The basis of our business budgeting and planning process is the estimation of revenues that we expect to achieve in a particular quarter and is based on 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. These pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter because of, among other things, the events identified in these risk factors, as well as the subjective nature of the estimates themselves. In particular, a slowdown in technology spending or a deterioration in economic conditions is likely to result in the delay or cancellation of prospective orders in our pipeline. A variation from the expected conversion rate of the pipeline could adversely affect our budget or planning and could consequently materially affect our operating results.
As our business evolves toward larger transactions at the enterprise level, the presence or absence of one or more of these large transactions in a particular period may have a material upwards or downwards effect on the revenue estimates in that period. These significant transactions require a considerable effort on the part of customers to assess alternative products and require additional levels of management approvals before being concluded. These factors combine to lengthen the typical sales cycle and increase the risk that the customer’s purchasing decision may be postponed or delayed from one period to another subsequent or later period or that the customer will alter its purchasing requirements. These factors, along with any other foreseen or unforeseen event, could result in lower than anticipated revenue for a particular period or in the reduction of estimated revenue in future periods.
We base our operating expenses on anticipated revenue trends. Since a high percentage of these expenses are relatively fixed, a delay in recognizing revenue from license transactions could cause significant variations in operating results from quarter to quarter and could result in operating losses. If these expenses precede, or are not subsequently followed by, increased revenues, our business, financial condition, or results of operations could be materially and adversely affected.
Economic conditions could adversely affect our revenue growth and ability to forecast revenue.
The revenue growth and profitability of our business depends on the overall demand for BI products and services. Because our sales are primarily to major corporate customers in the high technology, telecommunications, financial services (including insurance), pharmaceutical, utilities, and consumer packaged goods industries, our business depends on the overall economic conditions and the economic and business conditions within these industries. The progressive weakening of the global economy, the weakening of the information technology industry, and the weakening of the business conditions within the industries listed above may cause a decrease in our software license revenues. A decrease in demand for computer software caused, in part, by a continued weakening of the economy, domestically or internationally, may result in a decrease in revenues and growth rates.
Hostilities or terrorist attacks could harm our business.
Terrorist acts or the threat of future outbreak or continued escalation of hostilities involving the United States or other countries could adversely affect the growth rate of our software license revenue and have an adverse effect on our business, financial condition, or results of operations. In addition, any escalation in these events or similar future events may disrupt our operations or those of our customers, distributors, and suppliers, which could adversely affect our business, financial condition, or results of operations.
We operate internationally and face risks attendant to those operations, in particular currency risk.
We earn a significant portion of our total revenues from international sales generated through our foreign direct and indirect operations. These sales operations face risks arising from local political, legal and economic factors such as the general economic conditions in each country or region, varying regulatory requirements, compliance with international and local trade, labor and other laws, and reduced intellectual property protections in certain jurisdictions. As well, we may also face difficulties in managing these operations, collecting receivables in a timely fashion, and repatriating earnings. Any of these factors, either individually or in combination, could materially impact our international operations and adversely affect our business as a whole. Also, a substantial portion of both our revenues and expenditures are generated in currencies other than U.S. dollars, such as the Canadian dollar and the euro. These 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. Please see further discussion on foreign currency risk included in the Quantitative and Qualitative Disclosure on Market Risk in Item 3 of this Form 10-Q.
Making and integrating acquisitions could impair our operating results.
We have acquired and, if appropriate, will continue to seek to acquire additional products or businesses that we believe are complementary to ours. Acquisitions involve a number of other risks, including: diversion of management’s attention; disruption of our ongoing business; difficulties in integrating and retaining all or part of the acquired business and its personnel; and assumption of disclosed and undisclosed liabilities. The individual or combined effect of these risks could have a material adverse effect on our business. As well, in paying for an acquisition we may deplete our cash resources or dilute our shareholder base by issuing additional shares. Furthermore, there is the risk that our valuation assumptions and or models for an acquired product or business may be erroneous or inappropriate due to foreseen or unforeseen circumstances and thereby cause us to overvalue an acquisition target.
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If we introduce a new product, revenue from existing products may be eroded.
We may develop technology or a product that constitutes a marked advance over both our own products and those of our competitors. If we introduce such a product, we may experience a decline in revenues of our existing products that is not fully matched by the new product’s revenue. In addition, we may lose existing customers who choose a competitor’s product rather than migrate to our new product. This could result in a temporary or permanent revenue shortfall and materially affect our business.
We may have exposure to greater than anticipated tax liabilities.
We are subject to income taxes and non-income taxes in a variety of jurisdictions and our tax structure is subject to review by both domestic and foreign taxation authorities. The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Our intellectual property may be misappropriated or we may have to defend ourselves against other parties’ claims.
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, third parties may misappropriate our intellectual property causing us to lose potential revenue and competitive advantage. As well, we may ourselves from time to time become subject to claims by third parties that our technology infringes their intellectual property rights. In either case, we may incur expenditures to police, protect, and defend our interests and may become involved in litigation that could divert the attention of our management. Responding to such claims could result in substantial expense and result in damages, royalties, or injunctive relief, or require us to enter into licensing agreements on unfavorable terms, or redesign or stop selling affected products which could materially disrupt the conduct of our business.
We may face liability claims arising as a result of our software products or services’ failure to perform as intended.
The sale, servicing, and support of our products entails the risk of product liability, performance or warranty claims, which may be substantial in light of the use of our products in business-critical applications. A successful product liability claim could seriously disrupt our business and adversely affect our financial results. Software products are complex and may contain errors or defects, particularly when first introduced, or when new versions or enhancements are released, or when configured to individual customer computing systems. We currently have in place procedures and staff to exercise quality control over our products and respond to defects and errors found in current versions, new versions, or enhancements of our products. However, defects and errors in our products could inhibit or prevent customer deployment and cause us to lose customers or require us to pay penalties or damages.
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Our share price may 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 BI tools or related markets; or other events or factors.
New Accounting Pronouncements may require us to change the way in which we account for our operational or business activities.
The FASB and other bodies that have jurisdiction over the form and content of our accounts are constantly discussing proposals designed to ensure that companies best display relevant and transparent information relating to their respective businesses. The effect of the pronouncements of FASB and other bodies may have the effect of requiring us to account for revenues and/or expenses in a different manner than at present. In particular, if the FASB or any other standard-setting or regulatory body requires us to expense the fair value of stock options, we would likely 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 of accounting for stock options is disclosed in Note 3 of the Condensed Notes to the Consolidated Financial Statements.
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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 quarter ending May 31, 2004, 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 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. Sensitivity analysis is used to measure our foreign currency exchange rate risk. As of May 31, 2004, a 10% adverse change in foreign exchange rates versus the U.S. dollar would have decreased our reported cash, cash equivalents, and short-term investments by approximately two to four percent.
Also, as we conduct a substantial portion of our business in foreign currencies other than the U.S. dollar, 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, to 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. We cannot predict the effect foreign exchange fluctuations will have on our results going forward; 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 a date within 90 days before the filing date of 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-14(c) 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 controls |
There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the evaluation of the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II — OTHER INFORMATION
Cognos is not a party to any legal proceedings that, if resolved or determined adversely to Cognos, would have a material adverse effect on Cognos’ business, financial condition, and results of operation. Cognos, however, may become subject to claims and litigation in the ordinary course of business. In the event that any such claims or litigation are resolved against Cognos, such outcomes or resolutions could have a material adverse effect on Cognos’ business, financial condition, or results of operations.
PURCHASES OF EQUITY SECURITIES
| Period | Total
Number of
Shares
Purchased | Average Price
Paid per Share | Total Number of Shares Purchased
as Part of
Publicly
Announced
Plans | Approximate
Dollar
Value of
Shares that
May Yet Be
Purchased
Under
the Plans |
| March 1 to | | | | | | | | | |
| March 31, 2004 | | Nil | | Nil | | Nil | | $40,302,000 | |
| |
| April 1 to | | | | | | | | | | | |
| April 30, 2004 | | 70,000 | | $33.52 | | 70,000 | | $37,956,000 | |
| |
| May 1 to | | | | | | | | | |
| May 31, 2004 | | 230,000 | | $33.23 | | 230,000 | | $30,314,000 | |
| |
| |
| Total | | 300,000 | | $33.29 | | 300,000 | |
| |
| |
On October 7, 2003, Cognos Inc. announced that it had adopted a stock repurchase program that will enable the Company to purchase up to 4,468,639 common shares (not more than 5% of the common shares outstanding on that date) up to a maximum of $50,000,000 between October 9, 2003 and October 8, 2004.
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| a) | | The Corporation held its Annual and Special Meeting of Shareholders on June 23, 2004. |
| b) | | At the Annual and Special Meeting, shareholders elected the persons listed below as directors of the Corporation and approved the appointment of Ernst & Young LLP as the Corporation’s auditors for the fiscal year ending February 28, 2005. Shareholders also approved an amendment to the Cognos Incorporated 2003-2008 Stock Option Plan to increase the shares of common stock reserved for awards thereunder by 1.8 million shares, and approved an amendment to the Corporation’s Articles of Incorporation to eliminate the preferred class of shares. The voting results of the meeting are presented in the following table: |
Voting Results
Annual and Special Meeting of Shareholders
June 23, 2004
|
| | | FOR | | WITHHELD | | AGAINST | |
|
| Election of Directors | | | | | | | |
|
| Robert G. Ashe | | 61,809,322 | | 2,925,757 | | 0 | |
|
| John E. Caldwell | | 61,698,598 | | 3,036,481 | | 0 | |
|
| Paul D. Damp | | 61,805,113 | | 2,926,966 | | 0 | |
|
| Pierre Y. Ducros | | 61,783,199 | | 2,936,256 | | 0 | |
|
| Robert W. Korthals | | 61,581,587 | | 3,153,492 | | 0 | |
|
| John Rando | | 61,583,974 | | 3,151,105 | | 0 | |
|
| William Russell | | 61,466,003 | | 3,269,076 | | 0 | |
|
| James M. Tory | | 59,262,307 | | 5,348,948 | | 0 | |
|
| Renato Zambonini | | 60,782,763 | | 3,844,116 | | 0 | |
|
| Appointment of Auditors | | 63,451,860 | | 1,267,595 | | 0 |
|
|
| Amendment to the 2003-2008 Stock Option Plan to increase the shares of common stock reserved for awards thereunder by 1.8 million shares | | 44,512,488 | | 0 | | 12,036,012 |
|
|
| Amendment to Articles of Incorporation | | 56,442,042 | | 0 | | 81,875 |
|
|
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| a) | | Exhibits |
| | 3.1(i) | | Amendment to Articles of Incorporation dated June 24, 2004 | |
| | 3.1(ii) | | Articles of Incorporation and Amendments thereto (incorporated by reference to Exhibit 3.1 of the Corporation’s Form 10-Q filed for the quarter ended November 30, 2002) | |
| | 3.2 | | By-Laws of the Corporation (incorporated by reference to Exhibit 3.2 of the Corporation’s Form 10-K filed for the year ended February 28, 1997) | |
| | 31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a – 14(a) and 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 of Chief Financial Officer Pursuant to Rule 13a – 14(a) and 15d – 14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | 32 | | Certification of Chief Executive Officer and Chief Financial Officer 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 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 March 25, 2004 pursuant to Item 12,Disclosure of Results of Operations and Financial Condition.This Form 8-K related to the release of the Corporation’s results for the quarter and fiscal year ended February 29, 2004. Also on March 25, 2004, the Corporation filed a Form 8-K pursuant to Item 5,Other Events. This Form 8-K related to the announcement by the Corporation that its Chief Executive Officer would be retiring.
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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) |
| | |
| | |
| July 5, 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
47
