-----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, Etyfnh4PnoqGo34lo7ppDxNVgj2td8FIx80WXUumJtN7Dy5Njwvguq5vMqLrWBHD MowQIbZxHR9fFJYjGdepNA== 0000950109-01-501507.txt : 20010530 0000950109-01-501507.hdr.sgml : 20010530 ACCESSION NUMBER: 0000950109-01-501507 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010529 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COGNOS INC CENTRAL INDEX KEY: 0000746782 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 980119485 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-72402 FILM NUMBER: 1649756 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 10-K405 1 d10k405.txt FORM 10-K405 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended FEBRUARY 28, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _________ To ________ Commission File Number 0-16006 COGNOS INCORPORATED (Exact Name Of Registrant As Specified In Its Charter) CANADA 98-0119485 (State Or Other Jurisdiction Of (IRS Employer Identification No.) Incorporation Or Organization) 3755 Riverside Drive, P.O. Box 9707, Station T, Ottawa, Ontario, Canada K1G 4K9 (Address Of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (613) 738-1440 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Shares Without Nominal Or Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Shares held by non-affiliates of the registrant, based on the last reported sales price of the Common Shares on the Nasdaq National Market on May 4, 2001, was approximately US$1,617,897,000. As of May 4, 2001, 88,442,071 Common Shares, without nominal or par value, were outstanding. continued.... - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the COGNOS INCORPORATED Annual Report to Shareholders for the fiscal year ended February 28, 2001, are incorporated by reference into Items 5, 6, 7, 7A and 8 of Part II of this Annual Report on Form 10-K. The incorporated portions are filed as Exhibit 13. REPORTING CURRENCY All financial information contained in this document is expressed in United States dollars, unless otherwise stated. TRADEMARKS Cognos and the Cognos logo, Cognos Upfront, Axiant, DecisionStream, emPower, Impromptu, LEX2000, PowerHouse, and PowerPlay are trademarks or registered trademarks of Cognos Incorporated in the United States and/or elsewhere. All other trademarks or trade names referenced to in this Annual Report on Form 10-K are the property of their respective owners. TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business........................................................ 1-14 Item 2. Properties...................................................... 14 Item 3. Legal Proceedings............................................... 15 Item 4. Submission of Matters to a Vote of Security Holders............. 16-17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............................. 18 Item 6. Selected Financial Data......................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 19 Item 8. Financial Statements and Supplementary Data..................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 19 PART III Item 10. Directors and Executive Officers of the Registrant.............. 20-21 Item 11. Executive Compensation.......................................... 22-27 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 28-29 Item 13. Certain Relationships and Related Transactions.................. 29 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................... 30-32 Signatures ................................................................ 33
PART I ITEM 1. BUSINESS Overview Cognos is a leading global provider of business intelligence software solutions. We develop, market, and support an integrated business intelligence platform that allows our customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives and to coordinate decision-making and actions across the extended enterprise through intranets, extranets, and the Internet. Our software is designed to provide our customers with the ability to effectively use data to make faster, more informed decisions in order to improve operational effectiveness, increase customer satisfaction, accelerate corporate response times, and, ultimately, increase revenues and profits. Our enterprise business intelligence platform (EBI Platform) is uniquely positioned to take advantage of the accelerating demand for business intelligence solutions for the extended enterprise across all industries. Our EBI Platform is an integrated software foundation that is designed to meet our customers' end-to-end business intelligence requirements, including reporting, analysis, query, and visualization, in a secure, Web-based environment that is easy to use and deploy. The information is distributed over a business intelligence portal that enables users, both inside and outside the organization, to access business intelligence content, such as reports and scorecarding, through a single, personalized Web-based interface. Our business intelligence solution also includes an integrated set of analytic applications built upon the foundation of our EBI Platform, which provide "out-of-the-box" functionality for reporting and analysis in the areas of finance, inventory, and sales. We rely primarily on our direct sales force to target Global 2000 companies. We also license our products to a broad range of small and mid-size businesses. In fiscal 2001, sales made by our direct sales force accounted for approximately 70% of our software license revenue. We place reliance on the key relationships that we have developed with resellers, original equipment manufacturers, and system integrators worldwide to distribute our products. As of February 28, 2001, we had more than 17,000 customers located in over 120 countries, representing an installed base of approximately 2.5 million users. We currently have 52 sales offices in 20 countries. In fiscal 2001, we had total revenue of $495.7 million, of which approximately 64% was derived from sales in North America, 30% from sales in Europe, and 6% from sales in Asia/Pacific. Industry Business intelligence software allows non-technical users to easily access and analyze data gathered from across the extended enterprise. With business intelligence software, users can extract the value in database information by interacting with easy-to-understand graphs, tables, and reports. Business intelligence solutions can help an enterprise realize competitive advantages by enhancing its ability to make more timely, informed decisions at all levels within the organization and across the extended enterprise. Today, enterprises around the world use business intelligence solutions for numerous purposes, including: . to uncover new business opportunities, customer acquisition trends, and revenue sources; 1 . to build stronger relationships with customers, partners, and suppliers through the development of integrated supply chain management, customer relationship management, and e-business initiatives; . to recover and avoid costs through better management and control over enterprise resources, such as inventory, manufacturing, and service employees; and . to create measurable returns on investment through the optimization of business processes. For example, many large manufacturers use supply chain management solutions to integrate their transaction systems with those of their suppliers. Our business intelligence solution allows these manufacturers to evaluate and improve their e-business processes by exchanging reports and analyses with suppliers, thereby ensuring a common context for measuring business performance. As a result, manufacturers and their supply chain partners can strengthen their relationships and develop new opportunities for innovation since all parties are informed of the key performance metrics and the drivers of success. We believe that business intelligence solutions are becoming a strategic requirement of global organizations for the following reasons: e-Business and Extranets. e-Business and extranets have facilitated collaboration among customers and suppliers and created the need to integrate online and traditional operations. e-Business is responsible for changes in traditional business processes in areas such as marketing, outsourcing, automation, service dispatch, and product distribution and has changed the way in which these processes are monitored. As enterprises execute new business processes, the need for all participants to quickly understand the effectiveness of changes and to access new information in shorter time frames will continue. Enterprise-Wide Focus. The growth of global corporations with broadly distributed functions and the requirement for coordinated decision-making has accelerated the need for an enterprise-wide focus on business performance. Decision-makers now require a consistent enterprise-wide view of their business for measuring performance. Increasingly Competitive Business Environment. In a business environment characterized by the rapid spread of information, more efficient communications, and technological innovation, organizations are under competitive pressure to continuously improve their business processes. Innovations have not only increased the speed and efficiency of businesses, but also intensified competition. In order to succeed in this environment, enterprises must improve the ability of business professionals to access and analyze data. Development of Internet Architecture Affects the Number and Type of Users. Internet technologies have allowed organizations to deploy business intelligence solutions more widely and cost-effectively because the need to install and maintain applications on each user's desktop computer has been eliminated. This development has increased the number of users of business intelligence products within organizations. In addition, the use of extranets has expanded the user base for business intelligence solutions to include all of a company's customers, partners, and suppliers in a network of shared intelligence and collaborative decision-making. Increasing Amounts of Data Created by Enterprise Resource Planning and e-Business Systems. The implementation of enterprise resource planning systems and of e-business have allowed enterprises to create and store increasing amounts of data from traditional systems, as well as from new e-sources such 2 as clickstream data and Web sites. Powerful business intelligence tools are required to analyze this data so that it can be effectively used to make timely, well-informed business decisions. An emerging trend in the business intelligence market is the growing demand for pre-packaged applications that focus on specific functional areas. These applications reduce the time, effort, and cost required for an organization to realize competitive advantages from business intelligence and can help enterprises quickly achieve stronger returns on investment from operational applications such as enterprise resource planning, customer relationship management, and supply chain management implementations. The Cognos Solution Our EBI Platform is uniquely positioned to meet the broad business intelligence challenges faced by organizations in a variety of industries. Our business intelligence solution is a complete fully-integrated Web-based platform that is easy to use and scalable. The following are the key attributes of our EBI Platform: Built for e-Business. Our platform is uniquely positioned to take advantage of the opportunities represented by e-business. The majority of our Web-based solutions do not require software programs (e.g., Java applets or browser plug-ins) to be installed on the end-user's computer. For many large corporations, the installation of third-party software creates security concerns, and, as a result, they disable features in their Web browsers to prevent their employees from loading such software. In addition, the portal and centralized security components of our platform make it ideal for use in intranet, extranet, and Internet environments because each user's view can be remotely customized and controlled. Because our platform is comprised of Web server-based components, it can be quickly and easily deployed to many users and costs of training can be minimized. Complete End-to-End Solution. We believe that our EBI Platform is the only complete end-to-end integrated business intelligence platform capable of addressing all the business intelligence needs of the extended enterprise. We provide an entire business intelligence framework that is capable of collecting and organizing information, combining it with data from other functional areas, performing analysis, and presenting the results in a personalized format to the user, all within a secure environment. Flexibility. The component-based nature of our platform allows customers to purchase functionality that fits their particular needs and allows them to easily expand their capabilities as required. This flexibility helps our installed customer base to move quickly from a departmental focus to an enterprise-wide approach to business intelligence. High Speed of Adaptability. Our solution models data from across the extended enterprise according to consistent business rules, and, as a result, the individual business intelligence applications built on our platform are driven from a common framework. This model-based approach enables rapid and cost-effective adaptation to changing business conditions because adjustments that are made to the centralized models are applied to the entire system automatically. Without a model-based approach, developments in the business environment can lead to costly and time-consuming changes to thousands of reports. Consistency. Our solution establishes one set of business rules and definitions that is shared by all users throughout the extended enterprise. One of the major limitations of existing business intelligence tools is that they are departmental solutions that have the inherent weakness of not being able to provide a consistent, enterprise-wide view of data. Unlike these products, our integrated EBI Platform ensures 3 complete consistency of information among users and the ability to validate the decisions of others through a shared context. Advanced Personalization. Our platform is capable of generating reports and conducting analyses for users at all levels and across all functional areas, both inside and outside an organization. The information that a user is able to access, and the reports and analyses the user receives, can be easily tailored to meet the format and content requirements of the user based on personal preference and appropriate level of access. Users in the extended enterprise, such as suppliers and customers, can be granted access to the appropriate information that relates to their role in the enterprise's business process. Strategy Our objective is to capitalize on our market leadership position to become the leading strategic supplier of business intelligence solutions for use across the extended enterprise and to have our EBI Platform meet the strategic requirements of large global organizations. We intend to achieve this objective by executing the following strategies: Enhance Our EBI Platform to Further Capitalize on e-Business and Extranet Opportunities. We believe that e-business represents an opportunity for business intelligence solutions, and we intend to continue developing and optimizing our solution for use in e-business and extranet applications. Maintain Our Focus on Enterprise-Wide Deployments. We believe that enterprise-wide deployments will continue to represent the largest segment of consumers of business intelligence solutions. There is a significant first-move advantage associated with becoming an organization's sole business intelligence provider. We intend to take advantage of this opportunity by promoting our integrated, Web-centric, scalable platform to large global companies. Expand Our Presence in the Analytic Applications Market. In fiscal 2000, we created an e-Business Intelligence Applications unit to focus on delivering pre-packaged business intelligence applications as part of our EBI Platform for key parts of our customers' businesses. We currently have operationally oriented analytic applications for reporting and analysis in the areas of sales, accounts receivable, general ledger, accounts payable, inventory management, and procurement. Our objective is to develop a series of connected next-generation analytic applications that will enable enterprises to have a 360-degree analytical view of their business. Continuously Develop Our Business Intelligence Solution to Address Emerging Technologies. As computing trends change and new technologies emerge, we will continue to provide solutions to coordinate decision-making and action across the extended enterprise. For example, we believe that over the next few years, a significant amount of the information consumed by our customers will be accessed using wireless devices. To this end, in September 2000, we completed the purchase of NoticeCast Software Ltd. to provide us with the ability in the future to extend our platform to include real-time delivery of business intelligence to Web-connected and wireless devices. We are well-positioned for this transition because our platform is built around an infrastructure that uses XML technology, which can be easily integrated into the wireless world. Through acquisitions, the formation of strategic alliances, and our own in-house development, we will ensure that we are continuously focused on emerging technologies as they relate to business intelligence. Products 4 Enterprise Business Intelligence Platform Our EBI Platform comprises highly scalable business intelligence servers encapsulated in a robust layered architecture. This platform provides a single, common software foundation to deliver a highly integrated and expandable business intelligence solution. The platform's architecture consists of the following five layers: . portal; . business intelligence servers; . modeling and business rules; . data mart creation; and . security service. These layers operate in a seamless, integrated environment as a result of their shared infrastructure. The scalability of the platform architecture allows organizations to deliver business intelligence applications to a large and broad user community, both inside and outside an organization. Customers who purchase one of our business intelligence servers are also provided with the platform layers for modeling and business rules, security, and information delivery as integrated parts of their solution. With this framework, our customers are able to more quickly and easily deploy the server-based capabilities to end-users. In addition, this approach facilitates a customer's ability to add new capabilities because additional servers can be easily plugged into the existing infrastructure. This flexibility is critical as a customer's requirements change and as we introduce new capabilities to our solution. 5 [GRAPHIC] Portal. The portal service is delivered through a single component, Cognos - ------ Upfront(TM), which can be customized to fit seamlessly in an existing corporate portal or intranet/extranet environment. For information technology professionals, the portal represents a single point of content delivery and management for end-users inside and outside the organization. It is designed to ensure that each user views only the content he or she has authority to access. For end-users, the portal is a single, Web-based point of personalized access to business intelligence content that can be customized to present content in a format that is familiar and appropriate to each user. The portal also enables many users to share and collaborate on information. Business Intelligence Servers. The business intelligence servers facilitate all - ----------------------------- end-user business intelligence activities, including reporting, analysis, and query, for users inside and outside an organization. All of the servers use the portal for managing, deploying, and presenting content and use other platform components for common security and business modeling. All business intelligence servers are based on a scalable architecture with performance management capabilities and fail-over protection. Our business intelligence servers' functionality is based on a suite of proprietary applications that offers: Reporting. Our platform's reporting server is packaged as the Impromptu(R) Web Reports server. Reports can be rendered and viewed by browser users in a variety of outputs such as CSV, Excel, or Adobe PDF files. Customers use this component to securely author, manage, and broadcast sales results, inventory figures, financial updates, and other regularly scheduled reports that are distributed to a large Web-based community of users. Analysis. Our platform's analysis server is packaged as the Cognos PowerPlay(R) Enterprise server, which delivers online analytical process (OLAP) reporting and analysis. PowerPlay's single application server architecture allows organizations to deploy and manage online analytical processes from a central point of control. Through the Web, Windows, or Excel, users are able to access multidimensional data and use PowerPlay for analysis and reporting. Users can perform their own ad hoc analysis by investigating, in any combination and at any level, the critical success factors that drive their business. This server enables users to identify patterns and trends that they cannot readily identify with other methods of analysis. Users can manipulate information by "drilling down" through layers of summary information in successively greater levels of detail and can present the information in multiple graphical displays. 6 Query. Our platform's query server is packaged as the Cognos Query server. This server presents users with a simple and integrated view of various databases, allowing them to quickly and easily navigate corporate data. This engine allows users to run pre-defined queries or build ad hoc queries from within the Cognos portal. The software uses hyperlinks to allow users to jump from query to query to see related information such as customer details, sales orders, or the detailed transactions that underlie a particular analysis. Scorecarding and Advanced Data Visualization. Our platform's visualization server is packaged as Cognos Visualizer. This Web-based server delivers advanced visualization graphics, animation, mapping, and scorecarding, all fully integrated with the analysis and reporting servers. The foremost application of Cognos Visualizer is the construction of balanced scorecard systems that enable users to see complex business relationships and the interplay between factors that drive a company's business. Modeling and Business Rules. The modeling layer of our business intelligence - --------------------------- solution drives the consistency and adaptability of our platform. This layer is packaged as Cognos Architect, which ensures that every manager has a common framework for evaluating business performance and making key business decisions. This layer has the ability to present information stored in corporate databases in a format that is useful to the people who are responsible for the performance of the enterprise. In addition, common business rules, calculations, and goals such as the definitions of profitability, cash flow, and return on investment are visible and shared by all users. Each manager can be provided with a personalized view of information as well as a common view of business performance that permits the rapid coordination of management decisions and actions. Data Mart Creation. Unlike solutions provided by other business intelligence - ------------------ vendors, our EBI Platform has the ability to create and manage a data mart from an existing database. This data mart creation capability is packaged as Cognos DecisionStream(TM). Our solution is optimized for modeling, transforming, and creating high-speed, scalable business intelligence data marts that have embedded knowledge of the business intelligence applications they will serve, thereby enabling faster deployment and user acceptance of these applications. Our data mart creation and business intelligence tools work together to ensure that many of the calculations and analytic operations can be performed at the database level, which can dramatically improve response time and network traffic loads. Companies can build a network of data marts that spans the extended enterprise, using shared and common business models to ensure consistency and rapid adoption of change. Security Service. The security server layer spans the other four layers of our - ---------------- EBI Platform to provide common, centralized security. The security server is delivered by a single component called Access Manager that allows information technology (IT) managers to manage and maintain user profiles and classes for all servers from a single console. This service addresses both authentication security and authorization security, which determines what information users have the right to view. Access Manager uses open security standards, which allows it to be easily integrated with other enterprise security systems. 7 Cognos e-Applications An emerging trend in the market for business intelligence is the growing demand for pre-packaged solutions. We have developed our Cognos e-Applications, an integrated set of analytic applications that provides "out-of-the-box" functionality for our customers. Our platform environment makes it easy for customers to combine appropriate capabilities and to deploy them quickly. Our e-Applications are flexible and extendible because they are built upon the foundation of our EBI Platform. Customers are able to change models, create new reports, and perform new analyses by using our business intelligence servers in conjunction with our e-Applications. These applications reduce the time, effort, and cost required for an organization to gain a competitive advantage from business intelligence and can help the organization realize returns on investment from operational applications such as enterprise resource planning, customer relationship management, and supply chain management implementations more quickly. These e-Applications are enabled by a comprehensive Business Performance Management Foundation that includes: . business decision-making requirements (both functional and cross-functional) defining the type of analysis required based on best practices; . a technical design which ensures consolidated data from across the organization (ERP and other data sources), delivering consistent and reliable results; . a strategic architecture which allows for incremental implementation by functional area; and . Enterprise Business Intelligence (EBI) designed to deliver rich analysis and reporting, with the functionality to share information across the organization, as well as across corporate intranets and extranets with key business partners. Application Development Tools Our legacy line of products based on application development tools marketed under the PowerHouse(R) and Axiant(R) names represented approximately 10% of our total revenue for the fiscal year ended February 28, 2001. PowerHouse is an application development environment that enables customers to quickly develop complex business applications. We believe there has been a fundamental shift over the past several years away from application development environments towards packaged solutions. The large majority of organizations now choose to buy their next generation of business systems, rather than to attempt to build these corporate applications internally. Our strategy for this mature part of our business is focused solely on maintaining the product and supporting our existing customers. Product support is the largest source of revenue from these customers, and, as a result, we expect to continue to update our application development products to reflect the changing requirements of our customers. We expect our revenue from application development tools to continue to decline as customers focus on the next generation of business intelligence solutions. 8 Support and Services Support and services are a critical part of our business intelligence solution. We offer a wide variety of packaged and on-demand services to assist our customers with the installation, deployment, and effective use of our EBI Platform. We are committed to providing our customers with a broad range of high-quality services that will ensure their ongoing satisfaction and influence their future purchasing decisions. These services include product support, education, and consulting. Product Support Services. Product support services consist primarily of product enhancements, documentation, and support for product and documentation problem resolution. Telephone support and Web-based customer self-service support are also key to customer satisfaction and are available worldwide. These solutions provide our customers with online answers to their product questions, 24 hours a day. Education Services. Customers typically require specific training when they purchase our EBI Platform. In addition, we believe that customer education helps maximize the potential of productivity gains from our products. We provide regularly scheduled courses at Cognos education centers. Courses are also delivered on customer sites and can be customized to reflect the customer's data. We also offer e-training for customers through the use of computer-based training and "virtual classrooms" over the Internet. Consulting Services. We provide a variety of consulting services to our customers, such as implementation, planning, installation, design, and deployment reviews. These services can take the form of consulting services that are billed on a daily basis at competitive rates or pre-packaged services that are purchased for a particular project over a specific time frame. Generally, our consulting is aimed at guiding our customers through the solution implementation process and providing technical EBI expertise. Customers As of February 28, 2001, we had more than 17,000 customers located in over 120 countries, representing an installed base of approximately 2.5 million users. Our primary customer focus is Global 2000 companies. We also license our products to a broad base of small and mid-size businesses. Although our EBI Platform is a complete solution for the extended enterprise, our customers typically purchase our solution in stages. The first stage typically involves the purchase of a component of our solution to address a particular departmental requirement. The second stage usually involves purchases by other departments within that organization, often for applications that are closely related to the initial purchase. In many cases, there are a number of purchases in several departments before a customer makes the decision to deploy our solution on an enterprise-wide basis. Throughout the sales cycle, we work closely with our customers in the design of new products and the evolution of existing solutions. We view our large customer base as a significant asset. Because our platform solution makes it easy for customers to add new capabilities to the established infrastructure, our current customer base represents a market for additional business intelligence and analytical application sales. As an incumbent supplier, there is potential revenue growth through additional sales to existing customers. Our EBI Platform can be deployed across all industries. Data-intensive businesses, such as financial services, insurance, health care, and government, as well as industries that are under competitive pressure 9 to continually improve their business processes, such as retail, automotive, consumer packaged goods, and other manufacturing companies, have been the leaders in adopting enterprise-wise solutions. No single customer accounted for 10% or more of our total revenue in any of the last three fiscal years. Sales and Marketing We use an international, multi-tiered channel distribution system to reach customers on a cost-effective basis. We support these channels with an extensive organization of pre-sales and post-sales technical specialists. Our worldwide sales and marketing organizations are managed from our Burlington, Massachusetts location. Sales Channels We support our sales channels with lead-generation and marketing programs, including direct mail, public relations, advertising, telemarketing, Web-based programs, promotional seminars, and participation in trade shows and user group meetings. The principal elements of our distribution system are as follows: Direct Sales. We use a direct sales force in all major markets as the primary - ------------ channel for distribution. We believe our quota-carrying direct sales force increases our visibility and market penetration, ensures long-term customer contact, and facilitates sales of additional products. Because the demand from Global 2000 companies for enterprise-wide business intelligence solutions is growing, our sales force targets the senior executives of an organization. We believe that a direct sales force is more effective than third-party sales in reaching this market because it is more relationship focused. As of February 28, 2001, we employed over 300 sales representatives in 52 sales offices located in 20 countries. Third Parties. In order to extend our geographic coverage, we also market our - ------------- products in selected regions through third-party channels, which include resellers, value-added resellers, original equipment manufacturers, system integrators, and distributors. Examples include: . original equipment manufacturers such as CODA, GEAC Solutions, GE Capital Information Solutions, NCR, Peregrine Systems, and Tivoli; . systems integrators such as Andersen and PriceWaterhouseCoopers; and . application service providers such as Corio Inc. and Surebridge Inc. Telesales. We also use telesales representatives in certain areas to sell - --------- products and services, primarily to our installed customer base. Marketing and Technology Relationships Cognos has three categories of partners: business partners, technology partners, and alliance and marketing partners. Cognos Business Partners. Cognos Business Partners provide our customers with - ------------------------ expert implementation of Enterprise Business Intelligence (EBI) solutions. This global network of partners offers a wide variety of management and technology best practices to ensure a quick return on investment from our clients' investments in Cognos' reporting and analysis solutions. Recognizing the diversity of our client base and that one size may not fit all, Cognos developed a program to include two categories of partners: Enterprise Integrators and Solution Providers. 10 Enterprise Integrators. Enterprise Integrators are large, multinational management and technology consulting firms that assist Global 2000 corporations in developing and re-engineering their business processes. These firms include the Top 100 management consulting organizations and system integrators, including the Big Five. Solution Providers. Solution Providers are regionally focused management and technology consulting firms that provide expert EBI planning and implementation services to both traditional brick-and-mortar and today's click-and-mortar businesses. These firms, which focus primarily on small to mid-size enterprises, are self-sufficient Cognos representatives who are capable of delivering Cognos products and services to their respective clients. Through membership in the Cognos Business Partners Program, our partners receive discounted services and partner-only resources to help them deliver innovative e-business solutions. The Cognos Business Partners Program includes: . a common design for incentives, education, marketing support, and other enablement programs; . a common tiered-membership structure, with increasing benefits for Cognos Business Partners who invest more in support of Cognos offerings; and . the option of becoming a Professional Services Partner. Service Partners augment our Professional Services organization, providing additional coverage and specialized skills to assist our clients in achieving optimal results with our software. Technology Partners. Our technology partners consist of industry-leading - ------------------- database, server, OLAP server, Internet, enterprise application, and connectivity technology companies, including Hyperion Solutions, IBM, NCR, and Oracle. These technology and marketing relationships also provide us with the opportunity to market our products together with packaged solutions. Alliance and Marketing Partners. We also participate in cooperative technology - ------------------------------- and marketing programs with hardware, software, and database vendors, including the following: Compaq Solutions Alliance Partner, HP Solutions Provider Program, Hyperion Essbase Ready Partner, IBM Information Warehouse Alliance Partner, Informix Solution Alliance Partner, Microsoft Data Warehousing Alliance Partner, Onyx Software Partner, Oracle Partner Program, PeopleSoft/Vantive Global Alliance Program, SAP Complementary Software Partner, Scalable Data Warehouse Partner, Siebel Premier Software Partner, and Sybase Business Solutions Alliance. Marketing We divide our marketing organization between corporate marketing and field marketing. These two groups are coordinated to provide a consistent market message and presence and effective market coverage for Cognos. Our corporate marketing focuses on increasing "Cognos" brand awareness and visibility through advertising, events, sponsorship, our corporate Web site, and sales collateral. Our product marketing focuses on defining the key messages and positioning needed to win in our core data warehouse, OLAP, reporting, CRM, and B2B market segments and on defining the market requirements that drive product 11 development. The marketing function is managed from our Burlington, Massachusetts, office, with the majority of staff in Ottawa, Canada. We have deployed our field marketing organization throughout the world. This group is responsible for sales-lead generation and local marketing programs, such as trade shows, seminars, direct mail programs, and user group meetings and conferences, to help ensure local visibility and healthy sales pipelines. Research and Development We believe that our talented and experienced research and development staff is one of our core strengths. Our research and development efforts are aimed at enhancing and extending our existing business intelligence solution and creating new products. As of February 28, 2001, our research and development staff consisted of 781 employees. Research and development is undertaken primarily at our corporate headquarters. Research and development costs were $67.3 million, $53.5 million, and $42.3 million for fiscal 2001, 2000, and 1999, respectively. Research and development costs have continued to increase, in dollar terms, over the last three fiscal years, but have remained constant at 14% of total revenue. During fiscal 2001, we continued to invest in research and development of business intelligence solutions, particularly those solutions that support our strategy of meeting the needs of the extended enterprise within the e-business economy. These investments included the development of additional e-Application packages, which include pre-defined data marts, key reports, and analysis solutions. Our business intelligence platform and application development tools were developed primarily through internal resources. In support of the development of our products, we have acquired or licensed specialized products and technologies from other software firms, and we have undertaken further development to integrate these products into our offerings. Most of the third-party licenses are non-exclusive and do not preclude third parties from entering into similar agreements with our competitors. Competition The business intelligence market is highly competitive. Our competitors include software vendors that operate independently of hardware vendors, but who may have marketing or technology agreements with these vendors; database vendors who offer application development, query, and reporting products for their own databases; large diversified vendors who offer products in numerous market segments; and other companies that may in the future announce offerings of business intelligence products. Some of the key factors that affect our competitive position include the method of distribution, functionality, support and service, ease of use, price, training, and vendor stability and experience. Due to the all-encompassing nature of our EBI Platform, we encounter many competitors who focus on a single area within our overall offering. Our products compete directly and indirectly against various tools, depending on user needs and computing environments. There are several broad categories of competitors: Vendors of Query and Reporting Tools. These vendors manufacture and sell tools that enable users to query and report against corporate databases. They include Business Objects, Brio Technology, Seagate Software, and Oracle. 12 Vendors of Managed Reporting Environments. These vendors manufacture and sell products that are designed to execute and distribute large numbers of complex reports to many users. They include Actuate and Brio Technology. Vendors of Multidimensional Analysis Tools. These vendors manufacture and sell products that enable users to view, explore, and analyze a summarized view of their business using OLAP technology. They include Hyperion Solutions, Oracle, and MicroStrategy. Database Vendors. Some database vendors have tools that are included with their database environment that can be used for query and reporting, as well as some OLAP functionality. They include Oracle, Informix, and Microsoft. Application Vendors. Some application vendors manufacture and sell tools that are included with their application environment that can be used to create and deliver application-specific reports and analysis. They include Oracle, SAP, E.piphany, and i2 Technologies. Our products are complementary with the products of many of the above-named competitors, and, as a result, we have cooperative marketing relationships with some of these vendors, including Oracle and Hyperion Solutions. We expect our current competitors and potentially new competitors to continue to improve the performance of their products and to introduce new products or new technologies that reduce costs and improve performance. Employees As of February 28, 2001, we had 2,704 full-time permanent employees. We believe that our future success will depend, in part, on our ability to continue to identify, hire, motivate, and retain skilled and experienced personnel. In the software industry, there is a high demand for such employees. Historically, we have been successful in recruiting and retaining sufficient numbers of qualified personnel. We have formalized knowledge transfer programs for sales, technical, and research and development personnel to ensure that new staff are fully productive as soon as possible. In addition, there are formalized skills renewal programs for staff to ensure that they are employing state-of-the-art techniques for software development, customer support, sales, marketing, and management. We are also committed to developing strong management skills in our personnel and have established formal management and leadership development programs that promote effective management techniques and excellence in functional leadership. None of our employees is represented by a labor union. 13 Copyright, Trademarks, Patents, and Licenses In accordance with industry practice, we rely upon a combination of contract provisions and copyright, trademark, and trade secret laws to protect our proprietary rights in our products. We license the use of our products to our customers rather than transferring title to them. These licenses contain terms and conditions prohibiting the unauthorized reproduction, disclosure, or transfer of our products. In addition, we attempt to protect our trade secrets and other proprietary information through agreements with customers, suppliers, employees, and consultants. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. The source code versions of our products are protected as trade secrets and, in all major markets, as unpublished copyright works. However, effective copyright protection may not be available in some countries in which we license or market our products. We recognize that patent law may offer effective protection for our current and future products, and we have embarked on a program to identify and seek patent protection for appropriate elements of our products. There can be no assurance that any patentable elements will be identified or, if identified, that patent protection will be obtained. We have also obtained or applied for trademark registration of most of our product names, as well as the name Cognos, in all of our major markets. While the duration of trademark and copyright protections varies from country to country, we believe that the duration of this protection will be adequate to protect our products during the periods of their economic value. However, we believe that, due to the rapid pace of innovation within our industry, technological and creative skills of our personnel are even more important to establishing and maintaining a technology and product leadership position within the industry than are the various legal protections of our technology. ITEM 2. PROPERTIES Cognos owns the building located at 3755 Riverside Drive, Ottawa, Canada, the Corporation's corporate headquarters. During fiscal 2001 the Corporation completed the construction of a new building at this location. The total square footage of the Riverside facility is 268,000. The facility is located on approximately six acres of land which also includes a 220,000 square foot parking garage. The Corporation also conducts its operations from leased facilities totaling approximately 171,000 square feet in Canada, 164,000 square feet in the United States, 174,000 square feet in Europe, and 32,000 square feet in Asia/Pacific. 14 ITEM 3. LEGAL PROCEEDINGS On May 5, 2000 an action was filed in the United States District Court for the Northern District of California against the Corporation and its subsidiary, Cognos Corporation (collectively "Cognos") by Business Objects S.A. ("Complainant"), for alleged patent infringement. The complaint alleges that the Corporation's Impromptu product infringes the Complainant's United States Patent No. 5,555,403 entitled "Relational Database Access System using Semantically Dynamic Objects". The complaint seeks relief in the form of an injunction against the Corporation and unspecified damages. On May 30, 2000 the Corporation answered the complaint, denying all material allegations, and counterclaimed against the Complainant for a declaratory judgment that the Corporation is not infringing on the Complainant's patent and that the patent is invalid. As these actions are at the preliminary stage, the Corporation cannot estimate the financial impact, if any, at this time. In addition, the Corporation and its subsidiaries may, from time to time be involved in other legal proceedings, claims, and litigation that arise in the ordinary course of business which the Corporation believes would not reasonably be expected to have a material adverse effect on the financial condition of the Corporation. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of fiscal 2001, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. Executive Officers of the Registrant The following table sets out as of May 4, 2001, the name; age; position with the Corporation; and the principal occupation, business or employment during the last five years of each executive officer of the Corporation.
NAME AGE POSITION - ------------------------------------ -------- --------------------------------------------------------------- Renato (Ron) Zambonini 54 President and Chief Executive Officer, and Director Robert G. Ashe 42 Senior Vice President, Chief Corporate Officer Terry Hall 52 Senior Vice President, Operations and Chief Operating Officer Robert Minns 55 Senior Vice President, New Products Alan Rottenberg 51 Senior Vice President, e-Business Intelligence Applications Unit Tony Sirianni 41 Senior Vice President, North American Field Operations
Mr. Zambonini was appointed Chief Executive Officer of the Corporation in September 1995. Mr. Zambonini has also served as President since January 1993 and was elected to the Board of Directors in June 1994. Mr. Zambonini previously served as Chief Operating Officer of the Corporation from January 1993 to September 1995. Mr. Zambonini joined the Corporation in September 1989. Mr. Ashe was appointed Senior Vice President, Chief Corporate Officer in May 2001. He served as Senior Vice President, Worldwide Customer Services from July 1999 to May 2001; as Senior Vice President, Products from May 1997 to July 1999; as Senior Vice President, Application Development Tools from April 1996 to May 1997; and as Vice President, Application Development Tools from April 1994 to April 1996. Mr. Ashe joined the Corporation in September 1984. Mr. Hall was appointed Senior Vice President Operations and Chief Operating Officer in July 1999. He served as Senior Vice President, Worldwide Sales from March 1993 to July 1999. Mr. Hall joined the Corporation in September 1983. Mr. Minns was appointed Senior Vice President, New Products in March 1998. He served as Vice President, New Products from May 1997 to March 1998; and as Vice President, Technology from 1986 to May 1997. Mr. Minns joined the Corporation in March 1973. Mr. Rottenberg was appointed Senior Vice President, e-Business Intelligence Applications Unit in January 2000. He served as Senior Vice President, Marketing and Business Strategy from May 1997 to January 2000; and as Senior Vice President, Business Intelligence Tools from June 1994 to May 1997. Mr. Rottenberg joined the Corporation in June 1989. 16 Mr. Sirianni was appointed Senior Vice President, North American Field Operations in June 2000. He served as Vice President, North American Field Operations from April 1999 to May 2000; as Area Vice President, North American Partner Channels from December 1997 to March 1999; and Director, Desktop Partner Channels from March 1995 to November 1997. Mr. Sirianni joined the Corporation in March 1994. Officers are appointed annually by, and serve at the discretion of, the Board of Directors. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS For information relating to the market for the Corporation's common shares and related shareholder matters, reference is made to page 65 of the 2001 Annual Report to Shareholders, which is incorporated herein by reference and filed herewith as Item 14, Exhibit 13.1. On December 3, 1998, the Corporation acquired substantially all the assets of Relational Matters including DecisionStream software. DecisionStream aggregates and integrates large volumes of transaction data with multidimensional data structures. 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. A portion (40%) was released on the second anniversary of the closing of the transaction, and the remainder (60%) will be released on the third anniversary of the closing of the transaction. The shares were issued in a private placement pursuant to Section 4(2) of the Securities Act of 1933. On February 24, 1999, the Corporation acquired LEX2000 Inc., a developer of financial data mart and reporting software, for a combination of cash and the Corporation's common stock. The 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 delivered at closing; the remainder, all of which were issued, are being held in escrow by the Corporation. A portion (50%) was released on the second anniversary of the closing of the transaction, and the remainder (50%) will be released on the third anniversary of the closing of the transaction. The shares were issued in a private placement pursuant to Regulation D, promulgated under the Securities Act of 1933. On September 21, 2000, the Corporation acquired NoticeCast Software Ltd., based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management Software monitors business processes and delivers timely business intelligence notifications to business users across the enterprise via e-mail on their personal computer, hand-held or wireless device. The shareholders of NoticeCast Software Ltd. received approximately $9,000,000 in cash on closing and will receive 148,468 shares of the Corporation's common stock valued at approximately $4,820,000. The shares are being held in escrow by the Corporation and will be released on the second anniversary of the closing of the transaction. On November 1, 2000, the Corporation completed the acquisition of Johnson & Michaels, Inc. (JAMI), a leading provider of business intelligence consulting services. The shareholders of JAMI will receive total cash consideration of approximately $3,915,000 over three years and 104,230 shares of the Corporation's common stock valued at $4,250,000 over the same period. Approximately $1,406,000 was paid and 39,085 shares were issued on closing; the remaining shares, all of which were issued, are being held in escrow by the Corporation and will be released on the first (33%), second (33%), and third (34%) anniversaries of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. 18 ITEM 6. SELECTED FINANCIAL DATA For information relating to Selected Financial Data, reference is made to page 64 of the 2001 Annual Report to Shareholders, which is incorporated herein by reference and filed herewith as Item 14, Exhibit 13.2. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For Management's Discussion and Analysis of Financial Condition and Results of Operations, reference is made to pages 22 to 41 of the 2001 Annual Report to Shareholders, which is incorporated herein by reference and filed herewith as Item 14, Exhibit 13.3. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For quantitative and qualitative disclosures about market risk, reference is made to page 35 of the 2001 Annual Report to Shareholders, which is incorporated herein by reference and filed herewith as Item 14, Exhibit 13.4. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For information relating to the Corporation's consolidated supplementary data and consolidated financial statements, reference is made to pages 42 to 63 of the 2001 Annual Report to Shareholders, which is incorporated herein by reference and filed herewith as Item 14, Exhibit 13.5. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 1. (a) Identification of Directors The following table sets out the name and age of each person nominated for election as a director at the Annual Meeting of Shareholders ("Meeting") to be held on June 21, 2001; the period of service as a director; the principal occupation, business or employment of the nominee during the last five years; all other positions with the Corporation (or its significant subsidiaries) now held by the nominee, if any; and the name of any publicly-traded corporation of which the nominee is a director.
Name and Age Director Since Principal Occupation During Past Five Years John E. Caldwell (51) + 2000 Chief Executive Officer of Geac Computer Corporation Limited, a software and systems solutions provider, since November 2000. Private Investor from October 1999 to October 2000, and President and Chief Executive Officer, CAE Inc., from June 1993 to October 1999. Director of Geac Computer Corporation Limited and Stelco Inc. Douglas C. Cameron (62) *+ 1983 Investment Advisor, RBC Dominion Securities Inc., an investment dealer, since October 1993. Pierre Y. Ducros (62)++ 1986 Private Investor since June 1996. Chairman and Chief Executive Officer, DMR Group Inc. from February 1973 to June 1996. Director of Alliance Atlantis Communications Inc., BCE Emergis, National Bank Financial and Manulife Financial. Douglas J. Erwin (48)++ 1998 President and Chief Executive Officer, PentaSafe Security Technologies, 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 (67)++ 1997 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., RTO Enterprises Inc. and Suncor Energy Inc.
20
Name and Age Director Since Principal Occupation During Past Five Years Candy M. Obourn (51)+ 1999 President, Document Imaging and Senior Vice President, Eastman Kodak Company, a photographic products and imaging company, since January 2000. President, Document Imaging and Vice President of Kodak from October 1995 to December 1999. James M. Tory, Q.C. (71)* 1982 Chairman of the Board of Directors since September 1995. Chair Emeritus and Counsel, Torys, Barristers & Solicitors, since March 1995 and prior thereto as a partner in that firm. Director of Inmet Mining Corporation and Goldlist Properties Inc. Renato (Ron) Zambonini (54) 1994 President since January 1993 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. (b) Identification of Executive Officers Information regarding executive officers of the Company is set forth under Part I of this Form 10-K. 2. Compliance with Section 16(a) of the Exchange Act As a foreign private issuer, the Corporation is not subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934. 21 ITEM 11. EXECUTIVE COMPENSATION On April 6, 2000, the Board of Directors of the Corporation authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to shareholders of record at the close of business on April 20, 2000. Share and per-share amounts have been adjusted retroactively for this split. The following Summary Compensation Table sets out the compensation received for each of the last three fiscal years for Mr. Zambonini, the Chief Executive Officer of the Corporation, and those persons who were, at February 28, 2001, the other four most highly compensated executive officers of the Corporation and one additional individual who was not serving as an officer at the end of the fiscal year. 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) 2001 $267,148 $420,757 --- 100,000 $3,718 President and Chief 2000 $254,585 $375,938 --- 150,000 $4,583 Executive Officer 1999 $230,049 $391,083 --- 0 --- Terry Hall 2001 $315,000 $336,000 --- 80,000 $1,500 Senior Vice President, 2000 $281,250 $518,036 --- 200,000 $1,708 Operations and Chief 1999 $235,000 $440,740 --- 0 $531 Operating Officer Robert A. Engels (6) 2001 $225,967 $144,002 --- 0 $8,111 Senior Vice President, 2000 $244,826 $199,907 --- 30,000 $8,737 European Operations 1999 $233,773 $202,750 --- 0 $11,118 Tony Sirianni 2001 $180,000 $222,265 --- 60,000 $2,130 Senior Vice President, 2000 ---- ---- --- ---- ---- North American Field 1999 ---- ---- --- ---- ---- Operations Donnie M. Moore (5)(7)(8) 2001 $163,628 $161,290 --- 60,000 $3,673 Senior Vice President, 2000 $152,751 $157,721 --- 100,000 $3,793 Finance & Administration and 1999 $150,032 $170,036 --- 0 $3,684 Chief Financial Officer Robert G. Ashe (5)(8) 2001 $156,949 $118,994 --- 50,000 $3,651 Senior Vice President, 2000 ---- ---- --- ---- ---- Chief Corporate Officer 1999 ---- ---- --- ---- ---- - ----------------------------------------------------------------------------------------------------------------------
(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. 22 (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, Moore and Ashe. Cognos Limited (U.K.) contributed to the Cognos Limited Executive Retirement Scheme for Mr. Engels, and Cognos Corporation (U.S.A.) contributes to a 401(k) savings plan for Messrs. Hall and Sirianni. (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: 2001-- C$1.00 = US$0.6679 2000-- C$1.00 = US$0.6789 1999-- C$1.00 = US$0.6668 (6) Mr. Engels was employed in Europe and paid in pounds sterling. Mr. Engels was an executive officer of the Corporation until July 13, 2000. He remains an employee of the Corporation. 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: 2001-- UK(pounds)1.00 = US$1.4884 2000-- UK(pounds)1.00 = US$1.6107 1999-- UK(pounds)1.00 = US$1.6527 (7) In each of the three fiscal years shown the entire bonus amount was contributed on behalf of Mr. Moore to a retirement arrangement established and maintained in accordance with guidelines promulgated by the Canada Customs and Revenue Agency (formerly Revenue Canada). (8) On May 1, 2001, Mr. Moore resigned as Senior Vice President, Finance & Administration and Chief Financial Officer and retired from full-time employment with the Corporation. He will continue to be employed on an indefinite part-time basis for a period ending no earlier than May 1, 2002. Robert G. Ashe assumed his duties and was appointed Senior Vice President, Chief Corporate Officer effective on the same date. 23 Option/SAR Grants in Last Fiscal Year The following table provides information with respect to stock option grants by the Corporation to the named executive officers for the fiscal year ended February 28, 2001.
- -------------------------------------------------------------------------------------------------------------------- Individual Grants ---------------------------------------------------------- Potential Realizable Value at Number of % of Total Assumed Annual Rates of Stock Securities Options Price Appreciation for Option Underlying Granted to Exercise Expiration Term(3) Options Employees in Price per Date ----------------------------------- Name Granted(1) Fiscal Year Share(2) (mm/dd/yy) 5% 10% - -------------------------------------------------------------------------------------------------- ----------------- Renato Zambonini 100,000 3.9% $35.52 4/11/08 $1,696,012 $4,062,209 - -------------------------------------------------------------------------------------------------------------------- Terry Hall 80,000 3.1% $35.52 4/11/08 $1,356,810 $3,249,767 - -------------------------------------------------------------------------------------------------------------------- Robert A. Engels ---- ---- ---- ---- ---- ---- - -------------------------------------------------------------------------------------------------------------------- Tony Sirianni(4) 20,000 0.8% $31.65 3/31/08 $302,211 $723,841 40,000 1.6% $35.52 4/11/08 $678,405 $1,624,884 - -------------------------------------------------------------------------------------------------------------------- Donnie M. Moore 60,000 2.4% $35.52 4/11/08 $1,017,607 $2,437,325 - -------------------------------------------------------------------------------------------------------------------- Robert G. Ashe 50,000 2.0% $35.52 4/11/08 $848,006 $2,031,105 - --------------------------------------------------------------------------------------------------------------------
(1) Option awards are typically made following the release of the Corporation's year-end results. During the course of the year other awards may be granted in special circumstances. In all cases, option awards are approved by the Human Resources & Compensation Committee, the administrator of the Corporation's Stock Option Plans. Option awards to employees typically vest on each of the successive four anniversaries of the date of grant and expire on the eighth anniversary of the date of grant. (2) Exercise Price is equivalent to the market value, on The Toronto Stock Exchange, of securities underlying options on the day preceding the date of grant. (3) These amounts represent the gain that may be realized upon exercise of the options immediately prior to the expiration of their term (net of the option exercise price but before taxes associated with the exercise) assuming the specified compound rates of appreciation (5% and 10%) of the Corporation's shares over the term of the options. These amounts are calculated based on rules promulgated by the United States Securities and Exchange Commission and do not reflect the Corporation's estimate of future stock price increases. Actual gains, if any, on any stock option exercises and resultant shareholdings are dependent on the timing of each exercise and the future share performance. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected 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. Sirianni 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 28, 2001, by the named executive officers and the number and value of such officers' outstanding options as at February 28, 2001. Dollar values indicated represent the net of market value less exercise price. 24
- --------------------------------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised In- Underlying Unexercised The-Money Options at Shares Aggregate Options at Fiscal Year-End Fiscal Year-End (1) Acquired on Value ---------------------------------------------------------------- Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------------------------------------------------------------------------------------- Renato Zambonini 0 0 157,500 332,500 $1,781,149 $2,549,726 Terry Hall 124,996 $2,672,621 25,000 330,008 $90,867 $2,205,323 Robert A. Engels 82,496 $2,343,930 0 72,504 0 $812,645 Tony Sirianni 19,624 $419,965 0 105,626 0 $426,404 Donnie M. Moore 128,000 $3,656,188 0 235,000 0 $1,932,627 Robert G. Ashe 83,333 $2,239,472 91,659 225,008 $1,032,136 $1,932,721 - ---------------------------------------------------------------------------------------------------------------------
(1) Value of unexercised in-the-money options is calculated based on the fair market value of the underlying shares on the Nasdaq, minus the exercise price, and assumes sale of the underlying shares on February 28, 2001, the last trading day in fiscal 2001, at a price of $21.06 being the fair market value of the Corporation's shares on such date. 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." As of May 1, 2001, Mr. Donnie Moore resigned as Senior Vice President, Finance & Administration and Chief Financial Officer and retired from full-time employment with the Corporation. His employment agreement was amended to provide that he will continue to be employed on an indefinite part-time basis for a period ending no earlier than May 1, 2002. His compensation for those duties is $30,000 annually. Also, in recognition of his outstanding contribution to the Corporation during 15 years of service as Chief Financial Officer, a special one-time payment in the amount of C$156,916 will be made to his retirement arrangement established and maintained in accordance with guidelines issued by the Canada Customs and Revenue Agency (formerly Revenue Canada). 25 Long-Term Incentives Long-term incentives are provided through stock options awarded under the 1997-2002 Stock Option Plan ("1997 Option Plan"), which was adopted by the Board on April 9, 1997 and approved by shareholders on June 25, 1997. Directors, officers, employees and consultants of the Corporation are eligible to participate in the 1997 Option Plan. Through the award of stock options, the Corporation seeks to attract, reward and retain employees by providing them with a means of sharing in the financial success created by their combined efforts. In particular, the award of stock options to executive officers seeks to provide them with an incentive to enhance shareholder value. Options are granted on the basis of an individual's level of responsibility and potential to contribute to the Corporation's future success. Options to employees are awarded at the discretion of management and typically vest equally on each of the successive four anniversaries of the date of grant and expire on the eighth anniversary of the date of grant. Options to directors typically vest in their entirety on the date of grant. All options are priced at the market price of the Corporation's shares on The Toronto Stock Exchange on the trading day preceding the date of grant. On April 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 have fully vested and expire on the eighth anniversary of the date of grant. 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 fiscal 2000 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. Mr. Tony Sirianni, Senior Vice President, North American Field Operations, became an executive officer during the fiscal year ended February 28, 2001. On March 31, 2000, Mr. Sirianni was awarded an option to acquire 20,000 shares under the 1997 Option Plan. The Committee based this award on the importance of Mr. Sirianni's role in the key North American market. 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. 26 On April 11, 2000, the Committee awarded option grants to certain key employees of the Corporation and its subsidiaries, including all of the named executive officers, with the exception of Mr. Engels, as set out in "Option/SAR Grants in Last Fiscal Year". As of the Record Date, options to purchase 6,932,206 shares under the 1997 Option Plan, and predecessor plans, were outstanding at a weighted average exercise price of $8.37. Share Ownership To promote better alignment of management and shareholder interests, in May 1999 the Corporation adopted share ownership guidelines for the Chief Executive Officer, Senior Vice Presidents and Vice Presidents of the Corporation ("Executives"). Executives are expected to accumulate and hold shares having a market value at least equal to a multiple of their annual base salary. That multiple increases with the level of responsibility of the executive. Executives 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. 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets out information, as at May 4, 2001, with respect to (a) all shareholders known by the Corporation to be beneficial owners of more than 5% of its outstanding shares, and (b) share ownership, including the right to acquire shares by exercise of stock options on or before July 3, 2001, 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) 10,880,018 12.12% Sixty-Two John Street, Ottawa, Ontario, Canada, K1M 1M3 John E. Caldwell (3) 22,800 * Douglas C. Cameron (4) 28,000 * Pierre Y. Ducros (5) 41,000 * Douglas J. Erwin (6) 26,000 * Robert W. Korthals (7) 34,000 * Candy M. Obourn (8) 23,000 * James M. Tory (9) 110,000 * Renato Zambonini (10) 597,072 * Terry Hall (11) 293,600 * Robert A. Engels (12) 76,053 * Tony Sirianni (13) 63,003 * Donnie M. Moore (14) 122,484 * Robert G. Ashe (15) 265,167 * - ------------------------------------------------------ ----------------------------------- ----------------- Directors and Executive Officers as a group 1,972,711 2.2% (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 3, 2001. Reference to shares that the persons named below have the right to acquire through options includes options currently exercisable or exercisable on or before July 3, 2001. (2) Mr. Potter has sole voting power and sole investment power over 47,818 shares and shared voting power and shared investment power over 10,832,200 shares. Mr. Potter has the right to acquire nil shares through options. (3) Mr. Caldwell has the right to acquire 22,000 shares through options. (4) Mr. Cameron has the right to acquire 16,000 shares through options. (5) Mr. Ducros has the right to acquire 21,000 shares through options. (6) Mr. Erwin has the right to acquire 26,000 shares through options. 28 (7) Mr. Korthals has the right to acquire 32,000 shares through options. (8) Ms. Obourn has the right to acquire 22,000 shares through options. (9) Mr. Tory has the right to acquire 21,000 shares through options. (10) Mr. Zambonini has the right to acquire 340,000 shares through options. (11) Mr. Hall has the right to acquire 159,398 shares through options. (12) Mr. Engels ceased to be an officer of the Corporation on July 13, 2000 but remained an employee of the Corporation during the fiscal year ended February 28, 2001. He has the right to acquire 7,500 shares through options. (13) Mr. Sirianni has the right to acquire 25,000 shares through options. (14) Mr. Moore has the right to acquire 108,500 shares through options. (15) Mr. Ashe has the right to acquire 229,167 shares through options. (16) The group is comprised of the individuals named in the Summary Compensation Table on page 12, the remaining executive officers of the Corporation, and those persons who were directors of the Corporation on the Record Date. The amount shown includes 1,306,909 shares which the directors and executive officers as a group have the right to acquire by exercise of stock options granted under the Corporation's stock option plans through July 3, 2001. Statements contained in the table as to securities beneficially owned or controlled by directors, officers, and 5% beneficial owners are, in each instance, based upon information obtained from such directors, officers, and beneficial owners. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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. Mr. Tory himself provides no legal services to the Corporation and has no direct or indirect responsibility for any legal services provided by Torys to the Corporation. The Board does not consider that the amount paid to Mr. Tory in respect of additional duties carried out as Chairman of the Board impairs his status as an unrelated director as that amount is payable in respect of his additional responsibilities and duties as Chairman of the Board. In fiscal 2001, the Corporation did business with Geac Computer Corporation Limited, of which company Mr. Caldwell, a member of the Audit Committee, became Chief Executive Officer in November 2000. The amount received from Geac with respect to the license of products and the purchase of services is not considered to be significant and does not impair Mr. Caldwell's independence status. 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. It is the Corporation's policy that all transactions with related parties must be approved by a majority of the independent and disinterested directors considering a particular transaction and that a transaction be subject to terms no less favorable to the Corporation than can be obtained at arm's length. 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this Report: (a) 1. Consolidated Financial Statements-The following Consolidated Financial Statements of the Corporation and its subsidiaries, and the Auditors' Report related thereto, are included in the Corporation's 2001 Annual Report to Shareholders and are incorporated by reference into Items hereto, and filed as Exhibit 13.5 herewith: Report of Management Auditors' Report Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements (a) 2. Financial Statement Schedules-The Schedules supporting the Consolidated Financial Statements which are filed as part of this report are as follows: Schedule II Valuation and qualifying accounts Note: Schedules other than those listed are omitted as they are not applicable, not required, or the information is included in the consolidated financial statements or the notes thereto. (a) 3. Exhibits EXHIBIT NUMBER DESCRIPTION 3.0 Articles of Incorporation and Bylaws 3.1 --Articles of Incorporation and amendments thereto (filed as Exhibit 3.1 to Form 10-K filed for the year ended February 28, 1997) 3.2 --By-laws of the Corporation (filed as Exhibit 3.2 to Form 10-K filed for the year ended February 28, 1997) 4.0 Instruments defining the rights of security holders, including indentures 4.1 --Form of Share Certificate (filed as Exhibit 4.0 to Amendment No. 2 to Registration Statement No. 33- 14245 on Form S-1 filed on July 1, 1987) 4.2 --Description of Common Shares contained in the Articles of Incorporation and amendments thereto, (filed as Exhibit 3.1 to Amendment No. 2 to Registration Statement No. 33-14245 on Form S-1, filed on July 1, 1987) continued.... 30 EXHIBIT NUMBER DESCRIPTION (continued) 10.0 Material Contracts 10.1 --Charge/Mortgage of Land between the Company and Campeau Corporation, as tenants in common, and London Life Insurance Company dated September 16, 1985 (filed as Exhibit 10.16 to Registration Statement No. 33-14245 on Form S-1, filed on May 13, 1987) 10.2 --1988-1993 Stock Option Plan (Incentive and Non-Qualified), as amended (filed as Exhibit 10.2 on Form 10-K, filed for year ended February 28, 1989) 10.3 --Form of Incentive Stock Option Agreement under 1988-1993 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.4 to Registration Statement No. 33-39892 on Form S-2 filed on April 9, 1991) 10.4 --Form of Non-Qualified Stock Option Agreement under 1988-1993 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.5 to Registration Statement No. 33-39892 on Form S-2 filed on April 9, 1991) 10.5 --Letter Agreement between the Company and The Royal Bank of Canada, dated July 5, 1990 (filed as Exhibit 10.8 to Registration Statement No. 33-39892 on Form S-2 filed on April 9, 1991) 10.6 --1993-1998 Employee Stock Purchase Plan (filed as Exhibit 10.6 of Form 10-K filed for the year ended February 29, 2000) 10.7 --1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.7 of Form 10-K filed for the year ended February 29, 2000) 10.8 --Form of Incentive Stock Option Agreement under 1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.8 of Form 10-K filed for the year ended February 29, 2000) 10.9 --Form of Non-Qualified Stock Option Agreement under 1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.9 of Form 10-K filed for the year ended February 29, 2000) 10.10 --Amended and Restated 1988-1993 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.12 of Form 10-Q filed for the quarter ended August 31, 1996) 10.11 --Amended and Restated 1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.13 of Form 10-Q filed for the quarter ended August 31, 1996) 10.12 --1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.1 to Registration Statement No. 333-8552 on Form S-8, filed on March 31, 1998) 10.13 --Form of Incentive Stock Option Agreement under 1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.2 to Registration Statement No. 333-8552 on Form S-8, filed on March 31, 1998) 10.14 --Form of Non-Qualified Stock Option Agreement under 1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.3 to Registration Statement No. 333-8552 on Form S-8, filed on March 31, 1998) 10.15 --Amended and Restated 1993-1999 Employee Stock Purchase Plan (filed as Exhibit 10.17 of Form 10-K filed for the year ended February 28, 1998) 10.16 --Amended and Restated Cognos Employee Stock Purchase Plan (filed as Exhibit 10.16 of Form 10-Q filed for the quarter ended August 31, 1999) 31 EXHIBIT NUMBER DESCRIPTION (continued) 11.0 Statements regarding Computation of Earnings Per Share 11.1 --Computation of Earnings Per Share in accordance with Canadian Generally Accepted Accounting Principles 11.2 --Computation of Earnings Per Share in accordance with United States Generally Accepted Accounting Principles 13.0 Selected Portions of the Annual Report to Shareholders for the fiscal year ended February 28, 2001 13.1 Market for the Corporation's common shares and related shareholder matters incorporated by reference to page 65 of the 2001 Annual Report to Shareholders. 13.2 Selected Financial Data, incorporated by reference to page 64 of the 2001 Annual Report to Shareholders. 13.3 Management's Discussion and Analysis of the Corporation's Financial Condition and Results of Operations incorporated by reference to pages 22 to 41 of the 2001 Annual Report to Shareholders. 13.4 Quantitative and qualitative disclosures about market risk incorporated by reference to page 35 of the 2001 Annual Report to Shareholders. 13.5 Financial Statements and Supplementary Data incorporated by reference to pages 42 to 63 of the 2001 Annual Report to Shareholders. 21.0 Subsidiaries of the Company 23.0 Consent of Ernst & Young LLP, Independent Chartered Accountants 99.0 Consolidated Financial Information in accordance with Canadian Generally Accepted Accounting Principles (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the last quarter of the fiscal year ended February 28, 2001. (c) The Company hereby files as part of this Form 10-K, the exhibits listed in Item 14(a)3, as set forth above. (d) The Company hereby files as part of this Form 10-K, the schedules listed in Item 14(a)2, as set forth above. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COGNOS INCORPORATED (Registrant)
/s/ Donnie M. Moore /s/ Robert G. Ashe May 25, 2001 - ----------------------------------- --------------------------------- Donnie M. Moore Robert G. Ashe Senior Vice President, Finance and Administration Senior Vice President, Chief Corporate Officer (Principal Financial and Accounting Officer) (Acting Principal Financial & Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. /s/ Renato Zambonini May 25, 2001 - ------------------------------------ Renato Zambonini President and Chief Executive Officer, and Director /s/ Donnie M. Moore May 25, 2001 - ------------------------------------ Donnie M. Moore Senior Vice President, Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ James M. Tory May 25, 2001 - ------------------------------------ James M. Tory, Q.C. Chairman of the Board /s/ John E. Caldwell May 25, 2001 - ------------------------------------ John E. Caldwell Director /s/ Douglas C. Cameron May 25, 2001 - ------------------------------------ Douglas C. Cameron Director /s/ Pierre Y. Ducros May 25, 2001 - ------------------------------------ Pierre Y. Ducros Director /s/ Douglas J. Erwin May 25, 2001 - ------------------------------------ Douglas J. Erwin Director /s/ Robert W. Korthals May 25, 2001 - ------------------------------------ Robert W. Korthals Director /s/ Candy M. Obourn May 25, 2001 - ------------------------------------ Candy M. Obourn Director
33 Schedule II COGNOS INCORPORATED Valuation and Qualifying Accounts (US$000s, U.S. GAAP)
Balance, Additions Balance, beginning charged end of period to income Deductions (1) of period --------------- ------------- ------------------ --------------- Allowance for Doubtful Accounts Fiscal Year Ended February 28, 1999....................... $3,707 $1,047 $(324) $4,430 ===== ===== ===== ===== February 29, 2000....................... $4,430 $1,092 $(788) $4,734 ===== ===== ===== ===== February 28, 2001....................... $4,734 $3,701 $(2,379) $6,056 ===== ===== ======= ===== Allowance for Inventory Obsolescence Fiscal Year Ended February 28, 1999....................... $ 125 $ 131 $ (92) $ 164 ===== ==== ====== ===== February 29, 2000....................... $ 164 $ 59 $ (64) $ 159 ===== === ====== ===== February 28, 2001....................... $ 159 $ 163 $ (202) $ 119 ===== ==== ======= =====
(1) Represents amounts written off against the reserve, net of recoveries. 34 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 3.0 Articles of Incorporation and Bylaws 3.1 --Articles of Incorporation and amendments thereto (filed as Exhibit 3.1 to Form 10-K filed for the year ended February 28, 1997) 3.2 --By-laws of the Company (filed as Exhibit 3.2 to Form 10-K filed for the year ended February 28, 1997) 4.0 Instruments defining the rights of security holders, including indentures 4.1 --Form of Share Certificate (filed as Exhibit 4.0 to Amendment No. 2 to Registration Statement No. 33-14245 on Form S-1 filed on July 1, 1987) 4.2 --Description of Common Shares contained in the Articles of Incorporation and amendments thereto, (filed as Exhibit 3.1 to Amendment No. 2 to Registration Statement No. 33-14245 on Form S-1, filed on July 1, 1987) 10.0 Material Contracts 10.1 --Charge/Mortgage of Land between the Company and Campeau Corporation, as tenants in common, and London Life Insurance Company dated September 16, 1985 (filed as Exhibit 10.16 to Registration Statement No. 33-14245 on Form S-1, filed on May 13, 1987) 10.2 --1988-1993 Stock Option Plan (Incentive and Non-Qualified), as amended (filed as Exhibit 10.2 on Form 10-K, filed for year ended February 28, 1989) 10.3 --Form of Incentive Stock Option Agreement under 1988-1993 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.4 to Registration Statement No. 33-39892 on Form S-2 filed on April 9, 1991) 10.4 --Form of Non-Qualified Stock Option Agreement under 1988-1993 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.5 to Registration Statement No. 33-39892 on Form S-2 filed on April 9, 1991) 10.5 --Letter Agreement between the Company and The Royal Bank of Canada, dated July 5, 1990 (filed as Exhibit 10.8 to Registration Statement No. 33-39892 on Form S-2 filed on April 9, 1991) 10.6 --1993-1998 Employee Stock Purchase Plan (filed as Exhibit 10.6 of Form 10-K filed for the year ended February 29, 2000) 10.7 --1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.7 of Form 10-K filed for the year ended February 29, 2000) 10.8 --Form of Incentive Stock Option Agreement under 1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.8 of Form 10-K filed for the year ended February 29, 2000) 10.9 --Form of Non-Qualified Stock Option Agreement under 1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.9 of Form 10-K filed for the year ended February 29, 2000) 10.10 --Amended and Restated 1988-1993 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.12 of Form 10-Q filed for the quarter ended August 31, 1996) 10.11 --Amended and Restated 1993-1998 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 10.13 of Form 10-Q filed for the quarter ended August 31, 1996)
continued..... 1 EXHIBIT INDEX (continued)
EXHIBIT NUMBER DESCRIPTION 10.12 --1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.1 to Registration Statement No. 333-8552 on Form S-8, filed on March 31, 1998) 10.13 --Form of Incentive Stock Option Agreement under 1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.2 to Registration Statement No. 333-8552 on Form S-8, filed on March 31, 1998) 10.14 --Form of Non-Qualified Stock Option Agreement under 1997-2002 Stock Option Plan (Incentive and Non-Qualified) (filed as Exhibit 4.3 to Registration Statement No. 333-8552 on Form S-8, filed on March 31, 1998) 10.15 --Amended and Restated 1993-1999 Employee Stock Purchase Plan (filed as Exhibit 10.17 of Form 10-K filed for the year ended February 28, 1998) 10.16 --Amended and Restated Cognos Employee Stock Purchase Plan (filed as Exhibit 10.16 of Form 10-Q filed for the quarter ended August 31, 1999) 11.0 Statements regarding Computation of Earnings Per Share 11.1 --Computation of Earnings Per Share in accordance with Canadian Generally Accepted Accounting Principles 11.2 --Computation of Earnings Per Share in accordance with United States Generally Accepted Accounting Principles 13.0 Selected Portions of the Annual Report to Shareholders for the fiscal year ended February 28, 2001 13.1 Market for the Corporation's common shares and related shareholder matters incorporated by reference to page 65 of the 2001 Annual Report to Shareholders. 13.2 Selected Financial Data, incorporated by reference to page 64 of the 2001 Annual Report to Shareholders. 13.3 Management's Discussion and Analysis of the Corporation's Financial Condition and Results of Operations incorporated by reference to pages 22 to 41 of the 2001 Annual Report to Shareholders. 13.4 Quantitative and qualitative disclosures about market risk incorporated by reference to page 35 of the 2001 Annual Report to Shareholders. 13.5 Financial Statements and Supplementary Data incorporated by reference to pages 42 to 63 of the 2001 Annual Report to Shareholders. 21.0 Subsidiaries of the Company 23.0 Consent of Ernst & Young LLP, Independent Chartered Accountants 99.0 Consolidated Financial Information in accordance with Canadian Generally Accepted Accounting Principles
2 EX-11 2 dex11.txt EXHIBIT 11.1-COMPUTATION OF EARNINGS Exhibit 11.1 COGNOS INCORPORATED Computation of Earnings Per Share in accordance with Canadian Generally Accepted Accounting Principles (US$000s, except share amounts)
Year Ended --------------------------------------------------------- February 28, February 29, February 28, 2001 2000 1999 ----------------- ---------------- --------------- Basic Net income................................................. $62,736 $54,542 $58,122 ====== ====== ====== Weighted average number of shares outstanding (1)......................................... 87,324 85,972 87,416 ====== ====== ====== Net income per share (1)................................... $0.72 $0.63 $0.66 ==== ==== ==== Fully diluted Net income................................................. $62,736 $54,542 $58,122 Add imputed interest on options (net of tax)............... 2,496 2,941 2,571 ------ ------ ------ Adjusted net income........................................ $65,232 $57,483 $60,693 ====== ====== ====== Weighted average number of shares (1)...................... 87,324 85,972 87,416 Add share options (1)...................................... 5,171 6,110 5,988 ------ ------ ------ Fully diluted weighted average number of shares (1)......................................... 92,495 92,082 93,404 ====== ====== ====== Fully diluted net income per share (1)..................... $0.71 $0.62 $0.65 ==== ==== ====
(1) Reflects the two-for-one stock split authorized April 6, 2000. 1 EX-11.2 3 dex112.txt EXHIBIT 11.2-COMPUTATION OF EARNINGS Exhibit 11.2 COGNOS INCORPORATED Computation of Earnings Per Share in accordance with United States Generally Accepted Accounting Principles (US$000s, except share amounts)
Year Ended -------------------------------------------------------------- February 28, February 29, February 28, 2001 2000 1999 ------------------ ------------------ ------------------ Basic Net income.............................................. $64,260 $58,815 $58,434 ====== ====== ====== Weighted average number of shares outstanding (1) ..................................... 87,324 85,972 87,416 ====== ====== ====== Net income per share (1) ............................... $0.74 $0.68 $0.67 ==== ==== ==== Diluted Net Income per Share Net income.............................................. $64,260 $58,815 $58,434 ====== ====== ====== Weighted average number of shares (1) .................. 87,324 85,972 87,416 Dilutive effect of stock options (1) ................... 4,649 2,128 1,524 ------- ------- ------- Adjusted weighted average number of shares (1) ....................................... 91,973 88,100 88,940 ====== ====== ====== Diluted net income per share (1) ....................... $0.70 $0.67 $0.66 ==== ==== ====
(1) Reflects the two-for-one stock split authorized April 6, 2000. 2 EX-13.1 4 dex131.txt EXHIBIT 13.1-MARKET FOR CORP'S COMMON SHARES Exhibit 13.1 2OO1 COGNOS ANNUAL REPORT COMMON SHARE INFORMATION - -------------------------------------------------------------------------------- PRINCIPAL MARKETS The Toronto Stock Exchange and the Nasdaq National Market are the principal markets on which the Corporation's shares are traded. The Corporation's common shares were first listed on The Toronto Stock Exchange on August 21, 1986, on The Nasdaq Stock Market on July 1, 1987, and on Nasdaq's National Market on September 15, 1987. The stock symbol of the Corporation's common shares on The Toronto Stock Exchange is CSN and on Nasdaq is COGN. On April 6, 2000, the Board of Directors of the Corporation authorized a two-for-one stock split, effected in the form of a stock dividend. All historic information has been adjusted for the split. The following table sets forth the high and low sale prices, as well as the trading volume, for the common shares for the fiscal periods shown below:
----------------------------------------------------------------------------- Nasdaq National Market The Toronto Stock Exchange High Low Volume High Low Volume ----------------------------------------------------------------------------- Fiscal 2000 (US$) (US$) (000s) (Cdn$) (Cdn$) (000s) - ------------------------------------------------------------------------------------------------------------------- First Quarter 12.938 9.750 13,625 18.88 14.88 9,465 Second Quarter 12.063 9.844 14,415 17.80 14.63 12,054 Third Quarter 19.188 9.688 19,314 28.00 14.30 13,575 Fourth Quarter 37.125 16.688 29,621 54.00 24.73 16,386 Fiscal 2001 - ------------------------------------------------------------------------------------------------------------------- First Quarter 41.125 23.313 31,208 60.50 34.00 14,300 Second Quarter 46.500 35.375 24,729 67.00 52.60 11,639 Third Quarter 48.000 30.500 22,482 73.10 49.00 12,614 Fourth Quarter 40.875 16.000 34,771 62.90 25.25 20,858 Fiscal 2002 - ------------------------------------------------------------------------------------------------------------------- First Quarter 24.770 13.938 15,734 38.30 22.00 12,153 (through April 20, 2001) -----------------------------------------------------------------------------
SHAREHOLDERS As of April 20, 2001, there were approximately 2,719 registered shareholders. DIVIDEND POLICY The Corporation has never declared or paid any cash dividends on its common shares. The Corporation's current policy is to retain its earnings to finance expansion and to develop, license, and acquire new software products, and to otherwise reinvest in the Corporation. P. 65 EX-13.2 5 dex132.txt EXHIBIT 13.2-SELECTED FINANCIAL DATA Exhibit 13.2 2OO1 COGNOS ANNUAL REPORT SELECTED CONSOLIDATED FINANCIAL DATA - -------------------------------------------------------------------------------- FIVE-YEAR SUMMARY The following Selected Consolidated Financial Data has been derived from the Corporation's consolidated financial statements that have been audited by Ernst & Young LLP, independent chartered accountants. The Selected Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and related Notes, and with Management's Discussion and Analysis of Financial Condition and Results of Operations. On April 6, 2000, the Board of Directors of the Corporation authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders 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 (US$000s except share amounts, U.S. GAAP) ------------------------------------------------------------------------- 2OO1 2OOO 1999 1998 1997 Statement of Income Data Revenue $ 495,652 $ 385,640 $ 301,125 $ 244,834 $ 198,185 - ---------------------------------------------------------------------------------------------------------------------------------- Operating expenses Cost of product license 7,315 5,235 5,738 3,828 3,266 Cost of product support 17,820 13,758 11,166 9,694 9,634 Selling, general, and administrative 320,535 238,147 172,482 140,882 114,617 Research and development 67,264 53,548 42,274 33,530 28,951 Acquired in-process technology 3,000 -- 3,800 18,000 -- - ---------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 415,934 310,688 235,460 205,934 156,468 - ---------------------------------------------------------------------------------------------------------------------------------- Operating income 79,718 74,952 65,665 38,900 41,717 Interest expense (786) (718) (527) (481) (427) Interest income 12,386 7,454 6,430 5,340 4,524 - ---------------------------------------------------------------------------------------------------------------------------------- Income before taxes 91,318 81,688 71,568 43,759 45,814 Income tax provision 27,058 22,873 13,134 11,117 9,025 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 64,260 $ 58,815 $ 58,434 $ 32,642 $ 36,789 ================================================================================================================================== Net income per share Basic $0.74 $0.68 $0.67 $0.37 $0.43 Diluted $0.70 $0.67 $0.66 $0.36 $0.40 Net income per share, excluding the effect of the write-off of acquired in-process technology Basic $0.77 $0.68 $0.71 $0.57 $0.43 Diluted $0.73 $0.67 $0.69 $0.55 $0.40 Weighted average number of shares (000s) Basic 87,324 85,972 87,416 88,414 86,298 Diluted 91,973 88,100 88,940 91,544 92,104 Balance Sheet Data (at end of period) Working capital $ 197,673 $ 166,455 $ 123,343 $ 112,846 $ 103,727 Total assets 495,592 377,803 286,259 220,279 189,748 Total debt 32 2,176 2,612 2,457 2,655 Stockholders' equity 290,529 212,591 159,028 131,005 115,912 -------------------------------------------------------------------------
P. 64 EX-13.3 6 dex133.txt EXHIBIT 13.3-MANAGEMENT DISCUSSION & ANALYSIS Exhibit 13.3 2OO1 COGNOS ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- (in United States dollars, unless otherwise indicated, and in accordance with U.S. GAAP) The following discussion should be read in conjunction with the audited consolidated financial statements and notes included in this Annual Report. We prepare and file our consolidated financial statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in United States (U.S.) dollars and in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The consolidated financial statements and MD&A in accordance with Canadian GAAP, in U.S. dollars, are made available to all shareholders and filed with various regulatory authorities. On April 6, 2000, our Board of Directors authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders of record at the close of business on April 20, 2000. Share and per-share amounts in this MD&A, and the audited consolidated financial statements and notes thereto included in this Annual Report, have been adjusted retroactively for this split. OVERVIEW Cognos is a leading global provider of business intelligence software solutions. We develop, market, and support an integrated business intelligence platform that allows our customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives and to effectively coordinate decision-making and actions across the extended enterprise through intranets, extranets, and the Internet. Our software is designed to allow our customers to effectively use data to make faster, more informed decisions in order to improve operational effectiveness, increase customer satisfaction, accelerate corporate response times, and, ultimately, enhance revenues and profits. Our enterprise business intelligence platform (EBI Platform) is uniquely positioned to take advantage of the accelerating demand for business intelligence solutions for the extended enterprise across all industries. Our EBI Platform is an integrated software foundation that is designed to meet our customers' end-to-end business intelligence requirements, including reporting, analysis, query, and visualization, in a secure, Web-based environment that is easy to use and deploy across the extended enterprise. The information produced by our platform is distributed over a business intelligence portal that enables users, both inside and outside the organization, to access business intelligence content, such as reports and scorecarding, through a secure, personalized Web-based interface. Our business intelligence solution also includes an integrated set of analytic applications built upon the foundation of our EBI Platform, which provide "out-of-the-box" functionality for reporting and analysis in functional areas such as finance, inventory, and sales. Revenue is derived from the licensing of software and the provision of related services, which include product support and education, consulting, and other services. We generally license software and provide services subject to terms and conditions consistent with industry standards. Our customers may elect to contract with us for product support, which includes product and documentation enhancements, as well as telephone support, by paying either an annual fee or fees based on their usage of support services. We operate internationally with a substantial portion of our business conducted in foreign currencies. Accordingly, our results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, to other foreign currencies. P. 22 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- Currently we derive our revenue from the licensing, support, and service of business intelligence solutions and application development tools. In the most recent fiscal year, revenue associated with our business intelligence solutions made up 90% of our total revenues; application development tools made up 10% of our total revenues. The percentage of revenue attributable to application development tools has declined over the last six fiscal years and is expected to continue to decline in the future as the market moves away from proprietary systems and towards packaged application products. We are focused on maintaining our leadership position in the business intelligence market and believe that the application development tools market will continue to decrease in importance for our financial results. We recognize revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition. Substantially all of our product license revenue is earned from licenses of off-the-shelf software requiring no customization. Revenue from these licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. If a license includes the right to return the product for refund or credit, revenue is recognized net of an allowance for estimated returns provided all the requirements of SOP 97-2 have been met. Revenue from product support contracts is recognized ratably over the life of the contract. Incremental costs directly attributable to the acquisition of product support contracts, and that would not have been incurred but for the acquisition of that contract, are deferred and expensed in the period the related revenue is recognized. These costs include commissions payable on sales of support contracts. Revenue from education, consulting, and other services is recognized at the time the services are rendered. For contracts with multiple obligations (e.g., deliverable and undeliverable products, support obligations, education, consulting, and other services), we allocate revenue to each element of the contract based on objective evidence of the fair value of the element. The sales cycle for our products may span nine months or more. Historically, we have recognized a substantial portion of our revenues in the last month of a quarter, with these revenues frequently concentrated in the last two weeks of a quarter. Even minor delays in booking orders may have a significant adverse impact on revenues for a particular quarter. To the extent that delays are incurred in connection with orders of significant size, the impact will be correspondingly greater. As corporations move to enterprise-wide deployments, orders become larger and, hence, the impact of the sales cycle becomes increasingly harder to predict. We currently operate with virtually no order backlog because our software products typically are shipped shortly after orders are received. Product license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. As a result of these and other factors, our quarterly results have varied significantly in the past and are likely to fluctuate significantly in the future. Accordingly, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily indicative of the results to be expected in any future period. We license our software through our direct sales force and value-added resellers, system integrators, and original equipment manufacturers. Direct sales accounted for approximately 70%, 69%, and 69% of our license revenues for the years ended February 28, 2001 (fiscal 2001), February 29, 2000 (fiscal 2000), and February 28, 1999 (fiscal 1999), respectively. As enterprise-wide deployments become more important to our customers, we believe that the direct sales channel is the most effective method of penetrating the large enterprise market; however, in order to have adequate market coverage for smaller and mid-size companies, we continue to expend a significant amount of resources developing our indirect sales activities. We also continue to commit significant management time and financial resources to developing direct and indirect international sales and support channels. P. 23 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS [GRAPH] Net Income (US$M) Net Income, Net Income Excluding Write-Offs 1999 $ 58 $ 62 2000 $ 59 $ 59 2001 $ 64 $ 67 Total revenue for fiscal 2001 was $495.7 million, which was 29% more than the fiscal 2000 revenue of $385.6 million which, in turn, was 28% more than the fiscal 1999 revenue of $301.1 million. Net income for fiscal 2001 was $64.3 million and diluted net income per share was $0.70, compared to fiscal 2000 net income of $58.8 million and diluted net income per share of $0.67, and net income of $58.4 million and diluted net income per share of $0.66 for fiscal 1999. The results for fiscal 2001 include the write-off of $3.0 million related to the in-process technology acquired on the purchase of NoticeCast Software Ltd. during the third quarter of fiscal 2001. Excluding the effect of this item,net income and diluted net income per share for fiscal 2001 would have been $67.3 million and $0.73, respectively. Fiscal 2000 results did not include the write-off of any acquired in-in-process technology. The results for fiscal 1999 include the write-off of $3.8 million of acquired in-process technology as a result of the acquisitions of Relational Matters and LEX2000 Inc., both of which occurred in the last fiscal quarter of fiscal 1999. Excluding the effect of these write-offs, net income and diluted net income per share for fiscal 1999 would have been $61.8 million and $0.69, respectively. [GRAPH] Income Before Taxes (US$M) Income Before Taxes, Income Before Taxes Excluding Write-Offs 1999 $ 72 $ 75 2000 $ 82 $ 82 2001 $ 91 $ 94 Basic net income per share was $0.74, $0.68, and $0.67 in fiscal 2001, 2000, and 1999, respectively. Excluding the effect of the write-offs in fiscal 2001 and fiscal 1999, basic net income per share would have been $0.77 and $0.71, respectively. We experienced decreases in net income as a percentage of revenue in fiscal 2001 and 2000. In both fiscal 2001 and 2000 we increased our investment in our sales channels to focus on revenue growth and expand global market coverage. During fiscal 2001 the decrease in net income as a percentage of revenue was the result of increases in selling, general, and administrative expenses and the write-off of in-process technology acquired on the purchase of NoticeCast Software Ltd. during the third quarter. The decrease during fiscal 2000 was the result of increases in selling, general, and administrative expenses as well as an increase in the provision for income taxes.The provision for income taxes increased in fiscal 2000 from the prior fiscal years as we recognized the benefits of previously unrecorded tax benefits during fiscal 1999. P. 24 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- 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 of Revenue Percentage Change from Fiscal ------------------------------------------------------------ 2OO1 2OOO 1999 2OOO 1999 to 2OO1 to 2OOO ------------------------------------------------------------ Revenue 100.0% 100.0% 100.0% 28.5% 28.1% ------------------------------------------------------------ Operating expenses Cost of product license 1.5 1.3 1.9 39.7 (8.8) Cost of product support 3.6 3.5 3.7 29.5 23.2 Selling, general, and administrative 64.6 61.8 57.3 34.6 38.1 Research and development 13.6 13.9 14.0 25.6 26.7 Acquired in-process technology 0.6 0.0 1.3 * (100.0) - ------------------------------------------------------------------------------------------------------ Total operating expenses 83.9 80.5 78.2 33.9 31.9 - ------------------------------------------------------------------------------------------------------ Operating income 16.1 19.5 21.8 6.4 14.1 Interest expense (0.2) (0.2) (0.2) 9.5 36.2 Interest income 2.5 1.9 2.2 66.2 15.9 - ------------------------------------------------------------------------------------------------------ Income before taxes 18.4 21.2 23.8 11.8 14.1 Income tax provision 5.4 5.9 4.4 18.3 74.2 - ------------------------------------------------------------------------------------------------------ Net income 13.0% 15.3% 19.4% 9.3% 0.7% ===============================-----------------------------
*not meaningful The following table sets out, for each fiscal year indicated, the percentage that specific items bear to revenue, and the percentage change in the dollar amount of each item as compared to the prior fiscal year,when the effect of the write-offs of acquired in-process technology is excluded.
Percentage of Revenue Percentage Change from Fiscal ------------------------------------------------------------ 2OO1 2OOO 1999 2OOO 1999 to 2OO1 to 2OOO ------------------------------------------------------------ Revenue 100.0% 100.0% 100.0% 28.5% 28.1% Total operating expenses 83.3 80.5 76.9 32.9 34.1 Operating income 16.7 19.5 23.1 10.4 7.9 Net income 13.6% 15.3% 20.5% 14.4% (4.8%) ------------------------------------------------------------
P. 25 2001 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- REVENUE Our total revenue was $495.7 million in fiscal 2001, compared to $385.6 million in fiscal 2000, and $301.1 million in fiscal 1999. Our growth in total revenue was derived primarily from the increase in revenue from our business intelligence products, principally Web versions of Impromptu(R) and PowerPlay(R); contributing to the increase, but to a lesser extent, were Cognos Visualizer, DecisionStream(TM), Cognos Query, and Cognos Finance. Total revenue for all business intelligence products was $446.8 million, $328.0 million, and $230.9 million in fiscal 2001, 2000, and 1999, respectively, which resulted in year-over-year increases of 36% and 42%, respectively. Total revenue from our business intelligence products represented 90%, 85%, and 77% of total revenue in fiscal 2001, 2000, and 1999, respectively. [GRAPH] Total Revenue License Support Services 1999 $ 301 2000 $ 386 2001 $ 496 Total revenue from our application development tools, PowerHouse(R) and Axiant(R), was $48.9 million in fiscal 2001, compared to $57.6 million in fiscal 2000, and $70.2 million in fiscal 1999, which resulted in year-over-year decreases of 15% and 18%, respectively. The growth in total revenue from product license, product support, and services in fiscal 2001 from fiscal 2000 was as follows: a 29% increase in product license revenue, a 25% increase in product support revenue, and a 33% increase in services revenue. This compares to an increase for the same categories for fiscal 2000 from fiscal 1999 as follows: 28%, 27%, and 30%, respectively. [GRAPH] Fiscal 2001 Total Revenue by Geography North America 64% Europe 30% Asia/Pacific 6% Our operations are divided into three main geographic regions: (1) North America (includes Latin America), (2) Europe (consists of the U.K. and Continental Europe), and (3) Asia/Pacific (consists of Australia and countries in the Far East). In fiscal 2001, the percentage of total revenue from North America, Europe, and Asia/Pacific was 64%, 30%, and 6%, respectively, compared to 61%, 32%, and 7%, respectively, in fiscal 2000 and 59%, 34%, and 7%, respectively, in fiscal 1999. In fiscal 2001, total revenue from North America, Europe, and Asia/Pacific increased from fiscal 2000 by 35%, 19%, and 13%, respectively, compared to increases of 32%, 20%, and 32%, respectively, in fiscal 2000 from fiscal 1999. The increase in growth for fiscal 2001 compared to fiscal 2000 in North America is attributable to the increase in revenue from the business intelligence products; however, due to economic conditions, growth rates began to slow in the fourth quarter of fiscal 2001. The decrease in growth for Europe was partly the result of foreign exchange rate fluctuations. Further, we were able to take advantage of market opportunities in Continental Europe, but were unable to realize these advantages in the United Kingdom. Excluding exchange rate fluctuations, revenue growth for Europe would have been 32% for fiscal 2001 as compared to 28% growth, excluding exchange fluctuations, for fiscal 2000. The decline in growth rate during fiscal 2001 in Asia/Pacific was mainly attributable to our Australian markets, where we experienced slower growth which was mainly attributable to year-over-year exchange rate fluctuations. A substantial portion of our business is conducted in foreign currencies. Accordingly, our results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, to other foreign currencies. The effect of foreign exchange rate fluctuations decreased the overall revenue growth by four percentage points in fiscal 2001 from fiscal 2000 and by two percentage points in fiscal 2000 from fiscal 1999. P. 26 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- PRODUCT LICENSE REVENUE [GRAPH] Business Intelligence Product License Revenue (US$M) 1999 $132 2000 $187 2001 $249 Total product license revenue was $262.8 million, $203.3 million, and $158.4 million in fiscal 2001, 2000, and 1999, respectively, and accounted for 53% of our revenue for each of the respective time periods. The increase in all periods occurred predominantly as a result of the performance of our business intelligence products. Product license revenue from these products was $248.8 million, $186.6 million, and $131.9 million in fiscal 2001, 2000, and 1999, respectively, which resulted in year-over-year increases of 33% and 41%, respectively. The growth in product license revenue from the business intelligence products during fiscal 2001 was less than the growth rate reported in fiscal 2000. Although the overall revenue growth rate in North America increased in fiscal 2001 from fiscal 2000, we experienced the impact of the rapid economic slowdown in this geographical region late in our fourth fiscal quarter. We experienced hesitancy on the part of commercial customers in North America to make large commitments. We believe that the softening North American economy is causing a retrenchment in the near-term level of investment in higher valued software products. Product license revenue associated with the business intelligence products contributed approximately 95%, 92%, and 83% to this revenue category in fiscal 2001, 2000, and 1999, respectively. Product license revenue from our application development tools, PowerHouse and Axiant, was $14.0 million, $16.7 million, and $26.5 million in fiscal 2001, 2000, and 1999, respectively. We expect that, in both the short and long term, the trend of decreasing product license revenue from these products will continue. Our sales and marketing strategy includes multi-tiered channels ranging from a direct sales force to various forms of third-party distributors, resellers, and original equipment manufacturers. We believe that a direct sales force is more effective than third-party sales in reaching Global 2000 companies because it is more relationship focused. We use third-party distributors in selected regions in order to extend our geographic coverage. [GRAPH] Application Development Product License Revenue (US$M) 1999 $26 2000 $17 2001 $14 Total product license revenue from third-party channels represented 30% of total product license revenue in fiscal 2001 compared to 31% in fiscal 2000 and 1999. Within our business intelligence market, product license revenue from third-party channels was $75.7 million in fiscal 2001, compared to $57.3 million in fiscal 2000 and $42.3 million in fiscal 1999. Product license revenue within this market from third-party channels represented 30% of our product license revenue in fiscal 2001, compared to 31% in fiscal 2000 and 32% in fiscal 1999. PRODUCT SUPPORT REVENUE Product support revenue was $147.6 million, $118.1 million, and $93.3 million in fiscal 2001, 2000, and 1999, respectively. Product support revenue accounted for 30% of our total revenue for fiscal 2001 and 31% for fiscal 2000 and 1999. The increase in the dollar amounts was the result of new support contracts from the expansion of our customer base, as well as the renewal of existing support contracts. Total product support revenue from the business intelligence products was $114.2 million, $78.8 million, and $52.0 million in fiscal 2001, 2000, and 1999, respectively and made up 77%, 67%, and 56% of the total product support revenue in fiscal 2001, 2000, and 1999, respectively. In fiscal 2001, total product support revenue from business intelligence products increased by 45% from fiscal 2000 and total product support revenue from application development tools decreased by 15% over the same period. 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. P. 27 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- SERVICES REVENUE Revenue from education, consulting, and other services was $85.3 million, $64.3 million, and $49.4 million in fiscal 2001, 2000, and 1999, respectively. Services revenue accounted for 17% of our total revenue for fiscal 2001 and 2000 and accounted for 16% of our total revenue for fiscal 1999. During fiscal 2001, we continued to increase the level of sales of our business intelligence solutions within global enterprises. Our business intelligence solutions were increasingly being deployed on an enterprise-wide, global basis within organizations for mission-critical applications. Successful installation and deployment of our solution has become critical to our customers' success. As a result, our customers have increasingly required services such as strategic planning, project management, analysis and design, technical advisory, and instruction to effectively deploy our solutions. The increase in services revenue in fiscal 2001 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. Services revenue associated with the business intelligence products contributed approximately 98%, 97%, and 95% to this revenue category in fiscal 2001, 2000, and 1999, respectively. OPERATING EXPENSES COST OF PRODUCT LICENSE The cost of product license consists primarily of royalties for technology licensed from third parties and the costs of materials and distribution related to licensed software. Product license costs in fiscal 2001 were $7.3 million compared to $5.2 million in fiscal 2000 and $5.7 million in fiscal 1999. Product license costs represented 3% of product license revenue for fiscal 2001 and 2000 and 4% of product license revenue for fiscal 1999. The increase, in dollar terms, in fiscal 2001 from fiscal 2000 is due to increases in royalty costs; material and distribution costs remained relatively consistent with fiscal 2000 levels. The decrease in fiscal 2000 from fiscal 1999 was due to decreases in both royalty costs and materials and distribution costs associated with product offerings. COST OF PRODUCT SUPPORT The cost of product support includes the costs associated with resolving customer inquiries and other telesupport and web-support 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 $17.8 million, $13.8 million, and $11.2 million in fiscal 2001, 2000, and 1999, respectively. These costs represented 12% of product support revenue for each of fiscal 2001, 2000, and 1999. The increase, in dollar terms, in fiscal 2001 from fiscal 2000 was associated predominantly with increases in customer telesupport and websupport costs. The increase in fiscal 2000 from fiscal 1999 was associated predominantly with increases in customer telesupport and websupport costs; while enhancement release costs contributed to a lesser extent to the increase. [GRAPH] Selling, General, and Administrative Expenses As A Percent Of Total Revenue 1999 57% 2000 62% 2001 65% SELLING, GENERAL, AND ADMINISTRATIVE Selling, general, and administrative expenses were $320.5 million, $238.1 million, and $172.5 million in fiscal 2001, 2000, and 1999, respectively. These costs were 65% of revenue in fiscal 2001 compared to 62% and 57% in fiscal 2000 and 1999, respectively. The increase in the selling, general, and administrative expenses in fiscal 2001 was primarily the result of increases in staffing and related compensation expenses. Contributing to a lesser extent to the increase were facilities, marketing costs, and the amortization of the technology acquired on acquisitions of various companies over the last four fiscal years. During fiscal 2001, we continued to increase our investment in our sales channels, to focus on opportunities for new revenue growth and expand global market coverage. The average number of employees within the selling, general, and administrative areas grew by 29% in fiscal 2001, predominantly as the result of additions to sales and services staff. The increase in the selling, general, and administrative expenses in fiscal 2000 was primarily the result of increases in staffing and related compensation expenses and, to a lesser extent, increases in subcontracting, facilities, and marketing costs. During fiscal 2000, we increased our investment in our sales channels to focus on P. 28 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- revenue growth and to expand our global market coverage. The average number of employees within the selling, general, and administrative areas grew by 30% in fiscal 2000, predominantly as the result of additions to sales and services staff. The costs per employee increased 4% in fiscal 2001 and 6% in fiscal 2000. RESEARCH AND DEVELOPMENT [GRAPH] Research and Development (US$M) 1999 $42 2000 $54 2001 $67 Research and development costs were $67.3 million, $53.5 million, and $42.3 million for fiscal 2001, 2000, and 1999, respectively. Research and development costs have continued to increase, in dollar terms, over the last several fiscal years, but have remained constant at 14% of total revenue for each of fiscal 2001, 2000, and 1999. The growth in fiscal 2001 was primarily the result of increases associated with higher staffing levels in this area. Increases in services purchased externally and other costs associated with the development of our product lines to meet foreign market requirements also contributed to the increase for the fiscal year. The growth during fiscal 2000 was predominantly the result of higher staffing levels and related compensation expenses. The increase in the average number of employees in this area was 15% in fiscal 2001 from fiscal 2000, and was 26% in fiscal 2000 from 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. Costs were not deferred in any of fiscal 2001, 2000, or 1999 because either no projects met the criteria for deferral or the period between (i) achieving technological feasibility and (ii) the general availability of the product was short, and the associated costs were immaterial. During fiscal 2001 we continued to invest in R&D activities for our business intelligence solutions, including further development of e-Application packages and continued investment in our existing enterprise business intelligence platform. During the current fiscal year we released a new version of Cognos Query, our Web-based database query and navigation tool, and DecisionStream 6.5, a data mart creation component of the BI platform which unites data from disparate sources and consolidates it into data marts. In addition to our e-Application for Sales Analysis, Inventory Analysis, and Financial Analysis, we released the e-Commerce Analysis application for the IBM WebSphere Commerce Suite during fiscal 2001. We also released Version 5.0 of Cognos Finance, a solution that delivers integrated budgeting, forecasting, consolidation, and financial reporting and analysis in one comprehensive system, and Version 1.5 of Cognos Visualizer which has significant enhancements for scorecarding and key performance indicator applications displaying these metrics in a single presentation. To further drive business value for customers, we released a new product that creates scorecards of key performance indicators. This packaged application addresses a key requirement for enterprise business performance measurement. During fiscal 2002, we plan to make available a new version of all our core software products, with the release of EP Series 7. EP Series 7 will also introduce enterprise event management technology we acquired this past year through our purchase of NoticeCast Software Ltd. This technology monitors business processes and automatically notifies users of key events and performance indicators or data via their personal computer, personal digital assistant or other wireless device, enabling them to take immediate action. Our customers will be able to react rapidly to key business events and changes in business performance as they will be able to leverage our business intelligence platform to quickly relate these events to overall enterprise business performance. To help customers address a broader range of enterprise requirements, we plan to invest in research and development to extend our e-Application offerings. P. 29 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- ACQUIRED IN-PROCESS TECHNOLOGY FISCAL 2001 During the second quarter of fiscal 2001, we acquired Powerteam OY, our distributor in Finland. The shareholders of Powerteam OY will receive approximately $2,258,000 in cash over two years and could also receive cash payments not to exceed $500,000 over the next three years. The acquisition of Powerteam OY did not involve the purchase of acquired in-process technology. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of the purchase price. During the third quarter of fiscal 2001, we acquired NoticeCast Software Ltd., based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management Software monitors business processes and delivers timely business intelligence notifications to business users across the enterprise via e-mail on their personal computer, hand-held or wireless device. The shareholders of NoticeCast Software Ltd. received approximately $9,000,000 in cash on closing and will receive 148,468 shares of our common stock valued at approximately $4,820,000. We are holding the shares in escrow and they will be released on the second anniversary of the closing of the transaction. An independent appraisal valued the in-process research and development at $3,000,000. In the opinion of management and the appraiser, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we have recorded a special charge of $3,000,000 (or $0.03 per share on a diluted basis) in the third quarter ended November 30, 2000 to write off the in-process technology. At the time of acquisition, the NoticeCast product required integration with our platform, enhancements to ensure that the scalability of the product would be consistent with the Cognos platform as a whole, and systems testing to ensure predictability of performance. It is anticipated that the first Cognos version of the software will be made available coincident with the EP Series 7 release during fiscal 2002. We currently estimate that development efforts to complete this version of the software will cost approximately $4 million. For the acquisition of NoticeCast, the fair value of NoticeCast's one in-process research and technology project, emPower(TM), was assessed by independent business valuators at $3.0 million. The valuators used the income forecast method, with the percentage completion approach, to value the acquired in-process research and development. The adjusted discount rate applied by the valuators to the project's cash flows was 35%. We believe that emPower was approximately 40% complete at the time of purchase. Cash inflows from this project are expected to commence in fiscal 2002. With the integration of the NoticeCast technology into the Cognos solution, the average price of our products is expected to increase slightly. However, we do not expect a material impact, from the integration of this project, on the margin rates experienced historically. The risks and uncertainties associated with completing the development of the project are as follows: . We may be unable to integrate the project with our platform on a timely basis. . We may be unable to scale the project to align it with our platform. . We may be unable to complete testing on a timely basis. . Testing of the project may show that predictability of performance is not in line with our quality standards. If the project is not completed on schedule, our competition may introduce similar products before us. This could result in a decline in our sales or a loss of market acceptance of our products. Also during the third quarter of fiscal 2001, we completed the acquisition of Johnson & Michaels, Inc. (JAMI), a leading provider of business intelligence consulting services. The shareholders of JAMI will receive total cash consideration of approximately $3,915,000 over three years and 104,230 shares of our common stock valued at $4,250,000 over the same period. Approximately $1,406,000 was paid and 39,085 shares were issued on closing; we are holding the remaining shares, all of which were issued, in escrow and they will be released on the first (33%), second (33%), and third (34%) anniversaries of the closing of the transaction. We have conditioned a portion of the overall consideration on the continued tenure of P. 30 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of the purchase price. The deferred shares, valued at $2,656,000, are accounted for as an offset to capital stock. The acquisition of JAMI did not involve the purchase of acquired in-process technology. FISCAL 2000 During fiscal 2000, we completed two acquisitions. Neither the acquisition of Information Tools AG nor the acquisition of the minority interest in Cognos Far East Pte Limited involved the purchase of acquired in-process technology. We acquired Information Tools AG, our distributor in Switzerland. The 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 $60,000 will be paid in fiscal 2002 relating to fiscal 2001 results and approximately $120,000 was paid in fiscal 2001 relating to fiscal 2000 results. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. We also purchased the entire outstanding minority interest in our subsidiary in Singapore, Cognos Far East Pte Limited. The former minority shareholders of Cognos Far East Pte Limited received approximately $1,688,000 in cash upon completion of the purchase. No further consideration is due to the former minority shareholders of the subsidiary. FISCAL 1999 During the fourth quarter ended February 28, 1999 we acquired substantially all the assets of Relational Matters, including its DecisionStream software and technology. DecisionStream software is a high-performance data aggregation and integration tool used to populate data warehouses and data marts and OLAP (online analytical processing) servers. The software simplifies the loading of data marts into our business intelligence solutions providing a coordinated view of data marts throughout an organization. Relational Matters will receive approximately $7,550,000 over three years and 250,980 shares of our common stock valued at $1,823,000 over the same time period. We placed the shares, all of which were issued, in escrow on the closing of the acquisition. A portion (40%) was released on the second anniversary of the closing of the transaction and the remainder (60%) will be released on the third anniversary of the closing of the transaction. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,823,000, are accounted for as an offset to capital stock. An independent appraisal valued the in-process research and development at $2,400,000. In the opinion of management and the appraiser, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we recorded a special charge of $2,400,000 ($0.02 per share on a diluted basis) in the fourth quarter ended February 28, 1999, to write off the acquired in-process technology. DecisionStream was the primary technology acquired in this transaction. At the time of acquisition DecisionStream Version 3.0 had been released and was considered developed technology. Versions 3.1, 3.2, and 4.0 were approximately 90%, 40%, and 15% complete, respectively. Version 3.1 would build on the properties of Version 3.0 but would deliver support for additional databases, extend transformation features, and strengthen star schema support. Version 3.2 would be an incremental release to Version 3.1 adding metadata exports and support for additional OLAP targets. Version 4.0 would be focused on administrative enhancements. Version 3.1 was expected to be released in Q4 of fiscal 1999,Version 3.2 was expected to be released in Q1 of fiscal 2000, and Version 4.0 was expected to be released in Q3 of fiscal 2000. We also acquired a product package using DecisionStream technology as its foundation, which would deliver pre-configured metadata and application schema to deliver dimensional data marts from certain packaged applications. At the time of acquisition this technology was approximately 25% complete and it was anticipated that the product would not be ready for release until Q3 of fiscal 2000. For the acquisition of Relational Matters the fair value of the in-process research and technology was determined by independent business valuators who assessed the fair value of the in-process technology purchased at $2,400,000. Based on consideration of the weighted average costs of capital, the weighted average return on assets, and venture capital rates of P. 31 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- return, the valuators used a discount rate of 30% to determine the fair value of in-process technology. The valuators used an income approach to determine that fair value. Cash inflows from Versions 3.1 and 3.2 of DecisionStream were expected in early fiscal 2000 and cash inflows from Version 4.0 and application data marts were expected to commence in late fiscal 2000. With the integration of the DecisionStream-based technology into the Cognos solution we did not expect a material impact on the margin rates experienced historically. The risks and uncertainties surrounding the completion of the project were as follows: . The complex nature of DecisionStream needed to be expressed through an intuitive GUI (Graphical User Interface). Developing an intuitive GUI that did not restrict advanced functionality was considered to be a significant challenge and one that could require the use of new and immature technology. . DecisionStream versions under development required internal engine structure changes that could possibly disrupt the operation of existing functions. . OLAP interfaces for DecisionStream that would be used in development were largely unproven. . The integration interfaces for packaged applications were likely to be proprietary and complex or not well defined. If the projects were not completed on schedule, our competition could have introduced similar products before us. This may have resulted in a decline in our sales or a loss of market acceptance of the product. In addition, during the fourth quarter of fiscal 1999, we acquired LEX2000 Inc., for a combination of cash and our common stock. LEX2000(TM) was the only significant in-process research and development project acquired on the purchase. LEX2000 is a financial reporting, consolidation, budgeting, and forecasting system designed to gather data from many sources and allow users to report on and analyze data. LEX2000 provides the user with enterprise-wide access to financial data creating data marts and retrieving information in order to build complex financial reports. The shareholders of LEX2000 Inc. will receive approximately $7,444,000 over three years and 252,118 shares of our common stock valued at $1,940,000 over the same time period. Approximately 14,200 shares were issued at closing; we placed the remainder, all of which were issued, in escrow on the closing of the acquisition. A portion (50%) was released on the second anniversary of the closing of the transaction and the remainder (50%) will be released on the third anniversary of the closing of the transaction. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,644,000, are accounted for as an offset to capital stock.An independent appraisal valued the in-process research and development at $1,400,000. In the opinion of management and the appraiser, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we recorded a special charge of $1,400,000 ($0.02 per share on a diluted basis) in the fourth quarter ended February 28, 1999, to write off the acquired in-process technology. We believed that LEX2000,Version 4.0 for Windows, which built upon prior versions, was approximately 82% complete at the time of purchase. At that time, LEX2000 was a financial consolidation and reporting product that offered a full suite of reporting, consolidation, budgeting, and EIS reporting within a single product. It was anticipated that LEX2000, Version 4.0 for Windows, would be released in Q1 of fiscal 2000. We anticipated that costs to complete Version 4.0 would be $400,000. For the LEX2000 acquisition the fair value of the in-process research and development was determined using the valuation reports prepared by independent business valuators.The valuators used an income approach to determine fair market value. Cash inflows from the project were projected to start in fiscal 2000. Based on consideration of the weighted average costs of capital, the weighted average return on assets, and venture capital rates of return, the valuators used a discount rate of 34%.With the integration of the LEX2000 technology into the Cognos solution we did not expect a material impact on the margin rates experienced historically. The risks and uncertainties surrounding the completion of the project were assessed as follows: . The underlying code base for the LEX2000 project was APL2000. This code had to stay current with all the new features and functionality of other Windows development tools. There was risk that adding these features could degrade performance and increase support requirements. This may have caused delays in the development schedule for the project. If the projects were not completed on schedule, our competition could have introduced similar products before us. This may have resulted in a decline in our sales or a loss of market acceptance of the product. P. 32 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- The acquisitions in fiscal 2001, 2000, and 1999 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 our results of operations since their respective dates of acquisition. INTEREST INCOME AND EXPENSE Interest income was earned on our cash, cash equivalents, and short-term investments and interest expense related primarily to the interest on our mortgage, which was discharged during fiscal 2001, and capital leases. Net interest income was $11.6 million, $6.7 million, and $5.9 million in fiscal 2001, 2000, and 1999, respectively. The increase during fiscal 2001 was the result of an increase in the average size of the investment portfolio, and an increase in the average effective interest rates earned on investments during fiscal 2001. This increase was offset slightly by the impact of unfavorable exchange rate fluctuations. The increase in fiscal 2000 was the result of an 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 earned on investments during fiscal 2000. TAX EXPENSE Our tax rate is affected by the relative profitability of our operations in various geographic regions. In fiscal 2001, we recorded an income tax provision of $27.1 million on $91.3 million of pre-tax income, representing an effective income tax rate of 30%. In fiscal 2000, we recorded an income tax provision of $22.9 million on $81.7 million of pre-tax income. This tax expense represented an effective income tax rate of 28% for the year, as compared to an effective income tax rate of 18% for 1999. The rate for fiscal 2000 increased from fiscal 1999 as a result of having recognized the benefits of previously unrecorded tax benefits during fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2001, we held $234.6 million in cash, cash equivalents, and short-term investments, an increase of $37.8 million from February 29, 2000. In addition, we have arranged an unsecured credit facility that includes an operating line and foreign exchange conversion facilities. The operating line permits us to borrow funds or issue letters of credit or guarantee up to Cdn$15.0 (US$9.8) million, subject to certain covenants. As of February 28, 2001, there were no direct borrowings under this operating line. As discussed further below, we have foreign exchange conversion facilities that allow us to hold foreign exchange contracts of approximately Cdn$130.0 (US$84.9) million outstanding at any one time. As of February 28, 2001, we had a total of $1.6 million of long-term liabilities (including the current portion of long-term debt and long-term liabilities). As of February 28, 2001, working capital was $197.7 million, an increase of $31.2 million from February 29, 2000, primarily because of higher levels of short-term investments and accounts receivable which were partially offset by a decrease in cash and increases in deferred revenue and other current liabilities. During fiscal 2001 we used $14.0 million in cash for share repurchases and $11.4 million for acquisitions. Cash provided by operating activities (after changes in non-cash working capital items) for fiscal 2001 was $99.0 million, an increase of $15.8 million compared to the prior fiscal year. This fluctuation was due to an increase in net income after adjustments for depreciation, amortization, and other non-cash items and a net decrease in non-cash working capital as compared to a net increase in non-cash working capital during fiscal 2000. Cash used in investing activities was $119.2 million for fiscal 2001, an increase in investment of $81.5 million compared to the prior fiscal year. The majority of the fluctuation stems from an increase in net investment in short-term investments and increases in fixed asset additions and acquisition costs. In fiscal 2001, we spent $56.6 million related to the activity in short-term investments compared to $7.4 million (both net of maturities) in fiscal 2000. In addition, we spent $11.4 million in fiscal 2001 on acquisitions, compared to $2.1 million in fiscal 2000. (See Note 5 of the Notes to the Consolidated Financial Statements.) The increase in fixed asset additions was primarily the result of the construction, during fiscal 2001, of a second building on the site of our corporate headquarters in Ottawa as well as purchases of computer equipment and P. 33 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- software. We invested approximately $17.8 million during fiscal 2001 in the expansion of our headquarters, as compared to $3.4 million during fiscal 2000. This headquarters expansion was substantially complete in December 2000 and the building was fully occupied by the end of fiscal 2001. Cash provided by financing activities was $4.5 million for fiscal 2001, compared to the use of $9.1 million for financing activities during fiscal 2000. Our financing activities for both fiscal years involved the repurchase of our own shares in the open market, and the issuance of shares pursuant to our stock purchase plan and the exercise of stock options. Relating to financing activities, we issued 1,889,000 common shares for consideration of $20.6 million during fiscal 2001, compared to 2,093,000 shares for consideration of $16.5 million in fiscal 2000. The issuance of shares in both periods was pursuant to our stock purchase plan and the exercise of stock options by employees, officers, and directors. During fiscal 2001 we repurchased 579,500 shares at a cost of $14.0 million, compared to 2,286,000 shares repurchased at a cost of $26.0 million in fiscal 2000. The share repurchases made in the past two fiscal years were part of distinct open market share repurchase programs through the Nasdaq National Market. The share repurchases made in fiscal 2001 were part of two open market share repurchase programs. The program adopted in October 1999 expired on October 8, 2000. Under this program we repurchased 150,000 of our shares for $3.4 million; all repurchased shares were cancelled. In October 2000, we adopted a new program that will enable us to purchase up to 4,403,510 common shares (not more than 5% of those issued and outstanding) between October 9, 2000 and October 8, 2001. Under the current program we have repurchased 529,500 shares for $11.9 million during fiscal 2001; all repurchased shares were cancelled. This program does not commit us to make any share repurchases. Purchases will be made on the Nasdaq National Market 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.) Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in our various subsidiaries. Typically these contracts are between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. We enter into these foreign exchange forward contracts with major Canadian chartered banks, and therefore we do not anticipate non-performance by these counterparties. The amount of the exposure on account of any non-performance is restricted to the unrealized gains in such contracts. As of February 28, 2001, we had foreign exchange forward contracts, with maturity dates ranging from March 29, 2001 to July 26, 2001, to exchange various foreign currencies in the amount of $15.2 million. We have never declared or paid any cash dividends on our common shares. Our current policy is to retain our earnings to finance expansion and to develop, license, and acquire new software products, and to otherwise reinvest in Cognos. We anticipate that through fiscal 2002 our operations will be financed by current cash balances and funds from operations. If we were to require funds in excess of our current cash position to finance our longer-term operations, we would expect to obtain such funds from, one or a combination of, the expansion of our existing credit facilities, or from public or private sales of equity or debt securities. Inflation has not had a significant impact on our results of operations. EUROPEAN ECONOMIC AND MONETARY UNION The euro currency was introduced on January 1, 1999, and the transition to this new currency has associated with it many potential implications for businesses operating in Europe including, but not limited to, products, information technology, pricing, currency exchange rate risk and derivatives exposure, continuity of material contracts, and potential tax consequences. The new euro currency is being introduced in stages over the course of a 31/2 year transition period. We believe the transition to the euro will have limited longer-term implications on our business. We have taken steps in the transition to the euro in the area of our internal processes and systems through identifying, modifying, and testing these processes and systems to handle transactions and reporting requirements involving the euro in accordance with the regulations. Our financial application systems represent the most significant internal systems that are affected by the transition to the euro. We continue to upgrade P. 34 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- these systems to enable us, together with certain process changes and modifications provided by the application vendor to its supported customers, to handle the requirements for transactions and reporting involving the euro. To handle the full requirements of the euro we plan to implement the latest version level upgrade of our financial applications systems during fiscal 2002. We continue to identify, upgrade, and modify our systems and processes in order to handle the various stages of the euro implementation. We are continuing to monitor our pricing in Europe, giving consideration to the transition to the euro. We believe that the costs relating to the conversion of our internal systems and processes incurred to date, along with any future costs relating to such conversions, will not have a material adverse effect on our business, results of operations, or financial condition. MARKET RISK Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes. Further discussion of our investment and foreign exchange policies can be found in Notes 1 and 8 of the Notes to the Consolidated Financial Statements. INTEREST RATE RISK Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The investment of cash is regulated by our investment policy of which the primary objective is security of principal. Among other selection criteria, the investment policy states that the term to maturity of investments cannot exceed one year in length. We do not use derivative financial instruments in our investment portfolio. Interest income on our cash, cash equivalents, and short-term investments is subject to interest rate fluctuations, but we believe that the impact of these fluctuations does not have a material effect on our financial position due to the short-term nature of these financial instruments. The amount of our long-term debt is immaterial. Our interest income and interest expense are most sensitive to the general level of interest rates in Canada and the United States. Sensitivity analysis is used to measure our interest rate risk. For the fiscal year ending February 28, 2001, a 100 basis-point adverse change in interest rates would not have had a material effect on our consolidated financial position, earnings, or cash flows. FOREIGN CURRENCY RISK We operate internationally; accordingly, a substantial portion of our financial instruments are held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries. The forward contracts are typically between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. Sensitivity analysis is used to measure our foreign currency exchange rate risk. As of February 28, 2001, a 10% adverse change in foreign exchange rates versus the U.S.dollar would not have had a material effect on our reported cash, cash equivalents, and short-term investments. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS We make certain statements in this report that constitute forward-looking statements. These statements include, but are not limited to, statements relating to our expectations concerning future revenues and earnings, including future rates of growth, from the licensing of our business intelligence and application development products and related product support and services, and relating to the sufficiency of capital to meet our working capital and capital expenditure requirements. Forward-looking statements are neither promises nor guarantees, and are subject to risks and uncertainties that may cause future results to differ materially from those stated in the forward-looking statements. There can be no guarantee that future results will turn out as expected. Factors that may cause such differences include, but are not limited to, the factors discussed P. 35 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- below. Additional risks and uncertainties that we are unaware of or currently deem immaterial may also adversely affect our business operations. We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or events, conditions, or circumstances on which any such statement may be based. RISKS RELATED TO OUR BUSINESS OUR REVENUE MAY NOT CONTINUE TO GROW AT HISTORICAL RATES. Although we have experienced significant license revenue growth with respect to our business intelligence products over the past few fiscal years, we cannot assure you that we will continue to grow. If we do grow, we cannot assure you that we will be able to maintain the historical rate or extent of such growth in the future. Our growth rate may be affected by global economic conditions generally, and the current economic slowdown, in particular. OUR QUARTERLY AND ANNUAL OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS, WHICH MAY CAUSE OUR STOCK PRICE TO FLUCTUATE OR DECLINE. Historically, our quarterly operating results have varied from quarter to quarter, and we anticipate this pattern to continue. We typically realize a larger percentage of our annual revenue and earnings in the fourth quarter of each fiscal year, and lower revenue and earnings in the first quarter of the next fiscal year. Our quarterly and annual operating results may be adversely affected by a wide variety of factors, including: . our ability to maintain revenue growth at current levels or anticipate a decline in revenue from any of our products; . the impact of global economic conditions on the sales cycle; . our ability to obtain and close large enterprise transactions; . changes in product mix and our ability to anticipate changes in shipment patterns; . our ability to identify and develop new technologies and to commercialize those technologies into new products; . our ability to accurately select appropriate business models and strategies; . our ability to make appropriate decisions which will position us to achieve further growth; . our ability to identify, hire, train, motivate, and retain highly qualified personnel, and to achieve targeted productivity levels; . our ability to identify, develop, deliver, and introduce in a timely manner new and enhanced versions of our products which anticipate market demand and address customer needs; . market acceptance of business intelligence software generally and of new and enhanced versions of our products in particular; . timing of new product announcements; . our ability to establish and maintain a competitive advantage; . changes in our pricing policies or those of our competitors and other competitive pressures on selling prices; . size, timing, and execution of customer orders and shipments, including delays, deferrals, or cancellations of customer orders; . number and significance of product enhancements and new product and technology announcements by our competitors; . our reliance on third-party distribution channels as part of our sales and marketing strategy; . the timing and provision of pricing protections and exchanges from certain distributors; . changes in foreign currency exchange rates and issues relating to the conversion to the euro; and . our ability to enforce our intellectual property rights. These fluctuations could materially adversely affect our share price and our business, results of operations, and financial condition. OUR ABILITY TO ADJUST OUR EXPENSES IN THE NEAR TERM IS LIMITED, WHICH COULD CAUSE OUR PROFITS TO DECREASE. In recent fiscal years, we have experienced an increase in our operating expenses as a result of decisions to invest in our sales channels, technical support, and research and development organizations. As a result of current economic conditions discretionary spending levels will be tempered; however, we will continue to selectively incur expenditures in areas that we view as strengthening our position in the marketplace. We base our operating expense budgets on expected revenue trends which are more difficult to predict in periods of economic uncertainty. If we do not meet revenue goals, we may not be able to meet reduced operating expense levels. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the price of our common shares may fall. P. 36 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- WE MAY LOSE SALES, OR SALES MAY BE DELAYED, DUE TO THE LONG SALES AND IMPLEMENTATION CYCLES FOR OUR PRODUCTS, WHICH WOULD REDUCE OUR REVENUES. Our customers typically invest substantial time, money, and other resources when deciding to license our software products, in particular in situations where we are making large enterprise-wide sales. As a result, we may wait many months after our first contact with a customer while that customer seeks internal approval for the purchase of our products. During this long sales cycle, events may occur that affect the size or timing of the order or even cause it to be cancelled. For example, purchasing decisions may be postponed, or large purchases reduced, by periods of economic uncertainty, our competitors may introduce new products, or the customer's own budget and purchasing priorities may change. The time required for implementation of our product varies among our customers and may last several months, depending on our customer's needs. It may be difficult to install our products if the customer has complicated operation requirements, such as integrating databases, hardware, and software from different vendors. Also, if a customer hires a third party to install our products, we cannot be sure that our products will be installed successfully. WE RELY, IN PART, ON PARTNERS AND OTHER DISTRIBUTION CHANNELS TO MARKET AND DISTRIBUTE OUR PRODUCTS, AND ANY FAILURE OF THESE PARTIES TO DO SO COULD SIGNIFICANTLY HARM OUR ABILITY TO EXPAND OUR CUSTOMER BASE, WHICH WOULD ADVERSELY AFFECT OUR GROWTH STRATEGY. Our sales and marketing strategy includes multi-tiered channels of third-party distributors, resellers, and original equipment manufacturers. We have developed a number of these relationships and intend to continue to develop new channel partner relationships. Our inability to attract effective channel partners, or these partners' inability to penetrate their respective market segments, or the loss of any of our channel partners as a result of competitive products offered by other companies or products developed internally by these channel partners or otherwise could harm our ability to expand our customer base and, as a result, could cause our business to grow more slowly than forecasted or could result in additional, unanticipated expenses. IF WE DO NOT PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE COMPETITIVE. Our success depends in part on our ability to protect our proprietary rights in our intellectual property. We rely on certain intellectual property protections, including contractual provisions, patents, copyright, trademark and trade secret laws, to preserve our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. Policing unauthorized use of intellectual property is difficult and some foreign laws do not protect proprietary rights to the same extent as Canada or the United States. To protect our intellectual property, we may become involved in litigation, which could result in substantial expenses and materially disrupt the conduct of our business. INTELLECTUAL PROPERTY CLAIMS COULD BE TIME CONSUMING AND COSTLY TO DEFEND AGAINST, AND, IF WE ARE UNSUCCESSFUL, OUR ABILITY TO USE INTELLECTUAL PROPERTY IN THE FUTURE COULD BE LIMITED OR WE MAY HAVE TO PAY DAMAGES. We may become increasingly subject to claims by third parties that our technology infringes their proprietary rights due to the growth of software products in our target markets and the overlap in functionality of these products. Regardless of their merit, any such claims could: . be time consuming; . be expensive to defend; . divert management's attention and focus away from the business; . cause product shipment delays; and . require us to enter into costly royalty or licensing agreements. On May 5, 2000, an action was filed in the United States District Court for the Northern District of California against us and our subsidiary Cognos Corporation by Business Objects S.A., for alleged patent infringement. The complaint alleges that our Impromptu product infringes Business Objects' United States Patent No. 5,555,403 entitled "Relational Database Access System using Semantically Dynamic Objects". The complaint seeks relief in the form of an injunction against us and unspecified damages. On May 30, 2000 we answered the complaint, denying all material allegations,and counterclaimed P. 37 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- against Business Objects for a declaratory judgment that we are not infringing Business Objects' patent and that the patent is invalid. Based on the preliminary stage of the proceedings, we cannot estimate the financial impact, if any, at this time. If successful, a claim of infringement against us and our inability to license the infringed or similar technology on commercially reasonable terms could have a material adverse effect on our business, operating results, and financial condition. THE LOSS OF OUR RIGHTS TO USE SOFTWARE LICENSED TO US BY THIRD PARTIES COULD SIGNIFICANTLY INCREASE OUR OPERATING EXPENSES BY FORCING US TO SEEK ALTERNATIVE TECHNOLOGY AND ADVERSELY AFFECT OUR ABILITY TO COMPETE. In order to provide a complete business intelligence solution, we license certain technologies used in our products from third parties, generally on a non-exclusive basis. The termination of such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could delay our ability to ship certain of our products while we seek to implement alternative technology offered by other sources. In addition, alternative technology may not be available on commercially reasonable terms. In the future, it may be necessary or desirable to obtain other third-party technology licenses relating to one or more of our products or relating to current or future technologies to enhance our product offerings. We cannot assure you that we will be able to obtain licensing rights to the needed technology on commercially reasonable terms, if at all. WE FACE SIGNIFICANT OPERATIONAL AND FINANCIAL RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS. We derive a significant portion of our total revenues from international sales. International sales are subject to significant risks, including: . unexpected changes in legal and regulatory requirements and policy changes affecting our markets; . changes in tariffs and other trade barriers; . fluctuations in currency exchange rates; . political and economic instability; . longer payment cycles and other difficulties in accounts receivable collection; . difficulties in managing distributors and representatives; . difficulties in staffing and managing foreign operations; . difficulties in protecting our intellectual property; and . potentially adverse tax consequences. Each of these factors could materially impact our international operations and adversely affect our business as a whole. PURSUING, COMPLETING, AND INTEGRATING RECENT AND POTENTIAL ACQUISITIONS COULD DIVERT MANAGEMENT'S ATTENTION AND FINANCIAL RESOURCES AND MAY NOT PRODUCE THE DESIRED BUSINESS RESULTS. In the past we have made acquisitions of products and businesses. In the future, we may engage in additional selective acquisitions of other products or businesses that we believe are complementary to ours. We cannot assure you that we will be able to identify additional suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition, or successfully integrate any acquired product or business into our operations. Further, acquisitions may involve a number of special risks, including: . diversion of management's attention; . disruption to our ongoing business; . failure to retain key acquired personnel; . difficulties in assimilating acquired operations, technologies, products, and personnel; . unanticipated expenses, events, or circumstances; . assumption of legal and other undisclosed liabilities; and . the risk that we will not be able to value the acquired in-process research and development appropriately. P. 38 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- 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. FAILURE TO MANAGE OUR GROWTH MAY IMPACT OUR OPERATING RESULTS. We expect to continue to grow our business. The expansion of our business and customer base has placed, and will continue to place, increased demands on our management, operating systems, internal controls, and financial resources. If not managed effectively, these increased demands may adversely affect the services we provide to our existing clients. In addition, our personnel, systems, procedures, and controls may be inadequate to support our future operations. Consequently, in order to manage our growth effectively, we may be required to increase expenditures to expand, train, and manage our employee base, improve our management, financial, and information systems and controls, or make other capital expenditures. Our results of operations and financial condition could be harmed if we encounter difficulties in effectively managing our growth. IF OUR PRODUCT CONTAINS MATERIAL DEFECTS, OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS MAY BE HARMED. Our software products are complex and may contain errors or defects, particularly when first introduced, when new versions or enhancements are released, or when configured to individual customer computing systems. We currently have known errors and defects in our products. Despite testing conducted by us, additional defects and errors found in current versions, new versions, or enhancements of our products after commencement of commercial shipment could result in the loss of revenues or a delay in market acceptance. The occurrence of any of these events could cause us to lose customers or require us to pay damages to existing customers and, therefore, could seriously harm our business, operating results, and financial condition. IF A SUCCESSFUL PRODUCT LIABILITY CLAIM IS MADE AGAINST US, OUR BUSINESS WOULD BE SERIOUSLY HARMED. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. Despite this, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. We have not experienced any product liability claims to date. However, the sale and support of our products may entail the risk of such claims, which are likely to be substantial in light of the use of our products in business-critical applications. A successful product liability claim could result in significant monetary liability and could seriously disrupt our business. CURRENCY FLUCTUATIONS MAY ADVERSELY AFFECT US. A substantial portion of our revenues are earned in currencies other than U.S. dollars, and, similarly, a substantial portion of our operating expenses are incurred in currencies other than U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and other currencies, such as the Canadian dollar and the euro, may have a material adverse effect on our business, financial condition, and operating results. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. We enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries, typically between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. OUR EXECUTIVE MANAGEMENT AND OTHER KEY PERSONNEL ARE ESSENTIAL TO OUR BUSINESS, AND IF WE ARE NOT ABLE TO RECRUIT AND RETAIN QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP, MARKET, AND SUPPORT OUR PRODUCTS AND SERVICES COULD BE HARMED. We depend on the services of our key technical and management personnel. The loss of the services of any of these persons could have a material adverse effect on our business, results of operations, and financial condition. Our success is highly dependent on our continuing ability to identify, hire, train, motivate, and retain highly qualified management, technical, sales, and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be able to attract, assimilate, or retain highly qualified technical and managerial personnel in the future. Our inability to attract and retain the necessary management, technical, sales, and marketing personnel may adversely affect our future growth and profitability. P. 39 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- RISKS RELATED TO OUR INDUSTRY WE FACE INTENSE COMPETITION AND, IF WE FAIL TO COMPETE SUCCESSFULLY, OUR BUSINESS COULD BE SERIOUSLY HARMED AND OUR REVENUES COULD GROW MORE SLOWLY THAN EXPECTED. We face substantial competition throughout the world, primarily from software companies located in the United States, Europe, and Canada. Some of our competitors have been in business longer than we have and have substantially greater financial and other resources with which to pursue research and development, manufacturing, marketing, and distribution of their products. We expect our existing competitors and potentially new competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. New product introductions by our competitors could cause a decline in sales, a reduction in the sales price, or a loss of market acceptance of our existing products. To the extent that we are unable to effectively compete against our current and future competitors, our ability to sell products could be harmed and our market share reduced. Any erosion of our competitiveness could have a material adverse effect on our business, results of operations, and financial condition. IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGE, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE AND WE COULD LOSE CUSTOMERS. The markets for our products are characterized by: . rapid and significant technological change; . frequent new product introductions and enhancements; . changing customer demands; and . evolving industry standards. We cannot assure you that our products will remain competitive, respond to market demands and developments and new industry standards, and not become obsolete. If we are unable to identify a shift in the market demand quickly enough, we may not be able to develop products to meet those new demands, or bring them to market in a timely way. In addition, failure to respond successfully to technological change may harm our ability to attract and retain customers. RISKS RELATED TO EXTERNAL CONDITIONS OUR STOCK PRICE WILL FLUCTUATE. The market price of our common shares may be volatile and could be subject to wide fluctuations due to a number of factors, including: . actual or anticipated fluctuations in our results of operations; . announcements of technological innovations or new products by us or our competitors; . changes in estimates of our future results of operations by securities analysts; . general industry changes in the business intelligence tools or solutions markets; or . other events or factors. 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. P. 40 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- QUARTERLY RESULTS The following table sets out selected unaudited consolidated financial information for each quarter in fiscal 2001 and fiscal 2000. On April 6, 2000 our Board of Directors authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders of record at the close of business on April 20, 2000. All historic consolidated results have been restated for the split.
($000s, except per share amounts, U.S. GAAP) ------------------------------------------------------------------------------------- Fiscal 2000 Fiscal 2001 ------------------------------------------------------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------- Revenue $ 81,645 $ 88,128 $ 97,753 $118,114 $108,698 $118,213 $124,638 $144,103 - ------------------------------------------------------------------------------------------------------------------ Operating expenses Cost of product license 1,054 1,001 1,456 1,724 1,729 1,713 1,925 1,948 Cost of product support 3,095 3,336 3,608 3,719 4,274 4,071 4,551 4,924 Selling, general, and administrative 51,808 54,593 61,513 70,233 72,625 75,931 81,339 90,640 Research and development 12,197 12,845 13,574 14,932 15,854 16,507 16,854 18,049 Acquired in-process technology -- -- -- -- -- -- 3,000 -- - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 68,154 71,775 80,151 90,608 94,482 98,222 107,669 115,561 - ------------------------------------------------------------------------------------------------------------------ Operating income $ 13,491 $ 16,353 $ 17,602 $ 27,506 $ 14,216 $ 19,991 $ 16,969 $ 28,542 ================================================================================================================== Net income $ 10,865 $ 12,835 $ 13,851 $ 21,264 $ 11,984 $ 16,511 $ 13,627 $ 22,138 ================================================================================================================== Net income per share Basic $0.13 $0.15 $0.16 $0.25 $0.14 $0.19 $0.15 $0.25 ================================================================================================================== Diluted $0.12 $0.15 $0.16 $0.24 $0.13 $0.18 $0.15 $0.24 =====================================================================================
Our sales cycle may span nine months or more, depending on factors such as the size of the transaction, the product involved, the length of the customer relationship, the timing of our new product introductions and product introductions by others, the level of sales management activity, and general economic conditions. Delays in closing product licensing transactions at or near the end of any quarter may have a materially adverse effect on the financial results for that quarter. While we take steps to minimize the impact of such delays, there can be no assurance that such delays will not occur. (See Certain Factors That May Affect Future Results.) P. 41 EX-13.4 7 dex134.txt EXHIBIT 13.4-QUANTITATIVE/QUALITATIVE DISCLOSURE Exhibit 13.4 2001 COGNOS ANNUAL REPORT 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. INTEREST RATE RISK Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The investment of cash is regulated by our investment policy of which the primary objective is security of principal. Among other selection criteria, the investment policy states that the term to maturity of investments cannot exceed one year in length. We do not use derivative financial instruments in our investment portfolio. Interest income on our cash, cash equivalents, and short-term investments is subject to interest rate fluctuations, but we believe that the impact of these fluctuations does not have a material effect on our financial position due to the short-term nature of these financial instruments. The amount of our long-term debt is immaterial. Our interest income and interest expense are most sensitive to the general level of interest rates in Canada and the United States. Sensitivity analysis is used to measure our interest rate risk. For the fiscal year ending February 28, 2001, a 100 basis-point adverse change in interest rates would not have had a material effect on our consolidated financial position, earnings, or cash flows. FOREIGN CURRENCY RISK We operate internationally; accordingly, a substantial portion of our financial instruments are held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries. The forward contracts are typically between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. Sensitivity analysis is used to measure our foreign currency exchange rate risk. As of February 28, 2001, 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. 35 EX-13.5 8 dex135.txt EXHIBIT 13.5-FINANCIAL STATEMENTS AND SUPP. DATA Exhibit 13.5 2OO1 COGNOS ANNUAL REPORT REPORT OF MANAGEMENT - -------------------------------------------------------------------------------- The Corporation's management is responsible for preparing the accompanying consolidated financial statements in conformity with United States generally accepted accounting principles. In preparing these consolidated financial statements, management selects appropriate accounting policies and uses its judgment and best estimates to report events and transactions as they occur. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Financial data included throughout this Annual Report is prepared on a basis consistent with that of the financial statements. The Corporation maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded and that transactions are executed and recorded in accordance with the Corporation's policies for doing business. This system is supported by written policies and procedures for key business activities; the hiring of qualified, competent staff; and by a continuous planning and monitoring program. Ernst & Young LLP, the independent auditors appointed by the stockholders, have been engaged to conduct an examination of the consolidated financial statements in accordance with generally accepted auditing standards, and have expressed their opinion on these statements. During the course of their audit, Ernst & Young LLP reviewed the Corporation's system of internal controls to the extent necessary to render their opinion on the consolidated financial statements. The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and internal control, and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board carries out this responsibility principally through its Audit Committee; all members are outside Directors. The Committee meets four times annually to review audited and unaudited financial information prior to its public release. The Committee also considers, for review by the Board of Directors and approval by the stockholders, the engagement or reappointment of the external auditors. Ernst & Young LLP have 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 James M. Tory CHAIRMAN /s/ Ron Zambonini Ron Zambonini PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ Donnie M. Moore March 30, 2001 Donnie M. Moore SENIOR VICE PRESIDENT, FINANCE & ADMINISTRATION, AND CHIEF FINANCIAL OFFICER P. 42 2OO1 COGNOS ANNUAL REPORT AUDITORS' REPORT - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Cognos Incorporated: We have audited the consolidated balance sheets of Cognos Incorporated as at February 28, 2001 and February 29, 2000 and the consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended February 28, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with United States and Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at February 28, 2001 and February 29, 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended February 28, 2001, in accordance with United States generally accepted accounting principles. On March 30, 2001, we reported separately to the Board of Directors and Stockholders of Cognos Incorporated on financial statements for the same periods,prepared in accordance with Canadian generally accepted accounting principles. /s/ Ernst & Young LLP Ottawa, Canada ERNST & YOUNG LLP March 30, 2001 CHARTERED ACCOUNTANTS P. 43 2OO1 COGNOS ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (US$000s except share amounts, U.S. GAAP)
Years Ended the Last Day of February ----------------------------------------------- Note 2001 2000 1999 - -------------------------------------------------------------------------------------------- Revenue Product license $ 262,766 $ 203,299 $ 158,393 Product support 147,589 118,061 93,311 Services 85,297 64,280 49,421 - -------------------------------------------------------------------------------------------- Total revenue 495,652 385,640 301,125 - -------------------------------------------------------------------------------------------- Operating expenses Cost of product license 7,315 5,235 5,738 Cost of product support 17,820 13,758 11,166 Selling, general, and administrative 320,535 238,147 172,482 Research and development 67,264 53,548 42,274 Acquired in-process technology 5 3,000 -- 3,800 - -------------------------------------------------------------------------------------------- Total operating expenses 415,934 310,688 235,460 - -------------------------------------------------------------------------------------------- Operating income 79,718 74,952 65,665 Interest expense 6 (786) (718) (527) Interest income 12,386 7,454 6,430 - -------------------------------------------------------------------------------------------- Income before taxes 91,318 81,688 71,568 Income tax provision 9 27,058 22,873 13,134 - -------------------------------------------------------------------------------------------- Net income $ 64,260 $ 58,815 $ 58,434 ============================================================================================ Net income per share 10 Basic $0.74 $0.68 $0.67 ============================================================================================ Diluted $0.70 $0.67 $0.66 ============================================================================================ Weighted average number of shares (000s) 10 Basic 87,324 85,972 87,416 ============================================================================================ Diluted 91,973 88,100 88,940 ============================================================================================
(See accompanying notes) P. 44 2OO1 COGNOS ANNUAL REPORT CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- (US$000s, U.S. GAAP)
------------------------------------------- Note February 28, February 29, 2001 2000 - ------------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents 8 $ 115,293 $ 132,435 Short-term investments 8 119,265 64,284 Accounts receivable 2 146,867 107,823 Inventories 730 806 Prepaid expenses 8,648 8,470 - ------------------------------------------------------------------------------------------ 390,803 313,818 Fixed assets 3 74,208 44,835 Other assets 4 30,581 19,150 - ------------------------------------------------------------------------------------------ $ 495,592 $ 377,803 ========================================================================================== Liabilities Current liabilities Accounts payable $ 28,256 $ 22,908 Accrued charges 21,798 17,540 Salaries, commissions, and related items 28,822 24,024 Income taxes payable 17,548 3,548 Current portion of long-term debt 6 32 2,176 Deferred revenue 96,674 77,167 - ------------------------------------------------------------------------------------------ 193,130 147,363 Long-term liabilities 5 1,539 2,699 Deferred income taxes 9 10,394 15,150 - ------------------------------------------------------------------------------------------ 205,063 165,212 - ------------------------------------------------------------------------------------------ Commitments and Contingencies 5, 7, 14 Stockholders' Equity Capital stock Common shares (2001 - 87,885,161; 2000 - 86,168,680) 10 134,791 104,223 Retained earnings 165,755 114,601 Accumulated other comprehensive income (10,017) (6,233) - ------------------------------------------------------------------------------------------ 290,529 212,591 - ------------------------------------------------------------------------------------------ $ 495,592 $ 377,803 ==========================================================================================
(See accompanying notes) On behalf of the Board: /s/ Douglas C. Cameron /s/ James M. Tory Douglas C. Cameron DIRECTOR James M. Tory CHAIRMAN P. 45 2OO1 COGNOS ANNUAL REPORT CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- (US$000s except share amounts, U.S. GAAP)
Common Stock ----------------------- Retained Accumulated Other Shares Amount Earnings Comprehensive (OOOs) Income Total - ------------------------------------------------------------------------------------------------------------------- BALANCES, FEBRUARY 28, 1998 88,208 $ 85,718 $ 52,039 $ (6,752) $ 131,005 - ------------------------------------------------------------------------------------------------------------------- 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 Deferred stock-based compensation (489) (3,467) (3,467) Amortization of deferred stock-based compensation 61 61 Repurchase of shares (3,006) (3,005) (31,132) (34,137) Income tax effect related to stock options 522 522 - ------------------------------------------------------------------------------------------------------------------- 86,362 88,579 20,907 (6,752) 102,734 - ------------------------------------------------------------------------------------------------------------------- Net income 58,434 58,434 Other comprehensive income Foreign currency translation adjustments (1,960) (1,960) - ------------------------------------------------------------------------------------------------------------------- Comprehensive income 58,434 (1,960) 56,474 - ------------------------------------------------------------------------------------------------------------------- BALANCES, FEBRUARY 28, 1999 86,362 $ 88,579 $ 79,341 $ (8,712) $ 159,208 - ------------------------------------------------------------------------------------------------------------------- Issuance of stock Stock option plans 1,973 15,420 15,420 Stock purchase plans 120 1,095 1,095 Amortization of deferred stock-based compensation 693 693 Repurchase of shares (2,286) (2,458) (23,555) (26,013) Income tax effect related to stock options 894 894 - ------------------------------------------------------------------------------------------------------------------- 86,169 104,223 55,786 (8,712) 151,297 - ------------------------------------------------------------------------------------------------------------------- Net income 58,815 58,815 Other comprehensive income Foreign currency translation adjustments 2,479 2,479 - ------------------------------------------------------------------------------------------------------------------- Comprehensive income 58,815 2,479 61,294 - ------------------------------------------------------------------------------------------------------------------- BALANCES, FEBRUARY 29, 2000 86,169 $ 104,223 $ 114,601 $ (6,233) $ 212,591 - ------------------------------------------------------------------------------------------------------------------- Issuance of stock Stock option plans 1,816 18,574 18,574 Stock purchase plans 73 2,018 2,018 Business acquisitions 253 9,070 9,070 Deferred stock-based compensation 154 (2,656) (2,656) Amortization of deferred stock-based compensation 1,233 1,233 Repurchase of shares (580) (881) (13,106) (13,987) Income tax effect related to stock options 3,210 3,210 - ------------------------------------------------------------------------------------------------------------------- 87,885 134,791 101,495 (6,233) 230,053 - ------------------------------------------------------------------------------------------------------------------- Net income 64,260 64,260 Other comprehensive income Foreign currency translation adjustments (3,784) (3,784) - ------------------------------------------------------------------------------------------------------------------- Comprehensive income 64,260 (3,784) 60,476 - ------------------------------------------------------------------------------------------------------------------- BALANCES, FEBRUARY 28, 2001 87,885 $ 134,791 $ 165,755 $ (10,017) $ 290,529 ===================================================================================================================
(See accompanying notes) P. 46 2OO1 COGNOS ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- (US$000s, U.S. GAAP)
Years Ended the Last Day of February ----------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities Net income $ 64,260 $ 58,815 $ 58,434 Non-cash items Depreciation and amortization 23,657 17,546 11,789 Amortization of deferred stock-based compensation 1,233 693 61 Amortization of other deferred compensation 1,809 1,351 295 Write-off of acquired in-process technology 3,000 -- 3,800 Deferred income taxes (3,853) 7,165 (1,984) Loss on disposal of fixed assets 561 148 185 - ---------------------------------------------------------------------------------------------------------- 90,667 85,718 72,580 Change in non-cash working capital Increase in accounts receivable (39,824) (32,818) (12,805) Decrease (increase) in inventories 37 31 (267) Increase in prepaid expenses (731) (1,422) (2,772) Increase in accounts payable 4,320 3,930 3,526 Increase in accrued charges 3,145 1,004 2,568 Increase in salaries, commissions, and related items 5,630 4,394 5,806 Increase (decrease) in income taxes payable 14,262 (3,993) 5,624 Increase in deferred revenue 21,467 26,374 10,358 - ---------------------------------------------------------------------------------------------------------- 98,973 83,218 84,618 - ---------------------------------------------------------------------------------------------------------- Cash provided by (used in) investing activities Maturity of short-term investments 138,803 138,796 96,860 Purchase of short-term investments (195,386) (146,238) (116,093) Acquisition costs (11,377) (2,146) (9,174) Additions to fixed assets (51,963) (28,096) (21,147) Proceeds from the sale of fixed assets 759 24 12 - ---------------------------------------------------------------------------------------------------------- (119,164) (37,660) (49,542) - ---------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities Issue of common shares 23,802 17,409 5,509 Repurchase of shares (13,987) (26,013) (34,137) Repayment of long-term debt and long-term liabilities (5,293) (467) (107) - ---------------------------------------------------------------------------------------------------------- 4,522 (9,071) (28,735) - ---------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (1,473) 2,331 (2,338) - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (17,142) 38,818 4,003 Cash and cash equivalents, beginning of period 132,435 93,617 89,614 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 115,293 132,435 93,617 Short-term investments, end of period 119,265 64,284 56,074 - ---------------------------------------------------------------------------------------------------------- Cash, cash equivalents, and short-term investments, end of period $ 234,558 $ 196,719 $ 149,691 ==========================================================================================================
(See accompanying notes) P. 47 2OO1 COGNOS ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 _ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Cognos Incorporated (the "Corporation") is a global provider of business intelligence software solutions. The Corporation develops, markets, and supports an integrated business intelligence platform that allows customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives. The Corporation markets and supports these solutions both directly and through resellers worldwide. BASIS OF PRESENTATION These consolidated financial statements have been prepared by the Corporation in United States (U.S.) dollars and in accordance with United States generally accepted accounting principles (GAAP), applied on a consistent basis. Consolidated financial statements prepared in accordance with Canadian GAAP, in U.S. dollars, are made available to all shareholders, and filed with various regulatory authorities. BASIS OF CONSOLIDATION These consolidated financial statements include the accounts of the Corporation and its subsidiaries. All 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 net assets from transactions and other events, and circumstances other than transactions with stockholders. These changes are recorded directly as a separate component of Stockholders' Equity and excluded from net income. The only comprehensive income item for the Corporation relates to foreign currency translation adjustments pertaining to those subsidiaries not using the U.S. dollar as their functional currency. FOREIGN CURRENCY TRANSLATION The financial statements of the parent company and its non-U.S. subsidiaries have been translated into U.S. dollars in accordance with the Financial Accounting Standards Board's (FASB) Statement No. 52, Foreign Currency Translation. The financial statements of the foreign subsidiaries are measured using local currency as the functional currency. All balance sheet amounts have been translated using the exchange rates in effect at the applicable year end. Income statement amounts have been translated using the weighted average exchange rate for the applicable year. The gains and losses resulting from the 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 P. 48 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- includes the right to return the product for refund or credit, revenue is recognized net of an allowance for estimated returns provided all the requirements of SOP 97-2 have been met. Revenue from product support contracts is recognized ratably over the life of the contract. Incremental costs directly attributable to the acquisition of product support contracts, and that would not have been incurred but for the acquisition of that contract, are deferred and expensed in the period the related revenue is recognized. These costs include commissions payable on sales of support contracts. Revenue from education, consulting, and other services is recognized at the time such services are rendered. For contracts with multiple obligations (e.g., deliverable and undeliverable products, support obligations, education, consulting, and other services), the Corporation allocates revenue to each element of the contract based on objective evidence, specific to the Corporation, of the fair value of the element. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS Cash includes cash equivalents, which are investments that are generally held to maturity and have terms to maturity of three months or less at the time of acquisition. Cash equivalents typically consist of commercial paper, term deposits, banker's acceptances and bearer deposit notes issued by major North American banks, and corporate debt. Cash and cash equivalents are carried at cost, which approximates their fair value. Short-term investments are investments that are generally held to maturity and have terms greater than three months at the time of acquisition. Short-term investments typically consist of commercial paper, 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. Building improvements are amortized using the straight line method over the life of the improvement. Leasehold improvements are amortized using the straight line method over either the life of the improvement or the term of the lease, whichever is shorter. Assets leased on terms that transfer substantially all of the benefits and risks of ownership to the Corporation are accounted for as capital leases, as though the asset had been purchased and a liability incurred. All other leases are accounted for as operating leases. OTHER ASSETS This category includes acquired technology, goodwill, and other deferred compensation associated with various acquisitions, and deferred software development costs. Acquired technology 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 estimated fair 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. P. 49 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- Other deferred compensation includes cash consideration associated with acquisitions made by the Corporation. Other deferred compensation is recorded when its future payment is determinable and is payable contingent upon the continued tenure of the principals of the acquired companies who have become employees of the Corporation. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. 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. The Corporation did not capitalize any costs of internally-developed computer software to be sold, licensed, or otherwise marketed in each of fiscal 2001, 2000, and 1999. INCOME TAXES The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities, and are measured using the enacted tax rates and laws. 2 _ ACCOUNTS RECEIVABLE Accounts receivable include an allowance for doubtful accounts of $6,056,000 and $4,734,000 as of February 28, 2001, and February 29, 2000, respectively. 3 _ FIXED ASSETS
-------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- Accumulated Accumulated Depreciation Depreciation Depreciation/ and and Amortization Cost Amortization Cost Amortization Rate -------------------------------------------------------------------------------- ($000s) ($000s) Computer equipment and software $ 72,100 $ 47,991 $ 63,334 $ 43,370 33% Office furniture 27,756 12,538 21,602 11,317 20% Building and Leasehold improvements 17,438 5,350 8,160 3,726 Life of Improvement/ Lease Term Land 775 -- 820 -- -- Building 23,521 1,503 7,198 1,243 2.5% Construction in progress -- -- 3,377 -- -- - --------------------------------------------------------------------------------------------------------------------------- 141,590 $ 67,382 104,491 $ 59,656 ============= ============= (67,382) (59,656) ------------- ------------- Net book value $ 74,208 $ 44,835 ================================================================================
Depreciation and amortization of fixed assets was $18,475,000, $13,898,000, and $10,760,000 in each of fiscal 2001, 2000, and 1999, respectively. P. 50 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- 4 _ OTHER ASSETS Other assets as at February 28, 2001, and February 29, 2000, include acquired technology, goodwill, and other deferred compensation, and are disclosed net of amortization. The Corporation recorded $18,421,000 of goodwill, workforce, and other deferred compensation in fiscal 2001, and $2,352,000 of goodwill and other deferred compensation in fiscal 2000. Amortization of other assets was $6,991,000, $4,999,000, and $1,269,000 in each of fiscal 2001, 2000, and 1999, 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 2001, 2000, and 1999, and recorded $0, $0, and $55,000 of corresponding amortization, respectively. 5 _ ACQUISITIONS FISCAL 2001 ACQUISITIONS On June 1, 2000, the Corporation acquired Powerteam OY, the Corporation's distributor in Finland. The shareholders of Powerteam OY will receive approximately $2,258,000 in cash over two years and could also receive cash payments not to exceed $500,000 over the next three years. The Corporation has conditioned a portion of the consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. On September 21, 2000, the Corporation acquired NoticeCast Software Ltd., based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management Software monitors business processes and delivers timely business intelligence notifications to business users across the enterprise via e-mail on their personal computer, hand-held or wireless device. The shareholders of NoticeCast Software Ltd. received approximately $9,000,000 in cash on closing and will receive 148,468 shares of the Corporation's common stock valued at approximately $4,820,000. The shares are being held in escrow by the Corporation and will be released on the second anniversary of the closing of the transaction. An independent appraisal valued the in-process research and development at $3,000,000. In the opinion of management and the appraiser, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, the Corporation recorded a special charge of $3,000,000 (or $0.03 per share on a diluted basis) in the third quarter ended November 30, 2000, to write off the in-process technology. On November 1, 2000, the Corporation completed the acquisition of Johnson & Michaels, Inc. (JAMI), a leading provider of business intelligence consulting services. The shareholders of JAMI will receive total cash consideration of approximately $3,915,000 over three years and 104,230 shares of the Corporation's common stock valued at $4,250,000 over the same period. Approximately $1,406,000 was paid and 39,085 shares were issued on closing; the remaining shares, all of which were issued, are being held in escrow by the Corporation and will be released on the first (33%), second (33%), and third (34%) anniversaries of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $2,656,000, are accounted for as an offset to capital stock. The scheduled aggregate annual payments for the long-term liabilities related to these acquisitions are $921,000 and $1,539,000 in fiscal 2002 and 2003, respectively. Amounts due within twelve months are included in accrued charges. The acquisitions have been accounted for using the purchase method. The results of operations of all three acquired companies prior to the acquisitions were not material, and thus pro forma information has not been provided. The results of the acquired companies have been combined with those of the Corporation from the date of the acquisition. P. 51 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- Total consideration, including acquisition costs, was allocated based on estimated fair values on the acquisition date as follows: ($000s)
------------------------------------------------------------------ Powerteam NoticeCast Johnson & OY Software Inc. Michaels, Inc. Total ------------------------------------------------------------------ Assets acquired In-process technology $ -- $ 3,000 $ -- $ 3,000 Other assets 3,906 450 814 5,170 - ------------------------------------------------------------------------------------------------------------ 3,906 3,450 814 8,170 Liabilities assumed (2,502) (1,580) (922) (5,004) - ------------------------------------------------------------------------------------------------------------ Net assets acquired 1,404 1,870 (108) 3,166 Goodwill 854 11,950 3,545 16,349 - ------------------------------------------------------------------------------------------------------------ Purchase price $ 2,258 $ 13,820 $ 3,437 $ 19,515 ============================================================================================================ Purchase price consideration Cash $ 971 $ 9,000 $ 1,406 $ 11,377 Deferred payment 1,287 -- 437 1,724 Shares -- 4,820 1,594 6,414 - ------------------------------------------------------------------------------------------------------------ $ 2,258 $ 13,820 $ 3,437 $ 19,515 ============================================================================================================ Other consideration Deferred cash -- -- 2,072 2,072 Deferred shares -- -- 2,656 2,656 - ------------------------------------------------------------------------------------------------------------ Total consideration $ 2,258 $ 13,820 $ 8,165 $ 24,243 =================================================================
FISCAL 2000 ACQUISITIONS On May 28, 1999, the Corporation completed the acquisition of Information Tools AG, the Corporation's distributor in Switzerland. The 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 $60,000 will be paid in fiscal 2002 relating to fiscal 2001 results, and approximately $120,000 was paid in fiscal 2001 relating to fiscal 2000 results. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. On July 15, 1999, the Corporation completed the purchase of the entire outstanding minority interest in the Corporation's subsidiary in Singapore, Cognos Far East Pte Limited. The former minority shareholders of Cognos Far East Pte Limited received approximately $1,688,000 in cash upon completion of the purchase. No further consideration is due to the former minority shareholders of the subsidiary. Both acquisitions have been accounted for using the purchase method. The results of operations of both acquired companies prior to the acquisition were not material, and thus pro forma information has not been provided. The results of both acquired companies have been combined with those of the Corporation since their respective dates of acquisition. P. 52 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- Total consideration, including acquisition costs, was allocated based on estimated fair values on the acquisition date as follows: ($000s) ------------------------------------------- Cognos Far Information East Pte Tools AG Limited Total ------------------------------------------- Assets acquired $ 683 $ -- $ 683 Liabilities assumed (570) -- (570) - ------------------------------------------------------------------------------- Net assets acquired 113 -- 113 Goodwill 544 1,688 2,232 - ------------------------------------------------------------------------------- Purchase price $ 657 $ 1,688 $ 2,345 =============================================================================== Purchase price consideration Cash 458 1,688 2,146 Deferred payment 199 -- 199 - ------------------------------------------------------------------------------- $ 657 $ 1,688 $ 2,345 =============================================================================== Other consideration Deferred cash 180 -- 180 - ------------------------------------------------------------------------------- Total consideration $ 837 $ 1,688 $ 2,525 =========================================== 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 $7,550,000 over three years and 250,980 shares of the Corporation's common stock valued at $1,823,000 over the same time period. The shares, all of which were issued, were placed in escrow on the closing of the transaction by the Corporation. A portion (40%) were released on the second anniversary of the closing of the transaction and the remainder (60%) will be released on the third anniversary of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,823,000, are accounted for as an offset to capital stock. An independent appraisal valued the in-process research and development at $2,400,000. In the opinion of management and the appraiser, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, the Corporation recorded a special charge of $2,400,000 ($0.02 per share on a diluted basis) in the fourth quarter ended February 28, 1999, to write off the acquired in-process technology. On February 24, 1999, the Corporation completed the acquisition of LEX2000 Inc., a developer of financial reporting, consolidation, budgeting, and forecasting systems, 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, were placed in escrow on the closing of the transaction by the Corporation. A portion (50%) were released on the second anniversary of the closing of the transaction and the remainder (50%) will be released on the third anniversary of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,644,000, are accounted for as an offset to capital stock. An independent appraisal valued the in-process research and development at $1,400,000. In the opinion of management and the appraiser, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, the Corporation recorded a special charge of $1,400,000 ($0.02 per share on a diluted basis) in the fourth quarter ended February 28, 1999, to write off the acquired in-process technology. P. 53 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- The scheduled aggregate annual payments for the long-term liabilities related to these two acquisitions are $2,893,000 in fiscal 2002. 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 as follows: ($000s) ---------------------------------------------- Relational Matters LEX2000 Total ---------------------------------------------- Assets acquired In-process technology $ 2,400 $ 1,400 $ 3,800 Acquired technology 2,031 10,306 12,337 Other assets 25 1,501 1,526 - -------------------------------------------------------------------------------- 4,456 13,207 17,663 Liabilities assumed (37) (2,869) (2,906) Deferred tax credits -- (5,267) (5,267) - -------------------------------------------------------------------------------- Net assets acquired 4,419 5,071 9,490 Goodwill -- -- -- - -------------------------------------------------------------------------------- Purchase price $ 4,419 $ 5,071 $ 9,490 ================================================================================ Purchase price consideration Cash $ 4,419 $ 4,755 $ 9,174 Deferred payment -- 20 20 Shares -- 296 296 - -------------------------------------------------------------------------------- $ 4,419 $ 5,071 $ 9,490 ================================================================================ Other consideration Deferred cash $ 3,131 $ 2,669 $ 5,800 Deferred shares 1,823 1,644 3,467 - -------------------------------------------------------------------------------- Total consideration $ 9,373 $ 9,384 $ 18,757 ============================================== P. 54 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- 6 _ LONG - TERM DEBT
($000s) ----------------------- 2001 2000 ----------------------- Mortgage at 12.5% per annum, repayable in blended monthly installments of principal and interest of Cdn $45,200 to October 2000 $ - $ 2,142 Other 32 34 - --------------------------------------------------------------------------------------------------- 32 2,176 Less current portion (32) (2,176) - --------------------------------------------------------------------------------------------------- $ - $ - =======================
Interest expense on long-term debt was $166,000, $264,000, and $271,000 in fiscal 2001, 2000, and 1999, 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 2001, 2000, and 1999, was $14,715,000, $12,205,000, and $9,219,000, respectively. The aggregate amount of payments for these operating leases, in each of the next five fiscal years and thereafter, is approximately as follows: ($000s) 2002 $ 13,810 2003 10,735 2004 7,352 2005 5,743 2006 3,141 Thereafter 6,693 8 _ FINANCIAL INSTRUMENTS FOREIGN EXCHANGE FORWARD CONTRACTS The Corporation's policy with respect to foreign currency exposure is to manage its financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. 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. Foreign exchange forward contracts are recorded at their estimated fair value. 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 $84,878,000) outstanding at any one time. The Corporation enters into foreign exchange forward contracts with major Canadian chartered banks, and therefore does not anticipate non- performance by these counterparties. The amount of the exposure on account of any non-performance is restricted to the unrealized gains in such contracts. As of February 28, 2001, the Corporation had foreign exchange forward contracts, with maturity dates ranging from P. 55 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- March 29, 2001 to July 26, 2001, to exchange various foreign currencies in the amount of $15,173,000 (the estimated fair value was $15,353,000). 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 (the estimated fair value was $6,428,000). CONCENTRATION OF CREDIT RISK The investment of cash is regulated by the Corporation's investment policy, which is periodically reviewed and approved by the Audit Committee of the Board of Directors. The primary objective of the Corporation's investment policy is security of principal. The Corporation manages its investment credit risk through a combination of (i) a selection of securities with an acceptable credit rating; (ii) selection of term to maturity, which in no event exceeds one year in length; and (iii) diversification of debt issuers, both individually and by industry grouping. Included in cash, cash equivalents, and short-term investments as of February 28, 2001 and February 29, 2000 were corporate debt amounts of $44,058,000 and $73,805,000, respectively. The corporate debt amounts as of February 28, 2001 and February 29, 2000 were with three and two distinct issuers, respectively. These amounts were repaid, in full, at maturity in March of their respective years. All the Corporation's short-term investments as of February 28, 2001 and February 29, 2000 had maturity dates before the end of June of their respective years. The Corporation's cash, cash equivalents, and short-term investments are denominated predominantly in Canadian and U.S. dollars. The Corporation has an unsecured credit facility, subject to annual renewal, that includes an operating line and foreign exchange conversion facilities. The operating line permits the Corporation to borrow funds or issue letters of credit or guarantee up to an aggregate of Cdn $15,000,000 (US $9,794,000), subject to certain covenants. As of February 28, 2001 and February 29, 2000, there were no direct borrowings under this operating line. There is no concentration of credit risk related to the Corporation's position in trade accounts receivable. Credit risk, with respect to trade receivables, is minimized because of the Corporation's large customer base and its geographical dispersion (see Note 12). FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the Corporation's financial instruments, including accounts receivable, accounts payable, and other accrued charges, the carrying amounts approximate the fair value due to their short maturities. Cash and cash equivalents, short-term investments, long-term debt, and long-term liabilities are carried at cost, which approximates their fair value. Foreign exchange forward contracts are recorded at their estimated fair value. 9 _ INCOME TAXES Details of the income tax provision (recovery) are as follows: ($000s) ---------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Current Canadian $ 18,242 $ 4,909 $ 5,313 Foreign 12,707 9,943 9,228 - -------------------------------------------------------------------------------- 30,949 14,852 14,541 ---------------------------------------------- Deferred Canadian (2,463) 8,201 (1,370) Foreign (1,428) (180) (37) - -------------------------------------------------------------------------------- (3,891) 8,021 (1,407) ---------------------------------------------- Income tax provision $ 27,058 $ 22,873 $ 13,134 ============================================== P. 56 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- 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)
---------------------------------------- 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------- Expected Canadian tax rate 44.0% 44.0% 44.0% ======================================== Expected tax provision $ 40,180 $ 35,943 $ 31,490 Foreign tax rate differences (14,603) (10,422) (10,906) Net change in valuation allowance and other income tax benefits earned (5,787) (6,688) (9,142) Non-deductible expenses and non-taxable income 4,121 2,876 193 Non-deductible in-process R&D write-off 900 -- 560 Withholding tax on foreign income 1,774 1,179 987 Other 473 (15) (48) - --------------------------------------------------------------------------------------------------------------- Reported income tax provision $ 27,058 $ 22,873 $ 13,134 ========================================
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 28, 2001 and February 29, 2000 are as follows: ($000s) -------------------------- 2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets Net operating tax loss carryforwards $ 3,822 $ 4,460 Investment tax credits -- 1,404 Deferred revenue 2,811 2,490 Other 3,409 2,186 - -------------------------------------------------------------------------------- Total deferred tax assets 10,042 10,540 Valuation allowance for deferred tax assets (3,022) (4,460) - -------------------------------------------------------------------------------- Net deferred tax assets 7,020 6,080 - -------------------------------------------------------------------------------- Deferred tax liabilities Book and tax differences on assets 8,729 9,489 Reserves and allowances 6,141 7,484 Income tax credits 3,925 5,346 Other (1,381) (1,089) - -------------------------------------------------------------------------------- Total deferred tax liabilities 17,414 21,230 - -------------------------------------------------------------------------------- Net deferred income tax liability $ 10,394 $ 15,150 ========================== The net change in the total valuation allowance for the years ended February 28, 2001 and February 29, 2000 was a decrease of $1,438,000 and $1,047,000, respectively. Realization of the net deferred tax assets is dependent on generating sufficient taxable income in certain legal entities. Although realization is not assured, management believes it is more likely than not that the net amount of the deferred tax asset will be realized. However,this estimate could change in the near term as future taxable income in these certain legal entities changes. P. 57 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- As of February 28, 2001, the Corporation had tax loss carryforwards of approximately $8,872,000 available to reduce future years' income for tax purposes.These losses expire as follows: ($000s) ------------------------------ 2005-2011 $ 2,625 Indefinitely 6,247 ------------------------------ $ 8,872 ============================== Income before taxes attributable to all foreign operations was $45,565,000, $41,548,000, and $42,152,000, in each of fiscal 2001, 2000, and 1999, 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 $13,537,000, $18,658,000, and $8,201,000, in each of fiscal 2001, 2000, and 1999, 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. On April 6, 2000, the Corporation's Board of Directors authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders of record at the close of business on April 20, 2000. Share and per-share amounts have been adjusted retroactively for this split. SHARE REPURCHASE PROGRAMS The share repurchases made in the past three fiscal years were part of distinct open market share repurchase programs through the Nasdaq National Market. The share repurchases made in fiscal 2001 were part of two open market share repurchase programs. The program adopted in October 1999 expired on October 8, 2000. Under this program the Corporation repurchased 150,000 of its shares; all repurchased shares were cancelled. In October 2000, the Corporation adopted a new program that will enable it to purchase up to 4,403,510 common shares (not more than 5% of those issued and outstanding) between October 9, 2000 and October 8, 2001. This program does not commit the Corporation to make any share repurchases. Purchases will be made on the Nasdaq National 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: ---------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------- Shares Cost Shares Cost Shares Cost ---------------------------------------------------------- (000s) ($000s) (000s) ($000s) (000s) ($000s) October 1997 program -- $ -- -- $ -- 2,030 $23,463 October 1998 program -- -- 2,186 24,689 976 10,674 October 1999 program 50 2,041 100 1,324 -- -- October 2000 program 530 11,946 -- -- -- -- - -------------------------------------------------------------------------------- 580 $13,987 2,286 $26,013 3,006 $34,137 ========================================================== The amount paid to acquire the shares over and above the average carrying value has been charged to retained earnings. P. 58 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- STOCK OPTION PLANS As of February 28, 2001, the Corporation had stock options outstanding under two plans: 5,858,000 pertain to the 1997-2002 Stock Option Plan and 1,711,000 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. In June 2000, options were awarded to employees, executive officers, and directors. These options vest equally in April 2001, April 2002, April 2003, and April 2004, and expire in April 2008. There were 7,266,000 options available for grant under the Plan as of February 28, 2001. Under the 1993-1998 Stock Option Plan, options were awarded to directors, officers, and employees. For the options outstanding as of February 28, 2001, the vesting dates extend to September 2001 and the expiry dates range from April 2003 to September 2005. In April 1996, options were awarded to certain key officers under an executive option award. These options vested equally in April 1999, April 2000, and April 2001, and expire in April 2003. All options were priced at the market price of the Corporation's shares on The Toronto Stock Exchange on the trading day preceding the date of grant. The 1993-1998 Stock Option Plan expired on January 1, 1998. EMPLOYEE STOCK PURCHASE PLAN This plan was approved by the Corporation's shareholders in July 1993 and was amended on May 19, 1999. The amended plan was approved by the Corporation's shareholders on June 22, 1999, and will terminate on November 30, 2002. Under the plan, 3,000,000 common shares were reserved for issuance. A participant in the Employee Stock Purchase Plan authorizes the Corporation to deduct an amount per pay period that cannot exceed five (5) percent of annual target salary divided by the number of pay periods per year. Deductions are accumulated during each of the Corporation's fiscal quarters ("Purchase Period") and on the first trading day following the end of any Purchase Period these deductions are applied toward the purchase of common shares. The purchase price per share is ninety (90) percent of the lesser of The Toronto Stock Exchange average closing price on (a) the first five trading days of the Purchase Period or (b) the last five trading days of the Purchase Period. All full-time and part-time permanent employees may participate in the plan. ACCOUNTING FOR STOCK OPTION AND STOCK PURCHASE PLANS The Corporation applies APB Opinion 25 in accounting for its stock option and purchase plans. The exercise price of all stock options is equal to the market price of the stock on the trading day preceding the date of grant. Accordingly, no compensation cost has been recognized in the financial statements for its stock option and stock purchase plans. If the fair values of the options granted 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 $20,106,000, $9,096,000, and $8,239,000, reduced basic net income per share by $0.23, $0.11, and $0.09, and reduced diluted net income per share by $0.22, $0.10, and $0.09 in fiscal 2001, 2000, and 1999, respectively. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2001, 2000, and 1999, respectively: risk-free interest rates of 6.1%, 5.8%, and 5.5%, expected life of the options of 3.0 years, 2.8 years, and 2.9 years, expected volatility of 54%, 55%, and 56%, and for all years, a dividend yield of zero. P. 59 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- Activity in the stock option plans for fiscal 2001, 2000, and 1999 was as follows:
--------------------------------------------------------------------------- 2001 2000 1999 --------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------------------------------------------------------------------------- (000s) (000s) (000s) Outstanding, beginning of year 7,270 $ 11.17 6,769 $ 9.72 6,571 $ 8.29 Granted 2,537 34.02 2,772 11.18 1,935 13.33 Exercised (1,816) 10.23 (1,973) 7.81 (1,054) 3.94 Cancelled (422) 18.21 (298) 11.73 (683) 9.52 ---------- ---------- ---------- Outstanding, end of year 7,569 17.81 7,270 11.17 6,769 9.72 ========== ========== ========== Options exercisable at year end 1,607 1,234 1,460 ========== ========== ========== Weighted average per share fair value of options granted during the year calculated using the Black-Scholes option pricing model $ 14.07 $ 4.59 $ 5.54 ======= ======= =======
The following table summarizes significant ranges of outstanding and exercisable options held by directors, officers, and employees as of February 28, 2001:
------------------------------------------------------------------ Options Outstanding Options Exercisable ------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Range of Exercise Remaining Exercise Exercise Prices Options Life Price Options Price - ------------------------------------------------------------------------------------------- (000s) (Years) (000s) $8.30 - $9.96 1,096 3.2 $ 8.48 392 $ 8.49 $10.33 - $10.45 2,754 5.6 10.34 726 10.34 $10.53 - $13.11 1,140 5.2 12.74 393 12.70 $16.63 - $26.44 355 7.3 19.07 60 18.20 $26.54 - $32.48 177 7.2 29.24 22 31.46 $33.95 - $34.18 1,882 7.1 33.95 14 33.95 $35.26 - $46.29 165 7.5 40.25 -- -- ---------- ---------- 7,569 5.7 $17.81 1,607 $11.27 ==================================================================
DEFERRED STOCK-BASED COMPENSATION The Corporation recorded aggregate deferred stock-based compensation of $2,656,000, $0, and $3,467,000 in fiscal 2001, 2000, and 1999, respectively. In each year deferred stock-based compensation was recorded in connection with acquisitions made by the Corporation in which stock was issued to principals of the acquired companies, but held in escrow to be released on condition of continued tenure. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. P. 60 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- NET INCOME PER SHARE The dilutive effect of stock options is excluded under the requirements of FASB Statement No. 128 for calculating net income per share, but is included in the calculation of diluted net income per share. The reconciliation of the numerator and denominator for the calculation of net income per share and diluted net income per share is as follows: (000s, except per-share amounts)
-------------------------------- 2001 2000 1999 -------------------------------- Net Income per Share Net income $64,260 $58,815 $58,434 ============================================================================================ Weighted average number of shares outstanding 87,324 85,972 87,416 ============================================================================================ Net income per share $ 0.74 $ 0.68 $ 0.67 ============================================================================================ Diluted Net Income per Share Net income $64,260 $58,815 $58,434 ============================================================================================ Weighted average number of shares outstanding 87,324 85,972 87,416 Dilutive effect of stock options* and deferred stock-based compensation 4,649 2,128 1,524 - -------------------------------------------------------------------------------------------- Adjusted weighted average number of shares outstanding 91,973 88,100 88,940 ============================================================================================ Diluted net income per share $0.70 $0.67 $0.66 ================================
* All anti-dilutive options have been excluded. The average number of anti-dilutive options was 557,000, 1,580,000, and 1,980,000 for fiscal 2001, 2000, and 1999, respectively. 11 _ PENSION PLANS The Corporation operates a Retirement Savings Plan for the parent company and also operates various other defined contribution pension plans for its subsidiaries. The Corporation contributes amounts related to the level of employee contributions for both types of plans. The pension costs in fiscal 2001, 2000, and 1999 were $4,248,000, $3,839,000, and $2,744,000, respectively. 12 _ SEGMENTED INFORMATION The Corporation operates in one business segment--computer software solutions. This segment engages in business activities from which it earns license, support, and services revenue, and incurs expenses. Within this business segment, the Corporation develops, markets, and supports two complementary lines of software solutions that are designed to satisfy enterprise-wide business-critical needs. The Corporation's business intelligence software solutions allow customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives. The Corporation's client/server application development tools are designed to increase the productivity of system analysts and developers. Cognos products are distributed both directly and through resellers worldwide. Revenue is derived from the licensing of software and the provision of related services, which include product support and education, consulting, and other services. The Corporation generally licenses software and provides services subject to terms and conditions consistent with industry standards. Customers may elect to contract with the Corporation for product support, which includes product and documentation enhancements, as well as telephone support, by paying either an annual fee or fees based on usage of support services. The Corporation operates internationally, with a substantial portion of its business conducted in foreign currencies. Accordingly, the Corporation's results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, to other foreign currencies. P. 61 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- No single customer accounted for 10% or more of the Corporation's revenue during any of the last three fiscal years. In addition, the Corporation is not dependent on any single customer or group of customers or supplier. The accounting policies for the segment are the same as those described in the Summary of Significant Accounting Policies. The required financial information for segment profit and segment assets is the same as that presented in the Consolidated Financial Statements. Geographic information is as follows: ($000s) ----------------------------------------- 2001 2000 1999 ----------------------------------------- Revenue to external customers* U.S.A $ 281,907 $ 204,730 $ 153,827 Canada 35,890 30,120 24,040 United Kingdom 44,381 44,972 41,563 Europe 101,888 77,778 60,502 Asia/Pacific 31,586 28,040 21,193 - -------------------------------------------------------------------------------- $ 495,652 $ 385,640 $ 301,125 ========================================= *Revenues are attributed to countries based on location of customer --------------------------- 2001 2000 --------------------------- Fixed assets Canada $ 55,466 $ 31,055 U.S.A 9,510 8,659 Other countries 9,232 5,121 - ------------------------------------------------------------------ $ 74,208 $ 44,835 =========================== --------------------------- Other assets Canada $ 16,655 $ 6,866 U.S.A 13,926 12,284 - ------------------------------------------------------------------ $ 30,581 $ 19,150 =========================== P. 62 2OO1 COGNOS ANNUAL REPORT - -------------------------------------------------------------------------------- 13 _ NEW ACCOUNTING PRONOUNCEMENTS In June 1998 the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was subsequently amended by Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of SFAS No. 133. Statement No. 133 requires that all derivative financial instruments be recognized in the financial statements and measured at fair value. Changes in fair value of derivative financial instruments are either recognized periodically in net earnings or shareholders' equity, as a component of accumulated other comprehensive income. The Corporation will adopt Statement No. 133 and the corresponding amendments under Statement No. 138 beginning March 1, 2001. The impact of adopting these Statements will not result in a material change to net income, nor a material change to accumulated other comprehensive income. 14 _ LITIGATION On May 5, 2000 an action was filed in the United States District Court for the Northern District of California against the Corporation and its subsidiary, Cognos Corporation (collectively "Cognos") by Business Objects S.A. ("Complainant"), for alleged patent infringement. The complaint alleges that the Corporation's Impromptu product infringes the Complainant's United States Patent No. 5,555,403 entitled "Relational Database Access System using Semantically Dynamic Objects". The complaint seeks relief in the form of an injunction against the Corporation and unspecified damages. On May 30, 2000 the Corporation answered the complaint, denying all material allegations, and counterclaimed against the Complainant for a declaratory judgment that the Corporation is not infringing on the Complainant's patent and that the patent is invalid. As these actions are at the preliminary stage, the Corporation cannot estimate the financial impact, if any, at this time. In addition, the Corporation and its subsidiaries may, from time to time, be involved in other legal proceedings, claims, and litigation that arise in the ordinary course of business which the Corporation believes would not reasonably be expected to have a material adverse effect on the financial condition of the Corporation. 15 _ COMPARATIVE RESULTS Certain of the prior years' figures have been reclassified in order to conform to the presentation adopted in the current year. P. 63 EX-21 9 dex21.txt EXHIBIT 21-SUBSIDIARIES OF THE COMPANY Exhibit 21 COGNOS INCORPORATED JURISDICTION OF SUBSIDIARIES INCORPORATION - ------------ ------------- Cognos AB Sweden Cognos A/S Denmark Cognos Austria GmbH Austria Cognos (Barbados) Limited Barbados Cognos B.V. The Netherlands Cognos Corporation United States Cognos do Brasil Ltda. Brazil Cognos Far East Pte Limited Singapore Cognos France S.A. France Cognos GmbH Germany Cognos Limited United Kingdom Cognos N.V./S.A. Belgium Cognos OY Finland Cognos PTY Limited Australia Cognos Services (USA) Corporation United States Cognos South Africa (PTY) Limited South Africa Cognos S.p.A. Italy Cognos (Switzerland) Ltd. Switzerland APL2000 Inc. United States Interweave Software, Inc. United States LEX2000 Inc. United States NoticeCast Software Ltd. United Kingdom Right Information Systems Limited England and Wales Teijin Cognos Incorporated Japan All subsidiaries are 100% owned by Cognos Incorporated except Teijin Cognos Incorporated (50% owned), and APL2000 Inc. which is wholly-owned by LEX2000 Inc. 1 EX-23 10 dex23.txt EXHIBIT 23-CONSENT OF ERNST & YOUNG Exhibit 23 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Cognos Incorporated of our report dated March 30, 2001 with respect to the consolidated financial statements included in the 2001 Annual Report to Shareholders of Cognos Incorporated. Our audits also included the financial statement schedule of Cognos Incorporated listed in Item 14(a)2. This schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the incorporation by reference in the Registration Statements (Forms S-8 No. 33-39562, 33-72402, 33-72404 and 333-8552) pertaining to the 1988-1993 Stock Option Plan, the 1993-1998 Cognos Employee Stock Purchase Plan (now the 1993-1999 Cognos Employee Stock Purchase Plan), the 1993-1998 Stock Option Plan, and the 1997-2002 Stock Option Plan, respectively, of our report dated March 30, 2001 with respect to the consolidated financial statements of Cognos Incorporated incorporated by reference in the Annual Report (Form 10-K) for the year ended February 28, 2001. /s/ Ernst & Young LLP Ottawa, Canada ERNST & YOUNG LLP May 25, 2001 Chartered Accountants 1 EX-99 11 dex99.txt EXHIBIT 99-CONSOLIDATED FINANCIAL INFORMATION Exhibit 99 COGNOS INCORPORATED FINANCIAL INFORMATION IN ACCORDANCE WITH CANADIAN GAAP FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2001 The consolidated financial information as set out in the Corporation's 2001 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 2001 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. 1 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 28, 2001: PAGE ------- Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 3-22 Report of Management................................................... 23 Auditors' Report....................................................... 24 Consolidated Financial Statements and Notes............................ 25-45 Five-Year Summary...................................................... 46 2 COGNOS INCORPORATED 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 28, 2001. We prepare and file our consolidated financial statements and the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in United States (U.S.) dollars and in accordance with 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, our Board of Directors authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders of record at the close of business on April 20, 2000. Share and per-share amounts in this MD&A, and the audited consolidated financial statements and notes thereto, have been adjusted retroactively for this split. OVERVIEW Cognos is a leading global provider of business intelligence software solutions. We develop, market, and support an integrated business intelligence platform that allows our customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives and to effectively coordinate decision-making and actions across the extended enterprise through intranets, extranets, and the Internet. Our software is designed to allow our customers to effectively use data to make faster, more informed decisions in order to improve operational effectiveness, increase customer satisfaction, accelerate corporate response times, and, ultimately, enhance revenues and profits. Our enterprise business intelligence platform (EBI Platform) is uniquely positioned to take advantage of the accelerating demand for business intelligence solutions for the extended enterprise across all industries. Our EBI Platform is an integrated software foundation that is designed to meet our customers' end-to-end business intelligence requirements, including reporting, analysis, query, and visualization, in a secure, Web-based environment that is easy to use and deploy across the extended enterprise. The information produced by our platform is distributed over a business intelligence portal that enables users, both inside and outside the organization, to access business intelligence content, such as reports and scorecarding, through a secure, personalized Web-based interface. Our business intelligence solution also includes an integrated set of analytic applications built upon the foundation of our EBI Platform, which provide "out-of-the-box" functionality for reporting and analysis in functional areas such as finance, inventory, and sales. Revenue is derived from the licensing of software and the provision of related services, which include product support and education, consulting, and other services. We generally license software and provide services subject to terms and conditions consistent with industry standards. Our customers may elect to contract with us for product support, which includes product and documentation enhancements, as well as telephone support, by paying either an annual fee or fees based on their usage of support services. We operate internationally with a substantial portion of our business conducted in foreign currencies. Accordingly, our results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, to other foreign currencies. Currently we derive our revenue from the licensing, support, and service of business intelligence solutions and application development tools. In the most recent fiscal year, revenue associated with our 3 business intelligence solutions made up 90% of our total revenues; application development tools made up 10% of our total revenues. The percentage of revenue attributable to application development tools has declined over the last six fiscal years and is expected to continue to decline in the future as the market moves away from proprietary systems and towards packaged application products. We are focused on maintaining our leadership position in the business intelligence market and believe that the application development tools market will continue to decrease in importance for our financial results. We recognize 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 our product license revenue is earned from licenses of off-the-shelf software requiring no customization. Revenue from these licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. If a license includes the right to return the product for refund or credit, revenue is recognized net of an allowance for estimated returns provided all the requirements of SOP 97-2 have been met. Revenue from product support contracts is recognized ratably over the life of the contract. Incremental costs directly attributable to the acquisition of product support contracts, and that would not have been incurred but for the acquisition of that contract, are deferred and expensed in the period the related revenue is recognized. These costs include commissions payable on sales of support contracts. Revenue from education, consulting, and other services is recognized at the time the services are rendered. For contracts with multiple obligations (e.g., deliverable and undeliverable products, support obligations, education, consulting, and other services), we allocate revenue to each element of the contract based on objective evidence of the fair value of the element. The sales cycle for our products may span nine months or more. Historically, we have recognized a substantial portion of our revenues in the last month of a quarter, with these revenues frequently concentrated in the last two weeks of a quarter. Even minor delays in booking orders may have a significant adverse impact on revenues for a particular quarter. To the extent that delays are incurred in connection with orders of significant size, the impact will be correspondingly greater. As corporations move to enterprise-wide deployments, orders become larger, and hence, the impact of the sales cycle becomes increasingly harder to predict. We currently operate with virtually no order backlog because our software products typically are shipped shortly after orders are received. Product license revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. As a result of these and other factors, our quarterly results have varied significantly in the past and are likely to fluctuate significantly in the future. Accordingly, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily indicative of the results to be expected in any future period. We license our software through our direct sales force and value-added resellers, system integrators, and original equipment manufacturers. Direct sales accounted for approximately 70%, 69%, and 69% of our license revenues for the years ended February 28, 2001 (fiscal 2001), February 29, 2000 (fiscal 2000), and February 28, 1999 (fiscal 1999), respectively. As enterprise-wide deployments become more important to our customers, we believe that the direct sales channel is the most effective method of penetrating the large enterprise market; however, in order to have adequate market coverage for smaller and mid-size companies, we continue to expend a significant amount of resources developing our indirect sales activities. We also continue to commit significant management time and financial resources to developing direct and indirect international sales and support channels. 4 RESULTS OF OPERATIONS Total revenue for fiscal 2001 was $495.7 million, which was 29% more than the fiscal 2000 revenue of $385.6 million which, in turn, was 28% more than the fiscal 1999 revenue of $301.1 million. Net income for fiscal 2001 was $62.7 million and basic net income per share was $0.72, compared to fiscal 2000 net income of $54.5 million and basic net income per share of $0.63, and net income of $58.1 million and basic net income per share of $0.66 for fiscal 1999. We experienced decreases in net income as a percentage of revenue in fiscal 2001 and 2000. In both fiscal 2001 and 2000 we increased our investment in our sales channels to focus on revenue growth and expand global market coverage. During fiscal 2001 the decrease in net income as a percentage of revenue was the result of increases in selling, general, and administrative expenses. The decrease during fiscal 2000 was the result of increases in selling, general, and administrative expenses and decreases in the level of investment tax credits (ITCs) from prior years. The decrease in the level of 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 -------------------------------------------- ------------------------------- 2000 to 1999 to 2001 2000 1999 2001 2000 -------------------------------------------- ------------------------------- Revenue 100.0% 100.0% 100.0% 28.5% 28.1% -------------------------------------------- Operating expenses Cost of product license 1.5 1.3 1.9 39.7 (8.8) Cost of product support 3.6 3.6 3.7 29.5 23.2 Selling, general, and administrative 66.1 63.5 59.2 33.8 37.3 Research and development 13.6 13.9 14.0 25.6 26.7 Investment tax credits (1.4) (1.6) (4.9) 7.8 (58.3) -------------------------------------------- Total operating expenses 83.4 80.7 73.9 32.8 39.8 -------------------------------------------- Operating income 16.6 19.3 26.1 10.5 (5.2) Interest expense (0.2) (0.2) (0.2) 9.5 36.2 Interest income 2.5 1.9 2.2 66.2 15.9 -------------------------------------------- Income before taxes 18.9 21.0 28.1 15.6 (3.8) Income tax provision 6.3 6.9 8.8 16.9 1.4 -------------------------------------------- Net income 12.6% 14.1% 19.3% 15.0% (6.2)% ============================================
* not meaningful 5 REVENUE Our total revenue was $495.7 million in fiscal 2001, compared to $385.6 million in fiscal 2000, and $301.1 million in fiscal 1999. Our growth in total revenue was derived primarily from the increase in revenue from our business intelligence products, principally Web versions of Impromptu(R) and PowerPlay(R); contributing to the increase, but to a lesser extent, were Cognos Visualizer, DecisionStream(TM), Cognos Query, and Cognos Finance. Total revenue for all business intelligence products was $446.8 million, $328.0 million, and $230.9 million in fiscal 2001, 2000, and 1999, respectively, which resulted in year-over-year increases of 36% and 42%, respectively. Total revenue from our business intelligence products represented 90%, 85%, and 77% of total revenue in fiscal 2001, 2000, and 1999, respectively. Total revenue from our application development tools, PowerHouse(R) and Axiant(R), was $48.9 million in fiscal 2001, compared to $57.6 million in fiscal 2000, and $70.2 million in fiscal 1999, which resulted in year-over-year decreases of 15% and 18%, respectively. The growth in total revenue from product license, product support, and services in fiscal 2001 from fiscal 2000 was as follows: a 29% increase in product license revenue, a 25% increase in product support revenue, and a 33% increase in services revenue. This compares to an increase for the same categories for fiscal 2000 from fiscal 1999 as follows: 28%, 27%, and 30%, respectively. Our operations are divided into three main geographic regions: (1) North America (includes Latin America), (2) Europe (consists of the U.K. and Continental Europe), and (3) Asia/Pacific (consists of Australia and countries in the Far East). In fiscal 2001, the percentage of total revenue from North America, Europe, and Asia/Pacific was 64%, 30%, and 6%, respectively, compared to 61%, 32%, and 7%, respectively, in fiscal 2000 and 59%, 34%, and 7%, respectively, in fiscal 1999. In fiscal 2001, total revenue from North America, Europe, and Asia/Pacific increased from fiscal 2000 by 35%, 19%, and 13%, respectively, compared to increases of 32%, 20%, and 32%, respectively, in fiscal 2000 from fiscal 1999. The increase in growth for fiscal 2001 compared to fiscal 2000 in North America is attributable to the increase in revenue from the business intelligence products; however, due to economic conditions, growth rates began to slow in the fourth quarter of fiscal 2001. The decrease in growth for Europe was partly the result of foreign exchange rate fluctuations. Further, we were able to take advantage of market opportunities in Continental Europe, but were unable to realize these advantages in the United Kingdom. Excluding exchange rate fluctuations, revenue growth for Europe would have been 32% for fiscal 2001 as compared to 28% growth, excluding exchange fluctuations, for fiscal 2000. The decline in growth rate during fiscal 2001 in Asia/Pacific was mainly attributable to our Australian markets, where we experienced slower growth which was mainly attributable to year-over-year exchange rate fluctuations. A substantial portion of our business is conducted in foreign currencies. Accordingly, our results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, to other foreign currencies. The effect of foreign exchange rate fluctuations decreased the overall revenue growth by four percentage points in fiscal 2001 from fiscal 2000 and by two percentage points in fiscal 2000 from fiscal 1999. Product License Revenue Total product license revenue was $262.8 million, $203.3 million, and $158.4 million in fiscal 2001, 2000, and 1999, respectively, and accounted for 53% of our revenue for each of the respective time periods. The increase in all periods occurred predominantly as a result of the performance of our business intelligence products. Product license revenue from these products was $248.8 million, $186.6 million, and $131.9 million in fiscal 2001, 2000, and 1999, respectively, which resulted in year-over-year increases of 33% and 41%, respectively. The growth in product license revenue from the business 6 intelligence products during fiscal 2001 was less than the growth rate reported in fiscal 2000. Although the overall revenue growth rate in North America increased in fiscal 2001 from fiscal 2000, we experienced the impact of the rapid economic slowdown in this geographical region late in our fourth fiscal quarter. We experienced hesitancy on the part of commercial customers in North America to make large commitments. We believe that the softening North American economy is causing a retrenchment in the near-term level of investment in higher valued software products. Product license revenue associated with the business intelligence products contributed approximately 95%, 92%, and 83% to this revenue category in fiscal 2001, 2000, and 1999, respectively. Product license revenue from our application development tools, PowerHouse and Axiant, was $14.0 million, $16.7 million, and $26.5 million in fiscal 2001, 2000, and 1999, respectively. We expect that, in both the short and long term, the trend of decreasing product license revenue from these products will continue. Our sales and marketing strategy includes multi-tiered channels ranging from a direct sales force to various forms of third-party distributors, resellers, and original equipment manufacturers. We believe that a direct sales force is more effective than third-party sales in reaching Global 2000 companies because it is more relationship focused. We use third-party distributors in selected regions in order to extend our geographic coverage. Total product license revenue from third-party channels represented 30% of total product license revenue in fiscal 2001 compared to 31% in fiscal 2000 and 1999. Within our business intelligence market, product license revenue from third-party channels was $75.7 million in fiscal 2001, compared to $57.3 million in fiscal 2000 and $42.3 million in fiscal 1999. Product license revenue within this market from third-party channels represented 30% of our product license revenue in fiscal 2001, compared to 31% in fiscal 2000 and 32% in fiscal 1999. Product Support Revenue Product support revenue was $147.6 million, $118.1 million, and $93.3 million in fiscal 2001, 2000, and 1999, respectively. Product support revenue accounted for 30% of our total revenue for fiscal 2001 and 31% for fiscal 2000 and 1999. The increase in the dollar amounts was the result of new support contracts from the expansion of our customer base, as well as the renewal of existing support contracts. Total product support revenue from the business intelligence products was $114.2 million, $78.8 million, and $52.0 million in fiscal 2001, 2000, and 1999, respectively and made up 77%, 67%, and 56% of the total product support revenue in fiscal 2001, 2000, and 1999, respectively. In fiscal 2001, total product support revenue from business intelligence products increased by 45% from fiscal 2000 and total product support revenue from application development tools decreased by 15% over the same period. 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. Services Revenue Revenue from education, consulting, and other services was $85.3 million, $64.3 million, and $49.4 million in fiscal 2001, 2000, and 1999, respectively. Services revenue accounted for 17% of our total revenue for fiscal 2001 and 2000 and accounted for 16% of our total revenue for fiscal 1999. During fiscal 2001, we continued to increase the level of sales of our business intelligence solutions within global enterprises. Our business intelligence solutions were increasingly being deployed on an enterprise-wide, global basis within organizations for mission-critical applications. Successful installation and deployment 7 of our solution has become critical to our customers' success. As a result, our customers have increasingly required services such as strategic planning, project management, analysis and design, technical advisory, and instruction to effectively deploy our solutions. The increase in services revenue in fiscal 2001 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. Services revenue associated with the business intelligence products contributed approximately 98%, 97%, and 95% to this revenue category in fiscal 2001, 2000, and 1999, respectively. OPERATING EXPENSES Cost of Product License The cost of product license consists primarily of royalties for technology licensed from third parties and the costs of materials and distribution related to licensed software. Product license costs in fiscal 2001 were $7.3 million compared to $5.2 million in fiscal 2000 and $5.7 million in fiscal 1999. Product license costs represented 3% of product license revenue for fiscal 2001 and 2000 and 4% of product license revenue for fiscal 1999. The increase, in dollar terms, in fiscal 2001 from fiscal 2000 is due to increases in royalty costs; material and distribution costs remained relatively consistent with fiscal 2000 levels. The decrease in fiscal 2000 from fiscal 1999 was due to decreases in both royalty costs and materials and distribution costs associated with product offerings. Cost of Product Support The cost of product support includes the costs associated with resolving customer inquiries and other telesupport and websupport activities, royalties in respect of technological support received from third parties, and the cost of materials delivered in connection with enhancement releases. The cost of product support was $17.8 million, $13.8 million, and $11.2 million in fiscal 2001, 2000, and 1999, respectively. These costs represented 12% of product support revenue for each of fiscal 2001, 2000, and 1999. The increase, in dollar terms, in fiscal 2001 from fiscal 2000 was associated predominantly with increases in customer telesupport and websupport costs. The increase in fiscal 2000 from fiscal 1999 was associated predominantly with increases in customer telesupport and websupport costs; while enhancement release costs contributed to a lesser extent to the increase. Selling, General, and Administrative Selling, general, and administrative expenses were $327.6 million, $244.8 million, and $178.3 million in fiscal 2001, 2000, and 1999, respectively. These costs were 66% of revenue in fiscal 2001 compared to 64% and 59% in fiscal 2000 and 1999, respectively. The increase in the selling, general, and administrative expenses in fiscal 2001 was primarily the result of increases in staffing and related compensation expenses. Contributing to a lesser extent to the increase were facilities, marketing costs, and the amortization of the technology acquired on acquisitions of various companies over the last four fiscal years. During fiscal 2001, we continued to increase our investment in our sales channels, to focus on opportunities for new revenue growth and expand global market coverage. The average number of employees within the selling, general, and administrative areas grew by 29% in fiscal 2001, predominantly as the result of additions to sales and services staff. The increase in the selling, general, and administrative expenses in fiscal 2000 was primarily 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, we increased our investment in our sales channels to focus on revenue growth and to expand our global market coverage. The average number of employees within the selling, general, and 8 administrative areas grew by 30% in fiscal 2000, predominantly as the result of additions to sales and services staff. The costs per employee increased 4% in fiscal 2001 and 6% in fiscal 2000. Research and Development Research and development costs were $67.3 million, $53.5 million, and $42.3 million for fiscal 2001, 2000, and 1999, respectively. Research and development costs have continued to increase, in dollar terms, over the last several fiscal years, but have remained constant at 14% of total revenue for each of fiscal 2001, 2000, and 1999. The growth in fiscal 2001 was primarily the result of increases associated with higher staffing levels in this area. Increases in services purchased externally and other costs associated with the development of our product lines to meet foreign market requirements also contributed to the increase for the fiscal year. The growth during fiscal 2000 was predominantly the result of higher staffing levels and related compensation expenses. The increase in the average number of employees in this area was 15% in fiscal 2001 from fiscal 2000, and was 26% in fiscal 2000 from 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 2001, 2000, or 1999 because either no projects met the criteria for deferral or the period between (i) achieving technological feasibility and (ii) the general availability of the product was short, and the associated costs were immaterial. During fiscal 2001 we continued to invest in R&D activities for our business intelligence solutions, including further development of e-Application packages and continued investment in our existing enterprise business intelligence platform. During the current fiscal year we released a new version of Cognos Query, our Web-based database query and navigation tool, and DecisionStream 6.5, a data mart creation component of the BI platform which unites data from disparate sources and consolidates it into data marts. In addition to our e-Application for Sales Analysis, Inventory Analysis, and Financial Analysis, we released the e-Commerce Analysis application for the IBM WebSphere Commerce Suite during fiscal 2001. We also released version 5.0 of Cognos Finance, a solution that delivers integrated budgeting, forecasting, consolidation, and financial reporting and analysis in one comprehensive system, and version 1.5 of Cognos Visualizer which has significant enhancements for scorecarding and key performance indicator applications displaying these metrics in a single presentation. To further drive business value for customers, we released a new product that creates scorecards of key performance indicators. This packaged application addresses a key requirement for enterprise business performance measurement. 9 During fiscal 2002, we plan to make available a new version of all our core software products, with the release of EP Series 7. EP Series 7 will also introduce enterprise event management technology we acquired this past year through our purchase of NoticeCast Software Ltd. This technology monitors business processes and automatically notifies users of key events and performance indicators or data via their personal computer, personal digital assistant or other wireless device, enabling them to take immediate action. Our customers will be able to react rapidly to key business events and changes in business performance as they will be able to leverage our business intelligence platform to quickly relate these events to overall enterprise business performance. To help customers address a broader range of enterprise requirements, we plan to invest in research and development to extend our e-Application offerings. Acquisitions Fiscal 2001 During the second quarter of fiscal 2001, we acquired Powerteam OY, our distributor in Finland. The shareholders of Powerteam OY will receive approximately $2,258,000 in cash over two years and could also receive cash payments not to exceed $500,000 over the next three years. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of the purchase price. During the third quarter of fiscal 2001, we acquired NoticeCast Software Ltd., based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management Software monitors business processes and delivers timely business intelligence notifications to business users across the enterprise via e-mail on their personal computer, hand-held or wireless device. The shareholders of NoticeCast Software Ltd. received approximately $9,000,000 in cash on closing and will receive 148,468 shares of our common stock valued at approximately $4,820,000. We are holding the shares in escrow and they will be released on the second anniversary of the closing of the transaction. Also during the third quarter of fiscal 2001, we completed the acquisition of Johnson & Michaels, Inc. (JAMI), a leading provider of business intelligence consulting services. The shareholders of JAMI will receive total cash consideration of approximately $3,915,000 over three years and 104,230 shares of our common stock valued at $4,250,000 over the same period. Approximately $1,406,000 was paid and 39,085 shares were issued on closing; we are holding the remaining shares, all of which were issued, in escrow and they will be released on the first (33%), second (33%), and third (34%) anniversaries of the closing of the transaction. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of the purchase price. The deferred shares, valued at $2,656,000, are accounted for as an offset to capital stock. Fiscal 2000 We acquired Information Tools AG, our 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 $60,000 will be paid in fiscal 2002 relating to fiscal 2001 results and approximately $120,000 was paid in fiscal 2001 relating to fiscal 2000 results. We have conditioned a portion of the overall consideration on the continued tenure of certain 10 employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. We also purchased the entire outstanding minority interest in our subsidiary in Singapore, Cognos Far East Pte Limited. The former minority shareholders of Cognos Far East Pte Limited received approximately $1,688,000 in cash upon completion of the purchase. No further consideration is due to the former minority shareholders of the subsidiary. Fiscal 1999 During the fourth quarter ended February 28, 1999 we acquired substantially all the assets of Relational Matters, including its DecisionStream software and technology. DecisionStream software is a high-performance data aggregation and integration tool used to populate data warehouses and data marts and OLAP (online analytical processing) servers. The software simplifies the loading of data marts into our business intelligence solutions, providing a coordinated view of data marts throughout an organization. Relational Matters will receive approximately $7,550,000 over three years and 250,980 shares of our common stock valued at $1,823,000, over the same time period. We placed the shares, all of which were issued, in escrow on the closing of the acquisition. A portion (40%) were released on the second anniversary of the closing of the transaction and the remainder (60%) will be released on the third anniversary of the closing of the transaction. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,823,000, are accounted for as an offset to capital stock. In addition, during the fourth quarter of fiscal 1999, we acquired LEX2000 Inc., for a combination of cash and our common stock. LEX2000(TM) was the only significant in-process research and development project acquired on the purchase. LEX2000 is a financial reporting, consolidation, budgeting, and forecasting system designed to gather data from many sources and allow users to report on and analyze data. LEX2000 provides the user with enterprise-wide access to financial data creating data marts and retrieving information in order to build complex financial reports. The shareholders of LEX2000 Inc. will receive approximately $7,444,000 over three years and 252,118 shares of our common stock valued at $1,940,000 over the same time period. Approximately 14,200 shares were issued at closing; we placed the remainder, all of which were issued, in escrow on the closing of the acquisition. A portion (50%) was released on the second anniversary of the closing of the transaction and the remainder (50%) will be released on the third anniversary of the closing of the transaction. We have conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,644,000, are accounted for as an offset to capital stock. The acquisitions in fiscal 2001, 2000, and 1999 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 our results of operations since their respective dates of acquisition. Investment Tax Credits The Corporation recognized investment tax credits of $6.7 million, $6.2 million, and $14.9 million in fiscal 2001, 2000, and 1999, respectively, related to research and development activities performed in Canada. 11 Interest Income and Expense Interest income was earned on our cash, cash equivalents, and short-term investments and interest expense related primarily to the interest on our mortgage, which was discharged during fiscal 2001, and capital leases. Net interest income was $11.6 million, $6.7 million, and $5.9 million in fiscal 2001, 2000, and 1999, respectively. The increase during fiscal 2001 was the result of an increase in the average size of the investment portfolio, and an increase in the average effective interest rates earned on investments during fiscal 2001. This increase was offset slightly by the impact of unfavorable exchange rate fluctuations. The increase in fiscal 2000 was the result of an 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 earned on investments during fiscal 2000. Tax Expense Our tax rate is affected by the relative profitability of our operations in various geographic regions. In fiscal 2001 the Corporation's effective tax rate was 33%, compared to 33% in fiscal 2000, and 31% in fiscal 1999.(See Note 9 of the Notes to the Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2001, we held $234.6 million in cash, cash equivalents, and short-term investments, an increase of $37.8 million from February 29, 2000. In addition, we have arranged an unsecured credit facility that includes an operating line and foreign exchange conversion facilities. The operating line permits us to borrow funds or issue letters of credit or guarantee up to Cdn$15.0 (US$9.8) million, subject to certain covenants. As of February 28, 2001, there were no direct borrowings under this operating line. As discussed further below, we have foreign exchange conversion facilities that allow us to hold foreign exchange contracts of approximately Cdn$130.0 (US$84.9) million outstanding at any one time. As of February 28, 2001, we had a total of $1.6 million of long-term liabilities (including the current portion of long-term debt and long-term liabilities). As of February 28, 2001, working capital was $197.7 million, an increase of $31.2 million from February 29, 2000, primarily because of higher levels of short-term investments and accounts receivable which were partially offset by a decrease in cash and increases in deferred revenue and other current liabilities. During fiscal 2001 we used $14.0 million in cash for share repurchases and $11.4 million for acquisitions. Cash provided by operating activities (after changes in non-cash working capital items) for fiscal 2001 was $99.0 million, an increase of $15.8 million compared to the prior fiscal year. This fluctuation was due to an increase in net income after adjustments for depreciation, amortization, and other non-cash items and a net decrease in non-cash working capital as compared to a net increase in non-cash working capital during fiscal 2000. Cash used in investing activities was $119.2 million for fiscal 2001, an increase in investment of $81.5 million compared to the prior fiscal year. The majority of the fluctuation stems from an increase in net investment in short-term investments and increases in fixed asset additions and acquisition costs. In fiscal 2001, we spent $56.6 million related to the activity in short-term investments compared to $7.4 million (both net of maturities) in fiscal 2000. In addition, we spent $11.4 million in fiscal 2001 on acquisitions, compared to $2.1 million in fiscal 2000. (See Note 5 of the Notes to the Consolidated Financial Statements.) The increase in fixed asset additions was primarily the result of the construction, during fiscal 2001, of a second building on the site of our corporate headquarters in Ottawa as well as purchases of computer equipment and software. We invested approximately $17.8 million during fiscal 2001 in the 12 expansion of our headquarters, as compared to $3.4 million during fiscal 2000. This headquarters expansion was substantially complete in December 2000 and the building was fully occupied by the end of fiscal 2001. Cash provided by financing activities was $4.5 million for fiscal 2001, compared to the use of $9.1 million for financing activities during fiscal 2000. Our financing activities for both fiscal years involved the repurchase of our own shares in the open market, and the issuance of shares pursuant to our stock purchase plan and the exercise of stock options. Relating to financing activities, we issued 1,889,000 common shares for consideration of $20.6 million during fiscal 2001, compared to 2,093,000 shares for consideration of $16.5 million in fiscal 2000. The issuance of shares in both periods was pursuant to our stock purchase plan and the exercise of stock options by employees, officers, and directors. During fiscal 2001 we repurchased 579,500 shares at a cost of $14.0 million, compared to 2,286,000 shares repurchased at a cost of $26.0 million in fiscal 2000. The share repurchases made in the past two fiscal years were part of distinct open market share repurchase programs through the Nasdaq National Market. The share repurchases made in fiscal 2001 were part of two open market share repurchase programs. The program adopted in October 1999 expired on October 8, 2000. Under this program we repurchased 150,000 of our shares for $3.4 million; all repurchased shares were cancelled. In October 2000, we adopted a new program that will enable us to purchase up to 4,403,510 common shares (not more than 5% of those issued and outstanding) between October 9, 2000 and October 8, 2001. Under the current program we have repurchased 529,500 shares for $11.9 million during fiscal 2001; all repurchased shares were cancelled. This program does not commit us to make any share repurchases. Purchases will be made on the Nasdaq National Market 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.) Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in our various subsidiaries. Typically these contracts are between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. We enter into these foreign exchange forward contracts with major Canadian chartered banks, and therefore we do not anticipate non-performance by these counterparties. The amount of the exposure on account of any non-performance is restricted to the unrealized gains in such contracts. As of February 28, 2001, we had foreign exchange forward contracts, with maturity dates ranging from March 29, 2001 to July 26, 2001, to exchange various foreign currencies in the amount of $15.2 million. We have never declared or paid any cash dividends on our common shares. Our current policy is to retain our earnings to finance expansion and to develop, license, and acquire new software products, and to otherwise reinvest in Cognos. We anticipate that through fiscal 2002 our operations will be financed by current cash balances and funds from operations. If we were to require funds in excess of our current cash position to finance our longer-term operations, we would expect to obtain such funds from, one or a combination of, the expansion of our existing credit facilities, or from public or private sales of equity or debt securities. Inflation has not had a significant impact on our results of operations. 13 EUROPEAN ECONOMIC AND MONETARY UNION The euro currency was introduced on January 1, 1999, and the transition to this new currency has associated with it many potential implications for businesses operating in Europe including, but not limited to, products, information technology, pricing, currency exchange rate risk and derivatives exposure, continuity of material contracts, and potential tax consequences. The new euro currency is being introduced in stages over the course of a 3 1/2 year transition period. We believe the transition to the euro will have limited longer-term implications on our business. We have taken steps in the transition to the euro in the area of our internal processes and systems through identifying, modifying, and testing these processes and systems to handle transactions and reporting requirements involving the euro in accordance with the regulations. Our financial application systems represent the most significant internal systems that are affected by the transition to the euro. We continue to upgrade these systems to enable us, together with certain process changes and modifications provided by the application vendor to its supported customers, to handle the requirements for transactions and reporting involving the euro. To handle the full requirements of the euro we plan to implement the latest version level upgrade of our financial applications systems during fiscal 2002. We continue to identify, upgrade, and modify our systems and processes in order to handle the various stages of the euro implementation. We are continuing to monitor our pricing in Europe, giving consideration to the transition to the euro. We believe that the costs relating to the conversion of our internal systems and processes incurred to date, along with any future costs relating to such conversions, will not have a material adverse effect on our business, results of operations, or financial condition. MARKET RISK Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes. Further discussion of our investment and foreign exchange policies can be found in Notes 1 and 8 of the Notes to the Consolidated Financial Statements. Interest Rate Risk Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. The investment of cash is regulated by our investment policy of which the primary objective is security of principal. Among other selection criteria, the investment policy states that the term to maturity of investments cannot exceed one year in length. We do not use derivative financial instruments in our investment portfolio. Interest income on our cash, cash equivalents, and short-term investments is subject to interest rate fluctuations, but we believe that the impact of these fluctuations does not have a material effect on our financial position due to the short-term nature of these financial instruments. The amount of our long-term debt is immaterial. Our interest income and interest expense are most sensitive to the general level of interest rates in Canada and the United States. Sensitivity analysis is used to measure our interest rate risk. For the fiscal year ending February 28, 2001, 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. 14 Foreign Currency Risk We operate internationally; accordingly, a substantial portion of our financial instruments are held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries. The forward contracts are typically between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. Sensitivity analysis is used to measure our foreign currency exchange rate risk. As of February 28, 2001, a 10% adverse change in foreign exchange rates versus the U.S. dollar would not have had a material effect on our reported cash, cash equivalents, and short-term investments. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS We make certain statements in this report that constitute forward-looking statements. These statements include, but are not limited to, statements relating to our expectations concerning future revenues and earnings, including future rates of growth, from the licensing of our business intelligence and application development products and related product support and services, and relating to the sufficiency of capital to meet our working capital and capital expenditure requirements. Forward-looking statements are neither promises nor guarantees, and are subject to risks and uncertainties that may cause future results to differ materially from those stated in the forward-looking statements. There can be no guarantee that future results will turn out as expected. Factors that may cause such differences include, but are not limited to, the factors discussed below. Additional risks and uncertainties that we are unaware of or currently deem immaterial may also adversely affect our business operations. We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or events, conditions, or circumstances on which any such statement may be based. Risks Related to Our Business Our revenue may not continue to grow at historical rates. Although we have experienced significant license revenue growth with respect to our business intelligence products over the past few fiscal years, we cannot assure you that we will continue to grow. If we do grow, we cannot assure you that we will be able to maintain the historical rate or extent of such growth in the future. Our growth rate may be affected by global economic conditions generally, and the current economic slowdown, in particular. Our quarterly and annual operating results are subject to fluctuations, which may cause our stock price to fluctuate or decline. Historically, our quarterly operating results have varied from quarter to quarter, and we anticipate this pattern to continue. We typically realize a larger percentage of our annual revenue and earnings in the fourth quarter of each fiscal year, and lower revenue and earnings in the first quarter of the next fiscal year. Our quarterly and annual operating results may be adversely affected by a wide variety of factors, including: . our ability to maintain revenue growth at current levels or anticipate a decline in revenue from any of our products; . the impact of global economic conditions on the sales cycle; . our ability to obtain and close large enterprise transactions; 15 . 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. These fluctuations could materially adversely affect our share price and our business, results of operations, and financial condition. Our ability to adjust our expenses in the near term is limited, which could cause our profits to decrease. In recent fiscal years, we have experienced an increase in our operating expenses as a result of decisions to invest in our sales channels, technical support, and research and development organizations. As a result of current economic conditions discretionary spending levels will be tempered; however, we will continue to selectively incur expenditures in areas that we view as strengthening our position in the marketplace. We base our operating expense budgets on expected revenue trends which are more difficult to predict in periods of economic uncertainty. If we do not meet revenue goals, we may not be able to meet reduced operating expense levels. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the price of our common shares may fall. We may lose sales, or sales may be delayed, due to the long sales and implementation cycles for our products, which would reduce our revenues. Our customers typically invest substantial time, money, and other resources when deciding to license our software products, in particular in situations where we are making large enterprise-wide sales. As a result, we may wait many months after our first contact with a customer while that customer seeks internal approval for the purchase of our products. During this long sales cycle, events may occur that affect the size or timing of the order or even cause it to be cancelled. For example, purchasing decisions may be postponed, or large purchases reduced, by periods of economic uncertainty, our competitors may introduce new products or the customer's own budget and purchasing priorities may change. The time required for implementation of our product varies among our customers and may last several months, depending on our customer's needs. It may be difficult to install our products if the customer has 16 complicated operation requirements, such as integrating databases, hardware, and software from different vendors. Also, if a customer hires a third party to install our products, we cannot be sure that our products will be installed successfully. We rely, in part, on partners and other distribution channels to market and distribute our products, and any failure of these parties to do so could significantly harm our ability to expand our customer base, which would adversely affect our growth strategy. Our sales and marketing strategy includes multi-tiered channels of third-party distributors, resellers, and original equipment manufacturers. We have developed a number of these relationships and intend to continue to develop new channel partner relationships. Our inability to attract effective channel partners, or these partners' inability to penetrate their respective market segments, or the loss of any of our channel partners as a result of competitive products offered by other companies or products developed internally by these channel partners or otherwise, could harm our ability to expand our customer base and, as a result, could cause our business to grow more slowly than forecasted or could result in additional, unanticipated expenses. If we do not protect our intellectual property, we may not be competitive. Our success depends in part on our ability to protect our proprietary rights in our intellectual property. We rely on certain intellectual property protections, including contractual provisions, patents, copyright, trademark and trade secret laws, to preserve our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. Policing unauthorized use of intellectual property is difficult and some foreign laws do not protect proprietary rights to the same extent as Canada or the United States. To protect our intellectual property, we may become involved in litigation, which could result in substantial expenses and materially disrupt the conduct of our business. Intellectual property claims could be time consuming and costly to defend against, and, if we are unsuccessful, our ability to use intellectual property in the future could be limited or we may have to pay damages. We may become increasingly subject to claims by third parties that our technology infringes their proprietary rights due to the growth of software products in our target markets and the overlap in functionality of these products. Regardless of their merit, any such claims could: . be time consuming; . be expensive to defend; . divert management's attention and focus away from the business; . cause product shipment delays; and . require us to enter into costly royalty or licensing agreements. On May 5, 2000, an action was filed in the United States District Court for the Northern District of California against us and our subsidiary Cognos Corporation by Business Objects S.A., for alleged patent infringement. The complaint alleges that our Impromptu product infringes Business Objects' United States Patent No. 5,555,403 entitled "Relational Database Access System using Semantically Dynamic Objects". The complaint seeks relief in the form of an injunction against us and unspecified damages. On May 30, 2000 we answered the complaint, denying all material allegations, and counterclaimed against Business Objects for a declaratory judgment that we are not infringing Business Objects' patent and that the patent is invalid. Based on the preliminary stage of the proceedings, we cannot estimate the financial impact, if any, at this time. If successful, a claim of infringement against us and our inability to license the 17 infringed or similar technology on commercially reasonable terms could have a material adverse effect on our business, operating results, and financial condition. The loss of our rights to use software licensed to us by third parties could significantly increase our operating expenses by forcing us to seek alternative technology and adversely affect our ability to compete. In order to provide a complete business intelligence solution, we license certain technologies used in our products from third parties, generally on a non-exclusive basis. The termination of such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could delay our ability to ship certain of our products while we seek to implement alternative technology offered by other sources. In addition, alternative technology may not be available on commercially reasonable terms. In the future, it may be necessary or desirable to obtain other third-party technology licenses relating to one or more of our products or relating to current or future technologies to enhance our product offerings. We cannot assure you that we will be able to obtain licensing rights to the needed technology on commercially reasonable terms, if at all. We face significant operational and financial risks associated with our international operations. We derive a significant portion of our total revenues from international sales. International sales are subject to significant risks, including: . unexpected changes in legal and regulatory requirements and policy changes affecting our markets; . changes in tariffs and other trade barriers; . fluctuations in currency exchange rates; . political and economic instability; . longer payment cycles and other difficulties in accounts receivable collection; . difficulties in managing distributors and representatives; . difficulties in staffing and managing foreign operations; . difficulties in protecting our intellectual property; and . potentially adverse tax consequences. Each of these factors could materially impact our international operations and adversely affect our business as a whole. Pursuing, completing, and integrating recent and potential acquisitions could divert management's attention and financial resources and may not produce the desired business results. In the past we have made acquisitions of products and businesses. In the future, we may engage in additional selective acquisitions of other products or businesses that we believe are complementary to ours. We cannot assure you that we will be able to identify additional suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition, or successfully integrate any acquired product or business into our operations. Further, acquisitions may involve a number of special risks, including: . diversion of management's attention; . disruption to our ongoing business; . failure to retain key acquired personnel; . difficulties in assimilating acquired operations, technologies, products, and personnel; . unanticipated expenses, events, or circumstances; and . assumption of legal and other undisclosed liabilities 18 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. Failure to manage our growth may impact our operating results. We expect to continue to grow our business. The expansion of our business and customer base has placed, and will continue to place, increased demands on our management, operating systems, internal controls, and financial resources. If not managed effectively, these increased demands may adversely affect the services we provide to our existing clients. In addition, our personnel, systems, procedures, and controls may be inadequate to support our future operations. Consequently, in order to manage our growth effectively, we may be required to increase expenditures to expand, train, and manage our employee base, improve our management, financial, and information systems and controls, or make other capital expenditures. Our results of operations and financial condition could be harmed if we encounter difficulties in effectively managing our growth. If our product contains material defects, our ability to attract and retain customers may be harmed. Our software products are complex and may contain errors or defects, particularly when first introduced, when new versions or enhancements are released, or when configured to individual customer computing systems. We currently have known errors and defects in our products. Despite testing conducted by us, additional defects and errors found in current versions, new versions, or enhancements of our products after commencement of commercial shipment could result in the loss of revenues or a delay in market acceptance. The occurrence of any of these events could cause us to lose customers or require us to pay damages to existing customers and, therefore, could seriously harm our business, operating results, and financial condition. If a successful product liability claim is made against us, our business would be seriously harmed. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. Despite this, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. We have not experienced any product liability claims to date. However, the sale and support of our products may entail the risk of such claims, which are likely to be substantial in light of the use of our products in business-critical applications. A successful product liability claim could result in significant monetary liability and could seriously disrupt our business. Currency fluctuations may adversely affect us. A substantial portion of our revenues are earned in currencies other than U.S. dollars, and, similarly, a substantial portion of our operating expenses are incurred in currencies other than U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar and other currencies, such as the Canadian dollar and the euro, may have a material adverse effect on our business, financial condition, and operating results. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. We enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries, typically between the United States dollar, the euro, the British pound, the German mark, and the Australian dollar. 19 Our executive management and other key personnel are essential to our business, and if we are not able to recruit and retain qualified personnel, our ability to develop, market, and support our products and services could be harmed. We depend on the services of our key technical and management personnel. The loss of the services of any of these persons could have a material adverse effect on our business, results of operations, and financial condition. Our success is highly dependent on our continuing ability to identify, hire, train, motivate, and retain highly qualified management, technical, sales, and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be able to attract, assimilate, or retain highly qualified technical and managerial personnel in the future. Our inability to attract and retain the necessary management, technical, sales, and marketing personnel may adversely affect our future growth and profitability. Risks Related to Our Industry We face intense competition and, if we fail to compete successfully, our business could be seriously harmed and our revenues could grow more slowly than expected. We face substantial competition throughout the world, primarily from software companies located in the United States, Europe, and Canada. Some of our competitors have been in business longer than we have and have substantially greater financial and other resources with which to pursue research and development, manufacturing, marketing, and distribution of their products. We expect our existing competitors and potentially new competitors to continue to improve the performance of their current products and to introduce new products or new technologies that provide improved cost of ownership and performance characteristics. New product introductions by our competitors could cause a decline in sales, a reduction in the sales price, or a loss of market acceptance of our existing products. To the extent that we are unable to effectively compete against our current and future competitors, our ability to sell products could be harmed and our market share reduced. Any erosion of our competitiveness could have a material adverse effect on our business, results of operations, and financial condition. If we do not respond effectively and on a timely basis to rapid technological change, our products and services may become obsolete and we could lose customers. The markets for our products are characterized by: . rapid and significant technological change; . frequent new product introductions and enhancements; . changing customer demands; and . evolving industry standards. We cannot assure you that our products will remain competitive, respond to market demands and developments and new industry standards, and not become obsolete. If we are unable to identify a shift in the market demand quickly enough, we may not be able to develop products to meet those new demands, or bring them to market in a timely way. In addition, failure to respond successfully to technological change may harm our ability to attract and retain customers. 20 Risks Related to External Conditions Our stock price will fluctuate. The market price of our common shares may be volatile and could be subject to wide fluctuations due to a number of factors, including: . actual or anticipated fluctuations in our results of operations; . announcements of technological innovations or new products by us or our competitors; . changes in estimates of our future results of operations by securities analysts; . general industry changes in the business intelligence tools or solutions markets; or . other events or factors. 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. 21 QUARTERLY RESULTS The following table sets out selected unaudited consolidated financial information for each quarter in fiscal 2001 and fiscal 2000. On April 6, 2000 our Board of Directors authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders of record at the close of business on April 20, 2000. All historic consolidated results have been restated for the split.
Fiscal 2000 Fiscal 2001 ----------------------------------------- -------------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ----------------------------------------- -------------------------------------------- ($000s, except per share amounts, Canadian GAAP) Revenue $81,645 $88,128 $97,753 $118,114 $108,698 $118,213 $124,638 $144,103 ----------------------------------------- -------------------------------------------- Operating expenses Cost of product license 1,054 1,001 1,456 1,724 1,729 1,713 1,925 1,948 Cost of product support 3,095 3,336 3,608 3,719 4,274 4,071 4,551 4,924 Selling, general, and administrative 53,478 56,263 63,183 71,903 74,295 77,601 83,109 92,627 Research and development 12,197 12,845 13,574 14,932 15,854 16,507 16,854 18,049 Investment tax credits (1,167) (1,163) (2,177) (1,700) (1,338) (1,297) (2,765) (1,290) ----------------------------------------- -------------------------------------------- Total operating expenses 68,657 72,282 79,644 90,578 94,814 98,595 103,674 116,258 ----------------------------------------- -------------------------------------------- Operating income $12,988 $15,846 $18,109 $ 27,536 $ 13,884 $ 19,618 $ 20,964 $ 27,845 ========================================= ============================================ Net income $9,796 $11,768 $12,782 $ 20,196 $ 10,915 $ 15,443 $ 15,392 $ 20,986 ========================================= ============================================ Net income per share Basic $0.11 $0.14 $0.15 $0.23 $0.13 $0.18 $0.17 $0.24 ========================================= ============================================ Fully diluted $0.11 $0.14 $0.15 $0.23 $0.13 $0.17 $0.17 $0.23 ========================================= ============================================
Our sales cycle may span nine months or more, depending on factors such as the size of the transaction, the product involved, the length of the customer relationship, the timing of our new product introductions and product introductions by others, the level of sales management activity, and general economic conditions. Delays in closing product licensing transactions at or near the end of any quarter may have a materially adverse effect on the financial results for that quarter. While we take steps to minimize the impact of such delays, there can be no assurance that such delays will not occur. (See Certain Factors That May Affect Future Results). 22 COGNOS INCORPORATED REPORT OF MANAGEMENT The Corporation's management is responsible for preparing the accompanying consolidated financial statements in conformity with Canadian generally accepted accounting principles. In preparing these consolidated financial statements, management selects appropriate accounting policies and uses its judgment and best estimates to report events and transactions as they occur. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Financial data included throughout this Annual Report is prepared on a basis consistent with that of the financial statements. The Corporation maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded and that transactions are executed and recorded in accordance with the Corporation's policies for doing business. This system is supported by written policies and procedures for key business activities; the hiring of qualified, competent staff; and by a continuous planning and monitoring program. Ernst & Young LLP, the independent auditors appointed by the stockholders, have been engaged to conduct an examination of the consolidated financial statements in accordance with generally accepted auditing standards, and have expressed their opinion on these statements. During the course of their audit, Ernst & Young LLP reviewed the Corporation's system of internal controls to the extent necessary to render their opinion on the consolidated financial statements. The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and internal control, and is ultimately responsible for reviewing and approving the consolidated financial statements. The Board carries out this responsibility principally through its Audit Committee; all members are outside Directors. The Committee meets four times annually to review audited and unaudited financial information prior to its public release. The Committee also considers, for review by the Board of Directors and approval by the stockholders, the engagement or reappointment of the external auditors. Ernst & Young LLP has full and free access to the Audit Committee. Management acknowledges its responsibility to provide financial information that is representative of the Corporation's operations, is consistent and reliable, and is relevant for the informed evaluation of the Corporation's activities. /s/ James M. Tory /s/ Ron Zambonini /s/ 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 23 COGNOS INCORPORATED AUDITORS' REPORT To the Board of Directors and Stockholders of Cognos Incorporated: We have audited the consolidated balance sheets of Cognos Incorporated as at February 28, 2001 and February 29, 2000 and the consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended February 28, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at February 28, 2001 and February 29, 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended February 28, 2001, in accordance with Canadian generally accepted accounting principles. On March 30, 2001, we reported separately to the Board of Directors and Stockholders of Cognos Incorporated on financial statements for the same periods, prepared in accordance with United States generally accepted accounting principles. /s/ Ernst & Young LLP Ottawa, Canada Ernst & Young LLP March 30, 2001 Chartered Accountants 24 CONSOLIDATED STATEMENTS OF INCOME (US$000s except share amounts, CDN GAAP)
Years Ended the Last Day of February Note 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Revenue Product license $262,766 $203,299 $158,393 Product support 147,589 118,061 93,311 Services 85,297 64,280 49,421 - ----------------------------------------------------------------------------------------------------------------------- Total revenue 495,652 385,640 301,125 - ----------------------------------------------------------------------------------------------------------------------- Operating expenses Cost of product license 7,315 5,235 5,738 Cost of product support 17,820 13,758 11,166 Selling, general, and administrative 327,632 244,827 178,295 Research and development 67,264 53,548 42,274 Investment tax credits (6,690) (6,207) (14,880) - ----------------------------------------------------------------------------------------------------------------------- Total operating expenses 413,341 311,161 222,593 - ----------------------------------------------------------------------------------------------------------------------- Operating income 82,311 74,479 78,532 Interest expense 6 (786) (718) (527) Interest income 12,386 7,454 6,430 - ----------------------------------------------------------------------------------------------------------------------- Income before taxes 93,911 81,215 84,435 Income tax provision 9 31,175 26,673 26,313 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 62,736 $ 54,542 $ 58,122 ======================================================================================================================= Net income per share 10 Basic $0.72 $0.63 $0.66 ======================================================================================================================= Fully diluted $0.71 $0.62 $0.65 ======================================================================================================================= Weighted average number of shares (000s) 10 Basic 87,324 85,972 87,416 ======================================================================================================================= Fully diluted 92,495 92,082 93,404 =======================================================================================================================
(See accompanying notes) 25 CONSOLIDATED BALANCE SHEETS (US$000s, CDN GAAP)
February 28, February 29, Note 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents 8 $115,293 $132,435 Short-term investments 8 119,265 64,284 Accounts receivable 2 146,867 107,823 Inventories 730 806 Prepaid expenses 8,648 8,470 - ----------------------------------------------------------------------------------------------------------------------- 390,803 313,818 Fixed assets 3 74,208 44,835 Other assets 4 46,780 37,445 - ----------------------------------------------------------------------------------------------------------------------- $511,791 $396,098 ======================================================================================================================= Liabilities Current liabilities Accounts payable $ 28,256 $ 22,908 Accrued charges 21,798 17,540 Salaries, commissions, and related items 28,822 24,024 Income taxes payable 17,548 3,548 Current portion of long-term debt 6 32 2,176 Deferred revenue 96,674 77,167 - ----------------------------------------------------------------------------------------------------------------------- 193,130 147,363 Long-term liabilities 5 1,539 2,699 Deferred income taxes 9 16,402 21,730 - ----------------------------------------------------------------------------------------------------------------------- 211,071 171,792 - ----------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies 5, 7, 13 Stockholders' Equity Capital stock Common shares (2001 - 87,885,161; 2000 - 86,168,680) 10 134,791 104,223 Retained earnings 175,946 126,316 Accumulated other comprehensive income (10,017) (6,233) - ----------------------------------------------------------------------------------------------------------------------- 300,720 224,306 - ----------------------------------------------------------------------------------------------------------------------- $511,791 $396,098 =======================================================================================================================
(See accompanying notes) On behalf of the Board: /s/ Douglas C. Cameron /s/ James M. Tory Douglas C. Cameron, Director James M. Tory, Chairman 26 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (US$000s except share amounts, CDN GAAP)
Accumulated Common Stock Other -------------------------- Retained Comprehensive Shares Amount Earnings Income Total - ----------------------------------------------------------- --------------------------------------------------------- (000s) - ----------------------------------------------------------- --------------------------------------------------------- Balances, February 28, 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 Deferred stock-based compensation (489) (3,467) (3,467) Amortization of deferred stock-based compensation 61 61 Repurchase of shares (3,006) (3,005) (31,132) (34,137) Income tax effect related to stock options 522 522 - ------------------------------------------------------------------------------------------------------------------------ 86,362 88,579 37,207 (6,752) 119,034 - ------------------------------------------------------------------------------------------------------------------------ Net income 58,122 58,122 Other comprehensive income Foreign currency translation adjustments (1,960) (1,960) - ------------------------------------------------------------------------------------------------------------------------ Comprehensive income 58,122 (1,960) 56,162 - ------------------------------------------------------------------------------------------------------------------------ Balances, February 28, 1999 86,362 $ 88,579 $ 95,329 $ (8,712) $175,196 Issuance of stock Stock option plans 1,973 15,420 15,420 Stock purchase plans 120 1,095 1,095 Amortization of deferred stock-based compensation 693 693 Repurchase of shares (2,286) (2,458) (23,555) (26,013) Income tax effect related to stock options 894 894 - ------------------------------------------------------------------------------------------------------------------------ 86,169 104,223 71,774 (8,712) 167,285 - ------------------------------------------------------------------------------------------------------------------------ Net income 54,542 54,542 Other comprehensive income Foreign currency translation adjustments 2,479 2,479 - ------------------------------------------------------------------------------------------------------------------------ Comprehensive income 54,542 2,479 57,021 - ------------------------------------------------------------------------------------------------------------------------ Balances, February 29, 2000 86,169 $104,223 $126,316 $ (6,233) $224,306 Issuance of stock Stock option plans 1,816 18,574 18,574 Stock purchase plans 73 2,018 2,018 Business acquisitions 253 9,070 9,070 Deferred stock-based compensation 154 (2,656) (2,656) Amortization of deferred stock-based compensation 1,233 1,233 Repurchase of shares (580) (881) (13,106) (13,987) Income tax effect related to stock options 3,210 3,210 - ------------------------------------------------------------------------------------------------------------------------ 87,885 134,791 113,210 (6,233) 241,768 - ------------------------------------------------------------------------------------------------------------------------ Net income 62,736 62,736 Other comprehensive income Foreign currency translation adjustments (3,784) (3,784) - ------------------------------------------------------------------------------------------------------------------------ Comprehensive income 62,736 (3,784) 58,952 - ------------------------------------------------------------------------------------------------------------------------ Balances, February 28, 2001 87,885 $134,791 $175,946 $(10,017) $300,720 ========================================================================================================================
(See accompanying notes) 27 CONSOLIDATED STATEMENTS OF CASH FLOWS (US$000s, CDN GAAP)
Years Ended the Last Day of February 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities Net income $ 62,736 $ 54,542 $ 58,122 Non-cash items Depreciation and amortization 30,754 24,228 17,602 Amortization of deferred stock-based compensation 1,233 693 61 Amortization of other deferred compensation 1,809 1,351 295 Deferred income taxes (6,426) 4,756 (3,685) Loss on disposal of fixed assets 561 148 185 - ---------------------------------------------------------------------------------------------------------------------- 90,667 85,718 72,580 Change in non-cash working capital Increase in accounts receivable (39,824) (32,818) (12,805) Decrease (increase) in inventories 37 31 (267) Increase in prepaid expenses (731) (1,422) (2,772) Increase in accounts payable 4,320 3,930 3,526 Increase in accrued charges 3,145 1,004 2,568 Increase in salaries, commissions, and related items 5,630 4,394 5,806 Increase (decrease) in income taxes payable 14,262 (3,993) 5,624 Increase in deferred revenue 21,467 26,374 10,358 - ---------------------------------------------------------------------------------------------------------------------- 98,973 83,218 84,618 - ---------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) investing activities Maturity of short-term investments 138,803 138,796 96,860 Purchase of short-term investments (195,386) (146,238) (116,093) Acquisition costs (11,377) (2,146) (9,174) Additions to fixed assets (51,963) (28,096) (21,147) Proceeds from the sale of fixed assets 759 24 12 - ---------------------------------------------------------------------------------------------------------------------- (119,164) (37,660) (49,542) - ---------------------------------------------------------------------------------------------------------------------- Cash provided by (used in) financing activities Issue of common shares 23,802 17,409 5,509 Repurchase of shares (13,987) (26,013) (34,137) Repayment of long-term debt and long-term liabilities (5,293) (467) (107) - ---------------------------------------------------------------------------------------------------------------------- 4,522 (9,071) (28,735) - ---------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (1,473) 2,331 (2,338) - ---------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (17,142) 38,818 4,003 Cash and cash equivalents, beginning of period 132,435 93,617 89,614 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period 115,293 132,435 93,617 Short-term investments, end of period 119,265 64,284 56,074 - ---------------------------------------------------------------------------------------------------------------------- Cash, cash equivalents, and short-term investments, end of period $234,558 $196,719 $149,691 ======================================================================================================================
(See accompanying notes) 28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Cognos Incorporated (the "Corporation") is a global provider of business intelligence software solutions. The Corporation develops, markets, and supports an integrated business intelligence platform that allows customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives. The Corporation markets and supports these solutions both directly and through resellers worldwide. Basis of Presentation These consolidated financial statements have been prepared by the Corporation in United States (U.S.) dollars and in accordance with Canadian generally accepted accounting principles (GAAP), applied on a consistent basis. Consolidated financial statements prepared in accordance with 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 net assets from transactions and other events, and circumstances other than transactions with stockholders. These changes are recorded directly as a separate component of Stockholders' Equity and excluded from net income. The only comprehensive income item for the Corporation relates to foreign currency translation adjustments pertaining to those subsidiaries not using the U.S. dollar as their functional currency. Foreign Currency Translation The financial statements of the parent company and its non-U.S. subsidiaries have been translated into U.S. dollars in accordance with The Canadian Institute of Chartered Accountants (CICA) Handbook, Section 1650, Foreign Currency Translation. The financial statements of the foreign subsidiaries are measured using local currency as the functional currency. All balance sheet amounts have been translated using the exchange rates in effect at the applicable year end. Income statement amounts have been translated using the weighted average exchange rate for the applicable year. The gains and losses resulting from the changes in exchange 29 rates from year to year have been reported as a separate component of Stockholders' Equity. Currency transaction gains and losses are immaterial for all periods presented. Revenue The Corporation recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants. Substantially all of the Corporation's product license revenue is earned from licenses of off-the-shelf software requiring no customization. Revenue from these licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. If a license includes the right to return the product for refund or credit, revenue is recognized net of an allowance for estimated returns provided all the requirements of SOP 97-2 have been met. Revenue from product support contracts is recognized ratably over the life of the contract. Incremental costs directly attributable to the acquisition of product support contracts, and that would not have been incurred but for the acquisition of that contract, are deferred and expensed in the period the related revenue is recognized. These costs include commissions payable on sales of support contracts. Revenue from education, consulting, and other services is recognized at the time such services are rendered. For contracts with multiple obligations (e.g., deliverable and undeliverable products, support obligations, education, consulting, and other services), the Corporation allocates revenue to each element of the contract based on objective evidence, specific to the Corporation, of the fair value of the element. Cash, Cash Equivalents, and Short-Term Investments Cash includes cash equivalents, which are investments that are generally held to maturity and have terms to maturity of three months or less at the time of acquisition. Cash equivalents typically consist of commercial paper, term deposits, banker's acceptances and bearer deposit notes issued by major North American banks, and corporate debt. Cash and cash equivalents are carried at cost, which approximates their fair value. Short-term investments are investments that are generally held to maturity and have terms greater than three months at the time of acquisition. Short-term investments typically consist of commercial paper, 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. Building improvements are amortized using the straight line method over the life of the improvement. Leasehold improvements are amortized using the straight line method over either the life of the improvement or the term of the lease, whichever is shorter. 30 Assets leased on terms that transfer substantially all of the benefits and risks of ownership to the Corporation are accounted for as capital leases, as though the asset had been purchased and a liability incurred. All other leases are accounted for as operating leases. Other Assets This category includes acquired technology, goodwill, and other deferred compensation associated with various acquisitions, and deferred software development costs. Acquired technology 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 estimated fair 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. Other deferred compensation includes cash consideration associated with acquisitions made by the Corporation. Other deferred compensation is recorded when its future payment is determinable and is payable contingent upon the continued tenure of the principals of the acquired companies who have become employees of the Corporation. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. 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. The Corporation did not capitalize any costs of internally-developed computer software to be sold, licensed or otherwise marketed in each of fiscal 2001, 2000, and 1999. Income Taxes The liability method is used in accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities, and are measured using the tax rates and laws that are expected to be in effect when the differences reverse. 2. ACCOUNTS RECEIVABLE Accounts receivable include an allowance for doubtful accounts of $6,056,000 and $4,734,000 as of February 28, 2001 and February 29, 2000, respectively. 31 3. FIXED ASSETS
2001 2000 -------------------------------- ------------------------------- Accumulated Accumulated Depreciation Depreciation Depreciation/ and and Amortization Cost Amortization Cost Amortization Rate ------------- --------------- ------------- -------------- ---------------- ($000s) ($000s) Computer equipment and software $ 72,100 $47,991 $ 63,334 $43,370 33% Office furniture 27,756 12,538 21,602 11,317 20% Building and Life of Leasehold improvements 17,438 5,350 8,160 3,726 Improvement/ Lease Term Land 775 - 820 - - Building 23,521 1,503 7,198 1,243 2.5% Construction in progress - - 3,377 - - ------------- --------------- ------------- -------------- 141,590 $67,382 104,491 $59,656 ============== ============== (67,382) (59,656) -------------- ------------- Net book value $ 74,208 $ 44,835 ============== =============
Depreciation and amortization of fixed assets was $18,475,000, $13,898,000, and $10,760,000 in each of fiscal 2001, 2000, and 1999, respectively. 4. OTHER ASSETS Other assets as at February 28, 2001, and February 29, 2000, include acquired technology, goodwill, and other deferred compensation, and are disclosed net of amortization. The Corporation recorded $23,421,000 of acquired technology, goodwill, workforce, and other deferred compensation in fiscal 2001, and $2,352,000 of goodwill and other deferred compensation in fiscal 2000. Amortization of other assets was $14,088,000, $11,681,000, and $7,082,000 in each of fiscal 2001, 2000, and 1999, 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 2001, 2000, and 1999, and recorded $0, $0, and $55,000 of corresponding amortization, respectively. 5. ACQUISITIONS Fiscal 2001 Acquisitions On June 1, 2000, the Corporation acquired Powerteam OY, the Corporation's distributor in Finland. The shareholders of Powerteam OY will receive approximately $2,258,000 in cash over two years and could also receive cash payments not to exceed $500,000 over the next three years. The Corporation has conditioned a portion of the consideration on the continued tenure of certain employees. Under generally accepted 32 accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. On September 21, 2000, the Corporation acquired NoticeCast Software Ltd., based in Twickenham, United Kingdom. NoticeCast's Enterprise Event Management Software monitors business processes and delivers timely business intelligence notifications to business users across the enterprise via e-mail on their personal computer, hand-held or wireless device. The shareholders of NoticeCast Software Ltd. received approximately $9,000,000 in cash on closing and will receive 148,468 shares of the Corporation's common stock valued at approximately $4,820,000. The shares are being held in escrow by the Corporation and will be released on the second anniversary of the closing of the transaction. On November 1, 2000, the Corporation completed the acquisition of Johnson & Michaels, Inc. (JAMI), a leading provider of business intelligence consulting services. The shareholders of JAMI will receive total cash consideration of approximately $3,915,000 over three years and 104,230 shares of the Corporation's common stock valued at $4,250,000 over the same period. Approximately $1,406,000 was paid and 39,085 shares were issued on closing; the remaining shares, all of which were issued, are being held in escrow by the Corporation and will be released on the first (33%), second (33%), and third (34%) anniversaries of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $2,656,000, are accounted for as an offset to capital stock. The scheduled aggregate annual payments for the long-term liabilities related to these acquisitions are $921,000 and $1,539,000 in fiscal 2002 and 2003, respectively. Amounts due within twelve months are included in accrued charges. The acquisitions have been accounted for using the purchase method. The results of operations of all three acquired companies prior to the acquisitions were not material, and thus pro forma information has not been provided. The results of the acquired companies have been combined with those of the Corporation from the date of the acquisition. 33 Total consideration, including acquisition costs, was allocated based on estimated fair values on the acquistion date as follows: ($000s)
Powerteam NoticeCast Johnson & OY Software Inc. Michaels, Inc. Total --------------- ----------------- ------------------ ---------------- Assets acquired Acquired technology $ - $ 5,000 $ - $ 5,000 Other assets 3,906 450 814 5,170 --------------- ----------------- ------------------ ---------------- 3,906 5,450 814 10,170 Liabilities assumed (2,502) (1,580) (922) (5,004) Deferred tax credits - (2,000) - (2,000) --------------- ----------------- ------------------ ---------------- Net assets acquired 1,404 1,870 (108) 3,166 Goodwill 854 11,950 3,545 16,349 --------------- ----------------- ------------------ ---------------- Purchase price $2,258 $13,820 $3,437 $19,515 =============== ================= ================== ================ Purchase price consideration Cash $ 971 $ 9,000 $1,406 $11,377 Deferred payment 1,287 - 437 1,724 Shares - 4,820 1,594 6,414 --------------- ----------------- ------------------ ---------------- $2,258 $13,820 $3,437 $19,515 =============== ================= ================== ================ Other consideration Deferred cash - - 2,072 2,072 Deferred shares - - 2,656 2,656 --------------- ----------------- ------------------ ---------------- Total consideration $2,258 $13,820 $8,165 $24,243 =============== ================= ================== ================
Fiscal 2000 Acquisitions On May 28, 1999, the Corporation completed the acquisition of Information Tools AG, the Corporation's distributor in Switzerland. The 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 $60,000 will be paid in fiscal 2002 relating to fiscal 2001 results, and approximately $120,000 was paid in fiscal 2001 relating to fiscal 2000 results. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. On July 15, 1999, the Corporation completed the purchase of the entire outstanding minority interest in the Corporation's subsidiary in Singapore, Cognos Far East Pte Limited. The former minority shareholders of Cognos Far East Pte Limited received approximately $1,688,000 in cash upon completion of the purchase. No further consideration is due to the former minority shareholders of the subsidiary. Both acquisitions have been accounted for using the purchase method. The results of operations of both acquired companies prior to the acquisition were not material, and thus pro forma information has not been provided. The results of both acquired companies have been combined with those of the Corporation since their respective dates of acquisition. 34 Total consideration, including acquisition costs, was allocated based on estimated fair values on the acquisition date as follows: ($000s)
Cognos Far Information East Pte Tools AG Limited Total ------------------ ----------------- ----------------- Assets acquired $ 683 $ - $ 683 Liabilities assumed (570) - (570) ------------------ ----------------- ----------------- Net assets acquired 113 - 113 Goodwill 544 1,688 2,232 ------------------ ----------------- ----------------- Purchase price $ 657 $1,688 $2,345 ================== ================= ================= Purchase price consideration Cash $ 458 $1,688 $2,146 Deferred payment 199 - 199 ------------------ ----------------- ----------------- $ 657 $1,688 $2,345 ================== ================= ================= Other consideration Deferred cash 180 - 180 ------------------ ----------------- ----------------- Total consideration $ 837 $1,688 $2,525 ================== ================= =================
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 $7,550,000 over three years and 250,980 shares of the Corporation's common stock valued at $1,823,000 over the same time period. The shares, all of which were issued, were placed in escrow on the closing of the transaction by the Corporation. A portion (40%) were released on the second anniversary of the closing of the transaction and the remainder (60%) will be released on the third anniversary of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,823,000, are accounted for as an offset to capital stock. On February 24, 1999, the Corporation completed the acquisition of LEX2000 Inc., a developer of financial reporting, consolidation, budgeting, and forecasting systems, 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, were placed in escrow on the closing of the transaction by the Corporation. A portion (50%) were released on the second anniversary of the closing of the transaction and the remainder (50%) will be released on the third anniversary of the closing of the transaction. The Corporation has conditioned a portion of the overall consideration on the continued tenure of certain employees. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. The deferred shares, valued at $1,644,000 are accounted for as an offset to capital stock. The scheduled aggregate annual payments for the long-term liabilities related to these two acquisitions are $2,893,000 in fiscal 2002. Amounts due within twelve months are included in accrued charges. 35 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 as follows: ($000s)
Relational Matters LEX2000 Total ---------------- ----------------- ----------------- Assets acquired Acquired technology $4,431 $12,640 $17,071 Other assets 25 1,501 1,526 ---------------- ----------------- ----------------- 4,456 14,141 18,597 Liabilities assumed (37) (2,869) (2,906) Deferred tax credits - (6,201) (6,201) ---------------- ----------------- ----------------- Net assets acquired 4,419 5,071 9,490 Goodwill - - - ---------------- ----------------- ----------------- Purchase price $4,419 $ 5,071 $ 9,490 ================ ================= ================= Purchase price consideration Cash $4,419 $ 4,755 $ 9,174 Deferred payment - 20 20 Shares - 296 296 ---------------- ----------------- ----------------- $4,419 $ 5,071 $ 9,490 ================ ================= ================= Other consideration Deferred cash $3,131 $ 2,669 $ 5,800 Deferred shares 1,823 1,644 3,467 ---------------- ----------------- ----------------- Total consideration $9,373 $ 9,384 $18,757 ================ ================= =================
6. LONG-TERM DEBT
2001 2000 ----------------- --------------- ($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 Other 32 34 ----------------- --------------- 32 2,176 Less current portion (32) (2,176) ----------------- --------------- $ - $ - ================= ===============
Interest expense on long-term debt was $166,000, $264,000, and $271,000 in fiscal 2001, 2000, and 1999, respectively. 36 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 2001, 2000, and 1999, was $14,715,000, $12,205,000, and $9,219,000, respectively. The aggregate amount of payments for these operating leases, in each of the next five fiscal years and thereafter, is approximately as follows: ($000s) 2002 $13,810 2003 10,735 2004 7,352 2005 5,743 2006 3,141 Thereafter 6,693 8. FINANCIAL INSTRUMENTS Foreign Exchange Forward Contracts The Corporation's policy with respect to foreign currency exposure is to manage its financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. 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. Foreign exchange forward contracts are recorded at their estimated fair value. 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 $84,878,000) outstanding at any one time. The Corporation enters into foreign exchange forward contracts with major Canadian chartered banks, and therefore does not anticipate non-performance by these counterparties. The amount of the exposure on account of any non-performance is restricted to the unrealized gains in such contracts. As of February 28, 2001, the Corporation had foreign exchange forward contracts, with maturity dates ranging from March 29, 2001 to July 26, 2001, to exchange various foreign currencies in the amount of $15,173,000 (the estimated fair value was $15,353,000). 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 (the estimated fair value was $6,428,000). 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. 37 Included in cash, cash equivalents, and short-term investments as of February 28, 2001 and February 29, 2000 were corporate debt amounts of $44,058,000 and $73,805,000, respectively. The corporate debt amounts as of February 28, 2001 and February 29, 2000 were with three and two distinct issuers, respectively. These amounts were repaid, in full, at maturity in March of their respective years. All the Corporation's short-term investments as of February 28, 2001 and February 29, 2000 had maturity dates before the end of June of their respective years. The Corporation's cash, cash equivalents, and short-term investments are denominated predominantly in Canadian and U.S. dollars. The Corporation has an unsecured credit facility, subject to annual renewal, that includes an operating line and foreign exchange conversion facilities. The operating line permits the Corporation to borrow funds or issue letters of credit or guarantee up to an aggregate of Cdn $15,000,000 (US $9,794,000), subject to certain covenants. As of February 28, 2001 and February 29, 2000, there were no direct borrowings under this operating line. There is no concentration of credit risk related to the Corporation's position in trade accounts receivable. Credit risk, with respect to trade receivables, is minimized because of the Corporation's large customer base and its geographical dispersion (see Note 12). Fair Value of Financial Instruments For certain of the Corporation's financial instruments, including accounts receivable, accounts payable, and other accrued charges, the carrying amounts approximate the fair value due to their short maturities. Cash and cash equivalents, short-term investments, long-term debt, and long-term liabilities are carried at cost, which approximates their fair value. Foreign exchange forward contracts are recorded at their estimated fair value. 9. INCOME TAXES Details of the income tax provision (recovery) are as follows: ($000s) 2001 2000 1999 ---------------- --------------- ------------- Current Canadian $27,357 $16,880 $ 15,581 Foreign 12,707 9,943 9,228 ---------------- --------------- ------------- 40,064 26,823 24,809 ---------------- --------------- ------------- Deferred Canadian (5,727) 1,765 3,274 Foreign (3,162) (1,915) (1,770) ---------------- --------------- ------------- (8,889) (150) 1,504 ---------------- --------------- ------------- Income tax provision $31,175 $26,673 $26,313 ================ =============== ============= 38 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)
2001 2000 1999 --------------- -------------- ------------- Expected Canadian tax rate 44.0% 44.0% 44.0% =============== ============== ============= Expected tax provision $ 41,320 $ 35,735 $ 37,151 Foreign tax rate differences (14,603) (10,422) (10,906) Net change in valuation allowance and other income tax benefits earned (1,910) (2,680) (1,064) Non-deductible expenses and non-taxable income 4,121 2,876 193 Withholding tax on foreign income 1,774 1,179 987 Other 473 (15) (48) --------------- -------------- ------------- Reported income tax provision $ 31,175 $ 26,673 $ 26,313 =============== ============== =============
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 28, 2001 and February 29, 2000 are as follows: ($000s) 2001 2000 ----------------- -------------- Deferred tax assets Net operating tax loss carryforwards $ 3,822 $ 4,460 Investment tax credits - 1,404 Deferred revenue 2,811 2,490 Other 3,409 2,186 ----------------- -------------- Total deferred tax assets 10,042 10,540 Valuation allowance for deferred tax assets (3,022) (4,460) ----------------- -------------- Net deferred tax assets 7,020 6,080 ----------------- -------------- Deferred tax liabilities Book and tax differences on assets 14,737 16,069 Reserves and allowances 6,141 7,484 Income tax credits 3,925 5,346 Other (1,381) (1,089) ----------------- -------------- Total deferred tax liabilities 23,422 27,810 ----------------- -------------- Net deferred income tax liability $16,402 $21,730 ================= ============== The net change in the total valuation allowance for the years ended February 28, 2001 and February 29, 2000 was a decrease of $1,438,000 and $1,047,000, respectively. Realization of the net deferred tax assets is dependent on generating sufficient taxable income in certain legal entities. Although realization is not assured, management believes it is more likely than not that the net amount of the future tax asset will be realized. However, this estimate could change in the near term as future taxable income in these certain legal entities changes. 39 As of February 28, 2001, the Corporation had tax loss carryforwards of approximately $8,872,000 available to reduce future years' income for tax purposes. These losses expire as follows: ($000s) 2005-2011 $2,625 Indefinitely 6,247 ------------ $8,872 ============ Income before taxes attributable to all foreign operations was $41,232,000, $37,215,000, and $39,219,000, in each of fiscal 2001, 2000, and 1999, 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 $13,537,000, $18,658,000, and $8,201,000, in each of fiscal 2001, 2000, and 1999, 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. On April 6, 2000, the Corporation's Board of Directors authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to stockholders of record at the close of business on April 20, 2000. Share and per-share amounts have been adjusted retroactively for this split. Share Repurchase Programs The share repurchases made in the past three fiscal years were part of distinct open market share repurchase programs through the Nasdaq National Market. The share repurchases made in fiscal 2001 were part of two open market share repurchase programs. The program adopted in October 1999 expired on October 8, 2000. Under this program the Corporation repurchased 150,000 of its shares; all repurchased shares were cancelled. In October 2000, the Corporation adopted a new program that will enable it to purchase up to 4,403,510 common shares (not more than 5% of those issued and outstanding) between October 9, 2000 and October 8, 2001. This program does not commit the Corporation to make any share repurchases. Purchases will be made on the Nasdaq National Market at prevailing open market prices and paid out of general corporate funds. All repurchased shares will be cancelled. 40 The details of the share repurchases were as follows:
2001 2000 1999 ---------------------------- --------------------------- -------------------------- Shares Cost Shares Cost Shares Cost ------------- ------------- ------------- ------------- ------------- ------------- (000s) ($000s) (000s) ($000s) (000s) ($000s) October 1997 program - $ - - $ - 2,030 $23,463 October 1998 program - - 2,186 24,689 976 10,674 October 1999 program 50 2,041 100 1,324 - - October 2000 program 530 11,946 - - - - ------------- ------------- ------------- ------------- ------------- ------------- 580 $13,987 2,286 $26,013 3,006 $34,137 ============= ============= ============= ============= ============= =============
The amount paid to acquire the shares over and above the average carrying value has been charged to retained earnings. Stock Option Plans As of February 28, 2001, the Corporation had stock options outstanding under two plans: 5,858,000 pertain to the 1997-2002 Stock Option Plan and 1,711,000 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. In June 2000, options were awarded to employees, executive officers, and directors. These options vest equally in April 2001, April 2002, April 2003, and April 2004, and expire in April 2008. There were 7,266,000 options available for grant under the Plan as of February 28, 2001. Under the 1993-1998 Stock Option Plan, options were awarded to directors, officers, and employees. For the options outstanding as of February 28, 2001, the vesting dates extend to September 2001 and the expiry dates range from April 2003 to September 2005. In April 1996, options were awarded to certain key officers under an executive option award. These options vested equally in April 1999, April 2000, and April 2001, and expire in April 2003. All options were priced at the market price of the Corporation's shares on The Toronto Stock Exchange on the trading day preceding the date of grant. The 1993-1998 Stock Option Plan expired on January 1, 1998. 41 Employee Stock Purchase Plan This plan was approved by the Corporation's shareholders in July 1993 and was amended on May 19, 1999. The amended plan was approved by the Corporation's shareholders on June 22, 1999, and will terminate on November 30, 2002. Under the plan, 3,000,000 common shares were reserved for issuance. A participant in the Employee Stock Purchase Plan authorizes the Corporation to deduct an amount per pay period that cannot exceed five (5) percent of annual target salary divided by the number of pay periods per year. Deductions are accumulated during each of the Corporation's fiscal quarters ("Purchase Period") and on the first trading day following the end of any Purchase Period these deductions are applied toward the purchase of common shares. The purchase price per share is ninety (90) percent of the lesser of The Toronto Stock Exchange average closing price on (a) the first five trading days of the Purchase Period or (b) the last five trading days of the Purchase Period. All full-time and part-time permanent employees may participate in the plan. Accounting for Stock Option and Stock Purchase Plans Under Canadian GAAP, the benefits of the Corporation's stock option and purchase plans are not recognized as compensation expense. If the fair values of the options granted 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 $20,106,000, $9,096,000, and $8,239,000, reduced basic net income per share by $0.23, $0.11, and $0.09, and reduced fully diluted net income per share by $0.22, $0.10, and $0.09 in fiscal 2001, 2000, and 1999, respectively. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 2001, 2000, and 1999, respectively: risk-free interest rates of 6.1%, 5.8%, and 5.5%, expected life of the options of 3.0 years, 2.8 years, and 2.9 years, expected volatility of 54%, 55%, and 56%, and for all years, a dividend yield of zero. Activity in the stock option plans for fiscal 2001, 2000, and 1999 was as follows:
2001 2000 1999 ------------------------- ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------- ------------------------- ------------------------ (000s) (000s) (000s) Outstanding, beginning of year 7,270 $11.17 6,769 $ 9.72 6,571 $ 8.29 Granted 2,537 34.02 2,772 11.18 1,935 13.33 Exercised (1,816) 10.23 (1,973) 7.81 (1,054) 3.94 Cancelled (422) 18.21 (298) 11.73 (683) 9.52 ------------ ------------- ------------ Outstanding, end of year 7,569 17.81 7,270 11.17 6,769 9.72 ============ ============= ============ Options exercisable at year end 1,607 1,234 1,460 ============ ============= ============ Weighted average per share fair value of options granted during the year calculated using the Black-Scholes option pricing model $14.07 $ 4.59 $ 5.54 ============ ============ ============
The following table summarizes significant ranges of outstanding and exercisable options held by directors, officers, and employees as of February 28, 2001: 42
Options Outstanding Options Exercisable ---------------------------------------------------- -------------------------------- Weighted Weighted Weighted Range of Exercise Average Remaining Average Exercise Average Exercise Prices Options Life Price Options Price - ---------------------------- ----------- ----------------- ---------------- ------------ ----------------- (000s) (000s) $8.30 - $9.96 1,096 3.2 years $ 8.48 392 $ 8.49 $10.33 - $10.45 2,754 5.6 10.34 726 10.34 $10.53 - $13.11 1,140 5.2 12.74 393 12.70 $16.63 - $26.44 355 7.3 19.07 60 18.20 $26.54 - $32.48 177 7.2 29.24 22 31.46 $33.95 - $34.18 1,882 7.1 33.95 14 33.95 $35.26 - $46.29 165 7.5 40.25 - - ----------- ------------ 7,569 5.7 $17.81 1,607 $11.27 =========== ============
Deferred Stock-based Compensation The Corporation recorded aggregate deferred stock-based compensation of $2,656,000, $0, and $3,467,000 in fiscal 2001, 2000, and 1999, respectively. In each year deferred stock-based compensation was recorded in connection with acquisitions made by the Corporation in which stock was issued to principals of the acquired companies, but held in escrow to be released on condition of continued tenure. Under generally accepted accounting principles, these amounts are accounted for as compensation rather than as a component of purchase price. Net Income per Share Net income per share is based on the weighted average number of shares outstanding during each year. 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)
2001 2000 1999 ------------ ------------ ---------- Net Income per Share Net income $62,736 $54,542 $58,122 ============ ============ ========== Weighted average number of shares outstanding 87,324 85,972 87,416 ============ ============ ========== Net income per share $0.72 $0.63 $0.66 ============ ============ ========== Fully Diluted Net Income per Share Net income $62,736 $54,542 $58,122 Imputed interest 2,496 2,941 2,571 ------------ ------------ ---------- Adjusted net income $65,232 $57,483 $60,693 ============ ============ ========== Weighted average number of shares outstanding 87,324 85,972 87,416 Dilutive effect of stock options* and deferred stock-based compensation 5,171 6,110 5,988 ------------ ------------ ---------- Adjusted weighted average number of shares outstanding 92,495 92,082 93,404 ============ ============ ========== Fully diluted net income per share $0.71 $0.62 $0.65 ============ ============ ==========
* All anti-dilutive options have been excluded. 43 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 2001, 2000, and 1999 were $4,248,000, $3,839,000, and $2,744,000, respectively. 12. SEGMENTED INFORMATION The Corporation operates in one business segment--computer software solutions. This segment engages in business activities from which it earns license, support, and services revenue, and incurs expenses. Within this business segment, the Corporation develops, markets, and supports two complementary lines of software solutions that are designed to satisfy enterprise-wide business-critical needs. The Corporation's business intelligence software solutions allow customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives. The Corporation's client/server application development tools are designed to increase the productivity of system analysts and developers. Cognos products are distributed both directly and through resellers worldwide. Revenue is derived from the licensing of software and the provision of related services, which include product support and education, consulting, and other services. The Corporation generally licenses software and provides services subject to terms and conditions consistent with industry standards. Customers may elect to contract with the Corporation for product support, which includes product and documentation enhancements, as well as telephone support, by paying either an annual fee or fees based on usage of support services. The Corporation operates internationally, with a substantial portion of its business conducted in foreign currencies. Accordingly, the Corporation's results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to the Canadian dollar, to various European currencies, and to a lesser extent, to other foreign currencies. No single customer accounted for 10% or more of the Corporation's revenue during any of the last three fiscal years. In addition, the Corporation is not dependent on any single customer or group of customers, or supplier. The accounting policies for the segment are the same as those described in the Summary of Significant Accounting Policies. The required financial information for segment profit and segment assets is the same 44 as that presented in the Consolidated Financial Statements. Geographic information is as follows: ($000s) 2001 2000 1999 ------------- ------------- ------------ Revenue to external customers* U.S.A. $281,907 $204,730 $153,827 Canada 35,890 30,120 24,040 United Kingdom 44,381 44,972 41,563 Europe 101,888 77,778 60,502 Asia/Pacific 31,586 28,040 21,193 ------------- ------------- ------------ $495,652 $385,640 $301,125 ============= ============= ============ * Revenues are attributed to countries based on location of customer Fixed assets Canada $55,466 $31,055 U.S.A. 9,510 8,659 Other countries 9,232 5,121 -------------- ------------- $74,208 $44,835 ============== ============= Other assets Canada $24,232 $11,740 U.S.A. 22,548 25,705 -------------- ------------- $46,780 $37,445 ============== ============= 13. LITIGATION On May 5, 2000 an action was filed in the United States District Court for the Northern District of California against the Corporation and its subsidiary, Cognos Corporation (collectively "Cognos") by Business Objects S.A. ("Complainant"), for alleged patent infringement. The complaint alleges that the Corporation's Impromptu product infringes the Complainant's United States Patent No. 5,555,403 entitled "Relational Database Access System using Semantically Dynamic Objects". The complaint seeks relief in the form of an injunction against the Corporation and unspecified damages. On May 30, 2000 the Corporation answered the complaint, denying all material allegations, and counterclaimed against the Complainant for a declaratory judgment that the Corporation is not infringing on the Complainant's patent and that the patent is invalid. As these actions are at the preliminary stage, the Corporation cannot estimate the financial impact, if any, at this time. In addition, the Corporation and its subsidiaries may, from time to time, be involved in other legal proceedings, claims, and litigation that arise in the ordinary course of business which the Corporation believes would not reasonably be expected to have a material adverse effect on the financial condition of the Corporation. 14. COMPARATIVE RESULTS Certain of the prior years' figures have been reclassified in order to conform to the presentation adopted in the current year. 45 SELECTED CONSOLIDATED FINANCIAL DATA FIVE-YEAR SUMMARY The following Selected Consolidated Financial Data has been derived from the Corporation's consolidated financial statements that have been audited by Ernst & Young LLP, independent chartered accountants. The Selected Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and related Notes, and with Management's Discussion and Analysis of Financial Condition and Results of Operations. On April 6, 2000, the Board of Directors of the Corporation authorized a two-for-one stock split, effected in the form of a stock dividend, payable on or about April 27, 2000 to shareholders of record at the close of business on April 20, 2000. All historic consolidated results have been restated for the split.
Years Ended the Last Day of February - ---------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- (US$000s except share amounts, Canadian GAAP) Statement of Income Data Revenue $495,652 $385,640 $301,125 $244,834 $198,185 - ---------------------------------------------------------------------------------------------------------------------- Operating expenses Cost of product license 7,315 5,235 5,738 3,828 3,266 Cost of product support 17,820 13,758 11,166 9,694 9,634 Selling, general, and administrative 327,632 244,827 178,295 143,493 114,617 Research and development 67,264 53,548 42,274 33,530 28,951 Investment tax credits (6,690) (6,207) (14,880) (9,432) (3,683) - ---------------------------------------------------------------------------------------------------------------------- Total operating expenses 413,341 311,161 222,593 181,113 152,785 - ---------------------------------------------------------------------------------------------------------------------- Operating income 82,311 74,479 78,532 63,721 45,400 Interest expense (786) (718) (527) (481) (427) Interest income 12,386 7,454 6,430 5,340 4,524 - ---------------------------------------------------------------------------------------------------------------------- Income before taxes 93,911 81,215 84,435 68,580 49,497 Income tax provision 31,175 26,673 26,313 19,638 12,708 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 62,736 $ 54,542 $ 58,122 $ 48,942 $ 36,789 ====================================================================================================================== Net income per share Basic $0.72 $0.63 $0.66 $0.55 $0.43 Fully diluted $0.71 $0.62 $0.65 $0.54 $0.41 Weighted average number of shares (000s) Basic 87,324 85,972 87,416 88,414 86,298 Fully diluted 92,495 92,082 93,404 96,082 95,390 Balance Sheet Data (at end of period) Working capital $197,673 $166,455 $123,343 $112,846 $103,727 Total assets 511,791 396,098 311,235 246,334 189,748 Total debt 32 2,176 2,612 2,457 2,655 Stockholders' equity 300,720 224,306 175,196 147,305 115,912
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