-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C4SdyeyP424TAyXyOmqUYKrpgEerQmxDxP23uf3btbOj0yMAE+mpbgBVmOiimbVu PN6Y/924h0mz9E953PB5sg== /in/edgar/work/20000526/0000950109-00-002356/0000950109-00-002356.txt : 20000919 0000950109-00-002356.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950109-00-002356 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000621 FILED AS OF DATE: 20000526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COGNOS INC CENTRAL INDEX KEY: 0000746782 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 980119485 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 033-72402 FILM NUMBER: 644683 BUSINESS ADDRESS: STREET 1: 3755 RIVERSIDE DR STREET 2: PO BOX 9707 CITY: OTTAWA ONTARIO CAN K BUSINESS PHONE: 6137381440 MAIL ADDRESS: STREET 1: 3755 RIVERSIDE DR STREET 2: POST OFFICE BOX 9707 CITY: ONTARIO DEF 14A 1 NOTICE AND PROXY COGNOS INCORPORATED This Compliance Document provides information to the shareholders of Cognos Incorporated in advance of its fiscal 2000 Annual Meeting of Shareholders. The documentation consists of: A. The Notice of Meeting and Proxy Statement (with Proxy Card enclosed) for Page (i) and 1 the Corporation's Annual Meeting of Shareholders to be held June 21, 2000 B. Consolidated Financial Information in accordance with Canadian generally Page 24 accepted accounting principles for the Corporation's fiscal year ended February 29, 2000 (supplemental to the Corporation's 2000 Annual Report)
[LOGO] A. NOTICE OF MEETING & PROXY STATEMENT 3755 Riverside Drive, P.O. Box 9707, Station T, Ottawa, Ontario, Canada, K1G 4K9 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN THAT the Annual Meeting ("Meeting") of Shareholders of Cognos Incorporated ("Corporation") will be held at the Tudor Reception Hall, 3750 Bowesville Road, Ottawa, Ontario, Canada, on Wednesday, June 21, 2000, at 3:30 p.m., for the following purposes: l. to receive the consolidated financial statements of the Corporation in accordance with both United States and Canadian generally accepted accounting principles for the fiscal year ended February 29, 2000, and the reports of the auditors thereon, 2. to elect directors for the ensuing year, 3. to appoint auditors and authorize the directors to fix their remuneration, 4. to transact such other business as may properly come before the meeting and any adjournment thereof. This Notice is accompanied by a form of proxy; a Proxy Statement; the Annual Report of the Corporation, including financial information in accordance with United States (U.S.) generally accepted accounting principles; and financial information in accordance with Canadian generally accepted accounting principles for the fiscal year ended February 29, 2000. Shareholders of record at the close of business on May 5, 2000 are entitled to receive notice of the Meeting. They may vote at the Meeting unless their shares are transferred and the transferee: (a) produces a certificate(s) representing the transferred shares, or otherwise establishes ownership of the transferred shares, and (b) has demanded in writing, at least ten days before the Meeting, to be included on the list of the Corporation's shareholders entitled to vote at the Meeting. DATED at Ottawa this 25th day of May, 2000. By Order of the Board of Directors /s/ James M. Tory James M. Tory Chairman of the Board - -------------------------------------------------------------------------------- If you cannot attend the meeting in person, please complete, sign, date, and return the enclosed form of proxy in the envelope provided as soon as possible in order to ensure that your shares are represented at the Meeting. - -------------------------------------------------------------------------------- i PROXY STATEMENT Table of Contents
PAGE ---- Solicitation of Proxies........................................................................ 1 Appointment and Revocation of Proxies.......................................................... 1 Voting of Proxies.............................................................................. 2 Shareholder Proposals.......................................................................... 3 Voting Shares and Principal Holders Thereof.................................................... 3 Directors...................................................................................... 3 Security Ownership of Management and Principal Holders......................................... 9 Executive Compensation......................................................................... 11 Appointment of Auditors........................................................................ 17 Other Matters.................................................................................. 18 Expenses and Solicitation...................................................................... 18 Approval by Board of Directors................................................................. 18 Annex A - Alignment with TSE Corporate Governance Guidelines.................................. 19 Annex B - Alignment with SEC Audit Committee Rules............................................ 23
ii [LOGO OF COGNOS] 3755 Riverside Drive, Ottawa, Ontario, Canada, K1G 4K9 PROXY STATEMENT (First mailed to Shareholders on May 26, 2000) Solicitation of Proxies The information contained in this Proxy Statement is furnished in connection with the solicitation by the management of Cognos Incorporated ("Corporation") of proxies to be used at the Annual Meeting of Shareholders ("Meeting") of the Corporation to be held on June 21, 2000, at 3:30 p.m. at the Tudor Reception Hall, 3750 Bowesville Road, Ottawa, Ontario, Canada, or at any adjournment of the Meeting. The solicitation of proxies will be made primarily by mail but proxies may also be solicited directly by officers of the Corporation. The costs of solicitation will be borne by the Corporation. The specific purposes of the meeting are set out in the Notice of Meeting accompanying this Proxy Statement. The information contained in this Proxy Statement is given as at May 25, 2000, except where otherwise noted. All share and per-share amounts in this Proxy Statement have been adjusted for the two-for-one stock split approved by the Board of Directors on April 6, 2000, which was paid by way of dividend on April 27, 2000 to shareholders of record on April 20, 2000. All dollar amounts in this Proxy Statement are in United States dollars unless otherwise stated. Foreign currency amounts have been translated into United States dollars using the appropriate exchange rates for United States currency, as reported by the Bank of Canada. APPOINTMENT AND REVOCATION OF PROXIES The persons named in the enclosed form of proxy ("Proxy Form") are either directors or officers of the Corporation. Every shareholder has the right to appoint another person (who need not be a shareholder) to represent the shareholder at the Meeting and may do so either by inserting that person's name in the blank space provided in the Proxy Form or by completing another proper form of proxy. In either case, to be valid, the completed proxy must be delivered to: (a) the Corporation's transfer agent, Montreal Trust Company of Canada, 151 Front Street West, 8th Floor, Toronto, Ontario, Canada, M5J 2N1, in the addressed envelope accompanying this Proxy Statement, or (b) to the Secretary of the Corporation, no later than forty-eight hours preceding the Meeting or any adjournment of the Meeting. Only registered holders of common shares of the Corporation, or the person they appoint as their proxies, are permitted to attend and vote at the Meeting. However, in many cases, common shares of the Corporation beneficially owned by a holder (a "Non-Registered Holder") are registered either (a) in the name of an intermediary ("Intermediary") that the Non-Registered Holder deals with in respect of the shares; or (b) in the name of a clearing agency. 1 In accordance with the requirements of National Policy Statement No. 41 of the Canadian Securities Administrators, the Corporation has distributed copies of the Notice of Meeting, this Proxy Statement, the Proxy Form and the 2000 annual report (which includes management's discussion and analysis) (collectively, the "Meeting materials") to the clearing agencies and Intermediaries for distribution to Non-Registered Holders who have not waived the right to receive them. Generally, Non-Registered Holders who have not waived the right to receive Meeting materials will either (c) be given a voting instruction form which must ------ be completed and signed by the Non-Registered Holder in accordance with the instruction on the form (which may, in some cases, permit the completion of the voting instruction form by telephone), or (d) be given a proxy which has already been signed by the Intermediary (typically by a facsimile, stamped signature), and which is otherwise uncompleted except that it is restricted as to the number of shares beneficially owned by the Non-Registered Holder. This latter form of proxy need not be signed by the Non-Registered Holder. The Non-Registered Holder who wishes to submit a proxy should properly complete the form of proxy and deposit it with Montreal Trust Company of Canada, 151 Front Street West, 8th Floor, Toronto, Ontario, Canada M5J 2N1 as described above. These procedures permit Non-Registered Holders to direct the voting of the shares they beneficially own. If a Non-Registered Holder who receives either a proxy or a voting instruction form wishes to attend and vote at the Meeting in -- person (or have another person attend and vote on behalf of the Non-Registered - ------ Holder), the Non-Registered Holder should strike out the names of the persons named in the form of proxy and insert the Non-Registered Holder's (or such other person's) name in the blank space provided or, in the case of a voting instruction form, follow the corresponding directions on the form. In either case, Non-Registered Holders should carefully follow the instructions of their Intermediaries. A registered shareholder who has given a proxy may revoke the proxy by: (e) completing and signing a proxy bearing a later date and depositing it with Montreal Trust Company of Canada as described above; or (f) depositing an instrument in writing executed by the shareholder or by the shareholder's attorney authorized in writing: (i) at the registered offices of the Corporation at any time up to and including the last business day preceding the day of the Meeting, or any adjournment of the Meeting, at which the proxy is to be used, or (ii) with the chairman of the Meeting prior to the commencement of the Meeting on the day of the Meeting or any adjournment of the Meeting; or (g) in any other manner permitted by law. A Non-Registered Holder may revoke a voting instruction form or a waiver of the right to receive Meeting materials and to vote given to an Intermediary at any time by written notice to the Intermediary, except that an Intermediary is not required to act on a revocation of a voting instruction form or of a waiver of the right to receive materials and to vote that is not received by the Intermediary at least seven days prior to the Meeting. VOTING OF PROXIES The persons named in the Proxy Form will vote the shares in respect of which they are appointed proxy in accordance with the direction of the shareholder appointing them. In the absence of any direction, the shares will be voted FOR the election of directors and FOR the appointment of 2 auditors and the authorization of the directors to fix their remuneration, as described in this Proxy Statement. The management of the Corporation knows of no amendment to the matters referred to in the Notice of Meeting or of any other business that will be presented to the Meeting. If any amendment or other business is properly brought before the Meeting, the persons named in the Proxy Form are given discretionary authority to vote on any amendment or on any other business in accordance with their judgment. Shareholder Proposals Proposals by shareholders intended to be presented at the next Annual Meeting of Shareholders, and considered by management, must be received by the Corporation, c/o The Secretary, Cognos Incorporated, 3755 Riverside Drive, P. O. Box 9707, Station T, Ottawa, Ontario, Canada, K1G 4K9, no later than March 30, 2001, for inclusion in the Corporation's Proxy Statement and form of proxy relating to that meeting. VOTING SHARES AND PRINCIPAL HOLDERS THEREOF The authorized capital of the Corporation consists of an unlimited number of common shares ("shares") of which 87,366,527 shares were issued and outstanding as of May 5, 2000 ("Record Date"). Only shareholders of record at the close of business on the Record Date are entitled to receive notice of, attend and vote at the Meeting. They may vote at the Meeting unless their shares are transferred and the transferee: (a) produces a certificate(s) representing the transferred shares, or otherwise establishes ownership of the transferred shares, and (b) has demanded in writing, at least ten days before the Meeting, to be included on the list of the Corporation's shareholders entitled to vote at the Meeting. Shareholders are entitled to one vote for each share registered in their respective names. The principal shareholders of the Corporation are set out in the table appearing in "SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL HOLDERS". Directors will be elected and auditors will be appointed by a majority of shares represented and entitled to vote at the Meeting. DIRECTORS Election of Directors The Articles of the Corporation provide for a Board of Directors ("Board") of not less than three and not more than twelve directors to be elected annually. The number of directors to be elected at the Meeting is eight. Each director elected will hold office until the next annual meeting or until a successor is duly elected, or appointed, unless the position is earlier vacated. The persons named in the Proxy Form will (unless authority to vote is withheld) vote in favor of the election of the eight nominees listed below, or if one of those nominees is unable to serve, or for good cause will not serve (an event that management has no reason to believe will occur), the persons named in the Proxy Form reserve the right to fix the number of directors at less than eight or to vote for a substitute at their discretion. The following table sets out the name and age of each person nominated for election as a director; the period of service as a director; the principal occupation, business or employment of the nominee during the 3 last five years; all other positions with the Corporation (or its significant subsidiaries) now held by the nominee, if any; the name of any publicly-traded corporation of which the nominee is a director, and the number of common shares beneficially owned or over which control or direction is exercised and the number of deferred share units held by each of them.
- ------------------------------------------------------------------------------------------------------------------------ Name and Age Director Shares Beneficially Deferred Share Principal Occupation Since Owned or Controlled Units Held - ------------------------------------------------------------------------------------------------------------------------ John E. Caldwell (50) + (S) 2000 800 Nil Private Investor since October 1999. President and Chief Executive Officer, CAE Inc., a provider of civil and military flight simulation and control systems and other advanced technologies for the aerospace, defence and forestry sectors, from June 1993 to October 1999. Director of Stelco Inc. - ------------------------------------------------------------------------------------------------------------------------ Douglas C. Cameron (61) * + 1983 12,000 1,114.65 Investment Advisor, RBC Dominion Securities Inc., an investment dealer, since October 1993. President, Noranda Enterprise Limited from May 1983 to March 1993. - ------------------------------------------------------------------------------------------------------------------------ Pierre Y. Ducros (61) ++ 1986 20,000 955.41 Private Investor since June 1996. Chairman and Chief Executive Officer, DMR Group Inc. from February 1973 to June 1996. Director of Alliance Atlantis Communication Inc., BAE Systems Canada Inc., BCE Emergis, National Bank Financial, NovAtel Inc. and The Manufacturers Life Insurance Company. - ------------------------------------------------------------------------------------------------------------------------ Douglas J. Erwin (47) ++ 1998 Nil 955.41 President and Chief Executive Officer, PentaSafe, Inc., an auditing and security software company, since April 1998. Chief Operating Officer, BMC Software, Inc. from April 1994 to October 1997. - ------------------------------------------------------------------------------------------------------------------------ Robert W. Korthals (66) ++ 1997 2,000 1,114.65 Chairman, Ontario Teachers Pension Plan Board since January 2000 and Chairman, Co-Steel Inc., a minimill steel producer, since June 1997. Chairman, North American Life Assurance Company from April 1995 to December 1995. Director of Global Telecom Split Shares Corp., Jannock Properties Limited, MCM Split Shares Corp., Premium Income Corporation, Rogers Communications Inc. and Suncor Energy Inc. - ------------------------------------------------------------------------------------------------------------------------
4 - ------------------------------------------------------------------------------------------------------------------------ Candy M. Obourn (50) + (S) 1999 Nil Nil President, Document Imaging and Senior Vice President, Eastman Kodak Company, a photographic products and imaging company, since April 1998. President, Document Imaging and Vice President from October 1993 to March 1998. - ------------------------------------------------------------------------------------------------------------------------ James M. Tory, Q.C. (70) *+ 1982 89,000 4,140.13 Chairman of the Board of Directors. Chair Emeritus and Counsel, Torys, Barristers & Solicitors. Director of Inmet Mining Corporation and Goldlist Properties Inc. - ------------------------------------------------------------------------------------------------------------------------ Renato (Ron) Zambonini (53) 1994 257,072 N/A President and Chief Executive Officer since September 1995. - ------------------------------------------------------------------------------------------------------------------------
* Member of the Corporate Governance Committee. + Member of the Audit Committee. ++ Member of the Human Resources & Compensation Committee. (s) Candy M. Obourn and John E. Caldwell were appointed directors on December 21, 1999 and March 14, 2000, respectively, pursuant to the powers granted to the Board in the Articles of the Corporation. Statement of Corporate Governance Practices The Toronto Stock Exchange ("TSE") requires that the Corporation disclose its approach to corporate governance and relate the corporate governance practices of the Corporation to specific guidelines. These guidelines, together with a brief description of the alignment of the Corporation's practices with them, are set out in Annex A to this Proxy Statement. The Corporation is satisfied that it complies with the recommended guidelines. Board Meetings and Composition The Board has five regularly scheduled meetings each year - following the end of each fiscal quarter and a strategic planning session. Additional meetings may be convened by the Board as required. The Board met nine times during the recently completed fiscal year. Each director attended more than 75% of the total number of meetings of the Board in that period. All nominees for director, except Mr. Zambonini, are unrelated and outside directors. The Corporation does not have a significant shareholder. A significant shareholder is a shareholder with the ability to exercise a majority of the votes for the election of the Board of Directors. Board Committees The Board has established three standing committees: the Corporate Governance Committee, the Audit Committee, and the Human Resources & Compensation Committee. The Board has adopted written mandates for each committee. 5 Corporate Governance Committee The Corporate Governance Committee is responsible for making recommendations to the Board with respect to: (a) all matters relating to the stewardship role of the Board in respect of the management of the Corporation, (b) Board size, composition, and orientation, (c) Board compensation, and (d) procedures necessary to allow the Board to function independently of management. This committee is also responsible for reporting to the Board with respect to appropriate candidates for nomination to the Board, and for evaluating the performance of the Board. Although this committee did not meet during the recently completed fiscal year, the matters for which it is responsible were undertaken by the Board as a whole. This committee is currently composed of the following directors: Mr. Tory (Chairman) and Mr. Cameron. Each of them is an unrelated director. Audit Committee The Audit Committee is responsible for supervising the audit of the Corporation's financial records as well as establishing policies and procedures concerning the Corporation's financial reporting, internal accounting, financial controls, management information, and risk management. The committee is responsible for reviewing quarterly financial statements and the annual financial statements prior to their approval by the full Board and therefore meets not less frequently than each fiscal quarter in conjunction with each quarterly Board meeting. The committee meets with the auditors of the Corporation on a regular basis without any members of management present. The Audit Committee met four times during the most recently completed fiscal year. This committee is currently composed of the following directors: Mr. Cameron (Chairman), Mr. Caldwell, Ms. Obourn and Mr. Tory. Each of them is an unrelated director. The U.S. Securities and Exchange Commission has recently adopted new rules regarding the composition and operation of the Audit Committee. These rules are designed to improve the qualifications of audit committee members and the quality of financial information being given to the investing public. The rules are set out in Annex B to this Proxy Statement, together with a brief description of the alignment of the Corporation's practices with the rules. The Corporation has reviewed the requirements under the new rules and is satisfied that it is in compliance with their requirements. Human Resources & Compensation Committee The Human Resources & Compensation Committee reviews and recommends to the Board the compensation for the Chief Executive Officer. It also reviews and approves the compensation for other executive officers based, in part, on the recommendations of the Chief Executive Officer. In addition, the committee reviews and approves significant personnel policies of the Corporation, including incentive programs, compensation, benefits, and overall compensation policies. The committee met once during the most recently completed fiscal year. This committee is currently composed of unrelated directors, namely: Mr. Korthals (Chairman), Mr. Ducros and Mr. Erwin. Compensation of Directors During fiscal 2000 the Board researched the compensation practices of a broad range of comparable companies in both Canada and the United States and determined that the compensation regime for directors should be changed to better reflect industry practices. Effective June 22, 1999, the annual retainer payable to a non-employee director has been C$15,000 and an additional annual retainer of C$2,500 for each non-employee director who chairs a committee of the Board. The additional annual compensation payable to the Chairman is C$50,000. In addition, each non-employee director receives meeting fees of C$1,250 for attendance at each Board and Committee meeting (including telephone meetings) of which the director is a member. Directors are compensated for duties outside those normally undertaken by directors at the rate of C$2,000 per day. Employees of the Corporation serving on the Board do not receive directors' compensation. 6 A deferred share plan for non-employee directors ("DSP") was adopted by the Board on April 6, 1999. Under the DSP, non-employee directors may receive all or part of their annual retainer fee in cash, options or deferred share units. A deferred share unit ("DSU") is a unit, equivalent in value to a common share of the Corporation, credited by means of a bookkeeping entry in the books of the Corporation to an account in the name of the non-employee director and payable only at the end of his or her mandate on the Board in cash or by way of common shares purchased on the open market, based on the market value of the common shares at that time. DSUs represent the variable (at risk) component of the directors' compensation. Additional compensation consisting of deferred share units or an option award under the DSP may be awarded to non-employee directors as the Board deems appropriate. The total cash compensation paid to non-employee directors in fiscal 2000 for duties performed during the fiscal year was $95,385. The table at page 4 sets out the number of DSUs held by each nominee for director. No amounts were paid for duties outside those normally undertaken by directors. Non-executive directors hold stock options that are currently exercisable or exercisable within 60 days from the Record Date ("Exercisable Optioned Shares") as indicated in the notes to the table appearing in "SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL HOLDERS". The following table sets out, for each of the non-executive directors, the grant date and exercise price for those Exercisable Optioned Shares. Unless otherwise noted, all option grants vest immediately on the date of grant, continue as long as the grantee is a director and expire on the eighth anniversary of the date of grant.
- -------------------------------------------------------------------------------------------------------------------------------- Grant Date / April 15, April 23, October 8, April 14, Sept. 28, June 25, Dec. 21, March 14, Exercise 1996 / 1997 / 1997 / 1998 / 1998 / 1999 / 1999 / 2000 / Price/(1)/ $ 9.43 $ 11.35 $ 12.14 $ 14.09 $ 8.33 $ 10.75 $ 20.18 $ 33.80 Total - -------------------------------------------------------------------------------------------------------------------------------- J. Caldwell 20,000 20,000 D. Cameron 9,000/(2)/ 3,000 3,000 4,000 19,000 P. Ducros 9,000/(2)/ 3,000 3,000 4,000 19,000 D. Erwin 20,000 4,000 24,000 R. Korthals 15,000/(3)/ 3,000 3,000 4,000 25,000 C. Obourn 20,000 20,000 J. Tory 9,000/(2)/ 3,000 3,000 4,000 19,000 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL 27,000 15,000 12,000 12,000 20,000 20,000 20,000 20,000 146,000 - --------------------------------------------------------------------------------------------------------------------------------
(1) Options are granted in Canadian dollars. Exercise price shown in U.S. dollars is quoted using the historical rate of exchange as at the date of grant. (2) Options expire on the seventh anniversary of the date of grant. (3) Options vest in equal installments on each of the four successive anniversaries of the date of grant. All stock options referred to above were awarded under the Stock Option Plans described under "Human Resources & Compensation Committee Report on Executive Compensation - Long-Term Incentives". Decisions Requiring Board Approval In addition to those matters which must by law be approved by the Board, management is also required to seek Board approval for any disposition, commitment, venture, or significant expenditure in either monetary or business terms. Changes in senior management are reviewed by the Human Resources & Compensation Committee, and then referred to the Board. 7 Expectations of Management The Board expects management of the Corporation to effectively manage its business in accordance with the strategic and policy directions approved by the Board. Management is expected to fully inform the Board of its performance in relation to those plans and any events that may affect those plans, and propose to the Board remedial or alternate actions. The Corporate Governance Committee will continue to review the corporate governance practices of the Board and recommend to the Board any changes that it deems necessary. Shareholder Feedback Inquiries from shareholders are responded to by the Vice President, Corporate Relations, the Secretary or another appropriate officer of the Corporation. The Corporation maintains regular communications with the financial and investment community through industry analyst briefings by the Chief Executive Officer and the Chief Financial Officer on at least a quarterly basis. Directors' and Officers' Indemnification The Corporation indemnifies each director and officer of the Corporation against liability resulting from any civil, criminal or administrative action or proceeding to which that person is made a party by reason of being, or having been, a director or officer of the Corporation (including an action by or on behalf of the Corporation), as long as that person (a) acted honestly and in good faith with a view to the best interests of the Corporation, and (b) had reasonable grounds for believing that his or her conduct was lawful in any criminal or administrative proceeding that is enforced by a monetary penalty. During the year ended February 29, 2000, the Corporation carried directors' and officers' liability insurance coverage with an aggregate policy limit of $13.8 million (C$20 million) with a $5.2 million (C$7.5 million) deductible. The annual premium for this coverage, amounting to $44,754 (C$65,908), was paid by the Corporation. 8 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL HOLDERS The following table sets out information, as at May 5, 2000, 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 4, 2000, by each nominee for director, each executive officer named in the Summary Compensation Table, and all directors and executive officers as a group.
- --------------------------------------------------------------------------------------------------- Name Shares Beneficially Owned Percentage/(1)/ - --------------------------------------------------------------------------------------------------- Michael U. Potter /(2)/ 11,668,468 13.2% Sixty-Two John Street, Ottawa, Ontario, Canada, K1M 1M3 Private Capital Management, Inc. 9,280,196 10.5% 3003 Tamiami Trail North, Naples, FLA, U.S.A. 34103 Wellington Management Company, LLC /(3)/ 6,687,574 7.6% 75 State Street, Boston, MA, U.S.A. 02109 John E. Caldwell /(4)/ 20,800 * Douglas C. Cameron /(5)/ 31,000 * Pierre Y. Ducros /(6)/ 39,000 * Douglas J. Erwin /(7)/ 24,000 * Robert W. Korthals /(8)/ 27,000 * Candy M. Obourn /(9)/ 20,000 * James M. Tory /(10)/ 108,000 * Renato Zambonini /(11)/ 414,572 * Terry Hall /(12)/ 235,570 * Robert A. Engels /(13)/ 32,552 * Alan Rottenberg /(14)/ 157,062 * Donnie M. Moore /(15)/ 106,984 * Directors and Executive Officers as a group 1,576,989 1.8% (15 persons) (1) /(16)/ - ---------------------------------------------------------------------------------------------------
* Indicates less than 1% (1) 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 4, 2000. 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 4, 2000. 9 (2) Mr. Potter beneficially owns or controls 11,659,468 shares and has the right to acquire 9,000 shares through options. (3) Wellington Management Company, LLC is an investment advisor holding the shares on behalf of investment advisory clients and disclaims any pecuniary interest in such shares. (4) Mr. Caldwell has the right to acquire 20,000 shares through options. (5) Mr. Cameron has the right to acquire 19,000 shares through options. (6) Mr. Ducros has the right to acquire 19,000 shares through options. (7) Mr. Erwin has the right to acquire 24,000 shares through options. (8) Mr. Korthals has the right to acquire 25,000 shares through options. (9) Ms. Obourn has the right to acquire 20,000 shares through options. (10) Mr. Tory has the right to acquire 19,000 shares through options. (11) Mr. Zambonini has the right to acquire 157,500 shares through options. (12) Mr. Hall has the right to acquire nil shares through options. (13) Mr. Engels has the right to acquire 32,496 shares through options. (14) Mr. Rottenberg has the right to acquire 138,328 shares through options. (15) Mr. Moore has the right to acquire 93,000 shares through options. (16) The group is comprised of the individuals named in the Summary Compensation Table on page 11, the remaining executive officers of the Corporation, and those persons who were directors of the Corporation on the Record Date. The amount shown includes 843,441 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 4, 2000. 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. 10 EXECUTIVE COMPENSATION 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 29, 2000, 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)/ 2000 $254,585 $375,938 --- 150,000 $ 4,583 President and Chief 1999 $230,049 $391,083 --- 0 --- Executive Officer 1998 $228,775 $200,902 --- 0 --- Terry Hall 2000 $281,250 $518,036 --- 200,000 $ 1,708 Senior Vice President, 1999 $235,000 $440,740 --- 0 $ 531 Operations and Chief 1998 $220,000 $287,194 --- 0 $ 2,791 Operating Officer Robert A. Engels /(6)/ 2000 $244,826 $199,907 --- 30,000 $ 8,737 Senior Vice President, 1999 $233,773 $202,750 --- 0 $11,118 European Operations 1998 $208,822 $ 95,719 --- 0 $11,013 Alan Rottenberg /(5)/ 2000 $159,540 $156,078 --- 100,000 $ 3,708 Senior Vice President, 1999 $146,698 $204,044 --- 0 $ 3,684 e-Business Intelligence 1998 $142,539 $103,127 --- 40,000 $ 3,782 Applications Unit Donnie M. Moore /(5)(7)/ 2000 $152,751 $157,721 --- 100,000 $ 3,793 Senior Vice President, 1999 $150,032 $170,036 --- 0 $ 3,684 Finance & Administration 1998 $151,804 $ 83,095 $32,580 0 $ 3,849 and Chief Financial Officer - -------------------------------------------------------------------------------------------------------------------
(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. (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, Rottenberg and Moore. Cognos Limited (U.K.) contributes to the Cognos Limited Executive Retirement Scheme for Mr. Engels, and Cognos Corporation (U.S.A.) contributes to a 401(k) savings plan for Mr. Hall. 11 (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: 2000 -- C$1.00 = US$0.6789 1999 -- C$1.00 = US$0.6668 1998 -- C$1.00 = US$0.7128 (6) Mr. Engels is employed in Europe and paid in pounds sterling. 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: 2000 -- UK(Pounds)1.00 = US$1.6107 1999 -- UK(Pounds)1.00 = US$1.6527 1998 -- UK(Pounds)1.00 = US$1.6443 (7) In fiscal 2000 and fiscal 1999 the entire bonus amount was contributed on behalf of Mr. Moore to a retirement arrangement; for fiscal 1998 the bonus amount includes $61,144 which was contributed to a retirement arrangement. The fiscal 1998 amount of $32,580 represents a non-recurring payment for settlement of expatriate tax differences with Canada Customs and Revenue Agency (formerly Revenue Canada) for tax years 1990-1993. 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 29, 2000.
- ----------------------------------------------------------------------------------------------------------------------- Individual Grants -------------------------------------------------------------- Potential Realizable Value at Number of % of Total Assumed Annual Rates of Securities Options Stock Price Appreciation for Underlying Granted to Exercise Expiration Option Term /(3)/ Options Employees in Price per Date --------------------------------------- Name Granted /(1)/ Fiscal Year Share/(2)/ (mm/dd/yy) 5% 10% - ----------------------------------------------------------------------------------------------------------------------- Renato Zambonini 150,000 5.4% $10.82 4/12/2007 $774,584 $1,855,247 - ----------------------------------------------------------------------------------------------------------------------- Terry Hall /(4)/ 100,000 3.6% $10.82 4/12/2007 $516,389 $1,236,831 100,000 3.6% $17.43 11/13/2007 $832,133 $1,993,087 - ----------------------------------------------------------------------------------------------------------------------- Robert A. Engels 30,000 1.1% $10.82 4/12/2007 $154,917 $ 371,049 - ----------------------------------------------------------------------------------------------------------------------- Alan Rottenberg 100,000 3.6% $10.82 4/12/2007 $516,389 $1,236,831 - ----------------------------------------------------------------------------------------------------------------------- Donnie M. Moore 100,000 3.6% $10.82 4/12/2007 $516,389 $1,236,831 - -----------------------------------------------------------------------------------------------------------------------
(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. 12 (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 will be received by the individuals. (4) All named executive officers are participants in the executive option award described in "Human Resources & Compensation Committee Report on Executive Compensation - Long-Term Incentives". The circumstances giving rise to the second award granted to Mr. Hall are described within this section. 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 29, 2000, by the named executive officers and the number and value of such officers' outstanding options as at February 29, 2000. Dollar values indicated represent the net of market value less exercise price.
- ---------------------------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised In- Underlying Unexercised The-Money Options at Shares Aggregate Options at Fiscal Year-End Fiscal Year End Acquired on Value --------------------------------------------------------------- Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable - ---------------------------------------------------------------------------------------------------------------- Renato Zambonini 300,000 $6,013,479 0 390,000 - $9,132,550 Terry Hall 99,996 $ 953,676 0 400,004 - $8,641,229 Robert A. Engels 45,004 $ 688,182 24,998 130,002 $650,073 $3,072,088 Donnie M. Moore 116,000 $2,003,724 3,000 300,000 $ 78,015 $7,046,466 Alan Rottenberg 113,328 $1,986,089 0 326,672 - $7,634,037 - ----------------------------------------------------------------------------------------------------------------
Employment Agreements The employment agreements of each of Messrs. Zambonini, Hall and Moore provide, among other things, that if their employment is terminated without cause, the Corporation will pay severance in an amount equal to one year's salary at the time of termination. If either of Mr. Zambonini or Mr. Hall 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 agreements of each of Messrs. Zambonini, Hall and Moore have been amended in the manner described in the discussion of the Senior Executive Option Award in "Human Resources & Compensation Committee Report on Executive Compensation - Long-Term Incentives." 13 Human Resources & Compensation Committee Report on Executive Compensation Mandate of the Human Resources & Compensation Committee The mandate of the Human Resources & Compensation Committee ("Committee") is set out in "Corporate Governance - Board Committees". Among other matters, it is responsible for reviewing and approving the compensation for the Chief Executive Officer and the other executive officers of the Corporation. The Corporation's compensation program for executive officers comprises cash compensation and long-term incentive compensation in the form of stock options. In fiscal 2000, a policy of stock ownership for executives of the Corporation was adopted. Cash Compensation Each senior officer is assigned a target cash compensation amount at the beginning of each fiscal year. This amount is based on salary surveys of both similarly-sized software companies and larger software companies, some of which are represented in the Performance Graph on page 17, as well as on job responsibilities and performance. Target cash compensation is allocated between two components: a fixed base salary and a variable bonus target. At the election of the executive officer, the Corporation may contribute to a retirement arrangement in accordance with guidelines established by Canada Customs and Revenue Agency (formerly Revenue Canada). Base salary is based on the criteria set out above, that is, on market surveys, job responsibilities and performance. The bonus target varies with each officer's particular role, responsibilities and objectives. For each officer, the bonus earned is based primarily on corporate performance, including such measures as revenue growth and return on equity. The balance of the bonus target is apportioned among established objectives that relate to specific business or administrative unit performance. Some of these objectives are solely quantitative while others require subjective judgments to be made regarding performance. At year end, performance is evaluated against these established objectives. Actual bonus payments are determined primarily by way of a fixed formula based on a combination of the Corporation's revenue growth and return on equity during the fiscal year. This formula is established by the Committee at the commencement of the fiscal year ("Performance Formula"). Other payments are determined by multiplying a particular component of the bonus target by a percentage figure that either measures the attainment of specific quantifiable goals or that results from a subjective assessment of performance against the objective underlying that component. Accordingly, in a given year, an officer may achieve more or less than the established target cash compensation amount depending on corporate and personal performance against these objectives. For the year ended February 29, 2000, individual bonus amounts earned ranged from 152% to 363% of the bonus target primarily as a result of the effect of the Performance Formula and other bonus performance criteria. The range of total cash compensation earned by all named executive officers was from 118% to 189% of their respective individual target cash compensation amounts. 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 14 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. 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 15, 1996, the Committee awarded certain key officers of the Corporation and its subsidiaries, including all of its executive officers, options under the predecessor of the 1997 Option Plan, the 1993-1998 Stock Option Plan ("1993 Option Plan"), subject to terms that the Committee viewed as further aligning key officers' interests with those of shareholders and encouraging the enhancement of shareholder value ("Senior Executive Option Award"). These options vest equally on the third, fourth, and fifth anniversaries of the date of grant and expire on the eighth anniversary of that date. At the time of the granting of the Senior Executive Option Award, its terms provided that the net proceeds (after tax) of any exercise of these options occurring on or before the seventh anniversary of the date of grant would be used to purchase common shares of the Corporation in the name of the executive at prevailing market prices. The shares purchased would be held in trust by the Corporation and released to the executive in equal portions on the first and second anniversaries of purchase ("Trust Shares"). This Trust Shares procedure was reviewed by the Committee during the recent fiscal year and it concluded that it was unduly complex. On May 19, 1999 this requirement was ended and replaced by share ownership guidelines for executives (described below) which in the view of the Committee achieved the same end. Absent special circumstances, participants in the Senior Executive Option Award were not eligible to receive additional annual option awards until March 1, 1999. However, on April 23, 1997, Mr. Rottenberg was awarded an option to acquire 40,000 shares under the 1993 Option Plan upon his appointment as Senior Vice President, Marketing and Business Strategy. The importance of his appointment to the implementation of the Corporation's strategic initiatives to focus and upgrade the Corporation's marketing and business development activities were deemed by the Committee to be special circumstances justifying the award. The option vests equally on the second, third, and fourth anniversaries of the date of grant and expires on the seventh anniversary of that date. Mr. Robert Minns, Senior Vice President, New Products, became an executive officer during the fiscal year ended February 28, 1998, and did not participate in the Senior Executive Option Award. On April 14, 1998, Mr. Minns was awarded an option to acquire 30,000 shares under the 1997 Option Plan. The option vests equally on the second, third, and fourth anniversaries of the date of grant and expires on the eighth anniversary of that date. On April 12, 1999, the Committee awarded option grants to certain key employees of the Corporation and its subsidiaries, including all of the named executive officers as set out in "Option/SAR Grants in Last Fiscal Year". In recognition of his appointment as Senior Vice President, Operations and Chief Operating Officer, Mr. Hall was awarded an option to acquire an additional 100,000 shares under the 1997 Option Plan on November 13, 1999. The Committee based this award on Mr. Hall's importance in implementing the Corporation's aggressive growth strategy. The option vests equally on the second, third and fourth anniversaries of the date of grant and expires on the eighth anniversary of that date. As of the Record Date, options to purchase 6,711,559 shares under the 1997 Option Plan, and predecessor plans, were outstanding at a weighted average exercise price of $11.39. 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 15 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 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. Chief Executive Officer Compensation The Chief Executive Officer's ("CEO") compensation is reviewed and recommended to the Board by the Committee. Mr. Zambonini's base salary was set at $254,585 (C$375,000), representing a 9% increase over his Canadian dollar base salary in the previous fiscal year. His bonus target was also increased by 9% over his Canadian dollar bonus target in the previous fiscal year, to $127,293 (C$187,500). His bonus payment is determined by using the Performance Formula referred to in "Human Resources & Compensation Committee Report on Executive Compensation - Long Term Incentives", above, and resulted in a bonus of $308,048 (C$453,750) (242% of bonus target) for the fiscal year ended February 29, 2000. An additional one-time bonus payment of $67,890 (C$100,000) was made to Mr. Zambonini in recognition of outstanding achievement during fiscal 2000. This report has been provided by the Human Resources & Compensation Committee of the Board of Directors. Robert W. Korthals (Chairman) Pierre Y. Ducros Douglas J. Erwin 16 Human Resources & Compensation Committee Interlock and Insider Participation Messrs. Korthals, Ducros and Erwin comprised the Human Resources & Compensation Committee on February 29, 2000. Mr. Korthals was appointed a member and Chairman of the Committee in June 1997. Mr. Ducros was appointed to the Committee in September 1996. Mr. Erwin was appointed a member of the Committee on September 28, 1998. None of the members of the Human Resources & Compensation Committee is an officer, employee or former officer or employee of the Corporation or any of its affiliates or is eligible to participate in the Corporation's executive compensation program. Performance Graph GRAPH APPEARS HERE (1) Dollar amounts are in U.S. dollars. (2) The stock price performance graph is not necessarily indicative of future performance. Information used on the graph was obtained from The Nasdaq Stock Market, Inc., a source believed to be reliable, but the Corporation is not responsible for any errors or omissions in such information. The above graph compares the five-year cumulative total return on the Corporation's shares with the comparable cumulative return of a broad equity index and an industry index. The indexes used are the Center for Research in Securities Prices ("CRSP") Total Return Index for The Nasdaq Stock Market (U.S. and Foreign Companies), and the Nasdaq Computer & Data Processing Services Stocks Index. The graph assumes $100 invested on February 28, 1995 in the Corporation's shares and each of the Nasdaq indexes. APPOINTMENT OF AUDITORS A resolution will be presented at the Meeting to appoint Ernst & Young LLP as auditors of the Corporation for the fiscal year ending February 28, 2001 and authorize directors to fix their remuneration. Ernst & Young LLP have been auditors of the Corporation since January 1984. The Board recommends a vote in favor of this resolution. Arrangements have been made for one or more representatives of Ernst & Young LLP to attend the Meeting. These representatives will be accorded the opportunity to address the Meeting and can be expected to respond to appropriate questions. 17 OTHER MATTERS The management of the Corporation knows of no amendment or variation of the matters referred to in the Notice of Annual Meeting and of no other business to be brought before the Meeting. However, if any amendment, variation or other business is properly brought before the Meeting, the Proxy Form confers discretionary authority on the persons appointed proxy to vote on any amendment or variation of the matters referred to in the Notice of Annual Meeting or any other business in accordance with their best judgment. EXPENSES AND SOLICITATION The cost of solicitation of proxies will be borne by the Corporation. In addition to soliciting shareholders by mail through its regular employees, the Corporation may request banks and brokers to solicit their customers who have shares of the Corporation registered in the names of a nominee and, if so, will reimburse such banks and brokers for their reasonable out-of-pocket costs. Solicitation by officers and employees of the Corporation may also be made of some shareholders in person or by mail, telephone or fax following original solicitation. APPROVAL BY BOARD OF DIRECTORS The contents and the sending of this Proxy Statement have been approved by the Board of Directors of the Corporation. DATED at Ottawa this 25th day of May, 2000. /s/ James M. Tory James M. Tory Chairman of the Board 18 ANNEX A Alignment with TSE Corporate Governance Guidelines
- --------------------------------------------------------------------------------------------------------------------------------- TSE Corporate Governance Guideline Alignment Comment Status - --------------------------------------------------------------------------------------------------------------------------------- 1. Board should explicitly assume responsibility for stewardship of the corporation, and assume responsibility for: - --------------------------------------------------------------------------------------------------------------------------------- (a) adoption of a strategic planning process; Yes The Board meets with management annually to specifically discuss strategic planning, product and business plans and risks and opportunities. Updates are presented at Board meetings. - --------------------------------------------------------------------------------------------------------------------------------- (b) identification of principal risks and Yes Principal business risks are assessed by the Board at implementing appropriate risk management the annual strategic planning session and updated systems; regularly by senior management on compliance with various legal and financial requirements and management's assessment of those risks. The Audit committee assists the Board with the review of the risk management program. - --------------------------------------------------------------------------------------------------------------------------------- (c) succession planning, including Yes This responsibility is assigned to the Human appointing, training and monitoring of senior Resources & Compensation Committee. management; - --------------------------------------------------------------------------------------------------------------------------------- (d) communications policy; and Yes Communications with the Corporation's stakeholders is done by various means, including news releases, the general media, the corporate internet site (www.cognos.com), mailings and regular staff ---------------- meetings. Quarterly and annual earnings releases are approved by the Audit Committee and Board. Other media releases and communications are coordinated by the Public Relations department and the Corporate Human Resources Department. - --------------------------------------------------------------------------------------------------------------------------------- (e) integrity of internal control and Yes The Audit Committee establishes and regularly management information systems. monitors policies regarding internal controls and management information systems. - --------------------------------------------------------------------------------------------------------------------------------- 2. Majority of directors should be Yes The current Board consists of eight directors, "unrelated"./(1)/ seven of whom are unrelated. - --------------------------------------------------------------------------------------------------------------------------------- 3. Disclose for each director whether he or she Yes The table at page 4 sets out the principal occupation is related and how that conclusion was or employment of each proposed director. In making reached. the determination as to whether a proposed director is related, the factual circumstances of each proposed director are considered in the context of many factors, including the nature of any interest, business or other relationship which that proposed directors has, which could or could be reasonably be perceived to materially interfere with the ability to act with a view to the best interests of the Corporation./(2)/ - --------------------------------------------------------------------------------------------------------------------------------- 4. Committee composed of unrelated (i.e. non- Yes This responsibility is assigned to the Corporate management) directors responsible for Governance Committee. It is composed of unrelated nominations and assessment of directors. directors. - --------------------------------------------------------------------------------------------------------------------------------- 5. Implement a process to assess effectiveness Yes It is the Chairman's responsibility to assess the of board, committees and directors. effectiveness of the individual Board members and take such remedial action as is necessary. - ---------------------------------------------------------------------------------------------------------------------------------
19 20 - --------------------------------------------------------------------------------------------------------------------------------- 6. Provide orientation and education programs Yes All new directors receive a complete orientation for new directors. program, consisting of presentations and briefings by the Chairman and senior management on the business and operations of the Corporation. - --------------------------------------------------------------------------------------------------------------------------------- 7. Consider board size with view to improving Yes The Corporate Governance Committee makes effectiveness. recommendations with respect to board size. The current size of the Board is considered to be effective and its composition reflects diverse backgrounds and skills. - --------------------------------------------------------------------------------------------------------------------------------- 8. Review adequacy and form of director Yes Directors' compensation was reviewed during fiscal compensation relative to risks and 2000 and brought into line with industry practices. responsibilities. Only non-employee directors are compensated and may elect to receive all or a portion of their annual retainer fee in the form of deferred share units under a plan which took effect in June 1999. - --------------------------------------------------------------------------------------------------------------------------------- 9. Board committees should generally be Yes The Board committees are composed entirely of composed of outside directors, a majority of unrelated, outside directors. whom should be unrelated. - --------------------------------------------------------------------------------------------------------------------------------- 10. Appoint committee responsible for corporate Yes This responsibility is assigned to the Corporate governance issues. Governance Committee. - --------------------------------------------------------------------------------------------------------------------------------- 11. Develop position descriptions to limit management's responsibilities: - --------------------------------------------------------------------------------------------------------------------------------- (a) for board and Chief Executive Officer; and Yes Written mandates have been adopted for the Board, each of its committees, and for the Chief Executive Officer. - --------------------------------------------------------------------------------------------------------------------------------- (b) approve corporate objectives for Chief Yes The Chief Executive Officer's objectives are Executive Officer. established annually during the strategic planning session. - --------------------------------------------------------------------------------------------------------------------------------- 12. Establish procedures to enable board to Yes The positions of Chairman of the Board and Chief function independently of management. Executive Officer are held by different people. The mandate of the Corporate Governance Committee is structured to preserve this separation. The Board has the opportunity to meet without the presence of management at each Board meeting. - --------------------------------------------------------------------------------------------------------------------------------- 13. (a) Audit Committee should have a Yes The written mandate, including specific specifically defined mandate, including responsibilities, has been adopted. See Audit oversight responsibility for management Committee on page 6. reporting on internal controls. - --------------------------------------------------------------------------------------------------------------------------------- (b) All members should be outside directors. Yes All members are outside directors. - --------------------------------------------------------------------------------------------------------------------------------- (c) Have direct communication with auditors. Yes The Audit Committee meets with the Corporation's auditors without members of management present as required, but not less than annually. - --------------------------------------------------------------------------------------------------------------------------------- 14. Implement systems to enable individual Yes The Board, and individual directors may engage directors to engage outside advisor at outside advisors at the expense of the Corporation corporation's expense. in appropriate circumstances, in consultation with the Chairman. - ---------------------------------------------------------------------------------------------------------------------------------
(1) Under the TSE guidelines, the term "unrelated director" means a director who is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the Corporation, other than interests arising from shareholding. An "outside director" is a director who is not an officer (other than Chairman of the Board) or employee of the Corporation or any of its affiliates. 21 (2) Mr. Cameron is 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 has acted on behalf of various executives and other employees of the Corporation in his capacity as an Investment Advisor. The Board has been apprised by Mr. Cameron of these relationships and is of the view that neither their nature nor the amounts involved are significant. While the law firm of Torys, 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. 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 Compensation of Directors) impairs his status as an unrelated director as that amount is payable in respect of his increased responsibilities in his function as Chairman of the Board. 22 ANNEX B Alignment with SEC audit committee rules
- -------------------------------------------------------------------------------------------------------------------------- SEC Audit Committee Rule Alignment Comment Status - -------------------------------------------------------------------------------------------------------------------------- 1. (a) Every audit committee have at least Yes There are currently four members on the Audit three members; Committee. - -------------------------------------------------------------------------------------------------------------------------- (b) all audit committee members must be Yes All are independent under the new independence independent; standards. - -------------------------------------------------------------------------------------------------------------------------- (c) committee members be financially Yes Each of them is a seasoned business person. literate. - -------------------------------------------------------------------------------------------------------------------------- 2. At least one committee member have prior Yes All committee members have relevant accounting or accounting or financial management financial management experience. experience. - -------------------------------------------------------------------------------------------------------------------------- 3. The board adopt a written audit committee Yes A written mandate has been adopted. charter that describes the committee's responsibilities. - -------------------------------------------------------------------------------------------------------------------------- 4. The proxy statement must include a report N/A This requirement will take effect with proxy from the audit committee. statements relating to shareholder votes occurring after December 15, 2000. The Corporation intends to comply. - -------------------------------------------------------------------------------------------------------------------------- 5. Outside auditor review of quarterly Yes The Corporation's auditors have historically financial statements prior to filings. conducted reviews of the Corporation's quarterly financial statements. Reviews of quarterly financial statements prior to filings will commence with the quarter ending May 31, 2000. - --------------------------------------------------------------------------------------------------------------------------
23 [LOGO OF COGNOS] B. FINANCIAL INFORMATION IN ACCORDANCE WITH CANADIAN GAAP FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000 The consolidated financial information as set out in the Corporation's 2000 Annual Report is in United States (U.S.) dollars and in accordance with U.S. generally accepted accounting principles (GAAP). In keeping with the requirements of Canadian legislation, the Corporation is also providing its shareholders with consolidated financial information in accordance with Canadian GAAP (in United States dollars). The generally accepted accounting principles in Canada differ in some respects from those applicable in the U.S. The most significant difference in fiscal 2000 arises from the accounting for acquisitions (see Note 5 of the Notes to the Consolidated Financial Statements). All consolidated financial statements were affected by this difference. 24 COGNOS INCORPORATED CANADIAN GAAP FINANCIAL INFORMATION Table of Contents The information appearing in this document consists of the following information for the fiscal year ended February 29, 2000:
PAGE -------- Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 26 Report of Management............................................ 45 Auditors' Report................................................ 46 Consolidated Financial Statements And Notes..................... 47 Five-Year Summary............................................... 69
25 Management's Discussion and Analysis of Financial Condition and Results of Operations (in United States dollars, unless otherwise indicated, and in accordance with Canadian GAAP) The following discussion should be read in conjunction with the audited consolidated financial statements and notes for the fiscal year ended February 29, 2000, beginning on page 45. The Corporation prepares and files its 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 Generally Accepted Accounting Principles (GAAP) in Canada. The consolidated financial statements and MD&A in accordance with U.S. GAAP, in U.S. dollars, are also made available to all shareholders and filed with various regulatory authorities. On April 6, 2000, subsequent to the year-end, 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 in this MD&A, and the audited consolidated financial statements and notes thereto, have been adjusted retroactively for this split. Overview The Corporation develops, markets, and supports complementary lines of software tools that are designed to satisfy business-critical needs for the extended enterprise within traditional and e-business markets. The Corporation's business intelligence products are designed to give individual users the ability to independently access, explore, analyze, and report corporate data. 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. 26 Results of Operations Total revenue for the year ended February 29, 2000 (fiscal 2000) was $385.6 million, which was 28% more than the fiscal 1999 revenue of $301.1 million which, in turn, was 23% more than the fiscal 1998 revenue of $244.8 million. Net income for fiscal 2000 was $54.5 million and basic net income per share was $0.63, compared to fiscal 1999 net income of $58.1 million and basic net income per share of $0.66, and net income of $48.9 million and basic net income per share of $0.55 for fiscal 1998. The Corporation experienced a decrease in net income as a percentage of revenue in fiscal 2000 as a result of increases in selling, general and administrative expenses and decreases in the level of investment tax credits from prior years. During fiscal 2000 the Corporation increased its investment in its sales channels to focus on revenue growth and expand global market coverage. The decrease in the level of investment tax credits (ITCs) was the result of the Corporation recognizing the benefits of previously unrecorded ITCs during fiscal 1999 and 1998. 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 Change Percentage of Revenue from Fiscal -------------------------------------------------- -------------------------------- 1999 to 1998 to 2000 1999 1998 2000 1999 -------------------------------------------------- -------------------------------- Revenue 100.0% 100.0% 100.0% 28.1% 23.0% -------------------------------------------------- Operating expenses Cost of product license 1.3 1.9 1.5 (8.8) 49.9 Cost of product support 3.6 3.7 4.0 23.2 15.2 Selling, general, and administrative 63.5 59.2 58.6 37.3 24.3 Research and development 13.9 14.0 13.7 26.7 26.1 Investment tax credits (1.6) (4.9) (3.8) (58.3) 57.8 -------------------------------------------------- Total operating expenses 80.7 73.9 74.0 39.8 22.9 -------------------------------------------------- Operating income 19.3 26.1 26.0 (5.2) 23.2 Interest expense (0.2) (0.2) (0.2) 36.2 9.6 Interest income 1.9 2.2 2.2 15.9 20.4 -------------------------------------------------- Income before taxes 21.0 28.1 28.0 (3.8) 23.1 Income tax provision 6.9 8.8 8.0 1.4 34.0 -------------------------------------------------- Net income 14.1% 19.3% 20.0% (6.2)% 18.8% ==================================================
27 Revenue The Corporation's total revenue (consisting of product license, product support, and services revenue) was $385.6 million in fiscal 2000, compared to $301.1 million in fiscal 1999 and $244.8 million in fiscal 1998. 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. The effect of foreign exchange rate fluctuations decreased the overall revenue growth by two percentage points in fiscal 2000 from fiscal 1999 and by one percentage point in fiscal 1999 from fiscal 1998. The Corporation's growth in total revenue was derived primarily from the increase in revenue from the Corporation's business intelligence products, principally Web versions of PowerPlay(R), Impromptu(R) and to a lesser extent, the addition of revenue from Cognos Visualizer and DecisionStream(TM), which were released during fiscal 2000. The bundling of these products for facilitated and flexible deployment contributed to the growth of Web versions of the Corporation's business intelligence products. Total revenue for all business intelligence products was $328.0 million, $230.9 million, and $176.2 million in fiscal 2000, 1999, and 1998, respectively, which resulted in year-over-year increases of 42% and 31%, respectively. Total revenue from the Corporation's business intelligence products represented 85%, 77%, and 72% of total revenue in fiscal 2000, 1999, and 1998, respectively. As described in the following section on Product License Revenue, the Corporation believes that its business intelligence products address the current market need for distributing corporate information to the end user's desktop in an extended enterprise environment of corporate intranets, extranets and client/server networks. Total revenue from the Corporation's application development tools, PowerHouse(R) and Axiant(R), was $57.6 million in fiscal 2000, compared to $70.2 million in fiscal 1999, and $68.6 million in fiscal 1998, which resulted in year-over-year changes of (18)% and 2%, respectively. While the Corporation experienced an increase in total revenue from these products during fiscal 1999, as described in the following section on Product License Revenue, the Corporation believes that, in the long term, revenues from these products will continue to decline. The growth in total revenue from the three revenue categories in fiscal 2000 from fiscal 1999 was as follows: a 28% increase in product license revenue, a 27% increase in product support revenue, and a 30% increase in services revenue. This compares to an increase for the same categories for fiscal 1999 from fiscal 1998 as follows: 25%, 28%, and 9%, respectively. The Corporation's 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 2000, the percentage of total revenue from North America, Europe, and Asia/Pacific was 61%, 32%, and 7%, respectively, compared to 59%, 34%, and 7%, respectively, in fiscal 1999, and 60%, 33%, and 7%, respectively, in fiscal 1998. In fiscal 2000, total revenue from North America, Europe, and Asia/Pacific increased from fiscal 1999 by 32%, 20%, and 32%, respectively, compared to increases of 22%, 25%, and 23%, respectively, in fiscal 1999 from fiscal 1998. The increase in growth for fiscal 2000 compared to growth in fiscal 1999 in North America and Asia/Pacific is attributable to the increase in revenue from the business intelligence products. The decrease in growth for Europe was attributable to slower growth in the U.K. where the Corporation experienced a relatively larger decline in revenue from application development tools and relatively less growth in business intelligence products. 28 Product License Revenue Total product license revenue was $203.3 million, $158.4 million, and $126.8 million in fiscal 2000, 1999, and 1998, respectively, and accounted for 53%, 53%, and 52% of the Corporation's revenue for the respective time periods. The increase in all periods occurred predominantly as a result of the performance of the Corporation's business intelligence products. Product license revenue from these products was $186.6 million, $131.9 million, and $102.3 million in fiscal 2000, 1999, and 1998, respectively. The Corporation derived approximately 92% of its product license revenue in fiscal 2000 from these products, compared to 83% in fiscal 1999, and 81% in fiscal 1998. The Corporation believes that its business intelligence products address the current market need for distributing corporate information to the end user's desktop in an extended enterprise environment of corporate intranets, extranets and client/server networks. The Corporation continues to address the emerging market for Web or intranet-based products with the release in the current fiscal year of PowerPlay 6.6, and the launch of the Cognos enterprise BI Platform and in fiscal 1999, the release of Impromptu Web Reports. While the Corporation believes that there is a market opportunity for Web-based decision support solutions, there can be no assurance of the rate or extent of growth of this market, or that the Corporation will be successful in continuing to develop products that will effectively address this market. Product license revenue from the Corporation's application development tools, PowerHouse and Axiant, was $16.7 million, $26.5 million, and $24.5 million in fiscal 2000, 1999, and 1998, respectively. Over several of the past fiscal years, the Corporation has experienced a decline in product license revenue in this market which is consistent, in the Corporation's view, with the market trend away from proprietary systems and host-based computing toward industry- standard systems, corporate intranets, extranets, client/server technology, and packaged application products. The Corporation believes the increase during fiscal 1999 was partially the result of expanded use of PowerHouse applications or upgrades to customer computers, and testing of legacy systems to ensure Year 2000 compliance. The Corporation believes that the maximum revenue potential from the activity around Year 2000 compliance occurred during fiscal 1999 and expects that, in the long term, the trend of decreasing product license revenue from these products will continue. The Corporation's 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. In fiscal 2000, the Corporation increased product license revenue derived from third-party channels to $62.2 million from $49.2 million in fiscal 1999, and from $39.6 million in fiscal 1998. The majority of the increase in product license revenue derived from third parties in fiscal 2000 from fiscal 1999 was attributable to the activity in Asia/Pacific and Europe and to a lesser extent activity in North America. The increase in product license revenue derived from third parties in fiscal 1999 from fiscal 1998 was mainly attributable to an increase in activity in North America. Total product license revenue from third-party channels represented 31% of total product license revenue in each of fiscal 2000, 1999 and 1998. Within the Corporation's business intelligence market, product license revenue from third-party channels was $57.3 million in fiscal 2000, compared to $42.3 million in fiscal 29 1999, and $33.0 million in fiscal 1998. Product license revenue within this market, from third-party channels represented 31% of the Corporation's product license revenue in fiscal 2000, compared to 32% in fiscal 1999 and 1998. The Corporation expects to continue to enhance its combined sales and marketing strategies to further develop the potential within the business intelligence products market. The Corporation expects to continue to utilize a multi-tiered channel strategy, as outlined above. With respect to the marketing strategy, the Corporation intends to continue to form alliances with system integrators, the larger accounting and consulting firms, packaged application providers, and various other strategic partners. In addition, the Corporation plans to continue to utilize marketing and promotional programs to generate awareness of extended enterprise business intelligence solutions and interest in the Corporation's products. There can be no assurance that increases in total product license revenue will continue to occur, or occur to the same extent to which they have historically occurred. Product Support Revenue Product support revenue was $118.1 million, $93.3 million, and $72.8 million in fiscal 2000, 1999, and 1998, respectively. Product support revenue accounted for 31% of the Corporation's total revenue for fiscal 2000 and 1999 and 30% for fiscal 1998. The increase in the dollar amounts was the result of new support contracts from the expansion of the Corporation's customer base, as well as the renewal of existing support contracts. The rate of growth in product support revenue associated with the expansion of the Corporation's customer base exceeds the rate of non-renewals of support contracts. Total product support revenue from the business intelligence products was $78.8 million, $52.0 million, and $31.9 million in fiscal 2000, 1999, and 1998, respectively and comprised 67%, 56%, and 44% of the total product support revenue in fiscal 2000, 1999, and 1998, respectively. In fiscal 2000, total product support revenue from the business intelligence products increased by 52% from fiscal 1999, and total product support revenue from the application development tools decreased by 5% over the same period. In fiscal 1999, total product support revenue from the business intelligence products increased by 63% from fiscal 1998, and total product support revenue from the application development tools increased by 1% over the same period. Consistent with the discussion in product license revenue, the Corporation believes that, despite the product support revenue growth from the application development tools in fiscal 1999, in the long term, the trend of decreasing revenue from these products will continue. There can be no assurance that increases in total product support revenue will continue to occur, or occur to the same extent to which they have historically occurred. Services Revenue Revenue from education, consulting, and other services was $64.3 million, $49.4 million, and $45.2 million in fiscal 2000, 1999, and 1998, respectively. Services revenue accounted for 17%, 16%, and 18% of the Corporation's total revenue for the same time periods. During fiscal 2000 the Corporation began to offer a broader range of consulting and education services in line with the shift in the demand for Web-based products. As a result, during fiscal 2000 the Corporation experienced both an increase in growth of services revenue, and an increase in the percentage of total revenue generated by services. The decline in fiscal 1999 services revenue as a percentage of total revenue was the result of relatively larger increases in both product support and product license revenue. The increase in services revenue was predominantly the result of an increase in consulting revenue and to a lesser extent, increases in education revenue associated with the business intelligence products, 30 consistent with the trend in product license revenue in this market. Services revenue associated with the business intelligence products contributed approximately 97%, 95%, and 93% to this revenue category in fiscal 2000, 1999, and 1998, respectively. There can be no assurance that increases in total services revenue will continue to occur, or occur to the same extent to which they have historically occurred. 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 2000 were $5.2 million compared to $5.7 million in fiscal 1999, and $3.8 million in fiscal 1998. Product license costs represented 3% of product license revenue for fiscal 2000, compared to 4% and 3% of product license revenue for fiscal 1999 and 1998, respectively. The decrease, in dollar terms in fiscal 2000 from fiscal 1999 is principally due to decreases in both royalty costs and materials and distribution costs associated with product offerings. The increase in fiscal 1999 from fiscal 1998 was predominantly the result of a relatively larger increase in royalties; manufacturing and distribution costs remained constant between the two years. Cost of Product Support The cost of product support includes the costs associated with resolving customer telephone inquiries and other telesupport 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 $13.8 million, $11.2 million, and $9.7 million in fiscal 2000, 1999, and 1998, respectively. These costs represented 12% of product support revenue for fiscal 2000 and 1999, and 13% for fiscal 1998. The increase in fiscal 2000 from fiscal 1999 was associated predominantly with increases in customer telesupport costs; enhancement releases costs contributed to a lesser extent to the increase. The increase in fiscal 1999 from fiscal 1998 was primarily associated with increases in telesupport costs. Selling, General, and Administrative Selling, general, and administrative expenses were $244.8 million, $178.3 million, and $143.5 million in fiscal 2000, 1999, and 1998, respectively. These costs were 64% of revenue in fiscal 2000 compared to 59% in both fiscal 1999 and 1998. The increase in the selling, general, and administrative expenses in fiscal 2000 was substantially the result of increases in staffing and related compensation expenses, and to a lesser extent increases in subcontracting, facilities and marketing costs. During fiscal 2000 the Corporation increased its investment in its sales channels to focus on revenue growth and to expand global market coverage. The average number of employees within the selling, general, and 31 administrative areas grew by 30% in fiscal 2000 predominantly as the result of additions to sales staff. The increase in the selling, general, and administrative expenses in fiscal 1999 was mainly the result of increased staffing and related compensation expenses as the average number of employees within this area grew by approximately 15%. The costs per employee increased 6% in both fiscal 2000 and fiscal 1999. Foreign exchange rate fluctuations reduced the overall percentage increase in fiscal 2000 over 1999 by approximately one percentage point, whereas they reduced the overall percentage increase in fiscal 1999 over 1998 by approximately three percentage points. Research and Development The following table sets out the components of the Corporation's research and development, as well as the percentages of revenue for the periods indicated.
2000 1999 1998 --------------------------------------------- ($000s) Gross research and development costs $54,244 $42,746 $33,997 Government allowances (696) (527) (897) Amortization of previously capitalized amounts - 55 430 --------------------------------------------- Research and development $53,548 $42,274 $33,530 ============================================= Percentage of total revenue Gross research and development 14% 14% 14% Research and development 14% 14% 14%
Gross research and development costs have continued to increase, in dollar terms, over the last several fiscal years but have remained relatively constant as a percentage of total revenue. The growth in both fiscal 2000 and fiscal 1999 was predominantly the result of increases associated with higher staffing levels in this area. The increase in the average number of employees in this area was 26% in fiscal 2000 from fiscal 1999, and was 27% in fiscal 1999 from fiscal 1998. Foreign exchange rate fluctuations improved the overall percentage increase in fiscal 2000 by approximately one percentage point whereas it reduced the overall increase by eight percentage points for fiscal 1999. 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 technological feasibility do not meet these criteria, and are expensed as incurred. Capitalized costs are amortized over a period not exceeding 36 months. Costs were not deferred in any of fiscal 2000, 1999, or 1998 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. The Corporation believes there is a business opportunity for distributing corporate information to the end user's desktop in an extended enterprise environment of corporate intranets, extranets and client/server networks. In earlier years the Corporation addressed this opportunity with the release of Web-based products: PowerPlay Web, Impromptu Web Reports, and Cognos Query (formerly Impromptu Web Query). 32 During fiscal 2000 the Corporation launched a platform for Enterprise Business Intelligence. This platform, which includes DecisionStream, provides a single user interface or portal to support access to all Cognos business intelligence products in an extended enterprise environment. During fiscal 2000 the Corporation released PowerPlay 6.6, which provides Web managed reporting and analysis functions for intranet, extranet and Internet access to OLAP (online analytical processing) data. Also, during fiscal 2000 the Corporation released Cognos Visualizer, a business management and measurement product that extends the capabilities of PowerPlay and Impromptu with advanced visual reporting and analysis. The Corporation also released new versions of Impromptu Web Reports, DataMerchant, and Cognos Finance (formerly LEX2000). The Corporation continues to support its application development tools and to that end released a new version of PowerHouse during fiscal 2000 which enables Web deployment of PowerHouse applications. During fiscal 2001 the Corporation will invest in research and development of business intelligence solutions, particularly those solutions that support the Corporation's strategy to meet the needs of the extended enterprise customers within the e-business economy. These investments will include the development of e-application packages which include pre-defined data marts, key reports and analysis solutions. The Corporation will continue the development of business- to-business solutions using BI which extend the enterprise to incorporate the supply chain, and the relationship with an enterprise's customers. Acquisitions Fiscal 2000 The Corporation acquired Information Tools AG, the Corporation's distributor in Switzerland. The shareholders of Information Tools AG are 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) is 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 $120,000 will be paid in fiscal 2001 relating to fiscal 2000 results. This amount has been recorded as additional purchase price. The Corporation purchased 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. Fiscal 1999 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. Relational Matters will 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, are being held in escrow by the Corporation and will be released on the second (40%) and third (60%) anniversaries of the closing of the transaction. For valuation purposes, the deferred payments and shares were appropriately discounted. 33 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 shareholders of LEX2000 Inc. will 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 issued at closing; the remainder, all of which were issued, are being held in escrow by the Corporation and will be released equally on the second (50%) and third (50%) anniversaries of the closing of the transaction. For valuation purposes, the deferred payments and shares were appropriately discounted. Fiscal 1998 During the first quarter ended May 31, 1997, the Corporation completed the acquisition of Right Information Systems Limited (RIS) of London, England. RIS was the provider of 4Thought(TM), business modeling and forecasting software. The shareholders of RIS received $4,500,000 and 180,000 shares of the Corporation's common stock, valued at $1,607,000. These shares are being held in escrow by the Corporation until April 9, 2000. During the third quarter ended November 30, 1997, the Corporation completed the acquisition of Interweave Software, Inc. (Interweave) of Santa Clara, California, U.S.A. Interweave was the developer and marketer of the Interweave software product line, which allows information technology organizations to deploy intranet- and extranet-based business intelligence applications more broadly within and across enterprises. The acquisition agreement called for the Corporation to pay approximately $12,415,000 cash to the shareholders of Interweave, most of which was paid upon completion of the acquisition. The acquisitions in fiscal 2000, 1999, and 1998 have been accounted for using the purchase method. The results of operations of all acquired companies prior to their respective dates of acquisition were not material. The results of all acquired companies have been combined with those of the Corporation since their respective dates of acquisition. (See Note 5 of the Notes to the Consolidated Financial Statements.) Investment Tax Credits The Corporation recognized $6.2 million, $14.9 million, and $9.4 million in fiscal 2000, 1999, and 1998, respectively, related to research and development activities performed in Canada. Interest Income and Expense Interest income is earned on the Corporation's cash, cash equivalents, and short-term investments, and interest expense relates primarily to the interest on the Corporation's mortgage and capital leases. Net interest income was $6.7 million, $5.9 million, and $4.9 million in fiscal 2000, 1999, and 1998, respectively. The increase during fiscal 2000 was the result of a significant increase in the average size of the investment portfolio, and to a lesser extent the impact of favorable exchange rate fluctuations. This increase was offset by a slight decrease in the average effective interest rates during fiscal 2000. The increase in fiscal 1999 was primarily attributable to higher average effective interest rates, and to a lesser extent, a larger average portfolio, which was partially offset by the impact of adverse exchange rate fluctuations. 34 Tax Expense The Corporation's tax rate is affected by the relative profitability of its operations in various geographic regions. In fiscal 2000 the Corporation's effective tax rate was 33%, compared to 31% in fiscal 1999, and 29% in fiscal 1998. (See Note 9 of the Notes to the Consolidated Financial Statements.) Liquidity and Capital Resources As of February 29, 2000, the Corporation held $196.7 million in cash, cash equivalents, and short-term investments, an increase of $47.0 million from February 28, 1999. In addition, the Corporation has arranged an unsecured credit facility 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 Cdn$15.0 (US$10.4) million, subject to certain covenants. As of February 29, 2000, there were no direct borrowings under this operating line. As discussed further below, the Corporation has foreign exchange conversion facilities that allow it to hold foreign exchange contracts of approximately Cdn$130.0 (US$89.7) million outstanding at any one time. As of February 29, 2000, the Corporation had a total of $4.9 million of long- term liabilities (including the current portion of long-term debt), consisting of a mortgage, other long-term liabilities, and certain capital leases. As of February 29, 2000, working capital was $166.5 million, an increase of $43.1 million from February 28, 1999, primarily because of higher levels of cash, accounts receivable, and short-term investments, which were partially offset by increases in deferred revenue and other current liabilities. Working capital increased in fiscal 2000 even though the Corporation used $26.0 million for share repurchases and $2.1 million for acquisitions during the year. Cash provided by operating activities (after changes in non-cash working capital items) for fiscal 2000 was $83.2 million, a decrease of $1.4 million compared to the prior fiscal year. This fluctuation was due to a net increase in non-cash working capital as compared to a net decrease in non-cash working capital during fiscal 1999, which was offset by an increase in net income after adjustments for depreciation, amortization and other non-cash items. Cash used in investing activities was $37.7 million for fiscal 2000, a decrease in investment of $11.9 million compared to the prior fiscal year. The majority of the fluctuation stems from a decrease in net investments in short-term investment and decreases in acquisition costs; these decreases were offset by an increase in fixed asset additions. The increase in fixed asset additions was primarily the result of computer equipment and software purchases. Further, during fiscal 2000 the Corporation began the construction of a second building on the site of its corporate headquarters in Ottawa. The Corporation has invested approximately $3.4 million in the current year and it is anticipated that costs will total $21 million when the construction is substantially complete in fiscal 2001. (See Note 7 of the Notes to the Consolidated Financial Statements.) During fiscal 1999, the Corporation purchased the remaining interest in its head office building in Ottawa, Canada for approximately $4.8 million. In fiscal 2000, the Corporation spent $7.4 million related to the activity in short-term investments compared to $19.2 million (both net of maturities) in fiscal 1999. In addition, the Corporation spent $2.1 million in fiscal 2000 on acquisitions, compared to $9.2 million in fiscal 1999. (See Note 5 of the Notes to the Consolidated Financial Statements.) Cash used in financing activities was $9.1 million for fiscal 2000, compared to $28.7 million in fiscal 1999. The Corporation's financing activities for both fiscal years were centered around the repurchase of its own shares in the open market, and the issuance of shares pursuant to the Corporation's stock purchase 35 plan and the exercise of stock options. During fiscal 2000, the Corporation repurchased 2,286,000 shares at a cost of $26.0 million, compared to 3,006,000 shares repurchased at a cost of $34.1 million in fiscal 1999. Offsetting this activity, the Corporation issued 2,093,000 common shares for consideration of $16.5 million during fiscal 2000, compared to 1,146,000 shares for consideration of $5.0 million in fiscal 1999. The issuance of shares in both periods was pursuant to the Corporation's stock purchase plan and the exercise of stock options by employees, officers, and directors. In fiscal 1999, the Corporation also issued 503,000 shares for a value of $3.8 million in conjunction with the acquisition of Relational Matters and LEX2000 Inc. In fiscal 1998 the Corporation issued 180,000 shares for a value of $1.6 million in conjunction with the acquisition of RIS. (See Note 5 of the Notes to the Consolidated Financial Statements.) 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 2000 were part of two open market share repurchase programs. The program adopted in October 1998 expired on October 8, 1999. Under this program the Corporation repurchased 3,161,800 of its shares for $35.4 million; all repurchased shares were cancelled. In October 1999, the Corporation adopted a new program that will enable it to purchase up to 4,200,000 common shares (not more than 5% of those issued and outstanding) between October 9, 1999 and October 8, 2000. Under the current program the Corporation has repurchased 100,000 shares for $1.3 million during fiscal 2000; all repurchased shares were cancelled. This program does not commit the Corporation to make any share repurchases. Purchases will be made on The Nasdaq Stock Market 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.) 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. To achieve this objective, the Corporation enters into foreign exchange forward contracts to hedge portions of the net investment in its various subsidiaries. The Corporation enters into these 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 29, 2000, the Corporation had foreign exchange forward contracts, with maturity dates ranging from March 30, 2000 to May 25, 2000, to exchange various foreign currencies in the amount of $6.2 million. 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. The Corporation anticipates that through fiscal 2001 its operations will be financed by current cash balances and funds from operations. If the Corporation were to require funds in excess of its current cash position to finance its longer-term operations, the Corporation would expect to obtain such funds from, one or a combination of, the expansion of its existing credit facilities, or from public or private sales of equity or debt securities. Inflation has not had a significant impact on the Corporation's results of operations. Year 2000 Project Beginning in fiscal 1998 the Corporation commenced an intensive effort to identify and categorize 36 potential problem areas and develop action plans with respect to the Year 2000. This process involved an examination of its products, and its internal systems, hardware and software, as well as contacting its suppliers to obtain assurances regarding their Year 2000 readiness. The total project costs for both the Corporation's software products and its internal systems and processes were $2.4 million, of which approximately $0.1 million were capitalized. Of the total project costs, $0.7 million, were incurred during fiscal 2000, and $1.7 million during fiscal 1999. European Economic and Monetary Union The introduction of the euro currency on January 1, 1999 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 Corporation is preparing for this new euro currency, which is scheduled to be introduced in stages over the course of a 3 1/2 year transition period. The Corporation believes the introduction of the euro will have limited longer-term implications on the Corporation's business. The Corporation is preparing for the introduction of the euro in the area of its internal processes and systems through identifying, modifying, and testing these processes and systems to handle transactions involving the euro in accordance with the regulations. The Corporation's financial application systems represent the most significant internal systems that will be affected by the introduction of the euro. The Corporation upgraded these systems to a version that enables it, together with certain process changes and modifications provided by the application vendor to its supported customers, to handle the initial requirements for transactions involving the euro. The Corporation continues to identify and, where necessary, modify its systems and processes in order to handle the various stages of the euro implementation. The Corporation is continuing to monitor its pricing in Europe, giving consideration to the introduction of the euro. The Corporation believes that the costs relating to the conversion of its internal systems and processes will not have a material adverse effect on its business, results of operations, or financial condition. Market Risk Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes. 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. 37 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 29, 2000, a 100 basis-point adverse change in interest rates would not have had a material effect on our consolidated financial position, earnings, or cash flows. Foreign Currency Risk We operate internationally; accordingly, a substantial portion of our financial instruments are held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries. The forward contracts are typically between the United States dollar and the British pound, the German mark, and the Australian dollar. Sensitivity analysis is used to measure our foreign currency exchange rate risk. As of February 29, 2000, 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 subject to risks and uncertainties that may cause future results to differ materially from those expected. 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, the factors discussed below. Additional risks and uncertainties that we are unaware of or currently deem immaterial may also adversely affect our business operations. Our growth may not continue at historical growth 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. Despite product license revenue growth from our application development tools during fiscal 1999, we have been experiencing a decline in product license revenue from our application development tools 38 over the past several years. In the long term, we expect declining revenues in these more established proprietary markets for our application development tools. 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; . 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. As a result of the foregoing and other factors, we may experience material fluctuations in future quarterly and annual operating results. These fluctuations could materially and adversely affect our stock price, as well as, our business, results of operations, and financial condition. The software markets that we target are subject to rapid technological change and new product introductions and enhancements. The markets for our products are characterized by: . rapid and significant technological change; . frequent new product introductions and enhancements; 39 . changing customer demands; and . evolving industry standards. We believe that our future success depends principally on our ability to continue to support a number of popular operating systems and databases; our ability to maintain and improve our product line; and our ability to rapidly develop new products that achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. If we are unable to achieve these factors, we may lose our competitive position. Successful product development and introduction depend upon a number of factors, including new product selection, timely and efficient completion of product design, product performance at customer locations, and whether our competitors develop similar products. In addition, the introduction of products embodying new technologies can quickly make existing products obsolete and unmarketable. We cannot assure you that our products will remain competitive, respond to market demands and developments and new industry standards, and not become obsolete. In particular, we cannot assure you that we have developed the appropriate products to respond effectively to the growing market interest in Web-based software, or if so, whether we can continue to bring those products to market in a timely and cost-effective basis and distribute those products in the face of competition from similar products developed by existing or new competitors. We cannot assure you that market interest in Web-based software will continue at the same rate, or that alternative methods of deploying software will not become more popular. 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. We rely on partners and other distribution channels to market and distribute our products and any failure of these parties to do so, could have a material adverse effect on our business. 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 have developed a number of these relationships and intend to continue to develop new channel partner relationships. Our inability to attract important and 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 materially adversely affect our business, results of operations, and financial condition. Unauthorized used of our intellectual property could damage our business. 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 software 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. Third parties could assert that our technology infringes their proprietary rights, which could adversely affect our ability to distribute our products and result in substantial litigation expenses and monetary liability. Any invalidation of our intellectual property rights or lengthy and expensive defense of those rights could have a material adverse affect on our business, results of operations, and financial condition. 40 The loss of our rights to use software licensed to us by third parties could harm our business. In order to provide a complete 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. We face intense competition and could be affected by the actions of our competitors. 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 us 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 current 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. We have multinational operations that are subject to risks inherent in 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 adversely affect our business, results of operations, and financial condition. 41 Our executive management and other key personnel are essential to our business; we may not be able to recruit and retain the personnel we need to succeed. Our performance is substantially dependent on the performance of our key technical and management personnel. The loss of the services of any of these persons could have a material adverse effect on our business, results of operations, and financial condition. Our success is highly dependent on our continuing ability to identify, hire, train, motivate, and retain highly qualified management, technical, sales, and marketing personnel. Competition for such personnel 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 could have a material adverse effect on our business, results of operations, and financial condition. Pursuing and completing recent and potential acquisitions could divert management attention and financial resources and may not produce the desired business results. We completed the acquisitions of Information Tools AG, and the outstanding minority interest in Cognos Far East Pte Limited during fiscal 2000. In fiscal 1999, we acquired Relational Matters and LEX2000 Inc., and in fiscal 1998, Right Information Systems Limited and Interweave Software, Inc. We may in turn 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 ability to appropriately value the acquired in-process research and development. 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. 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 client/server development tools markets; or 42 . other events or factors. In addition, the financial markets have experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many 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. 43 Quarterly Results The following table sets out selected unaudited consolidated financial information for each quarter in fiscal 1999 and fiscal 2000. On April 6, 2000, subsequent to year-end, 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.
Fiscal 1999 Fiscal 2000 --------------------------------------- --------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter --------------------------------------- --------------------------------------- ($000s, except per share amounts, Canadian GAAP) Revenue $67,309 $70,583 $76,308 $86,925 $81,645 $88,128 $97,753 $118,114 -------------------------------------- -------------------------------------- Operating expenses Cost of product license 942 1,137 1,354 2,305 1,054 1,001 1,456 1,724 Cost of product support 2,408 2,793 2,968 2,997 3,095 3,336 3,608 3,719 Selling, general, and administrative 43,140 42,140 44,789 48,226 53,478 56,263 63,183 71,903 Research and development 9,946 10,235 10,863 11,230 12,197 12,845 13,574 14,932 Investment tax credits (2,465) (5,085) (3,647) (3,683) (1,167) (1,163) (2,177) (1,700) Total operating expenses 53,971 51,220 56,327 61,075 68,657 72,282 79,644 90,578 --------------------------------------- -------------------------------------- Operating income $13,338 $19,363 $19,981 $25,850 $12,988 $15,846 $18,109 $ 27,536 ======================================= ====================================== Net income $10,375 $13,223 $14,955 $19,569 $ 9,796 $11,768 $12,782 $ 20,196 ======================================= ====================================== Net income per share Basic $ 0.12 $ 0.15 $ 0.17 $ 0.23 $ 0.11 $ 0.14 $ 0.15 $ 0.23 ======================================= ====================================== Fully diluted $ 0.11 $ 0.15 $ 0.17 $ 0.22 $ 0.11 $ 0.14 $ 0.15 $ 0.23 ======================================= ======================================
The Corporation's sales cycle typically ranges from a few days up to twelve months, depending on factors such as the size of the transaction, the product involved, the length of the customer relationship, the timing of new product introductions by the Corporation and 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 the Corporation takes 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. 44 COGNOS INCORPORATED REPORT OF MANAGEMENT The Corporation's management is responsible for preparing the accompanying consolidated financial statements in conformity with accounting principles generally accepted in Canada. 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 shareholders, 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 shareholders, 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/ R. Zambonini /s/ Donnie M. Moore James M. Tory Ron Zambonini Donnie M. Moore Chairman President and Senior Vice President, Chief Executive Officer Finance & Administration, and Chief Financial Officer March 30, 2000 [except Note 14, as to which the date is April 6, 2000] 45 COGNOS INCORPORATED AUDITORS' REPORT To the Board of Directors and Shareholders of Cognos Incorporated: We have audited the consolidated balance sheets of Cognos Incorporated as at February 29, 2000 and February 28, 1999 and the consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three- year period ended February 29, 2000. 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 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 29, 2000 and February 28, 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended February 29, 2000, in accordance with accounting principles generally accepted in Canada. On March 30, 2000, we reported separately to the Board of Directors and Shareholders of Cognos Incorporated on financial statements for the same periods, prepared in accordance with accounting principles generally accepted in the United States of America. /s/ Ernst & Young LLP Ottawa, Canada Ernst & Young LLP March 30, 2000 Chartered Accountants [except Note 14, as to which the date is April 6, 2000] 46 CONSOLIDATED STATEMENTS OF INCOME (US$000s except share amounts, CDN GAAP)
Years Ended the Last Day of February Note 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Revenue Product license $203,299 $158,393 $126,820 Product support 118,061 93,311 72,832 Services 64,280 49,421 45,182 - -------------------------------------------------------------------------------------------------------------- Total revenue 385,640 301,125 244,834 - -------------------------------------------------------------------------------------------------------------- Operating expenses Cost of product license 5,235 5,738 3,828 Cost of product support 13,758 11,166 9,694 Selling, general, and administrative 244,827 178,295 143,493 Research and development 53,548 42,274 33,530 Investment tax credits (6,207) (14,880) (9,432) - -------------------------------------------------------------------------------------------------------------- Total operating expenses 311,161 222,593 181,113 - -------------------------------------------------------------------------------------------------------------- Operating income 74,479 78,532 63,721 Interest expense 6 (718) (527) (481) Interest income 7,454 6,430 5,340 - -------------------------------------------------------------------------------------------------------------- Income before taxes 81,215 84,435 68,580 Income tax provision 9 26,673 26,313 19,638 - -------------------------------------------------------------------------------------------------------------- Net income $ 54,542 $ 58,122 $ 48,942 ============================================================================================================== Net income per share 10, 14 Basic $0.63 $0.66 $0.55 ============================================================================================================== Fully diluted $0.62 $0.65 $0.54 ============================================================================================================== Weighted average number of shares (000s) 10, 14 Basic 85,972 87,416 88,414 ============================================================================================================== Fully diluted 92,082 93,404 96,082 ==============================================================================================================
(See accompanying notes) 47 CONSOLIDATED BALANCE SHEETS (US$000s, CDN GAAP)
February 29, February 28, Note 2000 1999 - ------------------------------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents 8 $132,435 $ 93,617 Short-term investments 8 64,284 56,074 Accounts receivable 2 107,823 76,876 Inventories 806 807 Prepaid expenses 7,840 6,388 - ------------------------------------------------------------------------------------------------------------ 313,188 233,762 Fixed assets 3 44,835 30,164 Intangible assets 4 40,158 50,179 - ------------------------------------------------------------------------------------------------------------ $398,181 $314,105 ============================================================================================================ Liabilities Current liabilities Accounts payable $ 22,908 $ 18,960 Accrued charges 17,540 13,148 Salaries, commissions, and related items 24,024 19,656 Income taxes payable 3,548 7,290 Current portion of long-term debt 6 2,176 123 Deferred revenue 76,537 51,242 - ------------------------------------------------------------------------------------------------------------ 146,733 110,419 Long-term debt 6 - 2,489 Long-term liabilities 5 2,699 5,820 Deferred income taxes 9 21,730 16,775 - ------------------------------------------------------------------------------------------------------------ 171,162 135,503 - ------------------------------------------------------------------------------------------------------------ Commitments and Contingencies 7 Stockholders' Equity Capital stock Common shares (2000 - 86,657,578; 1999 - 86,850,568) 10, 14 106,936 91,985 Retained earnings 126,316 95,329 Other accumulated comprehensive items (6,233) (8,712) - ------------------------------------------------------------------------------------------------------------ 227,019 178,602 - ------------------------------------------------------------------------------------------------------------ $398,181 $314,105 ============================================================================================================
(See accompanying notes) On behalf of the Board: 48 /s/ Douglas C. Cameron /s/ James M. Tory Douglas C. Cameron, Director James M. Tory, Chairman 49 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (US$000s except share amounts, CDN GAAP)
Other Accumulated Common Stock Retained Comprehensive ------------------------------ Shares Amount Earnings Items Total - ---------------------------------------------------------- ------------------------------------------------------------------ (000s) - ------------------------------------------------------------------------------------------------------------------------------- Balances, February 28, 1997 87,178 $ 74,739 $ 46,122 $(4,949) $115,912 Issuance of stock Stock option plans 3,316 8,557 8,557 Stock purchase plans 74 776 776 Business acquisitions 180 1,607 1,607 Repurchase of shares (2,540) (2,386) (26,725) (29,111) Income tax effect related to stock options 2,425 2,425 - ------------------------------------------------------------------------------------------------------------------------------ 88,208 85,718 19,397 (4,949) 100,166 - ------------------------------------------------------------------------------------------------------------------------------ Net income 48,942 48,942 Other comprehensive items Foreign currency translation adjustments (1,803) (1,803) - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 48,942 (1,803) 47,139 - ------------------------------------------------------------------------------------------------------------------------------ Balances, February 28, 1998 88,208 $ 85,718 $ 68,339 $(6,752) $147,305 Issuance of stock Stock option plans 1,054 4,141 4,141 Stock purchase plans 92 846 846 Business acquisitions 503 3,763 3,763 Repurchase of shares (3,006) (3,005) (31,132) (34,137) Income tax effect related to stock options 522 522 - ------------------------------------------------------------------------------------------------------------------------------ 86,851 91,985 37,207 (6,752) 122,440 - ------------------------------------------------------------------------------------------------------------------------------ Net income 58,122 58,122 Other comprehensive items Foreign currency translation adjustments (1,960) (1,960) - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 58,122 (1,960) 56,162 - ------------------------------------------------------------------------------------------------------------------------------ Balances, February 28, 1999 86,851 $ 91,985 $ 95,329 $(8,712) $178,602 Issuance of stock Stock option plans 1,973 15,420 15,420 Stock purchase plans 120 1,095 1,095 Repurchase of shares (2,286) (2,458) (23,555) (26,013) Income tax effect related to stock options 894 894 - ------------------------------------------------------------------------------------------------------------------------------ 86,658 106,936 71,774 (8,712) 169,998 - ------------------------------------------------------------------------------------------------------------------------------ Net income 54,542 54,542 Other comprehensive items Foreign currency translation adjustments 2,479 2,479 - ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income 54,542 2,479 57,021 - ------------------------------------------------------------------------------------------------------------------------------ Balances, February 29, 2000 86,658 $106,936 $126,316 $(6,233) $227,019 ==============================================================================================================================
(See accompanying notes) 50 CONSOLIDATED STATEMENTS OF CASH FLOWS (US$000s, CDN GAAP)
Years Ended the Last Day of February 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ Cash provided by (used in) operating activities Net income $ 54,542 $ 58,122 $ 48,942 Non-cash items Depreciation and amortization 26,272 17,958 12,367 Deferred income taxes 4,756 (3,685) (370) Loss on disposal of fixed assets 148 185 403 - ------------------------------------------------------------------------------------------------------------ 85,718 72,580 61,342 Change in non-cash working capital Increase in accounts receivable (32,818) (12,805) (17,135) Decrease (increase) in inventories 31 (267) 91 Increase in prepaid expenses (1,328) (2,852) (837) Increase in accounts payable 3,930 3,526 3,571 Increase in accrued charges 1,004 2,568 300 Increase in salaries, commissions, and related items 4,394 5,806 2,948 Increase (decrease) in income taxes payable (3,993) 5,624 (2,603) Increase in deferred revenue 26,280 10,438 8,208 - ------------------------------------------------------------------------------------------------------------ 83,218 84,618 55,885 - ------------------------------------------------------------------------------------------------------------ Cash provided by (used in) investing activities Maturity of short-term investments 138,796 96,860 131,340 Purchase of short-term investments (146,238) (116,093) (151,141) Acquisition costs (2,146) (9,174) (16,915) Additions to fixed assets (28,096) (21,147) (12,068) Proceeds from the sale of fixed assets 24 12 45 - ------------------------------------------------------------------------------------------------------------ (37,660) (49,542) (48,739) - ------------------------------------------------------------------------------------------------------------ Cash provided by (used in) financing activities Issue of common shares 17,409 5,509 11,758 Repurchase of shares (26,013) (34,137) (29,111) Repayment of long-term debt (467) (107) (92) - ------------------------------------------------------------------------------------------------------------ (9,071) (28,735) (17,445) - ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 2,331 (2,338) (1,240) - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 38,818 4,003 (11,539) Cash and cash equivalents, beginning of period 93,617 89,614 101,153 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period 132,435 93,617 89,614 Short-term investments, end of period 64,284 56,074 36,712 - ------------------------------------------------------------------------------------------------------------ Cash, cash equivalents, and short-term investments, end of period $ 196,719 $ 149,691 $ 126,326 ============================================================================================================
(See accompanying notes) 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Nature of Business The Corporation develops, markets, and supports computer software products for data access, exploring, reporting, and analysis, and for application development on a wide range of open and proprietary platforms. The Corporation markets and supports these products 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 generally accepted accounting principles (GAAP) in Canada, applied on a consistent basis. Consolidated financial statements prepared in accordance with U.S. 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 but one of the 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." Other comprehensive income refers to changes in the balances of revenues, expenses, gains, and losses that are recorded directly as a separate component of Stockholders' Equity and excluded from net income. The only comprehensive item for the Corporation relates to foreign currency translation adjustments pertaining to those subsidiaries not using the U.S. dollar as their functional currency. 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. 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 52 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 are deferred and expensed in the period the related revenue is recognized. 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, Government of Canada Treasury Bills, and banker's acceptances. Short-term investments are carried at cost, which approximates their fair value. 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. 53 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. 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. Intangible Assets This category includes acquired technology and goodwill associated with various acquisitions, and deferred software development costs. Acquired technology represents the discounted fair 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 net realizable value if necessary. 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 is amortized over five years on a straight line basis. The Corporation evaluates the expected future net cash flows of the acquired businesses at each reporting date, and adjusts goodwill for any impairment. 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 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. Income Taxes The Corporation adopted CICA Handbook, Section 3465, Income Taxes in fiscal 1998. 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. Cash Flows In June 1998, the CICA released Section 1540, Cash Flow Statements, which was adopted by the Corporation in fiscal 1999. Under this method, non-cash investing and financing transactions are excluded. The comparative consolidated statements of cash flows have been restated. 2. Accounts Receivable Accounts receivable include an allowance for doubtful accounts of $4,734,000 and $4,430,000 as of February 29, 2000 and February 28, 1999, respectively. 54 3. Fixed Assets
2000 1999 ---------------------------------- ---------------------------------- Accumulated Accumulated Depreciation Depreciation Depreciation/ and and Amortization Cost Amortization Cost Amortization Rate ------------- ---------------- -------------- --------------- ------------------ ($000s) ($000s) Computer equipment and software $ 63,334 $43,370 $ 46,795 $32,665 33% Office furniture 21,602 11,317 15,877 9,230 20% Leasehold improvements 8,160 3,726 5,404 2,754 Lease Term Land 820 - 788 - - Building 7,198 1,243 6,916 967 2.5% Construction in progress* 3,377 - - - - ------------- ---------------- -------------- --------------- 104,491 $59,656 75,780 $45,616 ================ =============== (59,656) (45,616) ------------- -------------- Net book value $ 44,835 $ 30,164 ============= ==============
* See Note 7 Depreciation and amortization of fixed assets was $13,898,000, $10,760,000, and $8,766,000 in each of fiscal 2000, 1999, and 1998, respectively. 4. Intangible assets Intangible assets as at February 29, 2000, and February 28, 1999, include acquired technology and goodwill, and are disclosed net of amortization. The Corporation recorded $2,352,000 of goodwill in fiscal 2000 and $26,338,000 of acquired technology and goodwill in fiscal 1999. Amortization of intangible assets was $12,374,000, $7,143,000, and $3,171,000 in each of fiscal 2000, 1999, and 1998, 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 2000, 1999, and 1998, and recorded $0, $55,000, and $430,000 of corresponding amortization, respectively. 5. Acquisitions Fiscal 2000 Acquisitions On May 28, 1999, the Corporation completed the acquisition of Information Tools AG, the Corporation's distributor in Switzerland. The shareholders of Information Tools AG are 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) is 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 55 amount, approximately $120,000 will be paid in fiscal 2001 relating to fiscal 2000 results and has been recorded as additional 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: ($000s)
Cognos Far Information East Pte Tools AG Limited Total ------------------ ------------------ ------------------ Assets acquired $ 683 $ - $ 683 Liabilities assumed (570) - (570) ------------------ ------------------ ------------------ Net assets acquired 113 - 113 Goodwill 664 1,688 2,352 ------------------ ------------------ ------------------ Purchase price $ 777 $1,688 $2,465 ================== ================== ================== Consideration Cash 458 1,688 2,146 Deferred payment 319 - 319 ------------------ ------------------ ------------------ $ 777 $1,688 $2,465 ================== ================== ==================
Fiscal 1999 Acquisitions On December 3, 1998, the Corporation completed the acquisition of substantially all the assets of Relational Matters including DecisionStream software. DecisionStream aggregates and integrates large volumes of transaction data with multidimensional data structures. Relational Matters will receive approximately $7,555,000 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, are being held in escrow by the Corporation and will be released on the second (40%) and third (60%) anniversaries of the closing of the transaction. For valuation purposes, the deferred payments and shares were appropriately discounted. On February 24, 1999, the Corporation completed the acquisition of LEX2000 Inc., a developer of financial data mart and reporting software, for a combination of cash and the Corporation's common stock. The shareholders of LEX2000 Inc. will 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 issued at closing; the remainder, all of which were issued, are being held in escrow by the Corporation and will be released equally on the second (50%) and third (50%) 56 anniversaries of the closing of the transaction. For valuation purposes, the deferred payments and remaining shares were appropriately discounted. The scheduled aggregate annual payments for the long-term liabilities related to these two acquisitions are $3,501,000 and $2,599,000, in fiscal 2001and 2002, respectively. Amounts due within twelve months are included in accrued charges. Both acquisitions have been accounted for using the purchase method. The results of operations of both acquired companies prior to the acquisitions 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: ($000s)
Relational Matters LEX2000 Total ----------------- ------------------ ----------------- Assets acquired Acquired technology $6,000 $15,499 $21,499 Other assets 25 1,501 1,526 ----------------- ------------------ ----------------- 6,025 17,000 23,025 Liabilities assumed (37) (2,869) (2,906) Deferred tax credits -- (6,201) (6,201) ----------------- ------------------ ----------------- Net assets acquired 5,988 7,930 13,918 Goodwill 3,385 1,454 4,839 ----------------- ------------------ ----------------- Purchase price $9,373 $ 9,384 $18,757 ================= ================== ================= Consideration Cash $4,419 $ 4,755 $ 9,174 Deferred payment 3,131 2,689 5,820 Shares 1,823 1,940 3,763 ----------------- ------------------ ----------------- $9,373 $ 9,384 $18,757 ================= ================== =================
Fiscal 1998 Acquisitions On April 9, 1997, the Corporation completed the acquisition of Right Information Systems Limited (RIS) of London, England. RIS was the provider of 4Thought, business modeling and forecasting software. The shareholders of RIS received $4,500,000 and 180,000 shares of the Corporation's common stock, valued at $1,607,000. These shares, all of which were issued, are being held in escrow by the Corporation until April 9, 2000. On October 24, 1997, the Corporation completed the acquisition of Interweave Software, Inc. (Interweave) of Santa Clara, California, U.S.A. Interweave was the developer and marketer of the Interweave software product line, which allows information technology organizations to deploy intranet- and extranet-based business intelligence applications more broadly within and across enterprises. The acquisition agreement called for the Corporation to pay $12,415,000 to the shareholders of Interweave, the majority of which was paid upon completion of the acquisition 57 Both acquisitions have been accounted for using the purchase method. The results of operations of both acquired companies prior to the acquisitions 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: ($000s)
RIS Interweave Total ----------------- ------------------ ------------------ Assets acquired Acquired technology $ 7,001 $21,667 $ 28,668 Other assets 239 390 629 ----------------- ------------------ ------------------ 7,240 22,057 29,297 Liabilities assumed (1,050) (4,544) (5,594) Deferred tax credits (2,001) (8,667) (10,668) ----------------- ------------------ ------------------ Net assets acquired 4,189 8,846 13,035 Goodwill 1,918 3,569 5,487 ----------------- ------------------ ------------------ Purchase price $ 6,107 $12,415 $ 18,522 ================= ================== ================== Consideration Cash $ 4,500 $12,415 $ 16,915 Shares 1,607 - 1,607 ----------------- ------------------ ------------------ $ 6,107 $12,415 $ 18,522 ================= ================== ==================
6. Long-term Debt
2000 1999 ------------------ ------------------ ($000s) Mortgage at 12.5% per annum, repayable in blended monthly installments of principal and interest of Cdn $45,200 to October 2000 $ 2,142 $2,160 Other 34 452 ------------------ ------------------ 2,176 2,612 Less current portion (2,176) (123) ------------------ ------------------ $ - $2,489 =================== ==================
Interest expense on long-term debt was $264,000, $271,000, and $301,000 in fiscal 2000, 1999, and 1998, respectively. 7. 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 2000, 1999, and 1998 was $12,205,000, $9,219,000, and $8,599,000, respectively. 58 The aggregate amount of payments for these operating leases, in each of the next five fiscal years and thereafter, is approximately as follows: ($000s) 2001 $12,939 2002 10,261 2003 7,501 2004 4,915 2005 4,200 Thereafter 8,770 In August 1999, the Corporation announced plans for the construction of a second building on the site of its corporate headquarters on Riverside Drive in Ottawa - -- Riverside II. The total cost of Riverside II and related improvements is estimated to be $21 million. The Corporation is currently committed to approximately $15 million of the total cost and as at February 29, 2000, had incurred capital expenditures of approximately $3.4 million. Construction is expected to be substantially complete before the end of fiscal 2001. 8. Financial Instruments Off-Balance-Sheet Risk 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. To achieve this objective, the Corporation enters into foreign exchange forward contracts to hedge portions of the net investment in its various subsidiaries. As a result, the exchange gains and losses recorded on translation of the subsidiaries' financial statements are partially offset by the gains and losses attributable to the applicable foreign exchange forward contracts. Realized and unrealized gains and losses from the applicable foreign exchange forward contracts are recorded as part of the foreign currency translation adjustments included in the Consolidated Statements of Stockholders' Equity. The Corporation has foreign exchange conversion facilities that allow it to hold foreign exchange contracts of Cdn $130,000,000 (US $89,730,000) 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 29, 2000, the Corporation had foreign exchange forward contracts, with maturity dates ranging from March 30, 2000 to May 25, 2000, to exchange various foreign currencies in the amount of $6,239,000. As of February 28, 1999, the Corporation had foreign exchange forward contracts, with maturity dates ranging from March 25, 1999 to May 27, 1999, to exchange various foreign currencies in the amount of $3,862,000. 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. 59 Included in cash, cash equivalents, and short-term investments as of February 29, 2000 and February 28, 1999 were corporate debt amounts of $73,805,000 and $46,941,000, respectively. The corporate debt amounts as of February 29, 2000 and February 28, 1999 were with two distinct issuers. These amounts were repaid, in full, at maturity in March of their respective years. All the Corporation's short-term investments as of February 29, 2000 and February 28, 1999 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 $10,353,000), subject to certain covenants. As of February 29, 2000 and February 28, 1999, 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. 9. Income Taxes Details of the income tax provision (recovery) are as follows: ($000s)
2000 1999 1998 ----------------- ---------------- -------------- Current Canadian $16,880 $15,581 $ 8,755 Foreign 9,943 9,228 8,550 ----------------- ---------------- -------------- 26,823 24,809 17,305 ----------------- ---------------- -------------- Deferred Canadian 1,765 3,274 4,163 Foreign (1,915) (1,770) (1,830) ----------------- ---------------- -------------- (150) 1,504 2,333 ----------------- ---------------- -------------- Income tax provision $26,673 $26,313 $19,638 ================= ================ ==============
60 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)
2000 1999 1998 ----------------- -------------- -------------- Expected Canadian tax rate 44.0% 44.0% 44.0% ================= ============== ============== Expected tax provision $ 35,735 $ 37,151 $29,279 Foreign tax rate differences (10,422) (10,906) (8,740) Net change in valuation allowance and other income tax benefits earned (2,680) (1,064) (4,581) Non-deductible expenses and non-taxable income 2,876 193 361 Withholding tax on foreign income 1,179 987 822 Reorganization costs - - 2,426 Other (15) (48) 71 ----------------- -------------- -------------- Reported income tax provision $ 26,673 $ 26,313 $19,638 ================= ============== ==============
Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and tax reporting purposes. Significant components of the Corporation's deferred tax assets and liabilities as of February 29, 2000 and February 28, 1999 are as follows: ($000s)
2000 1999 ----------------- --------------- Deferred tax assets Net operating tax loss carryforwards $ 4,460 $ 5,507 Investment tax credits 1,404 4,499 Deferred revenue 2,490 2,702 Other 2,186 1,912 ----------------- --------------- Total deferred tax assets 10,540 14,620 Valuation allowance for deferred tax assets (4,460) (5,507) ----------------- --------------- Net deferred tax assets 6,080 9,113 ----------------- --------------- Deferred tax liabilities Book and tax differences on assets 16,069 15,957 Reserves and allowances 7,484 5,415 Income tax credits 5,346 4,502 Other (1,089) 14 ----------------- --------------- Total deferred tax liabilities 27,810 25,888 ----------------- --------------- Net deferred income tax liability $21,730 $16,775 ================= ===============
The net change in the total valuation allowance for the years ended February 29, 2000 and February 28, 1999 was a decrease of $1,047,000 and $7,309,000, 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 61 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 29, 2000, the Corporation had tax loss carryforwards of approximately $10,027,000 available to reduce future years' income for tax purposes. These losses expire as follows: ($000s) 2002 $ 294 2003-2010 425 Indefinitely 9,308 ------------- Total $10,027 ============= Income before taxes attributable to all foreign operations was $37,215,000, $39,219,000, and $35,102,000 in each of fiscal 2000, 1999, and 1998, 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 $18,658,000, $8,201,000, and $11,273,000 in each of fiscal 2000, 1999, and 1998, respectively. 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. 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 2000 were part of two open market share repurchase programs. The program adopted in October 1998 expired on October 8, 1999. Under this program the Corporation repurchased 3,161,800 of its shares; all repurchased shares were cancelled. In October 1999, the Corporation adopted a new program that will enable it to purchase up to 4,200,000 common shares (not more than 5% of those issued and outstanding) between October 9, 1999 and October 8, 2000. This program does not commit the Corporation to make any share repurchases. Purchases will be made on The Nasdaq Stock Market 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:
2000 1999 1998 ------------------------------- -------------------------------- ----------------------------- Shares Cost Shares Cost Shares Cost ------------- ------------- ------------- -------------- ------------ ------------- (000s) ($000s) (000s) ($000s) (000s) ($000s) July 1996 program - $ - - $ - 170 $ 1,931 October 1997 program - - 2,030 23,463 2,370 27,180 October 1998 program 2,186 24,689 976 10,674 - - October 1999 program 100 1,324 - - - - ------------- ------------- ------------- -------------- ------------ ------------- 2,286 $26,013 3,006 $34,137 2,540 $29,111 ============= ============= ============= ============== ============ =============
62 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 29, 2000, the Corporation had stock options outstanding under two plans: 4,421,000 pertain to the 1997-2002 Stock Option Plan and 2,849,000 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. In June 1999, options were awarded to employees, executive officers and directors. These options vest equally in April 2000, April 2001, April 2002, and April 2003, and expire in April 2007. There were 9,381,000 options available for grant under the Plan as of February 29, 2000. Under the 1993-1998 Stock Option Plan, options were awarded to directors, officers, and employees. For the options outstanding as of February 29, 2000, the vesting dates extend to September 2001 and the expiry dates range from April 2000 to September 2005. In April 1996, options were awarded to certain key officers under an executive option award. These options vest 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 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. 63 Accounting for Stock-Based Compensation 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 since fiscal 1996 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 $9,096,000, $8,239,000, and $6,824,000; reduced basic net income per share by $0.11, $0.09, and $0.08, and reduced fully diluted net income per share by $0.10, $0.09, and $0.07 in fiscal 2000, 1999, and 1998, respectively. Because the Corporation has only applied these measurement principles to options granted subsequent to February 28, 1995 and the Corporation's amortization period for compensation expense approximates four years, the above pro forma disclosure for fiscal 1998 is not indicative of pro forma amounts that will be reported in future years. The pro forma disclosure for fiscal 2000 and 1999 includes the full extent of amortization expense for four years of option grants. 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 2000, 1999, and 1998, respectively: risk-free interest rates of 5.8%, 5.5%, and 6.5%, expected life of the options of 2.8 years, 2.9 years, and 3.0 years, expected volatility of 55%, 56%, and 56%, and for all years, a dividend yield of zero. Activity in the stock option plans for fiscal 2000, 1999, and 1998 was as follows:
2000 1999 1998 ---------------------------- ---------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------------------------- ---------------------------- ----------------------------- (000s) (000s) (000s) Outstanding, beginning of year 6,769 $ 9.72 6,571 $ 8.29 7,940 $ 5.33 Granted 2,772 11.18 1,935 13.33 2,190 11.48 Exercised (1,973) 7.81 (1,054) 3.94 (3,316) 2.60 Cancelled (298) 11.73 (683) 9.52 (243) 9.54 ------------ ------------- -------------- Outstanding, end of year 7,270 11.17 6,769 9.72 6,571 8.29 ============ ============= ============== Options exercisable at year end 1,234 1,460 1,077 ============ ============= ============== Weighted average per share fair value of options granted during the year calculated using the Black-Scholes option pricing model $ 4.59 $ 5.54 $ 4.84 ========== ========== ==========
64 The following table summarizes significant ranges of outstanding and exercisable options held by directors, officers, and employees as of February 29, 2000:
Options Outstanding Options Exercisable --------------------------------------------------------- ----------------------------------- Weighted Weighted Weighted Range of Exercise Average Average Average Prices Options Remaining Life Exercise Price Options Exercise Price - ---------------------- ------------- ------------------ ----------------- ------------- ----------------- (000s) (000s) $3.55 - $5.52 26 0.4 years $ 4.22 25 $ 4.22 $8.76 - $10.69 1,801 4.2 8.95 407 8.96 $10.70 - $11.04 3,612 6.5 10.93 449 10.94 $11.05 - $13.86 1,660 6.2 13.37 353 13.17 $17.58 - $23.56 158 7.8 18.65 - - $27.95 - $28.06 13 7.9 28.03 - - ------------- ------------- 7,270 5.9 $11.17 1,234 $10.78 ============= =============
Net Income per Share Net income per share is based on the weighted average number of shares outstanding during each year. 65 The reconciliation of the numerator and denominator for the calculation of net income per share and fully diluted net income per share is as follows: (000s, except per-share amounts)
2000 1999 1998 ------------- ------------- ------------- Net Income per Share Net income $54,542 $58,122 $48,942 ============= ============= ============= Weighted average number of shares outstanding 85,972 87,416 88,414 ============= ============= ============= Net income per share $ 0.63 $ 0.66 $ 0.55 ============= ============= ============= Fully Diluted Net Income per Share Net income $54,542 $58,122 $48,942 Imputed Interest 2,941 2,571 2,719 ------------- ------------- ------------- Adjusted Net Income $57,483 $60,693 $51,661 ============= ============= ============= Weighted average number of shares outstanding 85,972 87,416 88,414 Dilutive effect of stock options * 6,110 5,988 7,668 ------------- ------------- ------------- Adjusted weighted average number of shares outstanding 92,082 93,404 96,082 ============= ============= ============= Fully diluted net income per share $ 0.62 $ 0.65 $ 0.54 ============= ============= =============
* All anti-dilutive options have been excluded. Imputed earnings on the proceeds from the exercise of options are calculated using a 5% after-tax rate of return. 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 2000, 1999, and 1998 were $3,839,000, $2,744,000, and $2,327,000, respectively. 12. Segmented Information The Corporation operates in one business segment--computer software tools. 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 products that are designed to satisfy enterprise-wide business-critical needs. The Corporation's business intelligence products give individual users the ability to independently access, explore, analyze, and report corporate data. The Corporation's client/server application development 66 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. 67 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)
2000 1999 1998 ---------- ---------- --------- Revenue to external customers* U.S.A. $ 204,730 $ 153,827 $ 123,774 Canada 30,120 24,040 22,328 United Kingdom 44,972 41,563 38,257 Europe 77,778 60,502 43,189 Asia/Pacific 28,040 21,193 17,286 ---------- ---------- --------- $ 385,640 $ 301,125 $ 244,834 ========== ========== =========
* Revenues are attributed to countries based on location of customer Fixed assets Canada $ 31,055 $ 20,148 U.S.A. 8,659 6,078 Other countries 5,121 3,938 ---------- --------- $ 44,835 $ 30,164 ========== ========= Intangible assets Canada $ 13,137 $ 14,719 U.S.A. 27,021 35,460 ---------- --------- $ 40,158 $ 50,179 ========== ========= 13. Comparative Results Certain of the prior years' figures have been reclassified in order to conform to the presentation adopted in the current year. 14. Subsequent Event 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 share and per-share amounts in the accompanying financial statements, and notes thereto have been adjusted for the split. 68 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, subsequent to year-end, 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 - ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- (US$000s except share amounts, Canadian GAAP) Statement of Income Data Revenue $385,640 $301,125 $244,834 $198,185 $152,186 - ------------------------------------------------------------------------------------------------------------------------- Operating expenses Cost of product license 5,235 5,738 3,828 3,266 3,433 Cost of product support 13,758 11,166 9,694 9,634 7,488 Selling, general, and administrative 244,827 178,295 143,493 114,617 98,908 Research and development 53,548 42,274 33,530 28,951 22,382 Investment tax credits (6,207) (14,880) (9,432) (3,683) - - ------------------------------------------------------------------------------------------------------------------------- Total operating expenses 311,161 222,593 181,113 152,785 132,211 - ------------------------------------------------------------------------------------------------------------------------- Operating income 74,479 78,532 63,721 45,400 19,975 Interest expense (718) (527) (481) (427) (468) Interest income 7,454 6,430 5,340 4,524 4,019 - ------------------------------------------------------------------------------------------------------------------------- Income before taxes 81,215 84,435 68,580 49,497 23,526 Income tax provision 26,673 26,313 19,638 12,708 5,996 - ------------------------------------------------------------------------------------------------------------------------- Net income $ 54,542 $ 58,122 $ 48,942 $ 36,789 $ 17,530 ========================================================================================================================= Net income per share Basic $0.63 $ 0.66 $ 0.55 $ 0.43 $ 0.21 Fully diluted $0.62 $ 0.65 $ 0.54 $ 0.41 $ 0.20 Weighted average number of shares (000s) Basic 85,972 87,416 88,414 86,298 82,578 Fully diluted 92,082 93,404 96,082 95,390 90,426 Balance Sheet Data (at end of period) Working capital $166,455 $123,343 $112,846 $103,727 $ 66,149 Total assets 398,181 314,105 245,718 189,152 140,010 Total debt 2,176 2,612 2,457 2,655 2,744 Stockholders' equity 227,019 178,602 147,305 115,912 78,297
69 3755 Riverside Drive, Ottawa, Ontario, K1G 4K9 PROXY Annual Meeting of Shareholders to be held on June 21, 2000 THIS PROXY IS SOLICITED ON BEHALF OF THE MANAGEMENT OF THE CORPORATION The undersigned shareholder of COGNOS INCORPORATED (the "Corporation") hereby appoints each of James M. Tory, Chairman of the Board and Donnie M. Moore, Senior Vice President Finance & Administration and Chief Financial Officer of the Corporation, or instead of them ________________________ as proxy of the undersigned, with full power of substitution and authorizes each of them to represent and vote, as designated below, all of the Common Shares of Cognos Incorporated owned of record on May 5, 2000, by the undersigned at the Annual Meeting of Shareholders of the Corporation to be held on the 21st day of June, 2000 and any adjournment thereof, in the same manner, to the same extent and with the same powers as if the undersigned were present at that meeting or any adjournment. 1. ELECTION OF DIRECTORS FOR [ ] WITHHOLD AUTHORITY TO VOTE [ ] for nominees listed below (INSTRUCTIONS: To WITHHOLD authority to vote for any individual nominee, strike a line through the nominee's name in the list below) John E. Caldwell, Douglas C. Cameron, Pierre Y. Ducros, Douglas J. Erwin, Robert W. Korthals, Candy M. Obourn, James M. Tory, and Renato Zambonini. 2. APPOINTMENT OF ERNST & YOUNG LLP AS AUDITORS FOR [ ] WITHHOLD AUTHORITY TO VOTE [ ] In their discretion, the proxies are authorized to vote upon such other business as may properly come before the Meeting or any adjournment thereof. This Proxy confers authority for the above named to vote in their discretion with respect to amendments or variations to the matters identified in the Notice of the Meeting accompanying this Proxy or other matters which may properly come before that Meeting. This Proxy when properly executed will be voted in the manner directed above by the undersigned shareholder. If the persons named in this Proxy are appointed by the undersigned and no direction is made, they will vote for proposals 1 and 2. If someone other than the persons named is appointed and no direction is made, that person may vote at his or her discretion. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE. DATED the day of , 2000. _____________________________ __________________________________ (Signature of Shareholder) (Signature if held jointly) NOTES: - ------ 1. The shares represented by this Proxy will be voted unless authority to vote is withheld. 2. Every shareholder has the right to appoint a person to represent that shareholder (who need not to be a shareholder) other than the persons specified above, to attend the meeting and act on the shareholder's behalf. You may exercise that right by inserting the name of the person to be appointed in the blank space provided in this Proxy. 3. Please sign exactly as your name appears on the Proxy and date the Proxy. If this Proxy is not dated, it will be deemed to bear the date on which it was mailed. Where shares are held by joint tenants both should sign. When signing as attorney, executor, administrator, trustee or guardian please give full title as such. If the shareholder is a Corporation, this Proxy must be executed by an authorized person. If a partnership, please sign in partnership name by an authorized person. -----END PRIVACY-ENHANCED MESSAGE-----