UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
[X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended November 30, 2004
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 (Address Of Principal Executive Offices) |
K1G 4K9 (Zip Code) |
(613) 738-1440
(Registrant’s
Telephone Number, Including Area Code)
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 whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).
YES X NO
The number of shares outstanding of the registrant’s only class of Common Stock as of December 15, 2004, was 91,003,345.
2
PART I — FINANCIAL INFORMATION
| Item 1. | Unaudited Consolidated Financial Statements |
COGNOS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(US$000s except share amounts, U.S. GAAP)
(Unaudited)
| Three months ended November 30, |
Nine months ended November 30, |
||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| Revenue | |||||||||
| Product license | $ 91,580 | $ 72,551 | $ 233,012 | $ 192,586 | |||||
| Product support | 81,031 | 68,676 | 231,974 | 198,965 | |||||
| Services | 37,755 | 31,000 | 104,219 | 89,420 | |||||
| Total revenue | 210,366 | 172,227 | 569,205 | 480,971 | |||||
| Cost of revenue | |||||||||
| Cost of product license | 578 | 1,121 | 1,745 | 3,338 | |||||
| Cost of product support | 8,508 | 7,051 | 22,757 | 20,793 | |||||
| Cost of services | 28,574 | 22,924 | 81,506 | 65,286 | |||||
| Total cost of revenue | 37,660 | 31,096 | 106,008 | 89,417 | |||||
| Gross margin | 172,706 | 141,131 | 463,197 | 391,554 | |||||
| Operating expenses | |||||||||
| Selling, general, and administrative | 102,206 | 85,959 | 282,945 | 247,692 | |||||
| Research and development | 26,987 | 22,265 | 76,694 | 67,273 | |||||
| Amortization of intangible assets | 1,672 | 2,116 | 4,413 | 6,212 | |||||
| Total operating expenses | 130,865 | 110,340 | 364,052 | 321,177 | |||||
| Operating income | 41,841 | 30,791 | 99,145 | 70,377 | |||||
| Interest expense | (22 | ) | (552 | ) | (101 | ) | (877 | ) | |
| Interest income | 1,909 | 975 | 5,094 | 3,562 | |||||
| Income before taxes | 43,728 | 31,214 | 104,138 | 73,062 | |||||
| Income tax provision | 9,183 | 6,966 | 21,869 | 18,265 | |||||
| Net income | $ 34,545 | $ 24,248 | $ 82,269 | $ 54,797 | |||||
| Net income per share | |||||||||
| Basic | $0.38 | $0.27 | $0.91 | $0.61 | |||||
| Diluted | $0.37 | $0.26 | $0.89 | $0.60 | |||||
| Weighted average number of shares (000s) | |||||||||
| Basic | 90,621 | 89,692 | 90,364 | 89,133 | |||||
| Diluted | 93,235 | 92,614 | 92,925 | 91,779 | |||||
(See accompanying notes)
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COGNOS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(US$000s, U.S. GAAP)
| November 30, 2004 |
February 29, 2004 | ||||
| Assets | (Unaudited) | (Note 1) | |||
| Current assets | |||||
| Cash and cash equivalents | $ 313,937 | $ 224,830 | |||
| Short-term investments | 125,430 | 163,411 | |||
| Accounts receivable | 142,763 | 152,859 | |||
| Prepaid expenses and other current assets | 14,832 | 16,668 | |||
| Deferred tax assets | 1,656 | 2,445 | |||
| 598,618 | 560,213 | ||||
| Fixed assets | 73,622 | 71,292 | |||
| Intangible assets | 28,846 | 23,643 | |||
| Goodwill | 222,883 | 172,323 | |||
| $ 923,969 | $ 827,471 | ||||
| Liabilities | |||||
| Current liabilities | |||||
| Accounts payable | $ 33,415 | $ 30,698 | |||
| Accrued charges | 30,524 | 25,483 | |||
| Salaries, commissions, and related items | 68,576 | 59,903 | |||
| Income taxes payable | 13,809 | 5,875 | |||
| Deferred revenue | 153,137 | 178,752 | |||
| 299,461 | 300,711 | ||||
| Deferred income taxes | 23,357 | 18,098 | |||
| 322,818 | 318,809 | ||||
| Stockholders’ Equity | |||||
| Capital stock | |||||
| Common shares and additional paid-in capital | |||||
| (November 30, 2004 – 90,825,717; February 29, 2004 – 89,902,895) | 237,540 | 206,499 | |||
| Treasury shares | |||||
| (November 30, 2004 – 46,375; February 29, 2004 – 43,500) | (1,199 | ) | (1,065 | ) | |
| Deferred stock-based compensation | (496 | ) | (730 | ) | |
| Retained earnings | 361,707 | 305,399 | |||
| Accumulated other comprehensive income (loss) | 3,599 | (1,441 | ) | ||
| 601,151 | 508,662 | ||||
| $ 923,969 | $ 827,471 | ||||
(See accompanying notes)
4
COGNOS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, U.S. GAAP)
(Unaudited)
| Three months ended November 30, | Nine months ended November 30, | ||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||
| Cash flows from operating activities | |||||||||
| Net income | $ 34,545 | $ 24,248 | $ 82,269 | $ 54,797 | |||||
| Non-cash items | |||||||||
| Depreciation and amortization | 7,658 | 7,252 | 20,660 | 21,718 | |||||
| Amortization of deferred stock-based compensation | 109 | 215 | 514 | 605 | |||||
| Amortization of other deferred compensation | -- | 44 | 7 | 168 | |||||
| Deferred income taxes | (1,329 | ) | 1,227 | 972 | 5,280 | ||||
| Loss on disposal of fixed assets | 89 | 76 | 213 | 539 | |||||
| 41,072 | 33,062 | 104,635 | 83,107 | ||||||
| Change in non-cash working capital | |||||||||
| Decrease (increase) in accounts receivable | (14,405 | ) | (5,716 | ) | 22,056 | 26,181 | |||
| Decrease (increase) in prepaid expenses and other current assets | 3,980 | 2,327 | 4,151 | (1,533 | ) | ||||
| Increase (decrease) in accounts payable | 3,864 | 837 | (3,121 | ) | (9,941 | ) | |||
| Decrease in accrued charges | (2,346 | ) | (4,610 | ) | (4,243 | ) | (11,682 | ) | |
| Increase (decrease) in salaries, commissions, and related items | 8,580 | 6,647 | 1,305 | (7,141 | ) | ||||
| Increase in income taxes payable | 7,630 | 3,967 | 7,586 | 5,126 | |||||
| Decrease in deferred revenue | (10,051 | ) | (7,314 | ) | (31,542 | ) | (22,665 | ) | |
| Net cash provided by operating activities | 38,324 | 29,200 | 100,827 | 61,452 | |||||
| Cash flows from investing activities | |||||||||
| Maturity of short-term investments | 75,897 | 88,663 | 320,571 | 205,473 | |||||
| Purchase of short-term investments | (125,460 | ) | (144,406 | ) | (282,421 | ) | (277,445 | ) | |
| Additions to fixed assets | (4,261 | ) | (5,784 | ) | (11,971 | ) | (17,282 | ) | |
| Additions to intangible assets | (242 | ) | (381 | ) | (771 | ) | (1,067 | ) | |
| Acquisition costs, net of cash and cash equivalents | (49,706 | ) | (254 | ) | (49,706 | ) | (484 | ) | |
| Net cash used in investing activities | (103,772 | ) | (62,162 | ) | (24,298 | ) | (90,805 | ) | |
| Cash flows from financing activities | |||||||||
| Issue of common shares | 13,548 | 8,896 | 32,820 | 27,005 | |||||
| Purchase of treasury shares | -- | -- | (335 | ) | (564 | ) | |||
| Repurchase of shares | (7,965 | ) | -- | (27,820 | ) | -- | |||
| Decrease in long-term debt and long-term liabilities | -- | -- | -- | (1,697 | ) | ||||
| Net cash provided by financing activities | 5,583 | 8,896 | 4,665 | 24,744 | |||||
| Effect of exchange rate changes on cash | 9,020 | 4,111 | 7,913 | 8,248 | |||||
| Net increase (decrease) in cash and cash equivalents | (50,845 | ) | (19,955 | ) | 89,107 | 3,639 | |||
| Cash and cash equivalents, beginning of period | 364,782 | 186,182 | 224,830 | 162,588 | |||||
| Cash and cash equivalents, end of period | 313,937 | 166,227 | 313,937 | 166,227 | |||||
| Short-term investments, end of period | 125,430 | 154,668 | 125,430 | 154,668 | |||||
| Cash, cash equivalents, and short-term investments, end of period | $ 439,367 | $ 320,895 | $ 439,367 | $ 320,895 | |||||
(See accompanying notes)
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| 1. | Basis of Presentation |
| The accompanying unaudited consolidated financial statements have been prepared by the Corporation in United States (“U.S.”) dollars and in accordance with generally accepted accounting principles (“GAAP”) in the U.S. with respect to interim financial statements, applied on a consistent basis. The consolidated balance sheet as at February 29, 2004 has been extracted from the audited consolidated financial statements at that date. These consolidated financial statements do not include all of the information and footnotes required for compliance with GAAP in the U.S. for annual financial statements. These unaudited condensed notes to the consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended February 29, 2004. |
| The preparation of these unaudited consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. In the opinion of management, these unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. |
| All information is presented in U.S. dollars, unless otherwise stated. Consolidated financial statements prepared in accordance with Canadian GAAP, in U.S. dollars, are made available to all shareholders, and filed with various regulatory authorities. |
| 2. | Revenue Recognition |
| The Corporation recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants. |
| Substantially all of the Corporation’s product license revenue is earned from licenses of off-the-shelf software requiring no customization. Revenue from these licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. If a license includes the right to return the product for refund or credit, revenue is deferred, until the right of return lapses. |
6
COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
| 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. |
| Services revenue from education, consulting, and other services is recognized at the time such services are rendered. Many of the Corporation’s sales include both software and services. Where the service is (1) not essential to the functionality of any other element of the transaction and (2) stated separately such that the total price of the arrangement is expected to vary as a result of the inclusion or exclusion of the service, the software element is accounted for separately from the service element. Where these two criteria are not met, the entire arrangement is accounted for using the percentage of completion method in accordance with SOP 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts. |
| For contracts with multiple obligations (e.g., delivered and undelivered products, support obligations, education, consulting, and other services), the Corporation allocates revenue to each element of the contract based on vendor specific objective evidence (“VSOE”) of the fair value of the element. VSOE of fair value is assigned using the residual method as outlined in SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. VSOE is the renewal rate for product support elements of a contract and, for service elements, is the normal pricing and discounting practices for those products when they are sold separately; the residual is then assigned to the license element of the contract. |
| 3. | Stock Based Compensation |
| The Corporation applies Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (“APB 25”) in accounting for its stock option, stock purchase, and restricted share unit plans. Where the exercise price of stock options is equal to the market price of the stock on the trading day preceding the date of grant, no compensation cost has been recognized in the financial statements for its stock option and stock purchase plans. However, for certain options assumed on the acquisition of Adaytum, Inc. (“Adaytum”), under purchase accounting methodology, compensation cost has been recognized in the financial statements. For restricted share units, the fair value of each unit is calculated at the date of grant. Compensation cost relating to the restricted share unit plan is recognized in the financial statements over the vesting period. |
7
COGNOS INCORPORATED
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
| If the fair values of the options granted had been recognized as compensation expense on a straight-line basis over the vesting period of the grant, stock-based compensation costs would have reduced net income, basic net income per share and diluted net income per share as indicated in the table below (000s, except per share amounts): |
| Three months ended November 30, |
Nine months ended November 30 |
|||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||
| Net income: | ||||||||||
| As reported | $34,545 | $ 24,248 | $82,269 | $ 54,797 | ||||||
| Add: Stock-based employee compensation included above | 109 | 215 | 514 | 605 | ||||||
| Less: Stock-based employee compensation using fair value | ||||||||||
| based method | (4,518 | ) | (5,435 | ) | (11,355 | ) | (17,498 | ) | ||
| Pro forma | $ 30,136 | $ 19,028 | $ 71,428 | $ 37,904 | ||||||
| Basic net income per share: | ||||||||||
| As reported | $0.38 | $0.27 | $0.91 | $0.61 | ||||||
| Add: Stock-based employee compensation included above | -- | -- | 0.01 | 0.01 | ||||||
| Less: Stock-based employee compensation using fair value based method |
(0.05 | ) | (0.06 | ) | (0.13 | ) | (0.19 | ) | ||
| Pro forma | $0.33 | $0.21 | $0.79 | $0.43 | ||||||
| Diluted net income per share: | ||||||||||
| As reported | $0.37 | $0.26 | $0.89 | $0.60 | ||||||
| Add: Stock-based employee compensation included above | -- | -- | 0.01 | -- | ||||||
| Less: Stock-based employee compensation using fair value based method | (0.05 | ) | (0.05 | ) | (0.13 | ) | (0.19 | ) | ||
| Pro forma | $0.32 | $0.21 | $0.77 | $0.41 | ||||||
| Weighted average number of shares: | ||||||||||
| Basic | 90,621 | 89,692 | 90,364 | 89,133 | ||||||
| Diluted | 93,235 | 92,614 | 92,925 | 91,779 | ||||||
8