<PAGE>
COGNOS INCORPORATED
This Compliance Document provides information to the shareholders of Cognos
Incorporated in advance of its fiscal 2000 Annual Meeting of Shareholders. The
documentation consists of:
<TABLE>
<S> <C>
A. The Notice of Meeting and Proxy Statement (with Proxy Card enclosed) for Page (i) and 1
the Corporation's Annual Meeting of Shareholders to be held June 21, 2000
B. Consolidated Financial Information in accordance with Canadian generally Page 24
accepted accounting principles for the Corporation's fiscal year ended
February 29, 2000 (supplemental to the Corporation's 2000 Annual Report)
</TABLE>
<PAGE>
[LOGO]
A. NOTICE OF MEETING & PROXY STATEMENT
3755 Riverside Drive, P.O. Box 9707, Station T, Ottawa, Ontario, Canada, K1G 4K9
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN THAT the Annual Meeting ("Meeting") of Shareholders of
Cognos Incorporated ("Corporation") will be held at the Tudor Reception Hall,
3750 Bowesville Road, Ottawa, Ontario, Canada, on Wednesday, June 21, 2000, at
3:30 p.m., for the following purposes:
l. to receive the consolidated financial statements of the Corporation in
accordance with both United States and Canadian generally accepted
accounting principles for the fiscal year ended February 29, 2000, and the
reports of the auditors thereon,
2. to elect directors for the ensuing year,
3. to appoint auditors and authorize the directors to fix their remuneration,
4. to transact such other business as may properly come before the meeting and
any adjournment thereof.
This Notice is accompanied by a form of proxy; a Proxy Statement; the Annual
Report of the Corporation, including financial information in accordance with
United States (U.S.) generally accepted accounting principles; and financial
information in accordance with Canadian generally accepted accounting principles
for the fiscal year ended February 29, 2000. Shareholders of record at the close
of business on May 5, 2000 are entitled to receive notice of the Meeting. They
may vote at the Meeting unless their shares are transferred and the transferee:
(a) produces a certificate(s) representing the transferred shares, or otherwise
establishes ownership of the transferred shares, and (b) has demanded in
writing, at least ten days before the Meeting, to be included on the list of the
Corporation's shareholders entitled to vote at the Meeting.
DATED at Ottawa this 25th day of May, 2000.
By Order of the Board of Directors
/s/ James M. Tory
James M. Tory
Chairman of the Board
- --------------------------------------------------------------------------------
If you cannot attend the meeting in person, please complete, sign, date, and
return the enclosed form of proxy in the envelope provided as soon as possible
in order to ensure that your shares are represented at the Meeting.
- --------------------------------------------------------------------------------
i
<PAGE>
PROXY STATEMENT
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Solicitation of Proxies........................................................................ 1
Appointment and Revocation of Proxies.......................................................... 1
Voting of Proxies.............................................................................. 2
Shareholder Proposals.......................................................................... 3
Voting Shares and Principal Holders Thereof.................................................... 3
Directors...................................................................................... 3
Security Ownership of Management and Principal Holders......................................... 9
Executive Compensation......................................................................... 11
Appointment of Auditors........................................................................ 17
Other Matters.................................................................................. 18
Expenses and Solicitation...................................................................... 18
Approval by Board of Directors................................................................. 18
Annex A - Alignment with TSE Corporate Governance Guidelines.................................. 19
Annex B - Alignment with SEC Audit Committee Rules............................................ 23
</TABLE>
ii
<PAGE>
[LOGO OF COGNOS]
3755 Riverside Drive, Ottawa, Ontario, Canada, K1G 4K9
PROXY STATEMENT
(First mailed to Shareholders on May 26, 2000)
Solicitation of Proxies
The information contained in this Proxy Statement is furnished in connection
with the solicitation by the management of Cognos Incorporated ("Corporation")
of proxies to be used at the Annual Meeting of Shareholders ("Meeting") of the
Corporation to be held on June 21, 2000, at 3:30 p.m. at the Tudor Reception
Hall, 3750 Bowesville Road, Ottawa, Ontario, Canada, or at any adjournment of
the Meeting. The solicitation of proxies will be made primarily by mail but
proxies may also be solicited directly by officers of the Corporation. The costs
of solicitation will be borne by the Corporation.
The specific purposes of the meeting are set out in the Notice of Meeting
accompanying this Proxy Statement.
The information contained in this Proxy Statement is given as at May 25, 2000,
except where otherwise noted.
All share and per-share amounts in this Proxy Statement have been adjusted for
the two-for-one stock split approved by the Board of Directors on April 6, 2000,
which was paid by way of dividend on April 27, 2000 to shareholders of record on
April 20, 2000.
All dollar amounts in this Proxy Statement are in United States dollars unless
otherwise stated. Foreign currency amounts have been translated into United
States dollars using the appropriate exchange rates for United States currency,
as reported by the Bank of Canada.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named in the enclosed form of proxy ("Proxy Form") are either
directors or officers of the Corporation. Every shareholder has the right to
appoint another person (who need not be a shareholder) to represent the
shareholder at the Meeting and may do so either by inserting that person's name
in the blank space provided in the Proxy Form or by completing another proper
form of proxy. In either case, to be valid, the completed proxy must be
delivered to: (a) the Corporation's transfer agent, Montreal Trust Company of
Canada, 151 Front Street West, 8th Floor, Toronto, Ontario, Canada, M5J 2N1, in
the addressed envelope accompanying this Proxy Statement, or (b) to the
Secretary of the Corporation, no later than forty-eight hours preceding the
Meeting or any adjournment of the Meeting.
Only registered holders of common shares of the Corporation, or the person they
appoint as their proxies, are permitted to attend and vote at the Meeting.
However, in many cases, common shares of the Corporation beneficially owned by a
holder (a "Non-Registered Holder") are registered either (a) in the name of an
intermediary ("Intermediary") that the Non-Registered Holder deals with in
respect of the shares; or (b) in the name of a clearing agency.
1
<PAGE>
In accordance with the requirements of National Policy Statement No. 41 of the
Canadian Securities Administrators, the Corporation has distributed copies of
the Notice of Meeting, this Proxy Statement, the Proxy Form and the 2000 annual
report (which includes management's discussion and analysis) (collectively, the
"Meeting materials") to the clearing agencies and Intermediaries for
distribution to Non-Registered Holders who have not waived the right to receive
them.
Generally, Non-Registered Holders who have not waived the right to receive
Meeting materials will either (c) be given a voting instruction form which must
------
be completed and signed by the Non-Registered Holder in accordance with the
instruction on the form (which may, in some cases, permit the completion of the
voting instruction form by telephone), or (d) be given a proxy which has already
been signed by the Intermediary (typically by a facsimile, stamped signature),
and which is otherwise uncompleted except that it is restricted as to the number
of shares beneficially owned by the Non-Registered Holder. This latter form of
proxy need not be signed by the Non-Registered Holder. The Non-Registered Holder
who wishes to submit a proxy should properly complete the form of proxy and
deposit it with Montreal Trust Company of Canada, 151 Front Street West, 8th
Floor, Toronto, Ontario, Canada M5J 2N1 as described above.
These procedures permit Non-Registered Holders to direct the voting of the
shares they beneficially own. If a Non-Registered Holder who receives either a
proxy or a voting instruction form wishes to attend and vote at the Meeting in
--
person (or have another person attend and vote on behalf of the Non-Registered
- ------
Holder), the Non-Registered Holder should strike out the names of the persons
named in the form of proxy and insert the Non-Registered Holder's (or such other
person's) name in the blank space provided or, in the case of a voting
instruction form, follow the corresponding directions on the form. In either
case, Non-Registered Holders should carefully follow the instructions of their
Intermediaries.
A registered shareholder who has given a proxy may revoke the proxy by:
(e) completing and signing a proxy bearing a later date and depositing it
with Montreal Trust Company of Canada as described above; or
(f) depositing an instrument in writing executed by the shareholder or by
the shareholder's attorney authorized in writing: (i) at the
registered offices of the Corporation at any time up to and including
the last business day preceding the day of the Meeting, or any
adjournment of the Meeting, at which the proxy is to be used, or (ii)
with the chairman of the Meeting prior to the commencement of the
Meeting on the day of the Meeting or any adjournment of the Meeting;
or
(g) in any other manner permitted by law.
A Non-Registered Holder may revoke a voting instruction form or a waiver of the
right to receive Meeting materials and to vote given to an Intermediary at any
time by written notice to the Intermediary, except that an Intermediary is not
required to act on a revocation of a voting instruction form or of a waiver of
the right to receive materials and to vote that is not received by the
Intermediary at least seven days prior to the Meeting.
VOTING OF PROXIES
The persons named in the Proxy Form will vote the shares in respect of which
they are appointed proxy in accordance with the direction of the shareholder
appointing them. In the absence of any direction, the shares will be voted FOR
the election of directors and FOR the appointment of
2
<PAGE>
auditors and the authorization of the directors to fix their remuneration, as
described in this Proxy Statement.
The management of the Corporation knows of no amendment to the matters referred
to in the Notice of Meeting or of any other business that will be presented to
the Meeting. If any amendment or other business is properly brought before the
Meeting, the persons named in the Proxy Form are given discretionary authority
to vote on any amendment or on any other business in accordance with their
judgment.
Shareholder Proposals
Proposals by shareholders intended to be presented at the next Annual Meeting of
Shareholders, and considered by management, must be received by the Corporation,
c/o The Secretary, Cognos Incorporated, 3755 Riverside Drive, P. O. Box 9707,
Station T, Ottawa, Ontario, Canada, K1G 4K9, no later than March 30, 2001, for
inclusion in the Corporation's Proxy Statement and form of proxy relating to
that meeting.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Corporation consists of an unlimited number of
common shares ("shares") of which 87,366,527 shares were issued and outstanding
as of May 5, 2000 ("Record Date").
Only shareholders of record at the close of business on the Record Date are
entitled to receive notice of, attend and vote at the Meeting. They may vote at
the Meeting unless their shares are transferred and the transferee: (a) produces
a certificate(s) representing the transferred shares, or otherwise establishes
ownership of the transferred shares, and (b) has demanded in writing, at least
ten days before the Meeting, to be included on the list of the Corporation's
shareholders entitled to vote at the Meeting. Shareholders are entitled to one
vote for each share registered in their respective names.
The principal shareholders of the Corporation are set out in the table appearing
in "SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL HOLDERS".
Directors will be elected and auditors will be appointed by a majority of shares
represented and entitled to vote at the Meeting.
DIRECTORS
Election of Directors
The Articles of the Corporation provide for a Board of Directors ("Board") of
not less than three and not more than twelve directors to be elected annually.
The number of directors to be elected at the Meeting is eight. Each director
elected will hold office until the next annual meeting or until a successor is
duly elected, or appointed, unless the position is earlier vacated.
The persons named in the Proxy Form will (unless authority to vote is withheld)
vote in favor of the election of the eight nominees listed below, or if one of
those nominees is unable to serve, or for good cause will not serve (an event
that management has no reason to believe will occur), the persons named in the
Proxy Form reserve the right to fix the number of directors at less than eight
or to vote for a substitute at their discretion.
The following table sets out the name and age of each person nominated for
election as a director; the period of service as a director; the principal
occupation, business or employment of the nominee during the
3
<PAGE>
last five years; all other positions with the Corporation (or its significant
subsidiaries) now held by the nominee, if any; the name of any publicly-traded
corporation of which the nominee is a director, and the number of common shares
beneficially owned or over which control or direction is exercised and the
number of deferred share units held by each of them.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Name and Age Director Shares Beneficially Deferred Share
Principal Occupation Since Owned or Controlled Units Held
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John E. Caldwell (50) + (S) 2000 800 Nil
Private Investor since October 1999. President
and Chief Executive Officer, CAE Inc., a
provider of civil and military flight simulation
and control systems and other advanced
technologies for the aerospace, defence and
forestry sectors, from June 1993 to October
1999. Director of Stelco Inc.
- ------------------------------------------------------------------------------------------------------------------------
Douglas C. Cameron (61) * + 1983 12,000 1,114.65
Investment Advisor, RBC Dominion Securities
Inc., an investment dealer, since October 1993.
President, Noranda Enterprise Limited from May
1983 to March 1993.
- ------------------------------------------------------------------------------------------------------------------------
Pierre Y. Ducros (61) ++ 1986 20,000 955.41
Private Investor since June 1996. Chairman and
Chief Executive Officer, DMR Group Inc. from
February 1973 to June 1996. Director of Alliance
Atlantis Communication Inc., BAE Systems
Canada Inc., BCE Emergis, National Bank
Financial, NovAtel Inc. and The Manufacturers
Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------
Douglas J. Erwin (47) ++ 1998 Nil 955.41
President and Chief Executive Officer,
PentaSafe, Inc., an auditing and security
software company, since April 1998. Chief
Operating Officer, BMC Software, Inc. from
April 1994 to October 1997.
- ------------------------------------------------------------------------------------------------------------------------
Robert W. Korthals (66) ++ 1997 2,000 1,114.65
Chairman, Ontario Teachers Pension Plan Board
since January 2000 and Chairman, Co-Steel
Inc., a minimill steel producer, since June
1997. Chairman, North American Life Assurance
Company from April 1995 to December 1995.
Director of Global Telecom Split Shares Corp.,
Jannock Properties Limited, MCM Split Shares
Corp., Premium Income Corporation, Rogers
Communications Inc. and Suncor Energy Inc.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Candy M. Obourn (50) + (S) 1999 Nil Nil
President, Document Imaging and Senior Vice
President, Eastman Kodak Company, a
photographic products and imaging company,
since April 1998. President, Document Imaging
and Vice President from October 1993 to March
1998.
- ------------------------------------------------------------------------------------------------------------------------
James M. Tory, Q.C. (70) *+ 1982 89,000 4,140.13
Chairman of the Board of Directors. Chair
Emeritus and Counsel, Torys, Barristers &
Solicitors. Director of Inmet Mining
Corporation and Goldlist Properties Inc.
- ------------------------------------------------------------------------------------------------------------------------
Renato (Ron) Zambonini (53) 1994 257,072 N/A
President and Chief Executive Officer since
September 1995.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Member of the Corporate Governance Committee.
+ Member of the Audit Committee.
++ Member of the Human Resources & Compensation Committee.
(s) Candy M. Obourn and John E. Caldwell were appointed directors on December
21, 1999 and March 14, 2000, respectively, pursuant to the powers granted
to the Board in the Articles of the Corporation.
Statement of Corporate Governance Practices
The Toronto Stock Exchange ("TSE") requires that the Corporation disclose its
approach to corporate governance and relate the corporate governance practices
of the Corporation to specific guidelines. These guidelines, together with a
brief description of the alignment of the Corporation's practices with them, are
set out in Annex A to this Proxy Statement. The Corporation is satisfied that it
complies with the recommended guidelines.
Board Meetings and Composition
The Board has five regularly scheduled meetings each year - following the end of
each fiscal quarter and a strategic planning session. Additional meetings may be
convened by the Board as required. The Board met nine times during the recently
completed fiscal year. Each director attended more than 75% of the total number
of meetings of the Board in that period.
All nominees for director, except Mr. Zambonini, are unrelated and outside
directors. The Corporation does not have a significant shareholder. A
significant shareholder is a shareholder with the ability to exercise a majority
of the votes for the election of the Board of Directors.
Board Committees
The Board has established three standing committees: the Corporate Governance
Committee, the Audit Committee, and the Human Resources & Compensation
Committee. The Board has adopted written mandates for each committee.
5
<PAGE>
Corporate Governance Committee
The Corporate Governance Committee is responsible for making recommendations to
the Board with respect to: (a) all matters relating to the stewardship role of
the Board in respect of the management of the Corporation, (b) Board size,
composition, and orientation, (c) Board compensation, and (d) procedures
necessary to allow the Board to function independently of management. This
committee is also responsible for reporting to the Board with respect to
appropriate candidates for nomination to the Board, and for evaluating the
performance of the Board. Although this committee did not meet during the
recently completed fiscal year, the matters for which it is responsible were
undertaken by the Board as a whole. This committee is currently composed of the
following directors: Mr. Tory (Chairman) and Mr. Cameron. Each of them is an
unrelated director.
Audit Committee
The Audit Committee is responsible for supervising the audit of the
Corporation's financial records as well as establishing policies and procedures
concerning the Corporation's financial reporting, internal accounting, financial
controls, management information, and risk management. The committee is
responsible for reviewing quarterly financial statements and the annual
financial statements prior to their approval by the full Board and therefore
meets not less frequently than each fiscal quarter in conjunction with each
quarterly Board meeting. The committee meets with the auditors of the
Corporation on a regular basis without any members of management present. The
Audit Committee met four times during the most recently completed fiscal year.
This committee is currently composed of the following directors: Mr. Cameron
(Chairman), Mr. Caldwell, Ms. Obourn and Mr. Tory. Each of them is an unrelated
director.
The U.S. Securities and Exchange Commission has recently adopted new rules
regarding the composition and operation of the Audit Committee. These rules are
designed to improve the qualifications of audit committee members and the
quality of financial information being given to the investing public. The rules
are set out in Annex B to this Proxy Statement, together with a brief
description of the alignment of the Corporation's practices with the rules. The
Corporation has reviewed the requirements under the new rules and is satisfied
that it is in compliance with their requirements.
Human Resources & Compensation Committee
The Human Resources & Compensation Committee reviews and recommends to the Board
the compensation for the Chief Executive Officer. It also reviews and approves
the compensation for other executive officers based, in part, on the
recommendations of the Chief Executive Officer. In addition, the committee
reviews and approves significant personnel policies of the Corporation,
including incentive programs, compensation, benefits, and overall compensation
policies. The committee met once during the most recently completed fiscal year.
This committee is currently composed of unrelated directors, namely: Mr.
Korthals (Chairman), Mr. Ducros and Mr. Erwin.
Compensation of Directors
During fiscal 2000 the Board researched the compensation practices of a broad
range of comparable companies in both Canada and the United States and
determined that the compensation regime for directors should be changed to
better reflect industry practices. Effective June 22, 1999, the annual retainer
payable to a non-employee director has been C$15,000 and an additional annual
retainer of C$2,500 for each non-employee director who chairs a committee of the
Board. The additional annual compensation payable to the Chairman is C$50,000.
In addition, each non-employee director receives meeting fees of C$1,250 for
attendance at each Board and Committee meeting (including telephone meetings) of
which the director is a member. Directors are compensated for duties outside
those normally undertaken by directors at the rate of C$2,000 per day. Employees
of the Corporation serving on the Board do not receive directors' compensation.
6
<PAGE>
A deferred share plan for non-employee directors ("DSP") was adopted by the
Board on April 6, 1999. Under the DSP, non-employee directors may receive all or
part of their annual retainer fee in cash, options or deferred share units. A
deferred share unit ("DSU") is a unit, equivalent in value to a common share of
the Corporation, credited by means of a bookkeeping entry in the books of the
Corporation to an account in the name of the non-employee director and payable
only at the end of his or her mandate on the Board in cash or by way of common
shares purchased on the open market, based on the market value of the common
shares at that time. DSUs represent the variable (at risk) component of the
directors' compensation. Additional compensation consisting of deferred share
units or an option award under the DSP may be awarded to non-employee directors
as the Board deems appropriate.
The total cash compensation paid to non-employee directors in fiscal 2000 for
duties performed during the fiscal year was $95,385. The table at page 4 sets
out the number of DSUs held by each nominee for director. No amounts were paid
for duties outside those normally undertaken by directors.
Non-executive directors hold stock options that are currently exercisable or
exercisable within 60 days from the Record Date ("Exercisable Optioned Shares")
as indicated in the notes to the table appearing in "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL HOLDERS". The following table sets out, for each of the
non-executive directors, the grant date and exercise price for those Exercisable
Optioned Shares. Unless otherwise noted, all option grants vest immediately on
the date of grant, continue as long as the grantee is a director and expire on
the eighth anniversary of the date of grant.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Grant Date / April 15, April 23, October 8, April 14, Sept. 28, June 25, Dec. 21, March 14,
Exercise 1996 / 1997 / 1997 / 1998 / 1998 / 1999 / 1999 / 2000 /
Price/(1)/ $ 9.43 $ 11.35 $ 12.14 $ 14.09 $ 8.33 $ 10.75 $ 20.18 $ 33.80 Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J. Caldwell 20,000 20,000
D. Cameron 9,000/(2)/ 3,000 3,000 4,000 19,000
P. Ducros 9,000/(2)/ 3,000 3,000 4,000 19,000
D. Erwin 20,000 4,000 24,000
R. Korthals 15,000/(3)/ 3,000 3,000 4,000 25,000
C. Obourn 20,000 20,000
J. Tory 9,000/(2)/ 3,000 3,000 4,000 19,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 27,000 15,000 12,000 12,000 20,000 20,000 20,000 20,000 146,000
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options are granted in Canadian dollars. Exercise price shown in U.S.
dollars is quoted using the historical rate of exchange as at the date of
grant.
(2) Options expire on the seventh anniversary of the date of grant.
(3) Options vest in equal installments on each of the four successive
anniversaries of the date of grant.
All stock options referred to above were awarded under the Stock Option Plans
described under "Human Resources & Compensation Committee Report on Executive
Compensation - Long-Term Incentives".
Decisions Requiring Board Approval
In addition to those matters which must by law be approved by the Board,
management is also required to seek Board approval for any disposition,
commitment, venture, or significant expenditure in either monetary or business
terms. Changes in senior management are reviewed by the Human Resources &
Compensation Committee, and then referred to the Board.
7
<PAGE>
Expectations of Management
The Board expects management of the Corporation to effectively manage its
business in accordance with the strategic and policy directions approved by the
Board. Management is expected to fully inform the Board of its performance in
relation to those plans and any events that may affect those plans, and propose
to the Board remedial or alternate actions. The Corporate Governance Committee
will continue to review the corporate governance practices of the Board and
recommend to the Board any changes that it deems necessary.
Shareholder Feedback
Inquiries from shareholders are responded to by the Vice President, Corporate
Relations, the Secretary or another appropriate officer of the Corporation. The
Corporation maintains regular communications with the financial and investment
community through industry analyst briefings by the Chief Executive Officer and
the Chief Financial Officer on at least a quarterly basis.
Directors' and Officers' Indemnification
The Corporation indemnifies each director and officer of the Corporation against
liability resulting from any civil, criminal or administrative action or
proceeding to which that person is made a party by reason of being, or having
been, a director or officer of the Corporation (including an action by or on
behalf of the Corporation), as long as that person (a) acted honestly and in
good faith with a view to the best interests of the Corporation, and (b) had
reasonable grounds for believing that his or her conduct was lawful in any
criminal or administrative proceeding that is enforced by a monetary penalty.
During the year ended February 29, 2000, the Corporation carried directors' and
officers' liability insurance coverage with an aggregate policy limit of $13.8
million (C$20 million) with a $5.2 million (C$7.5 million) deductible. The
annual premium for this coverage, amounting to $44,754 (C$65,908), was paid by
the Corporation.
8
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL HOLDERS
The following table sets out information, as at May 5, 2000, with respect to (a)
all shareholders known by the Corporation to be beneficial owners of more than
5% of its outstanding shares, and (b) share ownership, including the right to
acquire shares by exercise of stock options on or before July 4, 2000, by each
nominee for director, each executive officer named in the Summary Compensation
Table, and all directors and executive officers as a group.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Name Shares Beneficially Owned Percentage/(1)/
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael U. Potter /(2)/ 11,668,468 13.2%
Sixty-Two John Street,
Ottawa, Ontario, Canada, K1M 1M3
Private Capital Management, Inc. 9,280,196 10.5%
3003 Tamiami Trail North,
Naples, FLA, U.S.A. 34103
Wellington Management Company, LLC /(3)/ 6,687,574 7.6%
75 State Street,
Boston, MA, U.S.A. 02109
John E. Caldwell /(4)/ 20,800 *
Douglas C. Cameron /(5)/ 31,000 *
Pierre Y. Ducros /(6)/ 39,000 *
Douglas J. Erwin /(7)/ 24,000 *
Robert W. Korthals /(8)/ 27,000 *
Candy M. Obourn /(9)/ 20,000 *
James M. Tory /(10)/ 108,000 *
Renato Zambonini /(11)/ 414,572 *
Terry Hall /(12)/ 235,570 *
Robert A. Engels /(13)/ 32,552 *
Alan Rottenberg /(14)/ 157,062 *
Donnie M. Moore /(15)/ 106,984 *
Directors and Executive Officers as a group 1,576,989 1.8%
(15 persons) (1) /(16)/
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Indicates less than 1%
(1) Percentage ownership is calculated using as the denominator total shares
outstanding as of the Record Date plus the number of shares which the
person, entity, or group indicated has a right to purchase pursuant to
options currently exercisable or exercisable within 60 days, or on or before
July 4, 2000. Reference to shares that the persons named below have the
right to acquire through options includes options currently exercisable or
exercisable on or before July 4, 2000.
9
<PAGE>
(2) Mr. Potter beneficially owns or controls 11,659,468 shares and has the
right to acquire 9,000 shares through options.
(3) Wellington Management Company, LLC is an investment advisor holding the
shares on behalf of investment advisory clients and disclaims any pecuniary
interest in such shares.
(4) Mr. Caldwell has the right to acquire 20,000 shares through options.
(5) Mr. Cameron has the right to acquire 19,000 shares through options.
(6) Mr. Ducros has the right to acquire 19,000 shares through options.
(7) Mr. Erwin has the right to acquire 24,000 shares through options.
(8) Mr. Korthals has the right to acquire 25,000 shares through options.
(9) Ms. Obourn has the right to acquire 20,000 shares through options.
(10) Mr. Tory has the right to acquire 19,000 shares through options.
(11) Mr. Zambonini has the right to acquire 157,500 shares through options.
(12) Mr. Hall has the right to acquire nil shares through options.
(13) Mr. Engels has the right to acquire 32,496 shares through options.
(14) Mr. Rottenberg has the right to acquire 138,328 shares through options.
(15) Mr. Moore has the right to acquire 93,000 shares through options.
(16) The group is comprised of the individuals named in the Summary Compensation
Table on page 11, the remaining executive officers of the Corporation, and
those persons who were directors of the Corporation on the Record Date. The
amount shown includes 843,441 shares which the directors and executive
officers as a group have the right to acquire by exercise of stock options
granted under the Corporation's stock option plans through July 4, 2000.
Statements contained in the table as to securities beneficially owned or
controlled by directors, officers, and 5% beneficial owners are, in each
instance, based upon information obtained from such directors, officers, and
beneficial owners.
10
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets out the compensation received for
each of the last three fiscal years for Mr. Zambonini, the Chief Executive
Officer of the Corporation, and those persons who were, at February 29, 2000,
the other four most highly compensated executive officers of the Corporation.
Summary Compensation Table
(All dollar amounts are in U.S. dollars)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Long-term
Compensation
Annual Compensation Awards /(3)/
- -------------------------------------------------------------------------------------------------------------------
Other Securities
Name and Principal Fiscal Annual Underlying All Other
Position Year Salary /(1)/ Bonus /(2)/ Compensation Options/SARs (#) Compensation /(4)/
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Renato Zambonini /(5)/ 2000 $254,585 $375,938 --- 150,000 $ 4,583
President and Chief 1999 $230,049 $391,083 --- 0 ---
Executive Officer 1998 $228,775 $200,902 --- 0 ---
Terry Hall 2000 $281,250 $518,036 --- 200,000 $ 1,708
Senior Vice President, 1999 $235,000 $440,740 --- 0 $ 531
Operations and Chief 1998 $220,000 $287,194 --- 0 $ 2,791
Operating Officer
Robert A. Engels /(6)/ 2000 $244,826 $199,907 --- 30,000 $ 8,737
Senior Vice President, 1999 $233,773 $202,750 --- 0 $11,118
European Operations 1998 $208,822 $ 95,719 --- 0 $11,013
Alan Rottenberg /(5)/ 2000 $159,540 $156,078 --- 100,000 $ 3,708
Senior Vice President, 1999 $146,698 $204,044 --- 0 $ 3,684
e-Business Intelligence 1998 $142,539 $103,127 --- 40,000 $ 3,782
Applications Unit
Donnie M. Moore /(5)(7)/ 2000 $152,751 $157,721 --- 100,000 $ 3,793
Senior Vice President, 1999 $150,032 $170,036 --- 0 $ 3,684
Finance & Administration 1998 $151,804 $ 83,095 $32,580 0 $ 3,849
and Chief Financial
Officer
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Salary is base salary earned for the current year.
(2) Bonuses for each year include amounts earned for that year, even if paid in
the subsequent year, and exclude bonuses paid during that year but earned
for a prior year.
(3) As of the Record Date, the Corporation has not granted any restricted
shares, or stock appreciation rights ("SARs"), as compensation.
(4) The amounts in this column pertain to the Corporation's annual contribution
to each individual's savings plan. The Corporation contributes to a
Retirement Savings Plan on behalf of Messrs. Zambonini, Rottenberg and
Moore. Cognos Limited (U.K.) contributes to the Cognos Limited Executive
Retirement Scheme for Mr. Engels, and Cognos Corporation (U.S.A.)
contributes to a 401(k) savings plan for Mr. Hall.
11
<PAGE>
(5) These individuals are employed in Canada and paid in Canadian dollars. The
amounts shown in the above table are expressed in U.S. dollars using the
following weighted annual exchange rate for the Corporation's fiscal years
ending on the last day of February:
2000 -- C$1.00 = US$0.6789
1999 -- C$1.00 = US$0.6668
1998 -- C$1.00 = US$0.7128
(6) Mr. Engels is employed in Europe and paid in pounds sterling. The amounts
shown in the above table are expressed in U.S. dollars using the following
weighted annual exchange rate for the Corporation's fiscal years ending on
the last day of February:
2000 -- UK(Pounds)1.00 = US$1.6107
1999 -- UK(Pounds)1.00 = US$1.6527
1998 -- UK(Pounds)1.00 = US$1.6443
(7) In fiscal 2000 and fiscal 1999 the entire bonus amount was contributed on
behalf of Mr. Moore to a retirement arrangement; for fiscal 1998 the bonus
amount includes $61,144 which was contributed to a retirement arrangement.
The fiscal 1998 amount of $32,580 represents a non-recurring payment for
settlement of expatriate tax differences with Canada Customs and Revenue
Agency (formerly Revenue Canada) for tax years 1990-1993.
Option/SAR Grants in Last Fiscal Year
The following table provides information with respect to stock option grants by
the Corporation to the named executive officers for the fiscal year ended
February 29, 2000.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Individual Grants
--------------------------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation for
Underlying Granted to Exercise Expiration Option Term /(3)/
Options Employees in Price per Date ---------------------------------------
Name Granted /(1)/ Fiscal Year Share/(2)/ (mm/dd/yy) 5% 10%
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Renato Zambonini 150,000 5.4% $10.82 4/12/2007 $774,584 $1,855,247
- -----------------------------------------------------------------------------------------------------------------------
Terry Hall /(4)/ 100,000 3.6% $10.82 4/12/2007 $516,389 $1,236,831
100,000 3.6% $17.43 11/13/2007 $832,133 $1,993,087
- -----------------------------------------------------------------------------------------------------------------------
Robert A. Engels 30,000 1.1% $10.82 4/12/2007 $154,917 $ 371,049
- -----------------------------------------------------------------------------------------------------------------------
Alan Rottenberg 100,000 3.6% $10.82 4/12/2007 $516,389 $1,236,831
- -----------------------------------------------------------------------------------------------------------------------
Donnie M. Moore 100,000 3.6% $10.82 4/12/2007 $516,389 $1,236,831
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Option awards are typically made following the release of the Corporation's
year-end results. During the course of the year other awards may be granted
in special circumstances. In all cases, option awards are approved by the
Human Resources & Compensation Committee, the administrator of the
Corporation's Stock Option Plans.
12
<PAGE>
(2) Exercise Price is equivalent to the market value, on The Toronto Stock
Exchange, of securities underlying options on the day preceding the date of
grant.
(3) These amounts represent the gain that may be realized upon exercise of the
options immediately prior to the expiration of their term (net of the
option exercise price but before taxes associated with the exercise)
assuming the specified compound rates of appreciation (5% and 10%) of the
Corporation's shares over the term of the options. These amounts are
calculated based on rules promulgated by the United States Securities and
Exchange Commission and do not reflect the Corporation's estimate of future
stock price increases. Actual gains, if any, on any stock option exercises
and resultant shareholdings are dependent on the timing of each exercise
and the future share performance. There can be no assurance that the rates
of appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals.
(4) All named executive officers are participants in the executive option award
described in "Human Resources & Compensation Committee Report on Executive
Compensation - Long-Term Incentives". The circumstances giving rise to the
second award granted to Mr. Hall are described within this section.
Aggregated Option Exercises and Fiscal Year-End Option Values
(All dollar amounts are in U.S. dollars)
The following table provides information on stock option exercises in the fiscal
year ended February 29, 2000, by the named executive officers and the number and
value of such officers' outstanding options as at February 29, 2000. Dollar
values indicated represent the net of market value less exercise price.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised In-
Underlying Unexercised The-Money Options at
Shares Aggregate Options at Fiscal Year-End Fiscal Year End
Acquired on Value ---------------------------------------------------------------
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Renato Zambonini 300,000 $6,013,479 0 390,000 - $9,132,550
Terry Hall 99,996 $ 953,676 0 400,004 - $8,641,229
Robert A. Engels 45,004 $ 688,182 24,998 130,002 $650,073 $3,072,088
Donnie M. Moore 116,000 $2,003,724 3,000 300,000 $ 78,015 $7,046,466
Alan Rottenberg 113,328 $1,986,089 0 326,672 - $7,634,037
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Employment Agreements
The employment agreements of each of Messrs. Zambonini, Hall and Moore provide,
among other things, that if their employment is terminated without cause, the
Corporation will pay severance in an amount equal to one year's salary at the
time of termination. If either of Mr. Zambonini or Mr. Hall is subsequently
employed by another party for any portion of the year following termination, the
severance payment will be reduced on a pro-rata basis for that portion.
The employment agreements of each of Messrs. Zambonini, Hall and Moore have been
amended in the manner described in the discussion of the Senior Executive Option
Award in "Human Resources & Compensation Committee Report on Executive
Compensation - Long-Term Incentives."
13
<PAGE>
Human Resources & Compensation Committee Report on Executive Compensation
Mandate of the Human Resources & Compensation Committee
The mandate of the Human Resources & Compensation Committee ("Committee") is set
out in "Corporate Governance - Board Committees". Among other matters, it is
responsible for reviewing and approving the compensation for the Chief Executive
Officer and the other executive officers of the Corporation. The Corporation's
compensation program for executive officers comprises cash compensation and
long-term incentive compensation in the form of stock options. In fiscal 2000, a
policy of stock ownership for executives of the Corporation was adopted.
Cash Compensation
Each senior officer is assigned a target cash compensation amount at the
beginning of each fiscal year. This amount is based on salary surveys of both
similarly-sized software companies and larger software companies, some of which
are represented in the Performance Graph on page 17, as well as on job
responsibilities and performance. Target cash compensation is allocated between
two components: a fixed base salary and a variable bonus target. At the election
of the executive officer, the Corporation may contribute to a retirement
arrangement in accordance with guidelines established by Canada Customs and
Revenue Agency (formerly Revenue Canada).
Base salary is based on the criteria set out above, that is, on market surveys,
job responsibilities and performance.
The bonus target varies with each officer's particular role, responsibilities
and objectives. For each officer, the bonus earned is based primarily on
corporate performance, including such measures as revenue growth and return on
equity. The balance of the bonus target is apportioned among established
objectives that relate to specific business or administrative unit performance.
Some of these objectives are solely quantitative while others require subjective
judgments to be made regarding performance. At year end, performance is
evaluated against these established objectives.
Actual bonus payments are determined primarily by way of a fixed formula based
on a combination of the Corporation's revenue growth and return on equity during
the fiscal year. This formula is established by the Committee at the
commencement of the fiscal year ("Performance Formula"). Other payments are
determined by multiplying a particular component of the bonus target by a
percentage figure that either measures the attainment of specific quantifiable
goals or that results from a subjective assessment of performance against the
objective underlying that component. Accordingly, in a given year, an officer
may achieve more or less than the established target cash compensation amount
depending on corporate and personal performance against these objectives. For
the year ended February 29, 2000, individual bonus amounts earned ranged from
152% to 363% of the bonus target primarily as a result of the effect of the
Performance Formula and other bonus performance criteria. The range of total
cash compensation earned by all named executive officers was from 118% to 189%
of their respective individual target cash compensation amounts.
Long-Term Incentives
Long-term incentives are provided through stock options awarded under the 1997-
2002 Stock Option Plan ("1997 Option Plan"), which was adopted by the Board on
April 9, 1997 and approved by shareholders on June 25, 1997. Directors,
officers, employees and consultants of the Corporation are eligible to
participate in the 1997 Option Plan. Through the award of stock options, the
Corporation seeks to attract, reward and retain employees by providing them with
a means of sharing in the financial success created by their combined efforts.
In particular, the award of stock options to executive officers seeks to provide
them with
14
<PAGE>
an incentive to enhance shareholder value. Options are granted on the basis of
an individual's level of responsibility and potential to contribute to the
Corporation's future success.
Options to employees are awarded at the discretion of management and typically
vest equally on each of the successive four anniversaries of the date of grant
and expire on the eighth anniversary of the date of grant. All options are
priced at the market price of the Corporation's shares on The Toronto Stock
Exchange on the trading day preceding the date of grant.
On April 15, 1996, the Committee awarded certain key officers of the Corporation
and its subsidiaries, including all of its executive officers, options under the
predecessor of the 1997 Option Plan, the 1993-1998 Stock Option Plan ("1993
Option Plan"), subject to terms that the Committee viewed as further aligning
key officers' interests with those of shareholders and encouraging the
enhancement of shareholder value ("Senior Executive Option Award"). These
options vest equally on the third, fourth, and fifth anniversaries of the date
of grant and expire on the eighth anniversary of that date. At the time of the
granting of the Senior Executive Option Award, its terms provided that the net
proceeds (after tax) of any exercise of these options occurring on or before the
seventh anniversary of the date of grant would be used to purchase common shares
of the Corporation in the name of the executive at prevailing market prices. The
shares purchased would be held in trust by the Corporation and released to the
executive in equal portions on the first and second anniversaries of purchase
("Trust Shares"). This Trust Shares procedure was reviewed by the Committee
during the recent fiscal year and it concluded that it was unduly complex. On
May 19, 1999 this requirement was ended and replaced by share ownership
guidelines for executives (described below) which in the view of the Committee
achieved the same end.
Absent special circumstances, participants in the Senior Executive Option Award
were not eligible to receive additional annual option awards until March 1,
1999. However, on April 23, 1997, Mr. Rottenberg was awarded an option to
acquire 40,000 shares under the 1993 Option Plan upon his appointment as Senior
Vice President, Marketing and Business Strategy. The importance of his
appointment to the implementation of the Corporation's strategic initiatives to
focus and upgrade the Corporation's marketing and business development
activities were deemed by the Committee to be special circumstances justifying
the award. The option vests equally on the second, third, and fourth
anniversaries of the date of grant and expires on the seventh anniversary of
that date.
Mr. Robert Minns, Senior Vice President, New Products, became an executive
officer during the fiscal year ended February 28, 1998, and did not participate
in the Senior Executive Option Award. On April 14, 1998, Mr. Minns was awarded
an option to acquire 30,000 shares under the 1997 Option Plan. The option vests
equally on the second, third, and fourth anniversaries of the date of grant and
expires on the eighth anniversary of that date.
On April 12, 1999, the Committee awarded option grants to certain key employees
of the Corporation and its subsidiaries, including all of the named executive
officers as set out in "Option/SAR Grants in Last Fiscal Year". In recognition
of his appointment as Senior Vice President, Operations and Chief Operating
Officer, Mr. Hall was awarded an option to acquire an additional 100,000 shares
under the 1997 Option Plan on November 13, 1999. The Committee based this award
on Mr. Hall's importance in implementing the Corporation's aggressive growth
strategy. The option vests equally on the second, third and fourth anniversaries
of the date of grant and expires on the eighth anniversary of that date.
As of the Record Date, options to purchase 6,711,559 shares under the 1997
Option Plan, and predecessor plans, were outstanding at a weighted average
exercise price of $11.39.
Share Ownership
To promote better alignment of management and shareholder interests, in May 1999
the Corporation adopted share ownership guidelines for the Chief Executive
Officer, Senior Vice Presidents and Vice
15
<PAGE>
Presidents of the Corporation ("Executives"). Executives are expected to
accumulate and hold shares having a market value at least equal to a multiple of
their annual base salary. That multiple increases with the level of
responsibility of the executive. Executives have three years from the time they
become subject to the guidelines to achieve the designated level of stock
ownership. Compliance with the guidelines, while voluntary, is strongly
recommended. Failure to comply could result in the reduction or suspension from
participation in the Corporation's incentive programs.
Chief Executive Officer Compensation
The Chief Executive Officer's ("CEO") compensation is reviewed and recommended
to the Board by the Committee. Mr. Zambonini's base salary was set at $254,585
(C$375,000), representing a 9% increase over his Canadian dollar base salary in
the previous fiscal year. His bonus target was also increased by 9% over his
Canadian dollar bonus target in the previous fiscal year, to $127,293
(C$187,500). His bonus payment is determined by using the Performance Formula
referred to in "Human Resources & Compensation Committee Report on Executive
Compensation - Long Term Incentives", above, and resulted in a bonus of $308,048
(C$453,750) (242% of bonus target) for the fiscal year ended February 29, 2000.
An additional one-time bonus payment of $67,890 (C$100,000) was made to Mr.
Zambonini in recognition of outstanding achievement during fiscal 2000.
This report has been provided by the Human Resources & Compensation Committee of
the Board of Directors.
Robert W. Korthals (Chairman)
Pierre Y. Ducros
Douglas J. Erwin
16
<PAGE>
Human Resources & Compensation Committee Interlock and Insider Participation
Messrs. Korthals, Ducros and Erwin comprised the Human Resources & Compensation
Committee on February 29, 2000. Mr. Korthals was appointed a member and Chairman
of the Committee in June 1997. Mr. Ducros was appointed to the Committee in
September 1996. Mr. Erwin was appointed a member of the Committee on September
28, 1998. None of the members of the Human Resources & Compensation Committee is
an officer, employee or former officer or employee of the Corporation or any of
its affiliates or is eligible to participate in the Corporation's executive
compensation program.
Performance Graph
GRAPH APPEARS HERE
(1) Dollar amounts are in U.S. dollars.
(2) The stock price performance graph is not necessarily indicative of future
performance. Information used on the graph was obtained from The Nasdaq
Stock Market, Inc., a source believed to be reliable, but the Corporation
is not responsible for any errors or omissions in such information.
The above graph compares the five-year cumulative total return on the
Corporation's shares with the comparable cumulative return of a broad equity
index and an industry index. The indexes used are the Center for Research in
Securities Prices ("CRSP") Total Return Index for The Nasdaq Stock Market (U.S.
and Foreign Companies), and the Nasdaq Computer & Data Processing Services
Stocks Index.
The graph assumes $100 invested on February 28, 1995 in the Corporation's shares
and each of the Nasdaq indexes.
APPOINTMENT OF AUDITORS
A resolution will be presented at the Meeting to appoint Ernst & Young LLP as
auditors of the Corporation for the fiscal year ending February 28, 2001 and
authorize directors to fix their remuneration. Ernst & Young LLP have been
auditors of the Corporation since January 1984. The Board recommends a vote in
favor of this resolution.
Arrangements have been made for one or more representatives of Ernst & Young LLP
to attend the Meeting. These representatives will be accorded the opportunity to
address the Meeting and can be expected to respond to appropriate questions.
17
<PAGE>
OTHER MATTERS
The management of the Corporation knows of no amendment or variation of the
matters referred to in the Notice of Annual Meeting and of no other business to
be brought before the Meeting. However, if any amendment, variation or other
business is properly brought before the Meeting, the Proxy Form confers
discretionary authority on the persons appointed proxy to vote on any amendment
or variation of the matters referred to in the Notice of Annual Meeting or any
other business in accordance with their best judgment.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies will be borne by the Corporation. In
addition to soliciting shareholders by mail through its regular employees, the
Corporation may request banks and brokers to solicit their customers who have
shares of the Corporation registered in the names of a nominee and, if so, will
reimburse such banks and brokers for their reasonable out-of-pocket costs.
Solicitation by officers and employees of the Corporation may also be made of
some shareholders in person or by mail, telephone or fax following original
solicitation.
APPROVAL BY BOARD OF DIRECTORS
The contents and the sending of this Proxy Statement have been approved by the
Board of Directors of the Corporation.
DATED at Ottawa this 25th day of May, 2000.
/s/ James M. Tory
James M. Tory
Chairman of the Board
18
<PAGE>
ANNEX A
Alignment with TSE Corporate Governance Guidelines
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TSE Corporate Governance Guideline Alignment Comment
Status
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Board should explicitly assume
responsibility for stewardship of the
corporation, and assume responsibility for:
- ---------------------------------------------------------------------------------------------------------------------------------
(a) adoption of a strategic planning process; Yes The Board meets with management annually to
specifically discuss strategic planning, product
and business plans and risks and opportunities.
Updates are presented at Board meetings.
- ---------------------------------------------------------------------------------------------------------------------------------
(b) identification of principal risks and Yes Principal business risks are assessed by the Board at
implementing appropriate risk management the annual strategic planning session and updated
systems; regularly by senior management on compliance
with various legal and financial requirements and
management's assessment of those risks. The Audit
committee assists the Board with the review of the risk
management program.
- ---------------------------------------------------------------------------------------------------------------------------------
(c) succession planning, including Yes This responsibility is assigned to the Human
appointing, training and monitoring of senior Resources & Compensation Committee.
management;
- ---------------------------------------------------------------------------------------------------------------------------------
(d) communications policy; and Yes Communications with the Corporation's stakeholders
is done by various means, including news releases,
the general media, the corporate internet site
(www.cognos.com), mailings and regular staff
----------------
meetings. Quarterly and annual earnings releases
are approved by the Audit Committee and Board.
Other media releases and communications are
coordinated by the Public Relations department and
the Corporate Human Resources Department.
- ---------------------------------------------------------------------------------------------------------------------------------
(e) integrity of internal control and Yes The Audit Committee establishes and regularly
management information systems. monitors policies regarding internal controls and
management information systems.
- ---------------------------------------------------------------------------------------------------------------------------------
2. Majority of directors should be Yes The current Board consists of eight directors,
"unrelated"./(1)/ seven of whom are unrelated.
- ---------------------------------------------------------------------------------------------------------------------------------
3. Disclose for each director whether he or she Yes The table at page 4 sets out the principal occupation
is related and how that conclusion was or employment of each proposed director. In making
reached. the determination as to whether a proposed director
is related, the factual circumstances of each proposed
director are considered in the context of many factors,
including the nature of any interest, business or other
relationship which that proposed directors has, which
could or could be reasonably be perceived to materially
interfere with the ability to act with a view to the
best interests of the Corporation./(2)/
- ---------------------------------------------------------------------------------------------------------------------------------
4. Committee composed of unrelated (i.e. non- Yes This responsibility is assigned to the Corporate
management) directors responsible for Governance Committee. It is composed of unrelated
nominations and assessment of directors. directors.
- ---------------------------------------------------------------------------------------------------------------------------------
5. Implement a process to assess effectiveness Yes It is the Chairman's responsibility to assess the
of board, committees and directors. effectiveness of the individual Board members and
take such remedial action as is necessary.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
20
<PAGE>
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
6. Provide orientation and education programs Yes All new directors receive a complete orientation
for new directors. program, consisting of presentations and briefings
by the Chairman and senior management on the
business and operations of the Corporation.
- ---------------------------------------------------------------------------------------------------------------------------------
7. Consider board size with view to improving Yes The Corporate Governance Committee makes
effectiveness. recommendations with respect to board size. The
current size of the Board is considered to be
effective and its composition reflects diverse
backgrounds and skills.
- ---------------------------------------------------------------------------------------------------------------------------------
8. Review adequacy and form of director Yes Directors' compensation was reviewed during fiscal
compensation relative to risks and 2000 and brought into line with industry practices.
responsibilities. Only non-employee directors are compensated and may
elect to receive all or a portion of their annual
retainer fee in the form of deferred share units
under a plan which took effect in June 1999.
- ---------------------------------------------------------------------------------------------------------------------------------
9. Board committees should generally be Yes The Board committees are composed entirely of
composed of outside directors, a majority of unrelated, outside directors.
whom should be unrelated.
- ---------------------------------------------------------------------------------------------------------------------------------
10. Appoint committee responsible for corporate Yes This responsibility is assigned to the Corporate
governance issues. Governance Committee.
- ---------------------------------------------------------------------------------------------------------------------------------
11. Develop position descriptions to limit
management's responsibilities:
- ---------------------------------------------------------------------------------------------------------------------------------
(a) for board and Chief Executive Officer; and Yes Written mandates have been adopted for the Board,
each of its committees, and for the Chief Executive
Officer.
- ---------------------------------------------------------------------------------------------------------------------------------
(b) approve corporate objectives for Chief Yes The Chief Executive Officer's objectives are
Executive Officer. established annually during the strategic planning
session.
- ---------------------------------------------------------------------------------------------------------------------------------
12. Establish procedures to enable board to Yes The positions of Chairman of the Board and Chief
function independently of management. Executive Officer are held by different people. The
mandate of the Corporate Governance Committee is
structured to preserve this separation. The Board
has the opportunity to meet without the presence of
management at each Board meeting.
- ---------------------------------------------------------------------------------------------------------------------------------
13. (a) Audit Committee should have a Yes The written mandate, including specific
specifically defined mandate, including responsibilities, has been adopted. See Audit
oversight responsibility for management Committee on page 6.
reporting on internal controls.
- ---------------------------------------------------------------------------------------------------------------------------------
(b) All members should be outside directors. Yes All members are outside directors.
- ---------------------------------------------------------------------------------------------------------------------------------
(c) Have direct communication with auditors. Yes The Audit Committee meets with the Corporation's
auditors without members of management present as
required, but not less than annually.
- ---------------------------------------------------------------------------------------------------------------------------------
14. Implement systems to enable individual Yes The Board, and individual directors may engage
directors to engage outside advisor at outside advisors at the expense of the Corporation
corporation's expense. in appropriate circumstances, in consultation with
the Chairman.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Under the TSE guidelines, the term "unrelated director" means a director
who is free from any interest and any business or other relationship which
could, or could reasonably be perceived to, materially interfere with the
director's ability to act with a view to the best interests of the
Corporation, other than interests arising from shareholding. An "outside
director" is a director who is not an officer (other than Chairman of the
Board) or employee of the Corporation or any of its affiliates.
21
<PAGE>
(2) Mr. Cameron is an Investment Advisor with RBC Dominion Securities, a
subsidiary of the Royal Bank of Canada, the Corporation's principal banker.
From time to time, Mr. Cameron has acted on behalf of various executives
and other employees of the Corporation in his capacity as an Investment
Advisor. The Board has been apprised by Mr. Cameron of these relationships
and is of the view that neither their nature nor the amounts involved are
significant.
While the law firm of Torys, of which Mr. Tory is Chair Emeritus and
Counsel, provides legal services to the Corporation, neither the amount nor
dollar value of these services is significant when compared to the overall
amount or dollar value of legal services obtained by the Corporation. The
Board does not consider that the amount paid to Mr. Tory in respect of
additional duties carried out as Chairman of the Board (see Compensation of
Directors) impairs his status as an unrelated director as that amount is
payable in respect of his increased responsibilities in his function as
Chairman of the Board.
22
<PAGE>
ANNEX B
Alignment with SEC audit committee rules
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SEC Audit Committee Rule Alignment Comment
Status
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. (a) Every audit committee have at least Yes There are currently four members on the Audit
three members; Committee.
- --------------------------------------------------------------------------------------------------------------------------
(b) all audit committee members must be Yes All are independent under the new independence
independent; standards.
- --------------------------------------------------------------------------------------------------------------------------
(c) committee members be financially Yes Each of them is a seasoned business person.
literate.
- --------------------------------------------------------------------------------------------------------------------------
2. At least one committee member have prior Yes All committee members have relevant accounting or
accounting or financial management financial management experience.
experience.
- --------------------------------------------------------------------------------------------------------------------------
3. The board adopt a written audit committee Yes A written mandate has been adopted.
charter that describes the committee's
responsibilities.
- --------------------------------------------------------------------------------------------------------------------------
4. The proxy statement must include a report N/A This requirement will take effect with proxy
from the audit committee. statements relating to shareholder votes occurring
after December 15, 2000. The Corporation intends to
comply.
- --------------------------------------------------------------------------------------------------------------------------
5. Outside auditor review of quarterly Yes The Corporation's auditors have historically
financial statements prior to filings. conducted reviews of the Corporation's quarterly
financial statements. Reviews of quarterly
financial statements prior to filings will commence
with the quarter ending May 31, 2000.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
[LOGO OF COGNOS]
B. FINANCIAL INFORMATION
IN ACCORDANCE WITH CANADIAN GAAP
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
The consolidated financial information as set out in the Corporation's 2000
Annual Report is in United States (U.S.) dollars and in accordance with U.S.
generally accepted accounting principles (GAAP). In keeping with the
requirements of Canadian legislation, the Corporation is also providing its
shareholders with consolidated financial information in accordance with Canadian
GAAP (in United States dollars).
The generally accepted accounting principles in Canada differ in some respects
from those applicable in the U.S. The most significant difference in fiscal 2000
arises from the accounting for acquisitions (see Note 5 of the Notes to the
Consolidated Financial Statements). All consolidated financial statements were
affected by this difference.
24
<PAGE>
COGNOS INCORPORATED
CANADIAN GAAP FINANCIAL INFORMATION
Table of Contents
The information appearing in this document consists of the following information
for the fiscal year ended February 29, 2000:
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 26
Report of Management............................................ 45
Auditors' Report................................................ 46
Consolidated Financial Statements And Notes..................... 47
Five-Year Summary............................................... 69
</TABLE>
25
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(in United States dollars, unless otherwise indicated, and in accordance with
Canadian GAAP)
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes for the fiscal year ended February
29, 2000, beginning on page 45. The Corporation prepares and files its
consolidated financial statements and the Management's Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) in United States (U.S.)
dollars and in accordance with Generally Accepted Accounting Principles (GAAP)
in Canada. The consolidated financial statements and MD&A in accordance with
U.S. GAAP, in U.S. dollars, are also made available to all shareholders and
filed with various regulatory authorities.
On April 6, 2000, subsequent to the year-end, the Board of Directors of the
Corporation authorized a two-for-one stock split, effected in the form of a
stock dividend, payable on or about April 27, 2000 to shareholders of record at
the close of business on April 20, 2000. Share and per-share amounts in this
MD&A, and the audited consolidated financial statements and notes thereto, have
been adjusted retroactively for this split.
Overview
The Corporation develops, markets, and supports complementary lines of software
tools that are designed to satisfy business-critical needs for the extended
enterprise within traditional and e-business markets. The Corporation's business
intelligence products are designed to give individual users the ability to
independently access, explore, analyze, and report corporate data. The
Corporation's client/server application development tools are designed to
increase the productivity of system analysts and developers. Cognos products are
distributed both directly and through resellers worldwide.
Revenue is derived from the licensing of software and the provision of related
services, which include product support and education, consulting, and other
services. The Corporation generally licenses software and provides services
subject to terms and conditions consistent with industry standards. Customers
may elect to contract with the Corporation for product support, which includes
product and documentation enhancements, as well as telephone support, by paying
either an annual fee or fees based on usage of support services.
The Corporation operates internationally, with a substantial portion of its
business conducted in foreign currencies. Accordingly, the Corporation's results
are affected by year-over-year exchange rate fluctuations of the United States
dollar relative to the Canadian dollar, to various European currencies, and to a
lesser extent, other foreign currencies.
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Results of Operations
Total revenue for the year ended February 29, 2000 (fiscal 2000) was $385.6
million, which was 28% more than the fiscal 1999 revenue of $301.1 million
which, in turn, was 23% more than the fiscal 1998 revenue of $244.8 million. Net
income for fiscal 2000 was $54.5 million and basic net income per share was
$0.63, compared to fiscal 1999 net income of $58.1 million and basic net income
per share of $0.66, and net income of $48.9 million and basic net income per
share of $0.55 for fiscal 1998.
The Corporation experienced a decrease in net income as a percentage of revenue
in fiscal 2000 as a result of increases in selling, general and administrative
expenses and decreases in the level of investment tax credits from prior years.
During fiscal 2000 the Corporation increased its investment in its sales
channels to focus on revenue growth and expand global market coverage. The
decrease in the level of investment tax credits (ITCs) was the result of the
Corporation recognizing the benefits of previously unrecorded ITCs during fiscal
1999 and 1998.
The following table sets out, for each fiscal year indicated, the percentage
that each income and expense item bears to revenue, and the percentage change in
the dollar amount of each item as compared to the prior fiscal year.
<TABLE>
<CAPTION>
Percentage Change
Percentage of Revenue from Fiscal
-------------------------------------------------- --------------------------------
1999 to 1998 to
2000 1999 1998 2000 1999
-------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 28.1% 23.0%
--------------------------------------------------
Operating expenses
Cost of product license 1.3 1.9 1.5 (8.8) 49.9
Cost of product support 3.6 3.7 4.0 23.2 15.2
Selling, general, and administrative 63.5 59.2 58.6 37.3 24.3
Research and development 13.9 14.0 13.7 26.7 26.1
Investment tax credits (1.6) (4.9) (3.8) (58.3) 57.8
--------------------------------------------------
Total operating expenses 80.7 73.9 74.0 39.8 22.9
--------------------------------------------------
Operating income 19.3 26.1 26.0 (5.2) 23.2
Interest expense (0.2) (0.2) (0.2) 36.2 9.6
Interest income 1.9 2.2 2.2 15.9 20.4
--------------------------------------------------
Income before taxes 21.0 28.1 28.0 (3.8) 23.1
Income tax provision 6.9 8.8 8.0 1.4 34.0
--------------------------------------------------
Net income 14.1% 19.3% 20.0% (6.2)% 18.8%
==================================================
</TABLE>
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Revenue
The Corporation's total revenue (consisting of product license, product support,
and services revenue) was $385.6 million in fiscal 2000, compared to $301.1
million in fiscal 1999 and $244.8 million in fiscal 1998. The Corporation
operates internationally, with a substantial portion of its business conducted
in foreign currencies. Accordingly, the Corporation's results are affected by
year-over-year exchange rate fluctuations of the United States dollar relative
to the Canadian dollar, to various European currencies, and to a lesser extent,
other foreign currencies. The effect of foreign exchange rate fluctuations
decreased the overall revenue growth by two percentage points in fiscal 2000
from fiscal 1999 and by one percentage point in fiscal 1999 from fiscal 1998.
The Corporation's growth in total revenue was derived primarily from the
increase in revenue from the Corporation's business intelligence products,
principally Web versions of PowerPlay(R), Impromptu(R) and to a lesser extent,
the addition of revenue from Cognos Visualizer and DecisionStream(TM), which
were released during fiscal 2000. The bundling of these products for facilitated
and flexible deployment contributed to the growth of Web versions of the
Corporation's business intelligence products. Total revenue for all business
intelligence products was $328.0 million, $230.9 million, and $176.2 million in
fiscal 2000, 1999, and 1998, respectively, which resulted in year-over-year
increases of 42% and 31%, respectively. Total revenue from the Corporation's
business intelligence products represented 85%, 77%, and 72% of total revenue in
fiscal 2000, 1999, and 1998, respectively. As described in the following section
on Product License Revenue, the Corporation believes that its business
intelligence products address the current market need for distributing corporate
information to the end user's desktop in an extended enterprise environment of
corporate intranets, extranets and client/server networks.
Total revenue from the Corporation's application development tools,
PowerHouse(R) and Axiant(R), was $57.6 million in fiscal 2000, compared to $70.2
million in fiscal 1999, and $68.6 million in fiscal 1998, which resulted in
year-over-year changes of (18)% and 2%, respectively. While the Corporation
experienced an increase in total revenue from these products during fiscal 1999,
as described in the following section on Product License Revenue, the
Corporation believes that, in the long term, revenues from these products will
continue to decline.
The growth in total revenue from the three revenue categories in fiscal 2000
from fiscal 1999 was as follows: a 28% increase in product license revenue, a
27% increase in product support revenue, and a 30% increase in services revenue.
This compares to an increase for the same categories for fiscal 1999 from fiscal
1998 as follows: 25%, 28%, and 9%, respectively.
The Corporation's 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 2000, the percentage of total revenue from North
America, Europe, and Asia/Pacific was 61%, 32%, and 7%, respectively, compared
to 59%, 34%, and 7%, respectively, in fiscal 1999, and 60%, 33%, and 7%,
respectively, in fiscal 1998. In fiscal 2000, total revenue from North America,
Europe, and Asia/Pacific increased from fiscal 1999 by 32%, 20%, and 32%,
respectively, compared to increases of 22%, 25%, and 23%, respectively, in
fiscal 1999 from fiscal 1998. The increase in growth for fiscal 2000 compared to
growth in fiscal 1999 in North America and Asia/Pacific is attributable to the
increase in revenue from the business intelligence products. The decrease in
growth for Europe was attributable to slower growth in the U.K. where the
Corporation experienced a relatively larger decline in revenue from application
development tools and relatively less growth in business intelligence products.
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Product License Revenue
Total product license revenue was $203.3 million, $158.4 million, and $126.8
million in fiscal 2000, 1999, and 1998, respectively, and accounted for 53%,
53%, and 52% of the Corporation's revenue for the respective time periods.
The increase in all periods occurred predominantly as a result of the
performance of the Corporation's business intelligence products. Product license
revenue from these products was $186.6 million, $131.9 million, and $102.3
million in fiscal 2000, 1999, and 1998, respectively. The Corporation derived
approximately 92% of its product license revenue in fiscal 2000 from these
products, compared to 83% in fiscal 1999, and 81% in fiscal 1998.
The Corporation believes that its business intelligence products address the
current market need for distributing corporate information to the end user's
desktop in an extended enterprise environment of corporate intranets, extranets
and client/server networks. The Corporation continues to address the emerging
market for Web or intranet-based products with the release in the current fiscal
year of PowerPlay 6.6, and the launch of the Cognos enterprise BI Platform and
in fiscal 1999, the release of Impromptu Web Reports. While the Corporation
believes that there is a market opportunity for Web-based decision support
solutions, there can be no assurance of the rate or extent of growth of this
market, or that the Corporation will be successful in continuing to develop
products that will effectively address this market.
Product license revenue from the Corporation's application development tools,
PowerHouse and Axiant, was $16.7 million, $26.5 million, and $24.5 million in
fiscal 2000, 1999, and 1998, respectively. Over several of the past fiscal
years, the Corporation has experienced a decline in product license revenue in
this market which is consistent, in the Corporation's view, with the market
trend away from proprietary systems and host-based computing toward industry-
standard systems, corporate intranets, extranets, client/server technology, and
packaged application products. The Corporation believes the increase during
fiscal 1999 was partially the result of expanded use of PowerHouse applications
or upgrades to customer computers, and testing of legacy systems to ensure Year
2000 compliance. The Corporation believes that the maximum revenue potential
from the activity around Year 2000 compliance occurred during fiscal 1999 and
expects that, in the long term, the trend of decreasing product license revenue
from these products will continue.
The Corporation's 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. In fiscal 2000, the Corporation
increased product license revenue derived from third-party channels to $62.2
million from $49.2 million in fiscal 1999, and from $39.6 million in fiscal
1998. The majority of the increase in product license revenue derived from third
parties in fiscal 2000 from fiscal 1999 was attributable to the activity in
Asia/Pacific and Europe and to a lesser extent activity in North America. The
increase in product license revenue derived from third parties in fiscal 1999
from fiscal 1998 was mainly attributable to an increase in activity in North
America.
Total product license revenue from third-party channels represented 31% of total
product license revenue in each of fiscal 2000, 1999 and 1998.
Within the Corporation's business intelligence market, product license revenue
from third-party channels was $57.3 million in fiscal 2000, compared to $42.3
million in fiscal
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1999, and $33.0 million in fiscal 1998. Product license revenue within this
market, from third-party channels represented 31% of the Corporation's product
license revenue in fiscal 2000, compared to 32% in fiscal 1999 and 1998.
The Corporation expects to continue to enhance its combined sales and marketing
strategies to further develop the potential within the business intelligence
products market. The Corporation expects to continue to utilize a multi-tiered
channel strategy, as outlined above. With respect to the marketing strategy, the
Corporation intends to continue to form alliances with system integrators, the
larger accounting and consulting firms, packaged application providers, and
various other strategic partners. In addition, the Corporation plans to continue
to utilize marketing and promotional programs to generate awareness of extended
enterprise business intelligence solutions and interest in the Corporation's
products.
There can be no assurance that increases in total product license revenue will
continue to occur, or occur to the same extent to which they have historically
occurred.
Product Support Revenue
Product support revenue was $118.1 million, $93.3 million, and $72.8 million in
fiscal 2000, 1999, and 1998, respectively. Product support revenue accounted for
31% of the Corporation's total revenue for fiscal 2000 and 1999 and 30% for
fiscal 1998. The increase in the dollar amounts was the result of new support
contracts from the expansion of the Corporation's customer base, as well as the
renewal of existing support contracts. The rate of growth in product support
revenue associated with the expansion of the Corporation's customer base exceeds
the rate of non-renewals of support contracts.
Total product support revenue from the business intelligence products was $78.8
million, $52.0 million, and $31.9 million in fiscal 2000, 1999, and 1998,
respectively and comprised 67%, 56%, and 44% of the total product support
revenue in fiscal 2000, 1999, and 1998, respectively. In fiscal 2000, total
product support revenue from the business intelligence products increased by 52%
from fiscal 1999, and total product support revenue from the application
development tools decreased by 5% over the same period. In fiscal 1999, total
product support revenue from the business intelligence products increased by 63%
from fiscal 1998, and total product support revenue from the application
development tools increased by 1% over the same period. Consistent with the
discussion in product license revenue, the Corporation believes that, despite
the product support revenue growth from the application development tools in
fiscal 1999, in the long term, the trend of decreasing revenue from these
products will continue.
There can be no assurance that increases in total product support revenue will
continue to occur, or occur to the same extent to which they have historically
occurred.
Services Revenue
Revenue from education, consulting, and other services was $64.3 million, $49.4
million, and $45.2 million in fiscal 2000, 1999, and 1998, respectively.
Services revenue accounted for 17%, 16%, and 18% of the Corporation's total
revenue for the same time periods. During fiscal 2000 the Corporation began to
offer a broader range of consulting and education services in line with the
shift in the demand for Web-based products. As a result, during fiscal 2000 the
Corporation experienced both an increase in growth of services revenue, and an
increase in the percentage of total revenue generated by services. The decline
in fiscal 1999 services revenue as a percentage of total revenue was the result
of relatively larger increases in both product support and product license
revenue.
The increase in services revenue was predominantly the result of an increase in
consulting revenue and to a lesser extent, increases in education revenue
associated with the business intelligence products,
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consistent with the trend in product license revenue in this market. Services
revenue associated with the business intelligence products contributed
approximately 97%, 95%, and 93% to this revenue category in fiscal 2000, 1999,
and 1998, respectively.
There can be no assurance that increases in total services revenue will continue
to occur, or occur to the same extent to which they have historically occurred.
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 2000 were $5.2 million compared to $5.7 million
in fiscal 1999, and $3.8 million in fiscal 1998. Product license costs
represented 3% of product license revenue for fiscal 2000, compared to 4% and 3%
of product license revenue for fiscal 1999 and 1998, respectively.
The decrease, in dollar terms in fiscal 2000 from fiscal 1999 is principally due
to decreases in both royalty costs and materials and distribution costs
associated with product offerings. The increase in fiscal 1999 from fiscal 1998
was predominantly the result of a relatively larger increase in royalties;
manufacturing and distribution costs remained constant between the two years.
Cost of Product Support
The cost of product support includes the costs associated with resolving
customer telephone inquiries and other telesupport 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 $13.8 million, $11.2 million, and $9.7 million
in fiscal 2000, 1999, and 1998, respectively. These costs represented 12% of
product support revenue for fiscal 2000 and 1999, and 13% for fiscal 1998.
The increase in fiscal 2000 from fiscal 1999 was associated predominantly with
increases in customer telesupport costs; enhancement releases costs contributed
to a lesser extent to the increase. The increase in fiscal 1999 from fiscal 1998
was primarily associated with increases in telesupport costs.
Selling, General, and Administrative
Selling, general, and administrative expenses were $244.8 million, $178.3
million, and $143.5 million in fiscal 2000, 1999, and 1998, respectively. These
costs were 64% of revenue in fiscal 2000 compared to 59% in both fiscal 1999 and
1998.
The increase in the selling, general, and administrative expenses in fiscal 2000
was substantially the result of increases in staffing and related compensation
expenses, and to a lesser extent increases in subcontracting, facilities and
marketing costs. During fiscal 2000 the Corporation increased its investment in
its sales channels to focus on revenue growth and to expand global market
coverage. The average number of employees within the selling, general, and
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administrative areas grew by 30% in fiscal 2000 predominantly as the result of
additions to sales staff. The increase in the selling, general, and
administrative expenses in fiscal 1999 was mainly the result of increased
staffing and related compensation expenses as the average number of employees
within this area grew by approximately 15%. The costs per employee increased 6%
in both fiscal 2000 and fiscal 1999.
Foreign exchange rate fluctuations reduced the overall percentage increase in
fiscal 2000 over 1999 by approximately one percentage point, whereas they
reduced the overall percentage increase in fiscal 1999 over 1998 by
approximately three percentage points.
Research and Development
The following table sets out the components of the Corporation's research and
development, as well as the percentages of revenue for the periods indicated.
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------
($000s)
<S> <C> <C> <C>
Gross research and development costs $54,244 $42,746 $33,997
Government allowances (696) (527) (897)
Amortization of previously capitalized amounts - 55 430
---------------------------------------------
Research and development $53,548 $42,274 $33,530
=============================================
Percentage of total revenue
Gross research and development 14% 14% 14%
Research and development 14% 14% 14%
</TABLE>
Gross research and development costs have continued to increase, in dollar
terms, over the last several fiscal years but have remained relatively constant
as a percentage of total revenue. The growth in both fiscal 2000 and fiscal 1999
was predominantly the result of increases associated with higher staffing levels
in this area. The increase in the average number of employees in this area was
26% in fiscal 2000 from fiscal 1999, and was 27% in fiscal 1999 from fiscal
1998. Foreign exchange rate fluctuations improved the overall percentage
increase in fiscal 2000 by approximately one percentage point whereas it reduced
the overall increase by eight percentage points for fiscal 1999.
Software development costs are expensed as incurred unless they meet generally
accepted accounting criteria for deferral and amortization. Software development
costs incurred prior to the establishment of technological feasibility do not
meet these criteria, and are expensed as incurred. Capitalized costs are
amortized over a period not exceeding 36 months. Costs were not deferred in any
of fiscal 2000, 1999, or 1998 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.
The Corporation believes there is a business opportunity for distributing
corporate information to the end user's desktop in an extended enterprise
environment of corporate intranets, extranets and client/server networks. In
earlier years the Corporation addressed this opportunity with the release of
Web-based products: PowerPlay Web, Impromptu Web Reports, and Cognos Query
(formerly Impromptu Web Query).
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During fiscal 2000 the Corporation launched a platform for Enterprise Business
Intelligence. This platform, which includes DecisionStream, provides a single
user interface or portal to support access to all Cognos business intelligence
products in an extended enterprise environment. During fiscal 2000 the
Corporation released PowerPlay 6.6, which provides Web managed reporting and
analysis functions for intranet, extranet and Internet access to OLAP (online
analytical processing) data. Also, during fiscal 2000 the Corporation released
Cognos Visualizer, a business management and measurement product that extends
the capabilities of PowerPlay and Impromptu with advanced visual reporting and
analysis. The Corporation also released new versions of Impromptu Web Reports,
DataMerchant, and Cognos Finance (formerly LEX2000).
The Corporation continues to support its application development tools and to
that end released a new version of PowerHouse during fiscal 2000 which enables
Web deployment of PowerHouse applications.
During fiscal 2001 the Corporation will invest in research and development of
business intelligence solutions, particularly those solutions that support the
Corporation's strategy to meet the needs of the extended enterprise customers
within the e-business economy. These investments will include the development of
e-application packages which include pre-defined data marts, key reports and
analysis solutions. The Corporation will continue the development of business-
to-business solutions using BI which extend the enterprise to incorporate the
supply chain, and the relationship with an enterprise's customers.
Acquisitions
Fiscal 2000
The Corporation acquired Information Tools AG, the Corporation's distributor in
Switzerland. The shareholders of Information Tools AG are to receive total
consideration of approximately $657,000, of which $458,000 was received in cash
during fiscal 2000. The remainder of the consideration ($199,000) is payable
equally on the first and second anniversaries of the closing of the transaction.
An amount, not to exceed $500,000 could also be paid in contingent
consideration. Of that amount, approximately $120,000 will be paid in fiscal
2001 relating to fiscal 2000 results. This amount has been recorded as
additional purchase price.
The Corporation purchased the entire outstanding minority interest in the
Corporation's subsidiary in Singapore, Cognos Far East Pte Limited. The former
minority shareholders of Cognos Far East Pte Limited received approximately
$1,688,000 in cash upon completion of the purchase. No further consideration is
due to the former minority shareholders of the subsidiary.
Fiscal 1999
The Corporation acquired substantially all the assets of Relational Matters
including DecisionStream software. DecisionStream aggregates and integrates
large volumes of transaction data with multidimensional data structures.
Relational Matters will receive approximately $7,550,000 over three years and
250,980 shares of the Corporation's common stock valued at $1,823,000 over the
same time period. The shares, all of which were issued, are being held in escrow
by the Corporation and will be released on the second (40%) and third (60%)
anniversaries of the closing of the transaction. For valuation purposes, the
deferred payments and shares were appropriately discounted.
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The Corporation acquired LEX2000 Inc., a developer of financial data mart and
reporting software, for a combination of cash and the Corporation's common
stock. The shareholders of LEX2000 Inc. will receive approximately $7,444,000
over three years and 252,118 shares of the Corporation's common stock valued at
$1,940,000 over the same time period. Approximately 14,200 shares were issued at
closing; the remainder, all of which were issued, are being held in escrow by
the Corporation and will be released equally on the second (50%) and third (50%)
anniversaries of the closing of the transaction. For valuation purposes, the
deferred payments and shares were appropriately discounted.
Fiscal 1998
During the first quarter ended May 31, 1997, the Corporation completed the
acquisition of Right Information Systems Limited (RIS) of London, England. RIS
was the provider of 4Thought(TM), business modeling and forecasting software.
The shareholders of RIS received $4,500,000 and 180,000 shares of the
Corporation's common stock, valued at $1,607,000. These shares are being held in
escrow by the Corporation until April 9, 2000.
During the third quarter ended November 30, 1997, the Corporation completed the
acquisition of Interweave Software, Inc. (Interweave) of Santa Clara,
California, U.S.A. Interweave was the developer and marketer of the Interweave
software product line, which allows information technology organizations to
deploy intranet- and extranet-based business intelligence applications more
broadly within and across enterprises. The acquisition agreement called for the
Corporation to pay approximately $12,415,000 cash to the shareholders of
Interweave, most of which was paid upon completion of the acquisition.
The acquisitions in fiscal 2000, 1999, and 1998 have been accounted for using
the purchase method. The results of operations of all acquired companies prior
to their respective dates of acquisition were not material. The results of all
acquired companies have been combined with those of the Corporation since their
respective dates of acquisition. (See Note 5 of the Notes to the Consolidated
Financial Statements.)
Investment Tax Credits
The Corporation recognized $6.2 million, $14.9 million, and $9.4 million in
fiscal 2000, 1999, and 1998, respectively, related to research and development
activities performed in Canada.
Interest Income and Expense
Interest income is earned on the Corporation's cash, cash equivalents, and
short-term investments, and interest expense relates primarily to the interest
on the Corporation's mortgage and capital leases.
Net interest income was $6.7 million, $5.9 million, and $4.9 million in fiscal
2000, 1999, and 1998, respectively. The increase during fiscal 2000 was the
result of a significant increase in the average size of the investment
portfolio, and to a lesser extent the impact of favorable exchange rate
fluctuations. This increase was offset by a slight decrease in the average
effective interest rates during fiscal 2000. The increase in fiscal 1999 was
primarily attributable to higher average effective interest rates, and to a
lesser extent, a larger average portfolio, which was partially offset by the
impact of adverse exchange rate fluctuations.
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Tax Expense
The Corporation's tax rate is affected by the relative profitability of its
operations in various geographic regions. In fiscal 2000 the Corporation's
effective tax rate was 33%, compared to 31% in fiscal 1999, and 29% in fiscal
1998. (See Note 9 of the Notes to the Consolidated Financial Statements.)
Liquidity and Capital Resources
As of February 29, 2000, the Corporation held $196.7 million in cash, cash
equivalents, and short-term investments, an increase of $47.0 million from
February 28, 1999. In addition, the Corporation has arranged an unsecured credit
facility that includes an operating line and foreign exchange conversion
facilities. The operating line permits the Corporation to borrow funds or issue
letters of credit or guarantee up to Cdn$15.0 (US$10.4) million, subject to
certain covenants. As of February 29, 2000, there were no direct borrowings
under this operating line. As discussed further below, the Corporation has
foreign exchange conversion facilities that allow it to hold foreign exchange
contracts of approximately Cdn$130.0 (US$89.7) million outstanding at any one
time.
As of February 29, 2000, the Corporation had a total of $4.9 million of long-
term liabilities (including the current portion of long-term debt), consisting
of a mortgage, other long-term liabilities, and certain capital leases. As of
February 29, 2000, working capital was $166.5 million, an increase of $43.1
million from February 28, 1999, primarily because of higher levels of cash,
accounts receivable, and short-term investments, which were partially offset by
increases in deferred revenue and other current liabilities. Working capital
increased in fiscal 2000 even though the Corporation used $26.0 million for
share repurchases and $2.1 million for acquisitions during the year.
Cash provided by operating activities (after changes in non-cash working capital
items) for fiscal 2000 was $83.2 million, a decrease of $1.4 million compared to
the prior fiscal year. This fluctuation was due to a net increase in non-cash
working capital as compared to a net decrease in non-cash working capital during
fiscal 1999, which was offset by an increase in net income after adjustments for
depreciation, amortization and other non-cash items.
Cash used in investing activities was $37.7 million for fiscal 2000, a decrease
in investment of $11.9 million compared to the prior fiscal year. The majority
of the fluctuation stems from a decrease in net investments in short-term
investment and decreases in acquisition costs; these decreases were offset by an
increase in fixed asset additions. The increase in fixed asset additions was
primarily the result of computer equipment and software purchases. Further,
during fiscal 2000 the Corporation began the construction of a second building
on the site of its corporate headquarters in Ottawa. The Corporation has
invested approximately $3.4 million in the current year and it is anticipated
that costs will total $21 million when the construction is substantially
complete in fiscal 2001. (See Note 7 of the Notes to the Consolidated Financial
Statements.) During fiscal 1999, the Corporation purchased the remaining
interest in its head office building in Ottawa, Canada for approximately $4.8
million. In fiscal 2000, the Corporation spent $7.4 million related to the
activity in short-term investments compared to $19.2 million (both net of
maturities) in fiscal 1999. In addition, the Corporation spent $2.1 million in
fiscal 2000 on acquisitions, compared to $9.2 million in fiscal 1999. (See Note
5 of the Notes to the Consolidated Financial Statements.)
Cash used in financing activities was $9.1 million for fiscal 2000, compared to
$28.7 million in fiscal 1999. The Corporation's financing activities for both
fiscal years were centered around the repurchase of its own shares in the open
market, and the issuance of shares pursuant to the Corporation's stock purchase
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plan and the exercise of stock options. During fiscal 2000, the Corporation
repurchased 2,286,000 shares at a cost of $26.0 million, compared to 3,006,000
shares repurchased at a cost of $34.1 million in fiscal 1999. Offsetting this
activity, the Corporation issued 2,093,000 common shares for consideration of
$16.5 million during fiscal 2000, compared to 1,146,000 shares for consideration
of $5.0 million in fiscal 1999. The issuance of shares in both periods was
pursuant to the Corporation's stock purchase plan and the exercise of stock
options by employees, officers, and directors. In fiscal 1999, the Corporation
also issued 503,000 shares for a value of $3.8 million in conjunction with the
acquisition of Relational Matters and LEX2000 Inc. In fiscal 1998 the
Corporation issued 180,000 shares for a value of $1.6 million in conjunction
with the acquisition of RIS. (See Note 5 of the Notes to the Consolidated
Financial Statements.)
The share repurchases made in the past three fiscal years were part of distinct
open market share repurchase programs through the Nasdaq National Market. The
share repurchases made in fiscal 2000 were part of two open market share
repurchase programs. The program adopted in October 1998 expired on October 8,
1999. Under this program the Corporation repurchased 3,161,800 of its shares for
$35.4 million; all repurchased shares were cancelled. In October 1999, the
Corporation adopted a new program that will enable it to purchase up to
4,200,000 common shares (not more than 5% of those issued and outstanding)
between October 9, 1999 and October 8, 2000. Under the current program the
Corporation has repurchased 100,000 shares for $1.3 million during fiscal 2000;
all repurchased shares were cancelled. This program does not commit the
Corporation to make any share repurchases. Purchases will be made on The Nasdaq
Stock Market at prevailing open market prices and paid out of general corporate
funds. All repurchased shares will be cancelled. A copy of the Notice of
Intention to Make an Issuer Bid is available from the Corporate Secretary. (See
Note 10 of the Notes to the Consolidated Financial Statements.)
The Corporation's policy with respect to foreign currency exposure is to manage
its financial exposure to certain foreign exchange fluctuations with the
objective of neutralizing some of the impact of foreign currency exchange
movements. To achieve this objective, the Corporation enters into foreign
exchange forward contracts to hedge portions of the net investment in its
various subsidiaries. The Corporation enters into these foreign exchange forward
contracts with major Canadian chartered banks, and therefore does not anticipate
non-performance by these counterparties. The amount of the exposure on account
of any non-performance is restricted to the unrealized gains in such contracts.
As of February 29, 2000, the Corporation had foreign exchange forward contracts,
with maturity dates ranging from March 30, 2000 to May 25, 2000, to exchange
various foreign currencies in the amount of $6.2 million.
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.
The Corporation anticipates that through fiscal 2001 its operations will be
financed by current cash balances and funds from operations. If the Corporation
were to require funds in excess of its current cash position to finance its
longer-term operations, the Corporation would expect to obtain such funds from,
one or a combination of, the expansion of its existing credit facilities, or
from public or private sales of equity or debt securities.
Inflation has not had a significant impact on the Corporation's results of
operations.
Year 2000 Project
Beginning in fiscal 1998 the Corporation commenced an intensive effort to
identify and categorize
36
<PAGE>
potential problem areas and develop action plans with respect to the Year 2000.
This process involved an examination of its products, and its internal systems,
hardware and software, as well as contacting its suppliers to obtain assurances
regarding their Year 2000 readiness. The total project costs for both the
Corporation's software products and its internal systems and processes were $2.4
million, of which approximately $0.1 million were capitalized. Of the total
project costs, $0.7 million, were incurred during fiscal 2000, and $1.7 million
during fiscal 1999.
European Economic and Monetary Union
The introduction of the euro currency on January 1, 1999 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 Corporation is preparing for this new euro currency, which is scheduled to
be introduced in stages over the course of a 3 1/2 year transition period. The
Corporation believes the introduction of the euro will have limited longer-term
implications on the Corporation's business. The Corporation is preparing for the
introduction of the euro in the area of its internal processes and systems
through identifying, modifying, and testing these processes and systems to
handle transactions involving the euro in accordance with the regulations. The
Corporation's financial application systems represent the most significant
internal systems that will be affected by the introduction of the euro. The
Corporation upgraded these systems to a version that enables it, together with
certain process changes and modifications provided by the application vendor to
its supported customers, to handle the initial requirements for transactions
involving the euro. The Corporation continues to identify and, where necessary,
modify its systems and processes in order to handle the various stages of the
euro implementation. The Corporation is continuing to monitor its pricing in
Europe, giving consideration to the introduction of the euro.
The Corporation believes that the costs relating to the conversion of its
internal systems and processes will not have a material adverse effect on its
business, results of operations, or financial condition.
Market Risk
Market risk represents the risk of loss that may impact our financial position
due to adverse changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in interest rates and foreign
currency exchange rates. We do not hold or issue financial instruments for
trading purposes.
Further discussion of our investment and foreign exchange policies can be found
in Notes 1 and 8 of the Notes to the Consolidated Financial Statements.
37
<PAGE>
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 29, 2000, 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 and the British pound, the German mark, and the
Australian dollar. Sensitivity analysis is used to measure our foreign currency
exchange rate risk. As of February 29, 2000, 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 subject to risks and
uncertainties that may cause future results to differ materially from those
expected. There can be no guarantee that future results will turn out as
expected. Factors that may cause such differences include, but are not limited
to, the factors discussed below. Additional risks and uncertainties that we are
unaware of or currently deem immaterial may also adversely affect our business
operations.
Our growth may not continue at historical growth 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. Despite product license revenue growth from our application
development tools during fiscal 1999, we have been experiencing a decline in
product license revenue from our application development tools
38
<PAGE>
over the past several years. In the long term, we expect declining revenues in
these more established proprietary markets for our application development
tools.
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;
. changes in product mix and our ability to anticipate changes in shipment
patterns;
. our ability to identify and develop new technologies and to commercialize
those technologies into new products;
. our ability to accurately select appropriate business models and
strategies;
. our ability to make appropriate decisions which will position us to achieve
further growth;
. our ability to identify, hire, train, motivate, and retain highly qualified
personnel, and to achieve targeted productivity levels;
. our ability to identify, develop, deliver, and introduce in a timely manner
new and enhanced versions of our products which anticipate market demand
and address customer needs;
. market acceptance of business intelligence software generally and of new and
enhanced versions of our products in particular;
timing of new product announcements;
. our ability to establish and maintain a competitive advantage;
changes in our pricing policies or those of our competitors and other
competitive pressures on selling prices;
. size, timing, and execution of customer orders and shipments, including
delays, deferrals, or cancellations of customer orders;
. number and significance of product enhancements and new product and
technology announcements by our competitors;
. our reliance on third party distribution channels as part of our sales and
marketing strategy;
. the timing and provision of pricing protections and exchanges from certain
distributors;
. changes in foreign currency exchange rates and issues relating to the
conversion to the euro; and
. our ability to enforce our intellectual property rights.
As a result of the foregoing and other factors, we may experience material
fluctuations in future quarterly and annual operating results. These
fluctuations could materially and adversely affect our stock price, as well as,
our business, results of operations, and financial condition.
The software markets that we target are subject to rapid technological change
and new product introductions and enhancements.
The markets for our products are characterized by:
. rapid and significant technological change;
. frequent new product introductions and enhancements;
39
<PAGE>
. changing customer demands; and
. evolving industry standards.
We believe that our future success depends principally on our ability to
continue to support a number of popular operating systems and databases; our
ability to maintain and improve our product line; and our ability to rapidly
develop new products that achieve market acceptance, maintain technological
competitiveness, and meet an expanding range of customer requirements. If we are
unable to achieve these factors, we may lose our competitive position.
Successful product development and introduction depend upon a number of factors,
including new product selection, timely and efficient completion of product
design, product performance at customer locations, and whether our competitors
develop similar products. In addition, the introduction of products embodying
new technologies can quickly make existing products obsolete and unmarketable.
We cannot assure you that our products will remain competitive, respond to
market demands and developments and new industry standards, and not become
obsolete. In particular, we cannot assure you that we have developed the
appropriate products to respond effectively to the growing market interest in
Web-based software, or if so, whether we can continue to bring those products to
market in a timely and cost-effective basis and distribute those products in the
face of competition from similar products developed by existing or new
competitors. We cannot assure you that market interest in Web-based software
will continue at the same rate, or that alternative methods of deploying
software will not become more popular. If we are unable to identify a shift in
the market demand quickly enough, we may not be able to develop products to meet
those new demands, or bring them to market in a timely way.
We rely on partners and other distribution channels to market and distribute our
products and any failure of these parties to do so, could have a material
adverse effect on our business.
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 have developed a number of these
relationships and intend to continue to develop new channel partner
relationships. Our inability to attract important and effective channel
partners, or these partners' inability to penetrate their respective market
segments, or the loss of any of our channel partners as a result of competitive
products offered by other companies or products developed internally by these
channel partners or otherwise, could materially adversely affect our business,
results of operations, and financial condition.
Unauthorized used of our intellectual property could damage our business.
Our success depends in part on our ability to protect our proprietary rights in
our intellectual property. We rely on certain intellectual property protections,
including contractual provisions, patents, copyright, trademark and trade secret
laws, to preserve our intellectual property rights. Despite our precautions, it
may be possible for third parties to obtain and use our intellectual property
without our authorization. Policing unauthorized use of software is difficult
and some foreign laws do not protect proprietary rights to the same extent as
Canada or the United States.
To protect our intellectual property, we may become involved in litigation,
which could result in substantial expenses and materially disrupt the conduct of
our business. Third parties could assert that our technology infringes their
proprietary rights, which could adversely affect our ability to distribute our
products and result in substantial litigation expenses and monetary liability.
Any invalidation of our intellectual property rights or lengthy and expensive
defense of those rights could have a material adverse affect on our business,
results of operations, and financial condition.
40
<PAGE>
The loss of our rights to use software licensed to us by third parties could
harm our business.
In order to provide a complete solution, we license certain technologies used in
our products from third parties, generally on a non-exclusive basis. The
termination of such licenses, or the failure of the third-party licensors to
adequately maintain or update their products, could delay our ability to ship
certain of our products while we seek to implement alternative technology
offered by other sources. In addition, alternative technology may not be
available on commercially reasonable terms. In the future, it may be necessary
or desirable to obtain other third-party technology licenses relating to one or
more of our products or relating to current or future technologies to enhance
our product offerings. We cannot assure you that we will be able to obtain
licensing rights to the needed technology on commercially reasonable terms, if
at all.
We face intense competition and could be affected by the actions of our
competitors.
We face substantial competition throughout the world, primarily from software
companies located in the United States, Europe, and Canada. Some of our
competitors have been in business longer than us and have substantially greater
financial and other resources with which to pursue research and development,
manufacturing, marketing, and distribution of their products. We expect our
current competitors and potentially new competitors to continue to improve the
performance of their current products and to introduce new products or new
technologies that provide improved cost of ownership and performance
characteristics. New product introductions by our competitors could cause a
decline in sales, a reduction in the sales price, or a loss of market acceptance
of our existing products. To the extent that we are unable to effectively
compete against our current and future competitors, our ability to sell products
could be harmed and our market share reduced. Any erosion of our competitiveness
could have a material adverse effect on our business, results of operations, and
financial condition.
We have multinational operations that are subject to risks inherent in
international operations.
We derive a significant portion of our total revenues from international sales.
International sales are subject to significant risks, including:
. unexpected changes in legal and regulatory requirements and policy
changes affecting our markets;
. changes in tariffs and other trade barriers;
. fluctuations in currency exchange rates;
. political and economic instability;
. longer payment cycles and other difficulties in accounts receivable
collection;
. difficulties in managing distributors and representatives;
. difficulties in staffing and managing foreign operations;
. difficulties in protecting our intellectual property; and
. potentially adverse tax consequences.
Each of these factors could adversely affect our business, results of
operations, and financial condition.
41
<PAGE>
Our executive management and other key personnel are essential to our business;
we may not be able to recruit and retain the personnel we need to succeed.
Our performance is substantially dependent on the performance of our key
technical and management personnel. The loss of the services of any of these
persons could have a material adverse effect on our business, results of
operations, and financial condition. Our success is highly dependent on our
continuing ability to identify, hire, train, motivate, and retain highly
qualified management, technical, sales, and marketing personnel. Competition for
such personnel is intense, and we cannot assure you that we will be able to
attract, assimilate, or retain highly qualified technical and managerial
personnel in the future. Our inability to attract and retain the necessary
management, technical, sales, and marketing personnel could have a material
adverse effect on our business, results of operations, and financial condition.
Pursuing and completing recent and potential acquisitions could divert
management attention and financial resources and may not produce the desired
business results.
We completed the acquisitions of Information Tools AG, and the outstanding
minority interest in Cognos Far East Pte Limited during fiscal 2000. In fiscal
1999, we acquired Relational Matters and LEX2000 Inc., and in fiscal 1998, Right
Information Systems Limited and Interweave Software, Inc. We may in turn engage
in additional selective acquisitions of other products or businesses that we
believe are complementary to ours. We cannot assure you that we will be able to
identify additional suitable acquisition candidates available for sale at
reasonable prices, consummate any acquisition, or successfully integrate any
acquired product or business into our operations. Further, acquisitions may
involve a number of special risks, including:
. diversion of management's attention;
. disruption to our ongoing business;
. failure to retain key acquired personnel;
. difficulties in assimilating acquired operations, technologies, products,
and personnel;
. unanticipated expenses, events, or circumstances;
. assumption of legal and other undisclosed liabilities; and
. the ability to appropriately value the acquired in-process research and
development.
If we do not successfully address these risks or any other problems encountered
in connection with an acquisition, the acquisition could have a material adverse
effect on our business, results of operations, and financial condition. Problems
with an acquired business could have a material adverse effect on our
performance as a whole. In addition, if we proceed with an acquisition, our
available cash may be used to complete the transaction, or shares may be issued
which could cause a dilution to existing shareholders.
Our stock price will fluctuate.
The market price of our common shares may be volatile and could be subject to
wide fluctuations due to a number of factors, including:
. actual or anticipated fluctuations in our results of operations;
. announcements of technological innovations or new products by us or our
competitors;
. changes in estimates of our future results of operations by securities
analysts;
. general industry changes in the business intelligence tools or
client/server development tools markets; or
42
<PAGE>
. other events or factors.
In addition, the financial markets have experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of these companies. Broad market fluctuations, as
well as economic conditions generally and in the software industry specifically,
may adversely affect the market price of our common shares. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. Similar litigation may occur in the future with respect to us,
which could result in substantial costs, divert management's attention and other
company resources, and have a material adverse effect upon our business, results
of operations, and financial condition.
43
<PAGE>
Quarterly Results
The following table sets out selected unaudited consolidated financial
information for each quarter in fiscal 1999 and fiscal 2000.
On April 6, 2000, subsequent to year-end, 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.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 2000
--------------------------------------- ---------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($000s, except per share amounts, Canadian GAAP)
Revenue $67,309 $70,583 $76,308 $86,925 $81,645 $88,128 $97,753 $118,114
-------------------------------------- --------------------------------------
Operating expenses
Cost of product license 942 1,137 1,354 2,305 1,054 1,001 1,456 1,724
Cost of product support 2,408 2,793 2,968 2,997 3,095 3,336 3,608 3,719
Selling, general, and
administrative 43,140 42,140 44,789 48,226 53,478 56,263 63,183 71,903
Research and development 9,946 10,235 10,863 11,230 12,197 12,845 13,574 14,932
Investment tax credits (2,465) (5,085) (3,647) (3,683) (1,167) (1,163) (2,177) (1,700)
Total operating expenses 53,971 51,220 56,327 61,075 68,657 72,282 79,644 90,578
--------------------------------------- --------------------------------------
Operating income $13,338 $19,363 $19,981 $25,850 $12,988 $15,846 $18,109 $ 27,536
======================================= ======================================
Net income $10,375 $13,223 $14,955 $19,569 $ 9,796 $11,768 $12,782 $ 20,196
======================================= ======================================
Net income per share
Basic $ 0.12 $ 0.15 $ 0.17 $ 0.23 $ 0.11 $ 0.14 $ 0.15 $ 0.23
======================================= ======================================
Fully diluted $ 0.11 $ 0.15 $ 0.17 $ 0.22 $ 0.11 $ 0.14 $ 0.15 $ 0.23
======================================= ======================================
</TABLE>
The Corporation's sales cycle typically ranges from a few days up to twelve
months, depending on factors such as the size of the transaction, the product
involved, the length of the customer relationship, the timing of new product
introductions by the Corporation and others, the level of sales management
activity, and general economic conditions. Delays in closing product licensing
transactions at or near the end of any quarter may have a materially adverse
effect on the financial results for that quarter. While the Corporation takes
steps to minimize the impact of such delays, there can be no assurance that such
delays will not occur. See Certain Factors That May Affect Future Results.
44
<PAGE>
COGNOS INCORPORATED
REPORT OF MANAGEMENT
The Corporation's management is responsible for preparing the accompanying
consolidated financial statements in conformity with accounting principles
generally accepted in Canada. In preparing these consolidated financial
statements, management selects appropriate accounting policies and uses its
judgment and best estimates to report events and transactions as they occur.
Management has determined such amounts on a reasonable basis in order to ensure
that the financial statements are presented fairly, in all material respects.
Financial data included throughout this Annual Report is prepared on a basis
consistent with that of the financial statements.
The Corporation maintains a system of internal accounting controls designed to
provide reasonable assurance, at a reasonable cost, that assets are safeguarded
and that transactions are executed and recorded in accordance with the
Corporation's policies for doing business. This system is supported by written
policies and procedures for key business activities; the hiring of qualified,
competent staff; and by a continuous planning and monitoring program.
Ernst & Young LLP, the independent auditors appointed by the shareholders, have
been engaged to conduct an examination of the consolidated financial statements
in accordance with generally accepted auditing standards, and have expressed
their opinion on these statements. During the course of their audit, Ernst &
Young LLP reviewed the Corporation's system of internal controls to the extent
necessary to render their opinion on the consolidated financial statements.
The Board of Directors is responsible for ensuring that management fulfills its
responsibility for financial reporting and internal control, and is ultimately
responsible for reviewing and approving the consolidated financial statements.
The Board carries out this responsibility principally through its Audit
Committee; all members are outside Directors. The Committee meets four times
annually to review audited and unaudited financial information prior to its
public release. The Committee also considers, for review by the Board of
Directors and approval by the shareholders, the engagement or reappointment of
the external auditors. Ernst & Young LLP has full and free access to the Audit
Committee.
Management acknowledges its responsibility to provide financial information that
is representative of the Corporation's operations, is consistent and reliable,
and is relevant for the informed evaluation of the Corporation's activities.
/s/ James M. Tory /s/ R. Zambonini /s/ Donnie M. Moore
James M. Tory Ron Zambonini Donnie M. Moore
Chairman President and Senior Vice President,
Chief Executive Officer Finance & Administration, and
Chief Financial Officer
March 30, 2000
[except Note 14, as to which
the date is April 6, 2000]
45
<PAGE>
COGNOS INCORPORATED
AUDITORS' REPORT
To the Board of Directors and Shareholders of Cognos Incorporated:
We have audited the consolidated balance sheets of Cognos Incorporated as at
February 29, 2000 and February 28, 1999 and the consolidated statements of
income, stockholders' equity, and cash flows for each of the years in the three-
year period ended February 29, 2000. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at February 29,
2000 and February 28, 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended February 29, 2000, in
accordance with accounting principles generally accepted in Canada.
On March 30, 2000, we reported separately to the Board of Directors and
Shareholders of Cognos Incorporated on financial statements for the same
periods, prepared in accordance with accounting principles generally accepted in
the United States of America.
/s/ Ernst & Young LLP
Ottawa, Canada Ernst & Young LLP
March 30, 2000 Chartered Accountants
[except Note 14, as to which
the date is April 6, 2000]
46
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(US$000s except share amounts, CDN GAAP)
<TABLE>
<CAPTION>
Years Ended the Last Day of February
Note 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Product license $203,299 $158,393 $126,820
Product support 118,061 93,311 72,832
Services 64,280 49,421 45,182
- --------------------------------------------------------------------------------------------------------------
Total revenue 385,640 301,125 244,834
- --------------------------------------------------------------------------------------------------------------
Operating expenses
Cost of product license 5,235 5,738 3,828
Cost of product support 13,758 11,166 9,694
Selling, general, and administrative 244,827 178,295 143,493
Research and development 53,548 42,274 33,530
Investment tax credits (6,207) (14,880) (9,432)
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 311,161 222,593 181,113
- --------------------------------------------------------------------------------------------------------------
Operating income 74,479 78,532 63,721
Interest expense 6 (718) (527) (481)
Interest income 7,454 6,430 5,340
- --------------------------------------------------------------------------------------------------------------
Income before taxes 81,215 84,435 68,580
Income tax provision 9 26,673 26,313 19,638
- --------------------------------------------------------------------------------------------------------------
Net income $ 54,542 $ 58,122 $ 48,942
==============================================================================================================
Net income per share 10, 14
Basic $0.63 $0.66 $0.55
==============================================================================================================
Fully diluted $0.62 $0.65 $0.54
==============================================================================================================
Weighted average number of shares (000s) 10, 14
Basic 85,972 87,416 88,414
==============================================================================================================
Fully diluted 92,082 93,404 96,082
==============================================================================================================
</TABLE>
(See accompanying notes)
47
<PAGE>
CONSOLIDATED BALANCE SHEETS
(US$000s, CDN GAAP)
<TABLE>
<CAPTION>
February 29, February 28,
Note 2000 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 8 $132,435 $ 93,617
Short-term investments 8 64,284 56,074
Accounts receivable 2 107,823 76,876
Inventories 806 807
Prepaid expenses 7,840 6,388
- ------------------------------------------------------------------------------------------------------------
313,188 233,762
Fixed assets 3 44,835 30,164
Intangible assets 4 40,158 50,179
- ------------------------------------------------------------------------------------------------------------
$398,181 $314,105
============================================================================================================
Liabilities
Current liabilities
Accounts payable $ 22,908 $ 18,960
Accrued charges 17,540 13,148
Salaries, commissions, and related items 24,024 19,656
Income taxes payable 3,548 7,290
Current portion of long-term debt 6 2,176 123
Deferred revenue 76,537 51,242
- ------------------------------------------------------------------------------------------------------------
146,733 110,419
Long-term debt 6 - 2,489
Long-term liabilities 5 2,699 5,820
Deferred income taxes 9 21,730 16,775
- ------------------------------------------------------------------------------------------------------------
171,162 135,503
- ------------------------------------------------------------------------------------------------------------
Commitments and Contingencies 7
Stockholders' Equity
Capital stock
Common shares
(2000 - 86,657,578; 1999 - 86,850,568) 10, 14 106,936 91,985
Retained earnings 126,316 95,329
Other accumulated comprehensive items (6,233) (8,712)
- ------------------------------------------------------------------------------------------------------------
227,019 178,602
- ------------------------------------------------------------------------------------------------------------
$398,181 $314,105
============================================================================================================
</TABLE>
(See accompanying notes)
On behalf of the Board:
48
<PAGE>
/s/ Douglas C. Cameron /s/ James M. Tory
Douglas C. Cameron, Director James M. Tory, Chairman
49
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(US$000s except share amounts, CDN GAAP)
<TABLE>
<CAPTION>
Other
Accumulated
Common Stock Retained Comprehensive
------------------------------
Shares Amount Earnings Items Total
- ---------------------------------------------------------- ------------------------------------------------------------------
(000s)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances,
February 28, 1997 87,178 $ 74,739 $ 46,122 $(4,949) $115,912
Issuance of stock
Stock option plans 3,316 8,557 8,557
Stock purchase plans 74 776 776
Business acquisitions 180 1,607 1,607
Repurchase of shares (2,540) (2,386) (26,725) (29,111)
Income tax effect related to stock options 2,425 2,425
- ------------------------------------------------------------------------------------------------------------------------------
88,208 85,718 19,397 (4,949) 100,166
- ------------------------------------------------------------------------------------------------------------------------------
Net income 48,942 48,942
Other comprehensive items
Foreign currency translation adjustments (1,803) (1,803)
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 48,942 (1,803) 47,139
- ------------------------------------------------------------------------------------------------------------------------------
Balances,
February 28, 1998 88,208 $ 85,718 $ 68,339 $(6,752) $147,305
Issuance of stock
Stock option plans 1,054 4,141 4,141
Stock purchase plans 92 846 846
Business acquisitions 503 3,763 3,763
Repurchase of shares (3,006) (3,005) (31,132) (34,137)
Income tax effect related to stock options 522 522
- ------------------------------------------------------------------------------------------------------------------------------
86,851 91,985 37,207 (6,752) 122,440
- ------------------------------------------------------------------------------------------------------------------------------
Net income 58,122 58,122
Other comprehensive items
Foreign currency translation adjustments (1,960) (1,960)
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 58,122 (1,960) 56,162
- ------------------------------------------------------------------------------------------------------------------------------
Balances,
February 28, 1999 86,851 $ 91,985 $ 95,329 $(8,712) $178,602
Issuance of stock
Stock option plans 1,973 15,420 15,420
Stock purchase plans 120 1,095 1,095
Repurchase of shares (2,286) (2,458) (23,555) (26,013)
Income tax effect related to stock options 894 894
- ------------------------------------------------------------------------------------------------------------------------------
86,658 106,936 71,774 (8,712) 169,998
- ------------------------------------------------------------------------------------------------------------------------------
Net income 54,542 54,542
Other comprehensive items
Foreign currency translation adjustments 2,479 2,479
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 54,542 2,479 57,021
- ------------------------------------------------------------------------------------------------------------------------------
Balances,
February 29, 2000 86,658 $106,936 $126,316 $(6,233) $227,019
==============================================================================================================================
</TABLE>
(See accompanying notes)
50
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, CDN GAAP)
<TABLE>
<CAPTION>
Years Ended the Last Day of February
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by (used in) operating activities
Net income $ 54,542 $ 58,122 $ 48,942
Non-cash items
Depreciation and amortization 26,272 17,958 12,367
Deferred income taxes 4,756 (3,685) (370)
Loss on disposal of fixed assets 148 185 403
- ------------------------------------------------------------------------------------------------------------
85,718 72,580 61,342
Change in non-cash working capital
Increase in accounts receivable (32,818) (12,805) (17,135)
Decrease (increase) in inventories 31 (267) 91
Increase in prepaid expenses (1,328) (2,852) (837)
Increase in accounts payable 3,930 3,526 3,571
Increase in accrued charges 1,004 2,568 300
Increase in salaries, commissions, and related items 4,394 5,806 2,948
Increase (decrease) in income taxes payable (3,993) 5,624 (2,603)
Increase in deferred revenue 26,280 10,438 8,208
- ------------------------------------------------------------------------------------------------------------
83,218 84,618 55,885
- ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities
Maturity of short-term investments 138,796 96,860 131,340
Purchase of short-term investments (146,238) (116,093) (151,141)
Acquisition costs (2,146) (9,174) (16,915)
Additions to fixed assets (28,096) (21,147) (12,068)
Proceeds from the sale of fixed assets 24 12 45
- ------------------------------------------------------------------------------------------------------------
(37,660) (49,542) (48,739)
- ------------------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities
Issue of common shares 17,409 5,509 11,758
Repurchase of shares (26,013) (34,137) (29,111)
Repayment of long-term debt (467) (107) (92)
- ------------------------------------------------------------------------------------------------------------
(9,071) (28,735) (17,445)
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 2,331 (2,338) (1,240)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 38,818 4,003 (11,539)
Cash and cash equivalents, beginning of period 93,617 89,614 101,153
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 132,435 93,617 89,614
Short-term investments, end of period 64,284 56,074 36,712
- ------------------------------------------------------------------------------------------------------------
Cash, cash equivalents, and short-term investments, end
of period $ 196,719 $ 149,691 $ 126,326
============================================================================================================
</TABLE>
(See accompanying notes)
51
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
The Corporation develops, markets, and supports computer software products for
data access, exploring, reporting, and analysis, and for application development
on a wide range of open and proprietary platforms. The Corporation markets and
supports these products both directly and through resellers worldwide.
Basis of Presentation
These consolidated financial statements have been prepared by the Corporation in
United States (U.S.) dollars and in accordance with generally accepted
accounting principles (GAAP) in Canada, applied on a consistent basis.
Consolidated financial statements prepared in accordance with U.S. GAAP, in U.S.
dollars, are made available to all shareholders, and filed with various
regulatory authorities.
Basis of Consolidation
These consolidated financial statements include the accounts of the Corporation
and its subsidiaries. All but one of the subsidiaries are wholly owned.
Intercompany transactions and balances have been eliminated.
Estimates
The preparation of these consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and the accompanying
notes. In the opinion of Management, these consolidated financial statements
reflect all adjustments necessary to present fairly the results for the periods
presented. Actual results could differ from these estimates.
Comprehensive Income
Comprehensive income includes net income and "other comprehensive income." Other
comprehensive income refers to changes in the balances of revenues, expenses,
gains, and losses that are recorded directly as a separate component of
Stockholders' Equity and excluded from net income. The only comprehensive item
for the Corporation relates to foreign currency translation adjustments
pertaining to those subsidiaries not using the U.S. dollar as their functional
currency.
Foreign Currency Translation
The financial statements of the parent company and its non-U.S. subsidiaries
have been translated into U.S. dollars in accordance with The Canadian Institute
of Chartered Accountants (CICA) Handbook, Section 1650, Foreign Currency
Translation. All balance sheet amounts have been translated using the exchange
rates in effect at the applicable year end. Income statement amounts have been
translated using
52
<PAGE>
the weighted average exchange rate for the applicable year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported as a separate component of Stockholders' Equity. Currency transaction
gains and losses are immaterial for all periods presented.
Revenue
The Corporation recognizes revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants.
Substantially all of the Corporation's product license revenue is earned from
licenses of off-the-shelf software requiring no customization. Revenue from
these licenses is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is probable. If a license 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 are deferred and expensed in the period the related
revenue is recognized.
Revenue from education, consulting, and other services is recognized at the time
such services are rendered.
For contracts with multiple obligations (e.g. deliverable and undeliverable
products, support obligations, education, consulting and other services), the
Corporation allocates revenue to each element of the contract based on objective
evidence, specific to the Corporation, of the fair value of the element.
Cash, Cash Equivalents, and Short-Term Investments
Cash includes cash equivalents, which are investments that are generally held to
maturity and have terms to maturity of three months or less at the time of
acquisition. Cash equivalents typically consist of commercial paper, term
deposits, banker's acceptances and bearer deposit notes issued by major North
American banks, and corporate debt. Cash and cash equivalents are carried at
cost, which approximates their fair value.
Short-term investments are investments that are generally held to maturity and
have terms greater than three months at the time of acquisition. Short-term
investments typically consist of commercial paper, Government of Canada Treasury
Bills, and banker's acceptances. Short-term investments are carried at cost,
which approximates their fair value.
Inventories
Inventories are comprised principally of finished goods and are stated at the
lower of cost, on an average cost basis, and net realizable value.
Fixed Assets
Fixed assets are recorded at cost. Computer equipment and software, and the
building, are depreciated using the straight line method. Office furniture is
depreciated using the diminishing balance method.
53
<PAGE>
Leasehold improvements are amortized using the straight line method over either
the life of the improvement or the term of the lease, whichever is shorter.
Assets leased on terms that transfer substantially all of the benefits and risks
of ownership to the Corporation are accounted for as capital leases, as though
the asset had been purchased and a liability incurred. All other leases are
accounted for as operating leases.
Intangible Assets
This category includes acquired technology and goodwill associated with various
acquisitions, and deferred software development costs.
Acquired technology represents the discounted fair value of the estimated net
future income-producing capabilities of software products acquired on
acquisitions. Acquired technology is amortized over five years on a straight
line basis. The Corporation evaluates the expected future net cash flows of the
acquired technology at each reporting date, and adjusts to net realizable value
if necessary.
Goodwill represents the excess of the purchase price of acquired companies over
the estimated fair value of the tangible and intangible net assets acquired.
Goodwill is amortized over five years on a straight line basis. The Corporation
evaluates the expected future net cash flows of the acquired businesses at each
reporting date, and adjusts goodwill for any impairment.
Software development costs are expensed as incurred unless they meet generally
accepted accounting criteria for deferral and amortization. Software development
costs incurred prior to the establishment of technological feasibility do not
meet these criteria, and are expensed as incurred. Research costs are expensed
as incurred. For costs that are capitalized, the amortization is the greater of
the amount calculated using either (i) the ratio that the appropriate product's
current gross revenues bear to the total of current and anticipated future gross
revenues for that product, or (ii) the straight line method over the remaining
economic life of the product. Such amortization is recorded over a period not
exceeding three years. The Corporation reassesses whether it has met the
relevant criteria for continued deferral and amortization at each reporting
date.
Income Taxes
The Corporation adopted CICA Handbook, Section 3465, Income Taxes in fiscal
1998. Under this method, future tax assets and liabilities are determined based
on differences between financial reporting and income tax bases of assets and
liabilities, and are measured using the tax rates and laws that are expected to
be in effect when the differences reverse.
Cash Flows
In June 1998, the CICA released Section 1540, Cash Flow Statements, which was
adopted by the Corporation in fiscal 1999. Under this method, non-cash investing
and financing transactions are excluded. The comparative consolidated
statements of cash flows have been restated.
2. Accounts Receivable
Accounts receivable include an allowance for doubtful accounts of $4,734,000 and
$4,430,000 as of February 29, 2000 and February 28, 1999, respectively.
54
<PAGE>
3. Fixed Assets
<TABLE>
<CAPTION>
2000 1999
---------------------------------- ----------------------------------
Accumulated Accumulated
Depreciation Depreciation Depreciation/
and and Amortization
Cost Amortization Cost Amortization Rate
------------- ---------------- -------------- --------------- ------------------
($000s) ($000s)
<S> <C> <C> <C> <C> <C>
Computer equipment and
software $ 63,334 $43,370 $ 46,795 $32,665 33%
Office furniture 21,602 11,317 15,877 9,230 20%
Leasehold improvements 8,160 3,726 5,404 2,754 Lease Term
Land 820 - 788 - -
Building 7,198 1,243 6,916 967 2.5%
Construction in progress* 3,377 - - - -
------------- ---------------- -------------- ---------------
104,491 $59,656 75,780 $45,616
================ ===============
(59,656) (45,616)
------------- --------------
Net book value $ 44,835 $ 30,164
============= ==============
</TABLE>
* See Note 7
Depreciation and amortization of fixed assets was $13,898,000, $10,760,000, and
$8,766,000 in each of fiscal 2000, 1999, and 1998, respectively.
4. Intangible assets
Intangible assets as at February 29, 2000, and February 28, 1999, include
acquired technology and goodwill, and are disclosed net of amortization.
The Corporation recorded $2,352,000 of goodwill in fiscal 2000 and $26,338,000
of acquired technology and goodwill in fiscal 1999. Amortization of intangible
assets was $12,374,000, $7,143,000, and $3,171,000 in each of fiscal 2000, 1999,
and 1998, respectively (see Note 5).
The Corporation did not capitalize any costs of internally-developed computer
software to be sold, licensed, or otherwise marketed in each of fiscal 2000,
1999, and 1998, and recorded $0, $55,000, and $430,000 of corresponding
amortization, respectively.
5. Acquisitions
Fiscal 2000 Acquisitions
On May 28, 1999, the Corporation completed the acquisition of Information Tools
AG, the Corporation's distributor in Switzerland. The shareholders of
Information Tools AG are to receive total consideration of approximately
$657,000 of which $458,000 was received in cash during fiscal 2000. The
remainder of the consideration ($199,000) is payable equally on the first and
second anniversaries of the closing of the transaction. An amount not to exceed
$500,000 could also be paid in contingent consideration. Of that
55
<PAGE>
amount, approximately $120,000 will be paid in fiscal 2001 relating to fiscal
2000 results and has been recorded as additional purchase price.
On July 15, 1999, the Corporation completed the purchase of the entire
outstanding minority interest in the Corporation's subsidiary in Singapore,
Cognos Far East Pte Limited. The former minority shareholders of Cognos Far East
Pte Limited received approximately $1,688,000 in cash upon completion of the
purchase. No further consideration is due to the former minority shareholders of
the subsidiary.
Both acquisitions have been accounted for using the purchase method. The results
of operations of both acquired companies prior to the acquisition were not
material, and thus pro forma information has not been provided. The results of
both acquired companies have been combined with those of the Corporation since
their respective dates of acquisition.
Total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date: ($000s)
<TABLE>
<CAPTION>
Cognos Far
Information East Pte
Tools AG Limited Total
------------------ ------------------ ------------------
<S> <C> <C> <C>
Assets acquired $ 683 $ - $ 683
Liabilities assumed (570) - (570)
------------------ ------------------ ------------------
Net assets acquired 113 - 113
Goodwill 664 1,688 2,352
------------------ ------------------ ------------------
Purchase price $ 777 $1,688 $2,465
================== ================== ==================
Consideration
Cash 458 1,688 2,146
Deferred payment 319 - 319
------------------ ------------------ ------------------
$ 777 $1,688 $2,465
================== ================== ==================
</TABLE>
Fiscal 1999 Acquisitions
On December 3, 1998, the Corporation completed the acquisition of substantially
all the assets of Relational Matters including DecisionStream software.
DecisionStream aggregates and integrates large volumes of transaction data with
multidimensional data structures. Relational Matters will receive approximately
$7,555,000 over three years and 250,980 shares of the Corporation's common stock
valued at $1,823,000 over the same time period. The shares, all of which were
issued, are being held in escrow by the Corporation and will be released on the
second (40%) and third (60%) anniversaries of the closing of the transaction.
For valuation purposes, the deferred payments and shares were appropriately
discounted.
On February 24, 1999, the Corporation completed the acquisition of LEX2000 Inc.,
a developer of financial data mart and reporting software, for a combination of
cash and the Corporation's common stock. The shareholders of LEX2000 Inc. will
receive approximately $7,444,000 over three years and 252,118 shares of the
Corporation's common stock valued at $1,940,000 over the same time period.
Approximately 14,200 shares were issued at closing; the remainder, all of which
were issued, are being held in escrow by the Corporation and will be released
equally on the second (50%) and third (50%)
56
<PAGE>
anniversaries of the closing of the transaction. For valuation purposes, the
deferred payments and remaining shares were appropriately discounted.
The scheduled aggregate annual payments for the long-term liabilities related to
these two acquisitions are $3,501,000 and $2,599,000, in fiscal 2001and 2002,
respectively. Amounts due within twelve months are included in accrued charges.
Both acquisitions have been accounted for using the purchase method. The results
of operations of both acquired companies prior to the acquisitions were not
material, and thus pro forma information has not been provided. The results of
both acquired companies have been combined with those of the Corporation since
their respective dates of acquisition.
Total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date: ($000s)
<TABLE>
<CAPTION>
Relational
Matters LEX2000 Total
----------------- ------------------ -----------------
<S> <C> <C> <C>
Assets acquired
Acquired technology $6,000 $15,499 $21,499
Other assets 25 1,501 1,526
----------------- ------------------ -----------------
6,025 17,000 23,025
Liabilities assumed (37) (2,869) (2,906)
Deferred tax credits -- (6,201) (6,201)
----------------- ------------------ -----------------
Net assets acquired 5,988 7,930 13,918
Goodwill 3,385 1,454 4,839
----------------- ------------------ -----------------
Purchase price $9,373 $ 9,384 $18,757
================= ================== =================
Consideration
Cash $4,419 $ 4,755 $ 9,174
Deferred payment 3,131 2,689 5,820
Shares 1,823 1,940 3,763
----------------- ------------------ -----------------
$9,373 $ 9,384 $18,757
================= ================== =================
</TABLE>
Fiscal 1998 Acquisitions
On April 9, 1997, the Corporation completed the acquisition of Right Information
Systems Limited (RIS) of London, England. RIS was the provider of 4Thought,
business modeling and forecasting software. The shareholders of RIS received
$4,500,000 and 180,000 shares of the Corporation's common stock, valued at
$1,607,000. These shares, all of which were issued, are being held in escrow by
the Corporation until April 9, 2000.
On October 24, 1997, the Corporation completed the acquisition of Interweave
Software, Inc. (Interweave) of Santa Clara, California, U.S.A. Interweave was
the developer and marketer of the Interweave software product line, which allows
information technology organizations to deploy intranet- and extranet-based
business intelligence applications more broadly within and across enterprises.
The acquisition agreement called for the Corporation to pay $12,415,000 to the
shareholders of Interweave, the majority of which was paid upon completion of
the acquisition
57
<PAGE>
Both acquisitions have been accounted for using the purchase method. The results
of operations of both acquired companies prior to the acquisitions were not
material, and thus pro forma information has not been provided. The results of
both acquired companies have been combined with those of the Corporation since
their respective dates of acquisition.
Total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date: ($000s)
<TABLE>
<CAPTION>
RIS Interweave Total
----------------- ------------------ ------------------
<S> <C> <C> <C>
Assets acquired
Acquired technology $ 7,001 $21,667 $ 28,668
Other assets 239 390 629
----------------- ------------------ ------------------
7,240 22,057 29,297
Liabilities assumed (1,050) (4,544) (5,594)
Deferred tax credits (2,001) (8,667) (10,668)
----------------- ------------------ ------------------
Net assets acquired 4,189 8,846 13,035
Goodwill 1,918 3,569 5,487
----------------- ------------------ ------------------
Purchase price $ 6,107 $12,415 $ 18,522
================= ================== ==================
Consideration
Cash $ 4,500 $12,415 $ 16,915
Shares 1,607 - 1,607
----------------- ------------------ ------------------
$ 6,107 $12,415 $ 18,522
================= ================== ==================
</TABLE>
6. Long-term Debt
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
($000s)
<S> <C> <C>
Mortgage at 12.5% per annum, repayable in blended monthly
installments of principal and interest of Cdn $45,200 to
October 2000 $ 2,142 $2,160
Other 34 452
------------------ ------------------
2,176 2,612
Less current portion (2,176) (123)
------------------ ------------------
$ - $2,489
=================== ==================
</TABLE>
Interest expense on long-term debt was $264,000, $271,000, and $301,000 in
fiscal 2000, 1999, and 1998, respectively.
7. Commitments
Certain of the Corporation's offices, computer equipment, and vehicles are
leased under various terms. The annual aggregate lease expense in each of fiscal
2000, 1999, and 1998 was $12,205,000, $9,219,000, and $8,599,000, respectively.
58
<PAGE>
The aggregate amount of payments for these operating leases, in each of the next
five fiscal years and thereafter, is approximately as follows: ($000s)
2001 $12,939
2002 10,261
2003 7,501
2004 4,915
2005 4,200
Thereafter 8,770
In August 1999, the Corporation announced plans for the construction of a second
building on the site of its corporate headquarters on Riverside Drive in Ottawa
- -- Riverside II. The total cost of Riverside II and related improvements is
estimated to be $21 million. The Corporation is currently committed to
approximately $15 million of the total cost and as at February 29, 2000, had
incurred capital expenditures of approximately $3.4 million. Construction is
expected to be substantially complete before the end of fiscal 2001.
8. Financial Instruments
Off-Balance-Sheet Risk
The Corporation's policy with respect to foreign currency exposure is to manage
its financial exposure to certain foreign exchange fluctuations with the
objective of neutralizing some of the impact of foreign currency exchange
movements. To achieve this objective, the Corporation enters into foreign
exchange forward contracts to hedge portions of the net investment in its
various subsidiaries. As a result, the exchange gains and losses recorded on
translation of the subsidiaries' financial statements are partially offset by
the gains and losses attributable to the applicable foreign exchange forward
contracts. Realized and unrealized gains and losses from the applicable foreign
exchange forward contracts are recorded as part of the foreign currency
translation adjustments included in the Consolidated Statements of Stockholders'
Equity. The Corporation has foreign exchange conversion facilities that allow it
to hold foreign exchange contracts of Cdn $130,000,000 (US $89,730,000)
outstanding at any one time. The Corporation enters into foreign exchange
forward contracts with major Canadian chartered banks, and therefore does not
anticipate non-performance by these counterparties. The amount of the exposure
on account of any non-performance is restricted to the unrealized gains in such
contracts. As of February 29, 2000, the Corporation had foreign exchange forward
contracts, with maturity dates ranging from March 30, 2000 to May 25, 2000, to
exchange various foreign currencies in the amount of $6,239,000. As of February
28, 1999, the Corporation had foreign exchange forward contracts, with maturity
dates ranging from March 25, 1999 to May 27, 1999, to exchange various foreign
currencies in the amount of $3,862,000.
Concentration of Credit Risk
The investment of cash is regulated by the Corporation's investment policy,
which is periodically reviewed and approved by the Audit Committee of the Board
of Directors. The primary objective of the Corporation's investment policy is
security of principal. The Corporation manages its investment credit risk
through a combination of (i) a selection of securities with an acceptable credit
rating; (ii) selection of term to maturity, which in no event exceeds one year
in length; and (iii) diversification of debt issuers, both individually and by
industry grouping.
59
<PAGE>
Included in cash, cash equivalents, and short-term investments as of February
29, 2000 and February 28, 1999 were corporate debt amounts of $73,805,000 and
$46,941,000, respectively. The corporate debt amounts as of February 29, 2000
and February 28, 1999 were with two distinct issuers. These amounts were repaid,
in full, at maturity in March of their respective years. All the Corporation's
short-term investments as of February 29, 2000 and February 28, 1999 had
maturity dates before the end of June of their respective years. The
Corporation's cash, cash equivalents, and short-term investments are denominated
predominantly in Canadian and U.S. dollars.
The Corporation has an unsecured credit facility, subject to annual renewal,
that includes an operating line and foreign exchange conversion facilities. The
operating line permits the Corporation to borrow funds or issue letters of
credit or guarantee up to an aggregate of Cdn $15,000,000 (US $10,353,000),
subject to certain covenants. As of February 29, 2000 and February 28, 1999,
there were no direct borrowings under this operating line.
There is no concentration of credit risk related to the Corporation's position
in trade accounts receivable. Credit risk, with respect to trade receivables, is
minimized because of the Corporation's large customer base and its geographical
dispersion (see Note 12).
Fair Value of Financial Instruments
For certain of the Corporation's financial instruments, including accounts
receivable, accounts payable, and other accrued charges, the carrying amounts
approximate the fair value due to their short maturities. Cash and cash
equivalents, short-term investments, long-term debt, and long-term liabilities
are carried at cost, which approximates their fair value.
9. Income Taxes
Details of the income tax provision (recovery) are as follows: ($000s)
<TABLE>
<CAPTION>
2000 1999 1998
----------------- ---------------- --------------
<S> <C> <C> <C>
Current
Canadian $16,880 $15,581 $ 8,755
Foreign 9,943 9,228 8,550
----------------- ---------------- --------------
26,823 24,809 17,305
----------------- ---------------- --------------
Deferred
Canadian 1,765 3,274 4,163
Foreign (1,915) (1,770) (1,830)
----------------- ---------------- --------------
(150) 1,504 2,333
----------------- ---------------- --------------
Income tax provision $26,673 $26,313 $19,638
================= ================ ==============
</TABLE>
60
<PAGE>
The reported income tax provision differs from the amount computed by applying
the Canadian rate to income before income taxes. The reasons for this difference
and the related tax effects are as follows: ($000s)
<TABLE>
<CAPTION>
2000 1999 1998
----------------- -------------- --------------
<S> <C> <C> <C>
Expected Canadian tax rate 44.0% 44.0% 44.0%
================= ============== ==============
Expected tax provision $ 35,735 $ 37,151 $29,279
Foreign tax rate differences (10,422) (10,906) (8,740)
Net change in valuation allowance and other
income tax benefits earned (2,680) (1,064) (4,581)
Non-deductible expenses and non-taxable income 2,876 193 361
Withholding tax on foreign income 1,179 987 822
Reorganization costs - - 2,426
Other (15) (48) 71
----------------- -------------- --------------
Reported income tax provision $ 26,673 $ 26,313 $19,638
================= ============== ==============
</TABLE>
Deferred income taxes result principally from temporary differences in the
recognition of certain revenue and expense items for financial and tax reporting
purposes. Significant components of the Corporation's deferred tax assets and
liabilities as of February 29, 2000 and February 28, 1999 are as follows:
($000s)
<TABLE>
<CAPTION>
2000 1999
----------------- ---------------
<S> <C> <C>
Deferred tax assets
Net operating tax loss carryforwards $ 4,460 $ 5,507
Investment tax credits 1,404 4,499
Deferred revenue 2,490 2,702
Other 2,186 1,912
----------------- ---------------
Total deferred tax assets 10,540 14,620
Valuation allowance for deferred tax assets (4,460) (5,507)
----------------- ---------------
Net deferred tax assets 6,080 9,113
----------------- ---------------
Deferred tax liabilities
Book and tax differences on assets 16,069 15,957
Reserves and allowances 7,484 5,415
Income tax credits 5,346 4,502
Other (1,089) 14
----------------- ---------------
Total deferred tax liabilities 27,810 25,888
----------------- ---------------
Net deferred income tax liability $21,730 $16,775
================= ===============
</TABLE>
The net change in the total valuation allowance for the years ended February 29,
2000 and February 28, 1999 was a decrease of $1,047,000 and $7,309,000,
respectively.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income in certain legal entities. Although realization is not assured,
management believes it is more likely than not that the
61
<PAGE>
net amount of the future tax asset will be realized. However, this estimate
could change in the near term as future taxable income in these certain legal
entities changes.
As of February 29, 2000, the Corporation had tax loss carryforwards of
approximately $10,027,000 available to reduce future years' income for tax
purposes. These losses expire as follows: ($000s)
2002 $ 294
2003-2010 425
Indefinitely 9,308
-------------
Total $10,027
=============
Income before taxes attributable to all foreign operations was $37,215,000,
$39,219,000, and $35,102,000 in each of fiscal 2000, 1999, and 1998,
respectively.
The Corporation has provided for foreign withholding taxes on the portion of the
undistributed earnings of foreign subsidiaries expected to be remitted.
Income taxes paid were $18,658,000, $8,201,000, and $11,273,000 in each of
fiscal 2000, 1999, and 1998, respectively.
10. Stockholders' Equity
Capital Stock
The authorized capital of the Corporation consists of an unlimited number of
common shares, without nominal or par value, and an unlimited number of
preferred shares, issuable in series. No series of preferred shares has been
created or issued.
Share Repurchase Programs
The share repurchases made in the past three fiscal years were part of distinct
open market share repurchase programs through the Nasdaq National Market. The
share repurchases made in fiscal 2000 were part of two open market share
repurchase programs. The program adopted in October 1998 expired on October 8,
1999. Under this program the Corporation repurchased 3,161,800 of its shares;
all repurchased shares were cancelled. In October 1999, the Corporation adopted
a new program that will enable it to purchase up to 4,200,000 common shares (not
more than 5% of those issued and outstanding) between October 9, 1999 and
October 8, 2000. This program does not commit the Corporation to make any share
repurchases. Purchases will be made on The Nasdaq Stock Market at prevailing
open market prices and paid out of general corporate funds. All repurchased
shares will be cancelled.
The details of the share repurchases were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------- -------------------------------- -----------------------------
Shares Cost Shares Cost Shares Cost
------------- ------------- ------------- -------------- ------------ -------------
(000s) ($000s) (000s) ($000s) (000s) ($000s)
<S> <C> <C> <C> <C> <C> <C>
July 1996 program - $ - - $ - 170 $ 1,931
October 1997 program - - 2,030 23,463 2,370 27,180
October 1998 program 2,186 24,689 976 10,674 - -
October 1999 program 100 1,324 - - - -
------------- ------------- ------------- -------------- ------------ -------------
2,286 $26,013 3,006 $34,137 2,540 $29,111
============= ============= ============= ============== ============ =============
</TABLE>
62
<PAGE>
The amount paid to acquire the shares over and above the average carrying value
has been charged to retained earnings.
Stock Option Plans
As of February 29, 2000, the Corporation had stock options outstanding under two
plans: 4,421,000 pertain to the 1997-2002 Stock Option Plan and 2,849,000
pertain to the 1993-1998 Stock Option Plan.
There were 14,000,000 shares of common stock originally reserved by the Board of
Directors for issuance under the Corporation's 1997-2002 Stock Option Plan ("the
Plan"), which was approved by the Corporation's shareholders in June 1997 and
replaced the 1993-1998 Stock Option Plan. Options may be granted to directors,
officers, employees, and consultants at such times and under such terms as
established by the Plan. Options may be fully exercisable on the date of grant
or may be exercisable in installments. Options will expire not later than 10
years from the date of grant or any shorter period as may be determined. All
options are priced at the market price of the Corporation's shares on The
Toronto Stock Exchange on the trading day preceding the date of grant. In June
1999, options were awarded to employees, executive officers and directors. These
options vest equally in April 2000, April 2001, April 2002, and April 2003, and
expire in April 2007. There were 9,381,000 options available for grant under the
Plan as of February 29, 2000.
Under the 1993-1998 Stock Option Plan, options were awarded to directors,
officers, and employees. For the options outstanding as of February 29, 2000,
the vesting dates extend to September 2001 and the expiry dates range from April
2000 to September 2005. In April 1996, options were awarded to certain key
officers under an executive option award. These options vest equally in April
1999, April 2000, and April 2001, and expire in April 2003. All options were
priced at the market price of the Corporation's shares on The Toronto Stock
Exchange on the trading day preceding the date of grant. The 1993-1998 Stock
Option Plan expired on January 1, 1998.
Employee Stock Purchase Plan
This plan was approved by the Corporation's shareholders in July 1993 and was
amended on May 19, 1999. The amended plan was approved by the Corporation's
shareholders on June 22, 1999, and will terminate on November 30, 2002. Under
the plan, 3,000,000 common shares were reserved for issuance. A participant in
the Employee Stock Purchase Plan authorizes the Corporation to deduct an amount
per pay period that cannot exceed five (5) percent of annual target salary
divided by the number of pay periods per year. Deductions are accumulated during
each of the Corporation's fiscal quarters ("Purchase Period") and on the first
trading day following the end of any Purchase Period these deductions are
applied toward the purchase of common shares. The purchase price is ninety (90)
percent of the lesser of The Toronto Stock Exchange average closing price on (a)
the first five trading days of the Purchase Period or (b) the last five trading
days of the Purchase Period. All full-time and part-time permanent employees may
participate in the plan.
63
<PAGE>
Accounting for Stock-Based Compensation
Under Canadian GAAP, the benefits of the Corporation's stock option and purchase
plans are not recognized as compensation expense. If the fair values of the
options granted since fiscal 1996 had been recognized as compensation expense on
a straight line basis over the vesting period of the grant (consistent with the
method prescribed by FASB Statement No. 123), stock-based compensation costs
would have reduced net income by $9,096,000, $8,239,000, and $6,824,000;
reduced basic net income per share by $0.11, $0.09, and $0.08, and reduced fully
diluted net income per share by $0.10, $0.09, and $0.07 in fiscal 2000, 1999,
and 1998, respectively.
Because the Corporation has only applied these measurement principles to options
granted subsequent to February 28, 1995 and the Corporation's amortization
period for compensation expense approximates four years, the above pro forma
disclosure for fiscal 1998 is not indicative of pro forma amounts that will be
reported in future years. The pro forma disclosure for fiscal 2000 and 1999
includes the full extent of amortization expense for four years of option
grants.
The fair value of the options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
fiscal 2000, 1999, and 1998, respectively: risk-free interest rates of 5.8%,
5.5%, and 6.5%, expected life of the options of 2.8 years, 2.9 years, and 3.0
years, expected volatility of 55%, 56%, and 56%, and for all years, a dividend
yield of zero.
Activity in the stock option plans for fiscal 2000, 1999, and 1998 was as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------------------------- ---------------------------- -----------------------------
(000s) (000s) (000s)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year 6,769 $ 9.72 6,571 $ 8.29 7,940 $ 5.33
Granted 2,772 11.18 1,935 13.33 2,190 11.48
Exercised (1,973) 7.81 (1,054) 3.94 (3,316) 2.60
Cancelled (298) 11.73 (683) 9.52 (243) 9.54
------------ ------------- --------------
Outstanding, end of year 7,270 11.17 6,769 9.72 6,571 8.29
============ ============= ==============
Options exercisable at
year end 1,234 1,460 1,077
============ ============= ==============
Weighted average per
share fair value of
options granted during
the year calculated
using the Black-Scholes
option pricing model $ 4.59 $ 5.54 $ 4.84
========== ========== ==========
</TABLE>
64
<PAGE>
The following table summarizes significant ranges of outstanding and exercisable
options held by directors, officers, and employees as of February 29, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------------------
Weighted Weighted Weighted
Range of Exercise Average Average Average
Prices Options Remaining Life Exercise Price Options Exercise Price
- ---------------------- ------------- ------------------ ----------------- ------------- -----------------
(000s) (000s)
<S> <C> <C> <C> <C> <C>
$3.55 - $5.52 26 0.4 years $ 4.22 25 $ 4.22
$8.76 - $10.69 1,801 4.2 8.95 407 8.96
$10.70 - $11.04 3,612 6.5 10.93 449 10.94
$11.05 - $13.86 1,660 6.2 13.37 353 13.17
$17.58 - $23.56 158 7.8 18.65 - -
$27.95 - $28.06 13 7.9 28.03 - -
------------- -------------
7,270 5.9 $11.17 1,234 $10.78
============= =============
</TABLE>
Net Income per Share
Net income per share is based on the weighted average number of shares
outstanding during each year.
65
<PAGE>
The reconciliation of the numerator and denominator for the calculation of net
income per share and fully diluted net income per share is as follows: (000s,
except per-share amounts)
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net Income per Share
Net income $54,542 $58,122 $48,942
============= ============= =============
Weighted average number of shares outstanding 85,972 87,416 88,414
============= ============= =============
Net income per share $ 0.63 $ 0.66 $ 0.55
============= ============= =============
Fully Diluted Net Income per Share
Net income $54,542 $58,122 $48,942
Imputed Interest 2,941 2,571 2,719
------------- ------------- -------------
Adjusted Net Income $57,483 $60,693 $51,661
============= ============= =============
Weighted average number of shares outstanding 85,972 87,416 88,414
Dilutive effect of stock options * 6,110 5,988 7,668
------------- ------------- -------------
Adjusted weighted average number of shares outstanding 92,082 93,404 96,082
============= ============= =============
Fully diluted net income per share $ 0.62 $ 0.65 $ 0.54
============= ============= =============
</TABLE>
* All anti-dilutive options have been excluded.
Imputed earnings on the proceeds from the exercise of options are calculated
using a 5% after-tax rate of return.
11. Pension Plans
The Corporation operates a Retirement Savings Plan for the parent company and
also operates various other defined contribution pension plans for its
subsidiaries. The Corporation contributes amounts related to the level of
employee contributions for both types of plans.
The pension costs in fiscal 2000, 1999, and 1998 were $3,839,000, $2,744,000,
and $2,327,000, respectively.
12. Segmented Information
The Corporation operates in one business segment--computer software tools. This
segment engages in business activities from which it earns license, support, and
services revenue, and incurs expenses. Within this business segment, the
Corporation develops, markets, and supports two complementary lines of software
products that are designed to satisfy enterprise-wide business-critical needs.
The Corporation's business intelligence products give individual users the
ability to independently access, explore, analyze, and report corporate data.
The Corporation's client/server application development
66
<PAGE>
tools are designed to increase the productivity of system analysts and
developers. Cognos products are distributed both directly and through resellers
worldwide.
Revenue is derived from the licensing of software and the provision of related
services, which include product support and education, consulting, and other
services. The Corporation generally licenses software and provides services
subject to terms and conditions consistent with industry standards. Customers
may elect to contract with the Corporation for product support, which includes
product and documentation enhancements, as well as telephone support, by paying
either an annual fee or fees based on usage of support services.
The Corporation operates internationally, with a substantial portion of its
business conducted in foreign currencies. Accordingly, the Corporation's results
are affected by year-over-year exchange rate fluctuations of the United States
dollar relative to the Canadian dollar, to various European currencies, and to a
lesser extent, other foreign currencies.
No single customer accounted for 10% or more of the Corporation's revenue during
any of the last three fiscal years. In addition, the Corporation is not
dependent on any single customer or group of customers, or supplier.
67
<PAGE>
The accounting policies for the segment are the same as those described in the
Summary of Significant Accounting Policies. The required financial information
for segment profit and segment assets is the same as that presented in the
Consolidated Financial Statements. Geographic information is as follows: ($000s)
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Revenue to external customers*
U.S.A. $ 204,730 $ 153,827 $ 123,774
Canada 30,120 24,040 22,328
United Kingdom 44,972 41,563 38,257
Europe 77,778 60,502 43,189
Asia/Pacific 28,040 21,193 17,286
---------- ---------- ---------
$ 385,640 $ 301,125 $ 244,834
========== ========== =========
</TABLE>
* Revenues are attributed to countries based on location of customer
Fixed assets
Canada $ 31,055 $ 20,148
U.S.A. 8,659 6,078
Other countries 5,121 3,938
---------- ---------
$ 44,835 $ 30,164
========== =========
Intangible assets
Canada $ 13,137 $ 14,719
U.S.A. 27,021 35,460
---------- ---------
$ 40,158 $ 50,179
========== =========
13. Comparative Results
Certain of the prior years' figures have been reclassified in order to conform
to the presentation adopted in the current year.
14. Subsequent Event
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 share and per-share amounts in the accompanying financial statements, and
notes thereto have been adjusted for the split.
68
<PAGE>
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, subsequent to year-end, 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.
<TABLE>
<CAPTION>
Years Ended the Last Day of February
- -------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
(US$000s except share amounts, Canadian GAAP)
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Revenue $385,640 $301,125 $244,834 $198,185 $152,186
- -------------------------------------------------------------------------------------------------------------------------
Operating expenses
Cost of product license 5,235 5,738 3,828 3,266 3,433
Cost of product support 13,758 11,166 9,694 9,634 7,488
Selling, general, and administrative 244,827 178,295 143,493 114,617 98,908
Research and development 53,548 42,274 33,530 28,951 22,382
Investment tax credits (6,207) (14,880) (9,432) (3,683) -
- -------------------------------------------------------------------------------------------------------------------------
Total operating expenses 311,161 222,593 181,113 152,785 132,211
- -------------------------------------------------------------------------------------------------------------------------
Operating income 74,479 78,532 63,721 45,400 19,975
Interest expense (718) (527) (481) (427) (468)
Interest income 7,454 6,430 5,340 4,524 4,019
- -------------------------------------------------------------------------------------------------------------------------
Income before taxes 81,215 84,435 68,580 49,497 23,526
Income tax provision 26,673 26,313 19,638 12,708 5,996
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 54,542 $ 58,122 $ 48,942 $ 36,789 $ 17,530
=========================================================================================================================
Net income per share
Basic $0.63 $ 0.66 $ 0.55 $ 0.43 $ 0.21
Fully diluted $0.62 $ 0.65 $ 0.54 $ 0.41 $ 0.20
Weighted average number of shares (000s)
Basic 85,972 87,416 88,414 86,298 82,578
Fully diluted 92,082 93,404 96,082 95,390 90,426
Balance Sheet Data (at end of period)
Working capital $166,455 $123,343 $112,846 $103,727 $ 66,149
Total assets 398,181 314,105 245,718 189,152 140,010
Total debt 2,176 2,612 2,457 2,655 2,744
Stockholders' equity 227,019 178,602 147,305 115,912 78,297
</TABLE>
69
<PAGE>
3755 Riverside Drive, Ottawa, Ontario, K1G 4K9
PROXY
Annual Meeting of Shareholders to be held on June 21, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE MANAGEMENT OF THE CORPORATION
The undersigned shareholder of COGNOS INCORPORATED (the "Corporation") hereby
appoints each of James M. Tory, Chairman of the Board and Donnie M. Moore,
Senior Vice President Finance & Administration and Chief Financial Officer of
the Corporation, or instead of them ________________________ as proxy of the
undersigned, with full power of substitution and authorizes each of them to
represent and vote, as designated below, all of the Common Shares of Cognos
Incorporated owned of record on May 5, 2000, by the undersigned at the Annual
Meeting of Shareholders of the Corporation to be held on the 21st day of June,
2000 and any adjournment thereof, in the same manner, to the same extent and
with the same powers as if the undersigned were present at that meeting or any
adjournment.
1. ELECTION OF DIRECTORS
FOR [ ] WITHHOLD AUTHORITY TO VOTE [ ] for nominees listed below
(INSTRUCTIONS: To WITHHOLD authority to vote for any individual nominee,
strike a line through the nominee's name in the list below)
John E. Caldwell, Douglas C. Cameron, Pierre Y. Ducros, Douglas J. Erwin,
Robert W. Korthals, Candy M. Obourn, James M. Tory, and Renato Zambonini.
2. APPOINTMENT OF ERNST & YOUNG LLP AS AUDITORS
FOR [ ] WITHHOLD AUTHORITY TO VOTE [ ]
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof. This Proxy
confers authority for the above named to vote in their discretion with respect
to amendments or variations to the matters identified in the Notice of the
Meeting accompanying this Proxy or other matters which may properly come before
that Meeting.
This Proxy when properly executed will be voted in the manner directed above by
the undersigned shareholder. If the persons named in this Proxy are appointed by
the undersigned and no direction is made, they will vote for proposals 1 and 2.
If someone other than the persons named is appointed and no direction is made,
that person may vote at his or her discretion. PLEASE MARK, SIGN, DATE AND
RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
DATED the day of , 2000.
_____________________________ __________________________________
(Signature of Shareholder) (Signature if held jointly)
NOTES:
- ------
1. The shares represented by this Proxy will be voted unless authority to vote
is withheld.
2. Every shareholder has the right to appoint a person to represent that
shareholder (who need not to be a shareholder) other than the persons
specified above, to attend the meeting and act on the shareholder's behalf.
You may exercise that right by inserting the name of the person to be
appointed in the blank space provided in this Proxy.
3. Please sign exactly as your name appears on the Proxy and date the Proxy.
If this Proxy is not dated, it will be deemed to bear the date on which it
was mailed. Where shares are held by joint tenants both should sign. When
signing as attorney, executor, administrator, trustee or guardian please
give full title as such. If the shareholder is a Corporation, this Proxy
must be executed by an authorized person. If a partnership, please sign in
partnership name by an authorized person.
