As of August 31, 2003, we held $284.4 million in cash, cash equivalents, and short-term investments, an increase of $42.2 million from February 28, 2003. Cash and cash equivalents include investments which are highly liquid and held to maturity. Cash equivalents typically include commercial paper and term deposits, banker’s acceptances and bearer deposit notes issued by major North American banks. All cash equivalents have terms to maturity of ninety days or less. Short-term investments are investments that are highly liquid and held to maturity with terms to maturity greater than ninety days, but less than twelve months. Short-term investments typically consist of commercial paper and corporate bonds.
Working capital represents our current assets less our current liabilities. As of August 31, 2003, working capital was $186.1 million, an increase of $57.3 million from February 28, 2003. The increase can be attributed to higher levels of cash and cash equivalents, and short-term investments and lower levels of accounts payable, accruals, and salaries, commissions, and related items, and deferred revenue. Partially offsetting this increase were decreases in accounts receivable.
Days sales outstanding (DSO) was 62 days at August 31, 2003 as compared to 59 days as at August 31, 2002. We calculate our days sales outstanding ratio based on ending accounts receivable balances and quarterly revenue.
As at August 31, 2003, we had no long-term liabilities, a decrease of $1.6 million from February 28, 2003. The decrease was the result of movement from long-term classification to short-term classification of a payment due during the first quarter of fiscal 2004 relating to a patent litigation settlement agreement finalized in May 2002. All remaining payments under the settlement are now current.
Cash provided by operating activities (after changes in non-cash working capital items) for the six months ended August 31, 2003 was $32.3 million, a decrease of $1.2 million compared to the comparative period last year. Although net income increased during the six months ended August 31, 2003 compared to the same period last year, this increase was offset by higher working capital primarily driven by greater changes in deferred revenue balances and larger payments of salaries, commissions, and related items, as compared to the same period last year.
Cash Provided by (Used In) Investing Activities
Cash used in investing activities was $28.6 million for six months ended August 31, 2003, an increase in investment of $101.6 million compared to the comparative period in the prior fiscal year. During the six months ended August 31, 2003 we increased our net investment in short-term investments from the comparative quarter in the prior fiscal year. In the six months ended August 31, 2003, purchases of short-term investments, net of maturities, were $16.2 million. In comparison during the six months ended August 31, 2002, our proceeds on maturity of short-term investments were in excess of investments in short-term investments by $80.7 million.
Cash Provided by (Used in) Financing Activities
Cash provided by financing activities was $15.8 million for the six months ended August 31, 2003, compared to a use of cash in financing activities of $10.5 million during the comparative period of the prior fiscal year. We issued 1,226,000 common shares, valued at $18.1 million, during the six months ended August 31, 2003, compared to the issue of 429,000 shares valued at $5.7 million during the corresponding period in the prior fiscal year. 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. Financing activities for the six-month period ended August 31, 2003 did not include the repurchase of shares in the open market. Comparatively we repurchased 568,000 shares at a value of $13.1 million in the corresponding period in the prior fiscal year.
In October 2002, we adopted a program that enables us to purchase up to 4,398,820 common shares (not more than 5% of those issued and outstanding) between October 9, 2002 and October 8, 2003. Purchases were made on the Nasdaq Stock Market or the Toronto Stock Exchange at prevailing open market prices and paid out of general corporate funds. This program did not commit us to make any share repurchases. All repurchased shares were cancelled. The share repurchases in the six-month period ended August 31, 2002 included shares purchased as part of an open market share repurchase program, as well as shares purchased under our secondary offering of common shares.
In October 2003, we adopted a program that enables us to purchase up to 4,468,639 common shares (not more than 5% of those issued and outstanding) between October 9, 2003 and October 8, 2004. Purchases will be made on the Nasdaq Stock Market or the Toronto Stock Exchange at prevailing open market prices and paid out of general corporate funds. This program does not commit us to make any share repurchases. All repurchased shares will be cancelled.
Contracts and Commitments
We have arranged an unsecured credit facility. The credit facility permits us to borrow funds or issue letters of credit or guarantee up to Cdn $12.5 million (U.S.$9.0 million), subject to certain covenants. As of August 31, 2003 and 2002, there were no direct borrowings under this facility.
We do not enter into off-balance sheet financing as a matter of practice except for the use of operating leases for office space, computer equipment, and vehicles. In accordance with GAAP, neither the lease liability nor the underlying asset is carried on the balance sheet, as the terms of the leases do not meet the thresholds for capitalization.
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Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in our various subsidiaries. As a result, the exchange gains or losses recorded on translation of the subsidiaries financial statements are partially offset by gains and losses attributable to the applicable foreign exchange forward contract. Realized and unrealized gains and losses from effective hedges are not included in income but are shown in the cumulative translation adjustment account included in other comprehensive income. Typically the forward contracts are between the United States dollar and the euro, the British pound, the Swiss franc, the Japanese yen, and the Australian dollar. We enter into these foreign exchange forward contracts with major Canadian chartered banks, and therefore we do not anticipate non-performance by these counterparties. The amount of the exposure on account of any non-performance is restricted to the unrealized gains in such contracts. As of August 31, 2003, we had foreign exchange forward contracts, with maturity dates on or before November 26, 2003, to exchange various foreign currencies in the amount of $21.9 million.
As consideration for the patent litigation settlement agreement with Business Objects we agreed to pay the sum of $24.0 million. During the six months ended August 31, 2003, $3.5 million was paid, and $1.8 million will be paid every quarter for the next three quarters. The remaining principal amount is recorded in accrued charges.
In connection with the acquisition of Adaytum, we undertook a restructuring plan in conjunction with the business combination. The 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. During the six months ended August 31, 2003 the total cash payments made in relation to the accrual were $3.5 million, and cash payments remaining at August 31, 2003 were $4.1 million. The remaining accrual is included in the balance sheet as accrued charges and salaries, commissions, and related items and is expected to be paid during fiscal 2004.
We have never declared or paid any cash dividends on our common shares. Our current policy is to retain our earnings to finance expansion and to develop, license, and acquire new software products, and to otherwise reinvest in Cognos.
We believe that our current cash, cash equivalents, and short-term investments balance and funds generated from operations, if any, will be adequate to finance operations and meet any capital requirements through fiscal 2004.
Inflation has not had a significant impact on our results of operations.
CERTAINFACTORSTHATMAYAFFECTFUTURERESULTS
This report contains forward-looking statements, including statements regarding the future success of our business and technology strategies, and future market opportunities. These statements are neither promises nor guarantees, but involve known and unknown risks and uncertainties that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed in or implied by these forward-looking statements. These risks include risks related to our revenue growth, operating results, industry, products, and litigation, as well as the other factors discussed below and elsewhere in this report. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they were made. We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
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Risks related to Our Business
Our revenue may not continue to grow at historical rates, could stop growing or decline.
We rely predominantly on revenue from our business intelligence products. Although we have experienced revenue growth with respect to our business intelligence products over the past few fiscal years, we cannot provide assurance that revenue from these products will continue to grow. Revenue associated with these products may, in the future, stop growing or decline. In addition, our growth rate may be adversely affected by global economic conditions generally, and economic conditions in Canada, the U.S. or Europe, in particular. Our growth rate in revenue may also be affected by external economic factors such as currency fluctuations.
Our ability to adjust our expenses in the near term is limited, which could cause our profits to decrease.
During periods of unfavorable economic conditions in recent fiscal years, we reduced overall discretionary spending levels but continued to incur expenditures selectively in areas that we viewed as necessary to strengthen our position in the marketplace. This resulted in an increase in our operating expenses. The economic environment remains challenging and external economic factors such as currency fluctuations may affect our expenses. We expect to continue to incur expenditures selectively in areas that we view as necessary for new revenue growth and expand global market coverage. We base our operating expense budgets on projections of future revenues that are more difficult to make in periods of economic uncertainty. As a result, our operating expense budgets may be based on inaccurate assumptions. If we do not meet our future revenue projections, operating expenses would increase as a percentage of our revenues and our profits would decrease.
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Currency fluctuations may adversely affect us.
A substantial portion of our revenues are earned in currencies other than U.S. dollars, such as the euro, and similarly, a substantial portion of our operating expenses are incurred in currencies other than U.S. dollars, such as the Canadian dollar and the euro. Revenues and expenses generated in foreign currencies are translated at exchange rates during the month in which the transaction occurs. The resulting gains or losses from this translation are included in net income. We cannot predict the effect of foreign exchange fluctuations in the future. Therefore, fluctuations in the exchange rate between the U.S. dollar and other currencies, such as the Canadian dollar and the euro, may have a material adverse effect on our business, financial condition, and operating results.
As a result of our international operations a substantial portion of our financial instruments is held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure, as it relates to financial instruments, is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. We enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries, typically between the U.S. dollar and the euro, the British pound, the Swiss franc, the Japanese yen, and the Australian dollar.
Our quarterly and annual operating results are volatile and difficult to predict, and if we fail to meet the expectations of securities analysts or investors, our share price could decline significantly.
Historically, our quarterly operating results have varied from quarter to quarter, and we anticipate this pattern to continue. We typically realize a larger percentage of our annual revenue and earnings in the fourth quarter of each fiscal year, and lower revenue and earnings in the first quarter of the following fiscal year. In addition, in each quarter we typically close a larger percentage of sales transactions near the end of that quarter. Because our quarterly and annual operating results may be significantly affected by large, enterprise-wide sales, our inability to close one or more such sales before the end of the applicable period may adversely affect our operating results. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the price of our common shares may fall. Our quarterly and annual operating results may be adversely affected by a wide variety of factors, including:
| | • | | our ability to achieve and maintain revenue growth or to anticipate a decline in revenue from any of our products; |
| | • | | the impact of global economic conditions on our sales cycle; |
| | • | | our ability to obtain and close sales, particularly large enterprise transactions; |
| | • | | changes in product mix and our ability to anticipate changes in shipment patterns; |
| | • | | our ability to identify and develop new technologies and to incorporate those technologies into new products; |
| | • | | our ability to select appropriate business models and strategies; |
| | • | | our ability to position ourselves to achieve growth; |
| | • | | our ability to identify, hire, train, motivate, and retain highly qualified personnel, and to achieve targeted productivity levels; |
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| | • | | our ability to identify, develop, introduce, and deliver in a timely manner new products and enhanced versions of our existing products which anticipate market demand and address customer needs; |
| | • | | market acceptance of business intelligence software and of new products and enhanced versions of our existing products; |
| | • | | our ability to establish and maintain a competitive advantage; |
| | • | | changes in our pricing policies or those of our competitors and other competitive pressures on selling prices; |
| | • | | size, timing, and execution of customer orders and shipments, including delays, deferrals, or cancellations of customer orders; |
| | • | | number, timing, and significance of product enhancements and new product and technology announcements by us or by our competitors; |
| | • | | our reliance on third-party distribution channels as part of our sales and marketing strategy; |
| | • | | the timing and provisions of pricing protections and exchange from our distributors; |
| | • | | changes in foreign currency exchange rates; and |
| | • | | our ability to enforce our intellectual property rights. |
These factors could materially adversely affect our share price and our business, results of operations, and financial condition.
We depend on our direct sales force to sell our products, and if we fail to retain or hire and train new sales personnel, our future growth will be impaired.
We sell our products primarily through our direct sales force, and we expect to continue to do so in the future. Our ability to achieve revenue growth in the future will depend on our ability to recruit, train, and retain qualified direct sales personnel. We have in the past and may in the future experience difficulty in recruiting and retaining qualified sales personnel. Our inability to maintain and improve the productivity of our direct sales force could impair our growth and cause our share price to fall.
We rely, in part, on others to market and distribute our products, and their failure to do so successfully could significantly harm our ability to maintain and expand our customer base, which would adversely affect our growth strategy.
Our sales and marketing strategy includes multi-tiered channels of third-party distributors, resellers, and original equipment manufacturers (OEMs). We have developed a number of these relationships and intend to continue to develop new ones. Our inability to attract effective third-party distributors or their inability to penetrate their respective market segments, or the loss of any of our third-party distributors as a result of competitive products offered by other companies, or products developed internally by them or otherwise, could harm our ability to maintain and expand our customer base. In addition, if a third-party distributor fails to install our product successfully, we could lose existing and potential customers. If these events were to occur, our business could grow more slowly than forecasted, or not at all, or we could incur additional, unanticipated expenses.
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We may lose sales, or sales may be delayed, due to the long sales and implementation cycles for our products, which would reduce our revenues.
Our customers typically invest substantial time, money, and other resources researching their needs and available competitive alternatives before deciding to license our software products. Typically, the larger the potential sale, the more time, money, and other resources will be invested. As a result, we may wait many months after our first contact with a customer before a sale can actually be completed. The time required for implementation of our products varies among our customers and may last several months, depending on our customers’ needs and the products deployed. In particular, it may be difficult to install our products if the customer has complicated operational requirements, such as integrating databases, hardware, and software from different vendors.
During these long sales and implementation cycles, events may occur that affect the size or timing of the order or even cause it to be cancelled. For example:
| | • | | purchasing decisions may be postponed, or large purchases reduced, during periods of economic uncertainty; |
| | • | | we or our competitors may announce or introduce new products; or |
| | • | | the customer's own budget and purchasing priorities may change. |
If these events were to occur, sales of our products may be cancelled or delayed, which would reduce our revenues.
Our sales forecasts may not consistently correlate to revenues in a particular quarter.
We forecast sales and trends in our business using a common industry practice known as the “pipeline” system. Under this system, information relating to sales prospects, the anticipated date when a sale will be completed and the potential dollar amount of the sale are tracked and analyzed to provide a “pipeline” of future business and serve as guidance for our business budgeting and planning. These pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter as a result of, among other things, the events identified in the preceding risk factors, as well as the subjective nature of the information itself. The occurrence of any of these events could result in a reduction of the conversion rate of the pipeline into contracts resulting in lower than projected revenue in a particular quarter.
If we do not protect our intellectual property, our products may lose any competitive advantage, and even if weare successful, protecting our intellectual property could be time consuming and expensive.
Our success depends in part on our ability to protect our rights in our intellectual property. We rely on various intellectual property protections, including contractual provisions, patents, copyright, trademark and trade secret laws, to preserve our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. Policing unauthorized use of intellectual property is difficult, and some foreign laws do not protect proprietary rights to the same extent as the laws of Canada or the United States.
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To protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of our management, and materially disrupt the conduct of our business.
Intellectual property claims brought against us could be time consuming and costly to defend, and if we are unsuccessful, our ability to sell products incorporating the disputed intellectual property could be limited orwe may have to pay license fees, royalties, or damages.
We may become increasingly subject to claims by third parties that our technology infringes their property rights due to the growth of software products in our target markets and the overlap in functionality of these products. Regardless of their merit, any such claims could:
| | • | | be expensive to defend; |
| | • | | divert management's attention and focus away from the business; |
| | • | | cause product shipment delays; and |
| | • | | require us to enter into costly royalty or licensing agreements or to stop using such technology. |
The loss of our rights to use software currently licensed to us by third parties could significantly increase our operating expenses by forcing us to seek alternative technology and adversely affect our ability to compete.
We license certain technologies used in our products from third parties, generally on a non-exclusive basis. The termination of any of these licenses, or the failure of the licensors to adequately maintain or update their products, could delay our ability to ship our products while we seek to implement alternative technology offered by other sources. In addition, alternative technology may not be available on commercially reasonable terms. In the future, it may be necessary or desirable to obtain other third-party technology licenses relating to one or more of our products, or relating to current or future technologies, to enhance our product offerings. We cannot provide assurance that we will be able to obtain licensing rights to the needed technology on commercially reasonable terms, if at all.
If a successful product liability claim were made against us, our business could be seriously harmed.
Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. Despite this, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. We have not experienced any product liability claims to date. However, the sale and support of our products may entail the risk of such claims, which are likely to be substantial in light of the use of our products in business-critical applications. A successful product liability claim could result in significant monetary liability and could seriously disrupt our business.
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We face significant operational and financial risks associated with our international operations.
We derive a significant portion of our total revenues from international sales. International sales are subject to significant risks, including:
| | • | | unexpected changes in legal and regulatory requirements and policies in foreign markets affecting our international sales; |
| | • | | changes in tariffs and other trade barriers; |
| | • | | fluctuations in currency exchange rates; |
| | • | | political and economic instability; |
| | • | | longer payment cycles and other difficulties in accounts receivable collection; |
| | • | | difficulties in managing foreign distributors and representatives; |
| | • | | difficulties in staffing and managing foreign operations; |
| | • | | difficulties in protecting our intellectual property internationally; and |
| | • | | potentially adverse consequences arising from changes in tax laws. |
Each of these factors could materially impact our international operations and adversely affect our business as a whole.
Pursuing, completing, and integrating recent and potential acquisitions could divert management’s attention and financial resources and may negatively affect our operating results.
In the past we have made acquisitions of products and businesses and in fiscal 2003 we acquired privately held Adaytum, Inc. In the future, we may engage in additional acquisitions of other products or businesses that we believe are complementary to ours. We cannot provide assurance that we will be able to identify additional suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition, or successfully integrate any acquired product or business into our operations. Further, acquisitions may involve a number of other risks, including:
| | • | | diversion of management's attention; |
| | • | | disruption to our ongoing business; |
| | • | | failure to retain key acquired personnel; |
| | • | | difficulties in assimilating acquired operations, technologies, products, or personnel; |
| | • | | unanticipated expenses, events, or circumstances; |
| | • | | assumption of disclosed and undisclosed liabilities; and |
| | • | | the risk that we will not be able to value the acquired in-process research and development, or an entire acquired business, appropriately. |
If we do not successfully address these risks or any other problems encountered in connection with an acquisition, the acquisition could have a material adverse effect on our business, results of operations, and financial condition. Problems with an acquired business could have a material adverse effect on our performance or our business as a whole. In addition, if we proceed with an acquisition, our available cash may be used to complete the transaction, diminishing our liquidity and capital resources, or shares may be issued which could cause a dilution to existing shareholders.
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Failure to manage our growth successfully may adversely impact our operating results.
The expansion of our business and customer base has placed, and will continue to place, increased demands on our management, operating systems, internal controls, and financial resources. If not managed effectively, these increased demands may adversely affect the products and services we provide to our existing clients. In addition, our personnel, systems, procedures, and controls may be inadequate to support our future operations. Consequently, in order to manage our growth effectively, we may be required to increase expenditures to expand, train, and manage our employee base, improve our management, financial and information systems, and controls, or make other capital expenditures. Our results of operations and financial condition could be harmed if we encounter difficulties in effectively managing our growth.
Our executive management and other key personnel are essential to our business, and if we are not able to recruit and retain qualified personnel, our ability to develop, market, and support our products and services could be harmed.
We depend on the services of our key technical and management personnel. The loss of the services of any of these persons could have a material adverse effect on our business, results of operations, and financial condition. Our success is highly dependent on our continuing ability to identify, hire, train, motivate, and retain highly qualified management, technical, sales, and marketing personnel. Competition for such personnel can be intense, and we cannot provide assurance that we will be able to attract, assimilate, or retain highly qualified technical and managerial personnel in the future. Our inability to attract and retain the necessary management, technical, sales, and marketing personnel may adversely affect our future growth and profitability.
We may have exposure to additional tax liabilities.
As an entity which operates globally, we calculate our income tax liabilities in each of the jurisdictions in which we conduct business. As is common in companies with a global presence, we have used prudent tax planning strategies. Tax planning strategies by their nature involve complicated transactions. Those transactions are subject to review or audit by taxation authorities and the ultimate tax outcome bears a measure of uncertainty. We must therefore make estimates and judgments and it may take a considerable period for the ultimate tax outcome to be known. Although we believe our estimates are reasonable, the ultimate tax outcome could differ materially from the amounts recorded in our financial statements. These differences could have a material effect on our financial position and our net income.
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Risks Related to Our Industry
Economic uncertainty and downturns in the software market may lead to decreases in our revenues and margins.
The market for our products depends on economic conditions affecting the broader software market. Downturns in the economy may cause businesses and governments to delay or cancel software projects, reduce their overall information technology budgets, or reduce or cancel orders for our products. In this environment, customers may experience financial difficulty, fail to purchase or defer the budget for the purchase of our products, or cease operations. This, in turn, may lead to longer sales cycles, delays, or failures in payment and collection, and price pressures, causing us to realize lower revenues and margins. In particular, acts of terrorism, military action, or war have created an uncertain economic environment and we cannot predict the impact of such events on our customers or business. We believe that, in light of such events, some businesses and governments may delay, curtail, or eliminate capital spending on information technology generally, or in certain sectors of information technology in particular. If capital spending in our markets declines, it may be necessary for us to gain significant market share from our competitors in order to achieve our financial goals and maintain profitability, and there is no assurance we would be able to do so.
If our products contain material defects, our ability to attract and retain customers may be harmed.
Software products are complex and may contain errors or defects, particularly when first introduced, when new versions or enhancements are released, or when configured to individual customer computing systems. We currently have known errors and defects in our products. Despite testing conducted by us, additional defects and errors found in current versions, new versions, or enhancements of our products after commencement of commercial shipment could result in the loss of revenues or a delay in market acceptance. If, as a result of such a defect or error, our products cannot be effectively integrated with other hardware, software and database and networking systems, our ability to attract and retain customers could suffer. The occurrence of any of these events could cause us to lose customers or require us to pay damages to existing customers and, therefore, could seriously harm our business, operating results, and financial condition.
We face intense competition, and if we fail to compete successfully, our business could be seriously harmed and our revenues could grow more slowly than expected, stop growing, or decline.
We face substantial competition throughout the world, primarily from software companies located in the United States, Europe, and Canada. Some of our competitors have been in the software business longer than we have and have substantially greater financial and other resources with which to pursue research and development, manufacturing, marketing, and distribution of their products. We expect our existing competitors and future competitors to continue to improve the performance of their current products and to introduce new products or new technologies. In addition, the business intelligence market may undergo a transformation as a result of the entry into this market by some of the large software companies through acquisition of business intelligence software vendors, and the consolidation of other vendors. New product introductions by our competitors could cause a decline in sales, a reduction in the sales price, or a loss of market acceptance of our existing products. To the extent that we are unable to effectively compete against our current and future competitors, our ability to sell products could be harmed and our market share reduced. Any erosion of our competitive position could have a material adverse effect on our business, results of operations, and financial condition.
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If we do not respond effectively and on a timely basis to rapid technological change, our products and services may become obsolete and we could lose customers.
The markets for our products are characterized by:
| | • | | rapid and significant technological change; |
| | • | | frequent new product introductions and enhancements; |
| | • | | changing customer demands; and |
| | • | | evolving industry standards. |
We cannot provide assurance that our products and services will remain competitive in light of future technological change or respond to market demands and developments or new industry standards. If we are unable to identify a shift in market demand or industry standards quickly enough, we may not be able to develop products to meet those new demands or standards, or bring them to market in a timely way. In addition, failure to respond successfully to technological change may render our products and services obsolete and thus harm our ability to attract and retain customers.
Risks Related to External Conditions
Our share price will fluctuate.
The market price of our common shares may be volatile and could be subject to wide fluctuations due to a number of factors, including:
| | • | | actual or anticipated fluctuations in our results of operations; |
| | • | | changes in estimates of our future results of operations by us or securities analysts; |
| | • | | announcements of technological innovations or new products by us or our competitors; |
| | �� | | general industry changes in the business intelligence tools or related markets; or |
| | • | | other events or factors. |
In addition, the financial markets have experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that sometimes have been unrelated to the operating performance of these companies. Broad market fluctuations, as well as economic conditions generally and in the software industry specifically, may adversely affect the market price of our common shares. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Similar litigation may occur in the future with respect to us, which could result in substantial costs, divert management’s attention and other company resources, and have a material adverse effect upon our business, results of operations, and financial condition.
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New Accounting Pronouncements could require us to change the way in which we account for employee stock options, which would result in a reduction of our net income and earnings per share.
The FASB and other financial accounting standard-setting bodies internationally are currently addressing issues related to stock-based payments, and alternative methods of valuing those payments. The goal of these activities is to develop one set of international accounting pronouncements for share-based payments. If those accounting pronouncements require, or if we elect to use, a method which requires us to expense the fair value of stock-options we would report increased expenses in our income statement, and a reduction of our net income and earnings per share. The impact of applying a fair value method is disclosed in Note 3 of the Condensed Notes to the Consolidated Financial Statements.
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| Item 3. | | Quantitative and Qualitative Disclosure about Market Risk |
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The investment of cash is regulated by our investment policy of which the primary objective is security of principal. Among other selection criteria, the investment policy states that the term to maturity of investments cannot exceed two years in length. We do not use derivative financial instruments in our investment portfolio.
Interest income on our cash, cash equivalents, and short-term investments is subject to interest rate fluctuations, but we believe that the impact of these fluctuations does not have a material effect on our financial position due to the short-term nature of these financial instruments. We have no long-term debt. Our interest income and interest expense are most sensitive to the general level of interest rates in Canada and the United States. Sensitivity analysis is used to measure our interest rate risk. For the three and six months ending August 31, 2003, a 100 basis-point adverse change in interest rates would not have had a material effect on our consolidated financial position, earnings, or cash flows.
Foreign Currency Risk
We operate internationally; accordingly, a substantial portion of our financial instruments are held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries. The forward contracts are typically between the United States dollar and the British pound, the euro, and the Australian dollar. Sensitivity analysis is used to measure our foreign currency exchange rate risk. As of August 31, 2003, a 10% adverse change in foreign exchange rates versus the U.S. dollar would not have had a material effect on our reported cash, cash equivalents, and short-term investments.
As we operate internationally, a substantial portion of our business is also conducted in foreign currencies other than the U.S. dollar. Accordingly, our results are affected, and may be affected in the future, by exchange rate fluctuations of the United States dollar relative to the Canadian dollar, various European currencies, and, to a lesser extent, other foreign currencies. Revenues and expenses generated in foreign currencies are translated at exchange rates during the month in which the transaction occurs. The resulting gains and losses from this translation are included in net income. We cannot predict the effect of foreign exchange losses in the future; however, if significant foreign exchange losses are experienced, they could have a material adverse effect on our business, results of operations, and financial condition.
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| a) | | Evaluation of disclosure controls and procedures. |
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation the Chief Executive Officer and Chief Financial Officer conclude that the disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) effectively ensure that information required to be disclosed in our filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
| b) | | Changes in internal control over financial reporting. |
There has been no significant change in our internal control over financial reporting during the quarter ended August 31, 2003, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
The Corporation is not a party to any litigation that, in the opinion of management, could reasonably be expected to have material adverse impact on the Corporation’s financial position.
In addition, we and our subsidiaries may, from time to time be involved in other legal proceedings, claims, and litigation that arise in the ordinary course of business.
| Item 6. | | Exhibits and Reports on Form 8-K |
| a) | | Exhibits | | | |
| | 31.1 | | Certification Pursuant to Rule 13a - 14(a) or 15d - 14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | 31.2 | | Certification Pursuant to Rule 13a - 14(a) or 15d - 14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | 32.1 | | Certification Pursuant to Rule 13a - 14(a) or 15d - 14(a) of the Securities Exchange Act and 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 | |
| | 32.2 | | Certification Pursuant to Rule 13a - 14(a) or 15d - 14(a) of the Securities Exchange Act and 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 | |
| | 99.1 | | Selected Consolidated Financial Statements and Notes in U.S. Dollars and in accordance with Canadian Generally Accepted Accounting Principles | |
| | 99.2 | | Management's Discussion and Analysis of Financial Condition and Results of Operations - Canadian Supplement | |
The Corporation filed a Form 8-K on June 19, 2003 pursuant to Items 7 and 12,Financial Statements and ExhibitsandDisclosure of Results of Operations and Financial Condition,respectively.This Form 8-K related to the release of the Corporation’s results for the first quarter of fiscal 2004 ended May 31, 2003.
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| COGNOS INCORPORATED |
| (Registrant) |
| | |
| | |
| October 10, 2003 | | /s/ Tom Manley |
| |
|
| Date | | Tom Manley |
| | Senior Vice President, Finance & |
| | Administration and Chief Financial Officer |
| | (Principal Financial Officer and Chief Accounting |
| | Officer) |
50
EXHIBIT INDEX
51
