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