2002 COGNIZANT FINANCIAL REVIEW Notes to Consolidated Financial Statements (in thousands, except share and per share data) The Company’s deferred tax assets (liabilities) are comprised of the following at December 31: Cognizant has generated net operating losses for U.S. tax purposes of approximately $8.6 million. These losses have an expiration date for Federal purposes through 12/31/22. For state purposes, the date of expiration varies but will generally be less than the Federal expiration period. Cognizant’s Indian subsidiary, CTS India, is an export-oriented company, which, under the Indian Income Tax Act of 1961 is entitled to claim tax holi- days for a period of ten years with respect to its export profits. Substantially all of the earnings of CTS India are attributable to export profits and are therefore currently entitled to a 90% exemption from Indian income tax. These tax holidays will begin to expire in 2004 and under current law will be completely phased out by March of 2009. Prior to 2002, it was manage- ment’s intent to repatriate all accumulated earnings from India to the United States; accordingly, Cognizant has provided deferred income taxes in the amount of approximately $24,935 on all such undistributed earnings through December 31, 2001. During the first quarter of 2002, Cognizant made a strategic decision to pursue an international strategy that includes expanded infrastructure investments in India and geographic expansion in Europe and Asia. As a component of this strategy, Cognizant intends to use 2002 and future Indian earnings to expand operations outside of the United States instead of repatriating these earnings to the United States. Accordingly, effective January 1, 2002, pursuant to Accounting Principles Bulletin 23, Cognizant will no longer accrue taxes on the repatriation of earnings recognized in 2002 and subsequent periods as these earnings are considered to be indefinitely reinvested outside of the United States. As of December 31, 2002, the amount of unrepatriated earnings upon which no provision for taxation has been recorded is approximately $30,059. If such earnings are repatriated in the future, or are no longer deemed to be indefi- nitely reinvested, Cognizant will accrue the applicable amount of taxes associated with such earnings. Due to the various methods by which such earnings could be repatriated in the future, it is not currently practicable to determine the amount of applicable taxes that would result from such repatriation. This change in intent, as well as a change in the manner in which repatriated earnings are taxed in India, resulted in an estimated effective tax rate for the year ended December 31, 2002 of 23.4%. This rate compares to an effec- tive tax rate for the year ended December 31, 2001 of 37.4%. Deferred U.S. income taxes on unremitted earnings from other foreign enti- ties have not been provided for as it is the Company’s intent to reinvest such earnings. Such income taxes are immaterial. On February 13, 2003, IMS Health completed its plan to distribute all of the Cognizant Class B common stock that IMS Health owned in an exchange offer. There is no impact on the number of Cognizant's total shares out- standing as a result of the completion of the exchange offer. As of February 21, 2003, pursuant to the Company’s Restated Certificate of Incorporation, all 33,872,700 shares of Class B common stock converted into shares of Class On January 30, 2003, the Company filed a tender offer in which IMS Health shareholders could exchange IMS Health shares held by them for Cognizant Class B common stock held by IMS Health. There will be no impact on the number of Cognizant’s total shares outstanding upon the completion of the exchange offer. As a direct result of the IMS Health exchange offer, Cognizant has incurred charges in the fourth quarter of 2002 of $1.7 million related to direct and incremental legal, accounting, printing and other costs. At December 31, 2002, IMS Health owned 55.3% of the outstanding stock of Cognizant (representing all of Cognizant’s Class B common stock) and held 92.5% of the combined voting power of Cognizant’s common stock. Holders of Cognizant’s Class A common stock have one vote per share and holders of Cognizant’s Class B common stock have ten votes per share. (See Note 13 to the Consolidated Financial Statements.) On May 23, 2000, the stockholders of the Company approved an increase in the number of authorized Class B common Stock from 15,000,000 shares to 25,000,000 shares. On June 12, 1998, the Company amended and restated its certificate of incorporation to authorize 100,000,000 shares of Class A common stock, par value $.01 per share, 15,000,000 shares of Class B common stock, par value $.01 per share, and 15,000,000 shares of preferred stock, par value $.10 per share, and effected a 0.65 for one reverse stock split. Holders of Class A common stock have one vote per share and holders of Class B common stock have ten votes per share. (See Note 13 to the Consolidated Financial Statements). No preferred stock has been issued. On June 24, 1998, the Company consummated its IPO of 17,502,000 shares of its Class A common stock at a price of $1.67 per share, 15,000,000 of which were issued and sold by the Company and 2,502,000 of which were sold by Cognizant Corporation, the Company’s then majority owner and con- trolling parent company. The net proceeds to the Company from the IPO were approximately $22,407 after $843 of direct expenses. In July 1998, IMS Health (the accounting successor to Cognizant Corporation) sold 2,625,300 shares of Class B common stock, which were converted to Class A common stock pursuant to an over allotment option granted to the underwriters of the IPO. Of the total net proceeds received by the Company upon the con- summation of its IPO, approximately $6,637 was used to repay the related party balance then owed to Cognizant Corporation. The related party balance resulted from certain advances to the Company from Cognizant Corporation used to purchase the minority interest of the Company’s Indian subsidiary and to fund payroll and accounts payable. Concurrent with the IPO, the Company reclassified the amounts in mandatorily redeemable common stock to stockholders’ equity as the redemption feature was voided. 7. Capital Stock 2002 2001 Deferred tax assets: Timing differences $ 430 $1 ,042 Net deferred tax assets  430 1,042 Deferred tax liabilities: Undistributed Indian income (24,935) (25,535) Total deferred tax liabilities (24,935) (25,535) Net deferred tax liability $(24,505) $ (24,493) 34