Exhibit 99.2
COGNOS INCORPORATED
REPORT OF MANAGEMENT
The Corporation's management is responsible for preparing the accompanying
consolidated financial statements in conformity with Canadian 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)
125
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 Canadian and United States
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 Canadian 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 United States 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)
126
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(US$000s except share amounts, CDN 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....... 350,892 327,632 244,827
Research and development................... 74,614 67,264 53,548
Investment tax credits..................... (4,784) (6,690) (6,207)
Special charges............................ 7, 14 33,440 -- --
-------- -------- --------
Total operating expenses.................... 474,347 413,341 311,161
-------- -------- --------
Operating income............................ 16,955 82,311 74,479
Interest expense............................ (540) (786) (718)
Interest income............................. 8,922 12,386 7,454
-------- -------- --------
Income before taxes......................... 25,337 93,911 81,215
Income tax provision........................ 9 10,738 31,175 26,673
-------- -------- --------
Net income.................................. $ 14,599 $ 62,736 $ 54,542
Retained earnings at beginning of the
period..................................... 175,946 126,316 95,329
Repurchase of shares........................ (26,401) (13,106) (23,555)
-------- -------- --------
Retained earnings at end of the period...... $164,144 $175,946 $126,316
======== ======== ========
Net income per share 10
Basic...................................... $ 0.17 $ 0.72 $ 0.63
======== ======== ========
Diluted.................................... $ 0.16 $ 0.68 $ 0.62
======== ======== ========
Weighted average number of shares (000s) 10
Basic...................................... 87,807 87,324 85,972
======== ======== ========
Diluted.................................... 90,461 91,973 88,100
======== ======== ========
(See accompanying notes)
127
CONSOLIDATED BALANCE SHEETS
(US$000s, CDN 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 29,433 46,780
-------- --------
$530,735 $511,791
======== ========
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 6,328 16,402
-------- --------
230,180 211,071
-------- --------
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............................ 164,144 175,946
Accumulated other comprehensive income....... (15,226) (10,017)
-------- --------
300,555 300,720
-------- --------
$530,735 $511,791
======== ========
(See accompanying notes)
On behalf of the Board:
/s/ Douglas C. Cameron /s/ James M. Tory
Douglas C. Cameron, Director James M. Tory, Chairman
128
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(US$000s except share amounts, CDN GAAP)
Accumulated
Common Stock Other
---------------- Retained Comprehensive
Shares Amount Earnings Income Total
------ -------- -------- ------------- --------
(000s)
Balances, February 28,
1999...................... 86,362 $ 88,579 $ 95,329 $ (8,712) $175,196
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 71,774 (8,712) 167,285
------ -------- -------- -------- --------
Net income................. 54,542 54,542
Other comprehensive income
Foreign currency
translation adjustments.. 2,479 2,479
-------- -------- --------
Comprehensive income....... 54,542 2,479 57,021
------ -------- -------- -------- --------
Balances, February 29,
2000...................... 86,169 $104,223 $126,316 $ (6,233) $224,306
------ -------- -------- -------- --------
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
------ -------- -------- -------- --------
87,885 134,791 113,210 (6,233) 241,768
------ -------- -------- -------- --------
Net income................. 62,736 62,736
Other comprehensive income
Foreign currency
translation adjustments.. (3,784) (3,784)
-------- -------- --------
Comprehensive income....... 62,736 (3,784) 58,952
------ -------- -------- -------- --------
Balances, February 28,
2001...................... 87,885 $134,791 $175,946 $(10,017) $300,720
------ -------- -------- -------- --------
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
------ -------- -------- -------- --------
87,997 151,637 149,545 $(10,017) 291,165
------ -------- -------- -------- --------
Net income 14,599 14,599
Other comprehensive income.
Foreign currency
translation adjustments.. (5,209) (5,209)
-------- -------- --------
Comprehensive income....... 14,599 (5,209) 9,390
------ -------- -------- -------- --------
Balances, February 28,
2002...................... 87,997 $151,637 $164,144 $(15,226) $300,555
====== ======== ======== ======== ========
(See accompanying notes)
129
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, CDN GAAP)
Years Ended the Last Day
of February
----------------------------
2002 2001 2000
-------- -------- --------
Cash provided by (used in) operating activities
Net income...................................... $ 14,599 $ 62,736 $ 54,542
Non-cash items
Depreciation and amortization.................. 38,646 30,754 24,228
Amortization of deferred stock-based
compensation.................................. 3,341 1,233 693
Amortization of other deferred compensation.... 4,767 1,809 1,351
Deferred income taxes.......................... (15,917) (6,426) 4,756
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)
130
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 Canadian generally
accepted accounting principles (GAAP), applied on a consistent basis.
Consolidated financial statements prepared in accordance with United States
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 Canadian
Institute of Chartered Accountants (CICA) Handbook, Section 1650, 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
131
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 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
All derivatives, whether designated in hedging relationships or not, are
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.
132
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 the Canadian Institute of Chartered Accountants
Handbook section 3062 (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
133
not capitalize any costs of internally-developed computer 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, future 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 tax rates and laws that are expected to be in
effect when the differences reverse.
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 Life of
Leasehold improvements. 18,945 7,213 18,182 5,350 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.
134
The Corporation recorded $2,193,000 of goodwill in fiscal 2002, $23,421,000 of
acquired technology, 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 $19,540,000, $14,088,000, and
$11,681,000 in each of fiscal 2002, 2001, and 2000, respectively (see Note 5).
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 Acquisition
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 CICA Handbook section 3062 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
135
exceed $500,000 over the three years subsequent to the date of acquisition.
The Corporation has conditioned a portion of the 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 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 $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.
136
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
Acquired technology............ $ -- $ 5,000 $ -- $ 5,000
Other assets................... 3,906 450 814 5,170
------ ------- ------ -------
3,906 5,450 814 10,170
Liabilities assumed............. (2,502) (1,580) (922) (5,004)
Deferred tax credits............ -- (2,000) -- (2,000)
------ ------- ------ -------
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
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 fiscal 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.
137
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
====== ====== ======
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 leases 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.
138
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
====== ====== =======
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).
139
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).
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.
140
9. Income Taxes
Details of the income tax provision (recovery) are as follows: ($000s)
2002 2001 2000
------- ------- -------
Current
Canadian............................................ $16,274 $27,357 $16,880
Foreign............................................. 9,392 12,707 9,943
------- ------- -------
25,666 40,064 26,823
------- ------- -------
Deferred
Canadian............................................ (12,584) (5,727) 1,765
Foreign............................................. (2,344) (3,162) (1,915)
------- ------- -------
(14,928) (8,889) (150)
------- ------- -------
Income tax provision................................. $10,738 $31,175 $26,673
======= ======= =======
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.............................. $10,388 $41,320 $35,735
Tax rate differences................................ (8,622) (14,603) (10,422)
Net change in valuation allowance and other income
tax benefits earned................................ (544) 110 (2,680)
Non-deductible expenses and non-taxable income...... 7,607 2,101 2,876
Withholding tax on foreign income................... 1,759 1,774 1,179
Other............................................... 150 473 (15)
------- ------- -------
Reported income tax provision....................... $10,738 $31,175 $26,673
======= ======= =======
141
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
------ -------
Deferred tax assets
Net operating tax loss carryforwards.......................... $3,257 $ 3,822
Investment tax credits........................................ -- --
Deferred revenue.............................................. 2,213 2,811
Reserves...................................................... 3,126 2,742
Book and tax differences on assets............................ 1,155 681
Litigation settlement......................................... 6,404 --
Other......................................................... 200 (14)
------ --------
Total deferred tax assets...................................... 16,355 10,042
Valuation allowance for deferred tax assets.................... (2,357) (3,022)
------ --------
Net deferred tax assets........................................ 13,998 7,020
------ --------
Deferred tax liabilities
Book and tax differences on assets............................ 6,758 14,737
Reserves and allowances....................................... 5,342 4,760
Investment tax credits........................................ 1,822 3,925
------ --------
Total deferred tax liabilities................................. 13,922 23,422
------ --------
Net deferred income tax asset (liability)...................... $ 76 $(16,402)
====== ========
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 future 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 $24,990,000,
$41,232,000, and $37,215,000, 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.
142
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
143
trading day preceding the date of grant. Options were awarded to employees,
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
Under Canadian GAAP, the benefits of the Corporation's stock option and
purchase plans are not recognized as compensation expense. 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.
144
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
--------------------------------------- ----------------------
Weighted Weighted
Weighted Average Average Average
Range of Exercise 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.
145
Net Income per Share
On March 1, 2001 the Corporation adopted the recommendations issued by the
Canadian Institute of Chartered Accountants with respect to earnings per share
(Handbook section 3500). The section specifies the method of calculation,
presentation and disclosure for basic and diluted earnings per share. The
comparative financial statements have been restated to reflect these changes.
The effect of this change was not material in fiscal 2002. Diluted EPS for the
years ended February 28, 2001 and February 29, 2000 were restated to $0.68 and
$0.62, respectively.
The dilutive effect of stock options is excluded under the requirements of
Handbook section 3500 for calculating basic 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
------- ------- -------
Basic net Income per Share
Net income............................................ $14,599 $62,736 $54,542
======= ======= =======
Weighted average number of shares outstanding......... 87,807 87,324 85,972
======= ======= =======
Basic net income per share............................ $ 0.17 $ 0.72 $ 0.63
======= ======= =======
Diluted Net Income per Share
Net income............................................ $14,599 $62,736 $54,542
======= ======= =======
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.......................... $ 0.16 $ 0.68 $ 0.62
======= ======= =======
* 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.
146
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 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
======== ======== ========
147
* Revenues are attributed to countries based on location of customer
2002 2001
------- -------
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......................................................... $17,944 $24,232
U.S.A.......................................................... 11,489 22,548
------- -------
$29,433 $46,780
======= =======
13. New Accounting Pronouncements
In June 2001, the Canadian Institute of Chartered Accountants issued new
Handbook sections 1581, Business Combinations and 3062, 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. The principles implied within
SFAS 144 are consistent with Canadian GAAP.
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 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
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: $10,000,0000 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
148
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.
149
SELECTED CONSOLIDATED FINANCIAL DATA
Five-Year Summary
The following Selected Consolidated Financial Data has been derived from the
Corporation's consolidated financial statements, in accordance with Canadian
GAAP, 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, Canadian 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............ 350,892 327,632 244,827 178,295 143,493
Research and development... 74,614 67,264 53,548 42,274 33,530
Investment tax credits..... (4,784) (6,690) (6,207) (14,880) (9,432)
Special charges............ 33,440 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses.... 474,347 413,341 311,161 222,593 181,113
-------- -------- -------- -------- --------
Operating income............ 16,955 82,311 74,479 78,532 63,721
Interest expense............ (540) (786) (718) (527) (481)
Interest income............. 8,922 12,386 7,454 6,430 5,340
-------- -------- -------- -------- --------
Income before taxes......... 25,337 93,911 81,215 84,435 68,580
Income tax provision........ 10,738 31,175 26,673 26,313 19,638
-------- -------- -------- -------- --------
Net income.................. $ 14,599 $ 62,736 $ 54,542 $ 58,122 $ 48,942
======== ======== ======== ======== ========
Net income per share
Basic...................... $ 0.17 $ 0.72 $ 0.63 $ 0.66 $ 0.55
Diluted.................... $ 0.16 $ 0.68 $ 0.62 $ 0.65 $ 0.53
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
Balance Sheet Data (at end
of period)
Working capital............. $227,573 $197,673 $166,455 $123,343 $112,846
Total assets................ 530,735 511,791 396,098 311,235 246,334
Total debt.................. 0 32 2,176 2,612 2,457
Stockholders' equity........ 300,555 300,720 224,306 175,196 147,305
150