COGNOS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(US$000s except share amounts, CDN GAAP)
(Unaudited)
Three months ended May 31, | |||||
2003 | 2002 | ||||
Revenue | |||||
Product license | $ 57,801 | $ 49,835 | |||
Product support | 64,127 | 48,179 | |||
Services | 28,635 | 22,116 | |||
Total revenue | 150,563 | 120,130 | |||
Cost of revenue | |||||
Cost of product license | 1,111 | 734 | |||
Cost of product support | 6,855 | 4,413 | |||
Cost of services | 20,859 | 15,547 | |||
Total cost of revenue | 28,825 | 20,694 | |||
Gross margin | 121,738 | 99,436 | |||
Operating expenses | |||||
Selling, general, and administrative | 80,436 | 65,841 | |||
Research and development | 23,294 | 19,698 | |||
Amortization of intangible assets | 2,396 | 2,702 | |||
Investment tax credits | (2,374 | ) | (1,327 | ) | |
Total operating expenses | 103,752 | 86,914 | |||
Operating income | 17,986 | 12,522 | |||
Interest expense | (171 | ) | (46 | ) | |
Interest income | 1,044 | 1,601 | |||
Income before taxes | 18,859 | 14,077 | |||
Income tax provision | 6,786 | 5,323 | |||
Net income | 12,073 | 8,754 | |||
Retained earnings at beginning of the period | 215,714 | 164,144 | |||
Repurchase of shares | -- | (9,315 | ) | ||
Retained earnings at end of the period | $ 227,787 | $ 163,583 | |||
Net income per share | |||||
Basic | $ 0.14 | $ 0.10 | |||
Diluted | $ 0.13 | $ 0.10 | |||
Weighted average number of shares (000s) | |||||
Basic | 88,527 | 88,000 | |||
Diluted | 90,924 | 91,531 | |||
(See accompanying notes)
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COGNOS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(US$000s, CDN GAAP)
May 31, 2003 | February 28, 2003 | ||||
Assets | (Unaudited) | ||||
Current assets | |||||
Cash and cash equivalents | $ 200,670 | $ 162,588 | |||
Short-term investments | 63,226 | 79,670 | |||
Accounts receivable | 105,235 | 139,116 | |||
Prepaid expenses and other current assets | 12,732 | 8,884 | |||
Deferred tax assets | 5,241 | 5,427 | |||
387,104 | 395,685 | ||||
Fixed assets | 68,864 | 63,467 | |||
Intangible assets | 30,506 | 32,902 | |||
Goodwill | 170,099 | 169,991 | |||
$ 656,573 | $ 662,045 | ||||
Liabilities | |||||
Current liabilities | |||||
Accounts payable | $ 25,772 | $ 33,310 | |||
Accrued charges | 30,050 | 34,192 | |||
Salaries, commissions, and related items | 35,401 | 48,916 | |||
Income taxes payable | 2,850 | 4,395 | |||
Deferred revenue | 139,754 | 146,008 | |||
233,827 | 266,821 | ||||
Long-term liabilities | -- | 1,647 | |||
Deferred income taxes | 13,848 | 14,868 | |||
247,675 | 283,336 | ||||
Stockholders' Equity | |||||
Capital stock | |||||
Common shares (May 31, 2003 - 88,990,745; | |||||
February 28, 2003 - 88,124,914) | 185,963 | 173,363 | |||
Treasury shares (May 31, 2003 - 43,500; | |||||
February 28, 2003 - 22,500) | (1,065 | ) | (501 | ) | |
Deferred stock-based compensation | (1,208 | ) | (1,243 | ) | |
Retained earnings | 227,787 | 215,714 | |||
Accumulated other comprehensive loss | (2,579 | ) | (8,624 | ) | |
408,898 | 378,709 | ||||
$ 656,573 | $ 662,045 | ||||
(See accompanying notes)
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COGNOS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, CDN GAAP)
(Unaudited)
Three months ended May 31, | |||||
2003 | 2002 | ||||
Cash flows from operating activities | |||||
Net income | $ 12,073 | $ 8,754 | |||
Non-cash items | |||||
Depreciation and amortization | 7,634 | 6,525 | |||
Amortization of deferred stock-based compensation | 169 | 185 | |||
Amortization of other deferred compensation | 62 | 148 | |||
Deferred income taxes | (3,122 | ) | (1,221 | ) | |
Loss on disposal of fixed assets | 454 | 97 | |||
17,270 | 14,488 | ||||
Change in non-cash working capital | |||||
Decrease in accounts receivable | 37,006 | 36,590 | |||
Increase in prepaid expenses and other current assets | (3,088 | ) | (247 | ) | |
Decrease in accounts payable | (8,625 | ) | (6,671 | ) | |
Decrease in accrued charges | (5,809 | ) | (2,068 | ) | |
Decrease in salaries, commissions, and related items | (15,793 | ) | (5,106 | ) | |
Decrease in income taxes payable | (138 | ) | (2,778 | ) | |
Decrease in deferred revenue | (10,282 | ) | (3,780 | ) | |
Net cash provided by operating activities | 10,541 | 30,428 | |||
Cash flows from investing activities | |||||
Maturity of short-term investments | 63,752 | 113,186 | |||
Purchase of short-term investments | (44,700 | ) | (47,626 | ) | |
Additions to fixed assets | (6,730 | ) | (4,269 | ) | |
Acquisition costs | (108 | ) | -- | ||
Net cash provided by investing activities | 12,214 | 61,291 | |||
Cash flows from financing activities | |||||
Issue of common shares | 12,466 | 3,765 | |||
Purchase of treasury shares | (564 | ) | -- | ||
Repurchase of shares | -- | (9,992 | ) | ||
Decrease in long-term-debt and long-term liabilities | (1,697 | ) | (16 | ) | |
Net cash provided by (used in) financing activities | 10,205 | (6,243 | ) | ||
Effect of exchange rate changes on cash | 5,122 | 2,653 | |||
Net increase in cash and cash equivalents | 38,082 | 88,129 | |||
Cash and cash equivalents, beginning of period | 162,588 | 192,901 | |||
Cash and cash equivalents, end of period | 200,670 | 281,030 | |||
Short-term investments, end of period | 63,226 | 57,229 | |||
Cash, cash equivalents, and short-term investments, end of period | $ 263,896 | $ 338,259 | |||
(See accompanying notes)
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
1. | Basis of Presentation |
The accompanying unaudited consolidated financial statements have been prepared by the Corporation in United States (U.S.) dollars and in accordance with Canadian generally accepted accounting principles (“GAAP”) with respect to the preparation of interim financial information. Accordingly, they do not include all information and footnotes as required in the preparation of annual consolidated financial statements. These unaudited condensed notes to the consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Annual Information Form for the fiscal year ended February 28, 2003. |
The preparation of these unaudited consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. In the opinion of Management, these unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. |
All information is presented in thousands of U.S. dollars, unless otherwise stated. Consolidated financial statements prepared in accordance with U.S. GAAP, in U.S. dollars, are made available to all shareholders, and filed with various regulatory authorities. |
2. | Revenue Recognition |
The Corporation recognizes revenue in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, issued by the American Institute of Certified Public Accountants. |
Substantially all of the Corporation’s product license revenue is earned from licenses of off-the-shelf software requiring no customization. Revenue from these licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. If a license includes the right to return the product for refund or credit, revenue is deferred, until the right of return lapses. |
Revenue from product support contracts is recognized ratably over the life of the contract. Incremental costs directly attributable to the acquisition of product support contracts, and that would not have been incurred but for the acquisition of that contract, are deferred and expensed in the period the related revenue is recognized. These costs include commissions payable on sales of support contracts. |
Revenue from education, consulting, and other services is recognized at the time such services are rendered. |
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
For contracts with multiple obligations (e.g. deliverable and undeliverable products, support obligations, education, consulting and other services), the Corporation allocates revenue to each element of the contract based on objective evidence, specific to the Corporation, of the fair value of the element. |
3. | Stock-based Compensation |
The Corporation applies CICA Handbook section 3870,Stock-based Compensation and Other Stock-Based Payments, (CICA 3870) in accounting for its stock option, stock purchase, and restricted share unit plans. Except for certain options assumed on the acquisition of Adaytum, where compensation cost has been recognized in the financial statements, the exercise price of all stock options is equal to the market price of the stock on the trading day preceding the date of grant. Where the exercise price of stock options is equal to the market price of the stock on the trading day preceding the date of grant, no compensation cost has been recognized in the financial statements for its stock option and stock purchase plans. The fair value of each restricted share unit is calculated at the date of grant. Compensation cost relating to the restricted share unit plan is recognized in the financial statements over the vesting period. |
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
If the fair values of the options granted had been recognized as compensation expense on a straight-line basis over the vesting period of the grant, stock-based compensation costs would have reduced net income, basic net income per share and diluted net income per share as indicated in the table below (000s, except per share amounts): |
Three months ended May 31, | |||||
2003 | 2002 | ||||
Net income (loss): | |||||
As reported | $ 12,073 | $ 8,754 | |||
Add: Stock-based employee compensation | |||||
included above | 169 | 185 | |||
Less: Stock-based employee compensation using | |||||
fair value based method | (6,249 | ) | (6,272 | ) | |
Pro forma | $ 5,993 | $ 2,667 | |||
Basic net income (loss) per share: | |||||
As reported | $ 0.14 | $ 0.10 | |||
Add: Stock-based employee compensation | |||||
included above | -- | -- | |||
Less: Stock-based employee compensation using | |||||
fair value based method | (0.07 | ) | (0.07 | ) | |
Pro forma | $ 0.07 | $ 0.03 | |||
Diluted net income (loss) per share: | |||||
As reported | $ 0.13 | $ 0.10 | |||
Add: Stock-based employee compensation | |||||
included above | -- | -- | |||
Less: Stock-based employee compensation using | |||||
fair value based method | (0.07 | ) | (0.07 | ) | |
Pro forma | $ 0.06 | $ 0.03 | |||
Weighted average number of shares: | |||||
Basic | 88,527 | 88,000 | |||
Diluted | 90,924 | 91,531 | |||
The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: |
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
Three months ended May 31, | |||||
2003 | 2002 | ||||
Risk-free interest rates | N/A* | 3.7 | % | ||
Expected life of options (years) | N/A* | 3.0 | |||
Expected volatility | N/A* | 62 | % | ||
Dividend yield | N/A* | 0 | % |
* During the three months ended May 31, 2003 no options were granted |
4. | Goodwill |
During the three months ended May 31, 2003 and May 31, 2002 there were additions to goodwill of $108,000 and $40,000 related to additional consideration paid to the former shareholders of Teijin Cognos Incorporated (TCI). This additional consideration was based on components of the net revenue of TCI during the quarter. The Corporation has designated the beginning its fiscal year as the date for the annual impairment test, and performed the required test as of March 1, 2003. Based on this test, goodwill is not considered to be impaired. |
Three months ended May 31, | ||||||
2003 | 2002 | |||||
Beginning balance | $169,991 | $15,230 | ||||
Additions | 108 | 40 | ||||
Closing balance | $170,099 | $15,270 | ||||
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
5. | Intangible Assets |
As at May 31, 2003 | As at February 28, 2003 | ||||||||||
Cost | Accumulated Amortization | Cost | Accumulated Amortization | Amortization Rate | |||||||
($000s) | ($000s) | ||||||||||
Acquired Technology | $ 33,381 | $13,423 | $ 33,381 | $11,821 | 20 | % | |||||
In-process technology | 38,400 | 35,395 | 38,400 | 34,906 | 20 | % | |||||
Deferred compensation | 8,945 | 8,824 | 8,945 | 8,763 | Compensation Period | ||||||
Contractual relationships | 7,800 | 378 | 7,800 | 134 | 12.5 | % | |||||
88,526 | $58,020 | 88,526 | $ 55,624 | ||||||||
(58,020 | ) | (55,624 | ) | ||||||||
Net book value | $ 30,506 | $32,902 | |||||||||
Amortization of intangible assets was $2,396,000 and $2,702,000 in the quarters ended May 31, 2003 and May 31, 2002. The estimated amortization expense related to intangible assets is as follows ($000s): |
2004 (Q2 to Q4) | 6,963 | ||
2005 | 5,922 | ||
2006 | 5,498 | ||
2007 | 4,915 | ||
2008 | 4,375 | ||
2009 | 975 | ||
2010 and thereafter | 1,858 |
6. | Income Taxes |
The Corporation provides for income taxes in its quarterly unaudited financial statements based on the estimated effective tax rate for the full fiscal year. |
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
7. | Net Income per Share |
The reconciliation of the numerator and denominator for the calculation of basic and diluted net income per share is as follows: (000s except per share amounts) |
Three months ended May 31, | |||||
2003 | 2002 | ||||
Basic Net Income per Share | |||||
Net income | $12,073 | $ 8,754 | |||
Weighted average number of shares outstanding | 88,527 | 88,000 | |||
Basic net income per share | $ 0.14 | $ 0.10 | |||
Diluted Net Income per Share | |||||
Net income | $12,073 | $ 8,754 | |||
Weighted average number of shares outstanding | 88,527 | 88,000 | |||
Dilutive effect of stock options | 2,397 | 3,531 | |||
Adjusted weighted average number of shares outstanding | 90,924 | 91,531 | |||
Diluted net income per share | $ 0.13 | $ 0.10 | |||
8. | Comprehensive Income |
Comprehensive income includes net income and other comprehensive income (OCI). OCI refers to changes in net assets from transactions and other events, and circumstances other than transactions with stockholders. These changes are recorded directly as a separate component of Stockholders’ Equity and excluded from net income. The only other comprehensive income item for the Corporation relates to foreign currency translation adjustments pertaining to those subsidiaries not using the U.S. dollar as their functional currency net of derivative gains or losses. |
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
The components of comprehensive income were as follows ($000‘s): |
Three months ended May 31, | |||||
2003 | 2002 | ||||
Net income | $12,073 | $ 8,754 | |||
Other comprehensive income: | |||||
Foreign currency translation adjustments | 6,045 | 3,864 | |||
Comprehensive income | $18,118 | $12,618 | |||
9. | Segmented Information |
The Corporation has one reportable segment—computer software products. |
10. | Stockholders’Equity |
The Corporation issued 866,000 common shares valued at $12.5 million during the three months ended May 31, 2003, and issued 296,000 shares valued at $3.8 million during the three months ended May 31, 2002. The issuance of shares in both periods was pursuant to our stock purchase plan and the exercise of stock options by employees, officers, and directors. During the three month period ended May 31, 2003, the Corporation did not repurchase shares in the open market. The Corporation repurchased 388,000 shares at a value of $10.0 million during the three months ended May 31, 2002. |
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COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
11. | Liabilities in Connection with Acquisition |
The Corporation undertook a restructuring plan in conjunction with the acquisition of Adaytum during January 2003. In accordance with Emerging Issues Committee (EIC) No. 42, Costs Incurred On Business Combinations (EIC 42) the liability associated with this restructuring is considered a liability assumed in the purchase price allocation. This restructuring primarily relates to involuntary employee separations of approximately 90 employees of Adaytum, accruals for abandoning leased premises of Adaytum and related write-downs of leasehold improvements as well as asset write-downs of Adaytum. The employee separations impact all functional groups and geographic regions of Adaytum. The remaining accrual is included on the balance sheet as accrued charges and salaries, commissions, and related items and is expected to be paid during fiscal 2004. The Corporation does not believe that any unresolved contingencies, purchase price allocation issues, or additional liabilities exist that would result in a material adjustment to the acquisition cost allocation. |
Employee separations | Other restructuring accruals | Total accrual | Asset write- downs | Total | |||||||
Restructuring | $ 3,888 | $ 3,976 | $ 7,864 | $ 768 | $ 8,632 | ||||||
Cash payments | (248 | ) | (11 | ) | (259 | ) | -- | (259 | ) | ||
Asset write-downs | -- | -- | -- | (768 | ) | (768 | ) | ||||
Balance as at | |||||||||||
February 28, 2003 | $ 3,640 | $ 3,965 | $ 7,605 | $ -- | $ 7,605 | ||||||
Cash payments | (1,103 | ) | (14 | ) | (1,117 | ) | -- | (1,117 | ) | ||
Balance as at | |||||||||||
May 31, 2003 | $ 2,537 | $ 3,951 | $ 6,488 | $ -- | $ 6,488 | ||||||
12. | Comparative Results |
Certain of the prior period’s figures have been reclassified in order to conform to the presentation adopted during the current fiscal year. We have updated our income statement presentation to segregate from selling, general, and administrative expenses $15,547,000 for the three months ended May 31, 2002, and created a new line item for, the cost of providing services. Additionally we have segregated from selling, general, and administrative expenses $2,702,000 for the three months ended May 31, 2002, and created a new line item for, amortization of intangible assets within operating expenses. This reclassification was made to provide more information to the users of our financial statements. This change in presentation does not affect previously reported assets, liabilities, or results of operations. |
67