Exhibit 99.1
COGNOS INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CANADIAN SUPPLEMENT
(in U.S. dollars, unless otherwise indicated, and in accordance with CDN GAAP)
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations-Canadian Supplement (“Canadian Supplement”) should be read in conjunction with our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in Item 2 of this quarterly report. The Canadian Supplement should also be read in conjunction with the unaudited Consolidated Financial Statements and Notes prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) (included in Item 1), and the audited Consolidated Financial Statements and Notes included in our Annual Information Form for the fiscal year ended February 28, 2005.
The following contains forward-looking statements and should be read in conjunction with the factors set forth in the “Certain Factors That May Affect Future Results” section and the Forward-looking Statements/Safe Harbor section of the MD&A in Item 2 of this quarterly report. All dollar amounts in this Canadian Supplement are in thousands of United States dollars unless otherwise stated. The Canadian Supplement has been prepared by management to provide an analysis of the material differences between Canadian GAAP and U.S. GAAP on our financial condition and results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In addition to the critical accounting estimates listed in the MD&A, we also use the following for Canadian GAAP purposes:
Accounting for Stock Option, Stock Purchase, and Restricted Share Unit Plans
We apply CICA Handbook section 3870,Stock-based Compensation and Other Stock-based payments, in accounting for our stock option, stock purchase, and restricted share unit plans. Compensation expense for options granted and shares issued under our stock option and restricted share unit plans is recognized over their vesting period using the fair value method of accounting for stock-based compensation. For purposes of computing the stock-based compensation, the fair value of the options granted during the three and nine-month periods ended November 30, 2005 was estimated at the date of grant using a binomial lattice option-pricing model. Prior to March 1, 2005, we used the Black-Scholes option-pricing model to estimate the fair value of options at the grant date. Any consideration paid by employees on the exercise of stock options is credited to capital stock. The discount from market price offered to employees who purchase stock through our stock purchase plan is also recognized as a compensation expense in the period when the shares are purchased.
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Exhibit 99.1
COGNOS INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CANADIAN SUPPLEMENT
(in U.S. dollars, unless otherwise indicated, and in accordance with CDN GAAP)
RESULTS OF OPERATIONS
| | Three months ended November 30, | Nine months ended November 30, |
|
| | 2005 | 2004 | 2005 | 2004 |
|
Income before taxes – U.S. GAAP | | $36,137 | | $43,728 | | $99,246 | | $104,138 | |
Income before taxes – Canadian GAAP | | $35,434 | | $42,900 | | $99,501 | | $103,118 | |
| |
Income tax provision – U.S. GAAP | | $ 7,869 | | $ 9,183 | | $18,434 | | $ 21,869 | |
Income tax provision – Canadian GAAP | | $11,475 | | $12,914 | | $30,570 | | $ 32,140 | |
| |
Net income per share diluted – U.S. GAAP | | $0.31 | | $0.37 | | $0.87 | | $0.89 | |
Net income per share diluted – Canadian GAAP | | $0.26 | | $0.32 | | $0.74 | | $0.76 | |
Acquired in-process technology
Canadian GAAP requires capitalization of the value assigned to acquired in-process technology and amortization of this value over its estimated useful life. Under U.S. GAAP, this value is written off immediately. The impact of this difference was to decrease income before taxes by $0.1 and $0.3 million for the three months ended November 30, 2005 and November 30, 2004, respectively, as compared to U.S. GAAP. For the nine-month periods ending November 30, 2005 and November 30, 2004, the impact of this difference was to decrease income before taxes by $0.6 million and $0.8 million, respectively, as compared to U.S. GAAP.
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Exhibit 99.1
COGNOS INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CANADIAN SUPPLEMENT
(in U.S. dollars, unless otherwise indicated, and in accordance with CDN GAAP)
Stock-based compensation
Under U.S. GAAP, companies may choose between the intrinsic value method and fair value method of accounting for stock-based compensation. We have elected to account for stock-based compensation using the intrinsic value method in accordance with APB 25 and to disclose the pro forma effect of recording compensation expense under the fair value method. This disclosure can be found in Note 3 to the unaudited consolidated financial statements. For Canadian GAAP purposes, companies are required to use the fair value method of accounting for stock-based compensation. The impact of this difference for the three months ended November 30, 2005 and November 30, 2004 was to decrease income before taxes by $4.9 million and $5.0 million, respectively. For the nine-month periods ending November 30, 2005 and November 30, 2004, the impact of this difference was to decrease income before taxes by $13.2 million and $12.3 million, respectively, as compared to U.S. GAAP.
Investment tax credits
Canadian GAAP requires that investment tax credits be deducted from operating expense. Under U.S. GAAP, these amounts are deducted from the income tax provision. The impact of this difference was to increase income before taxes and the income tax provision by $4.2 million and $4.4 million for the three months ended November 30, 2005 and November 30, 2004, respectively, with no corresponding impact on net income, as compared to U.S. GAAP. For the nine-month periods ended November 30, 2005 and November 30, 2004, the impact of this difference was to increase income before taxes and the income tax provision by $14.0 million and $12.0 million, respectively, as compared to U.S. GAAP.
Deferred income taxes
The capitalization of in-process technology created an additional deferred income tax liability on the Canadian GAAP balance sheet as the capitalization of the in-process technology created a temporary difference. The amortization of this balance decreased the Canadian GAAP income tax provision by $0.1 million for the quarter ended November 30, 2004 and had an immaterial effect for the quarter ended November 30, 2005, as compared to U.S. GAAP. For the nine-month periods ended November 30, 2005 and November 30, 2004, the amortization of this balance decreased the Canadian GAAP income tax provision by $0.2 million and $0.3 million, respectively, as compared to U.S. GAAP.
The expensing of stock-based compensation creates a deferred tax asset for Canadian GAAP purposes as this expense is deductible in certain jurisdictions when the options are exercised. Under U.S. GAAP, the reduction in the tax liability is treated as part of the purchase price component of the stock options and added to paid-in capital. The expensing of stock-based compensation reduced the Canadian GAAP tax provision by $0.6 million in both the three month periods ended November 30, 2005 and November 30, 2004, as compared to U.S. GAAP. For the nine months ended November 30, 2005 and November 30, 2004, the reduction in the tax provision was $1.6 million and $1.4 million, respectively.
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Exhibit 99.1
COGNOS INCORPORATED
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-CANADIAN SUPPLEMENT
(in U.S. dollars, unless otherwise indicated, and in accordance with CDN GAAP)
Derivative financial instruments
Under Canadian GAAP, derivative financial instruments that qualify for hedge accounting treatment may be recognized on the balance sheet only to the extent that cash has been paid and or received together with adjustments necessary to offset recognized gains or losses arising on the hedged items. Under U.S. GAAP, such derivative financial instruments are recognized on the balance sheet at fair value with a corresponding charge or credit recorded in other comprehensive income for any portion not recognized in income. At November 30, 2005 and February 28, 2005, there was $1.1 million and $0.3 million, respectively, included in accumulated other comprehensive income related to the net unrealized loss on the Corporation’s cash flow hedges. For Canadian GAAP, this amount was removed and applied against the accrued liability related to the hedge.
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