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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, 2002
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 (Zip Code)
Offices)
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 3, 2002, was approximately US$1,894,800,731.
As of May 3, 2002, 87,925,788 Common Shares, without nominal or par value,
were outstanding.
continued....
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...................................................... 1-10
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 10-11
Item 4. Submission of Matters to a Vote of Security Holders........... 11-12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 13-14
Item 6. Selected Financial Data....................................... 15-16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16-39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 40
Item 8. Financial Statements and Supplementary Data................... 41-63
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 64
PART III
Item 10. Directors and Executive Officers of the Registrant............ 65-66
Item 11. Executive Compensation........................................ 67-71
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 72-73
Item 13. Certain Relationships and Related Transactions................ 73-74
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 75-77
Signatures.............................................................. 78
1
PART I
ITEM 1. BUSINESS
Overview
Cognos Incorporated, a Canadian corporation founded in 1969, is a leading
global provider of business intelligence software. Our solutions help
companies improve business performance by enabling effective decision-making
at all levels of the organization through the consistent analysis and
reporting of data from multiple perspectives. 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.
The strategic application of our business intelligence framework on an
enterprise scale addresses the need for corporate performance management. CPM
lets organizations measure execution against business strategy to ensure the
two are aligned at all levels across the enterprise. We provide a framework
for CPM that enables the complete management cycle with integrated software
for planning, budgeting, reporting, analysis and scorecarding.
Our integrated solution consists of our business intelligence, financial
management and analytical applications components. The component-based nature
of our solution allows customers to purchase functionality that fits their
particular needs and allows them to easily expand their capabilities as
required. We provide a common business intelligence framework that is capable
of collecting, organizing and combining information from all sources of data.
Our integrated solution provides a scalable and secure web-based environment
that is easy to use and deploy across the extended enterprise.
Products
Our integrated solution consists of our business intelligence, financial
management and analytical applications components.
Business Intelligence Components
Our BI Solution is comprised of highly scalable business intelligence servers
encapsulated by a robust layered architecture. We provide a single, common
software framework to deliver a highly integrated and expandable business
intelligence solution. The solution's architecture consists of the following
five layers:
. common portal;
. business intelligence servers;
. modeling and business rules;
. data mart creation; and
. centralized security administration service.
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These layers operate in a seamless, integrated environment due to their common
framework. The scalability of the 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 framework components 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 framework. This flexibility is
critical as a customer's requirements change and as we introduce new
capabilities to our solution.
Common Portal. The portal service is delivered through a single component,
Cognos Upfront, which can be customized to fit seamlessly in an existing
company 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 of the organization. It is
designed to ensure that each user views only the content they have 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 the user's content in a format that is familiar and appropriate to
that user. The portal also allows for sharing and collaboration of information
across many users.
Business Intelligence Servers. The business intelligence servers facilitate
all end-user business intelligence activities, including reporting, analysis,
query, scorecarding, dashboarding/visualizations and event detection for users
inside and outside an organization. Our business intelligence servers are
based on a suite of proprietary applications which offer:
Reporting. Our reporting server is packaged as the Impromptu Web Reports
server. Reports can be rendered and viewed by users in a variety of outputs
such as CSV, Excel, or Adobe PDF files. Customers can 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 analysis server is packaged as the Cognos PowerPlay Enterprise
Server which delivers on-line analytical process (OLAP) reporting and
analysis. PowerPlay's single application server architecture allows
organizations to deploy and manage on-line 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. 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.
Query. Our query server is packaged as the Cognos Query server. This server
presents users with a simple view of various databases, allowing them to
quickly and easily navigate corporate data. This engine allows users to run
predefined queries or build ad hoc queries. The software uses hyperlinks to
allow the users to jump from query to query to see related information, such
as customer details, sales orders or the detailed transactions.
Advanced Data Visualization. Our visualization server is packaged as Cognos
Visualizer server. This web-based server delivers advanced visualization
graphics, animation, mapping and scorecarding through
2
multi-metric dashboards, all fully-integrated with the analysis and reporting
servers. With Cognos Visualizer, users can construct balanced scorecard
systems to see complex business relationships and the interplay between
factors that drive a company's business.
Scorecarding. Our scorecarding is packaged as KPI Business Pack. Using the KPI
Business Pack, users can present key performance indicators in a scorecard
view. Indicators of the same or different business metric are aggregated
hierarchically using business rules, to give users a clear picture of the
whole business at each level.
Event Detection. Our event detection server is packaged as Cognos NoticeCast
server. With Cognos NoticeCast, users can monitor time critical content and
then receive a notification through email when the content changes. User can
monitor events such as changes in key performance indicators and operational
data, and updates to reports. Along with the notification, users receive
business intelligence content that gives context to decision-making.
Modeling and Business Rules. The modeling layer of our business intelligence
solution drives the consistency and adaptability of our solution. This layer
is packaged as Cognos Architect, which ensures that every manager has a common
foundation for evaluating business performance and making key business
decisions. This layer is designed to present information stored in corporate
databases in a consistent format. In addition, common business rules,
calculations and goals, such as the definitions of profitability, cashflow and
return on investment, are visible and shared by all users, which ensures that
every manager has a consistent view of the business. 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 BI Solution has the ability to create and manage a data mart from
an existing database. This data mart creation capability is packaged as Cognos
DecisionStream. 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 span the
extended enterprise, using shared and common business models to ensure
consistency and rapid adoption of change.
Centralized Security and Administration. The security server layer spans the
other four layers of our BI Solution 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. We also have centralized administration with
common utilities for installation, configuration and application deployment.
Cognos Finance Components
Cognos Finance is a complete financial analytical applications suite that
delivers a unified financial view of the entire organization, combining
budgeting, planning, forecasting, closings, and financial reporting into one
comprehensive and easy-to-use system. It enables finance professionals to
perform day-to-day
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financial processes in a timely, user-friendly manner, such as closing books
quickly for monthly, quarterly, and annual periods; making the budget process
of gathering and distributing budget information with all of the budgeting
stakeholders easy to administer; and integrating up-to-date, actual data with
user-supplied forecasts and the overall enterprise plan.
Cognos Analytic Application Components
An emerging trend in the market for business intelligence is the growing
demand for pre-packaged solutions that shorten time to implementation and
results. We have developed our Cognos Analytic Applications, an integrated set
of applications to make it easy for customers to combine appropriate
capabilities and to deploy them quickly.
Our Analytic Applications are flexible and extendible because they are built
upon the foundation of our BI Solution. Customers are able to change models,
create new reports and perform new analyses by using our business intelligence
servers in conjunction with our Analytic Applications. These applications
reduce the time, effort and cost required for an organization to gain a
competitive advantage from business intelligence and can help them realize
returns on investment from operational applications such as enterprise
resource planning, customer relationship management and supply chain
management implementations more quickly.
Application Development Tools
We have a legacy line of products based on application development products
marketed under the PowerHouse and Axiant names, which represented
approximately 8% of our total revenue for the year ended February 28, 2002.
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 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.
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 BI
Solution. These services include product support, education, and consulting
and other services.
Product support services
4
Product support services consist primarily of implementation resolution,
product configurations, documentation and support for product 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
Customers typically require specific training when they purchase our BI
Solution. In addition, we believe that customer education helps maximize the
potential of productivity gains from our products. We provide courses at
Cognos education centers and customer sites and also offer e-training for
customers through the use of "virtual classrooms" over the Internet. In
addition to varying levels or product training, we offer solutions based
education fully utilizing our knowledge leadership in business intelligence.
Consulting and Other Services
We offer a variety of product consulting services to our customers, such as
performance, 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 coordinating
development services, project management and education.
Customers
As of February 28, 2002, we had more than 19,000 customers located in over 120
countries around the world. Our primary customer focus is Global 2000
companies. We also license our products to a broad base of small and medium-
size businesses through our more than 3000 partners and resellers.
Although our BI Solution 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 of an organization
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.
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
5
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, 2002, we
employed approximately 289 sales representatives in 51 sales offices located
in 17 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 PriceWaterhouseCoopers, Deloitte-Touche and
Accenture; and
. application service providers such as Breakaway Solutions.
Telesales
We also use telesales representatives in certain areas to sell products and
services, primarily to our installed customer base.
Marketing and Technology Relationships
Cooperative marketing arrangements with hardware and other software vendors
provide us with additional visibility in the marketplace. These relationships
permit our sales force to work closely with the sales representatives of these
vendors, enabling prospective customers to evaluate software applications,
services and, in certain instances, hardware together as a complete solution.
Our marketing relationships can be classified into three broad categories:
Technology Partners
Our technology partners consist of industry-leading database, server, OLAP
server, Internet, enterprise application and connectivity technology
companies, including IBM, Microsoft, Teradata, a division of NCR, and Oracle.
Solutions Partners
Our solutions partners consist of third-party resellers, such as certified
resellers, original equipment manufacturers, value-added resellers and
geographic distributors, including: GEAC Solutions, Peregrine Systems, Onyx
and Tivoli. These solutions partners combine their applications and business
expertise with our products in order to market a more customized solution.
Services Partners
6
Our services partners consist of "Big 5" accounting firms, large consulting
firms, system integrators, information technology consulting organizations and
certified resellers, including: PwC Consulting, Accenture, Deloitte & Touche,
Cap Gemini, DMR, Anderson and KPMG. These companies implement business
intelligence and data warehousing solutions.
These technology and marketing relationships also provide us with the
opportunity to market our products together with packaged solutions. We
believe that solution-selling can shorten sales cycles and increase our sales
opportunities.
We also participate in cooperative technology and marketing programs with
hardware, software and database vendors, including the following program
roles: Compaq Solutions Alliance Partner, Hewlett-Packard Developer and
Solution Partner Program, IBM PartnerWorld for Developers member, Microsoft
Data Warehousing Alliance Partner, Oracle Partner Network, SAP Portals
Partner, PeopleSoft Open Analytics Partner, Siebel Premier Software Partner,
Plumtree Premier Partner, RIM Select Partner, Sun Developer Connection Partner
Program and Sybase Open Solutions CODE Partner.
Marketing
We recognize the importance of a complete and focused marketing effort. 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. This function is managed from our Burlington,
Massachusetts office, with the majority of staff in Ottawa, Canada. We
recently launched Cognos Series 7 the latest release of our BI solution to
raise Cognos product awareness with business executives of Global 2000
companies.
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, 2002, our research and development
staff consisted of 752 employees. Research and development is undertaken
primarily at our corporate headquarters and leased facilities in Ottawa,
Canada.
We had research and development costs of $74.6 million, $67.3 million and
$53.5 million in fiscal 2002, 2001 and 2000, respectively. Research and
development costs have continued to increase, in dollar terms, over the last
three fiscal years, but have remained relatively constant as a percentage of
total revenue.
Our business intelligence solution 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
7
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, vendor stability and
experience.
Due to the all-encompassing nature of our BI Solution, 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, and include BusinessObjects, Crystal Decisions,
and Oracle.
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. Competitors in this
area include Actuate and Brio Software.
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, and
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. These vendors include Oracle and Microsoft.
Analytical 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. Vendors who offer these tools with
their applications include Oracle, SAP and Informatica.
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 Microsoft. We expect our current
competitors and potentially new competitors to continue to improve the
8
performance of their products and to introduce new products or new
technologies that reduce costs and improve performance characteristics.
Employees
As of February 28, 2002, we had 2,598 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. None of our employees is
represented by a labor union.
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.
9
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 269,000. 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 135,000 square feet in Canada, 188,000 square feet in the United
States, 173,000 square feet in Europe, and 32,000 square feet in Asia/Pacific.
For financial information about geographic areas, see "Note 12. Segmented
Information" in Notes to Consolidated Financial Statements contained in Item
8.
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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 us by Business Objects S.A., for alleged
patent infringement. The complaint alleged that our Impromptu product infringes
Business Objects' United States Patent No. 5,555,403 entitled "Relational
Database Access System using Semantically Dynamic Objects" (the "'403 Patent").
Although we have denied and continue to deny all claims asserted in the action,
on May 24, 2002, subsequent to the balance sheet date, we reached an agreement
to settle that action. Under the terms of the settlement agreement between
ourselves and Business Objects, Business Objects has agreed to release us for
any infringement of the '403 Patent (and any amendments or related patents) and
to effect that release, has granted us a license under the '403 Patent for the
term of that patent or any amendments or related patents. Both parties agreed to
release the other from all claims, liabilities, costs or expenses that either
party hold against the other, on account of actions taken prior to the effective
date. The parties have also entered into a covenant not to sue or assert any
claim against the other for infringement of any patents for a period of 5 years
from the effective date. As consideration for the settlement agreement, we have
agreed to pay Business Objects the sum of $24,000,000 in the following
installments: $10,000,000 on or before June 10, 2002, and $1,750,000 every
quarter for the next eight quarters, commencing on July 1, 2002.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2002, 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 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.. 55 Chief Executive Officer, and Director
Robert G. Ashe.......... 43 President and Chief Operating Officer
Tom Manley.............. 43 Senior Vice President, Finance & Administration and
Chief Financial Officer
Peter Griffiths......... 38 Senior Vice President, Products
Terry Hall.............. 53 Senior Vice President
David Laverty........... 46 Senior Vice President, Global Marketing
Robert Minns............ 56 Senior Vice President, New Products
Alan Rottenberg......... 52 Senior Vice President, Strategy
Tony Sirianni........... 42 Senior Vice President, North American Field Operations
Ad Voogt................ 46 Senior Vice President, European Field Operations
Mr. Zambonini was appointed Chief Executive Officer of the Corporation in
September 1995. Mr. Zambonini has also served as President from January 1993
until April 2002 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.
11
Mr. Ashe was appointed President and Chief Operating Officer on April 10,
2002. Mr. Ashe previously served as Senior Vice President, Chief Corporate
Officer of the Corporation from May 2001 until April 2002; as Senior Vice
President, Worldwide Customer Services from July 1999 to May 2001; as Senior
Vice President, Products from May 1997 to July 1999; and as Senior Vice
President, Application Development Tools from April 1996 to May 1997. Mr. Ashe
joined the Corporation in September 1984.
Mr. Manley was appointed Senior Vice President, Finance & Administration and
Chief Financial Officer in August 2001. Prior to joining the Corporation Mr.
Manley was with Nortel Networks Corporation and served as Chief Financial
Officer, High Performance Optical Component Solutions from April 2001 to
August 2001; Senior Vice President, Finance and Vice President, Finance,
Carrier Packet Solutions from 1998 to April 2001; and Vice President, Finance,
Broadband Networks from 1997 to 1998.
Mr. Griffiths was appointed Senior Vice President, Products in April 2002. Mr.
Griffiths served as Senior Vice, President Research and Development from
February 2002 to April 2002; as Vice President, Research and Development from
January 2001 to February 2002; and as Vice President, Decision Platform from
June 2000 to January 2001. Prior to joining the Corporation in 1998 Mr.
Griffiths was Chief Executive Officer of Relational Matters, a company
acquired by the Corporation in 1998.
Mr. Laverty was appointed Senior Vice President, Global Marketing in February
2002. Prior to joining the Corporation Mr. Laverty was with Surebridge Inc. as
Vice President, Marketing from May 2000 until February 2002. He was with Lotus
Development Corporation (a subsidiary of IBM) from 1990 until 2000 in a number
of senior marketing roles, most recently as Vice President, Marketing--North
America from 1997 to 2000.
Mr. Hall became Senior Vice President in April 2002 after the announcement of
his intention to retire from the Corporation. Mr. Hall served as Senior Vice
President Operations and Chief Operating Officer from July 1999 to April 2002.
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, Strategy in April 2002.
Mr. Rottenberg served as Senior Vice President, e-Business Intelligence
Applications Unit from January 2000 to April 2002; 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.
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.
Mr. Voogt was appointed Senior Vice President, European Field Operations in
September 2001. He served as Vice President, European Operations from July
2000 to September 2001; and Vice President, Northern Europe from September
1995 to July 2000. Mr. Voogt joined the Corporation in 1986.
Officers are appointed annually by, and serve at the discretion of, the Board
of Directors.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 The Toronto Stock
Market Exchange
------------------ --------------------
High Low Volume High Low Volume
----- ----- ------ ------ ------ ------
(US$) (US$) (000s) (Cdn$) (Cdn$) (000s)
Fiscal 2001
First Quarter.......................... 41.13 23.31 31,208 60.50 34.00 14,300
Second Quarter......................... 46.50 35.38 24,729 67.00 52.60 11,639
Third Quarter.......................... 48.00 30.50 22,482 73.10 49.00 12,614
Fourth Quarter......................... 40.88 16.00 34,771 62.90 25.25 20,858
Fiscal 2002
First Quarter.......................... 24.77 13.94 24,600 38.30 22.00 20,492
Second Quarter......................... 19.22 13.71 11,777 29.48 21.05 13,135
Third Quarter.......................... 20.39 11.60 15,561 32.70 17.70 21,152
Fourth Quarter......................... 29.79 19.25 27,239 47.32 30.13 15,534
Fiscal 2003
First Quarter.......................... 30.75 22.13 28,539 48.62 35.15 14,255
(through April 19, 2002)
SHAREHOLDERS
As of April 19, 2002, there were approximately 1,950 registered shareholders.
13
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.
OTHER MATTERS AFFECTING THE CORPORATION'S COMMON SHARES
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. The agreement stipulated that Relational
Matters would 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 held in escrow by the
Corporation and released on the second (40%) and third (60%) anniversaries 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 agreement stipulated that the shareholders of
LEX2000 Inc. would 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, were held in escrow by the Corporation
and released equally on the second (50%) and third (50%) anniversaries 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 agreement stipulated that
the shareholders of NoticeCast Software Ltd. would receive approximately
$9,000,000 in cash on closing and would receive 148,468 shares of the
Corporation's common stock valued at approximately $4,820,000. The shares are
being held in escrow by the Corporation and will be released on the second
anniversary of the closing of the transaction.
On November 1, 2000, the Corporation completed the acquisition of Johnson &
Michaels, Inc. (JAMI), a leading provider of business intelligence consulting
services. The agreement stipulated that the shareholders of JAMI would receive
total cash consideration of approximately $3,915,000 over three years and
104,230 shares of the Corporation's common stock valued at $4,250,000 over the
same period. Approximately $2,345,000 has been paid and 60,583 shares have
been issued since closing; the remaining shares, all of which were issued, are
being held in escrow by the Corporation and will be released on the 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.
14
ITEM 6. SELECTED FINANCIAL DATA
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
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(US$000s except share amounts, U.S. GAAP)
Statement of Income Data
Revenue..................... $491,302 $495,652 $385,640 $301,125 $244,834
-------- -------- -------- -------- --------
Operating expenses
Cost of product license.... 3,609 7,315 5,235 5,738 3,828
Cost of product support.... 16,576 17,820 13,758 11,166 9,694
Selling, general, and
administrative............ 343,276 320,535 238,147 172,482 140,882
Research and development... 74,614 67,264 53,548 42,274 33,530
Acquired in-process
technology................ -- 3,000 -- 3,800 18,000
Special charges............ 33,440 -- -- -- --
-------- -------- -------- -------- --------
Total operating expenses.... 471,515 415,934 310,688 235,460 205,934
-------- -------- -------- -------- --------
Operating income............ 19,787 79,718 74,952 65,665 38,900
Interest expense............ (540) (786) (718) (527) (481)
Interest income............. 8,922 12,386 7,454 6,430 5,340
-------- -------- -------- -------- --------
Income before taxes......... 28,169 91,318 81,688 71,568 43,759
Income tax provision........ 8,761 27,058 22,873 13,134 11,117
-------- -------- -------- -------- --------
Net income.................. $ 19,408 $ 64,260 $ 58,815 $ 58,434 $ 32,642
======== ======== ======== ======== ========
Net income per share
Basic...................... $0.22 $0.74 $0.68 $0.67 $0.37
Diluted.................... $0.21 $0.70 $0.67 $0.66 $0.36
Net income per share, excluding the effect of the special charges and write-off
of acquired in-process technology *
Basic...................... $0.49 $0.77 $0.68 $0.71 $0.57
Diluted.................... $0.48 $0.73 $0.67 $0.69 $0.55
Weighted average number of
shares (000s)
Basic...................... 87,807 87,324 85,972 87,416 88,414
Diluted.................... 90,461 91,973 88,100 88,940 91,544
15
Balance Sheet Data (at end of
period)
Working capital.................. $227,573 $197,673 $166,455 $123,343 $112,846
Total assets..................... 522,152 495,592 377,803 286,259 220,279
Total debt....................... -- 32 2,176 2,612 2,457
Stockholders' equity............. 295,173 290,529 212,591 159,028 131,005
*This is a supplementary pro-forma measure included to enhance comparability
ITEM 7. 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 Incorporated is a leading global provider of business intelligence
software. Our solutions help companies improve business performance by enabling
effective decision-making at all levels of the organization through the
consistent analysis and reporting of data from multiple perspectives. 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 business intelligence solution (BI Solution) is uniquely positioned to take
advantage of the accelerating demand for business intelligence solutions for the
extended enterprise across all industries. Our BI Solution is an integrated
software foundation that is designed to meet our customers' end-to-end business
intelligence requirements, including reporting, analysis, query, scorecarding,
and visualization, in a secure, Web-based environment that is easy to use and
deploy across the extended enterprise. The information produced by our solution
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 scorecards, through a secure, personalized Web-based
interface. In addition, our event detection capability allows users to monitor
changes in time-critical business intelligence content. If change occurs, the
user receives a notification e-mail with relevant business intelligence content
giving them context for decision-making. We have also developed an integrated
set of analytic applications built upon the foundation of our BI Solution, which
provide "out-of-the-box" functionality for reporting and
16
analysis in functional areas such as finance, inventory, procurement, and
sales. Additionally, our Cognos Finance product enables finance professionals
to manage all core financial processes within one solution.
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 telephone and Web-based customer self-service product
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, 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 business intelligence
solutions made up 92% of our total revenues; application development tools
made up 8% of our total revenues. The percentage of revenue attributable to
application development tools has declined over the last seven 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.
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%, 70%, and 69% of our license revenues
for the years ended February 28, 2002 (fiscal 2002), February 28, 2001 (fiscal
2001), and February 29, 2000 (fiscal 2000), 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and
17
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to revenue recognition,
allowance for doubtful accounts, foreign exchange risk management,
investments, intangible assets, income taxes, and contingencies and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We apply the following critical accounting policies in the preparation of our
consolidated financial statements:
Revenue Recognition Policy--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.
Allowance for Doubtful Accounts--We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Foreign Currency Management--We operate internationally and therefore hold
assets and liabilities in foreign currencies. These operations are translated
to U.S. dollars at prevailing exchange rates as at period end in accordance
with SFAS 52. Future adverse changes in a currency could cause a reduction in
the carrying amount of these assets and liabilities that may not be reflected
in the current carrying value.
Investments--We record an impairment charge when we believe an asset has
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investment's current
carrying value, thereby possibly requiring an impairment charge in the future.
Deferred Taxes--We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to subsequently determine that we would be able to realize our
deferred tax assets in the future in excess of our net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Similarly, should we determine that we would not be
able to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset would reduce income in the period such
determination was made.
Impairment of Long-Lived Assets--We evaluate the recoverability of our
identifiable intangible assets, goodwill, and other long-lived assets in
accordance with SFAS No.121 that generally requires us to assess
18
these assets for recoverability when events or circumstances indicate a
potential impairment by estimating the undiscounted cash flows to be generated
from the use and ultimate disposition of these assets. On March 1, 2002 we
implemented SFAS No. 142 and SFAS 144. SFAS 142 requires us to use the fair
value method to assess our goodwill on at least an annual basis and the
undiscounted cash flows method will continue to be used for qualifying
identifiable intangible assets. SFAS 144 requires us to use a similar method
for other long-lived assets. The results of the initial assessment will have
no material effects on our balance sheet or earnings from operations; however,
subsequent impairment assessments could result in future impairment charges.
Any impairment charge would result in reduction in the carrying values of
these assets.
Contingencies and Litigation -- We evaluate contingent liabilities including
threatened or pending litigation in accordance with SFAS No. 5, Accounting for
Contingencies and record accruals when the outcome of these matters is deemed
probable and the liability is reasonably estimable. We make these assessments
based on the facts and circumstances and in some instances based in part on
the advice of outside legal counsel.
RESULTS OF OPERATIONS
Total revenue for fiscal 2002 was $491.3 million, which was 1% less than the
fiscal 2001 revenue of $495.7 million which, in turn, was 29% more than the
fiscal 2000 revenue of $385.6 million. Net income for fiscal 2002 was $19.4
million and diluted net income per share was $0.21, compared to fiscal 2001
net income of $64.3 million and diluted net income per share of $0.70, and net
income of $58.8 million and diluted net income per share of $0.67 for fiscal
2000.
The results for fiscal 2002 include special charges of $33.4 million. These
special charges include a net business restructuring charge of $10.2 million and
a $23.2 million charge for settlement of a patent litigation action.
As reported in the first quarter of fiscal 2002, we recorded a
restructuring charge of $12.8 million in connection with a restructuring plan
to align our cost structure and operations to the economic environment. In the
fourth quarter of fiscal 2002 we reversed $2.6 million of the restructuring
charge into income. The reversal was the result of revisions to prior cost
assumptions including salary continuance, office leases, and outplacement.
On May 24, 2002, subsequent to the balance sheet date, the Corporation and
Business Objects reached an agreement to settle the action filed by Business
Objects on May 5, 2000. As consideration for the settlement agreement, the
Corporation has agreed to pay Business Objects the sum of $24,000,000 in the
following installments: $10,000,000 on or before June 10, 2002, and $1,750,000
every quarter for the next eight quarters commencing on July 1, 2002. The
Corporation has recorded a special charge of $23,231,000, representing the
present value of these payments, in fiscal 2002, in accordance with FASB
Statement 5 Contingent Liabilities.
Excluding the effect of these items, net income and diluted net income per share
for fiscal 2002 would have been $43.4 million and $0.48, respectively. 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 any
unusual one-time charges. This pro-forma information is provided for greater
comparability regarding our on-going operating performance and is unlikely to
be comparable to any similar measures in the financial information filed by
other issuers.
Basic net income per share was $0.22, $0.74, and $0.68 in fiscal 2002, 2001,
and 2000, respectively. Excluding the effect of the special charges in
fiscal 2002 and the write-offs of in-process technology in fiscal 2001 basic
net income per share would have been $0.49 and $0.77, respectively.
We experienced decreases in net income as a percentage of revenue in each of
fiscal 2002, and 2001. In fiscal 2002, we maintained our investment in our
sales channels and product development through difficult economic times to
ensure that we were appropriately positioned for revenue growth and expanded
global market coverage as the economy recovered. During fiscal 2002 the
decrease in net income as a percentage of revenue was the result of increases
in both selling, general, and administration expenses, and research and
development expenses as well as the special charges for restructuring and
settlement of a patent litigation action. As a result of this restructuring and
excluding the effect of the patent litigation settlement which occurred
subsequent to the balance sheet date, our net income as a
19
percentage of revenue has increased sequentially through the last three
quarters of the fiscal year. 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 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
Percentage of Change
Revenue from Fiscal
------------------- ----------------
2001 to 2000 to
2002 2001 2000 2002 2001
----- ----- ----- ------- -------
Revenue................................... 100.0% 100.0% 100.0% (0.9)% 28.5%
----- ----- -----
Operating expenses
Cost of product license.................. 0.7 1.5 1.3 (50.7) 39.7
Cost of product support.................. 3.4 3.6 3.5 (7.0) 29.5
Selling, general, and administrative..... 69.9 64.6 61.8 7.1 34.6
Research and development................. 15.2 13.6 13.9 10.9 25.6
Acquired in-process technology........... 0.0 0.6 0.0 * *
Special charges.......................... 6.8 0.0 0.0 * *
----- ----- -----
Total operating expenses.................. 96.0 83.9 80.5 13.4 33.9
----- ----- -----
Operating income.......................... 4.0 16.1 19.5 (75.2) 6.4
Interest expense.......................... (0.1) (0.2) (0.2) (31.3) 9.5
Interest income........................... 1.8 2.5 1.9 (28.0) 66.2
----- ----- -----
Income before taxes....................... 5.7 18.4 21.2 (69.2) 11.8
Income tax provision...................... 1.8 5.4 5.9 (67.6) 18.3
----- ----- -----
Net income................................ 3.9% 13.0% 15.3% (69.8)% 9.3%
===== ===== =====
*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 special charges and write-offs of acquired in-process technology are
excluded. This pro-forma information is provided for greater comparability
regarding our on-going operating performance and is unlikely to be comparable
to any similar measures in the financial information filed by other issuers.
20
Percentage of Percentage Change
Revenue from Fiscal
------------------- ---------------------
2001 to 2000 to
2002 2001 2000 2002 2001
----- ----- ----- --------- --------
Revenue........................... 100.0% 100.0% 100.0% (0.9)% 28.5%
Total operating expenses.......... 89.2 83.3 80.5 6.1 32.9
Operating income.................. 10.8 16.7 19.5 (35.7) 10.4
Net income........................ 8.8% 13.6% 15.3% (35.4)% 14.4%
REVENUE
Our total revenue was $491.3 million for fiscal 2002 as compared to $495.7
million in fiscal 2001, and $385.6 million in fiscal 2000. Our total revenue
was derived primarily 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. In Q4 we released Cognos Series 7, a fully integrated
enterprise business intelligence solution. We feel enterprise wide deployment
of business intelligence products is the trend in the industry and believe it
will continue to increase as a percentage of our total revenue. Total revenue
for all business intelligence products was $453.1 million, $446.8 million, and
$328.0 million in fiscal 2002, 2001, and 2000, respectively, which resulted in
year-over-year increases of 1% and 36%, respectively. Sequentially, within the
year our total BI revenue has increased by 8%, 7%, and 17% in the quarters
following our restructuring in the first quarter of fiscal 2002. Total revenue
from our business intelligence products represented 92%, 90%, and 85% of total
revenue in fiscal 2002, 2001, and 2000, respectively.
Total revenue from our application development tools, PowerHouse(R) and
Axiant(R), was $38.2 million in fiscal 2002, compared to $48.9 million in
fiscal 2001, and $57.6 million in fiscal 2000, which resulted in year-over-
year decreases of 22% and 15%, respectively.
The change in total revenue from product license, product support, and
services in fiscal 2002 from fiscal 2001 was as follows: a 13% decrease in
product license revenue, a 19% increase in product support revenue, and a 2%
increase in services revenue. This compares to an increase for the same
categories for fiscal 2001 from fiscal 2000 as follows: 29%, 25%, and 33%,
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 2002, the percentage of total revenue from North
America, Europe, and Asia/Pacific was 62%, 31%, and 7%, respectively, compared
to 64%, 30%, and 6%, respectively, in fiscal 2001 and 61%, 32%, and 7%,
respectively, in fiscal 2000. In fiscal 2002, total revenue from North America
decreased from fiscal 2001 by 4% while total revenue from Europe, and
Asia/Pacific increased from fiscal 2001 by 5% and 7%, respectively, compared
to increases of 35%, 19%, and 13%, respectively, in fiscal 2001 from fiscal
2000. The decrease in revenue growth for fiscal 2002 as compared to fiscal
2001 is attributable to the decline in information technology spending and the
uncertain economic environment that existed through the majority of fiscal
2002. These conditions affected all of our principal markets and were
especially pronounced in the U.S., our largest market. This affected the sales
of our business intelligence products. Revenue growth in North America was
also slowed by a decline in service revenue as a result of the events of
September 11th. The disruption in the United States in the wake of these
events including air travel and business closures affected our ability to
21
offer services and our customers appetite to consume them. In addition to the
above, growth rates for Europe and Asia/Pacific were affected by foreign
exchange rate fluctuations. Excluding exchange rate fluctuations, revenue
growth for Europe would have been 9% for fiscal 2002 as compared to revenue
growth excluding exchange rate fluctuations of 32% for fiscal 2001. Revenue
growth for Asia/Pacific would have been 17% for fiscal 2002 as compared to
revenue growth excluding exchange rate fluctuations of 22% for fiscal 2001.
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, other foreign
currencies. The effect of foreign exchange rate fluctuations decreased the
overall revenue growth by two percentage points in fiscal 2002 from fiscal
2001 and by four percentage points in fiscal 2001 from fiscal 2000.
PRODUCT LICENSE REVENUE
Total product license revenue was $228.3 million, $262.8 million, and $203.3
million in fiscal 2002, 2001, and 2000, respectively, and accounted for 46% of
our revenue for fiscal 2002 as compared to 53% in both fiscal 2001 and 2000.
The decrease in product license revenue for fiscal 2002 was predominantly due
to the decline in information technology spending and the uncertain economic
environment that was prevalent throughout the fiscal year in our principal
markets and specifically in the U.S., which is our largest market. This
affected the sales of our business intelligence products; which were the main
reason for our increase in revenue in fiscal 2001. Product license revenue
from our business intelligence products was $219.2 million, $248.7 million,
and $186.6 million, in fiscal 2002, 2001, and 2000, respectively, which
resulted in a year-over-year decrease of 12% in fiscal 2002 compared to a
year-over-year increase of 33% for fiscal 2001. Sequentially, within the year,
our total BI license revenue has increased by 17%, 17%, and 29% in the three
quarters following our restructuring in the first quarter of fiscal 2002.
Product license revenue associated with the business intelligence products
contributed approximately 96%, 95%, and 92% of total product license revenue
in fiscal 2002, 2001, and 2000, respectively.
Product license revenue from our application development tools, PowerHouse and
Axiant, was $9.1 million, $14.0 million, and $16.7 million, in fiscal 2002,
2001, and 2000, 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 31% of
total product license revenue in fiscal 2002 compared to 30% in fiscal 2001
and 31% in fiscal 2000. Within our business intelligence market, product
license revenue from third-party channels was $66.5 million, compared to $75.7
million in fiscal 2001, and $57.3 million in fiscal 2000. Product license
revenue within this market from third-party channels represented 30% of our
business intelligence product license revenue in fiscal 2002 compared to 30%
in fiscal 2001, and 31% in fiscal 2000.
PRODUCT SUPPORT REVENUE
22
Product support revenue was $175.6 million, $147.6 million, and $118.1 million
in fiscal 2002, 2001, and 2000, respectively. Product support revenue
accounted for 36% of our total revenue for fiscal 2002, compared to 30% in
fiscal 2001 and 31% for fiscal 2000. 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
$147.5 million, $114.2 million, and $78.8 million in fiscal 2002, 2001, and
2000, respectively and constituted 84%, 77%, and 67% of the total product
support revenue in fiscal 2002, 2001, and 2000, respectively. In fiscal 2002,
total product support revenue from business intelligence products increased by
29% from fiscal 2001 and total product support revenue from application
development tools decreased by 16% over the same period. In fiscal 2001, total
product support revenue from the business intelligence products increased by
45% from fiscal 2000 and total product support revenue from the application
development tools decreased by 15% over the same period.
SERVICES REVENUE
Revenue from education, consulting, and other services was $87.4 million,
$85.3 million, and $64.3 million in fiscal 2002, 2001, and 2000, respectively.
Services revenue accounted for 18% of our total revenue for fiscal 2002,
compared to 17% in fiscal 2001 and 2000. The increase in services revenue in
fiscal 2002 was predominantly the result of an increase in consulting revenue
that offset decreases in education revenue associated with the business
intelligence products. Services revenue associated with the business
intelligence products contributed approximately 99%, 98%, and 97%, of total
service revenue in fiscal 2002, 2001, and 2000, respectively.
During fiscal 2002, 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. This
trend was slowed in fiscal 2002 by two factors. First the uncertain economic
environment in our principal markets caused an increased level of scrutiny by
customers with regard to enterprise scale software purchases. Second, the
unfortunate events of September 11th caused a disruption in the United States
including air travel and business closures. These and other factors that
occurred in the wake of these tragic events affected our ability to offer
services and our customer's appetite to consume them.
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 2002 were $3.6
million compared to $7.3 million in fiscal 2001 and $5.2 million in fiscal
2000. Product license costs represented 2% of product license revenue for
fiscal 2002, compared to 3% for fiscal 2001 and 2000. The decrease, in dollar
terms, in fiscal 2002 from fiscal 2001 is due to decreases in royalty costs;
material and distribution costs remained relatively consistent with fiscal
2001 levels. The increase in fiscal 2001 from fiscal 2000 was due to increases
in royalty costs; material and distribution costs remained relatively
consistent with fiscal 2000 levels.
23
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 $16.6 million, $17.8 million, and $13.8 million in fiscal
2002, 2001, and 2000, respectively. These costs represented 9% of product
support revenue in fiscal 2002 and 12% for fiscal 2001, and 2000. The
decrease, in dollar terms, in fiscal 2002 from fiscal 2001 was associated
predominantly with decreases in royalty costs. The increase in fiscal 2001
from fiscal 2000 was associated with telesupport and web support activities.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses were $343.3 million, $320.5
million, and $238.1 million in fiscal 2002, 2001, and 2000, respectively.
These costs were 70% of revenue in fiscal 2002 compared to 65% and 62% in
fiscal 2001 and 2000, respectively.
The increase in the selling, general, and administrative expenses in fiscal
2002 was primarily the result of increases in average staffing levels and
related compensation expenses. Contributing to a lesser extent to the increase
were increases in facilities costs, computer costs, communications,
professional fees, and the amortization of the technology acquired on
acquisitions of various companies over the last five fiscal years. During
fiscal 2002, we continued our investment in our sales channels, to focus on
opportunities for new revenue growth and expand global market coverage.
Despite the weaker economic climate and staff reductions as a result of the
restructuring charge in the first quarter of fiscal 2002, the average number
of employees within the selling, general, and administrative areas grew by 2%,
predominantly as the result of the retention of key sales and services staff.
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. 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 costs per employee increased 5% in fiscal 2002
and 4% in fiscal 2001.
RESEARCH AND DEVELOPMENT
Research and development costs were $74.6 million, $67.3 million, and $53.5
million, for fiscal 2002, 2001, and 2000, respectively. Research and
development costs have continued to increase, in dollar terms, over the last
several fiscal years. In fiscal 2002 these costs increased slightly as a
percentage of revenue to 15% after having remained constant at 14% of total
revenue for each of fiscal 2001 and 2000. The growth in fiscal 2002 was
primarily the result of increases associated with higher staffing levels in
this area and increases in services purchased externally as we maintained our
investment in product development through an uncertain economic landscape. The
growth in fiscal 2001 was also 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 increase in the average number of employees in this area
was 9% in fiscal 2002 from fiscal 2001 and was 15% in fiscal 2001 from fiscal
2000.
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
24
technological feasibility do not meet these criteria and are expensed as
incurred. Costs were not deferred in any of fiscal 2002, 2001, or 2000 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 2002, we made available a new version of all our core software
products with the release of Cognos Series 7. Cognos Series 7 is a fully
integrated enterprise business intelligence solution. In addition to new
versions of Cognos on-line analytical processing and reporting and query,
Cognos Series 7 also introduced enterprise event detection technology we
acquired in fiscal 2001 through our purchase of NoticeCast Software Ltd. This
technology monitors business intelligence content and automatically notifies
users of key events such as changes in performance indicators via their
personal computer, personal digital assistant or other wireless device,
enabling them to take immediate action. This release offers an enterprise
scale solution that will allow our customers to react rapidly to key business
events and changes in business performance, as they will be able to leverage
our business intelligence solution to quickly relate these events to overall
enterprise business performance.
During fiscal 2002 we continued to invest in R&D activities for our e-
Application packages including the release in the fourth quarter of Cognos
Analytic Applications for Oracle eBusiness Suite. This release includes
analysis of sales, general ledger, accounts receivable, accounts payable,
inventory, and procurement. We also continued to develop our Analytic
Applications for JD Edwards and plan to release Analytic Applications for SAP
in fiscal 2003. Cognos Analytic Applications are pre-built business analysis
and reporting content that extend the value of existing investments in
Enterprise Resource Planning (ERP) and other operational systems. The result
is a single, integrated, 360-degree view of business operations built upon a
common foundation for enterprise-wide business performance management.
In fiscal 2002, we also continued investment in our existing enterprise
business intelligence solution, including development and enhancement of
DecisionStream, a data mart creation component of the BI platform that unites
data from disparate sources and consolidates it into data marts. We also
released version 5.1 of Cognos Finance, a solution that delivers integrated
budgeting, forecasting, consolidation, and financial reporting and analysis in
one comprehensive system. We continued to develop and enhance Cognos
Visualizer, that allows for interactive multi-metric dashboards of key
performance indicators. We also continued to develop Cognos KPI that creates
scorecards of key performance indicators. This packaged application addresses
a key requirement for enterprise business performance measurement.
ACQUISITIONS/ACQUIRED IN-PROCESS TECHNOLOGY
Fiscal 2002
On February 28, 2002, we exercised our option to purchase the 50% of the
voting shares representing all of the outstanding voting interest in our
subsidiary in Japan, Teijin Cognos Incorporated (TCI). We felt that TCI could
more gainfully serve the Japanese market as a wholly owned subsidiary. We have
always consolidated the results of TCI as we have had effective control over
TCI. The former shareholders of TCI received approximately $2,193,000 in cash
upon completion of the purchase. We will also pay Teijin Limited the
accumulated minority interest in TCI of approximately $1,462,000 due March 30,
2002. We have also agreed to pay additional consideration at each period end
for the next eight quarters, based on the net revenue of TCI. This additional
purchase price has not been recorded as it cannot be reasonably estimated. The
purchase of TCI did not involve the purchase of any in-process research and
development. The acquisition was accounted for using the purchase method. The
results of operations of TCI are already consolidated, and thus pro forma
information has not been provided. Goodwill recorded as a
25
result of this transaction will not be amortized in accordance with SFAS 142
but will be tested for impairment as of March 1, 2002.
Fiscal 2001
During the second quarter of fiscal 2001, we acquired Powerteam OY, our
distributor in Finland. The agreement stipulated that the shareholders of
Powerteam OY would receive approximately $2,258,000 in cash in the two years
subsequent to the date of acquisition and could also receive additional cash
payments not to exceed $500,000 in the three years subsequent to acquisition.
We have paid $2,073,000 of the amount due to shareholders and will pay
$185,000 in fiscal 2003. We have paid $76,000 towards the contingent amount
and could also pay cash payments not to exceed $210,000 in fiscal 2003. 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 agreement stipulated that
the shareholders of NoticeCast Software Ltd. would receive approximately
$9,000,000 in cash on closing and would receive 148,468 shares of 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. For valuation purposes, the shares were appropriately discounted.
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 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. The first Cognos version of the software
was made available coincident with the Cognos Series 7 release during fiscal
2002. At the time of acquisition, we estimated that development efforts to
complete this version of the software would 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 $3,000,000. 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 commenced in fiscal 2002.
With the integration of the NoticeCast technology into the Cognos solution,
the average price of our products was expected to increase slightly. However,
we have not experienced, and 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 at the time of acquisition were as follows:
. We might be unable to integrate the project with our platform on a
timely basis.
. We might be unable to scale the project to align it with our platform.
26
. We might 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 was not completed on schedule, our competition could have
introduced similar products before us. This could have resulted 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 agreement stipulated that the shareholders of JAMI
would receive total cash consideration of approximately $3,915,000 over three
years and 104,230 shares of our common stock valued at $4,250,000 over the
same period. Approximately $2,345,000 has been paid and 60,583 shares have
been issued; we held the remaining shares, all of which were issued, in escrow
for release 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. 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
agreement stipulated that the shareholders of Information Tools AG were to
receive total consideration of approximately $657,000, of which $458,000 was
received in cash during fiscal 2000. The remainder of the consideration
($199,000) was payable equally on the first and second anniversaries of the
closing of the transaction. An amount, not to exceed $500,000, could also be
paid in contingent consideration. Of all those amounts, approximately $60,000
was paid in fiscal 2002 relating to fiscal 2001 results and approximately
$120,000 was paid in fiscal 2001 relating to fiscal 2000 results.
Approximately $235,000 was paid in fiscal 2003 based on 2002 operating
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.
SPECIAL CHARGES
BUSINESS RESTRUCTURING CHARGE
During the quarter ended May 31, 2001, we implemented a restructuring plan to
align our cost structure and operations to the prevailing economic
environment, resulting in a pre-tax business restructuring charge to earnings
of $12.8 million. Business restructuring 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 employee separations impacted all
functional groups and geographic regions.
27
Cost savings as a result of the restructuring plan affect compensation,
amortization, and lease expenses. This decrease in costs primarily impacts
selling, general, and administration expense and research and development
expense. The expense reductions took effect in the second quarter of this
fiscal year.
Cash outlays of $8.2 million and fixed asset write-offs of $1.6 million
related to the restructuring activities were charged against the accrual in
fiscal 2002. In the fourth quarter of fiscal 2002, $2.6 million of the
original accrual was reversed into income. The reversal was the result of
revisions to prior cost assumptions including: subleases of closed sales
offices, reversal of amounts accrued for salary and benefits as favorable
arbitration rulings were pronounced and refinement of salary continuance
amounts based on actual outcomes, and individual outplacement costs as many
individuals refused the services and more affordable group alternatives were
found. The balance of the charge will be paid early in fiscal 2003.
Patent Litigation Settlement
On May 5, 2000, an action was filed in the United States District Court for the
Northern District of California against us 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 "'403 Patent").
Although we have denied and continue to deny all claims asserted in the action,
on May 24, 2002, subsequent to the balance sheet date, we reached an agreement
to settle that action. Under the terms of the settlement agreement between
ourselves and Business Objects, Business Objects has agreed to release us for
any infringement of the '403 Patent. Both parties also agreed to release the
other from all claims, liabilities, costs or expenses that either party hold
against the other, on account of actions taken prior to the effective date of
the agreement. The parties have also entered into a covenant not to sue or
assert any claim against each other for infringement of any patents for a period
of 5 years from the effective date. As consideration for the settlement
agreement, we have agreed to pay Business Objects the sum of $24,000,000 in the
following installments: $10,000,000 on or before June 10, 2002, and $1,750,000
every quarter for the next eight quarters commencing on July 1, 2002. We have
recorded a special charge of $23,231,000 in fiscal 2002, representing the
present value of this payment stream discounted using an interest rate of 6%, in
accordance with FASB Statement 5 Contingent Liabilities. The after-tax effect of
this charge is $16,827,000. The remaining balance of $769,000 represents the
interest to be recognized over the payment term. The principal amount is
recorded in accrued charges and long-term liabilities on the balance sheet.
INTEREST INCOME AND EXPENSE
Interest income was earned on our cash, cash equivalents, and short-term
investments and interest expense related primarily to interest incurred on
various transactions occurring throughout the year. Net interest income was
$8.4 million, $11.6 million, and $6.7 million in fiscal 2002, 2001, and 2000,
respectively. The decrease during fiscal 2002 was the result of a decrease in
the average effective interest rates earned on investments offset by an
increase in the average size of the investment portfolio. This decrease was
amplified by the impact of unfavorable exchange rate fluctuations. The
increase in 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. This increase was offset slightly by the impact
of unfavorable exchange rate fluctuations.
TAX EXPENSE
Our tax rate is affected by the relative profitability of our operations in
various geographic regions. In fiscal 2002, we recorded an income tax
provision of $8.8 million on $28.2 million of pre-tax income, representing an
effective income tax rate of 31%. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2002, we held $314.5 million in cash, cash equivalents, and
short-term investments, an increase of $80.0 million from February 28, 2001.
This increase was a result of both operating profits for the year of $19.8
million and a substantial decrease in accounts receivable as we increased our
billing and collection efforts. 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 (U.S.$9.3) million, subject to certain
covenants. As of February 28, 2002 and 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 (U.S.$81.0) million outstanding at any one time.
As of February 28, 2002, we had a total of $9.1 million of long-term
liabilities, an increase of $7.6 million from February 28, 2001. The increase
was the result of the long-term portion of the patent litigation settlement. As
of February 28, 2002, working capital was $227.6 million, an increase of $29.9
million from February 28, 2001, primarily because of higher levels of cash, cash
equivalents, and short-term investments which were partially offset
28
by a decrease in accounts receivable and increases in accrued charges and
deferred revenue. During fiscal 2002 we used $29.0 million in cash for share
repurchases and $2.2 million for acquisitions.
We do not enter into off-balance sheet financing as a matter of practice
except for the use of operating leases for office space, computer equipment,
and vehicles. In accordance with GAAP, neither the lease liability nor the
underlying asset is carried on the balance sheet, as the terms of the leases
do not meet the thresholds for capitalization. Annual payments on these leases
are approximately $16.0 million. These amounts are disclosed in Note 6 of the
Notes to the Consolidated Financial Statements.
Cash provided by operating activities (after changes in non-cash working
capital items) for fiscal 2002 was $103.7 million, an increase of $4.7
million compared to the prior fiscal year. This fluctuation was due to a net
decrease in non-cash working capital items as compared to fiscal 2001. This
was offset by a decrease in net income after adjustments for depreciation,
amortization, and other non-cash items.
Cash used in investing activities was $20.0 million for fiscal 2002, a
decrease in investment of $99.2 million compared to the prior fiscal year. The
majority of the fluctuation stems from a decrease in net investment in short-
term investments and decreases in fixed asset additions and acquisition costs.
In fiscal 2002, we spent $5.2 million related to the activity in short-term
investments compared to $56.6 million (both net of maturities) in fiscal 2001.
In addition, we spent $2.2 million in fiscal 2002 on acquisitions, compared to
$11.4 million in fiscal 2001. (See Note 5 of the Notes to the Consolidated
Financial Statements.) The decrease 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 and a reduction in spending in
fiscal 2002 due to the weakened economic environment prevalent through the
majority of the year. We invested approximately $17.8 million during fiscal
2001 in the expansion of our headquarters. This headquarter expansion was
substantially complete in December 2000 and the building was fully occupied by
the end of fiscal 2001. No costs relating to the construction of our
headquarters were incurred in fiscal 2002.
Cash used in financing activities was $5.1 million for fiscal 2002, compared
to cash provided of $4.5 million for financing activities during fiscal 2001.
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 1,436,000 common shares for consideration of $15.1
million during fiscal 2002, compared to 1,889,000 common shares for
consideration of $20.6 million during fiscal 2001. 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 2002 we
repurchased 1,616,000 shares at a cost of $29.0 million, compared to 580,000
shares at a cost of $14.0 million in fiscal 2001.
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 2002 were part of two open market share
repurchase programs. The program adopted in October 2000 expired on October 8,
2001. Under this program we repurchased 1,344,500 of our shares for $24.9
million including repurchases of 816,000 shares for $12.9 million in fiscal
2002; all repurchased shares were cancelled. In October 2001, we adopted a new
program that enables us to purchase up to 4,400,943 common shares (not more
than 5% of those issued and outstanding) between October 9, 2001 and October
8, 2002. Under the current program we have repurchased 800,257 shares for
$16.1 million during fiscal 2002; 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 or the Toronto Stock Exchange 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.)
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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 Swiss franc, the Japanese yen, 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,
2002, we had foreign exchange forward contracts, with maturity dates ranging
from March 28, 2002 to July 25, 2002, to exchange various foreign currencies
in the amount of $18.7 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 believe that our current cash, cash equivalents, and short-term investments
balance and funds generated from operations, if any, will be adequate to
finance operations and meet any capital requirements through fiscal 2003.
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 was fully implemented
on January 1, 2002. 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 was introduced in stages over the course of a 3 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 earlier upgraded these systems to a version that enables us,
together with certain process changes and modifications provided by the
application vendor to their supported customers, to handle the initial
requirements for transactions involving the euro. In the first quarter of
fiscal 2002 we reassessed the need to further upgrade our financial
applications system to handle the full requirements of the euro. We have
experienced no significant impact and believe our current procedures and the
modifications which have been made to the financial application system are
adequate to handle the adoption of the euro, however, we continue to identify
and, where necessary, 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
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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, 2002, 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 Swiss franc, the Japanese yen, and the Australian dollar.
Sensitivity analysis is used to measure our foreign currency exchange rate
risk. As of February 28, 2002, 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,
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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 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<