Each of these factors could materially impact our international operations and adversely affect our business as a whole.
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:
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.
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.
Our tax returns are subject to review by both domestic and foreign taxation authorities. As the results of these reviews bear a measure of uncertainty and take some time to complete, we must make estimates and judgments as to the impact of taxes on our results. Although we believe our estimates are appropriate, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may affect our financial position.
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
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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. 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. The business intelligence market may continue to consolidate by merger or acquisition. As well, competition may increase by the entry or expansion of other software vendors into this market. These competitors may have substantially greater financial and other resources with which to pursue research and development, manufacturing, marketing, and distribution of their products. 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.
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:
| | o | | rapid and significant technological change; |
| | o | | frequent new product introductions and enhancements; |
| | o | | changing customer demands; and |
| | o | | 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.
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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:
| | o | | actual or anticipated fluctuations in our results of operations; |
| | o | | changes in estimates of our future results of operations by us or securities analysts; |
| | o | | announcements of technological innovations or new products by us or our competitors; |
| | o | | general industry changes in the business intelligence tools or related markets; or |
| | o | | 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.
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. We expect those accounting pronouncements to require a method which requires us to expense the fair value of stock-options. This would require us to 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 nine months ended November 30, 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 November 30, 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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| Item 4. | | Controls and Procedures |
| 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 November 30, 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
| Item 1. | | Legal Proceedings |
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 |
| 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 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of The | |
| | Sarbanes-Oxley Act of 2002 | |
| 32.2 | | Certification Pursuant to 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 September 24, 2003 pursuant to Items 7 and 12,Financial Statements and Exhibits andDisclosure of Results of Operations and Financial Condition,respectively.This Form 8-K related to the release of the Corporation’s results for the second quarter of fiscal 2004 ended August 31, 2003.
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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) | |
| | | | |
| January 9, 2004 | | /s/ Tom Manley | |
| |
| |
| Date | | Tom Manley | |
| | | Senior Vice President, Finance &
Administration and Chief Financial Officer | |
| | | (Principal Financial Officer and Chief Accounting Officer) | |
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EXHIBIT INDEX
| EXHIBIT NO. | DESCRIPTION | PAGE |
| |
| 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 | | 54 |
| |
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 | | 55 |
| |
| |
| 32.1 | | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of The | |
| | Sarbanes-Oxley Act of 2002 | | 56 |
| |
| 32.2 | | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant to Section 906 of The | |
| | Sarbanes-Oxley Act of 2002 | | 57 |
| |
| 99.1 | | Selected Consolidated Financial Statements and Notes in U.S. Dollars and in accordance with | |
| | Canadian Generally Accepted Accounting Principles | | 58-69 |
| |
99.2
| | Management's Discussion and Analysis of Financial Condition and Results of Operations - Canadian Supplement | | 70-71 |
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