 45,461 66,116 98,792 165,481 274,070
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
- --------
We are a leading provider o