| COGNIZANT TECHNOLOGY SOLUTIONS CORP Item 1A Risk Factors 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, 2005, 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 and Iraq |
| 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, United States 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 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 |
| - 20 - ______________________________________________________________________ [46]Table of Contents We are investing substantial cash assets in new facilities and physical infrastructure, and our profitability could be reduced if our business does not grow proportionately |
| As of December 31, 2005, we had contractual commitments of approximately dlra21dtta5 million related to capital expenditures on construction or expansion of our development centers |
| We may encounter cost overruns or project delays in connection with new facilities |
| These expansions may increase our fixed costs and if we are unable to grow our business and revenues proportionately, our profitability will be reduced |
| Our international sales and operations are subject to many uncertainties |
| Revenues from customers outside North America represented approximately 13prca of our revenues for the fiscal year ended December 31, 2005, 13prca of our revenues for the fiscal year ended December 31, 2004 and 12prca of our revenues for the fiscal year ended December 31, 2003 |
| 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 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 |
| From time to time, we may engage in 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 |
| In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with international operations generally |
| We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture |
| Our international expansion plans may not be successful and we may not be able to compete effectively in other countries |
| 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: • systems integration firms; • contract programming companies; • application software companies; - 21 - ______________________________________________________________________ [47]Table of Contents • Internet solutions providers; • the professional services groups of computer equipment companies; and • facilities management and outsourcing companies |
| The market also includes numerous smaller local competitors in the various geographic markets in which we operate |
| Our direct competitors who use the on-site/offshore business model include, among others, Infosys Technologies, Tata Consultancy Services and WIPRO 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, Electronic Data Systems and IBM Global Services, have offshore operations |
| We 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 |
| We may face difficulties in providing end-to-end business solutions for our clients that could cause clients to discontinue their work with us, which in turn could harm our business |
| We have been expanding the nature and scope of our engagements and have added new service offerings, such as IT consulting, business process outsourcing, systems integration and outsourcing of entire portions of IT infrastructure |
| The success of these service offerings is dependent, in part, upon continued demand for such services by our existing and new clients and our ability to meet this demand in a cost-competitive and effective manner |
| In addition, our ability to effectively offer a wider breadth of end-to-end business solutions depends on our ability to attract existing or new clients to these service offerings |
| To obtain engagements for such end-to-end solutions, we also are more likely to compete with large, well-established - 22 - ______________________________________________________________________ [48]Table of Contents international consulting firms, resulting in increased competition and marketing costs |
| Accordingly, we cannot be certain that our new service offerings will effectively meet client needs or that we will be able to attract existing and new clients to these service offerings |
| The increased breadth of our service offerings may result in larger and more complex projects with our clients |
| This will require us to establish closer relationships with our clients and a thorough understanding of their operations |
| Our ability to establish such relationships will depend on a number of factors, including the proficiency of our IT professionals and our management personnel |
| Our failure to understand our client requirements or our failure to deliver services which meet the requirements specified by our clients could result in termination of client contracts, and we could be liable to our clients for significant penalties or damages |
| Larger projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for additional stages or may cancel or delay additional planned engagements |
| These terminations, cancellations or delays may result from the business or financial condition of our clients or the economy generally, as opposed to factors related to the quality of our services |
| Such cancellations or delays make it difficult to plan for project resource requirements, and inaccuracies in such resource planning may have a negative impact on our profitability |
| 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 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 |
| - 23 - ______________________________________________________________________ [49]Table of Contents The H-1 B visa classification enables United States employers to hire qualified foreign workers in positions which require an education at least equal to a Baccalaureate Degree in the United States 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 United States 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 |
| This cap has been reached as of October 1, 2005 |
| New H-1 B petitions may not be filed until April 1, 2006, and these petitions must be for positions beginning no earlier than October 1, 2006 |
| 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 United States Department of Labor |
| A finding by the United States 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 United States 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 United States consular post abroad rather than undergoing the pre-approval process in the United States |
| In recent years, both the United States consular posts that review initial L-1 applications and the CIS offices, which adjudicate extensions of L-1 status, have become more restrictive with respect to this category |
| 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 United States 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 |
| This legislation contained several important changes to the laws governing L-1 visa holders |
| Under one provision of the new law, all L-1 applicants, including those brought to the United States under a Blanket Program, must have worked abroad with the related company for one full year in the prior three years |
| The provision allowing Blanket L applicants who had worked abroad for the related company for six months during the qualifying three-year period has been revoked |
| In addition, L-1B holders (intracompany transferees with specialized company knowledge) may not be primarily stationed at the work site of another employer if the L-1B holder will be controlled and supervised by an employer other than the petitioning employer |
| Finally, L-1B status may not be granted where placement of the L-1B visa holder at a third party site is part of an arrangement to provide labor for the third party, rather than placement at the site in connection with the provision of a product or service involving specialized knowledge specific to the petitioning employer |
| - 24 - ______________________________________________________________________ [50]Table of Contents We do not place L-1B workers at third party sites where they are under the supervision of a different employer, nor do we place L-1B holders at third party sites in an arrangement to provide labor for the third party, without providing a service involving our specialized knowledge |
| Since implementation of the new law, we have not encountered any difficulty in establishing this fact to the satisfaction of Citizenship and Immigration Services |
| However, the United States Department of State is still in the process of implementing this provision at United States consular posts abroad |
| If these posts decide to interpret these provisions in a very restrictive fashion, this could impair our ability to staff our projects in the United States with resources from our entities abroad |
| In addition, Citizenship and Immigration Services has not yet issued regulations governing these new provisions |
| If such regulations are restrictive in nature, this could impair our ability to staff our projects in the United States 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 United States workers available to fill the positions |
| Compliance with existing United States 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 are certain restrictions on transferring our employees to work in the United Kingdom, where we have experienced significant growth |
| The United Kingdom requires that employees who are not nationals of the European Economic Area (EEA), which includes nationals of all European Union countries plus Iceland, Norway, Liechtenstein and Switzerland, to obtain an intra-company transfer work permit before beginning to perform work |
| Under the work permit regulations, in order for us to transfer our non-EEA employees to the United Kingdom, we must demonstrate that the employee had been employed by us for at least six months prior to the transfer and that the position in the United Kingdom requires someone with either: (1) a United Kingdom degree level qualification; or (2) a Higher National Diploma (HND) level occupational qualification which entitles a person to do a specific job; or (3) a general HND level qualification plus one year’s work experience doing the type of job for which the work permit is sought; or (4) at least three years’ high-level specialist skills acquired through doing the type of job for which the work permit is sought |
| 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 are subject to legislative and administrative changes as well as - 25 - ______________________________________________________________________ [51]Table of Contents 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 impair our ability to staff projects with IT professionals who are not citizens of the country where the work is to be performed |
| Anti-outsourcing legislation, if adopted, could adversely affect our business, financial condition and results of operations and impair our ability to service our customers |
| The issue of outsourcing of services abroad by American companies is a topic of political discussion in the United States |
| Measures aimed at limiting or restricting outsourcing by United States companies are under discussion in Congress and in numerous state legislatures |
| While no substantive anti-outsourcing legislation has been introduced to date, given the ongoing 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 and state 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 of these measures become law, our business, financial condition and results of operations could be adversely affected and our ability to service our customers could be impaired |
| An economic slowdown, hostilities involving the United States, and other acts of terrorism, violence or war could delay or reduce the number of new purchase orders we receive and impair our ability to service our customers, thereby adversely affecting our business, financial condition and results of operations |
| Approximately 87prca of our revenue during the year ended December 31, 2005 was derived from customers located in the United States |
| In the event of an economic slowdown, our customers may delay or reduce their IT spending significantly, which may in turn lower the demand for our services and could have a material adverse affect on our financial results |
| Further, hostilities involving the United States and other acts of terrorism, violence or war, such as the attacks of September 11, 2001 in the United States, the attacks of July 7, 2005 in the United Kingdom, and the continuing conflict in Iraq, could materially adversely affect our operations and our ability to service our customers |
| Hostilities involving the United States could cause customers in the United States to delay their decisions on IT spending, which could affect our financial results |
| In addition, acts of terrorism, violence or war could give rise to military or travel disruptions and restrictions affecting our employees |
| As of December 31, 2005, 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 and work permits |
| Travel restrictions could cause 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 |
| - 26 - ______________________________________________________________________ [52]Table of Contents Although we continue to believe that we have a strong competitive position in the United States, we continue to increase our efforts to geographically diversify our clients and revenue |
| Despite our efforts to diversify, an economic slowdown, hostilities involving the United States, and other acts of terrorism, violence or war may reduce the demand for our services and negatively affect our revenues and profitability |
| 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 all of our executive officers |
| We cannot assure you, 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 |
| Effective January 1, 2002, pursuant to Accounting Principles Board Opinion Nodtta 23, “Accounting for Income Taxes-Special Areas,” we no longer accrue incremental United States taxes on all Indian earnings recognized in 2002 and subsequent periods as these earnings are considered to be indefinitely reinvested outside of 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 2005 |
| These increased taxes could have a material adverse effect on our business, results of operations and financial condition |
| 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 25prca of our revenues for the fiscal year ended December 31, 2005 and approximately 24prca of our revenues for the fiscal year ended - 27 - ______________________________________________________________________ [53]Table of Contents December 31, 2004 |
| 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 |
| If we do not continue to improve our operational, financial and other internal controls and systems to manage our rapid growth, our business may suffer and the value of our shareholders’ investment may be harmed |
| Our anticipated growth will continue to place significant demands on our management and other resources |
| Our growth will require us to continue to develop and improve our operational, financial and other internal controls, both in the United States, India and elsewhere |
| In particular, our continued growth will increase the challenges involved in: • recruiting and retaining sufficiently skilled technical, marketing and management personnel; • adhering to our high quality standards; • maintaining high levels of client satisfaction; • developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal systems; and • preserving our culture, values and entrepreneurial environment |
| 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 |
| Our top five customers generated approximately 34prca of our revenues in the fiscal year ended December 31, 2005, approximately 38prca of our revenues in the fiscal year ended December 31, 2004 and approximately 36prca of our revenues in the fiscal year ended December 31, 2003 |
| 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 |
| - 28 - ______________________________________________________________________ [54]Table of Contents 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: • the number, timing, scope and contractual terms of IT development and maintenance projects in which we are engaged; • delays incurred in the performance of those projects; • the accuracy of estimates of resources and time required to complete ongoing projects; and • general economic conditions |
| In addition, our future revenues, operating results and margins may fluctuate as a result of: • changes in pricing in response to customer demand and competitive pressures; • the mix of on-site and offshore staffing; • the ratio of fixed-price contracts versus time-and-materials contracts; • employee wage levels and utilization rates; • changes in foreign exchange rates; • the timing of collection of accounts receivable; and • changes in domestic and international income tax rates and regulations |
| 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 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 |
| - 29 - ______________________________________________________________________ [55]Table of Contents 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 |
| As of December 31, 2005, we had a gross margin of 45dtta8prca and operating margin of 20dtta1prca, compared to a gross margin of 45dtta5prca and operating margins of 20dtta0prca as of December 31, 2004 |
| These margins 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 wage increases and foreign currency fluctuations through further leveraging of our low-cost operating structure and obtaining price increases, there can be no assurance that we will be able to continue to do so in the future |
| Liability claims for damages caused by disclosure of confidential information or system failures 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 |
| In addition, we often have access to or are required to collect and store confidential client and customer data |
| If any person, including any of our employees, penetrates our network security or misappropriates sensitive data, we could be subject to significant liability from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws |
| Unauthorized disclosure of sensitive or confidential client and customer data, whether through breach of our computer systems, systems failure or otherwise, could damage our reputation and cause us to lose clients |
| 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 |
| - 30 - ______________________________________________________________________ [56]Table of Contents 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 United States 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 relied upon by McDermott, Will & Emery in connection with rendering its opinion regarding the United States 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 RH 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 we were once a part, and ACNielsen Corporation (now a subsidiary of the Dutch company VNU NA) 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 RH Donnelly and ACNielsen for Cognizant Corporation obligations under the terms of the 1996 distribution agreement |
| IMS Health has requested similar undertakings from us as a condition to the distribution of our shares in the exchange offer |
| IMS Health is obligated to procure similar undertakings from us 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, we gave these undertakings and, as a result, we 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 |
| Information Resources’ complaint alleges damages in excess of dlra350dtta0 million, - 31 - ______________________________________________________________________ [57]Table of Contents 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) |
| 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 dlra125dtta0 million |
| Based on our undertaking, we 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 we may be jointly and severally liable for any losses suffered by the parties entitled to indemnification |
| IMS Health has agreed to indemnify us 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 |
| If we are unable to protect our intellectual property rights, or if we infringe on the intellectual property rights of others, our business may be adversely affected |
| 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 or the United States will not change in ways that may prevent or restrict the transfer of software components, libraries and toolsets from India to the United States or from the United States to India |
| 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 |
| - 32 - ______________________________________________________________________ [58]Table of Contents 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 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 and we may be subject to certain liabilities assumed in connection with our acquisitions that could harm our operating results |
| 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 |
| We cannot assure you 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 cash, debt financing, the issuance of equity securities or a combination of the foregoing |
| We cannot assure you 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 |
| Although we conduct due diligence in connection with each of our acquisitions, there may be liabilities that we fail to discover or that we inadequately assess in our due diligence efforts |
| In particular, to the extent that prior owners of any acquired businesses or properties failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations to customers, we, as the successor owner, may be financially responsible for these violations and failures and may suffer reputational harm or otherwise be adversely affected |
| While we generally require the selling party to indemnify us for any and all liabilities associated with such liabilities, if for any reason the seller does not perform their indemnification obligation, we may be held responsible for such liabilities |
| The discovery of any material liabilities associated with our acquisitions for which we are unable to perceive for indemnification could harm our operating results |
| - 33 - ______________________________________________________________________ [59]Table of Contents System failure or disruptions in telecommunications could disrupt our business and result in lost customers and curtailed operations which would reduce our revenue and profitability |
| To deliver our services to our customers, we must maintain a high speed network of satellite, fiber optic and land lines and an active voice and data communications 24 hours a day between our main offices in Chennai, our other IT development centers in India and globally and the offices of our customers worldwide |
| Although we maintain redundancy facilities and satellite communications links, any systems failure or a significant lapse in our ability to transmit voice and data through satellite and telephone communications could result in lost customers and curtailed operations which would reduce our revenue and profitability |
| 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 prohibition 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 |
| Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance |
| Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, and Nasdaq National Market rules, are creating uncertainty for companies like ours |
| These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations |
| Their application in practice may evolve over time, as new guidance is provided by regulatory and governing bodies |
| This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such corporate governance standards |
| In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over - 34 - ______________________________________________________________________ [60]Table of Contents financial reporting and our external auditors’ audit of that assessment requires the commitment of significant financial and managerial resources |
| We consistently assess the adequacy of our internal controls over financial reporting, remediate any control deficiencies that may be identified, and validate through testing that our controls are functioning as documented |
| While we do not anticipate any material weaknesses, the inability of our independent auditor to provide us with an unqualified report as to the adequacy of our internal controls over financial reporting for future year ends could result in adverse consequences to us, including, but not limited to, a loss of investor confidence in the reliability of our financial statements, which could cause the market price of our stock to decline |
| We are committed to maintaining high standards of corporate governance and public disclosure, and our efforts to comply with evolving laws, regulations and standards in this regard have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| In addition, the new laws, regulations and standards regarding corporate governance may make it more difficult for us to obtain director and officer liability insurance |
| Further, our board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with their performance of duties |
| As a result, we may face difficulties attracting and retaining qualified board members and executive officers, which could harm our business |
| If we fail to comply with new or changed laws, regulations or standards of corporate governance, our business and reputation may be harmed |