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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10–Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended May 31, 2002
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For The Transition Period From              To             
 
Commission File Number 0-16006
 
COGNOS INCORPORATED
(Exact Name Of Registrant As Specified In Its Charter)
 
CANADA
  
98-0119485
(State Or Other Jurisdiction Of
Incorporation Or Organization)
  
(IRS Employer
Identification No.)
3755 Riverside Drive,
    
P.O. Box 9707, Station T,
    
Ottawa, Ontario, Canada
  
K1G 4K9
(Address Of Principal Executive Offices)
  
(Zip Code)
 
(613) 738-1440
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES x     NO ¨
 
The number of shares outstanding of the registrant’s only class of Common Stock as of June 30, 2002, was 88,008,372.

Table of Contents
COGNOS INCORPORATED
 
INDEX
 
           
PAGE
    
PART I—FINANCIAL INFORMATION
       
Item 1.
          
         
3
         
4
         
5
         
6
Item 2.
        
12
Item 3.
        
21
    
PART II—OTHER INFORMATION
       
Item 1.
        
22
Item 4.
        
23
Item 6.
        
24
         
25

2

Table of Contents
PART I—FINANCIAL INFORMATION
 
Item 1.     Consolidated Financial Statements
 
COGNOS INCORPORATED
 
CONSOLIDATED STATEMENTS OF INCOME
(US$000s except share amounts, U.S. GAAP)
(Unaudited)
 
      
Three months ended May 31,
  
      
2002
       
2001
  
Revenue
                      
Product license
     
$
49,835
 
     
$
43,104
 
Product support
     
 
48,179
 
     
 
41,843
 
Services
     
 
22,116
 
     
 
23,069
 
      
    
Total revenue
     
 
120,130
 
     
 
108,016
 
      
    
Operating expenses
                      
Cost of product license
     
 
734
 
     
 
1,106
 
Cost of product support
     
 
4,413
 
     
 
4,294
 
Selling, general, and administrative
     
 
82,265
 
     
 
88,873
 
Research and development
     
 
19,698
 
     
 
19,422
 
Special charges
     
 
—
 
     
 
12,798
 
      
    
Total operating expenses
     
 
107,110
 
     
 
126,493
 
      
    
Operating income (loss)
     
 
13,020
 
     
 
(18,477
)
Interest expense
     
 
(46
)
     
 
(84
)
Interest income
     
 
1,601
 
     
 
2,812
 
      
    
Income (loss) before taxes
     
 
14,575
 
     
 
(15,749
)
Income tax provision (benefit)
     
 
4,664
 
     
 
(4,647
)
      
    
Net income (loss)
     
$
9,911
 
     
$
(11,102
)
      
    
Net income (loss) per share
                      
Basic
     
 
$0.11
 
     
 
$(0.13
)
      
    
Diluted
     
 
$0.11
 
     
 
$(0.13
)
      
    
Weighted average number of shares (000s)
                      
Basic
     
 
88,000
 
     
 
88,023
 
      
    
Diluted
     
 
91,531
 
     
 
88,023
 
      
    
 
(See accompanying notes)

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Table of Contents
COGNOS INCORPORATED
 
CONSOLIDATED BALANCE SHEETS
(US$000s, U.S. GAAP)
 
    
May 31, 2002
     
February 28, 2002
  
    
(Unaudited)
         
Assets
                  
Current assets
                  
Cash and cash equivalents
   
$
281,030
 
   
$
192,900
 
Short-term investments
   
 
57,229
 
   
 
121,629
 
Accounts receivable
   
 
80,210
 
   
 
114,059
 
Inventories
   
 
791
 
   
 
537
 
Prepaid expenses
   
 
7,126
 
   
 
6,765
 
Deferred tax assets
   
 
6,279
 
   
 
6,404
 
    
  
    
 
432,665
 
   
 
442,294
 
Fixed assets
   
 
61,914
 
   
 
59,008
 
Goodwill
   
 
15,270
 
   
 
15,230
 
Intangible assets
   
 
4,743
 
   
 
5,620
 
    
  
    
 
514,592
 
   
 
522,152
 
    
  
Liabilities
                  
Current liabilities
                  
Accounts payable
   
 
20,474
 
   
 
26,387
 
Accrued charges
   
 
33,069
 
   
 
34,210
 
Salaries, commissions, and related items
   
 
33,457
 
   
 
37,453
 
Income taxes payable
   
 
3,377
 
   
 
6,167
 
Deferred revenue
   
 
109,217
 
   
 
110,504
 
    
  
    
 
199,594
 
   
 
214,721
 
Long-term liabilities
   
 
9,192
 
   
 
9,131
 
Deferred income taxes
   
 
2,900
 
   
 
3,127
 
    
  
    
 
211,686
 
   
 
226,979
 
    
  
Stockholders’ Equity
                  
Capital stock
                  
Common shares            (May 31, 2002 – 87,904,533;
              February 28, 2002 – 87,997,220)
   
 
154,910
 
   
 
151,637
 
Retained earnings
   
 
159,358
 
   
 
158,762
 
Accumulated other comprehensive income
   
 
(11,362
)
   
 
(15,226
)
    
  
    
 
302,906
 
   
 
295,173
 
    
  
    
$
514,592
 
   
$
522,152
 
    
  
 
(See accompanying notes)

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COGNOS INCORPORATED
 
C ONSOLIDATED STATEMENTS OF CASH FLOWS
(US$000s, U.S. GAAP)
(Unaudited)
 
      
Three months ended
May 31,
  
      
2002
       
2001
  
Cash provided by (used in) operating activities
                      
Net income (loss)
     
$
9,911
 
     
$
(11,102
)
Non-cash items
                      
Depreciation and amortization
     
 
4,699
 
     
 
7,158
 
Amortization of deferred stock-based compensation
     
 
185
 
     
 
577
 
Amortization of other deferred compensation
     
 
148
 
     
 
666
 
Deferred income taxes
     
 
(552
)
     
 
(227
)
Loss on disposal of fixed assets
     
 
97
 
     
 
215
 
      
    
      
 
14,488
 
     
 
(2,713
)
Change in non-cash working capital
                      
Decrease in accounts receivable
     
 
36,590
 
     
 
46,163
 
Decrease (increase) in inventories
     
 
(229
)
     
 
153
 
Decrease (increase) in prepaid expenses
     
 
(18
)
     
 
1,499
 
Increase in income tax assets
     
 
—
 
     
 
(8,392
)
Decrease in accounts payable
     
 
(6,671
)
     
 
(11,388
)
Increase (decrease) in accrued charges
     
 
(2,068
)
     
 
6,158
 
Increase (decrease) in salaries, commissions, and related items
     
 
(5,106
)
     
 
819
 
Decrease in income taxes payable
     
 
(2,778
)
     
 
(16,131
)
Decrease in deferred revenue
     
 
(3,780
)
     
 
(7,460
)
      
    
      
 
30,428
 
     
 
8,708
 
      
    
Cash provided by (used in) investing activities
                      
Maturity of short-term investments
     
 
113,186
 
     
 
118,336
 
Purchase of short-term investments
     
 
(47,626
)
     
 
(60,606
)
Additions to fixed assets
     
 
(4,269
)
     
 
(6,813
)
      
    
      
 
61,291
 
     
 
50,917
 
      
    
Cash provided by (used in) financing activities
                      
Issue of common shares
     
 
3,765
 
     
 
3,569
 
Repurchase of shares
     
 
(9,992
)
     
 
—
 
Increase in (repayment of) long-term debt and long-term liabilities
     
 
(16
)
     
 
96
 
      
    
      
 
(6,243
)
     
 
3,665
 
      
    
Effect of exchange rate changes on cash
     
 
2,653
 
     
 
(808
)
      
    
Net increase in cash and cash equivalents
     
 
88,129
 
     
 
62,482
 
Cash and cash equivalents, beginning of period
     
 
192,901
 
     
 
115,293
 
      
    
Cash and cash equivalents, end of period
     
 
281,030
 
     
 
177,775
 
Short-term investments, end of period
     
 
57,229
 
     
 
61,652
 
      
    
Cash, cash equivalents, and short-term investments, end of period
     
$
338,259
 
     
$
239,427
 
      
    
 
(See accompanying notes)

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Table of Contents
COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in United States dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
 
1.    Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared by the Corporation in United States (U.S.) dollars and in accordance with generally accepted accounting principles (GAAP) in the U.S. with respect to interim financial statements, applied on a consistent basis. Accordingly, they do not include all of the information and footnotes required for compliance with GAAP in the U.S. for annual financial statements. These unaudited condensed notes to the consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Corporation’s Annual Report for the fiscal year ended February 28, 2002.
 
The preparation of these unaudited consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. In the opinion of Management, these unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could differ from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year.
 
All information is presented in U.S. dollars, unless otherwise stated.
 
2.    Accounting Changes
 
Business Combinations and Intangible Assets
 
Effective March 1, 2002 the Corporation adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS Nos. 141 and 142”), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the pronouncements. Other intangible assets will continue to be amortized over their useful lives.
 
Application of the non-amortization provisions of the pronouncements resulted in an increase in net income of $1,135,000 ($0.01 per share) for the quarter ended May 31, 2002 and is expected to result in an increase in net income of $4,000,000 ($0.04 per diluted share) for fiscal 2003. The Corporation performed the required impairment tests of goodwill and indefinite-lived intangible assets as of March 1, 2002. The effect of these tests was not material on the earnings and financial position of the Corporation.

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Table of Contents
 
COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in United States dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
 
3.    Revenue Recognition
 
The Corporation recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants.
 
Substantially all of the Corporation’s product license revenue is earned from licenses of off-the-shelf software requiring no customization. Revenue from these licenses is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable. If a license includes the right to return the product for refund or credit, revenue is recognized net of an allowance for estimated returns provided all the requirements of SOP 97-2 have been met.
 
Revenue from product support contracts is recognized ratably over the life of the contract. Incremental costs directly attributable to the acquisition of product support contracts, and that would not have been incurred but for the acquisition of that contract, are deferred and expensed in the period the related revenue is recognized. These costs include commissions payable on sales of support contracts.
 
Revenue from education, consulting, and other services is recognized at the time such services are rendered.
 
For contracts with multiple obligations (e.g. deliverable and undeliverable products, support obligations, education, consulting, and other services), the Corporation allocates revenue to each element of the contract based on objective evidence, specific to the Corporation, of the fair value of the element.
 
4.    Goodwill
 
The balance of goodwill as at the date of implementation of SFAS Nos.141 and 142, March 1, 2002 (see Note 2), was $15,230,000. During the quarter ended May 31, 2002 there were additions to goodwill of $40,000 related to additional consideration paid to the former shareholders of Teijin Cognos Incorporated (TCI). This additional consideration was based on the net revenue of TCI during the quarter.
 
During the quarter ended May 31, 2001 the Corporation recorded amortization expense of $1,089,000 related to the amortization of goodwill. If the non-amortization provision of SFAS Nos. 141 and 142 had been in effect beginning March 1, 2001 net loss for the quarter ended May 31, 2001 would have been $10,013,000 and basic net loss per share and diluted net loss per share for the same period would have been $0.11.

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Table of Contents
COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in United States dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
 
5.    Intangible Assets
 
    
As at May 31,
2002
   
As at February 28,
2002
     
    
Cost
       
Accumulated
Amortization
   
Cost
       
Accumulated
Amortization
   
Amortization Rate
    
($000s)
   
($000s)
     
Developed Technology
   
$
13,681
 
     
$
9,449
   
$
13,681
 
     
$
8,720
   
20%
Deferred Consideration
   
 
8,945
 
     
 
8,434
   
 
8,945
 
     
 
8,286
   
Consideration Period
    
    
  
    
    
    
 
22,626
 
     
$
17,883
   
 
22,626
 
     
$
17,006
     
               
             
    
    
 
(17,883
)
            
 
(17,006
)
              
    
           
             
Net book value
   
$
4,743
 
            
$
5,620
 
              
    
           
             
 
Amortization of intangible assets was $877,000 and $1,351,000 in the quarters ended May 31, 2002 and May 31, 2001, respectively. The estimated amortization expense related to intangible assets is as follows ($000s):
 
2003 (Q2 to Q4)
   
$
2,161
2004
   
 
2,575
2005
   
 
7
 
6.    Income Taxes
 
The Corporation provides for income taxes in its quarterly unaudited financial statements based on the estimated effective tax rate for the full fiscal year.

8

Table of Contents
COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in United States dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
 
7.    Net Income per Share
 
The reconciliation of the numerator and denominator for the calculation of basic and diluted net income (loss) per share is as follows: (000s except per share amounts)
 
      
Three months ended
May 31,
  
      
2002
     
2001
  
Basic Net Income (Loss) per Share
                    
Net income (loss)
     
$
9,911
     
$
(11,102
)
      
    
Weighted average number of shares outstanding
     
 
88,000
     
 
88,023
 
      
    
Basic net income (loss) per share
     
 
$0.11
     
 
$(0.13
)
      
    
Diluted Net Income( Loss) per Share
                    
Net income (loss)
     
$
9,911
     
$
(11,102
)
      
    
Weighted average number of shares outstanding
     
 
88,000
     
 
88,023
 
Dilutive effect of stock options
     
 
3,531
     
 
Nil
 
      
    
Adjusted weighted average number of shares outstanding
     
 
91,531
     
 
88,023
 
      
    
Diluted net income (loss) per share
     
 
$0.11
     
 
$(0.13
)
      
    
 
For the quarter ended May 31, 2001, the effect of converting stock options was antidilutive as a result of a net loss.
 
8.    Comprehensive Income
 
Comprehensive income includes net income and other comprehensive income (OCI). OCI refers to changes in net assets from transactions and other events, and circumstances other than transactions with stockholders. These changes are recorded directly as a separate component of Stockholders’ Equity and excluded from net income. The only other comprehensive income item for the Corporation relates to foreign currency translation adjustments pertaining to those subsidiaries not using the U.S. dollar as their functional currency net of derivative gains or losses.

9

Table of Contents
COGNOS INCORPORATED
 
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in United States dollars, unless otherwise stated)
(In accordance with U.S. GAAP)
 
For the quarter ended May 31, 2002, the Corporation had other comprehensive income of $3,864,000 compared to other comprehensive expense of $870,000 for the quarter ended May 31, 2001. When the other comprehensive income is added to net income this results in a comprehensive income of $13,775,000 for the quarter ended May 31, 2002. Comparatively, when other comprehensive expense is added to net loss this results in a comprehensive loss of $11,972,000 for the quarter ended May 31, 2001.
 
9.    Segmented Information
 
The Corporation has one reportable segment—computer software products.
 
10.    Special Charges
 
In the quarter ended May 31, 2001 the Corporation recorded a pretax special charge to earnings of $12,798,000 in connection with a restructuring plan to align the Corporation’s cost structure and operations to the prevailing economic environment. These special charges primarily related to involuntary employee separations for approximately 300 employees, as well as asset write-downs, and accruals for net costs of abandoning leases and related write-down of leasehold improvements. The accrual was included on the balance sheet as accrued charges and salaries, commissions, and related items. During the fourth quarter of fiscal 2002, $2,589,000 of the accrual was reversed into income as a result of revisions to prior cost assumptions.
 
The employee separations impacted all functional groups and geographic regions of the Corporation. All employee separations under the restructuring plan were completed within fiscal 2002 and substantially all cash payments have been paid.

10

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

11

Table of Contents
Item 2.
 
COGNOS INCORPORATED
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
(in United States dollars, unless otherwise indicated, and in accordance with U.S. GAAP)
 
The following information should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included in Item 1 of this Quarterly Report and can also be read in conjunction with the audited Consolidated Financial Statements and Notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report for the fiscal year ended February 28, 2002 (fiscal 2002).
 
RESULTS OF OPERATIONS
 
Revenue for the quarter ended May 31, 2002 was $120.1 million, an 11% increase from revenue of $108.0 million for the same quarter last year. Pretax income for the quarter ended May 31, 2002 was $14.6 million compared to pretax loss of $15.7 million in the same quarter last year. Net income for the current quarter was $9.9 million compared to net loss of $11.1 million for the same quarter last year. Diluted net income per share was $0.11 for the current quarter, compared to diluted net loss per share of $0.13 for the same quarter last year. Basic net income per share was $0.11 and basic net loss per share was $0.13 for the quarters ending May 31, 2002 and May 31, 2001, respectively. The results for the quarter ended May 31, 2001 included a special charge of $12.8 million. During the quarter ended May 31, 2001 uncertain economic conditions affected our customers’ information technology spending in our principal markets and therefore we undertook a restructuring plan to align our cost structure and operations to the economic environment prevalent at that time. Excluding the effect of this special charge, net loss and diluted net loss per share for the quarter ended May 31, 2001 would have been $2.1 million and $0.02, respectively. The improvement in operating performance in the quarter ended May 31, 2002 as compared to the same quarter in the previous year reflects the strength of our business model which is designed to fully engage the enterprise customer, the strength of our product offerings in the BI market, and changes in our internal costs attributable to the prior year restructuring plan.
 
Total operating expenses for the quarter ended May 31, 2002 were $107.1 million, a 15% decrease from operating expenses of $126.5 million for the same quarter last year. Operating margins for the quarter ended May 31, 2002 were 11%, compared to –17% for the same quarter last year. Excluding the effect related to the special charges discussed above, operating expenses in the quarter ended May 31, 2001 would have been $113.7 million and operating margins for quarter would have been –5%. These special charges primarily related to involuntary employee separations. The decrease in operating expenses, excluding these special charges, relates primarily to decreases in selling, general, and administrative expenses in the quarter ended May 31, 2002 as compared to the same quarter last year.

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The following table sets out, for the periods indicated, the percentage that each income and expense item bears to revenue, and the percentage change of each item as compared to the indicated prior period.
 
      
Percentage of Revenue
Three months ended
May 31,
       
Percentage Change
Three months ended
May 31,
      
2002
       
2001
       
2001 to 2002
Revenue
     
100.0
%
     
100.0
%
     
11.2%            
      
    
      
Operating expenses
                         
Cost of product license
     
0.6
 
     
1.0
 
     
(33.6)            
Cost of product support
     
3.7
 
     
4.0
 
     
2.8              
Selling, general, and administrative
     
68.5
 
     
82.3
 
     
(7.4)            
Research and development
     
16.4
 
     
18.0
 
     
1.4              
Special charges
     
0.0
 
     
11.8
 
     
*
      
    
      
Total operating expenses
     
89.2
 
     
117.1
 
     
(15.3)            
      
    
      
Operating income
     
10.8
 
     
(17.1
)
     
*
Interest expense
     
0.0
 
     
(0.1
)
     
(45.2)            
Interest income
     
1.3
 
     
2.6
 
     
(43.1)            
      
    
      
Income before taxes
     
12.1
 
     
(14.6
)
     
*
Income tax provision
     
3.8
 
     
(4.3
)
     
*
      
    
      
Net income
     
8.3
%
     
(10.3
)%
     
*
      
    
      
 
*
 
not meaningful
 
Revenue
 
Our total revenue was $120.1 million for the quarter ended May 31, 2002, an increase of $12.1 million or 11%, compared to the quarter ended May 31, 2001. We operate internationally, with a substantial portion of our business conducted in foreign currencies. Accordingly, our results are affected by year-over-year exchange rate fluctuations of the United States dollar relative to various European currencies, to the Canadian dollar, and to a lesser extent, other foreign currencies. The effect of foreign exchange rate fluctuations improved the overall revenue increase by approximately one percentage point for the quarter ended May 31, 2002 .
 
Our total revenue was derived primarily from our business intelligence products, principally Web versions of PowerPlay® and Impromptu®. Contributing to the increase, but to a lesser extent were Cognos Visualizer, Cognos Finance, Cognos Query, and DecisionStream™. At the end of fiscal 2002 we released Cognos Series 7, the latest integrated version of our suite of business intelligence components. We believe enterprise wide deployment of business intelligence products is the trend in the industry and it will continue to increase as a percentage of our total revenue. Total revenue (license, support, and services revenue) derived from these products was $111.6 million in the quarter ended May 31, 2002, an increase of $12.9 million or 13%, when compared to the corresponding period in the prior fiscal year. Total revenue from these business intelligence products was 93% and 91% of total revenue for the quarters ended May 31, 2002 and May 31, 2001, respectively.

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Total revenue (license, support, and services revenue) from our application development tools, PowerHouse® and Axiant®, was $8.5 million for the quarter ended May 31, 2002, a decrease of 9%, compared to the corresponding period in the prior fiscal year. We believe that, in the long-term, revenues from these products will continue to decline.
 
The overall change in total revenue from the three revenue categories in the quarter ended May 31, 2002 from May 31, 2001 was as follows: a 16% increase in product license revenue, a 15% increase in product support revenue, and an 4% decrease in services revenue.
 
In the quarter ended May 31, 2002 the percentage of revenue from our three geographic regions, North America, Europe, and Asia/Pacific was 66%, 28%, and 6%, respectively as compared to 62%, 31%, and 7%, respectively for the comparative quarter ended May 31, 2001. During the quarter ended May 31, 2002 revenue from North America increased 18%, revenue from Europe decreased 1%, and revenue from Asia/Pacific remained flat. Our growth rate in Europe reflects the impact of the economic environment in central Europe.
 
Product License Revenue
 
Product license revenue was $49.8 million in the quarter ended May 31, 2002, an increase of $6.7 million or 16%, compared to the corresponding period in the prior fiscal year. The increase in product license revenue during the quarter ended May 31, 2002 as compared to the same period in the prior year reflects the strength of our business model which is designed to fully engage the enterprise customer and the strength of our product offerings in the BI market. Additionally, during the quarter ended May 31, 2001 uncertain economic conditions affected our customers’ information technology spending in our principal markets. This affected the sales of our business intelligence products in that quarter. Customer purchasing behaviour remains challenging in the current economic environment, however we believe that the long-term prospects for the business intelligence market are promising. Product license revenue accounted for 41% of total revenue in the three months ended May 31, 2002 compared to 40% for the corresponding period in the prior fiscal year.
 
Product license revenue from the business intelligence products was $48.0 million for the quarter ended May 31, 2002, an increase of $6.6 million or 16%, compared to the corresponding period in the prior fiscal year. Product license revenue from business intelligence products accounted for 96% of total product license revenue for the quarters ended May 31, 2002 and 2001.
 
Product license revenue from application development tools was $1.9 million for the quarter ended May 31, 2002, an increase of $0.2 million or 10%, compared to the corresponding period in the prior fiscal year. Despite the increase in product license revenue in this market for the quarter ended May 31, 2002, we believe the market trend is away from proprietary systems and host-based computing toward industry-standard systems, corporate intranets, extranets, client/server technology, and packaged application products. In the long term, we expect the trend of decreasing product license revenue from these products will continue.

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Product Support Revenue
 
Product support revenue was $48.2 million in the quarter ended May 31, 2002, an increase of $6.3 million or 15%, compared to the corresponding period in the prior fiscal year. The increase in the dollar amounts was the result of the expansion of our customer base, as well as the positive rate of renewal of support contracts.
 
Product support revenue accounted for 40% and 39% of our total revenue in the quarters ended May 31, 2002 and 2001, respectively.
 
Total product support revenue from the business intelligence products comprised 87% and 82% of the total product support revenue for the quarters ended May 31, 2002 and 2001, respectively. Total support revenue from the business intelligence products increased by 21% in the quarter ended May 31, 2002, and total support revenue from the application development tools decreased by 14%, compared to the corresponding quarter in the prior fiscal year.
 
Services Revenue
 
Services revenue (training, consulting, and other revenue) was $22.1 million in the quarter ended May 31, 2002, a decrease of $1.0 million or 4%, compared to the corresponding period in the prior fiscal year. Services revenue accounted for 18% of our total revenue for the quarter ended May 31, 2002 compared to 21% for the corresponding period in the prior fiscal year. The decrease in the dollar amounts was primarily attributable to a decrease in education revenue and, to a lesser extent, consulting revenue associated with our business intelligence products.
 
In the quarter ended May 31, 2002, services revenue associated with the business intelligence products contributed $21.8 million, a decrease of $1.0 million or 4%, compared to the corresponding period in the prior fiscal year. The unfortunate events of September 11, 2001 and subsequent economic factors affected our ability to offer services and our customers’ appetite to consume them. However, services revenue has shown sequential quarterly increases since our quarter ended November 30, 2001. As a result we believe our customers’ demand for our services associated with our business intelligence products, and our ability to provide them is beginning to recover. Total services revenue associated with our application development tools for the quarter was $0.3 million, an immaterial increase from the corresponding period in the prior fiscal year.
 
Services revenue associated with business intelligence products contributed 99% of the total services revenue for each of the quarters ended May 31, 2002 and May 31, 2001.
 
Cost of Product License
 
The cost of product license consists primarily of royalties for technology licensed from third parties, as well as the costs of materials and distribution related to licensed software.
 
The cost of product license revenue was $0.7 million, a decrease of $0.4 million or 34% in the quarter ended May 31, 2002, compared to the corresponding period in the prior fiscal year. These costs represented 1% and 3% of product license revenue for the quarters ended May 31, 2002 and 2001, respectively. The decrease was the result of decreases in both materials and distribution costs and royalty expense.

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Cost of Product Support
 
The cost of product support includes the costs associated with resolving customer inquiries and other telesupport and websupport activities, royalties in respect of technological support received from third parties, and the cost of materials delivered in connection with enhancement releases.
 
The cost of product support revenue was $4.4 million, an increase of $0.1 million or 3% in the quarter ended May 31, 2002, compared to the corresponding period in the prior fiscal year.
 
The cost of product support represented 9% of total product support revenue for the quarter ended May 31, 2002 as compared to 10% for the corresponding quarter in prior fiscal year.
 
Selling, General, and Administrative
 
Selling, general, and administrative (SG&A) expenses were $82.3 million, a decrease of $6.6 million or 7% in the quarter ended May 31, 2002, compared to the corresponding period in the prior fiscal year. These costs decreased as a percentage of revenue, representing 68% for the quarter ended May 31, 2002 compared to 82% for the quarter ended May 31, 2001.
 
The decrease in these expenses was predominantly the result of decreases in staff development costs and decreases in amortization expense. As a result of the restructuring plan implemented during the quarter ended May 31, 2001, the average number of employees within selling, general, and administrative decreased 7% for the three months ended May 31, 2002 when compared to the corresponding period in the prior fiscal year. Amortization expense in the quarter ended May 31, 2002 decreased by approximately $2.1 million from the same quarter last year, as a result of certain intangible assets becoming fully amortized and the result of the implementation of the non-amortization provisions of SFAS Nos. 141 and 142.
 
Research and Development
 
Research and development (R&D) costs were $19.7 million, an increase of $0.3 million or 1% in the quarter ended May 31, 2002, compared to the corresponding period in the prior fiscal year. The increase was predominantly the result of increases associated with services purchased externally and a slight increase in annual merit-based staff compensation costs. As a result of the restructuring plan implemented in the quarter ended May 31, 2001, the average number of employees within R&D decreased 4% when compared to the corresponding period of the prior year.
 
During the quarter ended May 31, 2002, we continued to invest in R&D activities for our business intelligence solutions, including further investment in the existing Cognos enterprise business intelligence solution. During the quarter we released Cognos DecisionStream Connector for SAP R/3™, a solution for rapid access and extraction of SAP R/3 data which unites data from disparate sources to create an enterprise-wide view of business information. We also released a comprehensive suite of Cognos Analytic Applications for SAP R/3 and mySAP™. Cognos Analytic Applications are pre-packaged analytic applications including Sales Analysis, Accounts Receivable, General Ledger Analysis, Accounts Payable, Inventory

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Analysis, and Procurement Analysis. This suite allows corporate decision makers to monitor, analyze, and understand business information from both SAP and non-SAP data sources.
 
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. No costs were deferred in either quarter. Costs were not deferred in the period because either no projects met the criteria for deferral or, if met, the period between achieving technological feasibility and the general availability of the product was short, rendering the associated costs immaterial.
 
Special Charges
 
Business Restructuring Charge
 
During the quarter ended May 31, 2001, we implemented a restructuring plan to align our cost structure and operations to the prevailing economic environment, resulting in a pretax business restructuring charge to earnings of $12.8 million. Business restructuring charges primarily related to involuntary employee separations for approximately 300 employees, as well as asset write-downs, and accruals for net costs of abandoning leases and related write-down of leasehold improvements. The employee separations impacted all functional groups and geographic regions. In the fourth quarter of fiscal 2002, $2.6 million of the original accrual was reversed into income. The reversal was the result of revisions to prior cost assumptions.
 
Cost savings as a result of the restructuring plan affect compensation, amortization, and lease expenses. This decrease in costs primarily impacts selling, general, and administration expense and research and development expense. The expense reductions took effect in the second quarter of fiscal 2002.
 
Cash outlays of $0.1 million related to the restructuring activities were paid in the three month period ended May 31, 2002 as compared to cash outlays of $0.8 million in the three month period ended May 31, 2001.
 
Interest Income and Expense
 
Net interest income was $1.6 million, a decrease of $1.2 million or 43% in the quarter ended May 31, 2002, compared to the corresponding period in the prior fiscal year. The decrease was primarily attributable to a decrease in the average effective interest rates partially offset by the larger average portfolio and to a lesser extent, the impact of exchange rate fluctuations.

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Income Tax Provision
 
Our tax rate is affected by the relative profitability of our operations in various geographic regions. In the current quarter ended May 31, 2002, we recorded an income tax provision of $4.7 million which represents an effective income tax rate of 32%. In the quarter ended May 31, 2001, we recorded an income tax benefit of $4.6 million, representing an effective income tax rate of 29.5%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
As of May 31, 2002 we had $338.3 million in cash, cash equivalents, and short-term investments, an increase of $23.7 million from February 28, 2002. In addition, we have in place an unsecured credit facility that includes an operating line and foreign exchange conversion facilities. The operating line permits us to borrow funds or issue letters of credit or guarantee up to Cdn$15.0 (US$9.8) million, subject to certain covenants. As of May 31, 2002, there were no direct borrowings under this operating line. As discussed further below, we have foreign exchange conversion facilities that allow us to hold foreign exchange contracts of approximately Cdn$130.0 (US$85.1) million outstanding at any one time.
 
As of May 31, 2002, we had a total of $24.1 million of long-term liabilities (including the current portion presented in accrued charges), consisting of amounts due related to the settlement of a patent litigation and other long-term liabilities related to acquisitions. Patent litigation settlement payments of $10.0 million and $1.75 million have been made in June 2002 and July 2002, respectively, subsequent to the quarter end, in relation to the settlement of the patent litigation (See Part II, Item 1, Legal Proceedings of this Form 10-Q).
 
As of May 31, 2002, working capital was $233.1 million, an increase of $5.5 million from February 28, 2002. The increase was primarily due to increases in cash and cash equivalents and decreases in salaries, commissions, and related items which were partially offset by decreases in short-term investments and accounts receivable. The days sales outstanding ratio, calculated based on ending accounts receivable balances and quarterly revenue (“DSO”), was 60 days as at May 31, 2002 as compared with DSO of 72 days as at February 28, 2002.
 
Cash provided by operating activities (after changes in non-cash working capital items) for the three months ended May 31, 2002 was $30.4 million; a $21.7 million increase when compared to the corresponding period in the prior fiscal year. This increase was primarily due to the net income for the quarter ended May 31, 2002, as compared to the net loss incurred in the comparative quarter in the prior year, and an increase in non-cash working capital requirements in the quarter. This was partially offset by a decrease in non-cash items, primarily depreciation and amortization expense.
 
Cash provided by investing activities was $61.3 million for the three months ended May 31, 2002 compared to $50.9 million in the corresponding period in the prior fiscal year. During the current three-month period, we received $65.6 million related to the maturity of short-term investments (net of investments in short-term investments) compared to $57.7 million in the corresponding period in the prior fiscal year. During the quarter ended May 31, 2002 additions to fixed assets were $4.3 million as compared to $6.8 million for the corresponding

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quarter in fiscal 2001. Additions during both quarters were primarily computer hardware and software.
 
Cash used in financing activities was $6.2 million for the three months ended May 31, 2002 compared to cash provided by financing activities of $3.7 million in the corresponding period in the prior fiscal year. We issued 296,000 common shares, valued at $3.8 million, during the three months ended May 31, 2002, compared to the issue of 320,000 shares valued at $3.6 million during the corresponding period in the prior fiscal year. The issuance of shares in both periods was pursuant to our stock purchase plan and the exercise of stock options by employees, officers, and directors. Financing activities for the three month period ended May 31, 2002 included the repurchase of shares in the open market. We repurchased 388,000 shares at a value of $10.0 million; in comparison, no shares were repurchased in the corresponding period in the prior fiscal year.
 
The share repurchases in the three month period ended May 31, 2002 were part of an open market share repurchase program. In October 2001, we adopted a program that enables us to purchase up to 4,400,943 common shares (not more than 5% of those issued and outstanding) between October 9, 2001 and October 8, 2002. Purchases will be made on the Nasdaq Stock Market or the Toronto Stock Exchange at prevailing open market prices and paid out of general corporate funds. This program does not commit us to make any share repurchases. All repurchased shares will be cancelled.
 
Our policy with respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in our various subsidiaries. We enter into these foreign exchange forward contracts with major Canadian chartered banks, and therefore do not anticipate non-performance by these counterparties. We limit these foreign exchange forward contracts to a maximum term of six months. The amount of the exposure on account of any non-performance is restricted to the unrealized gains in such contracts. As of May 31, 2002, we had foreign exchange forward contracts, with maturity dates ranging from June 27, 2002 to September 26, 2002, to exchange various foreign currencies in the amount of $17.7 million.
 
We believe that our current cash, cash equivalents, and short term investments balance and funds generated from operations, if any, will be adequate to finance operations and meet any capital requirements over the next twelve months.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
 
This Form 10-Q contains forward-looking statements, expressed or implied, relating to, among other things, our expectations concerning future financial performance and continuing business momentum, future growth opportunities, the success and soundness of our business model and our sales, marketing, and technology strategies; the trends and opportunities in the business intelligence (“BI”) market place; the development, introduction, shipment, and market of our current and future products; and our leadership position in the BI market.

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These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements. Factors that may cause such differences include, but are not limited to: our ability to develop and introduce new products and enhancements in the BI software market; the impact of global economic conditions on our business and our ability to implement timely and appropriate remedial measures; our ability to obtain and close sales, particularly large enterprise transactions; our ability to select and implement appropriate business models and strategies; our ability to achieve and maintain revenue growth or to anticipate a decline in revenue from any of our products or services; fluctuations in our quarterly and annual operating results based on historical patterns, which may cause our stock price to fluctuate or decline; rapid technological change in the BI software market; new product introductions and enhancements by competitors; changing customers demands; our ability to establish and maintain competitive advantage; our reliance on partners and other third party distribution channels to market and distribute our products; our ability to maintain or obtain third-party technology licenses relating to one or more of our products; unauthorized use of our intellectual property; claims by third parties that our software infringes their intellectual property; the risks inherent in international operations, such as currency exchange rate fluctuations; our ability to identify, hire, train, motivate, and retain highly qualified management and other key personnel; and our ability to identify, pursue, and complete acquisitions which could divert management attention and financial resources and not produce desired business results. Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation to publicly update or revise any such statement to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements. A detailed discussion of each of these risk factors is contained under the heading “Certain Factors That May Affect Future Results” in our most recent Annual Report on Form 10–K and under the heading “Risk Factors” in our Form F-10 Registration Statement, each of which is filed with the United States Securities and Exchange Commission.

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Item 3.     Quantitative and Qualitative Disclosure about 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.
 
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. 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. For the quarter ended May 31, 2002, a 100 basis-point adverse change in interest rates would not have had a material effect on our consolidated financial position, earnings, or cash flows.
 
Foreign Currency Risk
 
We operate internationally; accordingly, a substantial portion of our financial instruments are held in currencies other than the United States dollar. Our policy with respect to foreign currency exposure is to manage financial exposure to certain foreign exchange fluctuations with the objective of neutralizing some of the impact of foreign currency exchange movements. To achieve this objective, we enter into foreign exchange forward contracts to hedge portions of the net investment in various subsidiaries. The forward contracts are typically between the United States dollar 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 May 31, 2002, a 10% adverse change in foreign exchange rates versus the U.S. dollar would not have had a material effect on our reported cash, cash equivalents, and short-term investments.

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PART II—OTHER INFORMATION
 
Item 1.     Legal Proceedings
 
On May 5, 2000, an action was filed in the United States District Court for the Northern District of California against us by Business Objects S.A., for alleged patent infringement. The complaint alleged that our Impromptu product infringes Business Objects’ United States Patent No. 5,555,403 entitled “Relational Database Access System using Semantically Dynamic Objects” (the “‘403 Patent”). Although we have denied and continue to deny all claims asserted in the action, on May 24, 2002, subsequent to the fiscal 2002 balance sheet date, we reached an agreement to settle that action. As this settlement was concluded prior to the issuance of our fiscal 2002 financial statements, it was required by generally accepted accounting principles to record the impact of this settlement in fiscal 2002. Under the terms of the settlement agreement between us and Business Objects, Business Objects has agreed to release us for any infringement of the ‘403 Patent (and any amendments or related patents) and to effect that release, has granted us a license under the ‘403 Patent for the term of that patent or any amendments or related patents. Each party also agreed to release the other from all claims, liabilities, costs or expenses that either party held against the other, on account of actions taken prior to the effective date. Each party has also entered into a covenant not to sue or assert any claim against the other for infringement of any patents for a period of five years from the effective date. As consideration for the settlement agreement, we have agreed to pay Business Objects the sum of $24,000,000. We paid $10,000,000 in June 2002, $1,750,000 in July 2002 and will pay $1,750,000 every quarter for the next seven quarters commencing on October 1, 2002. The court dismissed this action pursuant to an Order of Dismissal dated May 30, 2002.
 
In addition, we and our subsidiaries may, from time to time be involved in other legal proceedings, claims, and litigation that arise in the ordinary course of business.

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Item 4.    S ubmission of Matters to a Vote of Security Holders
 
a)
 
The Corporation held its Annual Meeting of Shareholders on July 2, 2002.
 
b)
 
At the meeting, it was resolved that those persons nominated as indicated below be elected as directors of the Corporation, that the extension of the Cognos Employee Stock Purchase Plan be approved, that the amendment to the Corporation’s Articles and By-law No. 1 be approved, and that Ernst & Young LLP be reappointed as the Corporation’s Auditors for the fiscal year ending February 28, 2003. The voting results of the meeting are presented in the following table:
 
Voting Results
Annual Meeting of Shareholders
July 2, 2002
 
    
FOR
   
WITHHELD
     
AGAINST
Election of Directors
                 
John E. Caldwell
   
63,050,376
   
41,674
       
Douglas C. Cameron
   
63,047,875
   
44,175
       
Pierre Y. Ducros
   
63,066,715
   
25,335
       
Robert W. Korthals
   
63,065,152
   
26,898
       
William Russell
   
63,069,420
   
22,630
       
James M. Tory
   
63,066,084
   
25,966
       
Renato Zambonini
   
63,068,426
   
23,624
       
Reappointment of Auditors
   
60,663,308
   
2,338,192
       
Approval of Extension of Employee Stock Purchase Plan
   
55,633,010
   
2,147,587
       
Approval of Amendment to Articles and By-law No. 1
   
57,335,170
   
393,176
       
 
As noted in our Definitive Proxy Statement filed with the Securities and Exchange Commission on Schedule14-A we had proposed the adoption of a new stock option plan. The proposed plan would have authorized the Compensation Committee of the Board of Directors to grant up to 3,800,000 options to purchase common shares of the Corporation. The plan did not secure sufficient shareholder support and was therefore withdrawn from consideration at the meeting. We will consider available alternatives and likely make a proposal more aligned to shareholder sentiment at a later date.

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Item 6.     Exhibits and Reports on Form 8–K
 
a)
 
Exhibits
 
99
       
Selected Consolidated Financial Statements in U.S. Dollars and in accordance with Canadian Generally Accepted Accounting Principles
99.1
       
Management’s Discussion and Analysis of Financial Condition and Results of Operations-Canadian Supplement
99.2
       
Supplementary disclosures relating to SFAS No. 142, Goodwill and Other Intangible Assets
 
b)
 
Reports on Form 8–K
 
There were no reports on Form 8-K filed during the three months ended May 31, 2002.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
COGNOS INCORPORATED
   
(Registrant)
July 10, 2002
  
/s/ Tom Manley
Date
  
Tom Manley
Senior Vice President,
Finance & Administration
and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)

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EXHIBIT INDEX
 
EXHIBIT NO.
   
DESCRIPTION
     
PAGE
99   
   
Selected Consolidated Financial Statements and Notes in U.S. Dollars and in accordance with Canadian Generally Accepted Accounting Principles
     
27-35
99.1
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations-Canadian Supplement
     
36-37
99.2
   
Supplementary disclosures relating to SFAS No. 142, Goodwill and Other Intangible Assets
     
     38

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