EX-99 3 dex99.htm SELECTED CONSOLIDATED FINANCIAL STATEMENTS Prepared by R.R. Donnelley Financial -- Selected Consolidated Financial Statements
Exhibit 99
 
COGNOS INCORPORATED
 
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(US$000s except share amounts, CDN GAAP)
(Unaudited)
 
      
Three months ended May 31,
  
      
2002
       
2001
  
Revenue
                      
Product license
     
$
49,835
 
     
$
43,104
 
Product support
     
 
48,179
 
     
 
41,843
 
Services
     
 
22,116
 
     
 
23,069
 
      
    
Total revenue
     
 
120,130
 
     
 
108,016
 
      
    
Operating expenses
                      
Cost of product license
     
 
734
 
     
 
1,106
 
Cost of product support
     
 
4,413
 
     
 
4,294
 
Selling, general, and administrative
     
 
84,090
 
     
 
90,793
 
Research and development
     
 
19,698
 
     
 
19,422
 
Investment tax credits
     
 
(1,327
)
     
 
(1,271
)
Special charges
     
 
—
 
     
 
12,798
 
      
    
Total operating expenses
     
 
107,608
 
     
 
127,142
 
      
    
Operating income (loss)
     
 
12,522
 
     
 
(19,126
)
Interest expense
     
 
(46
)
     
 
(84
)
Interest income
     
 
1,601
 
     
 
2,812
 
      
    
Income (loss) before taxes
     
 
14,077
 
     
 
(16,398
)
Income tax provision (benefit)
     
 
5,323
 
     
 
(4,077
)
      
    
Net income (loss)
     
 
8,754
 
     
 
(12,321
)
Retained earnings at beginning of the period
     
 
164,144
 
     
 
175,946
 
Repurchase of shares
     
 
(9,315
)
     
 
—
 
      
    
Retained earnings at end of the period
     
$
163,583
 
     
$
163,625
 
      
    
Net income (loss) per share
                      
Basic
     
 
$0.10
 
     
 
$(0.14
)
      
    
Diluted
     
 
$0.10
 
     
 
     $(0.14
)
      
    
Weighted average number of shares (000s)
                      
Basic
     
 
88,000
 
     
 
88,023
 
      
    
Diluted
     
 
91,531
 
     
 
88,023
 
      
    
 
(See accompanying notes)

27

COGNOS INCORPORATED
 
CONSOLIDATED BALANCE SHEETS
(US$000s, CDN GAAP)
 
      
May 31,
2002
       
February 28,
2002
  
      
(Unaudited)
           
Assets
                      
Current assets
                      
Cash and cash equivalents
     
$
281,030
 
     
$
192,900
 
Short-term investments
     
 
57,229
 
     
 
121,629
 
Accounts receivable
     
 
80,210
 
     
 
114,059
 
Inventories
     
 
791
 
     
 
537
 
Prepaid expenses
     
 
7,126
 
     
 
6,765
 
Deferred tax assets
     
 
6,279
 
     
 
6,404
 
      
    
      
 
432,665
 
     
 
442,294
 
Fixed assets
     
 
61,914
 
     
 
59,008
 
Goodwill
     
 
15,270
 
     
 
15,230
 
Intangible assets
     
 
11,501
 
     
 
14,203
 
      
    
      
$
521,350
 
     
$
530,735
 
      
    
Liabilities
                      
Current liabilities
                      
Accounts payable
     
$
20,474
 
     
$
26,387
 
Accrued charges
     
 
33,069
 
     
 
34,210
 
Salaries, commissions, and related items
     
 
33,457
 
     
 
37,453
 
Income taxes payable
     
 
3,377
 
     
 
6,167
 
Deferred revenue
     
 
109,217
 
     
 
110,504
 
      
    
      
 
199,594
 
     
 
214,721
 
Long–term liabilities
     
 
9,192
 
     
 
9,131
 
Deferred income taxes
     
 
5,433
 
     
 
6,328
 
      
    
      
 
214,219
 
     
 
230,180
 
      
    
Stockholders’ Equity
                      
Capital stock
                      
Common shares            (May 31, 2002 – 87,904,533;
                February 28, 2002 – 87,997,220)
     
 
154,910
 
     
 
151,637
 
Retained earnings
     
 
163,583
 
     
 
164,144
 
Accumulated other comprehensive income
     
 
(11,362
)
     
 
(15,226
)
      
    
      
 
307,131
 
     
 
300,555
 
      
    
      
$
521,350
 
     
$
530,735
 
      
    
 
(See accompanying notes)

28

COGNOS INCORPORATED
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, CDN GAAP)
(Unaudited)
 
      
Three months ended
May 31,
  
      
2002
       
2001
  
Cash provided by (used in) operating activities
                      
Net income (loss)
     
$
8,754
 
     
$
(12,321
)
Non-cash items
                      
Depreciation and amortization
     
 
6,525
 
     
 
9,078
 
Amortization of deferred stock-based compensation
     
 
185
 
     
 
577
 
Amortization of other deferred compensation
     
 
148
 
     
 
666
 
Deferred income taxes
     
 
(1,221
)
     
 
(928
)
Loss on disposal of fixed assets
     
 
97
 
     
 
215
 
      
    
      
 
14,488
 
     
 
(2,713
)
Change in non-cash working capital
                      
Decrease in accounts receivable
     
 
36,590
 
     
 
46,163
 
Decrease (increase) in inventories
     
 
(229
)
     
 
153
 
Decrease (increase) in prepaid expenses
     
 
(18
)
     
 
1,499
 
Increase in income tax assets
     
 
—
 
     
 
(8,392
)
Decrease in accounts payable
     
 
(6,671
)
     
 
(11,388
)
Increase (decrease) in accrued charges
     
 
(2,068
)
     
 
6,158
 
Increase (decrease) in salaries, commissions, and related items
     
 
(5,106
)
     
 
819
 
Increase (decrease) in income taxes payable
     
 
(2,778
)
     
 
(16,131
)
Decrease in deferred revenue
     
 
(3,780
)
     
 
(7,460
)
      
    
      
 
30,428
 
     
 
8,708
 
      
    
Cash provided by (used in) investing activities
                      
Maturity of short-term investments
     
 
113,186
 
     
 
118,336
 
Purchase of short-term investments
     
 
(47,626
)
     
 
(60,606
)
Additions to fixed assets
     
 
(4,269
)
     
 
(6,813
)
      
    
      
 
61,291
 
     
 
50,917
 
      
    
Cash provided by (used in) financing activities
                      
Issue of common shares
     
 
3,765
 
     
 
3,569
 
Repurchase of shares
     
 
(9,992
)
     
 
—
 
Increase in (repayment of) long-term debt and long-term liabilities
     
 
(16
)
     
 
96
 
      
    
      
 
(6,243
)
     
 
3,665
 
      
    
Effect of exchange rate changes on cash
     
 
2,653
 
     
 
(808
)
      
    
Net increase in cash and cash equivalents
     
 
88,129
 
     
 
62,482
 
Cash and cash equivalents, beginning of period
     
 
192,901
 
     
 
115,293
 
      
    
Cash and cash equivalents, end of period
     
 
281,030
 
     
 
177,775
 
Short-term investments, end of period
     
 
57,229
 
     
 
61,652
 
      
    
Cash, cash equivalents, and short-term investments, end of period
     
$
338,259
 
     
$
239,427
 
      
    
 
(See accompanying notes)

29

COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
 
1.    Basis of Presentation
 
The accompanying unaudited 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”) with respect to the preparation of interim financial information. Accordingly, they do not include all information and footnotes as required in the preparation of annual consolidated financial statements. These unaudited condensed notes to the consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Annual Information Form for the fiscal year ended February 28, 2002.
 
The preparation of these unaudited consolidated financial statements 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 unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
 
All information is presented in thousands of U.S. dollars, unless otherwise stated.
 
2.    Accounting Changes
 
Business Combinations and Intangible Assets
 
Effective March 1, 2002 the Corporation adopted the Canadian Institute of Chartered Accountants Handbook Sections 1581, Business Combinations, and 3062, Goodwill and Other Intangible Assets (“Sections 1581 and 3062”), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the pronouncements. Other intangible assets will continue to be amortized over their useful lives.
 
Application of the non-amortization provisions of the pronouncements resulted in an increase in net income of $1,135,000 ($0.01 per share) for the quarter ended May 31, 2002 and is expected to result in an increase in net income of $4,000,000 ($0.04 per diluted share) for fiscal 2003. The Corporation performed the required impairment tests of goodwill and indefinite-lived intangible assets as of March 1, 2002. The effect of these tests was not material on the earnings and financial position of the Corporation.
 
Stock-Based Payments
 
Effective January 1, 2002 the Corporation adopted, the CICA issued Handbook Section 3870 Stock-Based Compensation and Other Stock-Based Payments (Section 3870). Section 3870 establishes standards for the recognition, measurement, and disclosure of stock-based

30

COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
 
compensation and other stock-based payments made in exchange for goods and services. It applies to transactions, including non-reciprocal transactions, in which an enterprise grants shares of common stock, stock options, or other equity instruments or incurs liabilities based on the price of common stock or other equity instruments. Section 3870 outlines a fair value based method of accounting for certain stock-based transactions. As permitted by Section 3870, the Corporation did not adopt the fair value based method of accounting for all employee stock-based transactions, and was not affected by the requirements to account for the fair value of certain other stock-based transactions. During the period ended May 31, 2002 there was no impact on the Corporation’s financial position, results of operations, or cash flows.
 
3.    Revenue Recognition
 
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.
 
4.    Goodwill
 
The balance of goodwill as at the date of implementation of Sections 1581 and 3062, March 1, 2002 (see Note 2), was $15,230,000. During the quarter ended May 31, 2002 there were additions to goodwill of $40,000 related to additional consideration paid to the former shareholders of Teijin Cognos Incorporated (TCI). This additional consideration was based on the net revenue of TCI during the quarter.

31

COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
 
During the quarter ended May 31, 2001 the Corporation recorded amortization expense of $1,089,000 related to the amortization of goodwill. If the non-amortization provision of Sections 1581 and 3062 had been in effect beginning March 1, 2001 net loss for the quarter ended May 31, 2001 would have been $11,232,000 and basic net loss per share and diluted net loss per share for the same period would have been $0.13.
 
5.    Intangible Assets
 
    
As at May 31, 2002
   
As at February 28, 2002
     
    
Cost
     
Accumulated
Amortization
   
Cost
     
Accumulated
Amortization
   
Amortization
Rate
    
($000s)
   
($000s)
     
Developed Technology
   
$
13,681
 
   
$
9,449
   
$
13,681
 
   
$
8,720
   
20%
In-process technology
   
 
38,400
 
   
 
31,642
   
 
38,400
 
   
 
29,817
   
20%
Deferred Consideration
   
 
8,945
 
   
 
8,434
   
 
8,945
 
   
 
8,286
   
Consideration Period
    
  
  
  
    
    
 
61,026
 
   
 
49,525
   
 
61,026
 
   
 
46,823
     
             
           
    
    
 
(49,525
)
          
 
(46,823
)
            
    
         
           
Net book value
   
$
11,501
 
          
$
14,203
 
            
    
         
           
 
Amortization of intangible assets was $2,702,000 and $3,271,000 in the quarters ended May 31, 2002 and May 31, 2001, respectively. The estimated amortization expense related to intangible assets is as follows ($000s):
 
2003 (Q2 to Q4)
   
$
5,469
2004
   
 
4,442
2005
   
 
1,007
2006
   
 
583
 
6.    Income Taxes
 
The Corporation provides for income taxes in its quarterly unaudited financial statements based on the estimated effective tax rate for the full fiscal year.

32

COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
 
7.    Net Income (loss) per Share
 
The reconciliation of the numerator and denominator for the calculation of basic and diluted net income (loss) per share is as follows: (000s except per share amounts)
 
      
Three months ended
May 31,
  
      
2002
     
2001
  
Basic Net Income (Loss) per Share
                    
Net income (loss)
     
$
8,754
     
$
(12,321
)
      
    
Weighted average number of shares outstanding
     
 
88,000
     
 
88,023
 
      
    
Basic net income (loss) per share
     
 
$0.10
     
 
$(0.14
)
      
    
Diluted Net Income (Loss) per Share
                    
Net income (loss)
     
$
8,754
     
$
(12,321
)
      
    
Weighted average number of shares outstanding
     
 
88,000
     
 
88,023
 
Dilutive effect of stock options
     
 
3,531
     
 
Nil
 
      
    
Adjusted weighted average number of shares outstanding
     
 
91,531
     
 
88,023
 
      
    
Diluted net income (loss) per share
     
 
$0.10
     
 
$(0.14
)
      
    
 
For the quarter ended May 31, 2001, the effect of converting stock options was antidilutive as a result of net losses.
 
8.    Comprehensive Income
 
For the quarter ended May 31, 2002, the Corporation had other comprehensive income of $3,864,000 compared to other comprehensive expense of $870,000 for the quarter ended May 31, 2000. These amounts relate to foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, net of unrealized net derivative gains (losses) which corresponds to the cumulative translation adjustment for Canadian GAAP purposes.
 
Comprehensive income (loss) includes net income (loss) and “other comprehensive income (loss).” Other comprehensive income (loss) refers to changes in the balances of revenues, expenses, gains, and losses that are recorded directly as a separate component of Stockholders’ Equity and excluded from net income.

33

COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
 
9.    Accounting for Stock Option Plans
 
As permitted by Section 3870, the Corporation did not adopt the fair value based method of accounting for all employee stock-based compensation. 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 the Corporation’s stock option and stock purchase plans.
 
Section 3870 requires disclosure of pro forma net income and earnings per share as if the Corporation had elected to adopt the fair value based accounting method. If the fair values of the options granted had been recognized as compensation expense on a straight line basis over the vesting period of the grant, stock-based compensation costs would have reduced net income by $6,256,000 and $6,241,000, in the quarters ended May 31, 2002 and 2001, respectively. Basic net income per share and diluted net income per share would have been reduced by $0.07 in each the quarters ended May 31, 2002 and 2001, 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 the quarters ended May 31, 2002 and 2001, respectively: risk-free interest rates of 3.7% and 4.4%, expected life of the options of 3.0 years and 2.9 years, expected volatility of 68% and 69%, and for both quarters, a dividend yield of zero.
 
10.    Segmented Information
 
The Corporation has one reportable segment—computer software products.
 
11.    Special Charges
 
In the quarter ended May 31, 2001 the Corporation recorded a pre-tax special charge to earnings of $12,798,000 in connection with a restructuring plan to align the Corporation’s cost structure and operations to the prevailing economic environment. These special charges primarily related to involuntary employee separations for approximately 300 employees, as well as asset write-downs, and accruals for net costs of abandoning leases and related write-down of leasehold improvements. The accrual was included on the balance sheet as accrued charges and salaries, commissions, and related items. During the fourth quarter of fiscal 2002 $2,589,000 of the accrual was reversed into income as a result of revisions to prior cost assumptions.
 
The employee separations impacted all functional groups and geographic regions of the Corporation. All employee separations under the restructuring plan were completed within fiscal 2002 and substantially all cash payments have been paid.

34

COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with CDN GAAP)
 
The following table displays the status of the restructuring reserve at May 31, 2002: (000s)
 
    
Employee Separations
       
Other Restructuring Costs
     
Total
  
Restructuring charges Q1 fiscal 2002
   
$
9,660
 
     
$
3,138
 
   
$
12,798
 
Cash payments
   
 
(7,203
)
     
 
(1,040
)
   
 
(8,243
)
Asset write-downs
   
 
—
 
     
 
(1,557
)
   
 
(1,557
)
Adjustments to accrual
   
 
(2,306
)
     
 
(283
)
   
 
(2,589
)
    
    
  
Balance as at February 28, 2002
   
 
151
 
     
 
258
 
   
 
409
 
Cash Payments
   
 
(119
)
     
 
(16
)
   
 
(135
)
Asset write-downs
   
 
—
 
     
 
—
 
   
 
—
 
    
    
  
Balance as at May 31, 2002
   
$
32
 
     
$
242
 
   
$
274
 
    
    
  
 
12.    Subsequent Events
 
On June 20, 2002, subsequent to the quarter end, the Corporation filed a registration statement with the United States Securities and Exchange Commission and a Canadian prospectus with Canadian securities regulators for a secondary offering of 4,500,000 common shares. All of the common shares in the offering are being sold by certain entities affiliated with Michael U. Potter. The Corporation will not receive any proceeds from the sale of the shares. In addition, the underwriters have an option to purchase up to an additional 675,000 common shares in the offering from the selling shareholders.

35