UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended FEBRUARY 28, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From To
Commission File Number 0-16006
COGNOS INCORPORATED
(Exact Name Of Registrant As Specified In Its Charter)
CANADA 98-0119485
(State Or Other Jurisdiction Of (IRS Employer Identification No.)
Incorporation Or Organization)
3755 Riverside Drive,
P.O. Box 9707, Station T,
Ottawa, Ontario, Canada K1G 4K9
(Address Of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, including Area Code: (613) 738-1440
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares Without Nominal Or Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of Common Shares held by non-affiliates of the
registrant, based on the last reported sales price of the Common Shares on the
Nasdaq National Market on May 3, 2002, was approximately US$1,894,800,731.
As of May 3, 2002, 87,925,788 Common Shares, without nominal or par value,
were outstanding.
continued....
REPORTING CURRENCY
All financial information contained in this document is expressed in United
States dollars, unless otherwise stated.
TRADEMARKS
Cognos and the Cognos logo, Cognos Upfront, Axiant, DecisionStream, emPower,
Impromptu, LEX2000, PowerHouse, and PowerPlay are trademarks or registered
trademarks of Cognos Incorporated in the United States and/or elsewhere. All
other trademarks or trade names referenced to in this Annual Report on Form 10-
K are the property of their respective owners.
TABLE OF CONTENTS
PAGE
-----
PART I
Item 1. Business...................................................... 1-10
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 10-11
Item 4. Submission of Matters to a Vote of Security Holders........... 11-12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 13-14
Item 6. Selected Financial Data....................................... 15-16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16-39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 40
Item 8. Financial Statements and Supplementary Data................... 41-63
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 64
PART III
Item 10. Directors and Executive Officers of the Registrant............ 65-66
Item 11. Executive Compensation........................................ 67-71
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 72-73
Item 13. Certain Relationships and Related Transactions................ 73-74
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 75-77
Signatures.............................................................. 78
1
PART I
ITEM 1. BUSINESS
Overview
Cognos Incorporated, a Canadian corporation founded in 1969, is a leading
global provider of business intelligence software. Our solutions help
companies improve business performance by enabling effective decision-making
at all levels of the organization through the consistent analysis and
reporting of data from multiple perspectives. Our software is designed to
provide our customers with the ability to effectively use data to make faster,
more informed decisions in order to improve operational effectiveness,
increase customer satisfaction, accelerate corporate response times and
ultimately, increase revenues and profits.
The strategic application of our business intelligence framework on an
enterprise scale addresses the need for corporate performance management. CPM
lets organizations measure execution against business strategy to ensure the
two are aligned at all levels across the enterprise. We provide a framework
for CPM that enables the complete management cycle with integrated software
for planning, budgeting, reporting, analysis and scorecarding.
Our integrated solution consists of our business intelligence, financial
management and analytical applications components. The component-based nature
of our solution allows customers to purchase functionality that fits their
particular needs and allows them to easily expand their capabilities as
required. We provide a common business intelligence framework that is capable
of collecting, organizing and combining information from all sources of data.
Our integrated solution provides a scalable and secure web-based environment
that is easy to use and deploy across the extended enterprise.
Products
Our integrated solution consists of our business intelligence, financial
management and analytical applications components.
Business Intelligence Components
Our BI Solution is comprised of highly scalable business intelligence servers
encapsulated by a robust layered architecture. We provide a single, common
software framework to deliver a highly integrated and expandable business
intelligence solution. The solution's architecture consists of the following
five layers:
. common portal;
. business intelligence servers;
. modeling and business rules;
. data mart creation; and
. centralized security administration service.
1
These layers operate in a seamless, integrated environment due to their common
framework. The scalability of the architecture allows organizations to deliver
business intelligence applications to a large and broad user community, both
inside and outside an organization.
Customers who purchase one of our business intelligence servers are also
provided with the framework components for modeling and business rules,
security and information delivery as integrated parts of their solution. With
this framework, our customers are able to more quickly and easily deploy
the server-based capabilities to end-users. In addition, this approach
facilitates a customer's ability to add new capabilities because additional
servers can be easily plugged into the existing framework. This flexibility is
critical as a customer's requirements change and as we introduce new
capabilities to our solution.
Common Portal. The portal service is delivered through a single component,
Cognos Upfront, which can be customized to fit seamlessly in an existing
company portal or intranet/extranet environment. For information technology
professionals, the portal represents a single point of content delivery and
management for end-users inside and outside of the organization. It is
designed to ensure that each user views only the content they have authority
to access. For end-users, the portal is a single, Web-based point of
personalized access to business intelligence content that can be customized to
present the user's content in a format that is familiar and appropriate to
that user. The portal also allows for sharing and collaboration of information
across many users.
Business Intelligence Servers. The business intelligence servers facilitate
all end-user business intelligence activities, including reporting, analysis,
query, scorecarding, dashboarding/visualizations and event detection for users
inside and outside an organization. Our business intelligence servers are
based on a suite of proprietary applications which offer:
Reporting. Our reporting server is packaged as the Impromptu Web Reports
server. Reports can be rendered and viewed by users in a variety of outputs
such as CSV, Excel, or Adobe PDF files. Customers can author, manage and
broadcast sales results, inventory figures, financial updates and other
regularly scheduled reports that are distributed to a large Web-based
community of users.
Analysis. Our analysis server is packaged as the Cognos PowerPlay Enterprise
Server which delivers on-line analytical process (OLAP) reporting and
analysis. PowerPlay's single application server architecture allows
organizations to deploy and manage on-line analytical processes from a central
point of control. Through the Web, Windows, or Excel, users are able to access
multidimensional data and use PowerPlay for analysis and reporting. Users can
perform their own ad hoc analysis by investigating, in any combination and at
any level, the critical success factors that drive their business. Users can
manipulate information by "drilling down" through layers of summary
information in successively greater levels of detail and can present the
information in multiple graphical displays.
Query. Our query server is packaged as the Cognos Query server. This server
presents users with a simple view of various databases, allowing them to
quickly and easily navigate corporate data. This engine allows users to run
predefined queries or build ad hoc queries. The software uses hyperlinks to
allow the users to jump from query to query to see related information, such
as customer details, sales orders or the detailed transactions.
Advanced Data Visualization. Our visualization server is packaged as Cognos
Visualizer server. This web-based server delivers advanced visualization
graphics, animation, mapping and scorecarding through
2
multi-metric dashboards, all fully-integrated with the analysis and reporting
servers. With Cognos Visualizer, users can construct balanced scorecard
systems to see complex business relationships and the interplay between
factors that drive a company's business.
Scorecarding. Our scorecarding is packaged as KPI Business Pack. Using the KPI
Business Pack, users can present key performance indicators in a scorecard
view. Indicators of the same or different business metric are aggregated
hierarchically using business rules, to give users a clear picture of the
whole business at each level.
Event Detection. Our event detection server is packaged as Cognos NoticeCast
server. With Cognos NoticeCast, users can monitor time critical content and
then receive a notification through email when the content changes. User can
monitor events such as changes in key performance indicators and operational
data, and updates to reports. Along with the notification, users receive
business intelligence content that gives context to decision-making.
Modeling and Business Rules. The modeling layer of our business intelligence
solution drives the consistency and adaptability of our solution. This layer
is packaged as Cognos Architect, which ensures that every manager has a common
foundation for evaluating business performance and making key business
decisions. This layer is designed to present information stored in corporate
databases in a consistent format. In addition, common business rules,
calculations and goals, such as the definitions of profitability, cashflow and
return on investment, are visible and shared by all users, which ensures that
every manager has a consistent view of the business. Each manager can be
provided with a personalized view of information, as well as a common view of
business performance that permits the rapid coordination of management
decisions and actions.
Data Mart Creation. Unlike solutions provided by other business intelligence
vendors, our BI Solution has the ability to create and manage a data mart from
an existing database. This data mart creation capability is packaged as Cognos
DecisionStream. Our solution is optimized for modeling, transforming and
creating high-speed, scalable business intelligence data marts that have
embedded knowledge of the business intelligence applications they will serve,
thereby enabling faster deployment and user acceptance of these applications.
Our data mart creation and business intelligence tools work together to ensure
that many of the calculations and analytic operations can be performed at the
database level, which can dramatically improve response time and network
traffic loads. Companies can build a network of data marts that span the
extended enterprise, using shared and common business models to ensure
consistency and rapid adoption of change.
Centralized Security and Administration. The security server layer spans the
other four layers of our BI Solution to provide common, centralized security.
The security server is delivered by a single component called Access Manager
that allows information technology (IT) managers to manage and maintain user
profiles and classes for all servers from a single console. This service
addresses both authentication security and authorization security, which
determines what information users have the right to view. Access Manager uses
open security standards which allows it to be easily integrated with other
enterprise security systems. We also have centralized administration with
common utilities for installation, configuration and application deployment.
Cognos Finance Components
Cognos Finance is a complete financial analytical applications suite that
delivers a unified financial view of the entire organization, combining
budgeting, planning, forecasting, closings, and financial reporting into one
comprehensive and easy-to-use system. It enables finance professionals to
perform day-to-day
3
financial processes in a timely, user-friendly manner, such as closing books
quickly for monthly, quarterly, and annual periods; making the budget process
of gathering and distributing budget information with all of the budgeting
stakeholders easy to administer; and integrating up-to-date, actual data with
user-supplied forecasts and the overall enterprise plan.
Cognos Analytic Application Components
An emerging trend in the market for business intelligence is the growing
demand for pre-packaged solutions that shorten time to implementation and
results. We have developed our Cognos Analytic Applications, an integrated set
of applications to make it easy for customers to combine appropriate
capabilities and to deploy them quickly.
Our Analytic Applications are flexible and extendible because they are built
upon the foundation of our BI Solution. Customers are able to change models,
create new reports and perform new analyses by using our business intelligence
servers in conjunction with our Analytic Applications. These applications
reduce the time, effort and cost required for an organization to gain a
competitive advantage from business intelligence and can help them realize
returns on investment from operational applications such as enterprise
resource planning, customer relationship management and supply chain
management implementations more quickly.
Application Development Tools
We have a legacy line of products based on application development products
marketed under the PowerHouse and Axiant names, which represented
approximately 8% of our total revenue for the year ended February 28, 2002.
PowerHouse is an application development environment that enables customers to
quickly develop complex business applications.
We believe there has been a fundamental shift over the past several years away
from application development environments towards packaged solutions. The
large majority of organizations now choose to buy their next generation of
business systems, rather than attempt to build these corporate applications
internally. Our strategy for this mature part of our business is focused
solely on maintaining the product and supporting our existing customers.
Product support is the largest source of revenue from these customers, and as
a result, we expect to continue to update our application development products
to reflect the changing requirements of our customers. We expect our revenue
from application development tools to continue to decline as customers focus
on the next generation of business intelligence solutions.
Support and Services
Support and services are a critical part of our business intelligence
solution. We offer a wide variety of packaged and on-demand services to assist
our customers with the installation, deployment and effective use of our BI
Solution. These services include product support, education, and consulting
and other services.
Product support services
4
Product support services consist primarily of implementation resolution,
product configurations, documentation and support for product problem
resolution. Telephone support and Web-based customer self-service support are
also key to customer satisfaction and are available worldwide. These solutions
provide our customers with online answers to their product questions, 24 hours
a day.
Education
Customers typically require specific training when they purchase our BI
Solution. In addition, we believe that customer education helps maximize the
potential of productivity gains from our products. We provide courses at
Cognos education centers and customer sites and also offer e-training for
customers through the use of "virtual classrooms" over the Internet. In
addition to varying levels or product training, we offer solutions based
education fully utilizing our knowledge leadership in business intelligence.
Consulting and Other Services
We offer a variety of product consulting services to our customers, such as
performance, design and deployment reviews. These services can take the form
of consulting services that are billed on a daily basis at competitive rates,
or pre-packaged services that are purchased for a particular project over a
specific time frame. Generally our consulting is aimed at guiding our
customers through the solution implementation process and coordinating
development services, project management and education.
Customers
As of February 28, 2002, we had more than 19,000 customers located in over 120
countries around the world. Our primary customer focus is Global 2000
companies. We also license our products to a broad base of small and medium-
size businesses through our more than 3000 partners and resellers.
Although our BI Solution is a complete solution for the extended enterprise,
our customers typically purchase our solution in stages. The first stage
typically involves the purchase of a component of our solution to address a
particular departmental requirement. The second stage usually involves
purchases by other departments within that organization, often for
applications that are closely related to the initial purchase. In many cases,
there are a number of purchases in several departments of an organization
before a customer makes the decision to deploy our solution on an enterprise-
wide basis. Throughout the sales cycle, we work closely with our customers in
the design of new products and the evolution of existing solutions.
Sales and Marketing
We use an international, multi-tiered channel distribution system to reach
customers on a cost-effective basis. We support these channels with an
extensive organization of pre-sales and post-sales technical specialists. Our
worldwide sales and marketing organizations are managed from our Burlington,
Massachusetts location.
Sales Channels
We support our sales channels with lead generation and marketing programs,
including direct mail, public relations, advertising, telemarketing, Web-based
programs, promotional seminars and participation in trade shows and user group
meetings. The principal elements of our distribution system are as follows:
Direct Sales
5
We use a direct sales force in all major markets as the primary channel for
distribution. We believe our quota-carrying direct sales force increases our
visibility and market penetration, ensures long-term customer contact and
facilitates sales of additional products. Because the demand from Global 2000
companies for enterprise-wide business intelligence solutions is growing, our
sales force targets the senior executives of an organization. We believe that
a direct sales force is more effective than third party sales in reaching this
market because it is more relationship focused. As of February 28, 2002, we
employed approximately 289 sales representatives in 51 sales offices located
in 17 countries.
Third Parties
In order to extend our geographic coverage, we also market our products in
selected regions through third-party channels, which include resellers, value-
added resellers, original equipment manufacturers, system integrators and
distributors. Examples include:
. original equipment manufacturers such as CODA, GEAC Solutions, GE
Capital Information Solutions, NCR, Peregrine Systems and Tivoli;
. systems integrators such as PriceWaterhouseCoopers, Deloitte-Touche and
Accenture; and
. application service providers such as Breakaway Solutions.
Telesales
We also use telesales representatives in certain areas to sell products and
services, primarily to our installed customer base.
Marketing and Technology Relationships
Cooperative marketing arrangements with hardware and other software vendors
provide us with additional visibility in the marketplace. These relationships
permit our sales force to work closely with the sales representatives of these
vendors, enabling prospective customers to evaluate software applications,
services and, in certain instances, hardware together as a complete solution.
Our marketing relationships can be classified into three broad categories:
Technology Partners
Our technology partners consist of industry-leading database, server, OLAP
server, Internet, enterprise application and connectivity technology
companies, including IBM, Microsoft, Teradata, a division of NCR, and Oracle.
Solutions Partners
Our solutions partners consist of third-party resellers, such as certified
resellers, original equipment manufacturers, value-added resellers and
geographic distributors, including: GEAC Solutions, Peregrine Systems, Onyx
and Tivoli. These solutions partners combine their applications and business
expertise with our products in order to market a more customized solution.
Services Partners
6
Our services partners consist of "Big 5" accounting firms, large consulting
firms, system integrators, information technology consulting organizations and
certified resellers, including: PwC Consulting, Accenture, Deloitte & Touche,
Cap Gemini, DMR, Anderson and KPMG. These companies implement business
intelligence and data warehousing solutions.
These technology and marketing relationships also provide us with the
opportunity to market our products together with packaged solutions. We
believe that solution-selling can shorten sales cycles and increase our sales
opportunities.
We also participate in cooperative technology and marketing programs with
hardware, software and database vendors, including the following program
roles: Compaq Solutions Alliance Partner, Hewlett-Packard Developer and
Solution Partner Program, IBM PartnerWorld for Developers member, Microsoft
Data Warehousing Alliance Partner, Oracle Partner Network, SAP Portals
Partner, PeopleSoft Open Analytics Partner, Siebel Premier Software Partner,
Plumtree Premier Partner, RIM Select Partner, Sun Developer Connection Partner
Program and Sybase Open Solutions CODE Partner.
Marketing
We recognize the importance of a complete and focused marketing effort. We
divide our marketing organization between corporate marketing and field
marketing. These two groups are coordinated to provide a consistent market
message and presence and effective market coverage for Cognos.
Our corporate marketing focuses on increasing "Cognos" brand awareness and
visibility through advertising, events, sponsorship, our corporate Web site
and sales collateral. This function is managed from our Burlington,
Massachusetts office, with the majority of staff in Ottawa, Canada. We
recently launched Cognos Series 7 the latest release of our BI solution to
raise Cognos product awareness with business executives of Global 2000
companies.
We have deployed our field marketing organization throughout the world. This
group is responsible for sales lead generation and local marketing programs,
such as trade shows, seminars, direct mail programs and user group meetings
and conferences, to help ensure local visibility and healthy sales pipelines.
Research and Development
We believe that our talented and experienced research and development staff is
one of our core strengths. Our research and development efforts are aimed at
enhancing and extending our existing business intelligence solution and
creating new products. As of February 28, 2002, our research and development
staff consisted of 752 employees. Research and development is undertaken
primarily at our corporate headquarters and leased facilities in Ottawa,
Canada.
We had research and development costs of $74.6 million, $67.3 million and
$53.5 million in fiscal 2002, 2001 and 2000, respectively. Research and
development costs have continued to increase, in dollar terms, over the last
three fiscal years, but have remained relatively constant as a percentage of
total revenue.
Our business intelligence solution and application development tools were
developed primarily through internal resources. In support of the development
of our products, we have acquired or licensed specialized products and
technologies from other software firms, and we have undertaken further
7
development to integrate these products into our offerings. Most of the third-
party licenses are non-exclusive and do not preclude third parties from
entering into similar agreements with our competitors.
Competition
The business intelligence market is highly competitive. Our competitors
include software vendors that operate independently of hardware vendors, but
who may have marketing or technology agreements with these vendors; database
vendors who offer application development, query and reporting products for
their own databases; large diversified vendors who offer products in numerous
market segments; and other companies that may in the future announce offerings
of business intelligence products. Some of the key factors that affect our
competitive position include the method of distribution, functionality,
support and service, ease of use, price, training, vendor stability and
experience.
Due to the all-encompassing nature of our BI Solution, we encounter many
competitors who focus on a single area within our overall offering. Our
products compete directly and indirectly against various tools, depending on
user needs and computing environments.
There are several broad categories of competitors:
Vendors of Query and Reporting Tools
These vendors manufacture and sell tools that enable users to query and report
against corporate databases, and include BusinessObjects, Crystal Decisions,
and Oracle.
Vendors of Managed Reporting Environments
These vendors manufacture and sell products that are designed to execute and
distribute large numbers of complex reports to many users. Competitors in this
area include Actuate and Brio Software.
Vendors of Multidimensional Analysis Tools
These vendors manufacture and sell products that enable users to view, explore
and analyze a summarized view of their business using OLAP technology, and
include Hyperion Solutions, Oracle and MicroStrategy.
Database Vendors
Some database vendors have tools that are included with their database
environment that can be used for query and reporting, as well as some OLAP
functionality. These vendors include Oracle and Microsoft.
Analytical Application Vendors
Some application vendors manufacture and sell tools that are included with
their application environment that can be used to create and deliver
application-specific reports and analysis. Vendors who offer these tools with
their applications include Oracle, SAP and Informatica.
Our products are complementary with the products of many of the above-named
competitors, and as a result, we have cooperative marketing relationships with
some of these vendors, including Oracle and Microsoft. We expect our current
competitors and potentially new competitors to continue to improve the
8
performance of their products and to introduce new products or new
technologies that reduce costs and improve performance characteristics.
Employees
As of February 28, 2002, we had 2,598 full-time permanent employees. We
believe that our future success will depend, in part, on our ability to
continue to identify, hire, motivate and retain skilled and experienced
personnel. In the software industry, there is a high demand for such
employees. Historically, we have been successful in recruiting and retaining
sufficient numbers of qualified personnel. None of our employees is
represented by a labor union.
Copyright, Trademarks, Patents, and Licenses
In accordance with industry practice, we rely upon a combination of contract
provisions and copyright, trademark, and trade secret laws to protect our
proprietary rights in our products. We license the use of our products to our
customers rather than transferring title to them. These licenses contain terms
and conditions prohibiting the unauthorized reproduction, disclosure, or
transfer of our products. In addition, we attempt to protect our trade secrets
and other proprietary information through agreements with customers,
suppliers, employees, and consultants. Although we intend to protect our
rights vigorously, there can be no assurance that these measures will be
successful.
The source code versions of our products are protected as trade secrets and,
in all major markets, as unpublished copyright works. However, effective
copyright protection may not be available in some countries in which we
license or market our products. We recognize that patent law may offer
effective protection for our current and future products, and we have embarked
on a program to identify and seek patent protection for appropriate elements
of our products. There can be no assurance that any patentable elements will
be identified or, if identified, that patent protection will be obtained. We
have also obtained or applied for trademark registration of most of our
product names, as well as the name Cognos, in all of our major markets. While
the duration of trademark and copyright protections varies from country to
country, we believe that the duration of this protection will be adequate to
protect our products during the periods of their economic value.
However, we believe that, due to the rapid pace of innovation within our
industry, technological and creative skills of our personnel are even more
important to establishing and maintaining a technology and product leadership
position within the industry than are the various legal protections of our
technology.
9
ITEM 2. PROPERTIES
Cognos owns the building located at 3755 Riverside Drive, Ottawa, Canada, the
Corporation's corporate headquarters. During fiscal 2001 the Corporation
completed the construction of a new building at this location. The total
square footage of the Riverside facility is 269,000. The facility is located
on approximately six acres of land which also includes a 220,000 square foot
parking garage.
The Corporation also conducts its operations from leased facilities totaling
approximately 135,000 square feet in Canada, 188,000 square feet in the United
States, 173,000 square feet in Europe, and 32,000 square feet in Asia/Pacific.
For financial information about geographic areas, see "Note 12. Segmented
Information" in Notes to Consolidated Financial Statements contained in Item
8.
10
ITEM 3. LEGAL PROCEEDINGS
On May 5, 2000, an action was filed in the United States District Court for the
Northern District of California against us by Business Objects S.A., for alleged
patent infringement. The complaint alleged that our Impromptu product infringes
Business Objects' United States Patent No. 5,555,403 entitled "Relational
Database Access System using Semantically Dynamic Objects" (the "'403 Patent").
Although we have denied and continue to deny all claims asserted in the action,
on May 24, 2002, subsequent to the balance sheet date, we reached an agreement
to settle that action. Under the terms of the settlement agreement between
ourselves and Business Objects, Business Objects has agreed to release us for
any infringement of the '403 Patent (and any amendments or related patents) and
to effect that release, has granted us a license under the '403 Patent for the
term of that patent or any amendments or related patents. Both parties agreed to
release the other from all claims, liabilities, costs or expenses that either
party hold against the other, on account of actions taken prior to the effective
date. The parties have also entered into a covenant not to sue or assert any
claim against the other for infringement of any patents for a period of 5 years
from the effective date. As consideration for the settlement agreement, we have
agreed to pay Business Objects the sum of $24,000,000 in the following
installments: $10,000,000 on or before June 10, 2002, and $1,750,000 every
quarter for the next eight quarters, commencing on July 1, 2002.
In addition, the Corporation and its subsidiaries may, from time to time be
involved in other legal proceedings, claims, and litigation that arise in the
ordinary course of business which the Corporation believes would not reasonably
be expected to have a material adverse effect on the financial condition of the
Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2002, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
Executive Officers of the Registrant
The following table sets out the name; age; position with the Corporation; and
the principal occupation, business or employment during the last five years of
each executive officer of the Corporation.
NAME AGE POSITION
- ---- --- --------
Renato (Ron) Zambonini.. 55 Chief Executive Officer, and Director
Robert G. Ashe.......... 43 President and Chief Operating Officer
Tom Manley.............. 43 Senior Vice President, Finance & Administration and
Chief Financial Officer
Peter Griffiths......... 38 Senior Vice President, Products
Terry Hall.............. 53 Senior Vice President
David Laverty........... 46 Senior Vice President, Global Marketing
Robert Minns............ 56 Senior Vice President, New Products
Alan Rottenberg......... 52 Senior Vice President, Strategy
Tony Sirianni........... 42 Senior Vice President, North American Field Operations
Ad Voogt................ 46 Senior Vice President, European Field Operations
Mr. Zambonini was appointed Chief Executive Officer of the Corporation in
September 1995. Mr. Zambonini has also served as President from January 1993
until April 2002 and was elected to the Board of Directors in June 1994. Mr.
Zambonini previously served as Chief Operating Officer of the Corporation from
January 1993 to September 1995. Mr. Zambonini joined the Corporation in
September 1989.
11
Mr. Ashe was appointed President and Chief Operating Officer on April 10,
2002. Mr. Ashe previously served as Senior Vice President, Chief Corporate
Officer of the Corporation from May 2001 until April 2002; as Senior Vice
President, Worldwide Customer Services from July 1999 to May 2001; as Senior
Vice President, Products from May 1997 to July 1999; and as Senior Vice
President, Application Development Tools from April 1996 to May 1997. Mr. Ashe
joined the Corporation in September 1984.
Mr. Manley was appointed Senior Vice President, Finance & Administration and
Chief Financial Officer in August 2001. Prior to joining the Corporation Mr.
Manley was with Nortel Networks Corporation and served as Chief Financial
Officer, High Performance Optical Component Solutions from April 2001 to
August 2001; Senior Vice President, Finance and Vice President, Finance,
Carrier Packet Solutions from 1998 to April 2001; and Vice President, Finance,
Broadband Networks from 1997 to 1998.
Mr. Griffiths was appointed Senior Vice President, Products in April 2002. Mr.
Griffiths served as Senior Vice, President Research and Development from
February 2002 to April 2002; as Vice President, Research and Development from
January 2001 to February 2002; and as Vice President, Decision Platform from
June 2000 to January 2001. Prior to joining the Corporation in 1998 Mr.
Griffiths was Chief Executive Officer of Relational Matters, a company
acquired by the Corporation in 1998.
Mr. Laverty was appointed Senior Vice President, Global Marketing in February
2002. Prior to joining the Corporation Mr. Laverty was with Surebridge Inc. as
Vice President, Marketing from May 2000 until February 2002. He was with Lotus
Development Corporation (a subsidiary of IBM) from 1990 until 2000 in a number
of senior marketing roles, most recently as Vice President, Marketing--North
America from 1997 to 2000.
Mr. Hall became Senior Vice President in April 2002 after the announcement of
his intention to retire from the Corporation. Mr. Hall served as Senior Vice
President Operations and Chief Operating Officer from July 1999 to April 2002.
He served as Senior Vice President, Worldwide Sales from March 1993 to July
1999. Mr. Hall joined the Corporation in September 1983.
Mr. Minns was appointed Senior Vice President, New Products in March 1998. He
served as Vice President, New Products from May 1997 to March 1998; and as
Vice President, Technology from 1986 to May 1997. Mr. Minns joined the
Corporation in March 1973.
Mr. Rottenberg was appointed Senior Vice President, Strategy in April 2002.
Mr. Rottenberg served as Senior Vice President, e-Business Intelligence
Applications Unit from January 2000 to April 2002; Senior Vice President,
Marketing and Business Strategy from May 1997 to January 2000; and as Senior
Vice President, Business Intelligence Tools from June 1994 to May 1997. Mr.
Rottenberg joined the Corporation in June 1989.
Mr. Sirianni was appointed Senior Vice President, North American Field
Operations in June 2000. He served as Vice President, North American Field
Operations from April 1999 to May 2000; as Area Vice President, North American
Partner Channels from December 1997 to March 1999; and Director, Desktop
Partner Channels from March 1995 to November 1997. Mr. Sirianni joined the
Corporation in March 1994.
Mr. Voogt was appointed Senior Vice President, European Field Operations in
September 2001. He served as Vice President, European Operations from July
2000 to September 2001; and Vice President, Northern Europe from September
1995 to July 2000. Mr. Voogt joined the Corporation in 1986.
Officers are appointed annually by, and serve at the discretion of, the Board
of Directors.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON SHARE INFORMATION
PRINCIPAL MARKETS
The Toronto Stock Exchange and the Nasdaq National Market are the principal
markets on which the Corporation's shares are traded.
The Corporation's common shares were first listed on The Toronto Stock
Exchange on August 21, 1986, on The Nasdaq Stock Market on July 1, 1987, and
on Nasdaq's National Market on September 15, 1987. The stock symbol of the
Corporation's common shares on The Toronto Stock Exchange is CSN and on Nasdaq
is COGN.
On April 6, 2000, the Board of Directors of the Corporation authorized a two-
for-one stock split, effected in the form of a stock dividend. All historic
information has been adjusted for the split.
The following table sets forth the high and low sale prices, as well as the
trading volume, for the common shares for the fiscal periods shown below:
Nasdaq National The Toronto Stock
Market Exchange
------------------ --------------------
High Low Volume High Low Volume
----- ----- ------ ------ ------ ------
(US$) (US$) (000s) (Cdn$) (Cdn$) (000s)
Fiscal 2001
First Quarter.......................... 41.13 23.31 31,208 60.50 34.00 14,300
Second Quarter......................... 46.50 35.38 24,729 67.00 52.60 11,639
Third Quarter.......................... 48.00 30.50 22,482 73.10 49.00 12,614
Fourth Quarter......................... 40.88 16.00 34,771 62.90 25.25 20,858
Fiscal 2002
First Quarter.......................... 24.77 13.94 24,600 38.30 22.00 20,492
Second Quarter......................... 19.22 13.71 11,777 29.48 21.05 13,135
Third Quarter.......................... 20.39 11.60 15,561 32.70 17.70 21,152
Fourth Quarter......................... 29.79 19.25 27,239 47.32 30.13 15,534
Fiscal 2003
First Quarter.......................... 30.75 22.13 28,539 48.62 35.15 14,255
(through April 19, 2002)
SHAREHOLDERS
As of April 19, 2002, there were approximately 1,950 registered shareholders.
13
DIVIDEND POLICY
The Corporation has never declared or paid any cash dividends on its common
shares. The Corporation's current policy is to retain its earnings to finance
expansion and to develop, license, and acquire new software products, and to
otherwise reinvest in the Corporation.
OTHER MATTERS AFFECTING THE CORPORATION'S COMMON SHARES
On December 3, 1998, the Corporation acquired substantially all the assets of
Relational Matters, including DecisionStream software. DecisionStream
aggregates and integrates large volumes of transaction data with
multidimensional data structures. The agreement stipulated that Relational
Matters would receive approximately $7,550,000 over three years and 250,980
shares of the Corporation's common stock valued at $1,823,000 over the same
time period. The shares, all of which were issued, were held in escrow by the
Corporation and released on the second (40%) and third (60%) anniversaries of
the closing of the transaction. The shares were issued in a private placement
pursuant to Section 4(2) of the Securities Act of 1933.
On February 24, 1999, the Corporation acquired LEX2000 Inc., a developer of
financial data mart and reporting software, for a combination of cash and the
Corporation's common stock. The agreement stipulated that the shareholders of
LEX2000 Inc. would receive approximately $7,444,000 over three years and
252,118 shares of the Corporation's common stock valued at $1,940,000 over the
same time period. Approximately 14,200 shares were delivered at closing; the
remainder, all of which were issued, were held in escrow by the Corporation
and released equally on the second (50%) and third (50%) anniversaries of the
closing of the transaction. The shares were issued in a private placement
pursuant to Regulation D, promulgated under the Securities Act of 1933.
On September 21, 2000, the Corporation acquired NoticeCast Software Ltd.,
based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management
Software monitors business processes and delivers timely business intelligence
notifications to business users across the enterprise via e-mail on their
personal computer, hand-held or wireless device. The agreement stipulated that
the shareholders of NoticeCast Software Ltd. would receive approximately
$9,000,000 in cash on closing and would receive 148,468 shares of the
Corporation's common stock valued at approximately $4,820,000. The shares are
being held in escrow by the Corporation and will be released on the second
anniversary of the closing of the transaction.
On November 1, 2000, the Corporation completed the acquisition of Johnson &
Michaels, Inc. (JAMI), a leading provider of business intelligence consulting
services. The agreement stipulated that the shareholders of JAMI would receive
total cash consideration of approximately $3,915,000 over three years and
104,230 shares of the Corporation's common stock valued at $4,250,000 over the
same period. Approximately $2,345,000 has been paid and 60,583 shares have
been issued since closing; the remaining shares, all of which were issued, are
being held in escrow by the Corporation and will be released on the second
(33%), and third (34%) anniversaries of the closing of the transaction. The
Corporation has conditioned a portion of the overall consideration on the
continued tenure of certain employees.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
FIVE-YEAR SUMMARY
The following Selected Consolidated Financial Data has been derived from the
Corporation's consolidated financial statements that have been audited by
Ernst & Young LLP, independent chartered accountants. The Selected
Consolidated Financial Data should be read in conjunction with the
Consolidated Financial Statements and related Notes, and with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
On April 6, 2000, the Board of Directors of the Corporation authorized a two-
for-one stock split, effected in the form of a stock dividend, payable on or
about April 27, 2000 to shareholders of record at the close of business on
April 20, 2000. All historic consolidated results have been restated for the
split.
Years Ended the Last Day of February
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(US$000s except share amounts, U.S. GAAP)
Statement of Income Data
Revenue..................... $491,302 $495,652 $385,640 $301,125 $244,834
-------- -------- -------- -------- --------
Operating expenses
Cost of product license.... 3,609 7,315 5,235 5,738 3,828
Cost of product support.... 16,576 17,820 13,758 11,166 9,694
Selling, general, and
administrative............ 343,276 320,535 238,147 172,482 140,882
Research and development... 74,614 67,264 53,548 42,274 33,530
Acquired in-process
technology................ -- 3,000 -- 3,800 18,000
Special charges............ 33,440 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses.... 471,515 415,934 310,688 235,460 205,934
-------- -------- -------- -------- --------
Operating income............ 19,787 79,718 74,952 65,665 38,900
Interest expense............ (540) (786) (718) (527) (481)
Interest income............. 8,922 12,386 7,454 6,430 5,340
-------- -------- -------- -------- --------
Income before taxes......... 28,169 91,318 81,688 71,568 43,759
Income tax provision........ 8,761 27,058 22,873 13,134 11,117
-------- -------- -------- -------- --------
Net income.................. $ 19,408 $ 64,260 $ 58,815 $ 58,434 $ 32,642
======== ======== ======== ======== ========
Net income per share
Basic...................... $0.22 $0.74 $0.68 $0.67 $0.37
Diluted.................... $0.21 $0.70 $0.67 $0.66 $0.36
Net income per share, excluding the effect of the special charges and write-off
of acquired in-process technology *
Basic...................... $0.49 $0.77 $0.68 $0.71 $0.57
Diluted.................... $0.48 $0.73 $0.67 $0.69 $0.55
Weighted average number of
shares (000s)
Basic...................... 87,807 87,324 85,972 87,416 88,414
Diluted.................... 90,461 91,973 88,100 88,940 91,544
15
Balance Sheet Data (at end of
period)
Working capital.................. $227,573 $197,673 $166,455 $123,343 $112,846
Total assets..................... 522,152 495,592 377,803 286,259 220,279
Total debt....................... -- 32 2,176 2,612 2,457
Stockholders' equity............. 295,173 290,529 212,591 159,028 131,005
*This is a supplementary pro-forma measure included to enhance comparability
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(in United States dollars, unless otherwise indicated, and in accordance with
U.S. GAAP)
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes included in this Annual Report. We
prepare and file our consolidated financial statements and the Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) in United States (U.S.) dollars and in accordance with U.S. Generally
Accepted Accounting Principles (GAAP). The consolidated financial statements
and MD&A in accordance with Canadian GAAP, in U.S. dollars, are made available
to all shareholders and filed with various regulatory authorities.
On April 6, 2000, our Board of Directors authorized a two-for-one stock split,
effected in the form of a stock dividend, payable on or about April 27, 2000
to stockholders of record at the close of business on April 20, 2000. Share
and per-share amounts in this MD&A, and the audited consolidated financial
statements and notes thereto included in this Annual Report, have been
adjusted retroactively for this split.
OVERVIEW
Cognos Incorporated is a leading global provider of business intelligence
software. Our solutions help companies improve business performance by enabling
effective decision-making at all levels of the organization through the
consistent analysis and reporting of data from multiple perspectives. Our
software is designed to provide our customers with the ability to effectively
use data to make faster, more informed decisions in order to improve operational
effectiveness, increase customer satisfaction, accelerate corporate response
times and ultimately, increase revenues and profits.
Our business intelligence solution (BI Solution) is uniquely positioned to take
advantage of the accelerating demand for business intelligence solutions for the
extended enterprise across all industries. Our BI Solution is an integrated
software foundation that is designed to meet our customers' end-to-end business
intelligence requirements, including reporting, analysis, query, scorecarding,
and visualization, in a secure, Web-based environment that is easy to use and
deploy across the extended enterprise. The information produced by our solution
is distributed over a business intelligence portal that enables users, both
inside and outside the organization, to access business intelligence content,
such as reports and scorecards, through a secure, personalized Web-based
interface. In addition, our event detection capability allows users to monitor
changes in time-critical business intelligence content. If change occurs, the
user receives a notification e-mail with relevant business intelligence content
giving them context for decision-making. We have also developed an integrated
set of analytic applications built upon the foundation of our BI Solution, which
provide "out-of-the-box" functionality for reporting and
16
analysis in functional areas such as finance, inventory, procurement, and
sales. Additionally, our Cognos Finance product enables finance professionals
to manage all core financial processes within one solution.
Revenue is derived from the licensing of software and the provision of related
services, which include product support and education, consulting, and other
services. We generally license software and provide services subject to terms
and conditions consistent with industry standards. Our customers may elect to
contract with us for telephone and Web-based customer self-service product
support, by paying either an annual fee or fees based on their usage of
support services.
We operate internationally with a substantial portion of our business
conducted in foreign currencies. Accordingly, our results are affected by
year-over-year 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.
Currently we derive our revenue from the licensing, support, and service of
business intelligence solutions and application development tools. In the most
recent fiscal year, revenue associated with our business intelligence
solutions made up 92% of our total revenues; application development tools
made up 8% of our total revenues. The percentage of revenue attributable to
application development tools has declined over the last seven fiscal years
and is expected to continue to decline in the future as the market moves away
from proprietary systems and towards packaged application products. We are
focused on maintaining our leadership position in the business intelligence
market and believe that the application development tools market will continue
to decrease in importance for our financial results.
The sales cycle for our products may span nine months or more. Historically,
we have recognized a substantial portion of our revenues in the last month of
a quarter, with these revenues frequently concentrated in the last two weeks
of a quarter. Even minor delays in booking orders may have a significant
adverse impact on revenues for a particular quarter. To the extent that delays
are incurred in connection with orders of significant size, the impact will be
correspondingly greater. As corporations move to enterprise-wide deployments,
orders become larger and, hence, the impact of the sales cycle becomes
increasingly harder to predict. We currently operate with virtually no order
backlog because our software products typically are shipped shortly after
orders are received. Product license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. As a result of these
and other factors, our quarterly results have varied significantly in the past
and are likely to fluctuate significantly in the future. Accordingly, we
believe that quarter-to-quarter comparisons of our results of operations are
not necessarily indicative of the results to be expected in any future period.
We license our software through our direct sales force and value-added
resellers, system integrators, and original equipment manufacturers. Direct
sales accounted for approximately 70%, 70%, and 69% of our license revenues
for the years ended February 28, 2002 (fiscal 2002), February 28, 2001 (fiscal
2001), and February 29, 2000 (fiscal 2000), respectively. As enterprise-wide
deployments become more important to our customers, we believe that the direct
sales channel is the most effective method of penetrating the large enterprise
market; however, in order to have adequate market coverage for smaller and
mid-size companies, we continue to expend a significant amount of resources
developing our indirect sales activities. We also continue to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and
17
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to revenue recognition,
allowance for doubtful accounts, foreign exchange risk management,
investments, intangible assets, income taxes, and contingencies and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We apply the following critical accounting policies in the preparation of our
consolidated financial statements:
Revenue Recognition Policy--We recognize revenue in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognition. Substantially all of our
product license revenue is earned from licenses of off-the-shelf software
requiring no customization. Revenue from these licenses is recognized when all
of the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. If a license includes the right to return the
product for refund or credit, revenue is recognized net of an allowance for
estimated returns provided all the requirements of SOP 97-2 have been met.
Revenue from product support contracts is recognized ratably over the life of
the contract. Incremental costs directly attributable to the acquisition of
product support contracts, and that would not have been incurred but for the
acquisition of that contract, are deferred and expensed in the period the
related revenue is recognized. These costs include commissions payable on
sales of support contracts. Revenue from education, consulting, and other
services is recognized at the time the services are rendered. For contracts
with multiple obligations (e.g., deliverable and undeliverable products,
support obligations, education, consulting, and other services), we allocate
revenue to each element of the contract based on objective evidence of the
fair value of the element.
Allowance for Doubtful Accounts--We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Foreign Currency Management--We operate internationally and therefore hold
assets and liabilities in foreign currencies. These operations are translated
to U.S. dollars at prevailing exchange rates as at period end in accordance
with SFAS 52. Future adverse changes in a currency could cause a reduction in
the carrying amount of these assets and liabilities that may not be reflected
in the current carrying value.
Investments--We record an impairment charge when we believe an asset has
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investment's current
carrying value, thereby possibly requiring an impairment charge in the future.
Deferred Taxes--We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to subsequently determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Similarly, should we determine that we would not be
able to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would reduce income in the period such
determination was made.
Impairment of Long-Lived Assets--We evaluate the recoverability of our
identifiable intangible assets, goodwill, and other long-lived assets in
accordance with SFAS No.121 that generally requires us to assess
18
these assets for recoverability when events or circumstances indicate a
potential impairment by estimating the undiscounted cash flows to be generated
from the use and ultimate disposition of these assets. On March 1, 2002 we
implemented SFAS No. 142 and SFAS 144. SFAS 142 requires us to use the fair
value method to assess our goodwill on at least an annual basis and the
undiscounted cash flows method will continue to be used for qualifying
identifiable intangible assets. SFAS 144 requires us to use a similar method
for other long-lived assets. The results of the initial assessment will have
no material effects on our balance sheet or earnings from operations; however,
subsequent impairment assessments could result in future impairment charges.
Any impairment charge would result in reduction in the carrying values of
these assets.
Contingencies and Litigation -- We evaluate contingent liabilities including
threatened or pending litigation in accordance with SFAS No. 5, Accounting for
Contingencies and record accruals when the outcome of these matters is deemed
probable and the liability is reasonably estimable. We make these assessments
based on the facts and circumstances and in some instances based in part on
the advice of outside legal counsel.
RESULTS OF OPERATIONS
Total revenue for fiscal 2002 was $491.3 million, which was 1% less than the
fiscal 2001 revenue of $495.7 million which, in turn, was 29% more than the
fiscal 2000 revenue of $385.6 million. Net income for fiscal 2002 was $19.4
million and diluted net income per share was $0.21, compared to fiscal 2001
net income of $64.3 million and diluted net income per share of $0.70, and net
income of $58.8 million and diluted net income per share of $0.67 for fiscal
2000.
The results for fiscal 2002 include special charges of $33.4 million. These
special charges include a net business restructuring charge of $10.2 million and
a $23.2 million charge for settlement of a patent litigation action.
As reported in the first quarter of fiscal 2002, we recorded a
restructuring charge of $12.8 million in connection with a restructuring plan
to align our cost structure and operations to the economic environment. In the
fourth quarter of fiscal 2002 we reversed $2.6 million of the restructuring
charge into income. The reversal was the result of revisions to prior cost
assumptions including salary continuance, office leases, and outplacement.
On May 24, 2002, subsequent to the balance sheet date, the Corporation and
Business Objects reached an agreement to settle the action filed by Business
Objects on May 5, 2000. As consideration for the settlement agreement, the
Corporation has agreed to pay Business Objects the sum of $24,000,000 in the
following installments: $10,000,000 on or before June 10, 2002, and $1,750,000
every quarter for the next eight quarters commencing on July 1, 2002. The
Corporation has recorded a special charge of $23,231,000, representing the
present value of these payments, in fiscal 2002, in accordance with FASB
Statement 5 Contingent Liabilities.
Excluding the effect of these items, net income and diluted net income per share
for fiscal 2002 would have been $43.4 million and $0.48, respectively. The
results for fiscal 2001 include the write-off of $3.0 million related to the
in-process technology acquired on the purchase of NoticeCast Software Ltd.
during the third quarter of fiscal 2001. Excluding the effect of this item,
net income and diluted net income per share for fiscal 2001 would have been
$67.3 million and $0.73, respectively. Fiscal 2000 results did not include any
unusual one-time charges. This pro-forma information is provided for greater
comparability regarding our on-going operating performance and is unlikely to
be comparable to any similar measures in the financial information filed by
other issuers.
Basic net income per share was $0.22, $0.74, and $0.68 in fiscal 2002, 2001,
and 2000, respectively. Excluding the effect of the special charges in
fiscal 2002 and the write-offs of in-process technology in fiscal 2001 basic
net income per share would have been $0.49 and $0.77, respectively.
We experienced decreases in net income as a percentage of revenue in each of
fiscal 2002, and 2001. In fiscal 2002, we maintained our investment in our
sales channels and product development through difficult economic times to
ensure that we were appropriately positioned for revenue growth and expanded
global market coverage as the economy recovered. During fiscal 2002 the
decrease in net income as a percentage of revenue was the result of increases
in both selling, general, and administration expenses, and research and
development expenses as well as the special charges for restructuring and
settlement of a patent litigation action. As a result of this restructuring and
excluding the effect of the patent litigation settlement which occurred
subsequent to the balance sheet date, our net income as a
19
percentage of revenue has increased sequentially through the last three
quarters of the fiscal year. During fiscal 2001 the decrease in net income as
a percentage of revenue was the result of increases in selling, general, and
administrative expenses and the write-off of in-process technology acquired on
the purchase of NoticeCast Software Ltd. during the third quarter.
The following table sets out, for each fiscal year indicated, the percentage
that each income and expense item bears to revenue, and the percentage change
in the dollar amount of each item as compared to the prior fiscal year.
Percentage
Percentage of Change
Revenue from Fiscal
------------------- ----------------
2001 to 2000 to
2002 2001 2000 2002 2001
----- ----- ----- ------- -------
Revenue................................... 100.0% 100.0% 100.0% (0.9)% 28.5%
----- ----- -----
Operating expenses
Cost of product license.................. 0.7 1.5 1.3 (50.7) 39.7
Cost of product support.................. 3.4 3.6 3.5 (7.0) 29.5
Selling, general, and administrative..... 69.9 64.6 61.8 7.1 34.6
Research and development................. 15.2 13.6 13.9 10.9 25.6
Acquired in-process technology........... 0.0 0.6 0.0 * *
Special charges.......................... 6.8 0.0 0.0 * *
----- ----- -----
Total operating expenses.................. 96.0 83.9 80.5 13.4 33.9
----- ----- -----
Operating income.......................... 4.0 16.1 19.5 (75.2) 6.4
Interest expense.......................... (0.1) (0.2) (0.2) (31.3) 9.5
Interest income........................... 1.8 2.5 1.9 (28.0) 66.2
----- ----- -----
Income before taxes....................... 5.7 18.4 21.2 (69.2) 11.8
Income tax provision...................... 1.8 5.4 5.9 (67.6) 18.3
----- ----- -----
Net income................................ 3.9% 13.0% 15.3% (69.8)% 9.3%
===== ===== =====
*not meaningful
The following table sets out, for each fiscal year indicated, the percentage
that specific items bear to revenue, and the percentage change in the dollar
amount of each item as compared to the prior fiscal year, when the effect of
the special charges and write-offs of acquired in-process technology are
excluded. This pro-forma information is provided for greater comparability
regarding our on-going operating performance and is unlikely to be comparable
to any similar measures in the financial information filed by other issuers.
20
Percentage of Percentage Change
Revenue from Fiscal
------------------- ---------------------
2001 to 2000 to
2002 2001 2000 2002 2001
----- ----- ----- --------- --------
Revenue........................... 100.0% 100.0% 100.0% (0.9)% 28.5%
Total operating expenses.......... 89.2 83.3 80.5 6.1 32.9
Operating income.................. 10.8 16.7 19.5 (35.7) 10.4
Net income........................ 8.8% 13.6% 15.3% (35.4)% 14.4%
REVENUE
Our total revenue was $491.3 million for fiscal 2002 as compared to $495.7
million in fiscal 2001, and $385.6 million in fiscal 2000. Our total revenue
was derived primarily from our business intelligence products, principally Web
versions of Impromptu(R) and PowerPlay(R); contributing to the increase, but
to a lesser extent, were Cognos Visualizer, DecisionStream(TM), Cognos Query,
and Cognos Finance. In Q4 we released Cognos Series 7, a fully integrated
enterprise business intelligence solution. We feel enterprise wide deployment
of business intelligence products is the trend in the industry and believe it
will continue to increase as a percentage of our total revenue. Total revenue
for all business intelligence products was $453.1 million, $446.8 million, and
$328.0 million in fiscal 2002, 2001, and 2000, respectively, which resulted in
year-over-year increases of 1% and 36%, respectively. Sequentially, within the
year our total BI revenue has increased by 8%, 7%, and 17% in the quarters
following our restructuring in the first quarter of fiscal 2002. Total revenue
from our business intelligence products represented 92%, 90%, and 85% of total
revenue in fiscal 2002, 2001, and 2000, respectively.
Total revenue from our application development tools, PowerHouse(R) and
Axiant(R), was $38.2 million in fiscal 2002, compared to $48.9 million in
fiscal 2001, and $57.6 million in fiscal 2000, which resulted in year-over-
year decreases of 22% and 15%, respectively.
The change in total revenue from product license, product support, and
services in fiscal 2002 from fiscal 2001 was as follows: a 13% decrease in
product license revenue, a 19% increase in product support revenue, and a 2%
increase in services revenue. This compares to an increase for the same
categories for fiscal 2001 from fiscal 2000 as follows: 29%, 25%, and 33%,
respectively.
Our operations are divided into three main geographic regions: (1) North
America (includes Latin America), (2) Europe (consists of the U.K. and
Continental Europe), and (3) Asia/Pacific (consists of Australia and countries
in the Far East). In fiscal 2002, the percentage of total revenue from North
America, Europe, and Asia/Pacific was 62%, 31%, and 7%, respectively, compared
to 64%, 30%, and 6%, respectively, in fiscal 2001 and 61%, 32%, and 7%,
respectively, in fiscal 2000. In fiscal 2002, total revenue from North America
decreased from fiscal 2001 by 4% while total revenue from Europe, and
Asia/Pacific increased from fiscal 2001 by 5% and 7%, respectively, compared
to increases of 35%, 19%, and 13%, respectively, in fiscal 2001 from fiscal
2000. The decrease in revenue growth for fiscal 2002 as compared to fiscal
2001 is attributable to the decline in information technology spending and the
uncertain economic environment that existed through the majority of fiscal
2002. These conditions affected all of our principal markets and were
especially pronounced in the U.S., our largest market. This affected the sales
of our business intelligence products. Revenue growth in North America was
also slowed by a decline in service revenue as a result of the events of
September 11th. The disruption in the United States in the wake of these
events including air travel and business closures affected our ability to
21
offer services and our customers appetite to consume them. In addition to the
above, growth rates for Europe and Asia/Pacific were affected by foreign
exchange rate fluctuations. Excluding exchange rate fluctuations, revenue
growth for Europe would have been 9% for fiscal 2002 as compared to revenue
growth excluding exchange rate fluctuations of 32% for fiscal 2001. Revenue
growth for Asia/Pacific would have been 17% for fiscal 2002 as compared to
revenue growth excluding exchange rate fluctuations of 22% for fiscal 2001.
A substantial portion of our business is conducted in foreign currencies.
Accordingly, our results are affected by year-over-year 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. The effect of foreign exchange rate fluctuations decreased the
overall revenue growth by two percentage points in fiscal 2002 from fiscal
2001 and by four percentage points in fiscal 2001 from fiscal 2000.
PRODUCT LICENSE REVENUE
Total product license revenue was $228.3 million, $262.8 million, and $203.3
million in fiscal 2002, 2001, and 2000, respectively, and accounted for 46% of
our revenue for fiscal 2002 as compared to 53% in both fiscal 2001 and 2000.
The decrease in product license revenue for fiscal 2002 was predominantly due
to the decline in information technology spending and the uncertain economic
environment that was prevalent throughout the fiscal year in our principal
markets and specifically in the U.S., which is our largest market. This
affected the sales of our business intelligence products; which were the main
reason for our increase in revenue in fiscal 2001. Product license revenue
from our business intelligence products was $219.2 million, $248.7 million,
and $186.6 million, in fiscal 2002, 2001, and 2000, respectively, which
resulted in a year-over-year decrease of 12% in fiscal 2002 compared to a
year-over-year increase of 33% for fiscal 2001. Sequentially, within the year,
our total BI license revenue has increased by 17%, 17%, and 29% in the three
quarters following our restructuring in the first quarter of fiscal 2002.
Product license revenue associated with the business intelligence products
contributed approximately 96%, 95%, and 92% of total product license revenue
in fiscal 2002, 2001, and 2000, respectively.
Product license revenue from our application development tools, PowerHouse and
Axiant, was $9.1 million, $14.0 million, and $16.7 million, in fiscal 2002,
2001, and 2000, respectively. We expect that, in both the short and long term,
the trend of decreasing product license revenue from these products will
continue.
Our sales and marketing strategy includes multi-tiered channels ranging from a
direct sales force to various forms of third-party distributors, resellers,
and original equipment manufacturers. We believe that a direct sales force is
more effective than third-party sales in reaching Global 2000 companies
because it is more relationship focused. We use third-party distributors in
selected regions in order to extend our geographic coverage.
Total product license revenue from third-party channels represented 31% of
total product license revenue in fiscal 2002 compared to 30% in fiscal 2001
and 31% in fiscal 2000. Within our business intelligence market, product
license revenue from third-party channels was $66.5 million, compared to $75.7
million in fiscal 2001, and $57.3 million in fiscal 2000. Product license
revenue within this market from third-party channels represented 30% of our
business intelligence product license revenue in fiscal 2002 compared to 30%
in fiscal 2001, and 31% in fiscal 2000.
PRODUCT SUPPORT REVENUE
22
Product support revenue was $175.6 million, $147.6 million, and $118.1 million
in fiscal 2002, 2001, and 2000, respectively. Product support revenue
accounted for 36% of our total revenue for fiscal 2002, compared to 30% in
fiscal 2001 and 31% for fiscal 2000. The increase in the dollar amounts was
the result of new support contracts from the expansion of our customer base,
as well as the renewal of existing support contracts.
Total product support revenue from the business intelligence products was
$147.5 million, $114.2 million, and $78.8 million in fiscal 2002, 2001, and
2000, respectively and constituted 84%, 77%, and 67% of the total product
support revenue in fiscal 2002, 2001, and 2000, respectively. In fiscal 2002,
total product support revenue from business intelligence products increased by
29% from fiscal 2001 and total product support revenue from application
development tools decreased by 16% over the same period. In fiscal 2001, total
product support revenue from the business intelligence products increased by
45% from fiscal 2000 and total product support revenue from the application
development tools decreased by 15% over the same period.
SERVICES REVENUE
Revenue from education, consulting, and other services was $87.4 million,
$85.3 million, and $64.3 million in fiscal 2002, 2001, and 2000, respectively.
Services revenue accounted for 18% of our total revenue for fiscal 2002,
compared to 17% in fiscal 2001 and 2000. The increase in services revenue in
fiscal 2002 was predominantly the result of an increase in consulting revenue
that offset decreases in education revenue associated with the business
intelligence products. Services revenue associated with the business
intelligence products contributed approximately 99%, 98%, and 97%, of total
service revenue in fiscal 2002, 2001, and 2000, respectively.
During fiscal 2002, we continued to increase the level of sales of our
business intelligence solutions within global enterprises. Our business
intelligence solutions were increasingly being deployed on an enterprise-wide,
global basis within organizations for mission-critical applications.
Successful installation and deployment of our solution has become critical to
our customers' success. As a result, our customers have increasingly required
services such as strategic planning, project management, analysis and design,
technical advisory, and instruction to effectively deploy our solutions. This
trend was slowed in fiscal 2002 by two factors. First the uncertain economic
environment in our principal markets caused an increased level of scrutiny by
customers with regard to enterprise scale software purchases. Second, the
unfortunate events of September 11th caused a disruption in the United States
including air travel and business closures. These and other factors that
occurred in the wake of these tragic events affected our ability to offer
services and our customer's appetite to consume them.
OPERATING EXPENSES
COST OF PRODUCT LICENSE
The cost of product license consists primarily of royalties for technology
licensed from third-parties and the costs of materials and distribution
related to licensed software. Product license costs in fiscal 2002 were $3.6
million compared to $7.3 million in fiscal 2001 and $5.2 million in fiscal
2000. Product license costs represented 2% of product license revenue for
fiscal 2002, compared to 3% for fiscal 2001 and 2000. The decrease, in dollar
terms, in fiscal 2002 from fiscal 2001 is due to decreases in royalty costs;
material and distribution costs remained relatively consistent with fiscal
2001 levels. The increase in fiscal 2001 from fiscal 2000 was due to increases
in royalty costs; material and distribution costs remained relatively
consistent with fiscal 2000 levels.
23
COST OF PRODUCT SUPPORT
The cost of product support includes the costs associated with resolving
customer inquiries and other telesupport and websupport activities, royalties
in respect of technological support received from third-parties, and the cost
of materials delivered in connection with enhancement releases. The cost of
product support was $16.6 million, $17.8 million, and $13.8 million in fiscal
2002, 2001, and 2000, respectively. These costs represented 9% of product
support revenue in fiscal 2002 and 12% for fiscal 2001, and 2000. The
decrease, in dollar terms, in fiscal 2002 from fiscal 2001 was associated
predominantly with decreases in royalty costs. The increase in fiscal 2001
from fiscal 2000 was associated with telesupport and web support activities.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses were $343.3 million, $320.5
million, and $238.1 million in fiscal 2002, 2001, and 2000, respectively.
These costs were 70% of revenue in fiscal 2002 compared to 65% and 62% in
fiscal 2001 and 2000, respectively.
The increase in the selling, general, and administrative expenses in fiscal
2002 was primarily the result of increases in average staffing levels and
related compensation expenses. Contributing to a lesser extent to the increase
were increases in facilities costs, computer costs, communications,
professional fees, and the amortization of the technology acquired on
acquisitions of various companies over the last five fiscal years. During
fiscal 2002, we continued our investment in our sales channels, to focus on
opportunities for new revenue growth and expand global market coverage.
Despite the weaker economic climate and staff reductions as a result of the
restructuring charge in the first quarter of fiscal 2002, the average number
of employees within the selling, general, and administrative areas grew by 2%,
predominantly as the result of the retention of key sales and services staff.
The increase in the selling, general, and administrative expenses in fiscal
2001 was primarily the result of increases in staffing and related
compensation expenses. Contributing to a lesser extent to the increase were
facilities, marketing costs, and the amortization of the technology acquired
on acquisitions of various companies over the last four fiscal years. The
average number of employees within the selling, general, and administrative
areas grew by 29% in fiscal 2001, predominantly as the result of additions to
sales and services staff. The costs per employee increased 5% in fiscal 2002
and 4% in fiscal 2001.
RESEARCH AND DEVELOPMENT
Research and development costs were $74.6 million, $67.3 million, and $53.5
million, for fiscal 2002, 2001, and 2000, respectively. Research and
development costs have continued to increase, in dollar terms, over the last
several fiscal years. In fiscal 2002 these costs increased slightly as a
percentage of revenue to 15% after having remained constant at 14% of total
revenue for each of fiscal 2001 and 2000. The growth in fiscal 2002 was
primarily the result of increases associated with higher staffing levels in
this area and increases in services purchased externally as we maintained our
investment in product development through an uncertain economic landscape. The
growth in fiscal 2001 was also primarily the result of increases associated
with higher staffing levels in this area. Increases in services purchased
externally and other costs associated with the development of our product
lines to meet foreign market requirements also contributed to the increase for
the fiscal year. The increase in the average number of employees in this area
was 9% in fiscal 2002 from fiscal 2001 and was 15% in fiscal 2001 from fiscal
2000.
Software development costs are expensed as incurred unless they meet generally
accepted accounting criteria for deferral and amortization. Software
development costs incurred prior to the establishment of
24
technological feasibility do not meet these criteria and are expensed as
incurred. Costs were not deferred in any of fiscal 2002, 2001, or 2000 because
either no projects met the criteria for deferral or the period between (i)
achieving technological feasibility and (ii) the general availability of the
product was short, and the associated costs were immaterial.
During fiscal 2002, we made available a new version of all our core software
products with the release of Cognos Series 7. Cognos Series 7 is a fully
integrated enterprise business intelligence solution. In addition to new
versions of Cognos on-line analytical processing and reporting and query,
Cognos Series 7 also introduced enterprise event detection technology we
acquired in fiscal 2001 through our purchase of NoticeCast Software Ltd. This
technology monitors business intelligence content and automatically notifies
users of key events such as changes in performance indicators via their
personal computer, personal digital assistant or other wireless device,
enabling them to take immediate action. This release offers an enterprise
scale solution that will allow our customers to react rapidly to key business
events and changes in business performance, as they will be able to leverage
our business intelligence solution to quickly relate these events to overall
enterprise business performance.
During fiscal 2002 we continued to invest in R&D activities for our e-
Application packages including the release in the fourth quarter of Cognos
Analytic Applications for Oracle eBusiness Suite. This release includes
analysis of sales, general ledger, accounts receivable, accounts payable,
inventory, and procurement. We also continued to develop our Analytic
Applications for JD Edwards and plan to release Analytic Applications for SAP
in fiscal 2003. Cognos Analytic Applications are pre-built business analysis
and reporting content that extend the value of existing investments in
Enterprise Resource Planning (ERP) and other operational systems. The result
is a single, integrated, 360-degree view of business operations built upon a
common foundation for enterprise-wide business performance management.
In fiscal 2002, we also continued investment in our existing enterprise
business intelligence solution, including development and enhancement of
DecisionStream, a data mart creation component of the BI platform that unites
data from disparate sources and consolidates it into data marts. We also
released version 5.1 of Cognos Finance, a solution that delivers integrated
budgeting, forecasting, consolidation, and financial reporting and analysis in
one comprehensive system. We continued to develop and enhance Cognos
Visualizer, that allows for interactive multi-metric dashboards of key
performance indicators. We also continued to develop Cognos KPI that creates
scorecards of key performance indicators. This packaged application addresses
a key requirement for enterprise business performance measurement.
ACQUISITIONS/ACQUIRED IN-PROCESS TECHNOLOGY
Fiscal 2002
On February 28, 2002, we exercised our option to purchase the 50% of the
voting shares representing all of the outstanding voting interest in our
subsidiary in Japan, Teijin Cognos Incorporated (TCI). We felt that TCI could
more gainfully serve the Japanese market as a wholly owned subsidiary. We have
always consolidated the results of TCI as we have had effective control over
TCI. The former shareholders of TCI received approximately $2,193,000 in cash
upon completion of the purchase. We will also pay Teijin Limited the
accumulated minority interest in TCI of approximately $1,462,000 due March 30,
2002. We have also agreed to pay additional consideration at each period end
for the next eight quarters, based on the net revenue of TCI. This additional
purchase price has not been recorded as it cannot be reasonably estimated. The
purchase of TCI did not involve the purchase of any in-process research and
development. The acquisition was accounted for using the purchase method. The
results of operations of TCI are already consolidated, and thus pro forma
information has not been provided. Goodwill recorded as a
25
result of this transaction will not be amortized in accordance with SFAS 142
but will be tested for impairment as of March 1, 2002.
Fiscal 2001
During the second quarter of fiscal 2001, we acquired Powerteam OY, our
distributor in Finland. The agreement stipulated that the shareholders of
Powerteam OY would receive approximately $2,258,000 in cash in the two years
subsequent to the date of acquisition and could also receive additional cash
payments not to exceed $500,000 in the three years subsequent to acquisition.
We have paid $2,073,000 of the amount due to shareholders and will pay
$185,000 in fiscal 2003. We have paid $76,000 towards the contingent amount
and could also pay cash payments not to exceed $210,000 in fiscal 2003. The
acquisition of Powerteam OY did not involve the purchase of acquired in-
process technology. We have conditioned a portion of the overall consideration
on the continued tenure of certain employees. Under generally accepted
accounting principles these amounts are accounted for as compensation rather
than as a component of the purchase price.
During the third quarter of fiscal 2001, we acquired NoticeCast Software Ltd.,
based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management
Software monitors business processes and delivers timely business intelligence
notifications to business users across the enterprise via e-mail on their
personal computer, hand-held or wireless device. The agreement stipulated that
the shareholders of NoticeCast Software Ltd. would receive approximately
$9,000,000 in cash on closing and would receive 148,468 shares of our common
stock valued at approximately $4,820,000. We are holding the shares in escrow
and they will be released on the second anniversary of the closing of the
transaction. For valuation purposes, the shares were appropriately discounted.
An independent appraisal valued the in-process research and development at
$3,000,000. In the opinion of management and the appraiser, the acquired in-
process research and development had not yet reached technological feasibility
and had no alternative future uses. Accordingly, we recorded a special charge
of $3,000,000 (or $0.03 per share on a diluted basis) in the third quarter
ended November 30, 2000 to write off the in-process technology.
At the time of acquisition, the NoticeCast product required integration with
our platform, enhancements to ensure that the scalability of the product would
be consistent with the Cognos platform as a whole, and systems testing to
ensure predictability of performance. The first Cognos version of the software
was made available coincident with the Cognos Series 7 release during fiscal
2002. At the time of acquisition, we estimated that development efforts to
complete this version of the software would cost approximately $4 million.
For the acquisition of NoticeCast, the fair value of NoticeCast's one in-
process research and technology project, emPower(TM), was assessed by
independent business valuators at $3,000,000. The valuators used the income
forecast method, with the percentage completion approach to value the acquired
in-process research and development. The adjusted discount rate applied by the
valuators to the project's cash flows was 35%. We believe that emPower was
approximately 40% complete at the time of purchase. Cash inflows from this
project commenced in fiscal 2002.
With the integration of the NoticeCast technology into the Cognos solution,
the average price of our products was expected to increase slightly. However,
we have not experienced, and we do not expect, a material impact, from the
integration of this project, on the margin rates experienced historically.
The risks and uncertainties associated with completing the development of the
project at the time of acquisition were as follows:
. We might be unable to integrate the project with our platform on a
timely basis.
. We might be unable to scale the project to align it with our platform.
26
. We might be unable to complete testing on a timely basis.
. Testing of the project may show that predictability of performance is
not in line with our quality standards.
If the project was not completed on schedule, our competition could have
introduced similar products before us. This could have resulted in a decline
in our sales or a loss of market acceptance of our products.
Also during the third quarter of fiscal 2001, we completed the acquisition of
Johnson & Michaels, Inc. (JAMI), a leading provider of business intelligence
consulting services. The agreement stipulated that the shareholders of JAMI
would receive total cash consideration of approximately $3,915,000 over three
years and 104,230 shares of our common stock valued at $4,250,000 over the
same period. Approximately $2,345,000 has been paid and 60,583 shares have
been issued; we held the remaining shares, all of which were issued, in escrow
for release on the first (33%), second (33%), and third (34%) anniversaries of
the closing of the transaction. We have conditioned a portion of the overall
consideration on the continued tenure of certain employees. Under generally
accepted accounting principles these amounts are accounted for as compensation
rather than as a component of the purchase price. The deferred shares, valued
at $2,656,000, are accounted for as an offset to capital stock. The
acquisition of JAMI did not involve the purchase of acquired in-process
technology.
Fiscal 2000
During fiscal 2000, we completed two acquisitions. Neither the acquisition of
Information Tools AG nor the acquisition of the minority interest in Cognos
Far East Pte Limited involved the purchase of acquired in-process technology.
We acquired Information Tools AG, our distributor in Switzerland. The
agreement stipulated that the shareholders of Information Tools AG were to
receive total consideration of approximately $657,000, of which $458,000 was
received in cash during fiscal 2000. The remainder of the consideration
($199,000) was payable equally on the first and second anniversaries of the
closing of the transaction. An amount, not to exceed $500,000, could also be
paid in contingent consideration. Of all those amounts, approximately $60,000
was paid in fiscal 2002 relating to fiscal 2001 results and approximately
$120,000 was paid in fiscal 2001 relating to fiscal 2000 results.
Approximately $235,000 was paid in fiscal 2003 based on 2002 operating
results. We have conditioned a portion of the overall consideration on the
continued tenure of certain employees. Under generally accepted accounting
principles, these amounts are accounted for as compensation rather than as a
component of purchase price.
We also purchased the entire outstanding minority interest in our subsidiary
in Singapore, Cognos Far East Pte Limited. The former minority shareholders of
Cognos Far East Pte Limited received approximately $1,688,000 in cash upon
completion of the purchase. No further consideration is due to the former
minority shareholders of the subsidiary.
SPECIAL CHARGES
BUSINESS RESTRUCTURING CHARGE
During the quarter ended May 31, 2001, we implemented a restructuring plan to
align our cost structure and operations to the prevailing economic
environment, resulting in a pre-tax business restructuring charge to earnings
of $12.8 million. Business restructuring charges primarily related to
involuntary employee separations for approximately 300 employees, as well as
asset write-downs, and accruals for net costs of abandoning leases and related
write-down of leasehold improvements. The employee separations impacted all
functional groups and geographic regions.
27
Cost savings as a result of the restructuring plan affect compensation,
amortization, and lease expenses. This decrease in costs primarily impacts
selling, general, and administration expense and research and development
expense. The expense reductions took effect in the second quarter of this
fiscal year.
Cash outlays of $8.2 million and fixed asset write-offs of $1.6 million
related to the restructuring activities were charged against the accrual in
fiscal 2002. In the fourth quarter of fiscal 2002, $2.6 million of the
original accrual was reversed into income. The reversal was the result of
revisions to prior cost assumptions including: subleases of closed sales
offices, reversal of amounts accrued for salary and benefits as favorable
arbitration rulings were pronounced and refinement of salary continuance
amounts based on actual outcomes, and individual outplacement costs as many
individuals refused the services and more affordable group alternatives were
found. The balance of the charge will be paid early in fiscal 2003.
Patent Litigation Settlement
On May 5, 2000, an action was filed in the United States District Court for the
Northern District of California against us by Business Objects S.A., for alleged
patent infringement. The complaint alleges that our Impromptu product infringes
Business Objects' United States Patent No. 5,555,403 entitled "Relational
Database Access System using Semantically Dynamic Objects" (the "'403 Patent").
Although we have denied and continue to deny all claims asserted in the action,
on May 24, 2002, subsequent to the balance sheet date, we reached an agreement
to settle that action. Under the terms of the settlement agreement between
ourselves and Business Objects, Business Objects has agreed to release us for
any infringement of the '403 Patent. Both parties also agreed to release the
other from all claims, liabilities, costs or expenses that either party hold
against the other, on account of actions taken prior to the effective date of
the agreement. The parties have also entered into a covenant not to sue or
assert any claim against each other for infringement of any patents for a period
of 5 years from the effective date. As consideration for the settlement
agreement, we have agreed to pay Business Objects the sum of $24,000,000 in the
following installments: $10,000,000 on or before June 10, 2002, and $1,750,000
every quarter for the next eight quarters commencing on July 1, 2002. We have
recorded a special charge of $23,231,000 in fiscal 2002, representing the
present value of this payment stream discounted using an interest rate of 6%, in
accordance with FASB Statement 5 Contingent Liabilities. The after-tax effect of
this charge is $16,827,000. The remaining balance of $769,000 represents the
interest to be recognized over the payment term. The principal amount is
recorded in accrued charges and long-term liabilities on the balance sheet.
INTEREST INCOME AND EXPENSE
Interest income was earned on our cash, cash equivalents, and short-term
investments and interest expense related primarily to interest incurred on
various transactions occurring throughout the year. Net interest income was
$8.4 million, $11.6 million, and $6.7 million in fiscal 2002, 2001, and 2000,
respectively. The decrease during fiscal 2002 was the result of a decrease in
the average effective interest rates earned on investments offset by an
increase in the average size of the investment portfolio. This decrease was
amplified by the impact of unfavorable exchange rate fluctuations. The
increase in fiscal 2001 was the result of an increase in the average size of
the investment portfolio, and an increase in the average effective interest
rates earned on investments. This increase was offset slightly by the impact
of unfavorable exchange rate fluctuations.
TAX EXPENSE
Our tax rate is affected by the relative profitability of our operations in
various geographic regions. In fiscal 2002, we recorded an income tax
provision of $8.8 million on $28.2 million of pre-tax income, representing an
effective income tax rate of 31%. In fiscal 2001, we recorded an income tax
provision of $27.1 million on $91.3 million of pre-tax income, representing an
effective income tax rate of 30%. In fiscal 2000, we recorded an income tax
provision of $22.9 million on $81.7 million of pre-tax income. This tax
expense represented an effective income tax rate of 28% for the year.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2002, we held $314.5 million in cash, cash equivalents, and
short-term investments, an increase of $80.0 million from February 28, 2001.
This increase was a result of both operating profits for the year of $19.8
million and a substantial decrease in accounts receivable as we increased our
billing and collection efforts. In addition, we have arranged an unsecured
credit facility that includes an operating line and foreign exchange conversion
facilities. The operating line permits us to borrow funds or issue letters of
credit or guarantee up to Cdn$15.0 (U.S.$9.3) million, subject to certain
covenants. As of February 28, 2002 and 2001, there were no direct borrowings
under this operating line. As discussed further below, we have foreign exchange
conversion facilities that allow us to hold foreign exchange contracts of
approximately Cdn$130.0 (U.S.$81.0) million outstanding at any one time.
As of February 28, 2002, we had a total of $9.1 million of long-term
liabilities, an increase of $7.6 million from February 28, 2001. The increase
was the result of the long-term portion of the patent litigation settlement. As
of February 28, 2002, working capital was $227.6 million, an increase of $29.9
million from February 28, 2001, primarily because of higher levels of cash, cash
equivalents, and short-term investments which were partially offset
28
by a decrease in accounts receivable and increases in accrued charges and
deferred revenue. During fiscal 2002 we used $29.0 million in cash for share
repurchases and $2.2 million for acquisitions.
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. Annual payments on these leases
are approximately $16.0 million. These amounts are disclosed in Note 6 of the
Notes to the Consolidated Financial Statements.
Cash provided by operating activities (after changes in non-cash working
capital items) for fiscal 2002 was $103.7 million, an increase of $4.7
million compared to the prior fiscal year. This fluctuation was due to a net
decrease in non-cash working capital items as compared to fiscal 2001. This
was offset by a decrease in net income after adjustments for depreciation,
amortization, and other non-cash items.
Cash used in investing activities was $20.0 million for fiscal 2002, a
decrease in investment of $99.2 million compared to the prior fiscal year. The
majority of the fluctuation stems from a decrease in net investment in short-
term investments and decreases in fixed asset additions and acquisition costs.
In fiscal 2002, we spent $5.2 million related to the activity in short-term
investments compared to $56.6 million (both net of maturities) in fiscal 2001.
In addition, we spent $2.2 million in fiscal 2002 on acquisitions, compared to
$11.4 million in fiscal 2001. (See Note 5 of the Notes to the Consolidated
Financial Statements.) The decrease in fixed asset additions was primarily the
result of the construction, during fiscal 2001, of a second building on the
site of our corporate headquarters in Ottawa and a reduction in spending in
fiscal 2002 due to the weakened economic environment prevalent through the
majority of the year. We invested approximately $17.8 million during fiscal
2001 in the expansion of our headquarters. This headquarter expansion was
substantially complete in December 2000 and the building was fully occupied by
the end of fiscal 2001. No costs relating to the construction of our
headquarters were incurred in fiscal 2002.
Cash used in financing activities was $5.1 million for fiscal 2002, compared
to cash provided of $4.5 million for financing activities during fiscal 2001.
Our financing activities for both fiscal years involved the repurchase of our
own shares in the open market, and the issuance of shares pursuant to our
stock purchase plan and the exercise of stock options. Relating to financing
activities, we issued 1,436,000 common shares for consideration of $15.1
million during fiscal 2002, compared to 1,889,000 common shares for
consideration of $20.6 million during fiscal 2001. The issuance of shares in
both periods was pursuant to our stock purchase plan and the exercise of stock
options by employees, officers, and directors. During fiscal 2002 we
repurchased 1,616,000 shares at a cost of $29.0 million, compared to 580,000
shares at a cost of $14.0 million in fiscal 2001.
The share repurchases made in the past two fiscal years were part of distinct
open market share repurchase programs through the Nasdaq National Market. The
share repurchases made in fiscal 2002 were part of two open market share
repurchase programs. The program adopted in October 2000 expired on October 8,
2001. Under this program we repurchased 1,344,500 of our shares for $24.9
million including repurchases of 816,000 shares for $12.9 million in fiscal
2002; all repurchased shares were cancelled. In October 2001, we adopted a new
program that enables us to purchase up to 4,400,943 common shares (not more
than 5% of those issued and outstanding) between October 9, 2001 and October
8, 2002. Under the current program we have repurchased 800,257 shares for
$16.1 million during fiscal 2002; all repurchased shares were cancelled. This
program does not commit us to make any share repurchases. Purchases will be
made on the Nasdaq National Market or the Toronto Stock Exchange at prevailing
open market prices and paid out of general corporate funds. All repurchased
shares will be cancelled. A copy of the Notice of Intention to Make an Issuer
Bid is available from the Corporate Secretary. (See Note 10 of the Notes to
the Consolidated Financial Statements.)
29
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. Typically
these contracts are between the United States dollar, 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 February 28,
2002, we had foreign exchange forward contracts, with maturity dates ranging
from March 28, 2002 to July 25, 2002, to exchange various foreign currencies
in the amount of $18.7 million.
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 2003.
Inflation has not had a significant impact on our results of operations.
EUROPEAN ECONOMIC AND MONETARY UNION
The euro currency was introduced on January 1, 1999, and was fully implemented
on January 1, 2002. The transition to this new currency has associated with it
many potential implications for businesses operating in Europe including, but
not limited to, products, information technology, pricing, currency exchange
rate risk and derivatives exposure, continuity of material contracts, and
potential tax consequences.
The new euro currency was introduced in stages over the course of a 3 year
transition period. We believe the transition to the euro will have limited
longer-term implications on our business. We have taken steps in the
transition to the euro in the area of our internal processes and systems
through identifying, modifying, and testing these processes and systems to
handle transactions and reporting requirements involving the euro in
accordance with the regulations. Our financial application systems represent
the most significant internal systems that are affected by the transition to
the euro. We earlier upgraded these systems to a version that enables us,
together with certain process changes and modifications provided by the
application vendor to their supported customers, to handle the initial
requirements for transactions involving the euro. In the first quarter of
fiscal 2002 we reassessed the need to further upgrade our financial
applications system to handle the full requirements of the euro. We have
experienced no significant impact and believe our current procedures and the
modifications which have been made to the financial application system are
adequate to handle the adoption of the euro, however, we continue to identify
and, where necessary, modify our systems and processes in order to handle the
various stages of the euro implementation. We are continuing to monitor our
pricing in Europe, giving consideration to the transition to the euro.
We believe that the costs relating to the conversion of our internal systems
and processes incurred to date, along with any future costs relating to such
conversions, will not have a material adverse effect on our business, results
of operations, or financial condition.
MARKET RISK
30
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.
Further discussion of our investment and foreign exchange policies can be
found in Notes 1 and 8 of the Notes to the Consolidated Financial Statements.
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 one year 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. The amount of our long-
term debt is immaterial. 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 fiscal year ending February 28, 2002, 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, the euro, the
British pound, the Swiss franc, the Japanese yen, and the Australian dollar.
Sensitivity analysis is used to measure our foreign currency exchange rate
risk. As of February 28, 2002, 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
We make certain statements in this report that constitute forward-looking
statements. These statements include, but are not limited to, statements
relating to our expectations concerning future revenues and earnings,
including future rates of growth, from the licensing of our business
intelligence and application development products and related product support
and services, and relating to the sufficiency of capital to meet our working
capital and capital expenditure requirements. Forward-looking statements are
neither promises nor guarantees, and are subject to risks and uncertainties
that may cause future results to differ materially from those stated in the
forward-looking statements. There can be no guarantee that future results will
turn out as expected. Factors that may cause such differences include, but are
not limited to,
31
the factors discussed below. Additional risks and uncertainties that we are
unaware of or currently deem immaterial may also adversely affect our business
operations. We disclaim any obligation to publicly update or revise any such
statements to reflect any change in our expectations or events, conditions, or
circumstances on which any such statement may be based.
RISKS RELATED TO OUR BUSINESS
Our revenue may not continue to grow at historical rates.
Although we have experienced significant license revenue growth with respect
to our business intelligence products over the past few fiscal years, we
cannot assure you that we will continue to grow. If we do grow, we cannot
assure you that we will be able to maintain the historical rate or extent of
such growth in the future. Our growth rate may be affected by global economic
conditions generally, and the current economic slowdown, in particular.
Our quarterly and annual operating results are subject to fluctuations, which
may cause our stock price to fluctuate or decline.
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
next fiscal year. Our quarterly operating results may be adversely affected by
a wide variety of factors, including:
. our ability to maintain revenue growth at current levels or anticipate a
decline in revenue from any of our products;
. the impact of global economic conditions on the sales cycle;
. our ability to obtain and close 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
commercialize those technologies into new products;
. our ability to accurately select appropriate business models and
strategies;
. our ability to make appropriate decisions which will position us to
achieve further growth;
. our ability to identify, hire, train, motivate, and retain highly
qualified personnel, and to achieve targeted productivity levels;
. our ability to identify, develop, deliver, and introduce in a timely
manner new and enhanced versions of our products which anticipate market
demand and address customer needs;
. market acceptance of business intelligence software generally and of new
and enhanced versions of our products in particular;
. timing of new product announcements;
. 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 and significance of product enhancements and new product and
technology announcements by our competitors;
. our reliance on third-party distribution channels as part of our sales
and marketing strategy;
. the timing and provision of pricing protections and exchanges from
certain distributors;
. changes in foreign currency exchange rates and issues relating to the
conversion to the euro; and
. our ability to enforce our intellectual property rights.
32
These fluctuations could materially adversely affect our share price and our
business, results of operations, and financial condition.
Our ability to adjust our expenses in the near term is limited, which could
cause our profits to decrease.
In recent fiscal years, we have experienced an increase in our operating
expenses as a result of decisions to invest in our sales channels, technical
support, and research and development organizations. As a result of current
economic conditions discretionary spending levels will be tempered; however,
we will continue to selectively incur expenditures in areas that we view as
strengthening our position in the marketplace. We base our operating expense
budgets on expected revenue trends that are more difficult to predict in
periods of economic uncertainty. If we do not meet revenue goals, we may not
be able to meet reduced operating expense levels. 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.
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
when deciding to license our software products, in particular in situations
where we are making large enterprise-wide sales. As a result, we may wait many
months after our first contact with a customer while that customer seeks
internal approval for the purchase of our products. During this long sales
cycle, events may occur that affect the size or timing of the order or even
cause it to be canceled. For example, purchasing decisions may be postponed,
or large purchases reduced, by periods of economic uncertainty, our
competitors may introduce new products or the customer's own budget and
purchasing priorities may change. The time required for implementation of our
product varies among our customers and may last several months, depending on
our customer's needs. It may be difficult to install our products if the
customer has complicated operation requirements, such as integrating
databases, hardware, and software from different vendors. Also, if a customer
hires a third-party to install our products, we cannot be sure that our
products will be installed successfully.
We rely, in part, on partners and other distribution channels to market and
distribute our products, and any failure of these parties to do so could
significantly harm our ability to 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. We have
developed a number of these relationships and intend to continue to develop
new channel partner relationships. Our inability to attract effective channel
partners, or these partners' inability to penetrate their respective market
segments, or the loss of any of our channel partners as a result of
competitive products offered by other companies or products developed
internally by these channel partners or otherwise, could harm our ability to
expand our customer base and, as a result, could cause our business to grow
more slowly than forecasted or could result in additional, unanticipated
expenses.
33
If we do not protect our intellectual property, we may not be competitive.
Our success depends in part on our ability to protect our proprietary rights
in our intellectual property. We rely on certain 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 Canada or the United States.
To protect our intellectual property, we may become involved in litigation,
which could result in substantial expenses and materially disrupt the conduct
of our business.
Intellectual property claims could be time consuming and costly to defend
against, and, if we are unsuccessful, our ability to use intellectual property
in the future could be limited or we may have to pay damages.
We may become increasingly subject to claims by third-parties that our
technology infringes their proprietary 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 time consuming;
. 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.
On May 5, 2000, an action was filed in the United States District Court for the
Northern District of California against us by Business Objects S.A., for alleged
patent infringement. The complaint alleged that our Impromptu product infringes
Business Objects' United States Patent No. 5,555,403 entitled "Relational
Database Access System using Semantically Dynamic Objects" (the "'403 Patent").
Although we have denied and continue to deny all claims asserted in the action,
on May 24, 2002, subsequent to the balance sheet date, we reached an agreement
to settle that action. Under the terms of the settlement agreement between
ourselves and Business Objects, Business Objects has agreed to release us for
any infringement of the '403 Patent (and any amendments or related patents) and
to effect that release, has granted us a license under the '403 Patent for the
term of that patent or any amendments or related patents. Both parties also
agreed to release the other from all claims, liabilities, costs or expenses that
either party hold against the other, on account of actions taken prior to the
effective date. The parties have also entered into a covenant not to sue or
assert any claim against the other for infringement of any patents for a period
of 5 years from the effective date. As consideration for the settlement
agreement, the Corporation has agreed to pay Business Objects the sum of
$24,000,000 in the following installments: $10,000,000 on or before June 10,
2002, and $1,750,000 every quarter for the next eight quarters commencing on
July 1, 2002.
The loss of our rights to use software 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.
In order to provide a complete business intelligence solution, we license
certain technologies used in our products from third-parties, generally on a
non-exclusive basis. The termination of such licenses, or the failure of the
third-party licensors to adequately maintain or update their products, could
delay our ability to ship certain of 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
assure you that we will be able to obtain licensing rights to the needed
technology on commercially reasonable terms, if at all.
34
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 policy
changes affecting our markets;
. 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 distributors and representatives;
. difficulties in staffing and managing foreign operations;
. difficulties in protecting our intellectual property; and
. potentially adverse tax consequences.
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 not produce the
desired business results.
In the past we have made acquisitions of products and businesses. In the
future, we may engage in additional selective acquisitions of other products
or businesses that we believe are complementary to ours. We cannot assure you
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 special 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, and personnel;
. unanticipated expenses, events, or circumstances;
. assumption of legal and other undisclosed liabilities; and
. the risk that we will not be able to value the acquired in-process
research and development 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 as a whole. In addition, if we proceed with an
acquisition, our available cash may be used to complete the transaction, or
shares may be issued which could cause a dilution to existing shareholders.
35
Failure to manage our growth may impact our operating results.
We expect to continue to grow our business. 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
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.
If our product contains material defects, our ability to attract and retain
customers may be harmed.
Our 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.
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.
If a successful product liability claim were made against us, our business
would 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.
Currency fluctuations may adversely affect us.
A substantial portion of our revenues are earned in currencies other than U.S.
dollars, and, similarly, a substantial portion of our operating expenses are
incurred in currencies other than U.S. dollars. 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. 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. We enter into foreign exchange forward contracts
to hedge portions of the net investment in various subsidiaries, typically
between the United States dollar, the euro, the British pound, the German
mark, and the Australian dollar.
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
36
for such personnel is intense, and we cannot assure you 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.
RISKS RELATED TO OUR INDUSTRY
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.
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 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 potentially new competitors to continue to
improve the performance of their current products and to introduce new
products or new technologies that provide improved cost of ownership and
performance characteristics. 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 competitiveness 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:
. rapid and significant technological change;
. frequent new product introductions and enhancements;
. changing customer demands; and
. evolving industry standards.
We cannot assure you that our products will remain competitive; respond to
market demands, developments, and new industry standards; and not become
obsolete. If we are unable to identify a shift in the market demand quickly
enough, we may not be able to develop products to meet those new demands, or
bring them to market in a timely way. In addition, failure to respond
successfully to technological change may harm our ability to attract and
retain customers.
RISKS RELATED TO EXTERNAL CONDITIONS
Our stock 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;
. announcements of technological innovations or new products by us or our
competitors;
. changes in estimates of our future results of operations by securities
analysts;
. general industry changes in the business intelligence tools or solutions
markets; or
. other events or factors, including the announcement of our settlement of
the patent litigation matter with Business Objects.
37
In addition, the financial markets have experienced significant price and
volume fluctuations that have particularly affected the market prices of
equity securities of many high-technology companies and that often 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.
38
QUARTERLY RESULTS
The following table sets out selected unaudited consolidated financial
information for each quarter in fiscal 2002 and fiscal 2001.
On April 6, 2000 our Board of Directors authorized a two-for-one stock split,
effected in the form of a stock dividend, payable on or about April 27, 2000
to stockholders of record at the close of business on April 20, 2000. All
historic consolidated results have been restated for the split.
Fiscal 2001 Fiscal 2002
----------------------------------- ------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
($000s, except per share amounts, U.S. GAAP)
Revenue................. $108,698 $118,213 $124,638 $144,103 $108,016 $116,313 $124,181 $142,792
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses
Cost of product
license............... 1,729 1,713 1,925 1,948 1,106 962 847 694
Cost of product
support............... 4,274 4,071 4,551 4,924 4,294 3,862 3,825 4,595
Selling, general, and
administrative........ 72,625 75,931 81,339 90,640 88,873 85,311 84,943 84,149
Research and
development........... 15,854 16,507 16,854 18,049 19,422 18,423 17,579 19,190
Acquired in-process
technology............ -- -- 3,000 -- -- -- -- --
Special charges........ -- -- -- -- 12,798 -- -- 20,642
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses............... 94,482 98,222 107,669 115,561 126,493 108,558 107,194 129,270
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss). $ 14,216 $ 19,991 $ 16,969 $ 28,542 $(18,477) $ 7,755 $ 16,987 $ 13,522
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss)....... $ 11,984 $ 16,511 $ 13,627 $ 22,138 $(11,102) $ 7,104 $ 13,286 $ 10,120
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share
Basic.................. $0.14 $0.19 $0.15 $0.25 $(0.13) $0.08 $0.15 $0.12
======== ======== ======== ======== ======== ======== ======== ========
Diluted*............... $0.13 $0.18 $0.15 $0.24 $(0.13) $0.08 $0.15 $0.11
======== ======== ======== ======== ======== ======== ======== ========
* For the first quarter of fiscal year 2002 the effect of converting stock
options was anti-dilutive as a result of net losses.
Our sales cycle may span nine months or more, depending on factors such as the
size of the transaction, the product involved, the length of the customer
relationship, the timing of our new product introductions and product
introductions by others, the level of sales management activity, and general
economic conditions. Delays in closing product licensing transactions at or
near the end of any quarter may have a materially adverse effect on the
financial results for that quarter. While we take steps to minimize the impact
of such delays, there can be no assurance that such delays will not occur.
(See Certain Factors That May Affect Future Results).
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, reference is
made to page 31 of this form 10-K, Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations and to page 55 of this
form 10-K, Note 8 of the Notes to the Consolidated Financial Statements, Item
8, Financial Statements and Supplementary Data.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The Corporation's management is responsible for preparing the accompanying
consolidated financial statements in conformity with United States generally
accepted accounting principles. In preparing these consolidated financial
statements, management selects appropriate accounting policies and uses its
judgment and best estimates to report events and transactions as they occur.
Management has determined such amounts on a reasonable basis in order to
ensure that the financial statements are presented fairly, in all material
respects. Financial data included throughout this Annual Report is prepared on
a basis consistent with that of the financial statements.
The Corporation maintains a system of internal accounting controls designed to
provide reasonable assurance, at a reasonable cost, that assets are
safeguarded and that transactions are executed and recorded in accordance with
the Corporation's policies for doing business. This system is supported by
written policies and procedures for key business activities; the hiring of
qualified, competent staff; and by a continuous planning and monitoring
program.
Ernst & Young LLP, the independent auditors appointed by the stockholders,
have been engaged to conduct an examination of the consolidated financial
statements in accordance with generally accepted auditing standards, and have
expressed their opinion on these statements. During the course of their audit,
Ernst & Young LLP reviewed the Corporation's system of internal controls to
the extent necessary to render their opinion on the consolidated financial
statements.
The Board of Directors is responsible for ensuring that management fulfills
its responsibility for financial reporting and internal control, and is
ultimately responsible for reviewing and approving the consolidated financial
statements. The Board carries out this responsibility principally through its
Audit Committee; all members are outside Directors. The Committee meets four
times annually to review audited and unaudited financial information prior to
its public release. The Committee also considers, for review by the Board of
Directors and approval by the stockholders, the engagement or reappointment of
the external auditors. Ernst & Young LLP has full and free access to the Audit
Committee.
Management acknowledges its responsibility to provide financial information
that is representative of the Corporation's operations, is consistent and
reliable, and is relevant for the informed evaluation of the Corporation's
activities.
/s/ James M. Tory /s/ Ron Zambonini /s/ Tom Manley
James M. Tory Ron Zambonini Tom Manley
Chairman President and Senior Vice President,
Chief Executive Officer Finance &
Administration, and
Chief Financial
Officer
March 28, 2002 (except note 14,
as to which the date is
May 24, 2002)
41
AUDITORS' REPORT
To the Board of Directors and Stockholders of Cognos Incorporated:
We have audited the consolidated balance sheets of Cognos Incorporated as at
February 28, 2002 and February 28, 2001 and the consolidated statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended February 28, 2002. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with United States and Canadian
generally accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at February
28, 2002 and February 28, 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended February 28, 2002,
in accordance with United States generally accepted accounting principles.
On March 28, 2002 (except note 14, as to which the date is May 24, 2002), we
reported separately to the Board of Directors and Stockholders of Cognos
Incorporated on financial statements for the same periods, prepared in
accordance with Canadian generally accepted accounting principles.
/s/ Ernst & Young LLP
Ottawa, Canada Ernst & Young LLP
March 28, 2002 (except Chartered Accountants
note 14, as to which the
date is May 24, 2002)
42
CONSOLIDATED STATEMENTS OF INCOME
(US$000s except share amounts, U.S. GAAP)
Years Ended the Last Day
of February,
----------------------------
Note 2002 2001 2000
---- -------- -------- --------
Revenue
Product license............................. $228,255 $262,766 $203,299
Product support............................. 175,636 147,589 118,061
Services.................................... 87,411 85,297 64,280
-------- -------- --------
Total revenue................................ 491,302 495,652 385,640
-------- -------- --------
Operating expenses
Cost of product license..................... 3,609 7,315 5,235
Cost of product support..................... 16,576 17,820 13,758
Selling, general, and administrative........ 343,276 320,535 238,147
Research and development.................... 74,614 67,264 53,548
Acquired in-process technology.............. 5 -- 3,000 --
Special charges............................. 7,14 33,440 -- --
-------- -------- --------
Total operating expenses..................... 471,515 415,934 310,688
-------- -------- --------
Operating income............................. 19,787 79,718 74,952
Interest expense............................. (540) (786) (718)
Interest income.............................. 8,922 12,386 7,454
-------- -------- --------
Income before taxes.......................... 28,169 91,318 81,688
Income tax provision......................... 9 8,761 27,058 22,873
-------- -------- --------
Net income................................... $ 19,408 $ 64,260 $ 58,815
======== ======== ========
Net income per share......................... 10
Basic....................................... $0.22 $0.74 $0.68
======== ======== ========
Diluted..................................... $0.21 $0.70 $0.67
======== ======== ========
Weighted average number of shares (000s)..... 10
Basic....................................... 87,807 87,324 85,972
======== ======== ========
Diluted..................................... 90,461 91,973 88,100
======== ======== ========
(See accompanying notes)
43
CONSOLIDATED BALANCE SHEETS
(US$000s, U.S. GAAP)
February 28, February 28,
Note 2002 2001
-------- ------------ ------------
Assets
Current assets
Cash and cash equivalents................... 8 $192,900 $115,293
Short-term investments...................... 8 121,629 119,265
Accounts receivable......................... 2 114,059 146,867
Inventories................................. 537 730
Prepaid expenses............................ 6,765 8,648
Deferred tax assets......................... 6,404 --
-------- --------
442,294 390,803
Fixed assets................................. 3 59,008 74,208
Other assets................................. 4 20,850 30,581
-------- --------
$522,152 $495,592
======== ========
Liabilities
Current liabilities
Accounts payable............................ $ 26,387 $ 28,256
Accrued charges............................. 7, 14 34,210 21,830
Salaries, commissions, and related items.... 7 37,453 28,822
Income taxes payable........................ 9 6,167 17,548
Deferred revenue............................ 110,504 96,674
-------- --------
214,721 193,130
Long-term liabilities........................ 5, 14 9,131 1,539
Deferred income taxes........................ 9 3,127 10,394
-------- --------
226,979 205,063
-------- --------
Commitments and Contingencies................ 5, 6, 14
Stockholders' Equity
Capital stock
Common shares
(2002 - 87,997,220; 2001 - 87,885,161) 10 151,637 134,791
Retained earnings............................ 158,762 165,755
Accumulated other comprehensive income....... (15,226) (10,017)
-------- --------
295,173 290,529
-------- --------
$522,152 $495,592
======== ========
(See accompanying notes)
On behalf of the Board:
/s/ Douglas C. Cameron /s/ James M. Tory
Douglas C. Cameron, Director James M. Tory, Chairman
44
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(US$000s except share amounts, U.S. GAAP)
Accumulated
Common Stock Other
---------------- Retained Comprehensive
Shares Amount Earnings Income Total
------ -------- -------- ------------- --------
(000s)
Balances, February 28,
1999...................... 86,362 $ 88,579 $ 79,341 $ (8,712) $159,208
Issuance of stock
Stock option plans........ 1,973 15,420 15,420
Stock purchase plans...... 120 1,095 1,095
Amortization of deferred
stock-based compensation. 693 693
Repurchase of shares....... (2,286) (2,458) (23,555) (26,013)
Income tax effect related
to stock options.......... 894 894
------ -------- -------- -------- --------
86,169 104,223 55,786 (8,712) 151,297
------ -------- -------- -------- --------
Net income................. 58,815 58,815
Other comprehensive income
Foreign currency
translation adjustments... 2,479 2,479
-------- -------- --------
Comprehensive income....... 58,815 2,479 61,294
------ -------- -------- -------- --------
Balances, February 29,
2000...................... 86,169 $104,223 $114,601 $ (6,233) $212,591
------ -------- -------- -------- --------
Issuance of stock
Stock option plans........ 1,816 18,574 18,574
Stock purchase plans...... 73 2,018 2,018
Business acquisitions..... 253 9,070 9,070
Deferred stock-based
compensation............. (65) (2,656) (2,656)
Amortization of deferred
stock-based compensation. 219 1,233 1,233
Repurchase of shares....... (580) (881) (13,106) (13,987)
Income tax effect related
to stock options.......... 3,210 3,210
------ -------- -------- -------- --------
87,885 134,791 101,495 (6,233) 230,053
------ -------- -------- -------- --------
Net income................. 64,260 64,260
Other comprehensive income
Foreign currency
translation adjustments... (3,784) (3,784)
-------- -------- --------
Comprehensive income....... 64,260 (3,784) 60,476
------ -------- -------- -------- --------
Balances, February 28,
2001...................... 87,885 $134,791 $165,755 $(10,017) $290,529
------ -------- -------- -------- --------
Issuance of stock
Stock option plans........ 1,279 12,742 12,742
Stock purchase plans...... 157 2,337 2,337
Amortization of deferred
stock-based compensation. 292 3,341 3,341
Repurchase of shares....... (1,616) (2,638) (26,401) (29,039)
Income tax effect related
to stock options.......... 1,064 1,064
------ -------- -------- -------- --------
87,997 151,637 139,354 (10,017) 280,974
------ -------- -------- -------- --------
Net income................. 19,408 19,408
Other comprehensive income
Foreign currency
translation adjustments... (5,209) (5,209)
-------- -------- --------
Comprehensive income....... 19,408 (5,209) 14,199
------ -------- -------- -------- --------
Balances, February 28,
2002...................... 87,997 $151,637 $158,762 $(15,226) $295,173
====== ======== ======== ======== ========
(See accompanying notes)
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, U.S. GAAP)
Years Ended the Last Day
of February
----------------------------
2002 2001 2000
-------- -------- --------
Cash provided by (used in) operating activities
Net income...................................... $ 19,408 $ 64,260 $ 58,815
Non-cash items
Depreciation and amortization.................. 31,031 23,657 17,546
Amortization of deferred stock-based
compensation.................................. 3,341 1,233 693
Amortization of other deferred compensation.... 4,767 1,809 1,351
Write-off of acquired in-process technology.... -- 3,000 --
Deferred income taxes.......................... (13,111) (3,853) 7,165
Loss on disposal of fixed assets............... 1,114 561 148
-------- -------- --------
46,550 90,667 85,718
Change in non-cash working capital
Decrease (increase) in accounts receivable..... 29,605 (39,824) (32,818)
Decrease in inventories........................ 165 37 31
Decrease (increase) in prepaid expenses........ 1,546 (731) (1,422)
Increase (decrease) in accounts payable........ (1,052) 4,320 3,930
Increase in accrued charges.................... 13,204 3,145 1,004
Increase in salaries, commissions, and related
items......................................... 9,408 5,630 4,394
Increase (decrease) in income taxes payable.... (11,218) 14,262 (3,993)
Increase in deferred revenue................... 15,481 21,467 26,374
-------- -------- --------
103,689 98,973 83,218
-------- -------- --------
Cash provided by (used in) investing activities
Maturity of short-term investments.............. 235,743 138,803 138,796
Purchase of short-term investments.............. (240,974) (195,386) (146,238)
Additions to fixed assets....................... (12,588) (51,963) (28,096)
Acquisition costs............................... (2,193) (11,377) (2,146)
Proceeds from the sale of fixed assets.......... -- 759 24
-------- -------- --------
(20,012) (119,164) (37,660)
-------- -------- --------
Cash provided by (used in) financing activities
Issue of common shares.......................... 16,143 23,802 17,409
Repurchase of shares............................ (29,039) (13,987) (26,013)
Increase in (repayment of) long-term debt
and long-term liabilities...................... 7,798 (5,293) (467)
-------- -------- --------
(5,098) 4,522 (9,071)
-------- -------- --------
Effect of exchange rate changes on cash.......... (972) (1,473) 2,331
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 77,607 (17,142) 38,818
Cash and cash equivalents, beginning of period... 115,293 132,435 93,617
-------- -------- --------
Cash and cash equivalents, end of period......... 192,900 115,293 132,435
Short-term investments, end of period............ 121,629 119,265 64,284
-------- -------- --------
Cash, cash equivalents, and short-term
investments, end of period...................... $314,529 $234,558 $196,719
======== ======== ========
(See accompanying notes)
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies
Nature of Operations
Cognos Incorporated (the "Corporation") is a global provider of business
intelligence software solutions. The Corporation develops, markets, and
supports an integrated business intelligence solution that allows customers,
as well as their partners, customers, and suppliers, to analyze and report
data from multiple perspectives. The Corporation markets and supports these
solutions both directly and through resellers worldwide.
Basis of Presentation
These consolidated financial statements have been prepared by the Corporation
in United States (U.S.) dollars and in accordance with United States generally
accepted accounting principles (GAAP), applied on a consistent basis.
Consolidated financial statements prepared in accordance with Canadian GAAP,
in U.S. dollars, are made available to all shareholders, and filed with
various regulatory authorities.
Basis of Consolidation
These consolidated financial statements include the accounts of the
Corporation and its subsidiaries. All subsidiaries are wholly owned.
Intercompany transactions and balances have been eliminated.
Estimates
The preparation of these consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and the accompanying
notes. In the opinion of management, these consolidated financial statements
reflect all adjustments necessary to present fairly the results for the
periods presented. Actual results could differ from these estimates.
Comprehensive Income
Comprehensive Income includes net income and other comprehensive income (OCI).
OCI refers to changes in net assets from transactions and other events, and
circumstances other than transactions with stockholders. These changes are
recorded directly as a separate component of Stockholders' Equity and excluded
from net income. The only comprehensive income item for the Corporation
relates to foreign currency translation adjustments pertaining to those
subsidiaries not using the U.S. dollar as their functional currency net of
derivative gains or losses.
Foreign Currency Translation
The financial statements of the parent company and its non-U.S. subsidiaries
have been translated into U.S. dollars in accordance with the Financial
Accounting Standards Board's (FASB) Statement No. 52, Foreign Currency
Translation. The financial statements of the foreign subsidiaries are measured
using local currency as the functional currency. All balance sheet amounts
have been translated using the exchange rates in effect at the applicable year
end. Income statement amounts have been translated using the weighted average
exchange rate for the applicable year. The gains and losses resulting from the
47
changes in exchange rates from year to year have been reported as a separate
component of Stockholders' Equity. Currency transaction gains and losses are
immaterial for all periods presented.
Revenue
The Corporation recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants.
Substantially all of the Corporation's product license revenue is earned from
licenses of off-the-shelf software requiring no customization. Revenue from
these licenses is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the fee
is fixed or determinable, and collectibility is probable. If a license
includes the right to return the product for refund or credit, revenue is
recognized net of an allowance for estimated returns provided all the
requirements of SOP 97-2 have been met.
Revenue from product support contracts is recognized ratably over the life of
the contract. Incremental costs directly attributable to the acquisition of
product support contracts, and that would not have been incurred but for the
acquisition of that contract, are deferred and expensed in the period the
related revenue is recognized. These costs include commissions payable on
sales of support contracts.
Revenue from education, consulting, and other services is recognized at the
time such services are rendered.
For contracts with multiple obligations (e.g., deliverable and undeliverable
products, support obligations, education, consulting, and other services), the
Corporation allocates revenue to each element of the contract based on
objective evidence, specific to the Corporation, of the fair value of the
element.
Cash, Cash Equivalents, and Short-Term Investments
Cash includes cash equivalents, which are investments that are generally held
to maturity and have terms to maturity of three months or less at the time of
acquisition. Cash equivalents typically consist of commercial paper, term
deposits, banker's acceptances and bearer deposit notes issued by major North
American banks, and corporate debt. Cash and cash equivalents are carried at
cost, which approximates their fair value.
Short-term investments are investments that are generally held to maturity and
have terms greater than three months at the time of acquisition. Short-term
investments typically consist of commercial paper and corporate bonds. Short-
term investments are carried at cost, which approximates their fair value.
Derivative Financial Instruments
Effective March 1, 2001, the corporation adopted FASB Statement No. 133
Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and
the corresponding amendments under SFAS 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an amendment to SFAS No. 133.
SFAS 133 requires that all derivatives, whether designated in hedging
relationships or not, are to be recorded on the balance sheet at fair value.
If the derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged risk
are recognized in net income/loss. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in OCI and are recognized in net income/loss when the
hedged item affects net income/loss. If the derivative is designated a hedge
of net investment in foreign operations, the changes in fair value are
reported in OCI as part of the cumulative translation adjustment to the extent
that it is effective.
48
Inventories
Inventories are comprised principally of finished goods and are stated at the
lower of cost, on an average cost basis, and net realizable value.
Fixed Assets
Fixed assets are recorded at cost. Computer equipment and software, and the
building, are depreciated using the straight line method. Office furniture is
depreciated using the diminishing balance method. Building improvements are
amortized using the straight line method over the life of the improvement.
Leasehold improvements are amortized using the straight line method over
either the life of the improvement or the term of the lease, whichever is
shorter. Fixed assets are tested for impairment when evidence of a decline in
value exists and are adjusted to estimated fair value if the asset is
impaired.
Assets leased on terms that transfer substantially all of the benefits and
risks of ownership to the Corporation are accounted for as capital leases, as
though the asset had been purchased and a liability incurred. All other leases
are accounted for as operating leases.
Other Assets
This category includes acquired technology, goodwill, and other deferred
compensation associated with various acquisitions, and deferred software
development costs.
Acquired technology is initially recorded at fair value based on the present
value of the estimated net future income-producing capabilities of software
products acquired on acquisitions. Acquired technology is amortized over five
years on a straight line basis. The Corporation evaluates the expected future
net cash flows of the acquired technology at each reporting date, and adjusts
to estimated fair value if the value of the asset is impaired.
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and intangible net assets
acquired. Goodwill resulting from acquisitions prior to June 30, 2001 is
amortized over five years on a straight line basis. Goodwill resulting from
acquisitions subsequent to June 30, 2001 is not amortized in accordance with
the transitional provisions of FASB Statement 142 (see Note 13). The
Corporation evaluates the expected future net cash flows of the acquired
businesses at each reporting date, and adjusts goodwill for any impairment.
Other deferred compensation includes cash consideration associated with
acquisitions made by the Corporation. Other deferred compensation is recorded
when its future payment is determinable and is payable contingent upon the
continued tenure of the principals of the acquired companies who have become
employees of the Corporation. Under generally accepted accounting principles
these amounts are accounted for as compensation rather than as a component of
purchase price.
Development costs incurred internally in creating computer software to be
sold, licensed, or otherwise marketed, are expensed as incurred unless they
meet generally accepted accounting criteria for deferral and amortization.
Software development costs incurred prior to the establishment of
technological feasibility do not meet these criteria, and are expensed as
incurred. Research costs are expensed as incurred. For costs that are
capitalized, the amortization is the greater of the amount calculated using
either (i) the ratio that the appropriate product's current gross revenues
bear to the total of current and anticipated future gross revenues for that
product, or (ii) the straight line method over the remaining economic life of
the product. Such amortization is recorded over a period not exceeding three
years. The Corporation reassesses whether it has met the relevant criteria for
continued deferral and amortization at each reporting date. The Corporation
did not capitalize any costs of internally-developed computer
49
software to be sold, licensed or otherwise marketed, and recognized no
amortization expense in each of fiscal 2002, 2001, and 2000.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws.
2.Accounts Receivable
Accounts receivable include an allowance for doubtful accounts of $8,808,000
and $11,521,000 as of February 28, 2002 and February 28, 2001, respectively.
3.Fixed Assets
2002 2001
---------------------- ---------------------
Accumulated Accumulated
Depreciation Depreciation Depreciation /
and and Amortization
Cost Amortization Cost Amortization Rate
--------- ------------ ------- ------------ --------------
($000s) ($000s)
Computer equipment and
software............... $ 62,500 $48,496 $72,100 $47,991 33%
Office furniture........ 27,819 15,077 27,779 12,538 20%
Building and Leasehold 18,945 7,213 18,182 5,350 Life of
improvements........... Improvement /
Lease Term
Land.................... 740 -- 775 -- --
Building................ 21,897 2,107 22,754 1,503 2.5%
--------- ------- ------- -------
131,901 $72,893 141,590 $67,382
======= =======
(72,893) (67,382)
--------- -------
Net book value.......... $ 59,008 $74,208
========= =======
Depreciation and amortization of fixed assets was $23,874,000, $18,475,000,
and $13,898,000 in each of fiscal 2002, 2001, and 2000, respectively.
4.Other assets
Other assets as at February 28, 2002, and February 28, 2001, include acquired
technology, goodwill, and other deferred compensation, and are disclosed net
of amortization.
The Corporation recorded $2,193,000 of goodwill in fiscal 2002, $18,421,000 of
goodwill, workforce, and other deferred compensation in fiscal 2001, and
$2,352,000 of goodwill and other deferred compensation in fiscal 2000.
Amortization of other assets was $11,924,000, $6,991,000, and $4,999,000 in
each of fiscal 2002, 2001, and 2000, respectively (see Note 5).
50
The Corporation did not capitalize any costs of internally-developed computer
software to be sold, licensed, or otherwise marketed in each of fiscal 2002,
2001, and 2000, and did not record any amortization.
5.Acquisitions
Fiscal 2002 Acquisitions
On February 28, 2002, the Corporation exercised its option to purchase 50% of
the voting shares representing all of the outstanding voting interest in the
Corporation's subsidiary in Japan, Teijin Cognos Incorporated (TCI). The
Corporation felt that TCI could more gainfully serve the Japanese market as a
wholly owned subsidiary. The Corporation has always consolidated the results
of TCI as it has had effective control over TCI. The former shareholders of
TCI received approximately $2,193,000 in cash upon completion of the purchase.
The Corporation will also pay Teijin Limited its accumulated minority interest
in TCI of approximately $1,462,000 due March 30, 2002. The Corporation has
also agreed to pay additional consideration at each period end for the next 8
quarters, based on the net revenue of TCI. This additional purchase price has
not been recorded as it cannot be reasonably estimated. The purchase of TCI
did not involve the purchase of any in-process research and development. The
acquisition was accounted for using the purchase method. The results of
operations of TCI are already consolidated, and thus pro forma information has
not been provided.
Total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date as follows: ($000s)
Teijin Cognos
Incorporated
-------------
Assets acquired................................................... $ 3,712
Liabilities assumed............................................... (2,250)
-------
Net assets acquired............................................... 1,462
Goodwill.......................................................... 2,193
-------
Purchase price.................................................... $ 3,655
=======
Purchase price consideration
Cash............................................................. 2,193
Deferred payment................................................. 1,462
-------
$ 3,655
=======
Goodwill recorded as a result of this transaction will not be amortized in
accordance with SFAS 142 but will be tested for impairment as of March 1,
2002.
Fiscal 2001 Acquisitions
On June 1, 2000, the Corporation acquired Powerteam OY, the Corporation's
distributor in Finland. The agreement stipulated that the shareholders of
Powerteam OY would receive approximately $2,258,000 in cash in the two years
subsequent to the date of acquisition and could also receive cash payments not
to exceed $500,000 over the three years subsequent to the date of acquisition.
The Corporation has conditioned a portion of the contingent consideration on
the continued tenure of certain employees. Under generally accepted accounting
principles these amounts are accounted for as compensation rather than as a
component of purchase price.
On September 21, 2000, the Corporation acquired NoticeCast Software Ltd.,
based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management
Software monitors business processes and delivers timely business intelligence
notifications to business users across the enterprise via e-mail on
51
their personal computer, hand-held or wireless device. The agreement
stipulated that the shareholders of NoticeCast Software Ltd. would receive
approximately $9,000,000 in cash on closing and would receive 148,468 shares
of the Corporation's common stock valued at approximately $4,820,000. The
shares are being held in escrow by the Corporation and will be released on the
second anniversary of the closing of the transaction. An independent appraisal
valued the in-process research and development at $3,000,000. In the opinion
of management and the appraiser, the acquired in-process research and
development had not yet reached technological feasibility and had no
alternative future uses. Accordingly, the Corporation recorded a special
charge of $3,000,000 (or $0.03 per share on a diluted basis) in the third
quarter ended November 30, 2000, to write off the in-process technology.
On November 1, 2000, the Corporation completed the acquisition of Johnson &
Michaels, Inc. (JAMI), a leading provider of business intelligence consulting
services. The agreement stipulated that the shareholders of JAMI would receive
total cash consideration of approximately $3,915,000 over three years and
104,230 shares of the Corporation's common stock valued at $4,250,000 over the
same period. Approximately $1,406,000 was paid and 39,085 shares were issued
on closing; the remaining shares, all of which were issued, were held in
escrow by the Corporation and were scheduled to be released on the first
(33%), second (33%), and third (34%) anniversaries of the closing of the
transaction. The Corporation has conditioned a portion of the overall
consideration on the continued tenure of certain employees. Under generally
accepted accounting principles these amounts are accounted for as compensation
rather than as a component of purchase price. The deferred shares, valued at
$2,656,000, are accounted for as an offset to capital stock.
The scheduled aggregate annual payments for the long-term liabilities related
to these acquisitions are $921,000 and $1,539,000 in fiscal 2002 and 2003,
respectively. Amounts due within twelve months are included in accrued
charges.
The acquisitions have been accounted for using the purchase method. The
results of operations of all three acquired companies prior to the
acquisitions were not material, and thus pro forma information has not been
provided. The results of the acquired companies have been combined with those
of the Corporation from the date of the acquisition.
Total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date as follows: ($000s)
Powerteam NoticeCast Johnson &
OY Software Inc. Michaels Inc. Total
--------- ------------- ------------- -------
Assets acquired
In-process technology.......... $ -- $ 3,000 $ -- $ 3,000
Other assets................... 3,906 450 814 5,170
------- ------- ------ -------
3,906 3,450 814 8,170
Liabilities assumed............. (2,502) (1,580) (922) (5,004)
------- ------- ------ -------
Net assets acquired............. 1,404 1,870 (108) 3,166
Goodwill........................ 854 11,950 3,545 16,349
------- ------- ------ -------
Purchase price.................. $ 2,258 $13,820 $3,437 $19,515
======= ======= ====== =======
Purchase price consideration
Cash........................... $ 971 $ 9,000 $1,406 $11,377
Deferred payment............... 1,287 -- 437 1,724
Shares......................... -- 4,820 1,594 6,414
------- ------- ------ -------
$2,258 $13,820 $3,437 $19,515
======= ======= ====== =======
Other consideration
Deferred cash.................. -- -- 2,072 2,072
52
Deferred shares.................................. -- -- 2,656 2,656
------ ------- ------ -------
Total consideration............................... $2,258 $13,820 $8,165 $24,243
====== ======= ====== =======
Fiscal 2000 Acquisitions
On May 28, 1999, the Corporation completed the acquisition of Information
Tools AG, the Corporation's distributor in Switzerland. The agreement
stipulated that the shareholders of Information Tools AG were to receive total
consideration of approximately $657,000 of which $458,000 was received in cash
during fiscal 2000. The remainder of the consideration ($199,000) was payable
equally on the first and second anniversaries of the closing of the
transaction. An amount not to exceed $500,000 could also be paid in contingent
consideration. Of that amount, approximately $235,000 was paid in fiscal 2003
based on 2002 results, approximately $60,000 was paid in fiscal 2002 relating
to fiscal 2001 results, and approximately $120,000 was paid in fiscal 2001
relating to fiscal 2000 results. The Corporation has conditioned a portion of
the overall consideration on the continued tenure of certain employees. Under
generally accepted accounting principles, these amounts are accounted for as
compensation rather than as a component of purchase price.
On July 15, 1999, the Corporation completed the purchase of the entire
outstanding minority interest in the Corporation's subsidiary in Singapore,
Cognos Far East Pte Limited. The former minority shareholders of Cognos Far
East Pte Limited received approximately $1,688,000 in cash upon completion of
the purchase. No further consideration is due to the former minority
shareholders of the subsidiary.
Both acquisitions have been accounted for using the purchase method. The
results of operations of both acquired companies prior to the acquisition were
not material, and thus pro forma information has not been provided. The
results of both acquired companies have been combined with those of the
Corporation since their respective dates of acquisition.
Total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date as follows: ($000s)
Cognos Far
Information East Pte
Tools AG Limited Total
----------- ---------- ------
Assets acquired.................................. $ 683 $ -- $ 683
Liabilities assumed.............................. (570) -- (570)
------ ------ ------
Net assets acquired.............................. 113 -- 113
Goodwill......................................... 544 1,688 2,232
------ ------ ------
Purchase price................................... $ 657 $1,688 $2,345
====== ====== ======
Purchase price consideration
Cash............................................. 458 1,688 2,146
Deferred payment................................. 199 -- 199
------ ------ ------
$ 657 $1,688 $2,345
====== ====== ======
Other consideration
Deferred cash.................................... 415 -- 415
------ ------ ------
Total consideration.............................. $1,072 $1,688 $2,760
====== ====== ======
53
6.Commitments
Certain of the Corporation's offices, computer equipment, and vehicles are
leased under various terms. The annual aggregate lease expense in each of
fiscal 2002, 2001, and 2000, was $15,959,000, $14,715,000, and $12,205,000,
respectively.
The aggregate amount of payments for these operating leases, in each of the
next five fiscal years and thereafter, is approximately as follows: ($000s)
2003................................. $12,205
2004................................. 8,231
2005................................. 6,347
2006................................. 4,372
2007................................. 2,814
Thereafter........................... 5,441
7.Business Restructuring Charges
In connection with a restructuring plan to align the Corporation's cost
structure and operations to the prevailing economic environment, the
Corporation recorded in the quarter ended May 31, 2001 a pre-tax business
restructuring charge to earnings of $12,798,000. Business restructuring
charges primarily relate to involuntary employee separations for approximately
300 employees, as well as asset write-downs, and accruals for net costs of
abandoning leased premises and related write-downs of leasehold improvements.
The remaining accrual is included on the balance sheet as accrued charges and
salaries, commissions and related items.
The employee separations impact all functional groups and geographic regions
of the Corporation. All employee separations were completed within the fiscal
year and substantially all amounts have been paid.
The adjustment of $2,589,000 to the restructuring accrual includes reversals
resulting from revisions to prior cost assumptions including: subleases of
closed sales offices of $504,000, reversal of employee severance and related
costs of $1,306,000, and outplacement costs of $430,000.
The following table displays the status of the restructuring reserve at
February 28, 2002: ($000s)
Other
Employee Restructuring
Separations Costs Total
----------- ------------- -------
Restructuring charges in Q1 fiscal 2002...... $ 9,660 $ 3,138 $12,798
Cash Payments................................ (7,203) (1,040) (8,243)
Asset write-downs............................ -- (1,557) (1,557)
Adjustments to accrual....................... (2,306) (283) (2,589)
------- ------- -------
Balance as at February 28, 2002.............. $ 151 $ 258 $ 409
======= ======= =======
54
8.Financial Instruments
Foreign Exchange Forward Contracts
The Corporation's policy with respect to foreign currency exposure is to
manage its financial exposure to certain foreign exchange fluctuations with
the objective of neutralizing some of the impact of foreign currency exchange
movements. The corporation currently utilizes forward contracts to manage
foreign currency translation exposure of net investment in foreign operations.
As a result, the exchange gains and 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 these hedges are not included in income but
are shown in the cumulative translation adjustment account included in OCI.
During the years ended February 28, 2002, 2001, and February 29, 2000, the
amount recorded to the cumulative translation adjustment with respect to the
forward exchange contracts was a net gain of $973,000, $383,000, and a net
loss of $123,000, respectively.
The Corporation has foreign exchange conversion facilities that allow it to
hold foreign exchange contracts of Cdn $130,000,000 (US $81,012,000)
outstanding at any one time. The Corporation enters into foreign exchange
forward contracts with major Canadian chartered banks, and therefore does 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 February 28, 2002, the Corporation had foreign exchange
forward contracts, with maturity dates ranging from March 28, 2002 to July 25,
2002, to exchange various foreign currencies in the amount of $18,733,000 (the
estimated fair value was $19,124,000). As of February 28, 2001, the
Corporation had foreign exchange forward contracts, with maturity dates
ranging from March 29, 2001 to July 26, 2001, to exchange various foreign
currencies in the amount of $15,173,000 (the estimated fair value was
$15,353,000).
Concentration of Credit Risk
The investment of cash is regulated by the Corporation's investment policy,
which is periodically reviewed and approved by the Audit Committee of the
Board of Directors. The primary objective of the Corporation's investment
policy is security of principal. The Corporation manages its investment credit
risk through a combination of (i) a selection of securities with an acceptable
credit rating; (ii) selection of term to maturity, which in no event exceeds
one year in length; and (iii) diversification of debt issuers, both
individually and by industry grouping.
Included in cash, cash equivalents, and short-term investments as of February
28, 2002 and February 28, 2001 were corporate debt amounts of $40,000,000 and
$44,058,000, respectively. The corporate debt as of February 28, 2002 and
February 28, 2001 was with one and three distinct issuers, respectively. These
amounts were repaid, in full, at maturity in March of their respective years.
All the Corporation's short-term investments as of February 28, 2002 and
February 28, 2001 had maturity dates before the end of June of their
respective years. The Corporation's cash, cash equivalents, and short-term
investments are denominated predominantly in Canadian and U.S. dollars.
The Corporation has an unsecured credit facility, subject to annual renewal,
that includes an operating line and foreign exchange conversion facilities.
The operating line permits the Corporation to borrow funds or issue letters of
credit or guarantee up to an aggregate of Cdn $15,000,000 (US $9,348,000),
subject to certain covenants. As of February 28, 2002 and February 28, 2001,
there were no direct borrowings under this operating line.
There is no concentration of credit risk related to the Corporation's position
in trade accounts receivable. Credit risk, with respect to trade receivables,
is minimized because of the Corporation's large customer base and its
geographical dispersion (see Note 12).
55
Fair Value of Financial Instruments
For certain of the Corporation's financial instruments, including accounts
receivable, accounts payable, and other accrued charges, the carrying amounts
approximate the fair value due to their short maturities. Cash and cash
equivalents, short-term investments, long-term debt, and long-term liabilities
are carried at cost, which approximates their fair value. Foreign exchange
forward contracts are recorded at their estimated fair value.
9.Income Taxes
Details of the income tax provision (recovery) are as follows: ($000s)
2002 2001 2000
------- ------- -------
Current
Canadian............................................ $11,490 $18,242 $ 4,909
Foreign............................................. 9,392 12,707 9,943
------- ------- -------
20,882 30,949 14,852
------- ------- -------
Deferred
Canadian............................................ (11,510) (2,463) 8,201
Foreign............................................. (611) (1,428) (180)
------- ------- -------
(12,121) (3,891) 8,021
------- ------- -------
Income tax provision................................. $ 8,761 $27,058 $22,873
======= ======= =======
The reported income tax provision differs from the amount computed by applying
the Canadian rate to income before income taxes. The reasons for this
difference and the related tax effects are as follows: ($000s)
2002 2001 2000
-------- -------- --------
Expected Canadian tax rate....................... 41.0% 44.0% 44.0%
======== ======== ========
Expected tax provision........................... $ 11,549 $ 40,180 $ 35,943
Tax rate differences............................. (8,626) (14,603) (10,422)
Net change in valuation allowance and other
income tax benefits earned...................... (3,364) (5,787) (6,688)
Non-deductible expenses and non-taxable income... 7,288 4,121 2,876
Non-deductible in-process R&D write-off.......... -- 900 --
Withholding tax on foreign income................ 1,759 1,774 1,179
Other............................................ 155 473 (15)
-------- -------- --------
Reported income tax provision.................... $ 8,761 $ 27,058 $ 22,873
======== ======== ========
56
Significant components of the Corporation's deferred tax assets and
liabilities as of February 28, 2002 and February 28, 2001 are as follows:
($000s)
2002 2001 2000
------- ------- -------
Deferred tax assets
Net operating tax loss carryforwards................ $ 3,257 $ 3,822 $ 4,460
Investment tax credits.............................. -- -- 1,404
Deferred revenue.................................... 2,213 2,811 2,490
Reserves............................................ 3,126 2,742 1,663
Book and tax differences on assets.................. 1,155 681 469
Litigation settlement............................... 6,404 -- --
Other............................................... 200 (14) 54
------- ------- -------
Total deferred tax assets............................ 16,355 10,042 10,540
Valuation allowance for deferred tax assets.......... (2,357) (3,022) (4,460)
------- ------- -------
Net deferred tax assets.............................. 13,998 7,020 6,080
------- ------- -------
Deferred tax liabilities
Book and tax differences on assets.................. 3,643 8,729 9,489
Reserves and allowances............................. 5,256 4,760 6,395
Investment tax credits.............................. 1,822 3,925 5,346
------- ------- -------
Total deferred tax liabilities....................... 10,721 17,414 21,230
------- ------- -------
Net deferred income tax asset (liability)............ $ 3,277 $(10,394) $(15,150)
======= ======= =======
The net change in the total valuation allowance for the years ended February
28, 2002 and February 28, 2001 was a decrease of $665,000 and $1,438,000,
respectively.
Realization of the net deferred tax assets is dependent on generating
sufficient taxable income in certain legal entities. Although realization is
not assured, management believes it is more likely than not that the net
amount of the deferred tax asset will be realized. However, this estimate
could change in the near term as future taxable income in these certain legal
entities changes.
As of February 28, 2002, the Corporation had tax loss carryforwards of
approximately $8,884,000 available to reduce future years' income for tax
purposes. These losses expire as follows: ($000s)
2005 - 2011........................... $3,693
Indefinitely.......................... 5,191
------
$8,884
======
Income before taxes attributable to all foreign operations was $29,323,000,
$45,565,000, and $41,548,000, in each of fiscal 2002, 2001, and 2000,
respectively.
The Corporation has provided for foreign withholding taxes on the portion of
the undistributed earnings of foreign subsidiaries expected to be remitted.
Income taxes paid were $29,368,000, $13,537,000, and $18,658,000, in each of
fiscal 2002, 2001, and 2000, respectively.
57
10.Stockholders' Equity
Capital Stock
The authorized capital of the Corporation consists of an unlimited number of
common shares, without nominal or par value, and an unlimited number of
preferred shares, issuable in series. No series of preferred shares has been
created or issued.
On April 6, 2000, the Corporation's Board of Directors authorized a two-for-
one stock split, effected in the form of a stock dividend, payable on or about
April 27, 2000 to stockholders of record at the close of business on April 20,
2000. Share and per-share amounts have been adjusted retroactively for this
split.
Share Repurchase Programs
The share repurchases made in the past three fiscal years were part of
distinct open market share repurchase programs through the Nasdaq National
Market. The share repurchases made in fiscal 2002 were part of two open market
share repurchase programs. The program adopted in October 2000 expired on
October 8, 2001. Under this program the Corporation repurchased 1,344,500 of
its shares; all repurchased shares were cancelled. In October 2001, the
Corporation adopted a new program that will enable it to purchase up to
4,400,943 common shares (not more than 5% of those issued and outstanding)
between October 9, 2001 and October 8, 2002. This program does not commit the
Corporation to make any share repurchases. Purchases will be made on The
Nasdaq National Market or the Toronto Stock Exchange at prevailing open market
prices and paid out of general corporate funds. All repurchased shares will be
cancelled.
The details of the share repurchases were as follows:
2002 2001 2000
-------------- -------------- --------------
Shares Cost Shares Cost Shares Cost
------ ------- ------ ------- ------ -------
(000s) ($000s) (000s) ($000s) (000s) ($000s)
October 1998 program............... -- -- -- -- 2,186 24,689
October 1999 program............... -- -- 50 2,041 100 1,324
October 2000 program............... 816 12,945 530 11,946 -- --
October 2001 program............... 800 16,094 -- -- -- --
----- ------- --- ------- ----- -------
1,616 $29,039 580 $13,987 2,286 $26,013
===== ======= === ======= ===== =======
The amount paid to acquire the shares over and above the average carrying
value has been charged to retained earnings.
Stock Option Plans
As of February 28, 2002, the Corporation had stock options outstanding under
two plans: 9,567,000 pertain to the 1997-2002 Stock Option Plan and 987,000
pertain to the 1993-1998 Stock Option Plan.
There were 14,000,000 shares of common stock originally reserved by the Board
of Directors for issuance under the Corporation's 1997-2002 Stock Option Plan
("the Plan"), which was approved by the Corporation's shareholders in June
1997 and replaced the 1993-1998 Stock Option Plan. Options may be granted to
directors, officers, employees, and consultants at such times and under such
terms as established by the Plan. Options may be fully exercisable on the date
of grant or may be exercisable in installments. Options will expire not later
than 10 years from the date of grant or any shorter period as may be
determined. All options are priced at the market price of the Corporation's
shares on The Toronto Stock Exchange on the trading day preceding the date of
grant. Options were awarded to employees,
58
executive officers and directors in each of April 1998, June 1999, 2000, and
2001. Substantially all options vest equally in April of the next four years
after the date of grant and expire in April of the seventh year after the date
of grant. There were 3,057,000 options available for grant under the Plan as
of February 28, 2002.
Under the 1993-1998 Stock Option Plan, options were awarded to directors,
officers, and employees. For the options outstanding as of February 28, 2002,
the vesting dates have all passed and the expiry dates range from April 2003
to September 2005. In April 1996, options were awarded to certain key officers
under an executive option award. These options vested equally in April 1999,
April 2000, and April 2001, and expire in April 2003. All options were priced
at the market price of the Corporation's shares on The Toronto Stock Exchange
on the trading day preceding the date of grant. The 1993-1998 Stock Option
Plan expired on January 1, 1998.
Employee Stock Purchase Plan
This plan was approved by the Corporation's shareholders in July 1993 and was
amended on May 19, 1999. The amended plan was approved by the Corporation's
shareholders on June 22, 1999, and will terminate on November 30, 2002. Under
the plan, 3,000,000 common shares were reserved for issuance. A participant in
the Employee Stock Purchase Plan authorizes the Corporation to deduct an
amount per pay period that cannot exceed five (5) percent of annual target
salary divided by the number of pay periods per year. Deductions are
accumulated during each of the Corporation's fiscal quarters ("Purchase
Period") and on the first trading day following the end of any Purchase Period
these deductions are applied toward the purchase of common shares. The
purchase price per share is ninety (90) percent of the lesser of The Toronto
Stock Exchange average closing price on (a) the first five trading days of the
Purchase Period or (b) the last five trading days of the Purchase Period. All
full-time and part-time permanent employees may participate in the plan.
Accounting for Stock Option and Stock Purchase Plans
The Corporation applies APB Opinion 25 in accounting for its stock option and
purchase plans. The exercise price of all stock options is equal to the market
price of the stock on the trading day preceding the date of grant.
Accordingly, no compensation cost has been recognized in the financial
statements for its stock option and stock purchase plans.
If the fair values of the options granted had been recognized as compensation
expense on a straight line basis over the vesting period of the grant
(consistent with the method prescribed by FASB Statement No. 123), stock-based
compensation costs would have reduced net income by $25,467,000, $20,106,000,
and $9,096,000, reduced basic net income per share by $0.29, $0.23, and $0.11,
and reduced diluted net income per share by $0.28, $0.22, and $0.10 in fiscal
2002, 2001, and 2000, respectively.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 2002, 2001, and 2000, respectively: risk-free interest
rates of 4.2%, 6.1%, and 5.8%, expected life of the options of 2.9 years, 3.0
years, and 2.8 years, expected volatility of 68%, 54%, and 55%, and for all
years, a dividend yield of zero.
59
Activity in the stock option plans for fiscal 2002, 2001, and 2000 was as
follows:
2002 2001 2000
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
(000s) (000s) (000s)
Outstanding, beginning of
year....................... 7,569 $17.81 7,270 $11.17 6,769 $9.72
Granted.................... 4,835 16.71 2,537 34.02 2,772 11.18
Exercised.................. (1,279) 9.96 (1,816) 10.23 (1,973) 7.81
Cancelled.................. (571) 20.33 (422) 18.21 (298) 11.73
------ ------ ------
Outstanding, end of year.... 10,554 17.35 7,569 17.81 7,270 11.17
====== ====== ======
Options exercisable at year
end........................ 3,002 1,607 1,234
====== ====== ======
Weighted average per share
fair value of options
granted during the year
calculated using the Black-
Scholes option pricing
model...................... $ 7.48 $14.07 $4.59
====== ====== =====
The following table summarizes significant ranges of outstanding and
exercisable options held by directors, officers, and employees as of February
28, 2002:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Range of Exercise Weighted Average Weighted Average Weighted Average
Prices Options Remaining Life Exercise Price Options Exercise Price
- ----------------- ------- ---------------- ---------------- ------- ----------------
(000s) (Years) (000s)
$7.91 -
$9.51 552 2.2 8.13 536 8.11
$9.84 -
$9.98 2,209 4.6 9.87 1,134 9.87
$10.06 -
$14.28 1,274 5.2 12.68 556 12.10
$14.55 -
$15.83 3,627 7.2 15.62 121 15.62
$15.84 -
$18.39 375 7.0 16.90 42 17.43
$18.69 -
$28.04 476 7.1 23.01 78 21.80
$28.07 -
$44.19 2,041 6.2 32.73 535 32.69
------ -----
10,554 5.9 17.35 3,002 14.66
====== =====
Deferred Stock-based Compensation
The Corporation recorded aggregate deferred stock-based compensation of $0,
$2,656,000, and $0 in fiscal 2002, 2001, and 2000, respectively. In each year
deferred stock-based compensation was recorded in connection with acquisitions
made by the Corporation in which stock was issued to principals of the
acquired companies, but held in escrow to be released on condition of
continued tenure. Under generally accepted accounting principles, these
amounts are accounted for as compensation rather than as a component of
purchase price.
60
Net Income per Share
The dilutive effect of stock options is excluded under the requirements of
FASB Statement No. 128 for calculating net income per share, but is included
in the calculation of diluted net income per share.
The reconciliation of the numerator and denominator for the calculation of net
income per share and diluted net income per share is as follows: (000s, except
per-share amounts)
2002 2001 2000
------- ------- -------
Net Income per Share
Net income............................................ $19,408 $64,260 $58,815
======= ======= =======
Weighted average number of shares outstanding......... 87,807 87,324 85,972
======= ======= =======
Net income per share.................................. $0.22 $0.74 $0.68
======= ======= =======
Diluted Net Income per Share
Net income............................................ $19,408 $64,260 $58,815
======= ======= =======
Weighted average number of shares outstanding......... 87,807 87,324 85,972
Dilutive effect of stock options* and deferred stock-
based compensation................................... 2,654 4,649 2,128
------- ------- -------
Adjusted weighted average number of shares
outstanding.......................................... 90,461 91,973 88,100
======= ======= =======
Diluted net income per share.......................... $ 0.21 $ 0.70 $ 0.67
======= ======= =======
* All anti-dilutive options have been excluded. The average number of anti-
dilutive options was 3,327,000, 557,000, and 1,580,000 for fiscal 2002,
2001, and 2000, respectively.
11.Pension Plans
The Corporation operates a Retirement Savings Plan for the parent company and
also operates various other defined contribution pension plans for its
subsidiaries. The Corporation contributes amounts related to the level of
employee contributions for both types of plans.
The pension costs in fiscal 2002, 2001, and 2000 were $4,889,000, $4,248,000,
and $3,839,000, respectively.
12.Segmented Information
The Corporation operates in one business segment--computer software solutions.
This segment engages in business activities from which it earns license,
support, and services revenue, and incurs expenses. Within this business
segment, the Corporation develops, markets, and supports two complementary
lines of software solutions that are designed to satisfy enterprise-wide
business-critical needs. The Corporation's business intelligence software
solutions allow customers, as well as their partners, customers, and
suppliers, to analyze and report data from multiple perspectives. The
Corporation's
61
client/server application development tools are designed to increase the
productivity of system analysts and developers. Cognos products are
distributed both directly and through resellers worldwide.
Revenue is derived from the licensing of software and the provision of related
services, which include product support and education, consulting, and other
services. The Corporation generally licenses software and provides services
subject to terms and conditions consistent with industry standards. Customers
may elect to contract with the Corporation for product support, which includes
product and documentation enhancements, as well as telephone support, by
paying either an annual fee or fees based on usage of support services.
The Corporation operates internationally, with a substantial portion of its
business conducted in foreign currencies. Accordingly, the Corporation's
results are affected by year-over-year 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.
No single customer accounted for 10% or more of the Corporation's revenue
during any of the last three fiscal years. In addition, the Corporation is not
dependent on any single customer or group of customers, or supplier.
The accounting policies for the segment are the same as those described in the
Summary of Significant Accounting Policies. The required financial information
for segment profit and segment assets is the same as that presented in the
Consolidated Financial Statements. Geographic information is as follows:
($000s)
2002 2001 2000
-------- -------- --------
Revenue to external customers*
U.S.A.............................................. $263,488 $281,907 $204,730
Canada............................................. 40,979 35,890 30,120
United Kingdom..................................... 45,759 44,381 44,972
Europe............................................. 107,278 101,888 77,778
Asia/Pacific....................................... 33,798 31,586 28,040
-------- -------- --------
$491,302 $495,652 $385,640
======== ======== ========
* Revenues are attributed to countries based on location of customer
Fixed assets
Canada............................................. $ 46,813 $ 55,466
U.S.A.............................................. 6,508 9,510
Other countries.................................... 5,687 9,232
-------- --------
$ 59,008 $ 74,208
======== ========
Other assets
Canada............................................. $ 13,183 $ 16,655
U.S.A.............................................. 7,667 13,926
-------- --------
$ 20,850 $ 30,581
======== ========
62
13.New Accounting Pronouncements
In June 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets ("the pronouncements"), effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill (and intangible assets deemed to have indefinite lives) will no
longer be amortized but will be subject to annual impairment tests in
accordance with the pronouncements. Other intangible assets will continue to
be amortized over their useful lives.
The Corporation will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003. Application
of the non-amortization provisions of the pronouncements is expected to result
in an increase in net income of $4,000,000 ($0.04 per diluted share) for
fiscal 2003. The Corporation performed the required impairment tests of
goodwill and indefinite-lived intangible assets as of March 1, 2002. The
effect of these tests was not material on the earnings and financial position
of the Corporation.
In October 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS 121, and the accounting and reporting provisions of
APB 30, for the disposal of a segment of a business. The provisions of SFAS
144 are required to be adopted by March 1, 2002. The Corporation believes that
the adoption of SFAS 144 will not have a material effect on the business,
results of operations, and financial condition.
14.Litigation
On May 5, 2000, an action was filed in the United States District Court for the
Northern District of California against the Corporation and its subsidiary
Cognos Corporation by Business Objects S.A., for alleged patent infringement.
The complaint alleged that the Corporation's Impromptu product infringes
Business Objects' United States Patent No. 5,555,403 entitled "Relational
Database Access System using Semantically Dynamic Objects" (the "'403 Patent").
On May 24, 2002, subsequent to the balance sheet date, the Corporation and
Business Objects reached an agreement to settle that action. Under the terms of
the settlement agreement between the Corporation and Business Objects, Business
Objects has agreed to release the Corporation for any infringement of the '403
Patent (and any amendments or related patents) and to effect that release, has
granted the Corporation a license under the '403 Patent for the term of that
patent or any amendments to related patents. Both parties agreed to release the
other from all claims, liabilities, costs or expenses that either party hold
against the other, on account of actions taken prior to the effective date. The
Corporation and Business Objects have also entered into a covenant not to sue or
assert any claim against the other for infringement of any patents for a period
of 5 years from the effective date. As consideration for the settlement
agreement, the Corporation has agreed to pay Business Objects the sum of
$24,000,000, in the following installments: $10,000,000 on or before June 10,
2002, and $1,750,000 every quarter for the next eight quarters commencing on
July 1, 2002. The Corporation has recorded a special charge of $23,231,000, in
fiscal 2002, representing the present value of this payment stream discounted
using an interest rate of 6%, in accordance with FASB Statement 5 Contingent
Liabilities. The after-tax effect of this charge is $16,827,000. The remaining
balance of $769,000 represents the interest to be recognized over the payment
term. The principal amount is recorded in accrued charges and long-term
liabilities on the balance sheet as follows ($000's):
Accrued charges $14,861
Long-term liabilities 8,370
Payments in respect of this settlement are as follows ($000's):
2003 $15,250
2004 7,000
2005 1,750
In addition, the Corporation and its subsidiaries may, from time to time, be
involved in other legal proceedings, claims, and litigation that arise in
the ordinary course of business which the Corporation believes would not
reasonably be expected to have a material adverse effect on the financial
condition of the Corporation.
15.Comparative Results
Certain of the prior years' figures have been reclassified in order to conform
to the presentation adopted in the current year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
63
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
1.(a) Identification of Directors
The following table sets out the name and age of each director and person
nominated for election as a director at the Annual Meeting of Shareholders
("Meeting") to be held on July 2, 2002; the period of service as a director;
the principal occupation, business or employment of the nominee during the last
five years; all other positions with the Corporation (or its significant
subsidiaries) now held by the nominee, if any; and the name of any publicly-
traded corporation of which the nominee is a director.
Name and Age Director Since Principal Occupation During Past Five Years
------------ -------------- -------------------------------------------
John E. Caldwell (52) +..... 2000 Consultant since December 2001. Chief Executive
Officer of Geac Computer Corporation Limited, from
November 2000 to December 2001. Private Investor
from October 1999 to October 2000, and President and
Chief Executive Officer, CAE Inc., from June 1993 to
October 1999. Director of Mosaic Group and Stelco
Inc.
Douglas C. Cameron (63) *+.. 1983 Private Investor since November 2001. Investment
Advisor, RBC Dominion Securities Inc., from October
1993 to November 2001.
Pierre Y. Ducros (63) ++.... 1986 Private Investor since June 1996. Chairman and Chief
Executive Officer, DMR Group Inc., from February
1973 to June 1996. Director of BCE Emergis, National
Bank Financial, Manulife Financial, and Stein
Technologies.
Douglas J. Erwin (49) ...... 1998 President and Chief Executive Officer, PentaSafe
Security Technologies, Inc., an auditing and security
company, since April 1998. Chief Operating Officer,
BMC Software, Inc. from April 1994 to October 1997.
Robert W. Korthals (68) ++.. 1997 Chairman, Ontario Teachers Pension Plan Board since
January 2000 and Chairman, Co-Steel Inc., since June
1997. Director of Global Telecom Split Shares Corp.,
Jannock Properties Limited, MCM Split Shares Corp.,
Premium Income Corporation, Rogers Communications
Inc., RTO Enterprises Inc., and Suncor Energy Inc.
Candy M. Obourn (52) ....... 1999 President, Document Imaging and Senior Vice
President, Eastman Kodak Company, a photographic
product and imaging company, since January 2000.
President, Document Imaging and Vice President
Kodak from October 1955 to December 1999.
William Russell (50) +...... 2002 Vice President, Hewlett-Packard Company since 1998
and General Manager, Global Alliances Organization,
Hewlett-Packard Company since September 1999. Vice
President and General Manager, Enterprise Systems
Group, from May 1997 to September 1999. Since 1980,
Mr. Russell has held a number of sales and
management positions in different Hewlett-Packard
sales and business units, with worldwide
responsibilities.
65
Name and Age Director Since Principal Occupation During Past Five Years
------------ -------------- -------------------------------------------
James M. Tory, Q.C. (72) *.. 1982 Chairman of the Board of Directors of Cognos
Incorporated since September 1995. Chair Emeritus
and Counsel, Torys LLP, Barristers & Solicitors,
since March 1995 and prior thereto as a partner in
that firm. Director of Inmet Mining Corporation.
Renato (Ron) Zambonini (55). 1994 Chief Executive Officer of Cognos Incorporated since
September 1995 and President from January1993 to
April 2002.
* Member of the Corporate Governance Committee.
+ Member of the Audit Committee.
++ Member of the Human Resources & Compensation Committee.
(b) Identification of Executive Officers
Information regarding executive officers of the Company is set forth under
Part I of this Form 10-K.
2.Compliance with Section 16(a) of the Exchange Act
As a foreign private issuer, the Corporation is not subject to the reporting
requirements of Section 16 of the Securities Exchange Act of 1934.
66
ITEM 11. EXECUTIVE COMPENSATION
On April 6, 2000, the Board of Directors of the Corporation authorized a two-
for-one stock split, effected in the form of a stock dividend, payable on or
about April 27, 2000 to shareholders of record at the close of business on
April 20, 2000. Share and per-share amounts have been adjusted retroactively
for this split.
The following Summary Compensation Table sets out the compensation received
for each of the last three fiscal years for Mr. Zambonini, the Chief Executive
Officer of the Corporation, and those persons who were, at February 28, 2002,
the other four most highly compensated executive officers of the Corporation.
Summary Compensation Table
(All dollar amounts are in U.S. dollars)
Long-term
Compensation
Annual Compensation Awards (3)
--------------------------------- ----------------
Other Securities
Name and Principal Fiscal Annual Underlying All Other
Position Year Salary (1) Bonus (2) Compensation Options/SARs (#) Compensation (4)
- ------------------ ------ ---------- --------- ------------ ---------------- ----------------
Renato Zambonini (5).... 2002 $297,038 $150,000 -- 150,000 $ 3,756
Chief Executive Officer 2001 $267,148 $420,757 -- 100,000 $ 3,718
2000 $254,585 $375,938 -- 150,000 $ 4,583
Terry Hall (6).......... 2002 $365,000 $267,880 -- 100,000 $597,768
Senior Vice President 2001 $315,000 $336,000 -- 80,000 $ 1,500
2000 $281,250 $518,036 -- 200,000 $ 1,708
Tony Sirianni........... 2002 $180,000 $276,814 -- 110,000 $ 3,466
Senior Vice President, 2001 $180,000 $222,265 -- 60,000 $ 2,130
North American Field 2000 -- -- -- -- --
Operations
Ad Voogt (7)............ 2002 $185,744 $216,501 $126,126 125,000 $ 25,565
Senior Vice President, 2001 -- -- -- -- --
European Field
Operations 2000 -- -- -- -- --
Robert G. Ashe (5) (8).. 2002 $239,671 $ 55,923 -- 150,000 $ 4,793
President and Chief 2001 $156,949 $118,994 -- 50,000 $ 3,651
Operating Officer 2000 -- -- -- -- --
(1) Salary is base salary earned for the current year.
(2) Bonuses for each year include amounts earned for that year, even if paid
in the subsequent year, and exclude bonuses paid during that year but
earned for a prior year. Bonuses for Messrs. Sirianni and Voogt were based
on the attainment of specific sales and operational objectives. Those of
Messrs. Zambonini, Ashe, and Hall were based on a bonus payout authorized
by the Human Resources & Compensation Committee (see "Human Resources &
Compensation Committee Report on Executive Compensation -- Cash
Compensation").
(3) As of the Record Date, the Corporation has not granted any restricted
shares, or stock appreciation rights ("SARs"), as compensation.
(4) The amounts in this column pertain to the Corporation's annual
contribution to each individual's savings plan. The Corporation
contributes to a Retirement Savings Plan on behalf of Messrs. Zambonini
and Ashe. Cognos
67
Corporation (U.S.A.) contributes to a 401(k) savings plan for Messrs. Hall
and Sirianni. Cognos GmbH (Germany) contributes to Retirement Savings Plan
on behalf of Mr. Voogt. The amount of contribution for Mr. Hall was $3,618;
the balance of $594,150 is explained in note (6).
(5) These individuals are employed in Canada and paid in Canadian dollars. The
amounts shown in the above table are expressed in U.S. dollars using the
following weighted annual exchange rate for the Corporation's fiscal years
ending on the last day of February:
2002 -- C$1.00 = US$0.6391
2001 -- C$1.00 = US$0.6679
2000 -- C$1.00 = US$0.6789
(6) On April 10, 2002, Mr. Hall, who held the offices of Chief Operating
Officer and Senior Vice President, Worldwide Field Operations,
relinquished his executive positions. The amount indicated in the column
for "All Other Compensation" includes $594,150 paid to him by the
Corporation in respect of the amendment of his employment agreement (see
"Employment Agreements" below). On the same date, Mr. Rob Ashe was
appointed his successor as Chief Operating Officer.
(7) Mr. Voogt was employed in Europe and paid in Netherland Guilders. The
amounts shown in the above table are expressed in U.S. dollars using the
following weighted annual exchange rate for the Corporation's fiscal year
ending on the last day of February:
2002 -- NLG = US$0.3994
The amount indicated in the column for "Other Annual Compensation" consists
primarily of expatriate allowances.
(8) Mr. Ashe was appointed President and Chief Operating Officer on April 10,
2002, succeeding Mr. Zambonini who had been President of the Corporation
since 1993. Mr. Zambonini continues as Chief Executive Officer of the
Corporation. Mr. Ashe previously held the position of Senior Vice
President, Chief Corporate Officer.
68
Option/SAR Grants in Last Fiscal Year
The following table provides information with respect to stock option grants
by the Corporation to the named executive officers for the fiscal year ended
February 28, 2002.
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (3)
--------------------------------------------- -----------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise Expiration
Options Employees in Price per Date
Name Granted (1) Fiscal Year Share (2) (mm/dd/yy) 5% 10%
- ---- ----------- ------------ --------- ---------- -------------- ---------------
Renato Zambonini........ 150,000 3.1% $15.44 06/28/09 $ 1,105,857 $ 2,648,698
Terry Hall.............. 100,000 2.1% $14.18 09/25/09 $ 677,050 $ 1,621,639
Tony Sirianni (4)....... 60,000 1.2% $16.32 04/10/09 $ 467,581 $ 1,119,927
50,000 1.0% $14.18 09/25/09 $ 338,525 $ 810,819
Ad Voogt (4)............ 50,000 1.0% $16.32 04/10/09 $ 389,651 $ 933,273
75,000 1.6% $14.18 09/25/09 $ 507,787 $ 1,216,229
Robert G. Ashe.......... 150,000 3.1% $15.44 06/28/09 $ 1,105,857 $ 2,648,698
- -------
(1) Option awards are typically made following the release of the
Corporation's year-end results. During the course of the year other awards
may be granted in special circumstances. In all cases, option awards are
approved by the Human Resources & Compensation Committee, the
administrator of the Corporation's Stock Option Plans. Option awards to
employees typically vest on each of the successive four anniversaries of
the date of grant and expire on the eighth anniversary of the date of
grant.
(2) Exercise Price is equivalent to the market value, on The Toronto Stock
Exchange, of securities underlying options on the day preceding the date
of grant.
(3) These amounts represent the gain that may be realized upon exercise of the
options immediately prior to the expiration of their term (net of the
option exercise price but before taxes associated with the exercise)
assuming the specified compound rates of appreciation (5% and 10%) of the
Corporation's shares over the term of the options. These amounts are
calculated based on rules promulgated by the United States Securities and
Exchange Commission and do not reflect the Corporation's estimate of
future stock price increases. Actual gains, if any, on any stock option
exercises and resultant shareholdings are dependent on the timing of each
exercise and the future share performance. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected would be received by the individuals.
(4) The circumstances giving rise to the second award granted to Messrs.
Sirianni and Voogt are described in "Human Resources & Compensation
Committee Report on Executive Compensation -- Long-Term Incentives".
Aggregated Option Exercises and Fiscal Year-End Option Values
(All dollar amounts are in U.S. dollars)
The following table provides information on stock option exercises in the
fiscal year ended February 28, 2002, by the named executive officers and the
number and value of such officers' outstanding options as at February 28,
2002. Dollar values indicated represent the net of market value less exercise
price.
69
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options at
Shares Aggregate Options at Fiscal Year-End Fiscal Year End (1)
Acquired on Value ------------------------------ -------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ---------- ------------- -------------- ----------- -------------
Renato Zambonini........ -- -- 340,000 300,000 $4,956,803 $2,608,103
Terry Hall.............. 175,008 $2,361,698 20,000 260,000 Nil $2,267,820
Tony Sirianni........... 19,626 $ 127,968 15,000 181,000 Nil $1,477,624
Ad Voogt................ -- -- 103,502 174,000 $1,360,273 $1,565,951
Robert G. Ashe.......... 140,000 $2,312,282 89,167 237,500 $1,162,207 $2,241,235
- -------
(1) Value of unexercised in-the-money options is calculated based on the fair
market value of the underlying shares on the Nasdaq, minus the exercise
price, and assumes sale of the underlying shares on February 28, 2002, the
last trading day in fiscal 2002, at a price of $25.49, being the fair
market value of the Corporation's shares on such date.
Employment Agreements
The employment agreement of Mr. Zambonini provides, among other things, that
if his employment is terminated without cause, the Corporation will pay
severance in an amount equal to one year's salary at the time of termination
and if he is subsequently employed by another party for any portion of the
year following termination, the severance payment will be reduced on a pro-
rata basis for that portion. The employment agreement of Mr. Sirianni was
amended during the fiscal year to provide for a severance payment of eighteen
months at his current target compensation should his employment be terminated
without cause.
In December 2001, Mr. Terry Hall and the Corporation reached an agreement
regarding the relinquishment of his executive positions on or before May 1,
2002. After May 1, 2002, Mr. Hall will remain as an employee of the
Corporation through December 10, 2003 and will be assigned responsibilities
relating to strategic corporate initiatives. Mr. Hall has announced his
intention to retire after that date. He will be subject to post-employment
non-competition and non-solicitation covenants for a period of one year
following his departure from the Corporation. As consideration for the
foregoing, Mr. Hall was paid a lump sum equivalent to one year's salary at his
current target earnings ($594,150) and, subject to certain conditions, he will
earn an equivalent amount over the period May 1, 2002 to the date of his
departure. In addition, the Corporation agreed to award Mr. Hall 100,000 stock
options in 2001 as part of his regular executive officer option grant, vesting
equally in 2002 and 2003. Mr. Hall's current benefits package will be
maintained and he will be entitled to expense reimbursement should he relocate
to Canada prior to December 2003.
70
Long-Term Incentives
Long-term incentives are provided through stock options awarded under the
1997-2002 Stock Option Plan ("1997 Option Plan"), which was adopted by the
Board on April 9, 1997 and approved by shareholders on June 25, 1997.
Directors, officers, employees, and consultants of the Corporation are
eligible to participate in the 1997 Option Plan. Through the award of stock
options, the Corporation seeks to attract, reward and retain employees by
providing them with a means of sharing in the financial success created by
their combined efforts. In particular, the award of stock options to executive
officers seeks to provide them with an incentive to enhance shareholder value.
Options are granted on the basis of an individual's level of responsibility
and potential to contribute to the Corporation's future success.
Options to employees are awarded at the discretion of management and typically
vest equally on each of the successive four anniversaries of the date of grant
and expire on the eighth anniversary of the date of grant. Options to
directors typically vest in their entirety on the date of grant. All options
are priced at the market price of the Corporation's shares on The Toronto
Stock Exchange on the trading day preceding the date of grant.
On April 10, 2001, following the release of the Corporation's year-end
results, and on June 28, 2001, following the completion of the Committee's
annual review of executive compensation, the Committee awarded option grants
to certain key employees of the Corporation and its subsidiaries, including
certain of its executive officers, as set out in "Option/SAR Grants in Last
Fiscal Year".
Mr. Rob Ashe was appointed Chief Corporate Officer on April 5, 2001. In
recognition of the importance of his appointment and the additional
responsibilities associated with the position, Mr. Ashe was awarded an option
to acquire 150,000 shares under the 1997 Option Plan on June 28, 2001. One-
half of that option award vests on the second anniversary of the date of
grant, and the balance vests equally on the third and fourth anniversaries,
and expires on the eighth anniversary of that date.
On September 25, 2001, in recognition of his promotion to Senior Vice
President, Mr. Ad Voogt was awarded an option to acquire 25,000 shares,
vesting equally on each of the next four anniversaries of the date of grant,
and expiring on the eighth anniversary of that date. On the same date, Messrs.
Voogt and Sirianni were each awarded an option to acquire 50,000 shares. The
Committee based this latter award on the importance of maintaining executive
stability in the North American and European sales organizations during a
period of economic challenges and executive change. These options vest equally
on each of the next four anniversaries of the date of grant and expire on the
eighth anniversary of that date.
As of the Record Date, options to purchase 13,590,576 shares under the 1997
Option Plan, and predecessor plans, were outstanding at a weighted average
exercise price of $19.23.
Share Ownership
To promote better alignment of management and shareholder interests, in May
1999 the Corporation adopted share ownership guidelines for the Chief
Executive Officer, Senior Vice Presidents and Vice Presidents of the
Corporation ("Executives"). Executives are expected to accumulate and hold
shares having a market value at least equal to a multiple of their annual base
salary. That multiple increases with the level of responsibility of the
executive. Executives generally have three years from the time they become
subject to the guidelines to achieve the designated level of stock ownership.
Compliance with the guidelines, while voluntary, is strongly recommended.
Failure to comply could result in the reduction or suspension from
participation in the Corporation's incentive programs.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
71
The following table sets out information, as at May 3, 2002, with respect to
(a) all shareholders known by the Corporation to be beneficial owners of more
than 5% of its outstanding shares, and (b) share ownership, including the
right to acquire shares by exercise of stock options on or before July 3,
2002, by each nominee for director, each executive officer named in the
Summary Compensation Table, and all directors and executive officers as a
group.
Name and Address of Beneficial Owner
(1) Shares Beneficially Owned Percentage (2)
- ------------------------------------ ------------------------- --------------
Michael U. Potter (3)................. 9,582,594 10.75%
Sixty-Two John Street,
Ottawa, Ontario, Canada, K1M 1M3
The Windsor Trust (4)................. 9,546,290 10.71%
Royal Bank House, The Garrison,
St. Michael, Barbados
McLean Budden Ltd..................... 6,447,326 7.23%
145 King Street, Suite 225
Toronto, Ontario, Canada, M5H 1J8
Private Capital Management............ 5,636,124 6.32%
8889 Pelican Bay Boulevard
Naples, Florida, U.S.A. 34108
John E. Caldwell (5).................. 800 *
Douglas C. Cameron (6)................ 12,000 *
Pierre Y. Ducros (7).................. 20,000 *
Robert W. Korthals (8)................ 2,000 *
William Russell (9)................... Nil --
James M. Tory (10).................... 86,000 *
Renato Zambonini (11)................. 184,097 *
Terry Hall (12)....................... 90,246 *
Tony Sirianni (13).................... 20,000 *
Ad Voogt (14)......................... Nil --
Robert G. Ashe (15)................... 76,000 *
Directors and Executive Officers as a
group (19 persons) (2) (16).......... 1,735,579 1.95%
- -------
* Indicates less than 1%
(1) Unless otherwise indicated, the address for each beneficial owner is care
of Cognos Incorporated, 3755 Riverside Drive, Ottawa, Ontario, Canada, K1G
4K9
(2) Percentage ownership is calculated using as the denominator total shares
outstanding as of the Record Date plus the number of shares which the
person, entity, or group indicated has a right to purchase pursuant to
options currently exercisable or exercisable within 60 days, or on or
before July 3, 2002. Reference to shares that the persons named below have
the right to acquire through options includes options currently
exercisable or exercisable on or before July 3, 2002.
(3) Mr. Potter has sole voting power and sole investment power over 36,304
shares and, through his wholly-owned entities, has shared voting power and
shared investment power with The Windsor Trust over 9,546,290
72
shares. Mr. Potter is neither the settlor, the trustee, nor a beneficiary
of The Windsor Trust. Mr. Potter and The Windsor Trust each hold 50% of the
voting power of 3497704 Canada Inc. (Canada 2), 3539202 Canada Inc. (Canada
3), 3539211 Canada, Inc. (Canada 4), 3539229 Canada, Inc. (Canada 5),
3539334 Canada, Inc. (Canada 6), 3539393 Canada, Inc. (Canada 7), 3539423
Canada, Inc. (Canada 8), 3539130 Canada, Inc. (Canada 10), 3497801 Canada
Inc. (Canada 13), 3539504 Canada Inc. (Canada 14), 3539555 Canada Inc.
(Canada 15), and 3539571 Canada Inc. (Canada 16). Canada 2 through Canada
16 directly own, in the aggregate, 9,546,290 shares. Accordingly, Mr.
Potter may be deemed to beneficially own the common shares held by these
corporations. Mr. Potter has the right to acquire nil shares through
options.
(4) The Windsor Trust holds 50% of the voting power of Canada 2 through Canada
16. Canada 2 through Canada 16 directly own, in the aggregate, 9,546,290
shares. Therefore, The Windsor Trust may be deemed to beneficially own the
common shares held by these corporations. Since, Mr. Potter may also be
deemed to beneficially own these same shares (see note (3)), the 9,546,290
shares appear in the above table as beneficially owned by both The Windsor
Trust and Mr. Potter. Mr. Potter is neither the settlor, the trustee, nor
a beneficiary of The Windsor Trust.
(5) Mr. Caldwell has the right to acquire 25,000 shares through options.
(6) Mr. Cameron has the right to acquire 9,000 shares through options.
(7) Mr. Ducros has the right to acquire 15,000 shares through options.
(8) Mr. Korthals has the right to acquire 35,000 shares through options.
(9) Mr. Russell has the right to acquire 10,000 shares through options.
(10) Mr. Tory has the right to acquire 24,000 shares through options.
(11) Mr. Zambonini has the right to acquire 452,500 shares through options.
(12) Mr. Hall has the right to acquire 65,000 shares through options.
(13) Mr. Sirianni has the right to acquire 55,000 shares through options.
(14) Mr. Voogt has the right to acquire 134,752 shares through options.
(15) Mr. Ashe has the right to acquire 126,667 shares through options.
(16) The group is comprised of the individuals named in the Summary
Compensation Table on page 67, the remaining executive officers of the
Corporation, and those persons who were directors of the Corporation on
the Record Date. The amount shown includes 1,206,419 shares which the
directors and executive officers as a group have the right to acquire by
exercise of stock options granted under the Corporation's stock option
plans through July 3, 2002.
Statements contained in the table as to securities beneficially owned or
controlled by directors, officers, and 5% beneficial owners are, in each
instance, based upon information obtained from such directors, officers, and
beneficial owners.
ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
Until November 2001, Mr. Cameron was an Investment Advisor with RBC Dominion
Securities, a subsidiary of the Royal Bank of Canada, the Corporation's
principal banker. From time to time, Mr. Cameron acted on behalf of various
executives and other employees of the Corporation in his capacity as an
Investment Advisor. The Board had been apprised by Mr. Cameron of these
relationships and was of the view that neither their nature nor the amounts
involved are significant. Mr. Cameron retired from his occupation in November
2001.
While the law firm of Torys LLP, of which Mr. Tory is Chair Emeritus and
Counsel, provides legal services to the Corporation, neither the amount nor
dollar value of these services is significant when compared to the overall
amount or dollar value of legal services obtained by the Corporation. Mr. Tory
himself provides no legal services to the Corporation and has no direct or
indirect responsibility for any legal services provided by Torys LLP to the
Corporation. The Board does not consider that the amount paid to Mr. Tory in
respect of additional duties carried out as Chairman of the Board (see
73
"Compensation of Directors") impairs his status as an unrelated director as
that amount is payable in respect of his additional responsibilities and
duties as Chairman of the Board.
The Corporation may license its products and sell its services in the ordinary
course of business to companies for which members of the Corporation's Board
serve as executive officers. In fiscal 2002, the Corporation did business with
Geac Computer Corporation Limited, of which company Mr. Caldwell, a member of
the Audit Committee, was the Chief Executive Officer until December 2001. The
Corporation also did business with Hewlett-Packard Company, of which Mr.
Russell, also a member of the Audit Committee, is a Vice President, and the
General Manager of its Software and Solutions Organization division. The
amount received from either of Geac and Hewlett-Packard with respect to the
license of products and the purchase of services is not considered sufficient
to impair the independence of either Messrs. Caldwell or Russell.
It is the Corporation's policy that all transactions with related parties must
be approved by a majority of the independent and disinterested directors
considering a particular transaction and that a transaction be subject to
terms no less favorable to the Corporation than can be obtained at arm's
length.
74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The following documents are filed as part of this Report:
(a) 1.Financial Statement Schedule The Schedule supporting the Consolidated
Financial Statements that is filed as part of this report is as
follows:
Schedule II Valuation and qualifying accounts
Note: Schedules other than those listed are omitted as they are not
applicable, not required, or the information is included in the
consolidated financial statements or the notes thereto.
(a) 2.Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.0 Articles of Incorporation and Bylaws
3.1 --Articles of Incorporation and amendments thereto (filed as Exhibit
3.1 to Form 10-K filed for the year ended February 28, 1997)
3.2 --By-laws of the Corporation (filed as Exhibit 3.2 to Form 10-K
filed for the year ended February 28, 1997)
3.3 --Amended By-law of the Corporation
4.0 Instruments defining the rights of security holders, including
indentures
4.1 --Form of Share Certificate (filed as Exhibit 4.0 to Amendment No. 2
to Registration Statement No. 33-14245 on Form S-1 filed on July 1,
1987)
4.2 --Description of Common Shares contained in the Articles of
Incorporation and amendments thereto, (filed as Exhibit 3.1 to
Amendment No. 2 to Registration Statement No. 33-14245 on Form S-1,
filed on July 1, 1987)
continued....
75
EXHIBIT
NUMBER DESCRIPTION (continued)
------- -----------------------
10.0 Material Contracts
10.1 --Charge/Mortgage of Land between the Company and Campeau
Corporation, as tenants in common, and London Life Insurance
Company dated September 16, 1985 (filed as Exhibit 10.16 to
Registration Statement No. 33-14245 on Form S-1, filed on May 13,
1987)
10.2 --1988-1993 Stock Option Plan (Incentive and Non-Qualified), as
amended (filed as Exhibit 10.2 on Form 10-K, filed for year ended
February 28, 1989)
10.3 --Form of Incentive Stock Option Agreement under 1988-1993 Stock
Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.4
to Registration Statement No. 33-39892 on Form S-2 filed on April
9, 1991)
10.4 --Form of Non-Qualified Stock Option Agreement under 1988-1993
Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit
10.5 to Registration Statement No. 33-39892 on Form S-2 filed on
April 9, 1991)
10.5 --Letter Agreement between the Company and The Royal Bank of
Canada, dated July 5, 1990 (filed as Exhibit 10.8 to Registration
Statement No. 33-39892 on Form S-2 filed on April 9, 1991)
10.6 --1993-1998 Employee Stock Purchase Plan (filed as Exhibit 10.6 of
Form 10-K filed for the year ended February 29, 2000)
10.7 --1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed
as Exhibit 10.7 of Form 10-K filed for the year ended February
29, 2000)
10.8 --Form of Incentive Stock Option Agreement under 1993-1998 Stock
Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.8
of Form 10-K filed for the year ended February 29, 2000)
10.9 --Form of Non-Qualified Stock Option Agreement under 1993-1998
Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit
10.9 of Form 10-K filed for the year ended February 29, 2000)
10.10 --Amended and Restated 1988-1993 Stock Option Plan (Incentive and
Non-Qualified) (filed as Exhibit 10.12 of Form 10-Q filed for the
quarter ended August 31, 1996)
10.11 --Amended and Restated 1993-1998 Stock Option Plan (Incentive and
Non-Qualified) (filed as Exhibit 10.13 of Form 10-Q filed for the
quarter ended August 31, 1996)
10.12 --1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed
as Exhibit 4.1 to Registration Statement No. 333-8552 on Form S-
8, filed on March 31, 1998)
10.13 --Form of Incentive Stock Option Agreement under 1997-2002 Stock
Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.2
to Registration Statement No. 333-8552 on Form S-8, filed on
March 31, 1998)
10.14 --Form of Non-Qualified Stock Option Agreement under 1997-2002
Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit
4.3 to Registration Statement No. 333-8552 on Form S-8, filed on
March 31, 1998)
10.15 --Amended and Restated 1993-1999 Employee Stock Purchase Plan
(filed as Exhibit 10.17 of Form 10-K filed for the year ended
February 28, 1998)
10.16 --Amended and Restated Cognos Employee Stock Purchase Plan (filed
as Exhibit 10.16 of Form 10-Q filed for the quarter ended August
31, 1999)
continued....
76
EXHIBIT
NUMBER DESCRIPTION (continued)
------- -----------------------
10.17 --2002-2003 Stock Option Plan (Incentive and Non-Qualified)
10.18 --Amended and Restated Cognos Employee Stock Purchase Plan
10.19 --Amended Employee agreement -- Terry Hall.
10.20 --Employee release agreement -- Terry Hall.
11.0 Statements regarding Computation of Earnings Per Share
11.1 --Computation of Earnings Per Share in accordance with Canadian
Generally Accepted Accounting Principles
11.2 --Computation of Earnings Per Share in accordance with United
States Generally Accepted Accounting Principles
21.0 Subsidiaries of the Company
23.0 Consent of Ernst & Young LLP, Independent Chartered Accountants
99.0 Consolidated Financial Information in accordance with Canadian
Generally Accepted Accounting Principles
99.1 Management's Discussion and Analysis of the Corporation's
Financial Condition and Results of Operations -- Canadian
Supplement
99.2 Consolidated Financial Statements in accordance with Canadian
Generally Accepted Accounting Principles
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of
the fiscal year ended February 28, 2002.
(c) The Company hereby files as part of this Form 10-K, the exhibits listed in
Item 14(a)3, as set forth above.
(d) The Company hereby files as part of this Form 10-K, the schedules listed in
Item 14(a)2, as set forth above.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ Tom Manley May 24, 2002
_________________________________
Tom Manley
Senior Vice President, Finance and
Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ Renato Zambonini Chief Executive Officer, May 24, 2002
- ------------------------ and Director
Renato Zambonini
/s/ Tom Manley Senior Vice President, May 24, 2002
- ------------------------ Finance and
Tom Manley Administration and Chief
Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ James M. Tory Chairman of the Board May 24, 2002
- ------------------------
James M. Tory, Q.C.
/s/ John E. Caldwell Director May 24, 2002
- ------------------------
John E. Caldwell
/s/ Douglas C. Cameron Director May 24, 2002
- ------------------------
Douglas C. Cameron
/s/ Pierre Y. Ducros Director May 24, 2002
- ------------------------
Pierre Y. Ducros
/s/ Douglas J. Erwin Director May 24, 2002
- ------------------------
Douglas J. Erwin
/s/ Robert W. Korthals Director May 24, 2002
- ------------------------
Robert W. Korthals
/s/ Candy M. Obourn Director May 24, 2002
- ------------------------
Candy M. Obourn
/s/ William Russell Director May 24, 2002
- ------------------------
William Russell
78
Schedule II
COGNOS INCORPORATED
Valuation and Qualifying Accounts
(US$000s, U.S. GAAP)
Balance, Additions
beginning charged Balance, end
of period to income Deductions (1) of period
--------- --------- -------------- ------------
Allowance for Doubtful
Accounts
Fiscal Year Ended
February 29, 2000............ $ 7,637 $1,885 $ (788) $ 8,734
======= ====== ======= =======
February 28, 2001............ $ 8,734 $5,166 $(2,379) $11,521
======= ====== ======= =======
February 28, 2002............ $11,521 $3,373 $(6,086) $ 8,808
======= ====== ======= =======
Allowance for Inventory
Obsolescence
Fiscal Year Ended
February 29, 2000............ $ 164 $ 59 $ (64) $ 159
======= ====== ======= =======
February 28, 2001............ $ 159 $ 163 $ (202) $ 119
======= ====== ======= =======
February 28, 2002............ $ 119 $ 99 $ (66) $ 152
======= ====== ======= =======
- --------
(1) Represents amounts written off against the reserve, net of recoveries.
79
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
3.0 Articles of Incorporation and Bylaws *
3.1 --Articles of Incorporation and amendments thereto (filed *
as Exhibit 3.1 to Form 10-K filed for the year ended
February 28, 1997)
3.2 --By-laws of the Corporation (filed as Exhibit 3.2 to Form *
10-K filed for the year ended February 28, 1997)
3.3 --Amended By-law of the Corporation 82
4.0 Instruments defining the rights of security holders, *
including indentures
4.1 --Form of Share Certificate (filed as Exhibit 4.0 to *
Amendment No. 2 to Registration Statement No. 33-14245 on
Form S-1 filed on July 1, 1987)
4.2 --Description of Common Shares contained in the Articles of
Incorporation and amendments thereto, (filed as Exhibit
3.1 to Amendment No. 2 to Registration Statement No. 33-
14245 on Form S-1, filed on July 1, 1987)
10.0 Material Contracts *
10.1 --Charge/Mortgage of Land between the Company and Campeau *
Corporation, as tenants in common, and London Life
Insurance Company dated September 16, 1985 (filed as
Exhibit 10.16 to Registration Statement No. 33-14245 on
Form S-1, filed on May 13, 1987)
10.2 --1988-1993 Stock Option Plan (Incentive and Non- *
Qualified), as amended (filed as Exhibit 10.2 on Form 10-
K, filed for year ended February 28, 1989)
10.3 --Form of Incentive Stock Option Agreement under 1988-1993 *
Stock Option Plan (Incentive and Non-Qualified) (filed as
Exhibit 10.4 to Registration Statement No. 33-39892 on
Form S-2 filed on April 9, 1991)
10.4 --Form of Non-Qualified Stock Option Agreement under 1988- *
1993 Stock Option Plan (Incentive and Non-Qualified)
(filed as Exhibit 10.5 to Registration Statement No. 33-
39892 on Form S-2 filed on April 9, 1991)
10.5 --Letter Agreement between the Company and The Royal Bank *
of Canada, dated July 5, 1990 (filed as Exhibit 10.8 to
Registration Statement No. 33-39892 on Form S-2 filed on
April 9, 1991)
10.6 --1993-1998 Employee Stock Purchase Plan (filed as Exhibit *
10.6 of Form 10-K filed for the year ended February 29,
2000)
10.7 --1993-1998 Stock Option Plan (Incentive and Non-Qualified) *
(filed as Exhibit 10.7 of Form 10-K filed for the year
ended February 29, 2000)
10.8 --Form of Incentive Stock Option Agreement under 1993-1998 *
Stock Option Plan (Incentive and Non-Qualified) (filed as
Exhibit 10.8 of Form 10-K filed for the year ended
February 29, 2000)
10.9 --Form of Non-Qualified Stock Option Agreement under 1993- *
1998 Stock Option Plan (Incentive and Non-Qualified)
(filed as Exhibit 10.9 of Form 10-K filed for the year
ended February 29, 2000)
10.10 --Amended and Restated 1988-1993 Stock Option Plan *
(Incentive and Non-Qualified) (filed as Exhibit 10.12 of
Form 10-Q filed for the quarter ended August 31, 1996)
continued.....
80
EXHIBIT INDEX (continued)
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
10.11 --Amended and Restated 1993-1998 Stock Option Plan *
(Incentive and Non-Qualified) (filed as Exhibit 10.13 of
Form 10-Q filed for the quarter ended August 31, 1996)
10.12 --1997-2002 Stock Option Plan (Incentive and Non-Qualified) *
(filed as Exhibit 4.1 to Registration Statement No. 333-
8552 on Form S-8, filed on March 31, 1998)
10.13 --Form of Incentive Stock Option Agreement under 1997-2002 *
Stock Option Plan (Incentive and Non-Qualified) (filed as
Exhibit 4.2 to Registration Statement No. 333-8552 on Form
S-8, filed on March 31, 1998)
10.14 --Form of Non-Qualified Stock Option Agreement under 1997- *
2002 Stock Option Plan (Incentive and Non-Qualified)
(filed as Exhibit 4.3 to Registration Statement No. 333-
8552 on Form S-8, filed on March 31, 1998)
10.15 --Amended and Restated 1993-1999 Employee Stock Purchase *
Plan (filed as Exhibit 10.17 of Form 10-K filed for the
year ended February 28, 1998)
10.16 --Amended and Restated Cognos Employee Stock Purchase Plan *
(filed as Exhibit 10.16 of Form 10-Q filed for the quarter
ended August 31, 1999)
10.17 --2002-2003 Stock Option Plan (Incentive and Non-Qualified) 94
10.18 --Amended and Restated Cognos Employee Stock Purchase Plan 103
10.19 --Amended Employee agreement -- Terry Hall. 106
10.20 --Employee release agreement -- Terry Hall. 112
11.0 Statements regarding Computation of Earnings Per Share
11.1 --Computation of Earnings Per Share in accordance with 116
Canadian Generally Accepted Accounting Principles
11.2 --Computation of Earnings Per Share in accordance with 117
United States Generally Accepted Accounting Principles
21.0 Subsidiaries of the Company 118
23.0 Consent of Ernst & Young LLP, Independent Chartered 119
Accountants
99.0 Consolidated Financial Information in accordance with
Canadian Generally Accepted Accounting Principles
99.1 Management's Discussion and Analysis of the Corporation's 122
Financial Condition and Results of Operations -- Canadian
Supplement
99.2 Consolidated Financial Statements in accordance with 124
Canadian Generally Accepted Accounting Principles
*Incorporated by reference to document identified, which has been previously
filed.
81